Recent Audit Developments: The “SuperCircular”

1. Brustein & Manasevit, PLLC Recent Audit Developments:The “SuperCircular” Michael Brustein, Esq. mbrustein@bruman.com Brustein & Manasevit, PLLC www.bruman.com Spring Forum 2013

2. Brustein & Manasevit, PLLC 2013 Super Circular NPRM 2009 ARRA ($101 billion Cash Infusion) 2002 NCLB Provides Statutory Base to CAROI 2001 Risk Management (High Risk Designations) 1996 Birth of CAROI (FL / PA) Federal Education Audit Resolution Key Events Rewrite of A-87 1995 1989 Appeal of New York (Equitable Remedies) 1988 GEPA Amended (Due Process / OALJ) 1986 Appeal of California (Tydings / Linkage) Single Audit Act 1984 U.S. Education Department Established 1980 1978 Inspector General Act

3. Brustein & Manasevit, PLLC Why “Supercircular”??? • Greater simplicity • Greater consistency • Obama Executive Order on Regulatory Review

4. Brustein & Manasevit, PLLC • Greater “simplicity” means elimination of several compliance elements in the Compliance Supplement • 14 requirements reduced to 7, eliminating: • Equipment Management • MOE/Ear-Marking • Procurement • Program Income

5. Brustein & Manasevit, PLLC • The elimination of the compliance requirements from A-133 will place the burden on “Pass-Through” agencies

6. Brustein & Manasevit, PLLC Key Requirements Retained • Allowable Costs • Eligibility • Cash Management • Reporting • Subrecipient Monitoring

7. Brustein & Manasevit, PLLC What is covered? • Administrative Requirements (A-102, A-110) • Cost Principles (A-87, A-21, A-122) • Audit Requirements (A-133)

8. Brustein & Manasevit, PLLC Who is covered? • All non-federal entities expending federal awards

9. Brustein & Manasevit, PLLC When is it effective? • NPRM – 2/1/13 • Close of comment period 06/02/13 • Analysis of public comment • Final regulation (2 CFR) – not likely before 1/1/14 • EDGAR revisions – within one year of final regulation ? • Effective date of 7/1/14 is doubtful

10. Brustein & Manasevit, PLLC Might EDGAR be inconsistent with Supercircular? • Yes, but federal agencies applying more restrictive requirements need OMB approval Section _.108

11. Brustein & Manasevit, PLLC • Agencies can request special tests for A-133 items removed (e.g., equipment management, period of availability of funds)

12. Brustein & Manasevit, PLLC If program statute differs from Supercircular, statute governs Section _.106

13. Brustein & Manasevit, PLLC So what is new?

14. Brustein & Manasevit, PLLC Federal agencies must evaluate risks to the program posed by each applicantFocus now on risk! • Financial stability • Management system • History of performance • Generally available information • Single audits • Capacity to implement programs Section _.205

15. Brustein & Manasevit, PLLC Following risk analysis, agencies may impose conditions on grantee Section _.205

16. Brustein & Manasevit, PLLC Performance Expectations • Agencies must include in the award indication of timing and scope of expected performance – as related to outcomes intended to be achieved by the program Section _.404

17. Brustein & Manasevit, PLLC Pass-Through Agency may impose “supplemental requirements” Section _.501(c)(4)

18. Brustein & Manasevit, PLLC Pass-Through Monitoring shall include: • Analyzing financial and programmatic reports • Ensure subrecipients take timely and appropriate corrective action • Issue management decision on A-133 finding at subgrantee level Section _.501(c)(5)

19. Brustein & Manasevit, PLLC Monitoring Tools of Pass-Through • On-site reviews • Provide training and technical assistance • Arrange for “Agreed Upon Procedures” Section _.501(c)(5)

20. Brustein & Manasevit, PLLC Risk Factors for Pass-Through Monitoring • Results of previous audits • New subrecipients • New personnel or substantially changed system • Extent of federal monitoring Section _.501(c)(6)

21. Brustein & Manasevit, PLLC Cash Management • Recipients shall maintain advances of federal funds in interest bearing accounts unless… • Recipient receives less than $120,000 in federal $ per year • Interest will not exceed $500 • Bank requires minimum balance Section _.502(e)(3)(k)

22. Brustein & Manasevit, PLLC Inventory Management • Equipment definition same • Acquisition cost of $5,000 • Useful life greater than one year Section _.503(d)

23. Brustein & Manasevit, PLLC Inventory Management • Use/Management/Disposition • Same as EDGAR 80.32 Section _.503(d)

24. Brustein & Manasevit, PLLC “Costs of Computing Devices” = “Supplies” But • When no longer needed for any other federally sponsored project, recipient may • Retain them • Sell them • But compensate federal government if per unit value exceeds $5000 But • Conflicts with C-31(6) total aggregate value of $5000 (unused) Section _.503(e) and Section _ .620

25. Brustein & Manasevit, PLLC Cost Shifting • Grantee cannot shift cost from one award to another to overcome shortfall, unless costs are allowable under both awards Section _.607(c)

26. Brustein & Manasevit, PLLC Cost Allocation – Cost Sharing • If a cost benefits two or more projects in a proportion that can be easily determined, then cost should be allocated on the proportional benefit Section _.607(d)

