Proposed OMB Uniform Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards National Association for State Community Services Programs Kevin C. Myren, C.P.A.

 Overall Themes  Major Changes  Impact on our Work  What’s Next  Questions and Answers AGENDA

Overall Themes

 Risk assessment  Merit/performance based  Outcomes oriented  Enhanced efficiency ◦ Eliminate ‘red tape,’ barriers and requirements  Transparent  Accountability ◦ Increase burden on state  State focus  Current business practice Overall Themes

Major Changes

 _.205 Agency Review of Merit of Proposals and Risk Posed by Applicants risks ◦ Prior to making an award, whether competitive or not, the Federal agency shall evaluate risks to the program posed by each applicant  Financial stability  Quality of management systems  Ability to meet the management standards  History of performance  Reports and findings from single audits ◦ For competitive, agencies shall design and execute a merit review process for applications  Not just continuation awards! Subchapter B – Pre-award Requirements

 _.501 Subrecipient Monitoring and Management ◦ Pass-through entity determines status ◦ Substance of relationship more important than the form of the agreement ◦ Subrecipients:  Characteristics:  Determines who is eligible to receive Federal assistance  Has its performance measured in relation to the Federal program  Has responsibility for adherence to Federal requirements  Uses Federal funds to carry out a program for a public purpose, as opposed to providing goods or services Subchapter E – Post Federal Award Requirements

 _.501 Subrecipient Monitoring and Management, continued ◦ Contractors:  Characteristics:  Provides goods or services within normal business operations  Provides similar goods or services to many different purchasers  Normally operates in a competitive environment  Provides goods or services that are ancillary to the operation of the Federal program  Is NOT subject to compliance requirements Subchapter E – Post Federal Award Requirements

 _.501 Subrecipient Monitoring and Management, Continued ◦ All pass-through entities shall:  Ensure subawards include:  All clauses required by Federal statute, regulation, etc.  Each administrative, national policy and program-specific requirement  Any additional Federal requirements  A recognized indirect cost rate, negotiated rate between pass-through and subrecipient, or de minimis rate equal to 10% of total modified direct costs  Access to records  Closeout terms Subchapter E – Post Federal Award Requirements

 _.501 Subrecipient Monitoring and Management, Continued ◦ All pass-through entities shall, Continued  Inform the subrecipient of the CFFA title and number  Ensure subrecipients are aware of requirements imposed upon them by Federal laws, regulations, and provisions of subawards  Monitor the activities as necessary to ensure Federal awards are used for authorized purpose, in compliance with laws, regulations and provisions of subawards  Analyze financial and programmatic reports of subs  Follow-up and ensure subs take timely and appropriate action on all deficiencies from audits and on-site reviews  Issue a management decision for audit findings Subchapter E – Post Federal Award Requirements

 _.501 Subrecipient Monitoring and Management, Continued ◦ All pass-through entities shall, Continued ◦ Depending upon pass-through entity’s assessment of risk posed by the subrecipient, the following monitoring tools may be used to ensure proper accountability and compliance with program requirements and achievement of performance goals”  Performing on-site reviews of operations  Providing training and technical assistance  Arranging for agreed-upon-procedures engagements ◦ Ensure every sub is audited ◦ Consider whether adjustments are needed on pass through books ◦ Consider taking enforcement action Subchapter E – Post Federal Award Requirements

 _.502 Standards for Financial and Program Management, continued ◦ Period of availability ◦ Internal Controls  Recipient shall identify Federal awards received and expended  Must maintain internal control over Federal programs that provides reasonable assurance that awards are managed in compliance with laws, regulations, terms and conditions of awards that could have a material effect on each program  Comply with laws, regulations, and the terms and conditions of Federal awards for each of its programs Subchapter E – Post Federal Award Requirements

