This Financial Management Workshop Was Originally Created by Cost Negotiator Staff of The

Transcript Audit Requirements

This discussion of audit requirements in this Financial Management Workshop will cover both the rules related to the grantee audit obligations and requirements and the process for resolving findings that arise from audit reports. Please refer to the GAO Report issued in October 2007 and to the report on Single Audit Quality – Actions Needed to Address Persistent Audit Quality dated October, 2007, available at www.gao.gov. GAO states, “In our view, the current status of single audit quality is unacceptable. We are concerned that audits are not being conducted in accordance with professional standards and requirements. These audits may provide a false sense of assurance and could mislead users of audit reports regarding issues of compliance and internal control over federal programs.

The PCIE report recommended a three-pronged approach to reduce the types of deficiencies noted and improve the quality of single audits: 1. revise and improve single audit standards, criteria, and guidance; 2. establish minimum continuing professional education (CPE) as a prerequisite for auditors to be eligible to conduct and continue to perform single audits; and 3. review and enhance the disciplinary processes to address unacceptable audits and for not meeting training and CPE requirements.

Within this workshop, we will cover the purpose of having an audit and the organizations to which the rules apply as well as the roles and responsibilities of the entity audited and the entity responsible for resolving any audit findings whether that is a federal agency or a pass through non-federal agency. Also, we will discuss the components to have a Single Audit as required under OMB CIRCULAR A-133 single audit. In addition, the workshop will address some of the specific considerations and provisions which apply to programs funded under the Workforce Investment Act. Finally, we will provide some suggested guidance on how grantees might conduct testing to assure that its subrecipients are fulfilling their audit responsibilities.

OMB Circular A-133 is titled “Audits of States, Local Governments, and Non-Profit Organizations” and was issued to implement the requirements of the Single Audit Act Amendments of 1996. The Act and the Circular are intended to improve audits of Federal financial assistance programs by setting standards to assure consistency and uniformity in the requirements and policies for audits of recipients and subrecipients that receive financial assistance awards funded by federal agencies. The A-133 single audit provides a snapshot of an organization’s financial operations over the period of the entity’s fiscal year. The concept of the single audit was to replace the individual federal agency OIG program specific audits with one audit to be accepted by all federal agencies. The idea was to reduce the burden on grant recipients by cutting back on the number of different auditors conducting audit reviews on the organization’s books and records. The Transcript Audit Requirements

single audit was never intended to provide detailed in-depth review coverage of individual grant program awards.

Each covered non-federal entity which expends $500,000 or more in federal financial assistance award funds during its fiscal year is required to have a single audit conducted for that fiscal year. A program specific audit may be substituted only when the auditee spends federal award funds under only one federal program.

If a non-Federal entity is exempt because it spends less than $500,000 in federal award funds in its fiscal year, it is still required to have records available for review or audit by appropriate officials of the Federal Agency, pass-through entity, and Government Accountability Office (GAO). These entities may choose to conduct a program specific, a limited scope or an agreed upon procedures audit or review to assure that the federal funds were properly expended.

Let’s say this is your very first DOL-ETA grant and you are part of a larger organization with various offices and multiple sources of federal funding? How do you know whether you are in compliance with the audit requirements. Check with your accounting or auditing department.

Which entities are covered and thus required to have an audit conducted under the Single Audit Act? All state and local governments, including Indian tribal governments, all colleges and universities, and all non-profit organizations which received federal financial assistance awards either directly from a federal agency or indirectly as a subrecipient from a pass-through agency are required to have a single audit.

The Single Audit Act and OMB Circular A-133 do not provide coverage for audits of commercial for-profit entities or vendors. Thus, these types of entities are not covered by this audit requirement. Instead, it is the federal agency, such as DOL, which awards assistance funds to a commercial organization that has the responsibility to determine whether or not it will have an audit conducted of these direct recipients.

The WIA regulations at 20 CFR 667.200(b)(2)(ii) contain a requirement that commercial organizations which are subrecipients of federal financial assistance funds provided under the Workforce Investment Act and which expend $500,000 in WIA funds must have either an organization-wide audit or a program specific financial and compliance audit conducted in accordance with the requirements of OMB Circular A-133.