27. Brustein & Manasevit, PLLC Cost Allocation – Cost Sharing • If proportion cannot be easily determined then allocate on any reasonable documented basis Section _.607(d)

28. Brustein & Manasevit, PLLC Set-Asides • If program statute contains reserves or limitations, amount not used cannot be charged to other federal awards Section _.611

29. Brustein & Manasevit, PLLC Administrative Costs – Direct Charging of Administrative Costs • Salaries of administrative and clerical staff should be treated as indirect, unless • Services are integral to project, and • Individuals can be specifically identified, and • Costs are explicitly set out in budget, and • Costs not recovered as indirect Section _.615(d)

30. Brustein & Manasevit, PLLC Indirect Costs • A federally approved negotiated rate shall be accepted by all federal agencies Section _.616(c)(1)

31. Brustein & Manasevit, PLLC Indirect Costs • Pass-through entities must abide by the federally recognized indirect cost rate negotiated between the federal agency and subrecipient (restricted vs. unrestricted) Section _.501(c)(1)(D)

32. Brustein & Manasevit, PLLC Indirect Costs • But if no such rate exists, the pass-through must negotiate the rate, or a de minimis indirect cost rate equal to 10% of total modified direct costs to small entities. (But what about restricted rates? Most LEAs have restricted rates in single digits.) Section _.616(e)

33. Brustein & Manasevit, PLLC Time and Effort Management • Eliminate reference to PARs • Now “Certified Reports” • Reports may be electronic • Semi-Annual for single cost objective - same Section _.621 C-10(9)

34. Brustein & Manasevit, PLLC Time and Effort Management • After the fact, unless mutually satisfactory alternative approved by awarding agency • Certification periods cannot exceed 12 months • Activities may be expressed as percentages Section _.621 C-10(9)

35. Brustein & Manasevit, PLLC Time and Effort Management • Certified Reports on 2 or more cost objectives certified by employee or individual responsible for verification Section _.621 C-10(9)

36. Brustein & Manasevit, PLLC Time and Effort Management • No additional support other than certification is necessary Section _.621 C-10(9)

37. Brustein & Manasevit, PLLC Time and Effort Management • Substitute systems may be used if approved by cognizant agency • Federal agencies are encouraged to approve alternative proposals based on outcomes Section _.621 C-10(9)(F)

38. Brustein & Manasevit, PLLC Time and Effort Management • Awarding agencies may approve “blended funding” where multiple programs involved, and “performance-oriented metrics” are used Section _.621 C-10(9)(F)

39. Brustein & Manasevit, PLLC Cost Principles Changes • Costs for services of counsel (in-house or Bruman) for administrative proceedings (OALJ) may not be charged if the ALJ imposes a “monetary penalty.” Legal expenses are allowable if the proceeding is resolved by consent or compromise. Section _.621 C-14(2)

40. Brustein & Manasevit, PLLC Cost Principles Changes • Cost of Meetings • Costs from meetings and conferences “beyond the recipient entity” are allowable Section _.621 C-32

41. Brustein & Manasevit, PLLC Cost Principles Changes • Travel Costs • Grantee must retain documentation • Participation of individual is necessary to the federal award • Costs are reasonable and consistent with entity’s established travel policy Section _.621 C-53(2)

42. Brustein & Manasevit, PLLC Cost Principles Changes Travel • If no institutional travel policy, GSA rates apply - 48 CFR 31.205-46(a) Section _.621 C-53(2)(C)

43. Brustein & Manasevit, PLLC Single Audits • Single Audit threshold is raised from $500,000 in federal annual expenditures to $750,000 Section _.701(a)

44. Brustein & Manasevit, PLLC Audit Follow-Up • Federal awarding agencies shall use “cooperative audit resolution mechanisms” to improve federal program outcomes through better audit resolution, follow-up and corrective action Section _.713(c)(5)

45. Brustein & Manasevit, PLLC Cooperative Audit Resolution • Improve communication, foster collaboration, promote trust, and develop understanding between auditor and auditee Appendix I - Definitions

46. Brustein & Manasevit, PLLC Cooperative Audit Resolution • This approach is based upon “Federal agencies offering appropriate amnesty for past noncompliance when audits show prompt corrective action” Appendix I - Definitions

47. Brustein & Manasevit, PLLC Agency Determination Letters • The federal agency or pass-through entity may request additional information from auditee as a way of mitigating disallowed costs Section _.714(a)

48. Brustein & Manasevit, PLLC Time Requirements • The federal agency or pass-through shall make the determination within six months of the acceptance of the audit report Section _.714(d)

49. Brustein & Manasevit, PLLC Audit Findings Revises definition of “major program” to focus audits on material issues • The auditor shall report known questioned costs greater than $25,000 for major programs • If not a major program (auditor normally will not find questioned costs) but if auditor becomes aware of questioned costs greater than $25,000 for non-major programs – must report Section _.714(a)

50. Brustein & Manasevit, PLLC Disclaimer This presentation is intended solely to provide general information and does not constitute legal advice. Attendance at the presentation or later review of these printed materials does not create an attorney-client relationship with Brustein & Manasevit, PLLC. You should not take any action based upon any information in this presentation without first consulting legal counsel familiar with your particular circumstances.