January 16, 2014
In prior newsletters we discussed the federal Office of Management and Budget’s (OMB) proposals for revising grantee and auditor compliance requirements with regard to federal grants. The revisions were made for the purpose of streamlining requirements to promote efficient grant administration, although in the end there was less trimming of requirements and more of a consolidation of prior requirements into one document, which is still an improvement.
Issued on December 26, 2013, the document, entitled Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, replaces eight separate circulars which governed audit requirements, and separate cost standards and administrative requirements for non-profit organizations, government agencies and educational institutions. The document contains audit requirements and one set of administrative requirements and cost standards for all grantees. The audit provisions are effective first for calendar 2015 year-ends.
The document, exclusive of the preamble, is 627 pages long. Accordingly, this article provides only a high-level review of its provisions. Federal auditees will need to read and become familiar with the document to ensure compliance with the administrative requirements and cost standards.
Changes in Grantee Administrative Requirements
The following are highlights of changes in administrative requirements:
- Clarification that items below the federal equipment threshold of $5,000 that are treated as supplies include computers and related equipment
- The document allows federal agencies to review grant applicant risk, including financial risk, in making federal awards
- New guidance was added to indicate that electronic, open, machine-readable information is preferable to paper
- Added grant close-out procedures requiring federal close-out within one year of receipt of the required reports
Changes in Cost Standards
The following are highlights of changes in cost standards:
- Added more specific language about when administration costs can be allocated directly to an award (as opposed to charging administrative costs through use of a federal indirect cost rate). One of the factors that would allow direct charging of administrative costs is the grant budget.
- Provides that a grantee that has never had a negotiated indirect cost rate can use a de minimus rate of 10% of modified total direct costs rather than submit a formal proposal and negotiate a rate with the feds. Although this represents a true streamlining, most grantees would agree that the actual indirect costs exceed 10%, so using the rate would leave unfunded administrative costs.
- For those organizations with negotiated indirect cost rates, new rules allow the grantee to apply for a one-time four year extension of the current indirect cost rate without further negotiation.
- The allowability requirements for salaries and wages changed from the prior proposal and prior requirements. Grantees are required to maintain internal controls over payroll allocation and are required to document payroll allocations, but the terms “timesheet” (relating to hourly employees) and “personal activity report” (referring to salaried employees) in prior cost standards have been removed. In addition, prior standards required that such allocation documentation covers a period of no more than one month, and the proposal increased the period to a year for salaried employees. In the final document, no certification periods are specified. Although both grantees and auditors appreciate the added flexibility with regard to documenting payroll allocations, the guidance is vague enough to create potential issues between auditors and auditees. In the coming months we will examine this area in more detail to provide you with our interpretation of what documentation we would expect to see as auditors.
- The allowability requirements for salaries and wages also refer to federal statutes that contain compensation (charging) ceilings for certain employees. The statutes referenced describe the method for determining benchmark compensation.
- There is extensive new language concerning charging of salaries for institutions of higher education.
- There are additional limitations to charging costs of attending conferences, but the document also encourages entities to provide for dependent care coverage while at the conference and allows this cost.
- Costs to improve employee morale that were previously allowable are no longer allowable.
- Makes interest incurred to acquire, construct or replace capital assets an allowable cost subject to certain limitations which are not onerous.
Changes in Federal Single Audit Requirements
The following are highlights of some of the changes in audit requirements:
- The threshold for requiring a federal single audit has been raised from $500,000 in federal expenditures to $750,000. This represents a reduction of 5,000 audits nationwide, or 13% of the total. Most parties commenting on the proposal felt that the threshold should have been raised further.
- All federal single audits are currently transmitted to the federal single audit clearing house but are not available for public inspection. The only search that can currently be made is to determine whether or not the reports were filed. The document provides that federal single audits will become publicly available and searchable on the website of the clearinghouse. Due to concerns about the inclusion of personal information in the reports, part of the revised electronic submission process will be to certify that the reports contain no personal information. The necessary revisions were recently made to the data collection form.
- The threshold for reporting questioned costs has been raised from $10,000 to $25,000, regardless of entity size.
- The initial OMB proposal proposed reducing the number of standard federal compliance areas from 14 to eight. It also proposed that federal agencies could petition OMB to restore deleted compliance requirements by adding them to “special tests and provisions”, a catch-all category. There was great public outcry to this because it was believed that agencies would all clamor to get their deleted requirements in through the special tests and provisions “back door”. The other issue with the proposal was that it would require a complete rewrite of the federal Compliance Supplement, which lists the applicable requirements for most federal awards. Recent history has shown that OMB has been unable to update the compliance supplement on a timely basis each year just for program requirement changes. On this basis, rewriting the supplement could take years. Because OMB did not want to hold up issuance of this document, and was also leery of back-dooring requirements, it did not change the 14 compliance requirement areas.
- Additional criteria have been added for a grantee to be considered a “low risk auditee”. In addition to generally having two prior year clean reports, the financial statements must be reported using GAAP unless a different accounting basis is required by state or local statute, and there can’t be a going concern reference in the audit opinion.
- The Type A/B program threshold has been raised from $300,000 to $750,000 for entities with less than $25 million in federal expenditures. Generally, each “A” program must be audited as a major program at least once every three years.
- The determination of whether a program is high risk has been simplified in that previous subjective factors have been eliminated and the determination is based on the three year rotation requirement discussed above and the existence or absence of prior year findings with respect to the program.
- The threshold for risk rating programs has been increased from $100,000 to $187,500 (for entities with less than $25M in federal expenditures).
- The expenditure coverage thresholds have been lowered. For low-risk auditees, programs selected for testing have to exceed 20% of total federal expenditures, down from the previous 25%. For other auditees, the new threshold is down 40% from the previous 50%.
The change in the federal single audit effort from these new requirements will vary widely from between auditees. Auditees that have one or two large programs could see little change. Auditees without prior findings that have a number of grants of relatively the same size could see some reduction in audit effort.
As we have more time to digest this massive document, we will keep you informed of other changes.