Sponsored Projects: Financial Compliance and Audit

1. Sponsored Projects: Financial Compliance and Audit Jing LiuAssistant Director, Sponsored Projects626-6442, jingliu@email.arizona.edu

2. Topics • Financial Compliance • Why compliance matters • Consequences of non-compliance • Regulations and policies to comply with • How to ensure compliance • Common areas of financial compliance

3. Topics (Cont’d) • Audit • Why audit • Types of audit • Types of auditor • Audit process • Audit findings • Roles and responsibilities • Audit tips

4. Financial Compliance

5. Why Compliance Matters? • Maintain trust between sponsors/public and the University • Provide stewardship to safeguard research investment • Avoid consequences of non-compliance

6. Consequences of Non-Compliance • More scrutiny by Federal auditors and increased administrative costs • Audit findings and cost disallowance • Loss of administrative flexibilities: eg. automatic carryover and no cost extension • Withholding of future awards • Multi-million dollars to settle lawsuits • Criminal/civil/administrative penalties • Negative publicity and damage to the University’s and PIs’ reputation • Sponsors • Donors • Faculty • Staff • Students

7. Examples of litigations and audits • Multi-million dollar lawsuits • Aug. 13, Emery University, $1.5 million • July. 13, Northwestern University, $3 million • Oct. 12, University of the District of Columbia, $0.5 million • Feb. 10, Fort Valley State University, $0.5 million • Dec. 08, Yale University, $7.6 million • July 08, St. Louis University, $1 million • April 06, Clark Atlanta University, $5 million • Jan. 06, University of Connecticut, $2.5 million • Dec. 05, Rush University, $1 million • June 05, Cornell University, $4.3 million

8. Examples of litigations and audits (Cont’d) • Multi-million dollar lawsuits (Cont’d) • June 05, Mayo Foundation, $6.5 million • March 05, Florida International University, $11.5 million • July 04, Harvard University, $2.5 million • March 04, John Hopkins University, $2.6 million • Feb. 04, Lawrence Livermore National Lab operated by UC, $3.9 million • Sept. 03, University of South Florida, $4.1 million • Feb. 03, Northwestern University, $5.5 million

9. Examples of litigations and audits (Cont’d) • Numerous audits conducted by NIH OIG and NSF OIG or their contracted CPA firms in recent years • Areas of focus: • Allowability: for example, computer purchases • Cost transfer • Effort reporting • Cost share • Subrecipient monitoring • Administrative costs • Faculty salary • ARRA awards • Service centers • NIH OIG Audit Reports: • https://oig.hhs.gov/reports-and-publications/oas/nih.asp • NSF OIG Audit Reports • http://www.nsf.gov/oig/pubs.jsp

10. Regulations and Policies to Comply With • Federal Regulations • OMB Circular A-21: Cost Principles for Educational Institutions • OMB Circular A-110: Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations • OMB Circular A-133: Audits of States, Local Governments, and Non-Profit Organizations • FAR: Federal Acquisition Regulation • Agency policy guidelines • Terms and Conditions of grants and contracts • ABOR and University Policies

11. How do we comply? • Strong internal controls • Establish and maintain policies and procedures • Current • Compliant • Communicated and understood • Follow the policies and procedures • Adequate systems • Clearly defined roles and responsibilities • Sufficient training • Monitoring programs • Sufficient documentation • Understand Federal regulations and policies

12. Basic Spending Principles • Allowability • Reasonableness • Necessary • Arm’s length transaction* • The prudent person test • Consistent with policies and procedures • Allocability • Chargeable or assignable to a project in proportion to the benefit received • Reasonable allocation basis without undue effort or cost • May not shift costs to eliminate deficit or for convenience • Documentation • Consistent Treatment of Costs • See Appendix A: A-21 Section C1-4 * A transaction in which the buyers and sellers act independently of each other and have no relationship to each other.

13. Common Areas of Financial Compliance • Cost allowability • Cost transfer • Effort reporting • Cost sharing • Subrecipient monitoring • Recharge centers • Indirect costs and the CAS • Financial report and closeout

14. Cost Allowability • Allowable, reasonable, allocable, and applied consistently • Adequate monitoring • Document business purpose • Timely review of grant expenditure • Correct errors immediately • Monitor budget to avoid overruns • Sufficiently document direct charging of clerical and administrative salaries and other admin. costs (see Appendix B) • PI must be informed of expenses and balances • Manage HHS/NIH over-the-cap salary costs • Manage NSF 2-month salary limitation • Avoid excessive cost transfers and untimely transfers: 90 days limit by NIH Grants Policy • Avoid large purchase of equipment and supplies at the end of a project

