To date there has been much discussion regarding the impact of the American Recovery and Reinvestment Act of 2009 on Michigan school districts. Most of the focus has been on when, how much, and in what form the funds will come. What has not received much attention has been the “accountability” aspect of the funds. Until recently, much of this has been unknown, but the federal government has been actively building their process and beginning to issue guidance to the states.
Over the last several weeks through our participation in the Government Audit Quality Center, we have had access to periodic updates on the accountability process. We have excerpted sections from those updates along with information recently provided from the State of Michigan for use in your planning. The funds, which are expected to begin flowing around June 30, 2009, will require the school district to adjust their accounting for the use of the funds as well as their documentation for how they demonstrate compliance with the related requirements.
The following discussion should be helpful as you get started.
Effect of American Recovery and Reinvestment Act of 2009 on Single Audits
The Recovery Act results in approximately $300 billion in additional federal funds being passed down. These federal funds are intended to either supplement existing federal programs (e.g., Title I and special education for K-12), create new programs, or to provide more broad fiscal relief (such as the stabilization funding provided to Michigan schools to offset cuts in the school aid fund, estimated at $370/pupil for 2009). In most cases, direct recipients (the State of Michigan) will pass the funds through to subrecipients such as school districts, local governments, or not-for-profit organizations.
The impact the Recovery Act funds will have on June 30, 2009, year-end single audits is not yet fully defined. At this time, Michigan schools expect to receive stabilization funding for the June 30, 2009, fiscal year. It is expected that significant Recovery Act funds for Title I (and the other Title programs) as well as special education will be expended for year ends after June 30, 2009. Therefore, while the stabilization funding will have a significant impact on the June 30, 2009 single audit, it is expected that the funding of the other programs will create an even larger impact on single audits performed for years ending in June 30, 2010, and 2011.
What We Know Today
Recovery Website. The Recovery Act mandates an unprecedented amount of oversight and transparency around the Recovery Act spending. The Office of Management and Budget (OMB) has set up a website (recovery.gov) that will be a central point for transparency.
Initial OMB Guidance to Federal Agencies. The OMB has begun to provide guidance to federal agencies (the OMB guidance) regarding management of programs and activities relating to the Recovery Act. It can be found at whitehouse.gov/omb/assets/memoranda_fy2009/m09-10.pdf. More OMB guidance is expected as we move into summer. The Michigan Department of Education (MDE) uses OMB information and the Department of Education to develop its own guidance. This guidance is located at michigan.gov/mde. Since schools expect to receive Recovery Act stabilization funds prior to June 30, 2009, and significant new funding for the title programs and special education in just a few months, we suggest reviewing these websites regularly. The OMB guidance addresses many issues and responsibilities including the following:
- Recipients are generally required to clearly distinguish Recovery Act funds from non-Recovery Act funds. New programs or existing programs that have significant changes in compliance requirements will receive a new Catalog of Federal Domestic Assistance (CFDA) number. For existing programs without significant compliance requirement changes, the District will have to track the recovery Act funds separately and label them on grant reports using an “ARRA” prefix in the program description. Essentially, this treatment creates a new federal program “cluster”, combining recurring and ARRA funds, and will require the auditor to test the program if the combined program exceeds $300,000.
- Federal agencies will be performing risk assessments on Recovery Act programs and designating some programs as high risk for single audit purposes. Such designations will also affect major program determination and the scope of the audit going forward.
- It is still unclear as to the level of reporting that will have to be made by prime recipients and first tier subrecipients versus second and later tier subrecipients (generally Michigan schools would be first tier for the title programs). The award documents associated with Recovery Act funds, as well as the guidance issued by the Michigan Department of Education, will go into more detail on this requirement, including how to meet the 10-day reporting requirement. As a result, the MDE may determine new reporting requirements for school districts.
- Federal agencies will initiate additional oversight of implementation risks for Recovery Act funds. Significant dollars were provided to federal agencies to carry out this oversight function. The GAO has selected Michigan to perform on-site monitoring. This means it is possible that they will visit local districts over the next three years.
- Federal agencies are expected to use the single audit to promote accountability for Recovery funds. The OIGs will perform follow-up reviews of single audit quality related to Recovery Act funds and to report the results of those reviews on recovery.gov. The quality reviews will likely occur for years ending between June 30, 2010 and 2011, which will cover the majority of the Recovery Act awards. Clearly, this increased federal scrutiny will add to the existing high-risk nature of these single audit engagements.
- The Federal Audit Clearinghouse (FAC) will make publicly available on the Internet all single audit reports filed with the FAC for fiscal years ending September 30, 2009, and later. There will be a link from recovery.gov to the single audit reports. Districts should be aware that in your audit reports and the Schedule of Findings and Questioned Costs may be made publicly available going forward.
Impact on the OMB Compliance Supplement. The 2009 OMB Compliance Supplement (Compliance Supplement) was just recently issued and includes initial Recovery Act guidance. OMB added Appendix VII to the 2009 Compliance Supplement describing certain high-level Recovery Act considerations for 2009 audits and informs auditors that they will need to watch for monthly additions/updates to the Compliance Supplement for Recovery Act matters posted to the OMB website. Such additions will include more detailed guidance on certain compliance requirements and related audit procedures.
Congressional Interest. Congress is very committed to ensuring that Recovery Act funds are spent appropriately and to ensure that there is minimal waste, fraud, or abuse associated with these funds. This may include a focus on single audits and their role in the process.
It is clear the Recovery Act funds will have a significant impact on school district single audits. Since the Recovery Act funds will begin to flow shortly to Michigan schools, June 30, 2009, single audits will be impacted, primarily as a result of the stabilization funding. Clearly the 2010 single audits will be significantly impacted! Therefore, it is not too soon to begin planning for how the district will account for and track compliance related to this funding.
Planning topics include:
- That control procedures in place over federal expenditures are appropriate, working properly, and designed to prevent unallowable expenditures.
- Whether additional controls and system requirements will be needed to ensure that Recovery Act funds are able to be separately identified and tracked.
- The ability to track and report on jobs saved or created resulting from use of Recovery Act funds.
- If applicable, whether new controls will need to be established to meet the stringent reporting requirements back to federal agencies, or Tier 1 pass through agencies.
- If Recovery Act funds will be passed down to subrecipients (such as ISDs to local districts), that controls are in place to ensure appropriate subrecipient monitoring and also whether any new controls will need to be established related to new subrecipient reporting responsibilities.
We at Plante & Moran continue to track developments at the federal and state levels and will keep you advised about new developments in this area.