 _.503 Property Standards, continued ◦ Equipment  Title vests upon acquisition in the recipient or sub  States will use, manage and dispose of equipment acquired under an award in accordance with state laws and procedures  Use:  Equipment shall be used for purpose as long as needed  When no longer needed, may be used in other activities supported by a Federal agency (includes IT systems)  May use for a few, but may not compete unfairly with private companies that provide equivalent services  May trade-in or use sales proceeds to offset cost of replacement equipment, subject to Federal approval Subchapter E – Post Federal Award Requirements

 _.504 Procurement Standards ◦ States will follow state policies and procedures ◦ Requirements:  Recipients use their own procurement procedures  Maintain a contract administration system  Written standards of real or apparent conflict of interest  Review proposed procurements to avoid unnecessary or duplicative acquisitions  Encouraged to use  State and local intergovernmental agreements  Federal excess and surplus property  Value engineering  Consider contractor integrity, compliance, past performance and technical and financial resources Subchapter E – Post Federal Award Requirements

 _.504 Procurement Standards, continued ◦ Competition  Full and open competition  Contractors that develop specs, ect are prohibited from proposing  Situations considered restrictive of competition  Unreasonable requirements on firms to qualify  Unnecessary experience and excessive bonding  Specifying a “brand name”  Written selection procedures  Must have a written procurement protest procedure Subchapter E – Post Federal Award Requirements

 _.504 Procurement Standards, continued ◦ Methods of procurement:  Some form of cost or price analysis required for all  Small purchases  $150,000 or less  Price or rate quotations shall be obtained from an adequate number of qualified sources  Sealed bids  Preferred method for procuring construction  Invitation for bids will be publicly advertised  Bids will be publicly opened  Awarded to lowest responsive and responsible bidder Subchapter E – Post Federal Award Requirements

 _.504 Procurement Standards, continued ◦ Methods of procurement, continued  Competitive proposals  Requests for proposals will be publicized  Solicited from an adequate number of qualified sources  Written method for conducting technical evaluation  Awarded to firm whose proposal is most advantageous to the program, with price and other factors considered  Noncompetitive proposals  Available only from a single source Subchapter E – Post Federal Award Requirements

 _.504 Procurement Standards, continued ◦ Small, minority, women and labor surplus area firms  Affirmative steps:  Placing firms on solicitation lists  Solicited whenever they are potential sources  Dividing total requirements into smaller tasks  Requiring prime contractor to subcontract Subchapter E – Post Federal Award Requirements

 _.505 Performance and financial Monitoring and Reporting ◦ Collect reports electronically ◦ Shall only solicit OMB-approved data elements for financial reporting ◦ Monitoring by recipients must cover each program, function or activity ◦ Performance reports must include:  Comparison of actual accomplishments to award  Reason for slippage, if any  Explanation of any cost overruns or high unit cost Subchapter E – Post Federal Award Requirements

 _.616 Indirect (F & A) Costs, Continued ◦ Negotiate Indirect Cost Rates  Negotiated rates shall be accepted by all Federal agencies  Any entity that has never received or does not currently have a negotiated indirect cost rate is eligible for a de minimis indirect cost rate of 10% of modified total direct costs (MTDC)  May be utilized for an initial period of up to 4 years  MTDC = salaries, wages, fringe benefits, materials and supplies, services, travel and subgrants up to the first $25,000 of each  Excluded from MTDC = equipment, capital expenditures, rent, participant costs  All entities may apply for a one-time extension of a current negotiated indirect cost rate for a period of up to 4 years Subchapter F – Cost Principles Subtitle III – Direct and Indirect Costs

 _.621 Selected Items of Cost, Continued ◦ C – 10 Compensation – Personal Services  Reasonable – consistent with that paid for similar work  Consistent – must follow organization-wide policies/practices  Incentive compensation  Overall compensation must be reasonable  Paid or accrued pursuant to an agreement entered into in good faith before services were rendered Subchapter F – Cost Principles Subtitle VI – General Provisions for Selected Items of Cost