15. Cost Allowability (Cont’d) • Useful resources • OMB Circular A-21, Section J • NIH Grants Policy: Cost Considerations • SPS Direct and Indirect Costs Policy • FSO Financial Policies and Procedures • Specific sponsor terms and conditions

16. Cost Transfer • Allowable • Allocable: Is the allocation basis reasonable • Timely • Reasons and allocation basis for transfers must be documented in detail • OMB Circular A-21 • NIH Grants Policy • Salary Transfers: transferring certified costs may be a problem • Useful resources • OMB Circular A-21 • NIH Grants Policy See Appendix C

17. Effort Reporting • Reflect actual time spent on projects and other university activities • 100% university compensated effort included • Include committed cost sharing • Completed timely • Signed by individuals who have the first hand knowledge or suitable means of verification of the work performed • Designated official’s signature is valid only when after-the-fact confirmation is obtained

18. Effort Reporting (Cont’d) • Difference between effort reports and payroll distribution adjusted immediately • Transfers are generally not allowed once effort is certified • Useful resource • OMB Circular A-21, Section J.10 • Research Gateway • SPS Effort Reporting Policy and Procedure • SPS online training module

19. Cost Sharing • Commitment met and reported correctly • Allowable • Not funded by other federal sources • Not committed to other grants • Tracked and documented • Third party contribution documented • Prime grantee responsible for meeting the cost sharing • Financials: subaccount required to track UA cost share • Useful resource • OMB Circular A-110 • NSF Grant Policy Manual • NIH Grants Policy • SPS Cost Sharing Documentation Policy and Procedure

20. Subrecipient Monitoring • Subrecipient adequately monitored • Risk level assessment • Review of A-133 audit report • Review invoices and supporting documents for allowability and allocability • PI confirms technical progress by approving invoices before payment is processed • Review cost sharing commitment and supporting documentation • Periodic desk reviews or on-site audit • Useful resource • OMB Circular A-110 • OMB Circular A-133: compliance supplement • UA’s Contracting & Research Services (CRS)

21. Recharge Center • Operated on a break-even basis • Billing rate(s) should: • based on actual costs • does not include unallowable costs • reviewed and updated at least biennially • the same for all internal customers • approved by FSO • Transactions at arm’s length • Useful resource • OMB Circular A-21, Section J.47. • FRS Departmental Manual, Section 18 • FSO: Rate Analysis Team

22. Indirect Costs and the CAS • Indirect cost proposal documented carefully • Indirect cost rate applied correctly and consistently to grants • Disclosure Statement (DS-2) consistent with actual practice • Cost Accounting Standard (CAS) applied to educational institutions • 501: consistency in estimating, accumulating and reporting costs • 502: consistency in allocating costs incurred for the same purpose

23. Indirect Costs and the CAS (Cont’d) • 505: accounting for unallowable costs • 506: consistency in using the same cost accounting period • Useful resource • OMB Circular A-21 • FSO: Rate Analysis Team

24. Financial Reports and Closeout • Federal Financial Report (FFR) submitted on time • FFR accurate and complete • No unallowable costs • Cost sharing captured and reported • Subcontract costs allowable and accurate • Program income included • Indirect costs charged correctly • Closeout • Charges and transfers made near and after the grant end date should be sufficiently documented and justified • Overruns to be removed • Unallowable costs to be removed

25. Other Areas of Compliance • Equipment purchases: contact SPS Property Officer • Clinical trials and fixed price contracts • Price budgeted with costs in mind • Solid billing and A/R systems • Avoid cross-subsidization from other grants • Avoid large percentage of residuals which could trigger detailed reviews • Specific compliance items worth remembering • NSF: voluntary cost share is not allowed • NIH: genomic array costs (NOT-OD-10-097) • Fly America Act exception: Waiver form (see Appendix D) • NIH Cap • NSF 2-month Salary Limitation • Supplemental Compensation (see Appendix E)

26. Other Areas of Compliance – Cont’d • Research compliance: Research Compliance Services • Biosafety & Biosecurity • Chemical Safety & Medical Gas Information • Conflict of Interest (COI) • Export Controls (ITAR/ERA) • Health Information Privacy (HIPPA) • Human Subjects Protection • Animal Care and Use • Radiation, Chemical & Biological Safety • Research Integrity • http://rgw.arizona.edu/

27. Recent Areas of Focus by Feds • ARRA Funding: reporting and allowability • FFATA (Federal Funding Accountability and Transparency Act) • Conflict of Interests • Recharge Centers • Faculty Base Salary (See Appendix E) • Effort Reporting • Subrecipient Monitoring • Administrative Costs • Research Integrity