All of the audits required by the Single Audit Act and OMB Circular A-133 are to be conducted annually. There are only a couple of exceptions to this rule for annual audits. 1. Any State or local government that is required by constitution or statute to have its audits conducted less frequently than annually, is permitted to undergo its audits biennially provided that such requirement was in effect on January 1, 1987 and is still in Transcript Audit Requirements

effect. 2. Any non-profit organization that had biennial audits conducted for all biennial periods which ended between July 1, 1992 and January 1, 1995, is permitted to undergo it’s A-133 audits biennially. Biennial audits must cover both years of the biennial period. It should also be noted that any entity which is permitted to have a biennial audit but chooses to conduct an annual audit cannot revert back to having biennial audits.

When A-133 audits are completed they are to be submitted to the Federal Audit Clearinghouse within one month of completion but in no case any later that nine months after the end of the auditee’s fiscal year.

A number of copies of the Single Audit Reporting Package and a single required Data Collection Form [SF-SAC] are to be submitted to the Federal Audit Clearinghouse which is part of the Census Bureau at the address provided on the slide. The reporting package consists of: 1. The Financial Statements and the Schedule of Federal Awards; 2. The summary schedule of prior audit findings; 3. The auditors’ report(s), including any audit findings; and 4. The auditee’s corrective action plan.

The number of copies of the reporting package to be submitted includes one copy to be retained by the federal clearinghouse as an archival copy plus one copy for each federal awarding agency for which there are any findings in either the auditor’s report(s) or the summary schedule of prior audit findings. In addition, all auditees which are subrecipients must directly provide a copy of the package to each pass-through entity from which it receives federal financial assistance funds when there are findings related to the pass-through award(s).

The slide also includes the phone number for the clearinghouse as well as for its processing center. The e-mail address for the clearinghouse is provided as well. The clearinghouse also has a website which is identified on the slide. Users are permitted to query the database of audit reports through this website.

The single audit report is comprised of a number of reports prepared by the auditor. The reports may include a separate signed report letter for each area for which a report is required or may be a single signed report letter covering all of the areas to be included. In either case, the auditor’s report(s) are part of the single audit report. Some auditors will also issue a management letter that is a separate document from the audit report and is intended to provide the organization’s management with guidance on how to improve its operations. The auditor’s report(s) include the auditor’s opinion which we will cover on the next slide, a report on internal controls related to the financial statements and the major programs of the auditee, a report on compliance with the applicable laws, regulations and award provisions, and a schedule of findings and questioned costs. Transcript Audit Requirements

On the prior slide we mentioned that the auditor’s report(s) require the expression of the auditor’s opinion on the financial statements and on the schedule of expenditures of federal awards. The auditors opinion may be an unqualified opinion which is essentially a “clean bill of health” stating that the financial statements are presented fairly in conformity with generally accepted accounting principles (GAAP) and that the schedule of expenditures is presented fairly in all material respects. A qualified opinion from the auditor is an indication that there is some exception which precludes the expression of an unqualified opinion; it is still an opinion that the financial statements present the organization’s financial position, results of operations and cash flows are in conformance with GAAP. The types of exceptions which might cause an auditor to write a qualified opinion might include an audit scope limitation, a unique but acceptable deviation from GAAP, and/or the existence of certain audit findings which do not materially impact the fairness of the financial statements. An adverse opinion by the auditor is an indication that the auditor has concluded that the financial statements do not present the entity’s financial position, results of its operations and cash flows in conformance with generally accepted accounting principles but instead contain material departures from GAAP. An auditor may issue a disclaimer of opinion which is basically a statement that the auditor cannot form an opinion about the propriety of the organization’s financial statements. A disclaimer of opinion may be issued when the auditor does not meet the required GAO Yellow Book independence standard with respect to the entity being audited, when a material limitation in the scope of the audit exists, when the entity’s books of account and supporting records are not available, or when some other significant uncertainty exists.

