WHEN THE AUDITOR COMES KNOCKING -- WHAT WE’VE LEARNED AND HOW TO PREPARE Bonnie L. Graham, Esq. Brustein & Manasevit, PLLC Fall Forum 2013

Non-Compliance Findings Audit 1. OIG Audit 2. A-133 Audit Monitoring 3. Federal 4. State 2 Brustein & Manasevit, PLLC

Preparation Key to successful outcome Self assessment - critical 3 Brustein & Manasevit, PLLC

Self Assessment Identify potential trouble spots Review significant violations from other processes Review prior findings Conduct self assessment 4 Brustein & Manasevit, PLLC

Review of 27 OIG Audit Reports $ 1,398,564 unallowable personnel costs Employee compensation charged to grants in which the employee did not work on $826,183 unallowable non-personnel costs Unnecessary or unreasonable to carry out the grant or not-for-program purposes $810,055 unallowable non-personnel costs Contracts were: missing required elements; unfulfilled; not approved; or included expenditures that exceeded the contract amounts 5 Brustein & Manasevit, PLLC

Review of 27 OIG Audit Reports (cont.) $66,666,155 inadequately documented personnel costs Time and effort documentation (both semi-annual certifications and PARs) were missing, incomplete, inaccurate, or untimely $16,010,550 inadequately documented non-personnel costs Missing or inaccurate supporting documentation $2,693,004 in lost or unaccounted for property Improper inventory control systems $2,504,617 unallowable supplanting of Federal grant funds 6 Brustein & Manasevit, PLLC

Review of 27 OIG Audit Reports (cont.) Pervasive non-compliance issues Inadequate policies and procedures (34 times) No policies and procedures (15 times) Not understanding the regulations and guidance (10 times) Policies in place, but not followed (5 times) 7 Brustein & Manasevit, PLLC

Audit violations deemed “significant” by the U.S. Education Department 8 Brustein & Manasevit, PLLC

9 1.Time Distribution 2.MOE 3.Supplement Not Supplant 4.Unallowable Expenses 5.Procurement Irregularity 6.Ineligible Students 7.Lack of Accountability for Equipment/Materials 8.Lack of Appropriate Record Keeping 9.Record Retention Problems 10.Late or No Submission of Required Reports, Inaccuracies, Inconsistence 11.Audits of Subrecipient Unresolved 12.Lack of Subrecipient Monitoring 13.Drawdown before they are needed or more than 90 days after the end of funding period 14.Large Carryover Balances 15.Lack of valid, reliable or complete performance data

Evaluate Areas to be Examined 1. OIG Audit Notice of Audit: Correspondence 2. A-133 Audit Prior Audits (Findings) A-133 Compliance Supplement 10 Brustein & Manasevit, PLLC

Evaluate Areas to be Examined (cont.) 3. Monitoring ESEA Flexibility Monitoring; SASA Guide CrEAG; RDA Perkins IV Checksheets Request for documents Make a separate set of copies of all documents provided to ED 11 Brustein & Manasevit, PLLC

Remedy Problem Areas AND / OR Develop Corrective Actions (Plans) 12 Brustein & Manasevit, PLLC

Corrective Action Plan Critical – in place at time of visit – even if implementation - FUTURE Specific Measurable Objectives Timelines Clear Lines of Responsibility 13 Brustein & Manasevit, PLLC

PREPARATION FOR VISIT 14 Brustein & Manasevit, PLLC

Logistics Secure Space Copy Machine 15 Brustein & Manasevit, PLLC

Audit Records Can the auditee refuse to provide the auditors with requested documents? GEPA 20 USC 1232(f) requires that ED and its representatives (which arguably includes A-133 auditors) “shall have access, for the purpose of audit examination, to any records maintained by a recipient that may be related, or pertinent to, grants” EDGAR 80.26(b)(5) also indicates audit access to records without qualifiers. If requested records are not provided, likely receive an audit limitation. 16 Brustein & Manasevit, PLLC

Communication with Staff Formal (governmental) inquiry Provide any information within personal knowledge No guessing No speculation No time to settle grudges No gossip 17 Brustein & Manasevit, PLLC

Identify Key Staff (Audit Committee) Audit Manager: Key contact for all questions, interview arrangements, documents requests, logistical arrangements Agency Leadership: Entrance, exit conference 18 Brustein & Manasevit, PLLC

Identify Key Staff (Audit Committee) Relevant Staff: Assure staff are prepared for interview Subject matter awareness Terminology/Definitions Time and Effort Necessary and Reasonable Inventory Familiarity with job description Familiarity with prior problem areas Familiarity with likely areas of inquiry 19 Brustein & Manasevit, PLLC