 _.621 Selected Items of Cost, Continued ◦ C – 10 Compensation – Personal Services  Standards for Documentation of Personnel Expenses  Based on documented payrolls approved by a responsible official  No documentation outside payroll system required for employee who works in a single indirect activity  Where employee works solely on a single Federal award, charges will be supported by periodic certification  Certification prepared at least semi-annually AND signed by employee or a responsible supervisory official  Reports may be integrated into payroll distribution system  No duplication necessary  Reports must be after-the-fact certification Subchapter F – Cost Principles Subtitle VI – General Provisions for Selected Items of Cost

 _.621 Selected Items of Cost, Continued ◦ C – 10 Compensation – Personal Services  Standards for Documentation of Personnel Expenses  Nonprofessional employees’ compensation must supported by records indicating total hours worked  Salaries/wages for matching/cost sharing must be supported in the same manner  Substitute system for allocating salaries/wages may be used, if approved by the cognizant agency  Random moment sampling, “rolling” time studies, case counts, or other quantifiable measures of employee effort  After the fact certification is still required Subchapter F – Cost Principles Subtitle VI – General Provisions for Selected Items of Cost

 _.621 Selected Items of Cost, Continued ◦ C – 11 Compensation – Fringe Benefits  Costs of leaves, employee insurances, pensions  Must be reasonable and required by law, entity-employee agreement or an established policy  Leaves  Under written leave policies  Equitably allocated to all related activities  Determined by GAAP, when leave is earned  Lesser of the amount accrued or funded  Insurances and pensions must be granted under a written policy  May be assigned to cost objectives by indentifying specific benefits to individual employees or by allocating on the basis of entity-wide salaries and wages Subchapter F – Cost Principles Subtitle VI – General Provisions for Selected Items of Cost

 _.621 Selected Items of Cost, Continued ◦ C – 11 Compensation – Fringe Benefits  Insurance  Reserves under a self-insurance program for unemployment compensation or workers’ comp are allowable  If provisions represent reasonable estimates of liabilities  However, provisions for self-insured liabilities which do not become payable for more than one year after the provision is made shall not exceed the present value of the liability  Automobiles  That portion of automobile costs furnished by the entity that relates to personal use by employees is unallowable regardless of whether the cost is reported as taxable income to the employee Subchapter F – Cost Principles Subtitle VI – General Provisions for Selected Items of Cost

 _.621 Selected Items of Cost, Continued ◦ C – 11 Compensation – Fringe Benefits  Pension  Costs for a fiscal year must be funded within 6 months of fiscal year end  Post Retirement Health  Pay-as-you-go…actual payments to beneficiaries are allowable  Actuarial cost…GAAP expense allowed, if funded in 6 months  Severance Pay  Allowable if required by law, employer-employee agreement, or established policy Subchapter F – Cost Principles Subtitle VI – General Provisions for Selected Items of Cost

 _.701 Audit Requirements ◦ Required for non-Federal entities that expend $750,000 or more in Federal awards in a year  Single audit unless eligible and elect program-specific audit  Program-specific audit allowable if entity has only one Federal program  When a subrecipient and a contractor – Recipient and sub subject to audit requirements; contractor would not  Contractor – Federal compliance conditions do NOT pass down  For-profit subrecipients, pass through entity shall establish requirements Subchapter G – Audit Requirements Subtitle II – Audits

 _.708 Auditee responsibilities ◦ The auditee shall:  Prepare appropriate financial statements  Procure or otherwise arrange for the audit  Follow up and take corrective action on audit findings  Provide the auditor with access  _.709 Auditor Selection ◦ Factors to considered in evaluating proposals for audit services: responsiveness; relevant experience; availability of staff with professional qualifications; technical abilities; peer review; and, price ◦ Preparer of indirect cost proposal or cost allocation plan can NOT perform the audit Subchapter G – Audit Requirements Subtitle III – Auditees

 _.710 Financial Statements ◦ Auditee shall prepare:  Statement of Financial Position  Statement of Activities (results of operations/changes in NA)  Statement of Cash Flows  Schedule of expenditures of Federal Awards  _.711 Audit Findings Follow-Up ◦ Auditee shall prepare schedule of prior audit findings ◦ Auditee shall prepare Corrective Action Plan, for current year findings Subchapter G – Audit Requirements Subtitle III – Auditees