Prior to 2007 auditor opinions on internal controls were expressed “reportable conditions” or “material weaknesses.” A Federal Register notice issued on June 26, 2007, changed the definition of material weakness and replaced the category reportable conditions with a new one called “significant deficiency” effective for all audit periods beginning after December 15, 2006. A significant deficiency is a control deficiency or combination of control deficiencies in the organization’s internal controls which creates more than a remote likelihood that a misstatement of the auditee’s financial statements which is more than inconsequential will not be prevented or detected. Remember that the purpose of internal controls is to detect or prevent errors and wrongdoing. An internal control deficiency exists when either the way that the internal control is designed or its operation fails to allow management or staff performing their assigned functions to discover or prevent misstatements on a timely basis. The new definition of material weakness indicates that it is a significant internal control deficiency or a combination of significant deficiencies that will result in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. Thus, a significant deficiency suggests that there is apt to be a misstatement in the auditee’s financial statements which is not inconsequential while a material weakness indicates that there is apt to be a material misstatement in the financial statements. Additional references are located at http://harvester.census.gov/sac/E7-12320.pdf. Transcript Audit Requirements

Auditors are required to identify the risk to federal programs given the management operations and controls of the auditee organization. The auditor judgment as to risk is to be based on the organization’s current and prior audit experience including the internal control environment, prior audit findings, and whether or not a particular program has recently been audited as a major program. The auditors also consider the extent of oversight conducted by the federal funding agency and any pass-through entity. High Risk is also dependent on the nature of the program. Child Support programs will always be considered high risk since the nature of the program requires the handling of cash in mulitple methods and forms.

Auditors should consider recent monitoring or review reports to determine whether or not there were any significant problems identified. Auditors are also to consider any inherent risk of the federal program itself. Characteristics of the federal program to be considered would include its complexity, the nature of the types of expenditures under the program, whether the majority of the effort is performed by the award recipient or involve significant effort by subrecipients, whether or not the program is new and or if there are new program regulations and requirements, and also where the program is in its lifecycle at the auditee organization.

In addition to assessing the risk to federal programs, auditors are also expected to determine whether or not an auditee can be considered low risk. To qualify as a low-risk auditee, an entity must meet all of the following conditions for each of the preceding two years. 1. OMB Circular A-133 single audits were performed annually; 2. The auditor’s opinion on the schedule of expenditures of federal awards were unqualified opinions; 3. There were no deficiencies in internal controls identified as material weaknesses; and 4. None of the federal programs had audit findings from: a. Internal control deficiencies identified as material weaknesses, b. Noncompliance with provisions of laws, regulations, contracts, or grant agreements, or c. Questioned costs exceeding 5% of total Federal awards expended. The percentage of coverage for major programs is reduced for low-risk auditees. Ordinarily, auditors are to audit as major programs all federal programs for which the aggregate total of the expenditures represents at least 50% of federal funds expended by the auditee. For low-risk auditees, that aggregate of total expenditures need only represent 25% of federal funds expended.

The auditor is required to retain working papers and reports for a minimum of three years after the date of issuance of the auditor’s report to the auditee unless notified in writing by the cognizant agency for audit, the oversight agency for audit or a pass-through entity to extend the retention period. If the auditor is aware that a federal awarding agency, a Transcript Audit Requirements

pass-through agency or the auditee is contesting an audit finding, it should contact the appropriate parties for guidance prior to destroying the work papers and reports.

Audit working papers are to be made available on request to the cognizant agency, an oversight agency, a federal awarding agency, or GAO for any quality review, as part of any audit resolution, and/or to carry out oversight responsibilities. Federal agencies have the right to obtain copies as reasonable and necessary to their functions.

OMB Circular A-133identifies six categories of responsibility for the organization which is being audited. First, the auditee must identify in its books of account all of the federally funded awards that it received and all of those funds expended by federal program, including the Code of Federal Domestic Assistance (CFDA) title and number, the award number and year, the name of the federal agency, and the name of the pass- through entity. Second, the auditee must maintain internal controls sufficient to assure that federal awards are managed in compliance with the applicable laws, regulations and award provisions. While the third responsibility area might sound redundant, the entity must comply with the laws, regulations and award provisions. Fourth, the auditee must prepare its financial statements including the schedule of expenditures of federal awards. Fifth, the entity must ensure that its required audits are properly performed and submitted when due. This item includes the expectation that the organization procure its audit timely and that the terms of the audit agreement require performance in accordance with the A-133 provisions, including timely completion for on-time submittal to the clearinghouse. Last but not least, the auditee must follow up on all audit findings and take the necessary corrective action to address the findings. This includes: 1. the preparation of a schedule of prior audit findings which indicates the corrective action taken and the current status of the finding, and 2. the preparation of a corrective action plan to address the current audit findings.

