Arizona’s First University. Sponsored Projects: Financial Compliance and Audit Jing Liu Assistant Director, Sponsored Projects ,

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

Arizona’s First University. 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: – NSF OIG Audit Reports –

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 ) –Fly America Act exception: Waiver form (see Appendix D) –NIH Cap –NSF 2-month Salary Limitation –Supplemental Compensation ( see Appendix E )

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 – 26

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 27

28 SPS Training Opportunities Online training material and other resources Check 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 or via messages To subscribe RAMTALK: lists/help/subscribe#subscribe lists/help/subscribe#subscribe

Arizona’s First University. 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: Financial Policy and Procedure Manuals: Direct and Indirect Cost Policy: and-indirect-costs-sponsored-agreementshttp://rgw.arizona.edu/documents/direct- and-indirect-costs-sponsored-agreements A-21: A-110: NIH Grants Policy: NSF Grants Policy: FSO Compliance & Internal Control: AZ A-133 audit reports: UA annual financial reports: management/annual-reportshttp:// 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?