28. SPS Training Opportunities • Online training material and other resourceshttp://rgw.arizona.edu/research-resources/trainingCheck UAccess Learning training web site for live sessions • NCURA tapes or CD-Rom • Subcontracts: contact Contracting & Research Services (CRS) • Indirect cost rate and recharge centers: contact FSO Rate Study Team • To request training sessions be presented at your location: contact Marcel Villalobos or Jennifer Brown at 626-6000 or via email messages • To subscribe RAMTALK: http://uits.arizona.edu/services/email/email-lists/help/subscribe#subscribe

29. Audit

30. Why Audit? Sponsors love audit because: • Monitor whether we are in compliance • Are we capable of managing sponsored funding according to the regulations and policies (Internal Control) • Have we used sponsored funding according to the regulations and policies (Compliance) • Decide the risk of future funding We need audit because: • Let the public know that we are in compliance and our financial statements present the University’s financial position fairly • Establish a good track record and reputation

31. Types of Audit • Financial Statements • A-133 (aka. Single Audit) • Project financial • Program performance • Disclosure Statement – 2 (DS-2) • F&A rate agreement (indirect cost rate) • System and performance audit/review • Special audit: eg. cost sharing, cost transfer, effort reporting, subcontract costs, administrative salaries, etc. • Desk Review: mostly project specific or pertain to a special area • Internal audit • Internal review

32. Types of Auditors • Inspector Generals of federal agencies • AZ Auditors General • Federal agencies • Any other sponsors • General Accounting/Accountability Office • HHS DCA (division of cost allocation) • Public accounting firms • ABOR auditors • Internal auditors • Financial Service Office (FSO) and Sponsored Projects (SPS) financial compliance units

33. Audit Process • SPS receives engagement letter or notice of an audit: (External financial audits are coordinated by SPS and FSO financial compliance officers. ) • SPS and FSO prepare for the audit • Provide financial records and supporting documentation to the auditor • Provide policy manuals and explain procedures and practices to the auditor • Notify parties involved (PIs, business officers, etc.) • Entrance conference • Auditor explains audit scope and purpose • Auditor assesses basic organization information • Audit coordination work arranged

34. Audit Process (Cont’d) • Auditors’ field work • Internal control assessment • Test of transactions • Resolve questions • Exit conference • Summarize initial findings • Arrange follow-up works • Management representation letter • Draft report and findings • Final audit report and findings • University response and follow-up actions • Final audit report with the university response published and distributed

35. Audit Findings • Internal Control: • Material weakness: “…is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis." • Significant deficiency: “…is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. • Compliance with applicable laws, regulations, and policies • Questioned Costs

36. Roles and Responsibilities • Central • Coordinates financial audits • Provides files, books, and support for transactions • Work with departments and PIs to provide additional information • Provides response to audit findings • Ensures follow up actions are implemented • Departments and PIs • Be ready for interviews and questions • Provide files not maintained by central • Work with central financial to implement auditor’s recommendations • Coordinate project performance reviews and site visits from sponsors

37. Roles and Responsibilities (Cont’d) • Auditors • Clarify audit scope and objectives • Conduct audit • Issue audit opinions • Provide recommendation to improve internal controls • Follow up with implementation of recommendation

38. Audit Tips • Documentation is the key: business purposes • Audit interview: it’s a risk assessment process • Be prepared: have all documents ready • Be professional and well organized • Be serious about internal control • Do tell the truth • Answer what is asked • Contact SPS or FSO financial compliance officer when • Contacted directly by auditors for questions and documentation (except SAS 99 fraud detection interviews) • Aware of problems or issues • Notify SPS financial compliance officer for project performance site visit (because most performance visits involve financial reviews.)

39. Useful Web Sites • Research Gateway: http://rgw.arizona.edu/ • Financial Policy and Procedure Manuals: http://policy.fso.arizona.edu/ • Direct and Indirect Cost Policy: http://rgw.arizona.edu/documents/direct-and-indirect-costs-sponsored-agreements • A-21: http://www.whitehouse.gov/omb/circulars_a021_2004 • A-110: http://www.whitehouse.gov/omb/circulars_a110 • NIH Grants Policy: http://grants.nih.gov/grants/policy/nihgps_2012/ • NSF Grants Policy: http://www.nsf.gov/publications/pub_summ.jsp?ods_key=papp • FSO Compliance & Internal Control: http://www.fso.arizona.edu/compliance • AZ A-133 audit reports: http://www.gao.az.gov/financials/ • UA annual financial reports: http://www.fso.arizona.edu/financial-management/annual-reports

40. List of Attachment • Appendix A: A-21 Section C.1-4 • Appendix B: A-21 Section F.6 and Exhibit C • Appendix C: Federal cost transfer policies • Appendix D: Fly America Act Waiver Checklist • Appendix E: UA Compensation Definitions for Faculty and Appointed Professionals

41. Questions?