These additional responsibilities are not specified in the Single Audit Act or A-133, but are responsibilities under the procurement provisions of the uniform administrative requirements applicable to the grantee organizations. The basic tenet of the procurement requirements is “Full and Open Competition”. Thus, audit services should be procured through a competitive procurement process which should always include a periodic review of the terms of the audit agreement awarded to assure that the current A-133 requirements as well as the management needs of the auditee organization are met. It is strongly suggested that the audit agreement terms include no more than one or two option years. This helps to assure that the competition requirement continues to be met and that the auditor organization does not become so “familiar” with the auditee that it fails to fully recognize when things are not proper.

There are poor auditors and good auditors out there. The quality of the work varies across the board. Similar to monitors, there are good monitors that may spot weaknesses right away and other monitors that walk away from your agency giving you high marks Transcript Audit Requirements

or no findings. You get want you pay for but do not expect anything less. If they can not provide you with a quality audit – find new auditors who will. Guidance about audit procurement can be found in the booklet, “How to Avoid a Substandard Audit: Suggestions for Procuring an Audit” which can be found on the GAO website identified on this slide. Additional information can be found at www.harvester.census.gov, and at www.agacgfm.org/homepage.aspx.

Entities that pass through federal financial assistance funds in awards to subrecipients must ensure that those subrecipient entities meet the requirements of the award and the audit requirements of OMB Circular A-133. To accomplish this, the pass-through entity must identify the CFDA title and number for all federal funds provided as well as the federal award name and number, the year of the funding award, and the federal agency which provided the funding. The pass-through entity must advise the subrecipient of the requirements imposed by laws, regulations, and award provisions. It must monitor the subrecipient to assure compliance, including the obligation of the subrecipient to have an A-133 audit when it expends $500,000 or more in federal financial assistance funds, no matter how many different agencies those funds are received from. In addition, the pass- through entity is required to issue a management decision on all subrecipient audit findings associated with the funding provided within six months of receipt of the subrecipient audit. We will discuss the management decision as part of the audit resolution process. However, it should also be noted here that the pass-through entity is responsible for ensuring that the subrecipient takes timely and appropriate corrective action to remedy the identified audit findings.

All federal awarding agencies have the responsibility of ensuring that all of its recipients of federal financial assistance awards have their required A-133 audits completed within the nine months following the end of each recipient’s fiscal year, that the reports are finished and submitted to the single audit clearinghouse within one month of completion but not later than the end of the 9 month period allowed for audit completion. Each federal awarding agency is required to issue its management decision on the audit findings within six months of receipt of the audit report. This is not six months from the submittal to the clearinghouse. The federal awarding agency must then ensure that its recipients take timely and appropriate corrective action to fix the matters identified as audit findings.

The resolution process utilized by ETA is found in the DOL regulations at 29 CFR Part 96, Subpart E. After receipt of the audit report, the clearinghouse conducts a review of the report for acceptability and may request more work or information from the auditee and/or the auditor. Once accepted, audits with DOL findings are sent to the Department’s Office of Inspector General (OIG) which also conducts an acceptability review. After it finds an audit acceptable, the OIG issues the report to the Employment and Training Administration (ETA) grant officer. The six month audit resolution with management Transcript Audit Requirements

decision process starts when the ETA grant officer receives the report from the OIG. The resolution process which ETA uses starts with a notification letter to the auditee indicating that the audit has been received and the timing for the steps in the process as well as providing the contact information of the staff who will work with the auditee and the grant officer to complete the “Grant Officer’s Determination Process.” An Initial Determination (ID) is usually issued between thirty and sixty days from audit receipt. The ID provides for an informal resolution period within which the auditee may submit additional documentation and/or conduct discussions with the resolution staff to help resolve the findings. Before the end of six months, the Grant Officer’s Final Determination (FD) is issued. The FD specifies that disallowed amounts which are subject to debt collection are due within 30 days of receipt unless a request for an Administrative Law Judge (ALJ) hearing is received within twenty-one (21) days of the date of the FD.

