1. Audit and Accounting System Requirements Department of Health & Human Services National Institutes of Health / OD / OALM / OAMP Division of Financial Advisory Services Hruta Virkar, CPA Chief – Special Reviews Branch 16th Annual NIH SBIR/STTR Conference

2. Understand the audit requirements of for-profit organizations Understand the requirements of an adequate accounting system Presentation Objectives 2

3. 3 Roles and Responsibilities Grants Management Officer (GMO) – responsible for the business management of the grant, including review, negotiation, award administration, and interpretation of policies and provisions. Program Official – answers your scientific questions and discusses funding alternatives. Principal Investigator (PI) – is accountable for the research and takes direct responsibility for completion of the funded project, directing the research and reporting directly to the funding agency.

4. 4 Roles and Responsibilities – Cont. Grants Management Specialist (GMS) – evaluates grant applications for administrative content and compliance with statutes, regulations and guidelines, and negotiates grant awards. Grantee Organization – is legally responsible for the proper conduct and execution of the project and provides fiscal management of the project.

5. 5 Audit? Who said anything about having an audit? The Department of Health and Human Services (HHS) did! HHS specifies requirements for audits of for-profit organizations in Title 45 CFR Part 74.26 (d) http://www.ecfr.gov/cgi-bin/text- idx?SID=51fce90de204d8ce7c9c64aae71f1e9f&tpl=/ecf rbrowse/Title45/45cfr74_main_02.tpl

6. 6 Audit Requirements A for-profit organization is required to have an audit if: it expended $500,000 or more under HHS awards in its Fiscal Year AND at least one of the awards is an HHS grant WAIT – Haven't the requirements changed?

7. 7 Audit Requirements – Cont. Title 45 CFR Part 74.26 provides for-profit organizations with two options regarding the type of audit that will satisfy the audit requirements either: - a financial related audit of the HHS awards in accordance with Generally Accepted Government Auditing Standards (GAGAS), OR - an audit that meets the requirements contained in OMB Circular No. A-133

8. 8 Audit Requirements – Cont. The audit period is the awardee’s Fiscal Year – not the grant budget period, the grant project period or the Government’s Fiscal Year. Audits must be completed and submitted within:  30 days after receipt of the auditor’s report OR  9 months after the end of the audit period Whichever is earlier

9. 9 Audit Requirements – Cont. A for-profit organization is subject to audit requirements for a non-Federal audit if, during its Fiscal Year, it expended $500,000 or more under HHS awards and at least one award is an HHS grant or sub grant. Therefore, the organization must have one grant or sub grant in order to be required to obtain a non-Federal audit, but other HHS awards are included in the threshold calculations and the scope of the audit. Your grant-related records must be available to NIH officials for review or audit even if the above audit requirements are not met.

10. 10 The Audit Process  The audit is typically conducted by an independent CPA firm, and tends to be more extensive and scrutinizing than a traditional audit of your financial statements.  In addition to examining your financial statements and controls for evidence of general GAGAS (Yellow Book) compliance, an A-133 audit delves into specific issues related to the control of funds provided by the Federal government. These issues include:  Proper classification and documentation of allowable and unallowable costs  Cash Management  Period of availability of Federal funds  Reporting  Procurement and Suspension and Debarment  Internal Controls  Compliance with laws, regulations, contracts and grant agreements

11.  Audit reports of for-profit organizations should be submitted directly to: Department of Health and Human Services Office of Inspector General Office of Audit Services National External Audit Review Center (NEARC) 1100 Walnut Street, Suite 850 Kansas City, MO 64106-2197 Phone: 800-732-0679 or 816-426-7725  HHS identifies organizations not meeting audit requirements. Failure to comply may jeopardize eligibility to receive future HHS awards.  For more information about audit requirements, see the information posted at the NIH Division of Financial Advisory Services website, Non-Federal Audit Requirements for Commercial (For-Profit) Organizations http://oamp.od.nih.gov/dfas/faq/for-profit- auditshttp://oamp.od.nih.gov/dfas/faq/for-profit- audits The Audit Process – Cont. 11

12. 12 The Audit Process – Cont. What happens once the audit report is submitted to NEARC?  The National External Audit Review Center will process the audit report – checking for adequacy and identifying audit findings.  NEARC will code each finding for tracking purposes. The Transmittal Letter identifying each coded finding is sent to the auditee. The auditee has 30 days to respond to the Transmittal Letter. A copy of the Transmittal Letter and the audit report is also sent to the respective awarding components.  The Special Reviews Branch of DFAS is responsible for resolving findings coded by NEARC relating to NIH awards.

