1. RECENT AUDIT DEVELOPMENTS: THE SUPERCIRCULAR Michael Brustein, Esq. mbrustein@bruman.com Brustein & Manasevit, PLLC www.bruman.com Spring Forum 2013 1 Brustein & Manasevit, PLLC

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

3. Why Supercircular??? 1. Greater simplicity 2. Greater consistency 3. Obama Executive Order on Regulatory Review 3 Brustein & Manasevit, PLLC

4. Greater simplicity means elimination of several compliance elements in the Compliance Supplement 14 requirements reduced to 7, eliminating: 1. Equipment Management 2. MOE/Ear-Marking 3. Procurement 4. Program Income 4 Brustein & Manasevit, PLLC

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

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

7. What is covered? 1. Administrative Requirements (A- 102, A-110) 2. Cost Principles (A-87, A-21, A-122) 3. Audit Requirements (A-133) 7 Brustein & Manasevit, PLLC

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

9. 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 9 Brustein & Manasevit, PLLC

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

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

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

13. SO WHAT IS NEW? 13 Brustein & Manasevit, PLLC

14. Federal agencies must evaluate risks to the program posed by each applicant Focus now on risk! a) Financial stability b) Management system c) History of performance d) Generally available information e) Single audits f) Capacity to implement programs 14 Section _.205 Brustein & Manasevit, PLLC

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

16. 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 16 Section _.404 Brustein & Manasevit, PLLC

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

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

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

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

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

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

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

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

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

26. 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 26 Section _.607(d) Brustein & Manasevit, PLLC

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

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

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

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

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

32. 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.) 32 Section _.616(e) Brustein & Manasevit, PLLC

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

34. 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 34 Section _.621 C-10(9) Brustein & Manasevit, PLLC

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

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

37. 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 37 Section _.621 C-10(9)(F) Brustein & Manasevit, PLLC

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

39. 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. 39 Section _.621 C-14(2) Brustein & Manasevit, PLLC

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

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

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

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

44. 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 44 Section _.713(c)(5) Brustein & Manasevit, PLLC

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

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

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

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

49. 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 49 Section _.714(a) Brustein & Manasevit, PLLC

50. 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. 50 Brustein & Manasevit, PLLC