Next let’s talk about the management decision required by the single audit act, OMB Circular A-133 and its DOL codification at 29 CFR, Part 99. Specifically, the regulation at 29 CFR 99.405 is to indicate whether or not each audit finding is sustained, the reasons for the decision and the expected auditee action to repay disallowed costs, make financial adjustments or take other actions like updating policies and procedures. Paragraph (b) describes the federal agency requirements and we’ve mentioned the DOL procedure on the previous slide. It is the responsibility of the non-federal pass-through entity to make the management decision for audit findings that relate to federal awards to its subrecipients. Paragraph (c) requires that the management decision be issued within six months of the receipt of the audit report. The process leading up to that final management decision is the period for the resolution of the findings included in the audit report.

Audit resolution is the process used to resolve any findings that have arisen as a result of the audit. It includes a decision to either accept or reject the auditor’s findings--based on a review of the law, the regulations, and any explanatory information or additional documentation provided by the auditee. After the final decision of the awarding agency, sanctions are applied to address any unresolved findings. Sanctions may include repayment of disallowed costs as well as completion of required corrective action associated with internal control or administrative findings. The final decision must be issued by the awarding agency no later than 180 days or 6 months from receipt of the audit report. It is the responsibility of the awarding agency whether a federal agency or a pass-through agency to resolve ALL audit findings related to the expenditure of the program funds that they awarded to the auditee.

The resolution process starts with a pre-resolution stage. During this period, the awarding agency either accepts the audit as submitted or determines that additional work is required and returns the audit for completion. If the audit is accepted, the awarding agency should notify the auditee that the audit is acceptable and provide an opportunity Transcript Audit Requirements

for the submittal of any further documentation or explanatory material that may impact the decision. This notification should also establish all time frames associated with the resolution process and provide a contact person who will have responsibility for reviewing documentation and preparing the decision.

In order to track the requirements for audits and audit resolution, an awarding agency may wish to use an audit control log. This tracking system may be manual or automated, but should contain sufficient detail to ensure audit coverage at the subrecipient level. At a minimum, the system should include dates of the audits, period covered by the audit, number of administrative findings (and recommended corrective action), questioned costs (and their disposition), dates of the management decision documents, and any appeal (including ultimate hearing dates and disposition).

There is no prescribed system for audit resolution at the non-Federal level for ETA- funded grant programs. However, ETA has often recommended that the resolution system mirror the DOL process discussed a few slides earlier. ETA urges pass-through agencies to use this system for resolving audits of subrecipients. While there is no prescribed system, all pass-through agencies with the responsibility to resolve audits must ensure that there is adequate corrective action to resolve administrative findings, must make a decision to either allow or disallow costs for monetary findings, must determine the applicability of “stand-in costs” which we will discuss shortly, must establish any debt due as a result of disallowed costs, and must provide appeal rights to the subrecipient.

The WIA regulations specify that the governor is responsible for resolving all audit findings found in the audits of local workforce investment area grant recipients as well as of all the other state subrecipients. Ordinarily, the governor designates state agency officials to resolve findings as the governor’s designee in much the same way as the Secretary of Labor delegates Grant and Contracting Officer authority to appropriate officials within the Department. The resolution process which the state is required to utilize for WIA must be the same procedures for resolution, debt collection, and appeals as is used for all other federal grant programs.

There are two types of audit findings which must be addressed in the resolution process. The first type is the monetary finding, sometimes referred to as disallowed costs findings. These findings result from clear violations of the law or regulations. For example, questioned costs associated with ineligible participants would be considered monetary findings. The charging of unallowable costs, such as entertainment costs, fines and penalties, or the purchase of alcoholic beverages, would also result in a monetary finding. In addition, monetary findings may result because of a lack of supporting source documentation. In fact, the most common basis for monetary findings is the lack of adequate supporting documentation for the cost incurred. The costs may have otherwise been allowable, but because the cost could not be supported, there is no evidence that it Transcript Audit Requirements

met the criteria for an allowable cost to the program. For example, if labor costs were charged based on time sheets, the lack of a time sheet may be a basis for disallowing the costs. Monetary findings will result in disallowed costs if they are not conclusively addressed during the audit resolution process.

The second type of findings found in an audit are the administrative findings. These result from deficiencies in the internal control or financial management systems. While there are no dollars associated with these findings, they do represent non-compliance with the requirements of the programs being audited and may lead to disallowed cost findings if they are not corrected.

