ARRA imposes new transparency and accountability requirements on federal awarding agencies and their recipients. The Office of Management and Budget (OMB) has made it clear that the single audit process is a key factor in the achievement of many accountability objectives including that the uses of all funds are transparent to the public; the public benefits of these funds are reported clearly, accurately, and in a timely manner; and that funds are used for authorized purposes and instances of fraud, waste, error, and abuse are mitigated.
Many governmental organizations are about to undergo their first single audit experience under the American Recovery and Reinvestment Act of 2009 (ARRA); perhaps some governments may even be about to embark on their first single audit period. Regardless of where you fall on this spectrum, there are some recent developments at the federal level that you should know about that will impact your single audit process. As you know, the goal of the Recovery Act was to disburse funds quickly to stimulate the economy. Unfortunately, the act did not relax any compliance requirements. So, this might also be a good time to address some common challenges on a global and program-specific basis so that you can more successfully navigate your single audit this year!
Due to the importance the OMB has placed on the single audit process, the OMB has advised all federal agencies that single audit extension requests to grantees for fiscal years 2009 through 2011 should not be granted. Potential implications of a late single audit filing include an increase in the required level of testing in the subsequent year; more testing means more time required by your organization’s staff! To ensure a timely single audit filing, it will be all-the-more important to be ready for the single audit when it begins. Any follow-up items related to that audit need to be resolved promptly in order to file your report with the Federal Audit Clearinghouse (FAC) well before that nine-month deadline.
All federal agencies have been told by the OMB to take immediate action on single audit reports with findings related to ARRA awards. According to the guidance issued by the OMB on March 22, 2010, agencies should ensure that findings are resolved within six months after they are filed with the FAC. Governments should expect diligent follow up by the various federal agencies and should be prepared to have implemented an appropriate action plan in advance.
Single audit testing of 1512 reports
Auditors (and perhaps auditees alike) have long awaited guidance from the OMB on the extent of testing required in the single audit environment on the reports local governments file at www.federalreporting.gov (called the 1512 reports because Section 1512 of the Act mandates this filing) on ARRA awards and related spending. That guidance was released this past summer when the OMB released its 2010 Compliance Supplement. The good news is that auditor testing of 1512 reports is going to be limited to prime recipients only, and limited to only a few data elements – the notorious jobs reporting figures not being one of them!
Schedule of Expenditures of Federal Awards (SEFA)
The SEFA is the financial schedule included in your organization’s single audit report. The SEFA reports total expenditures for each federal program and serve as the primary basis for the auditor’s major program determination. Circular A133 dictates that the preparation of the SEFA is the responsibility of the auditee. An inaccurate SEFA could lead to improper major program determinations and ultimately to improper testing. Therefore, due to its significance in the single audit process, accuracy in the preparation of the SEFA is extremely important. Auditees who fail to present their auditor with an accurate SEFA will most likely find themselves with a finding in their single audit report.
Because of the significance of the SEFA and the past challenges entities have had accurately preparing the schedule, the AICPA has developed a workaid to assist the auditee in its development. We encourage the use of this tool.
Supplement versus supplant
Some federal grant agreements require that the federal funds add to or supplement current nonfederal programs, rather than supplant existing funding for that program. It is important for the government to understand the specific rules for supplement versus supplant for each grant and be able to document how the requirement was met. In particular, many of the Department of Justice grants, such as the various Byrne grants, have this requirement. For example, a police department receives $100,000 in equitable sharing funds. As a result, the city appropriates $100,000 less in the budget. The police department has received no benefit from the federal funds; federal funds have, in essence, supplanted city funding rather than increased the resources available to that department.
Recovery Act funding focuses on the importance of “transparency and accountability.” If you have received ARRA funding directly and passed it along to a subrecipient, you should already be aware of the additional requirements ARRA places on subrecipients, not the least of which is your ongoing monitoring responsibilities of those subrecipients. For some organizations that are passing along significant ARRA funding, this requirement could become particularly burdensome. Identifying the need for these additional monitoring procedures now and planning accordingly is imperative. Documentation of having performed these monitoring visits is even more important. Remember, if it isn’t documented, it is assumed that it wasn’t done!
Those governments that are the subrecipients of this funding should anticipate that the pass-through agency will perform these monitoring visits and should be prepared to have all documentation in order when they do.
Neighborhood stabilization program
There continues to be a bit of confusion over the two different NSP programs that have been awarded by HUD. The first, NSP1, carrying CFDA No. 14.218 or 14.228, was awarded under the Housing and Economic Recovery Act of 2008 and is NOT the same as the funding provided under ARRA bearing the same name. On the other hand, NSP2 is authorized under ARRA and is identified by the CFDA No. 14.256.
Drinking water revolving fund/Clean water state revolving fund programs
ARRA allowed these revolving fund programs to tender additional loans to many communities and, in addition, to provide a 40 percent principal forgiveness. However, these additional subsidies came with additional compliance requirements, many of which were new to these types of programs – Davis-Bacon and Buy American to name a few. As your organization is preparing for its single audit, you may want to pay particular attention to ensure that your documentation behind compliance with these requirements is in order. Some governments have hired a third party to monitor compliance in these areas, particularly with Davis-Bacon. Although delegation of this task is certainly allowable, please remember that compliance still remains the responsibility of the government itself; therefore, the government should have in place some type of procedure in order to ensure the third party is performing the necessary procedures to ensure that compliance is maintained.
These grants have also gotten a bit more complicated due to accounting for the 40 percent principal forgiveness. Under this program, the first dollars spent will be completely forgiven until the first 40 percent of the loan amount has been expended; that 40 percent will go on the SEFA when incurred. Thereafter, while the financial statements will show all the remaining activity as debt, only the federal portion, as identified by the MDNRE, will show up on the SEFA. Understanding the reporting differences between the SEFA and the basic financial statements is an important component to ensuring the accuracy of the two different reports.
Plante Moran has been and will continue to monitor developments surrounding these funding sources. In the meantime, if you have any questions about compliance requirements, documentation, or reporting, please contact one of your Plante & Moran engagement team members.