 _.714 Management Decision ◦ Federal agency or pass-through entity shall make management decision on audit findings ◦ Federal agency is responsibility for coordinating a management decision for a program ◦ Pass-through entity shall make management decision on findings of subrecipients ◦ Management decision shall be made within 6 months of acceptance of the audit report by the Federal Clearinghouse Subchapter G – Audit Requirements Subtitle IV – Federal Agencies

 _.717 Audit Findings ◦ Significant deficiencies and material weaknesses in internal control over major programs ◦ Material noncompliance with the provisions of laws, regulations or terms/conditions of awards over a major ◦ Known questioned costs that are greater than $25,000  Auditor should project potential error ◦ Known or likely fraud Subchapter G – Audit Requirements Subtitle V – Auditors

 _.717 Audit Findings, Continued ◦ Elements of a finding  Federal program and Federal award identification  CFFA number and title  Criteria upon which the audit finding is based (citation)  Condition found (facts that support the deficiency)  Statement of effect  Identification of questioned cost and how computed  Information on prevalence (# of findings from # in universe)  Whether a repeat finding from a previous audit  Recommendation to prevent future occurrences  View of responsible official of the auditee Subchapter G – Audit Requirements Subtitle V – Auditors

 _.718 Audit Documentation ◦ Must be sufficiently detailed to enable someone having no previous connection to the audit to understand  Nature, timing and extent of audit procedures  Results of audit procedures performed and evidence obtained  Conclusions reached on significant matters  Extent of agreement between accounting records and audited financial statement ◦ Auditor shall retain audit documentation for 3 years after date of issuance of the auditor’s report Subchapter G – Audit Requirements Subtitle V – Auditors

Audit Requirements  Streamlining the types of compliance requirements. ◦ Focus on areas of higher risk ◦ In:  A. Activities Allowed/Unallowed and B. Allowable Costs/Cost Principles (combined)  C. Cash Management  E. Eligibility  L. Reporting  M. Subrecipient Monitoring  N. Special Tests and Provisions

Audit Requirements  Out: ◦ D. Davis-Bacon ◦ F. Equipment and Real property Management ◦ G. Matching, Level of Effort and Earmarking ◦ H. Period of Availability of Federal Funds ◦ I. Procurement and Suspension and Debarment ◦ J. Program Income ◦ K. Real Property Acquisition and Relocation Assistance

Impact on our Work

Potential Impact on Our Work  Some agencies may no longer be audited ◦ $500,001 - $750,000  Some programs may not be audited ◦ Major program definition changes  Amount of dollars audited will decrease  Auditors will no longer review certain compliance elements  Emphasis on RISK analysis  MERIT, not just continuation  Subchapter E.501 – Monitoring responsibilities more detailed (greater emphasis) ◦ Need to use single audits  Indirect cost rates – what’s next?  Internal control section is new, what’s it mean?

Responding to the Change  Educating our recipients ◦ Communicating changes  Training ◦ Update policies and procedures  Procurement  Payroll systems  Modifying our monitoring practices  Sharing Best Practices

What’s Next

What Next……  Comments through June 2, 2013  OMB will ‘FINAL’ the document ◦ Perhaps as early as end of the year???????  Then agencies have one year to codify ◦ Put in the CFR  Then put it in the grants

 Over 300 comments received by OMB  Mostly from Colleges/Universities & Native American Tribes  General Themes: ◦ Lack of Privacy (Tribal Governments) ◦ Time and effort reporting ◦ Deadlines for reporting ◦ Monitoring requirements are too burdensome ◦ Indirect Cost Rates Comments

 Full text of Proposed OMB Uniform Guidance for Federal Financial Assistance ◦ MB MB  CROSSWALKS from existing to proposed guidance ◦ 25;po=0;dct=SR%252BO;D=OMB ;po=0;dct=SR%252BO;D=OMB Resources

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