The usual recommendation for administrative findings is a specified corrective action. The findings should include a description of the required corrective action and the time frames for completion. Administrative findings not corrected within the specified time period could be subject to sanctions, and those sanctions should be identified. This step is crucial if the administrative findings are so severe that the awarding agency would undertake serious sanctions, such as termination of funding.

As we’ve already discussed A-133 requires a final management decision on all findings within six months of receipt of the audit report. The decision should address all findings contained in the audit. The written findings should contain the following elements which are drawn from the requirements for audit finding details found in A-133 and include:

Condition - A description of the situation revealed by the audit test, Criteria - The law or regulation or requirement upon which compliance is based, Effect - The results of non-compliance with the regulations, Cause - A description of the situation at the grantee that led to the finding, if known, and Recommendation - The awarding agency decision for correcting the finding.

These 5 elements should make up each of the findings contained in the decision document issued by the awarding agency to the auditee. For example, the audit reveals that the internal controls over the petty cash account are deficient (condition). This was determined through audit testing procedures. Internal controls are required by Federal regulations (criteria) and a lack of them may put program funds at risk (effect). The situation occurred because the same person making payouts from the fund also approved any requests for payment (cause). The recommendation in this situation would be for the agency to split these responsibilities between two different staff (recommendation). Following the issuance of the preliminary decision, the auditee should be afforded a set amount of time for response. This period is known as the Informal Resolution. During this period, grantees and subgrantees may submit additional documentation or proposed stand-in costs as a method of resolving any monetary findings. They would also use this Transcript Audit Requirements

period to submit documentation that administrative findings have been corrected. There is sufficient time during this period for a one-on-one meeting with the awarding agency to present the additional materials, if needed or requested. At the end of the informal resolution period, but not later than six months after receipt of the audit report, the awarding agency must issue its final management decision.

The use of stand-in costs is part of the audit resolution process and should be completed before the final management decision is issued. The requirement to accept stand-in costs as substitutes for unallowable costs was mandated by the GAO Comptroller General Decision issued on February 9, 1989. Guidance on the use and applicability of stand-in costs is provided in Part II Chapter 12 of the One-Stop Financial Management Technical Assistance Guide available on the DOL ETA website.

As a result of a Comptroller General decision, DOL is required to accept stand-in costs to resolve the findings provided they meet certain criteria. Stand-in costs are defined as allowable grant costs that may be substituted during the resolution process for disallowed costs. They must be allowable additional program costs that have not previously been charged to the grant, but are financed instead from non-Federal funds. If stand-in costs are proposed as part of the process to resolve disallowed cost findings, their use should be requested when documentation or comments are provided to the awarding agency prior to the issuance of the final management decision.

In order for stand-in costs to be used, they must meet certain other criteria. For example, the costs must be included in the scope of the audit and be from the same funding stream as the disallowed costs. This criteria is ordinarily satisfied because the costs would necessarily have been recorded in the auditee’s books of account which are the subject of the A-133 single audit. The use of these costs cannot result in any limitation on the use of the funds being exceeded. For example, if the disallowed costs were program costs, then administrative costs could not be used to substitute for them IF the administrative cost limitation would be exceeded because of their substitution for the disallowed program costs. An example of unacceptable stand-in costs based on the same funding stream criteria would be if a WIA funded organization proposed to use costs associated with the Adult programs to “stand-in” for costs associated with the Dislocated Worker program.

In addition to the criteria we just reviewed, there are a few additional conditions. The stand-in costs must receive the same treatment as grant costs--in other words, they must be accounted for and classified appropriately in the official books of account. In addition, they are subject to the same requirements for source documentation that apply to grant expenditures.

There are also certain types of costs that are not appropriate for use as stand-in. For example, matching funds generated through in-kind contributions may not be used as Transcript Audit Requirements

stand-in. Examples of these costs would be such items as uncompensated overtime or the State share of tuition or space donated for program use by an outside third party. These do not represent costs to the program, therefore they do not qualify as a substitute for disallowed costs.

Stand-in costs must also have been incurred during the same time period as the grant fund availability. For example, a grantee may not propose to use current PY costs as a stand- in for disallowed costs that were incurred four years prior against another PY funds. In other words, the proposed stand-in costs must be incurred during the same period of fund availability as the disallowed costs.

