1. Audit Resolution Under the Uniform Grant Guidance Presented by Michael Brustein, Esq. mbrustein@bruman.com Jennifer Castillo, Esq. jcastillo@bruman.com Brustein & Manasevit, PLLC Fall Forum 2014

2. The Uniform Grant Guidance: 1)“Right-sizes the footprint of oversight and single audit requirements” 2)Focus audits where there is greatest risk of fraud, waste and abuse Brustein & Manasevit, PLLC 2

3. 3 HOW???

4. 1.Makes single audits available online 2.Encourages a cooperative approach to audit resolution 3.Raises threshold to $750,000 4.Places focus on internal control deficiencies that have been identified as material weaknesses Brustein & Manasevit, PLLC 4

5. Internal control deficiencies remain a moving target Brustein & Manasevit, PLLC 5

6. OMB / COFAR have not finalized guidance on oversight of single audit vs. pass-through responsibility Who is responsible for which internal controls? Brustein & Manasevit, PLLC 6

7. Notice of Intent 2-28-12 77 fr 11780 Compliance requirements will be “streamlined” Brustein & Manasevit, PLLC 7

8. Audit focus should be on Allowable costs / activities Eligibility Reporting Selection of subs Monitoring Cash management Procurement Brustein & Manasevit, PLLC 8

9. NPRM 2-1-13 78 fr 7295 Proposed limiting audit review of internal controls in compliance supplement from 14 to 7 Brustein & Manasevit, PLLC 9

10. The Proposed Seven Deadly Sins 1.Activities Allowed or Unallowed 2.Allowable Costs (and Matching) 3.Cash Management (Minimizing time) 4.Eligibility 5.Reporting (financial and performance) 6.Subrecipient Monitoring 7.Requirements Unique to the Program Brustein & Manasevit, PLLC 10

11. The Seven Controls Proposed to be Voted off the Island 1.Davis-Bacon 2.Inventory Management 3.MOE / Earmarking 4.Period of Availability of Funds 5.Procurement 6.Program Income 7.Real Property Acquisition Brustein & Manasevit, PLLC 11

12. But who is responsible for oversight of these seven??? Pass-Through Brustein & Manasevit, PLLC 12

13. And where will the resources come from? Brustein & Manasevit, PLLC 13

14. Final Guidance  “While most commenters were in favor of the proposed reduction of the number of types of compliance requirements in the compliance supplement, many voiced concern about the process that would implement such changes” – 78 CFR 78608 Brustein & Manasevit, PLLC 14

15. No changes made at this time COFAR recommends further outreach Brustein & Manasevit, PLLC 15

16. May 2014 Compliance Supplement Silent Brustein & Manasevit, PLLC 16

17. OMB / COFAR FAQ 8/14/14  Look to the 2015 Compliance Supplement on the streamlining of compliance requirements (P. 15) Brustein & Manasevit, PLLC 17

18. While final chapter is yet to be written, we recommend every non-federal entity has fundamental understanding of the following four legal authorities Brustein & Manasevit, PLLC 18

19. 1.Uniform Guidance – Subpart F 2.Compliance Supplement 3.Generally Accepted Government Auditing Standards (Yellow Book) 4.EDGAR / GEPA Enforcement Provisions Brustein & Manasevit, PLLC 19

20. UNIFORM GUIDANCE SUBPART F Brustein & Manasevit, PLLC 20

21. Federal Agency Responsibility Cognizant agency for audit – TA to auditees – Quality control – Advice to auditors – Notice to auditors of audit deficiencies – Coordinate management decisions Brustein & Manasevit, PLLC 21

22. Federal Agency Responsibilities Awarding agency responsibility – Ensure completion of audits – timely – TA to auditees and auditors – Follow up – ensure corrective action – Management decision – Monitor corrective action – Use CAROI Brustein & Manasevit, PLLC 22

23. CAROI Cooperative Audit Resolution Oversight Initiative – Developed with ED and pilot states – Adopted by ED as standard audit resolution Brustein & Manasevit, PLLC 23

24. CAROI Historically:  Rejected by most other agencies  Labor  Agriculture  Health Human Services Brustein & Manasevit, PLLC 24

25. Uniform Grant Guidance Applies CAROI To all federal agencies Government wide policy Brustein & Manasevit, PLLC 25

26. CAROI 200.25 Audit and follow up that promotes prompt corrective action Improve communication Foster collaboration Promote trust Develop federal – non federal agency understanding Brustein & Manasevit, PLLC 26

27. CAROI (cont.) Basis – Leadership commitment to program integrity – Partnership, federal Non federal and auditors – Focus Current conditions and cooperative action Brustein & Manasevit, PLLC 27

28. CAROI (cont.) Message: – Continued failure to correct unacceptable Brustein & Manasevit, PLLC 28

29. CAROI (cont.) Prompt corrective action as shown by audits – Federal agencies offer – Appropriate relief Past non- compliance Brustein & Manasevit, PLLC 29

30. CAROI (cont.) Federal agency responsibilities 200.513 – Use CAROI to improve outcomes Audit resolution Follow up Corrective action Brustein & Manasevit, PLLC 30

31. CAROI (cont.)  Management Decision  Audit finding sustained or not sustained  Reasons for decision  Expected action Repayment?  Corrective action  Appeal available  6 months of filing with Federal Audit Clearing House (FAC) Brustein & Manasevit, PLLC 31

32. The Office of Management and Budget (OMB) A-133 Compliance Supplement What is it?

33. Who does it apply to? Expend more than $500k ($750k under Uniform Grant Guidance) Covers 150 major programs Brustein & Manasevit, PLLC 33