The Visit Entrance Conference Leadership Set positive tone Audit Manager Review process/logistics Request all interview requests go through manager Request periodic updates (especially problem areas) Do not wait for exit conference 20 Brustein & Manasevit, PLLC

The Visit Keep extra copy of all documents supplied!!! Debrief staff after interviews Clear up misunderstandings 21 Brustein & Manasevit, PLLC

Exit Conference Press for specifics If issues: Documents requested? List and send Potential noncompliance findings Review carefully – If confirmed, develop corrective actions proactively 22 Brustein & Manasevit, PLLC

Next Steps OIG Audit, A-133 Audit Draft Audit Report Final Audit Report Final determination (ED, State Agency) Respond carefully at each level Problems always easier to resolve at earliest level 23 Brustein & Manasevit, PLLC

For example: Alabama Audit Cash Management Findings Draft Audit Report - October 2011 Alabama Response: Policies and procedures, internal controls Final Audit Report – February 2012 Alabama Response: Disagreed with some findings, but addressed OIG concerns; acknowledged Federal requirements; implemented corrective actions. Brustein & Manasevit, PLLC 24

For example: Alabama Audit “With all these facts and circumstances, we find that the State has been willing to implement and to also require the prime recipients and subrecipients to implement corrective action that complies with the draw down, transfer, disbursement and maintenance of excess Federal grant funds and the internal control requirements applicable to Federal grant funds. Therefore, we do not request the State, prime recipients, or subrecipients to refund any of the Federal grant funds they have received... It is our determination that this finding is resolved.” Program Determination Letter – May Brustein & Manasevit, PLLC

Next Steps ED can: Accept finding as is Accept finding but Reduce or eliminate liability Reject finding Letter of final audit determination Establishes prima facie case 34 CFR Brustein & Manasevit, PLLC

Review by ED ED accepts finding with $ liability Appeal to Office of Hearings and Appeals (OHA), 34 CFR Administrative Law Judges (ALJs) are independent Caution – Time limits Other Rules of Procedure for Appeals 27 Brustein & Manasevit, PLLC

Review by ED ALJ Decision – Appeal to Secretary 28 Brustein & Manasevit, PLLC

AUDIT DEFENSE AND RESOLUTION 29 Brustein & Manasevit, PLLC

Common Defenses Harm to the Federal interest Equitable offset Statute of limitations 30 Brustein & Manasevit, PLLC

Harm to the Federal Interest 34 CFR and Appendix “A recipient that made an unallowable expenditure or otherwise failed to account properly for funds shall return an amount that is proportional to the extent of the harm its violation caused to an identifiable Federal interest associated with the program... ” 31 Brustein & Manasevit, PLLC

Harm – Always Ineligible Beneficiaries Example: IDEA, Part B program funds for students without a disability Unauthorized activities Example: Migrant funds used for local agency staff to attend conference unrelated to Migrant program 32 Brustein & Manasevit, PLLC

Harm - Always (cont.) Fiscal Set-aside Example: SEA spends more than 10% on Perkins state leadership MOE Comparability Supplanting Excess cost Matching 33 Brustein & Manasevit, PLLC

Possible No Harm May argue “no harm” if: Did not obtain required prior approval Missing required time and effort documentation Missing evidence of procurement Caution: ED takes more limited view – may require litigation 34 Brustein & Manasevit, PLLC

ALJ Decisions - Reconstruction Application of the New York State Department of Education (April 21, 1995) After-the-fact affidavits and other pertinent documentation are admissible as evidence. Consolidated Appeals of the Florida Department of Education (June 26, 1990) Accepted affidavits completed by supervisors years later as credible and useful evidence. 35 Brustein & Manasevit, PLLC

Equitable Offset In effect, an equitable offset permits the substitution of any costs paid under the grant that are subsequently disallowed with otherwise allowable expenditures paid by the grantee, and thereby reduces or eliminates a liability due to ED. Application of Pittsburg Pre-School Community Council, Docket No R, May 16, Brustein & Manasevit, PLLC

Statute of Limitations No recipient under an applicable program shall be liable to return funds which were expended in a manner not authorized by law more than 5 years before the recipient received written notice of a preliminary departmental decision. 20 USC 1234a(k); 34 CFR 81.31(c) For purposes of measuring the statute of limitations, funds are “expended” as of the date of obligation. 37 Brustein & Manasevit, PLLC

Resolution Strategies CAROI Compromise Settlement Litigation 38 Brustein & Manasevit, PLLC

Monitoring Findings Opportunity to Respond Generally, Corrective Actions No Liability 39 Brustein & Manasevit, PLLC

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. Brustein & Manasevit, PLLC 40