Finally, the stand-in costs must be from the same organization that incurred the disallowed costs. In other words, grantees may not develop a pool of unbilled costs that they propose to use for stand-in regardless of where the disallowance was incurred. For example, if the disallowance occurs at the subrecipient level, the awarding agency may not use a different subrecipient’s unbilled costs to “stand-in” for the disallowance.

This slide identifies a number of types of costs which do not meet the criteria to be accepted as stand-in costs. They include: 1. Uncompensated overtime - no cost is incurred; 2. Unbilled premises costs associated with fully depreciated buildings - no allowable depreciation left; 3. Allocated costs derived from an improper allocation methodology; 4. Discounts, refunds, rebates or any other form of credits - those are treated as reductions in costs; and 5. Any state share of the cost of state or community college tuition is also excluded because grant participants are already entitled to that state share just as any other student. Paragraph (2) of WIA section 195 indicates that funds provided are only to be used for activities that are in addition to those that would otherwise be available. Since stand-in costs are substitute allowable costs the state share of tuition cannot count.

There is no system prescribed for debt collection at the subrecipient level, but all pass- through awarding agencies must have a process and procedures to collect any amount of misspent federal funds which they disallow. If the fund availability period for the disallowed costs has not expired, the funds collected may be used again for allowable grant program costs. However, if the availability period has lapsed, the funds must be returned through the system to the federal awarding agency.

Remember that when ETA issues its final management decision, the Grant Officer’s Final Determination, that document specifies that all disallowed amounts which are subject to debt collection are due within 30 days. If not paid, the process which ETA uses for debt collection includes a series of up to 3 demand letters, usually sent at 30 day intervals. Interest must be assessed on unpaid debts of more than 30 days, and the Transcript Audit Requirements

interest is then assessed from the date of the Final Determination. There are two options available to collect a debt at the Federal level. The first, and preferable, method is cash repayment. Grantees must use non-Federal funds and remit the total disallowed costs to the Department of Labor. In certain instances, the Department may utilize offset as a method to collect a debt.

Grantees must also have a system in place for debt collection from their subrecipients.

For WIA funded grants, there are provisions for waivers of liability, advance approval of corrective action, and the WIA offset process which have an impact on debt collection.

WIA provides that direct recipients may request a waiver of liability for debts incurred by its subrecipients under certain circumstances. If the waiver is made during the ETA resolution period, it must be made as part of the informal resolution. The WIA regulations which cover waiver of liability are found at 20 CFR 667.720. Guidance on the waiver process is included in both Chapters II-12 and II-13 of the One-Stop Financial Management TAG because it relates to both audit resolution and debt collection activities. The circumstances under which the waiver of liability will be granted are: . Misexpenditure occurred at subrecipient level; . Was not the result of any gross negligence or a willful disregard of the Act and/or regulations or a failure to follow accepted standards for costs, or did not constitute fraud; . If the misexpenditures are due to fraud, all due diligence has been applied to recover the funds. This would include investigation, prosecution, and debt collection against the evil-doer. Also, it should be demonstrated that further attempts at debt collection would be either inappropriate or would prove futile. . The debt was established in accordance with audit resolution procedures, including a final determination which disallows the misexpenditure, and an appeals process which has been exhausted. Finally the direct recipient grantee must formally request the waiver from the Grant Officer, and provide all documentation to support compliance with the waiver requirements

Direct WIA grantees may also request approval from the Grant Officer for any debt collection actions they plan to begin or forego. This material is also covered in both Chapters II-12 & II-13 of the TAG. The request must include a description of how the debt was established and all actions taken to collect the debt. The Grant Officer may then determine whether or not to permit the direct recipient to forego collection action against its subrecipient. However, the misexpenditure for which such a request applies must Transcript Audit Requirements

occur at a lower tier subrecipient level. In other words a direct recipient may request advance approval to forego debt collection against its subrecipient when the misexpenditure is made by an entity which received the federal funds from the subrecipient. The requirements which the subrecipient must meet are listed in the WIA regulations at 20 CFR 667.730(b) and are substantially the same as the requirements which the recipient must satisfy for waiver(s) of liability requests which we have just discussed.

Offset as a method of debt collection for WIA programs is described in 20 CFR 667.740 of the regulations and authorized in the Act at Section 184(c). ETA may determine that a debt be offset against amounts due to a State formula grantee. The State must submit a written request for offset to the Grant Officer. If accepted, the offset is applied against the amounts available to the state for its administrative expenditures. The offset request must document that certain conditions similar to those conditions for a waiver of liability have been met.

