What are you required to do? According to OMB Circular A-133 (which governs the administration of federal awards), organizations are required to:
“Maintain internal control over Federal programs that provides reasonable assurance that the auditee is managing Federal awards in compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a material effect on each of its Federal programs.”
       To ensure that you have the proper controls in place, it is a good idea to perform an assessment of each of the compliance requirements that affect your federal grants. Here are a few questions you can ask yourself and others involved with the administration of the grant:
     “How do we know that case managers who are carrying out the program are fully informed of the provisions of the grant?”
     “What process do we have that would prevent an unallowable cost from being charged to the grant?
     “How do we know that participants in the program are eligible to receive services? Does anyone verify eligibility after the initial assessment?”
     “How do we make certain that we have paid for allowable costs before we request reimbursement from the grantor?”
     “How do we communicate changes involving the grant to those personnel who need to know?”
     “Do we routinely check the “Excluded Parties Listing System” to ensure that we are not doing business with any vendors that have been suspended or debarred?”
     “What process do we have in place to make sure that all reports were filed accurately and timely?”

     After doing this assessment, you may find that your internal controls need to be strengthened. If you need assistance with this, please give us a call.

• The by-laws of the organization require an annual audit of the financial statements.
• Affiliated fund raising organizations, such as United Way, may require recipient organizations to have an audit as a condition of receiving allocations.
• Lending institutions may require audited financial statements before making a loan and in each year that the loan has an outstanding balance.
• Potential donors, especially foundations, may ask for a copy of the most recent audited financial statements. Although it may not be a prerequisite to receiving funding from them, it is a tool that the foundation can use in its decision-making.
• The federal or state agency from which you are seeking funding requires an audit.
• Management and/or the Board of Directors believe that it is a “best practice” to have an annual audit.

This last reason is the one that I like the most because there is no outside interest that is forcing an audit. I have a friend who recently became a controller at a local church that had never been audited. He requested that his Board of Trustees hire a CPA firm to conduct an audit because he wanted to start his tenure with a clean slate and to have full accountability. What better way to demonstrate to your Board that you are above board, capable, and fiscally responsible than to open your books and records to professionals trained in auditing that will provide an opinion on whether the financial statements are free of material misstatements.

If you’ve never had an annual audit (or it has been a long time since your last audit), some may ask when you should start. Following are a few ideas:

• A year or two before launching a capital campaign
• If there is an expectation that you may be involved in a merger or acquisition
• Before starting a new program that may require some creative funding
• Construction of new facilities that may require interim or permanent bank financing

If you are wondering if the organization you are involved in should have an audit of your financial statements, give us a call.

Has your company received a portion of the American Recovery and Reinvestment Act of 2009 funds or do you anticipate applying to receive such funds?  If so the following are a few key points that should be discussed/considered:Consider appointing a Recovery Act “Czar” who is responsible for becoming familiar with the numerous requirements associated with the Recovery Act funds and communicate them to others in the organization.  They will also be a resource for others in the organization and be indicative of a strong “tone at the tope” for the importance of compliance with Recovery Act awards.

• Additional controls and systems may be required to ensure that Recovery Act funds are separately identified and tracked in the accounting system.  This segregation will have to carry through to the Schedule of Expenditures of Federal Awards and the Data Collection Form.
• Additional controls and systems may be required to meet the stringent reporting requirements to the federal agencies. 
• Internal control over compliance is extremely important to ensure funds are spent appropriately.  Consider the following:
  • Are control procedures over federal expenditures appropriate, working properly and designed to prevent unallowable expenditures?
  • Are additional controls and systems required to ensure that Recovery Act funds are separately identified and tracked?
  • Are new controls needed to meet the stringent reporting requirements to the federal government?
  • If Recovery Act funds are passed down to subrecipients are controls in place to ensure appropriate monitoring and reporting requirements?
• The Federal Audit Clearinghouse is required to provide public access, via the internet, to all single audit reports filed with the FAC for fiscal years ending 9/30/09 and later.  This will include the Schedule of Findings and Questioned Costs, if applicable.
• With the addition of Recovery Act funds, there will likely be more high-risk programs and additional compliance requirements that auditors will need to test.

For more information, see the Government Audit Quality Center Alert No.’s 106, 111 and 112 and the OMB Circular A-133 Compliance Supplement Appendix 7.

Is your organization ready for the strict rules of oversight, transparency and accountability? Can your internal control structure prevent and detect fraud? In an effective internal control system, the following five components work to support the achievement of the organization’s mission, strategies and objectives:

1. Control environment – describes the “consciousness” of the individuals within the organization. This element is the foundation for the remaining components and is exhibited by discipline and structure.

2. Risk assessment – describes how management identifies, analyzes and manages the risks relating to preparing financial statements in accordance with GAAP.

3. Control activities – defines the organization’s policies and procedures in accomplishing its objectives.

4. Information and communication – mechanism for transmitting pertinent information timely, so that individuals can fulfill their responsibilities.

5. Monitoring – determines the quality and effectiveness of the system.

Will your internal control structure provide the boundaries necessary to ensure that the federal funds are expended appropriately? If you are uncertain, consider having your system evaluated before you accept and expend the federal funds.  