34. Why is the Compliance Supplement important?

35. How is the Document Organized? Part 1 – Background, Purpose, and Applicability Part 2 – Matrix of Compliance Requirements Part 3 – Compliance Requirements Part 4 – Agency Program Requirements Part 5 – Clusters of Programs Part 6 – Internal Control Part 7 – Guidance for Auditing Programs Not Included in the Compliance Supplement Brustein & Manasevit, PLLC 35

36. Part 4: Agency Program Requirements Brustein & Manasevit, PLLC 36 The most useful portion for federal education grant recipients is the agency- specific section on the Department of Education

37. Example: Title I, Part A of the ESEA I.Program Objectives: The objective of this program is to improve the teaching and learning of children who are at risk of not meeting challenging academic standards and who reside in areas with high concentrations of children from low-income families. II.Program Procedures I.Describes ESEA flexibility, Sources of Governing requirements, availability of other program information III.Compliance Requirements Brustein & Manasevit, PLLC37

38. Example: CAREER AND TECHNICAL EDUCATION—BASIC GRANTS TO STATES (Perkins IV) Program Objectives: Perkins IV provides grants to States and outlying areas to develop the career, technical, vocational, and academic skills of secondary students and postsecondary students … I.Program Procedures: II.Compliance Requirements: I. Matching, Level of Effort, Earmarking I.Level of Effort – Maintenance of Effort Brustein & Manasevit, PLLC 38

39. Example: 21 Century Learning Centers I.Program Objectives: The objective of this program is to establish or expand community learning centers that provide students with academic enrichment opportunities along with activities designed to complement the students’ regular academic program. II.Program Procedures: I.ESEA Flexibility is Referenced II.Source of Governing Requirement III.Availability of other Program Information III.Compliance Requirements Brustein & Manasevit, PLLC 39

40. PART 6: Internal Control Five Components of Internal Control that should reasonably assure compliance with the requirements of Federal laws, regulations and program compliance requirements Control Environment Risk Assessment Control Activities Information and Communication Monitoring Brustein & Manasevit, PLLC40

41. 2014 Compliance Supplement Changes from the 2013 Version

42. What are the next steps for the Compliance Supplement?

43. The GAO Yellow Book Generally Accepted Government Auditing Standards

44. Who does it apply to? Single auditors OIG auditors Brustein & Manasevit, PLLC 44

45. Why is the Yellow Book Important? “We conducted this audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective.” LAUSD OIG Audit report  Noncompliance with the auditing standards may result in failure to establish prima facie case (case dismissed!)  Colorado / Houston PDLs Brustein & Manasevit, PLLC 45

46. Auditor Findings

47. How Often is the Yellow Book Updated and How is it Organized? Yellow book last updated in 2011 Organization – Financial audits – Attestation engagements – Performance audits Brustein & Manasevit, PLLC 47

48. High Standards for Auditors

49. Continued…

50. Conceptual Framework for Independence Brustein & Manasevit, PLLC 50

51. Important Provisions What may cause finding?  Internal control deficiencies  Fraud and illegal acts  Abuse  Violations of contracts or grant agreements Brustein & Manasevit, PLLC 51

52. What happens when an auditors identify findings? Condition Effect Cause Criteria Recommendation Brustein & Manasevit, PLLC 52

53. EDGAR GEPA Audit Resolution and Enforcement Brustein & Manasevit, PLLC 53

54. ED Programmatic Components (OCFO, OESE, OSERS, OPE, OCTAE) Review all external audits (OIG and Single Audits) Brustein & Manasevit, PLLC 54

55. Audits are recommendation to management Management sustains or rejects audit findings Brustein & Manasevit, PLLC 55

56. Management sustains audit liability in a Program Determination Letter (PDL) Brustein & Manasevit, PLLC 56

57. Audit Violations Deemed Significant Brustein & Manasevit, PLLC 57

58. Significant Violations 1.Time Distribution 2.MOE 3.Supplement, Not Supplant 4.Unallowable Expenses Brustein & Manasevit, PLLC 58

59. Significant Violations 5.Procurement Irregularity 6.Ineligible Students 7.Lack of Accountability for Equipment/Materials Brustein & Manasevit, PLLC 59

60. Significant Violations 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 Brustein & Manasevit, PLLC 60

61. Significant Violations 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 Brustein & Manasevit, PLLC 61

62. Triggers EDGAR / GEPA Procedures 34 CFR Part 81 Brustein & Manasevit, PLLC 62

63. AUDIT DEFENSE AND RESOLUTION Brustein & Manasevit, PLLC 63

64. Common Defenses Harm to the Federal interest Equitable offset Statute of limitations Brustein & Manasevit, PLLC 64

65. Harm to the Federal Interest 34 CFR 81.32 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 program…” Brustein & Manasevit, PLLC 65

66. 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. Brustein & Manasevit, PLLC 66

67. 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 09-20-R, May 16, 2012 Brustein & Manasevit, PLLC 67

68. 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. Brustein & Manasevit, PLLC 68

69. Disclaimer This presentation is intended solely to provide general information and does not constitute legal advice or a legal service. This presentation does not create a client-lawyer relationship with Brustein & Manasevit, PLLC and, therefore, carries none of the protections under the D.C. Rules of Professional Conduct. Attendance at this presentation, a later review of any printed or electronic materials, or any follow-up questions or communications arising out of this presentation with any attorney at Brustein & Manasevit, PLLC 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, PLLC69