If ETA disallows costs to a State for misexpenditures by subrecipients, then the State can offset an amount equal to the debt from the subsequent year’s local allocation from the appropriate program funding stream. In these cases, the offset will provide that the state must offset the amount against funds available for administrative costs of the local area.

For all programs, including non-WIA funded programs, offset is authorized for Federal use by the Debt Collection Act. The offset process occurs after the federal agency refers an uncollected debt to the US Department of Justice. At this point the US Treasury may offset the uncollected debt against any source of federal funds, usually the next funds that the entity is supposed to receive from the federal government. Offset is not authorized for anyone other than the Federal government.

Under offset provisions, a portion of the allotment is withheld from the grantee, but the services to be provided must be provided at the level demanded by the allotment. For example, if the State Wagner-Peyser allotment were $1,000,000 and the total debt were $10,000; then the allotment would be reduced to $990,000. The State would be required, however, to expend the full million dollars on the Wagner-Peyser grant. At the non-Federal level, cash repayment is the ONLY option available.

Under OMB Circular A-133, making sure that the organization’s audit as well as those of subrecipients are completed, are timely and are resolved is the responsibility of every entity which receives federal funds and provides some of those funds as a pass-through entity to subrecipients. In order to comply with the requirement and ensure compliance at the recipient and subrecipient level, grant recipients should review laws, regulations and other compliance requirements to ensure audits required are properly performed and submitted when due. Audit requirements should also be included in the subrecipient contract agreement. Transcript Audit Requirements

Potential sanctions which may be imposed for failure to meet the A-133 requirements include: 1. Withholding of a percentage of federal award funds until the A-133 audit is completed; 2. Withholding the payment of and/or disallowing the organization’s overhead costs; 3. Suspending federal awards to the organization until the audit is done; and/or 4. Terminating federal awards to the organization.

The requirements which implement the Single Audit Act are in OMB Circular A-133. Each year, an A-133 Compliance Supplement is issued to assist auditors by identifying the compliance requirements for federal programs which should be tested in the conduct of the audit. The compliance supplements also address when programs may be audited as a cluster of programs (such as WIA Adult, Youth, & Dislocated Workers) with common compliance requirements. DOL has codified its requirements for audit which are applicable to ETA-funded programs in the regulations contained in 29 CFR Part 96. These regulations require audits to be conducted in accordance with 29 CFR Part 99 which is the DOL’s codification of OMB Circular A-133.

There are no audit requirements for vendors or for organizations which expend less than $500,000 in TOTAL federal funds during the audit fiscal period. The definition of vendor is contained in the A-133 provision that discusses the distinctions between vendors and subrecipients and is codified at 29 CFR 99.210. While there is no A-133 audit requirement, the WIA regulations require that commercial organizations, or private- for-profit entities, which function as a subrecipient must have a program-specific or organization-wide audit in conformance with A-133 if they expend $500,000 or more in Federal funds. Audits of direct recipients that are commercial organizations are the responsibility of the Department of Labor as indicated at 29 CFR 96.32.

The standards for audit are found in the Government Auditing Standards, a document commonly referred to as the “yellow book” which is issued by the Government Accountability Office (GAO).

This slide identifies a number of different websites where information related to audit and audit related matters can be found. The first one is the GAO site where the yellow book can be found. The second is the site where DOL’s OIG provides a summary of audit requirements. The third is the site for the federal audit clearinghouse which includes the single audit database. Fourth is the site which provides the links to public laws, regulations, federal register notices, and privacy act issuances. Fifth is the OMB website which has links to all circulars, the compliance supplements, and OMB policies. The six and last one on this slide is the site for the Catalog of Federal Domestic Assistance. Transcript Audit Requirements

It is very important that you maintain on-going communication with your Federal Project Officer. That is the person who can guide and direct you as you navigate through all of the rules and regulations and take steps to apply them and comply with them, while implementing your ETA grant. They are your first point of contact with ETA and will ensure that your questions are addressed. We thank you for participating in this Fiscal Management Workshop on Audit Requirements. We hope you have found it useful!!! There are many other topics covered in ten additional Financial Management Workshops that we think you will find interesting and helpful. Check them out soon.