For more information about the American Recovery and Reinvestment Act of 2009, see www.recovery.gov.

There are potentially 14 areas of compliance requirements.  The first step in compliance is knowing which of these requirements pertain to your grant(s). Which requirement relate to your grant, see this post. The compliance requirements are listed below and include some of the “common” deficiencies we have encountered.

• Allowable activities – activities that are being performed under the “guise” of a grant are not allowed by that grant.
• Allowable costs – expenses charged to the grant are not approved; documentation, such as invoices, can’t be located; expenses that are being allocated, such as salaries, are not done properly and/or proper documentation is not maintained.
• Cash management – funds that are drawn down are not spent timely; reimbursements are requested from the grantor before the funds are actually spent by the not-for-profit organization.
• Davis-Bacon Act – not knowing that this requirement applies to your grant (usually involves federal awards used for construction purposes).
• Eligibility – not maintaining proper documentation to show that program recipient was eligible for services; no review to ensure that staff are following guidelines.
• Equipment and real property management – not performing an inventory of items obtained with federal awards; not clearly marking/tagging property; not maintaing accurate records of items acquired and/or disposed of that were purchased with federal awards.
• Matching, level of effort, earmarking – not monitoring during the year to determine if you are meeting the match or level of effort; using income items for a match that do not qualify; documentation to determine if these items have been complied with have not been maintained or is incomplete.
• Period of availability – requesting reimbursement of an expense that was incurred before or after the grant period.
• Procurement – not checking the excluded parties list (at www.epls.gov) to determine if vendors with which you do business have been suspended or debarred; not following your organization’s procurement policies; not obtaining bids when required.
• Program income – not properly recorded or misclassified; used as part of your match when it is not allowed.
• Real property acquisition and relocation assistance – not doing your research when purchasing property that may require relocation of the current owners.
• Reporting – not submitting your reports to the grantor timely or not knowing when the reports are to be submitted; documentation for number of participants served or expenses requested for reimbursement on the reports does not agree with the documentation supporting these numbers.
• Subrecipient monitoring – not realizing that you have subrecipients; not properly monitoring those subrecipients

For more information about these compliance requirements, you can review the OMB Circular A-133, Compliance Supplement, OMB Circular A-122 (cost principles) and OMB Circular A-110 (administrative requirements) on-line.

1. Financial statement audit – this is the typical audit that many for-profit enterprises have conducted as well as not-for-profit organizations.  It is a process that involves auditing the account transactions and year-end balances included in the organization’s financial statements and reporting on the “fairness of the presentation”.  It is all encompassing – not just concerned with the federal awards received.
2. Yellow book audit – this is a type of financial statement audit that is conducted under Government Auditing Standards.  Its focus is also oriented towards financial statement reporting, but it also includes assessing internal controls and compliance issues.  As with a financial statement audit, a yellow book audit’s objective is to provide an opinion on whether the financial statements are free of material misstatements. 
3. Single audit – this type of audit is required when the amount of federal awards EXPENDED (or incurred) during an organization’s fiscal year exceeds $500,000.  The term EXPENDED means the amount of expenses that the organization incurred related to the grant, not the amount of expense that have been paid. Be aware that the amount of funds RECEIVED is not the trigger.  This audit is focused on one or more “major” programs that received federal funding.  If you have a single audit, then the financial statement audit must be conducted under Government Auditing Standards (a.k.a.  a yellow book audit).

Financials statement audits may be “optional” for some not-for-profit organizations, with only the Board of Directors requiring an audit.  Yellow book audits will be required by law, regulations or grant contract and would not be optional.  Additionally, single audits are not optional.  If you expend more than $500,000 in your fiscal year, this type of  audit is required by the federal government.

So how do you know what type of audit is required?  You must read your grant agreement.  Typical language may include, “If the contractor receives $500,000 or more from all federal sources during one fiscal year, the contractor shall have an independent, organization-wide audit conducted in accordance with the Single Audit Act of 1984…“  If the grant agreement does not mention audit requirements, then you should contact the grantor for clarification.

If your grant agreement does not require you to have an audit, please keep in mind that this does not diminish your responsibility to comply with the grant and compliance requirements that govern federal awards. If you have any questions regarding compliance, contact us.

What changes were made?
Primary changes include those in terminology, due to provisions of SAS 112. The term reportable condition has been changed to significant deficiency in Part II-items 3 and 4, and Part III – items 4, 5 and 10a.

These changes are consistent with the Federal Register Notice dated June 26, 2007, which addressed how to handle new AICPA, OMB and Yellow Book guidance on the applicability of SAS 112 to single audits.

Also, the form will be required to be submitted electronically. To assist in the preparation of the new filing requirements, the Federal Audit Clearinghouse provides a Form SF-SAC Worksheet & Single Audit Component Checklist that can be downloaded and used to assist in preparing the form.

As part of our firm’s client service, we prepare this form electronically. Our clients receive notification via e-mail to accept the submission. Auditees will only have to submit one copy of the reporting package along with the data collection form and the Federal Audit Clearinghouse will distribute the required copies to the appropriate federal agencies.

If you prepare your entity’s form and need assistance, give us a call.