13.  Federal agencies look at the audit report as a “report card” of how the organization spends its money  The organization is responsible for ensuring that the reported expenditures are compliant with the terms and conditions of the award and applicable Federal cost principles.  It strengthens the relationship of trust that exists between the Federal agency and the recipient organization. 13 Why is an Audit Important?

14.  There are many external audit (CPA) firms in the market, but the question is “which one will you choose?”  For small business owners, here are some important tips for choosing an external auditor or audit firm: - Professional license requirements to perform an audit; - Auditor’s independence; - Audit reputation and track record; - Qualifications of the audit firm and the audit team; - The right auditor for your business type and size; and - The audit fee. Selecting an Auditor 14

15.  Resources for finding external auditors/CPA firms: - State Accountancy Boards - Government Audit Quality Center (http://www.aicpa.org/INTERESTAREAS/GOVERNMENTA LAUDITQUALITY/RESOURCES/AUDITEERESOURCECE NTER/Pages/AuditeeResourceCenter.aspx)http://www.aicpa.org/INTERESTAREAS/GOVERNMENTA LAUDITQUALITY/RESOURCES/AUDITEERESOURCECE NTER/Pages/AuditeeResourceCenter.aspx - Your state's website for the society of CPAs Do not choose a CPA by pricing alone. CPAs with low pricing may have limited experience in your industry and may not be up-to-date on audit requirements relevant to your business and the Federal government. Selecting an Auditor – Cont. 15

16.  Misuse of funds  Untimely submission of audit reports  Unallowable costs  Misallocation of costs  Accelerated expenditures  Large unobligated balances  Cost transfers  Conflict of interest Types of Audit Findings 16

17. 17 Common Contributors to Audit Findings  Inadequate resources  Lack of understanding of roles and responsibilities  Outdated or non-existent policies and procedures  Inadequate staff training and education  Inadequate accounting system  Inadequate time and attendance system  Inadequate segregation of duties

18. 18 Accounting System Fundamentals  Grantees need adequate accounting systems to ensure that grants are used for intended purposes and in accordance with regulations.  An adequate accounting system enables NIH to decide whether to award the grant, and whether conditions should be added.  An adequate accounting system provides the Federal agency with confidence that grantees have, or will have, adequate internal controls to ensure accountability for all funds, property, and other assets.

19. 19 Accounting System  Issues that you must address before receiving an award: –Project cost accounting system Your accounting system must be able to accumulate and segregate costs by project, i.e. the system must identify receipts and expenditures for each grant. –Segregation of direct and indirect costs A review of your Chart of Accounts should demonstrate that - Direct and indirect costs are segregated; and - Unallowable costs have been separately identified. –Adequate timekeeping system All timesheets must - Have a labor distribution system for ALL employees; and - Account for total hours (direct, indirect and paid absences).

20. 20 Accounting System

21. 21 Accounting System 21

22. 22 Accounting System

23. 23 Q1:How many hours should be recorded on the timesheet? Timekeeping – exceeding standard hours: A salaried employee that works a standard 40 hour week earns $10 per hour, or $400 per week (40 hrs. x $10/hr). Suppose that employee works 50 hrs. in any given week as follows:  NIH Grant = 40 hours  Other – non-Federal (IR&D) = 10 hours Accounting System

24. 24 Accounting System Timekeeping – exceeding standard hours: A salaried employee that works a standard 40 hour week earns $10 per hour, or $400 per week (40 hrs. x $10/hr). Suppose that employee works 50 hrs. in any given week as follows:  NIH Grant = 40 hours  Other – non-Federal (IR&D) = 10 hours Q2:How much salary should be charged to the NIH Grant?

25. 25 Consequences of Lack of Compliance  Special Terms and Conditions on awards  Loss of carryover authority  Cost disallowances  Suspension and/or termination of award

26. A non-Federal entity that expends $750,000 or more during the non-Federal entity’s fiscal year in federal awards must have a Single or program-specific audit conducted. Impact: Increases sub recipient monitoring burden and Reduces audit costs for organizations with less than $750,000 in expenditures (reduces audit burden for approximately 5,000 while maintaining Single Audit coverage for over 99% of the Federal dollars currently covered). 2 CFR Part 200 – New Audit requirements 26

27.  Uniform implementation December 26, 2014 – applicable to new awards and to incremental funding awarded on or after December 26, 2014.  Effective for non-Federal entity’s first Fiscal Year or biennial period beginning on or after December 26, 2014. First year example:  FY beginning January 1, 2015 and ending December 31, 2015. EARLY IMPLEMENTATION IS NOT PERMITTED ! Effective/Applicability Date 27

28. Visit our website at: http://oamp.od.nih.gov/dfas Contact: Hruta Virkar, CPA Branch Chief, Special Reviews 301-496-4137 Hruta.Virkar@nih.gov Additional Information 28

29. Questions? 29