New rules governing the management and audit of federal programs
This reform of OMB guidance is an attempt to reduce the administrative burden for non-federal entities receiving a portion of the $600 billion in federal grants that are awarded annually, while reducing the risk of waste, fraud, and abuse. It applies to institutions of higher education, nonprofits, state/local governments, Indian tribes, and certain for-profit and foreign entities. These revisions are clearly the most significant change to occur in relation to federal grants management in recent history. Entities receiving federal funding will need to carefully digest these changes.
The new rules combine eight previously separate sets of OMB regulations into one streamlined, comprehensive policy. This consolidated document is aimed at eliminating duplicative or almost duplicative language in order to clarify where policy is substantively different across types of entities, and where it is not. As a result, the guidance includes sections and parts of sections which are clearly delineated by the type of non-federal entity to which they apply. This final guidance is located in Title 2 of the Code of Federal Regulations.
This guidance supersedes requirements from various prior OMB Circulars and provides reforms in three main areas:
|Reform Area||Guidance Previously Located In|
|Administrative Requirements||Circulars A-102 (the Common Rule), Circular A-110 and Circular A-89|
|Cost Principles||Circulars A-21, A-87 and A-122|
|Audit Requirements||Circulars A-133 and A-50|
These regulations became effective for new awards and/or new funding increments made on or after Dec. 26, 2014, exactly one year after the publication date of these reforms. However, standards set forth related to the audit requirements will be effective for audits of fiscal years beginning ON or AFTER Jan. 1, 2015; i.e., the first single audits affected by this rule will be for the year ending Dec. 31, 2015.
While these reforms make many changes, we've highlighted some of the more significant ones below:
Changes to administrative requirements
The Final Guidance standardizes definitions, general provisions and pre- and post-award requirements across the OMB Circulars. Among the more impactful changes:
- Requirements for pass-through entities
The requirements are now perhaps more explicit about the required monitoring of subrecipients, although the federal government has emphasized that these requirements are substantively unchanged from existing guidance. The main focus of this monitoring is to ensure the federal program is operating as expected, services and costs are allowable, and any compliance issues are mitigated. As a reminder, subrecipient monitoring requirements include, but are not limited to:
- Reviewing any performance and financial reports that the pass-through entity has decided to require in order to meet its own award terms or conditions
- Following up to ensure that the subrecipient takes timely and appropriate corrective action on any deficiencies related to federal awards
- Issuing management decisions on weaknesses found through audits only when those findings pertain to federal award funds provided to the subrecipient by the pass-through entity.
- Procurement standards
The wording in these final standards come mainly from the original Circular A-102 requirements, with some refinements. Therefore, entities previously not subject to Circular A-102, which was only relevant to state and local governments, should pay particular attention to this section. Please note that these regulations retained the prior language in Circular A-102 that prohibits geographic preference in solicitations, which received a lot of buzz during the comment period. In December 2014, a one year extension of the procurement standard changes was officially implemented. Therefore, although the new grants reform apply to awards received on or after Dec. 26, 2014, all entities are afforded, at their choosing, an additional fiscal years' time to implement any procurement related policy changes in order to conform with these new rules.
Changes to the cost principles
Allowable costs have been more limited in these final regulations along with clarification on allowable spending for certain specific cost items. Noteworthy changes include:
- Time and effort reporting
The final guidance in this area requires entities to comply with a stringent framework of internal control objectives and requirements for documenting personnel expenses. First, charges to federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated. In addition, the records must reasonably reflect the total activity for which the employee is compensated, not exceeding 100 percent. If an employee works on more than one federal program or splits time between federal and non-federal activities, those records must support the allocation of the employee's salary among the specific activities. The guidance also requires that when interim charges are based on budget estimates, the entity's system of internal controls must include processes to ensure necessary adjustments are made such that the final amount charged to federal awards is proper.
Without necessarily stating how that documentation must be maintained, the requirements provide the entity the ability to implement the internal control systems and business processes that best fit their needs. While many non-federal entities may still find that existing procedures in place, such as personal activity reports and similar documentation, are the best method for them to meet the internal control requirements, this final guidance does not specifically require them. The focus in this final guidance on overall internal controls mitigates the risk that a non-federal entity or their auditor will focus solely on prescribed procedures such as reports, certifications, or certification time periods which alone may be ineffective in assuring full accountability.
- Direct costs
Clarifies the circumstances under which it is allowable to directly charge administrative support costs. Salaries of administrative and clerical staff may be treated as direct costs if (i) the services are integral to a project or activity; (ii) the individuals involved can be identified specifically with the project or activity; (iii) the costs are included expressly in the budget or have the prior written approval of the federal awarding agency; and (iv) the costs are not recovered as indirect costs.
- Indirect costs
Provides for a de minimis indirect cost rate of 10 percent of modified total direct costs for entities that have never had a negotiated indirect cost rate. In addition, the regulations allow for a one-time extension without further negotiation of a federally approved negotiated indirect cost rate for up to four years.
- Prior approval
Provides a single comprehensive list of circumstances under which entities need to seek prior approval from the Federal awarding agency, including pre-award costs, additions to program income or the use of program income to meet a cost sharing or matching requirement, changes in scope or objectives of a project/program, or subcontract of work under the award not previously approved.
- Allowable costs
Clarifies certain allowable costs including conferences, employee health/welfare costs, interest, and travel costs.
Changes to audit requirements
The new regulations slightly reduce the number of entities subject to compliance audits while focusing the auditor’s attention on areas with the highest risk of waste, fraud, and abuse. In addition, by making audit reports publicly available online, it is hoped transparency and accountability will be increased.
- Single audit threshold increased
The threshold for a compliance audit has increased from the current $500,000 federal expenditure threshold to $750,000. Raising the threshold to $750,000 would maintain single audit oversight over 99.7 percent of the dollars and 87.1 percent of the entities that are currently subject to the single audit requirement. Those organizations that expend less than $750,000 in federal funding will no longer need a federal compliance audit, but they will be required to make their records available for review or audit, if requested, by appropriate officials of the federal agency, pass-through entities or the U. S. Government Accountability Office.
- Reporting audit findings
The reforms raise the reporting threshold for questioned costs from $10,000 to $25,000.
- Major program determination
The changes herein focus audits on the areas with internal control deficiencies that have been identified as material weaknesses. In addition, where auditors previously had to ensure that 25 percent of federal expenditures were audited for a low-risk auditee, and 50 percent for an auditee not assessed as low-risk, those coverage requirements have been lowered to 20 percent (low-risk auditee) and 40 percent (not a low-risk auditee).
- Criteria for low-risk auditee
If an auditee qualifies as a low-risk auditee, they are eligible for reduced audit coverage under a compliance audit. Under these regulations, in order to be low risk, an entity must have had:
- An unmodified opinion on the schedule of expenditures of federal awards
- No material weaknesses
- No going concern opinion
- Type A programs had no federal program audit findings in the preceding two audit periods that were classified as material weaknesses, modifications to the compliance opinion or questioned costs that exceeded 5 percent of total awards for that federal program.
- Audit reports publicly available
Audit reports will now be publicly available on the Internet. With the Federal Audit Clearinghouse being the central repository of record and authoritative source for single audit reports, federal agencies, pass-through entities, and others interested should therefore obtain an entity’s single audit by accessing the clearinghouse rather than requesting it directly from the non-federal entity.