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Presented By: Katherine Wakefield CPA Donna Denker & Associates Slide 2 Overview Allowable Costs/Cost Principles (Section B in Part 3 of the OMB Compliance Supplement) OMB A-133 Compliance Supplement 14 Compliance Requirements Internal Controls over Compliance OMB A-133 Sub Part C Your (auditee) responsibilities Slide 3 Compliance What is it? The act of complying with a wish, request, or demand. Grant funding usually requires meeting certain requirements. For example: What is allowed to be purchased Supporting documentation How tracked and reported Policies and procedures in place Adequate internal controls Reporting 14 specific requirements (to be discussed) Slide 4 How would you know? Refer to the grant and make inquiries to the granting agency Code of Federal Regulation Administrative Law by agency http://www.access.gpo.gov/nara/cfr/cfr-table- search.html Cost Circulars and Compliance Supplement The focus in this presentation is the federal requirements Slide 5 What comes next? Apply procedures that ensure that you are meeting all of the compliance requirements Assign the responsibility to someone Internal controls in place Segregation of duties someone to do the work and someone else to review Financial statements and reports Slide 6 Determine if an audit is required Auditee requirements OMB A-133 Sub Part C Slide 7 Cost circulars are cost accounting principles and policies for Federal Awards These cost circulars are required to be followed by entities receiving Federal funding Three cost circulars Slide 8 Cost principles for State, Local, and Indian Tribal Governments Applicable to: State Government Local Government Federally-recognized Indian Tribal Governments Components of the above governments Slide 9 Cost Principles for Educational Institutions Applicable to Public and Private: Colleges Universities Slide 10 Cost Principles for Nonprofit Organizations Applicable to nonprofit organizations Operated primarily for the public interest, Not organized primarily for profit, and Uses its net proceeds to maintain, improve and/or expand its operations Slide 11 Slide 12 States, Local Governments, and Indian Tribes Follow: A-87 for cost principles (relocated to 2 CFR, Part 225) A-102 for administrative requirements, and A-133 for audit requirements. Agency CFR - Administrative Slide 13 Educational Institutions (even part of a State or local government) follow: A-21 for cost principles (relocated to 2CFR, Part 220) A-110 for administrative requirements (Relocated to 2 CFR, Part 215), and A-133 for audit requirements. Agency Administrative CFR Slide 14 Non-Profit Organizations Follow: A-122 for cost principles (Relocated to 2 CFR, Part 220) A-110 for administrative requirements (Relocated to 2 CFR, Part 215), and A-133 for audit requirements. Agency Administrative CFR Slide 15 PART 3 Compliance Requirements A. Activities Allowed or Unallowed B. Allowable Costs/Cost Principles Slide 16 The different cost principles contain slightly different wording, but essentially the same baseline requirements. Slide 17 General Principles Basic Guidelines Direct Costs Indirect Costs Selected Items of Cost Slide 18 Be necessary and reasonable for the program Subject to the prudent person test Be allocated under the provisions of a 2 CFR Part 225 Be authorized or not prohibited under State or local laws or regulations Conform to any limitations or exclusions set forth in these principles Slide 19 A-21 Necessary for the operations Arms Length Bargaining Acted with Prudence Cost Consistent with Established Institutional Policies and Practices A-87 Ordinary & Necessary Sound Business Practices Market Prices Acted with Prudence Significant Deviations from Established Practices A-122 Ordinary & Necessary Generally Accepted Sound Business Practices Acted with Prudence Slide 20 Be consistent with policies, regulations and procedures of the program Be accorded consistent treatment (no doubling up, direct and indirect) Be determined in accordance with generally accepted accounting principles (unless otherwise provided by the cost circular) Slide 21 Not to be included as cost or used to meet cost sharing or matching requirements of another program (unless provided by Federal law) Be net of all applicable credits Be adequately documented Slide 22 Are costs that can be specifically identified to the program Compensation of employees Cost of materials Equipment Travel Other Slide 23 Are costs that can not be specifically identified to the program. These types of costs benefit more than one function of the organization. For example, building costs, administrative staff, etc. The rule of allowability: Indirect costs need to be equitable to relative benefits received. Slide 24 A-87, 43 types of cost A-21, 54 types of cost A-122, 52 types of cost Slide 25 Advertising Alcoholic Beverages Audit costs Bad debt Bonding costs Communication costs Compensation (Payroll) Contingency Legal defense Depreciation Donations and Contributions Slide 26 Employee morale Entertainment Equipment Fines and penalties Fundraising and investment management Gains and losses on assets Personal use Living expenses Idle facilities Insurance Interest Slide 27 Labor relations Lobbying Maintenance and repair costs Meeting and conferences Memberships Organization costs Patent costs Plant and homeland security Professional services Publication and printing Recruiting costs Slide 28 Relocation costs Rental costs Royalties Selling and marketing Taxes Training costs Transportation costs Travel costs Trustees Slide 29 Employee Morale Costs incurred by the entity's established practice or custom for improving Working conditions Employee-employer relations Employee morale Employee performance Must be equitably apportioned to all activities of the entity Allowable Entertainment Cost of entertainment, including amusement, diversion, and social activities Examples: tickets to shows, sporting events, meals, lodging, rentals, transportation, gratuities Unallowable Slide 30 Allowable if the primary purpose is to disseminate technical information related to the program or administrative of the grant. Includes meals, transportation, etc. Caution entertainment costs are not allowable EVER! Slide 31 Compensation must be reasonable Consistent treatment throughout the entire entity. Unallowable costs can not be considered under this section because they constitute personnel compensation. Example: Providing sporting event tickets to program support personnel as part of their compensation. Slide 32 Allowable, examples noted in cost circular Leave (sick, annual, court, military, other) Employee insurance Pensions Unemployment However, certain requirement must be met Benefits must be provided under established written policies, Benefits must be allocated equitably across the entity, AND Benefits must be either a cash or accrual basis (GAAP) of accounting. Slide 33 Under A-87 100% Administrative (indirect) 100% of time is charged to one Federal program (direct) Time is changed to more than one activity or program (direct or indirect) Slide 34 All charges to Federal programs (direct or indirect) must be documented based on payroll in accordance with accepted practices of the organization. Slide 35 Must certify their time by: Making a statement, such as, I Sean Walker, certify I have spent 100% of my efforts on the Medicare program (CFDA# 93.778). Signing such statement or having supervisor sign such statement. Must be at lease twice per year. Slide 36 Time distribution must be supported by Personnel Activity Reports After-the-fact distribution of actual activity Accounts for 100% of total activity Prepared monthly Coincide with a payroll cycle Signed by the employee Slide 37 I, Sean Walker, Have worked on the following programs and activities during the month of October 2010 Signed: Sean Walker Slide 38 Does not qualify as adequate documentation (Questioned) Can be used, however, they need to be adjusted at least quarterly Slide 39 Sampling methods are allowable, however, they are usually required to be approved by the cognizant agency. States use this technique, however, rare in small institutions. Slide 40 Same rules with the following tweaks: All salaries and wages need to be supported by Personal Activity Reports Reports can be signed by employee or responsible official Slide 41 http://www.whitehouse.gov/omb/ http://www.whitehouse.gov/omb/ Purpose of the Compliance Supplement: Identifies important compliance requirements Required to be used by the auditors Ensures audit consistency, efficiency, and effectiveness Slide 42 Includes: Purpose and applicability Matrix of compliance requirements programs by CFDA# Agency program requirements Clusters of programs Internal control Guidance for auditing programs not included in compliance supplements Slide 43 14 Type of Compliance Requirements: A. Activities allowed or unallowed B. Allowable costs/cost principles C. Cash management D. Davis-Bacon Act E. Eligibility F. Equipment and real property management G. Matching, level of effort, earmarking H. Period of availability of Federal funds I. Procurement and suspension and debarment J. Program income K. Real property acquisition and relocation assistance L. Reporting M. Subrecipient monitoring N. Special tests and provisions Slide 44 **Refer to the matrix or the grant to determine if applicable. A. Activities Allowed or Unallowed: Unique to each Federal program Found in laws, regulation, and provisions of contract or grant agreement B. Allowable Costs / Costs Principles: OMB Costs Principles Circulars (A-87, A-122 or A- 21) Find here a list of selected costs and a comparison of the circulars Slide 45 C. Cash Management When funded on a reimbursement basis Procedures to minimize the time elapsing between the transfer of funds from the US Treasury and disbursement of those funds D. Davis-Bacon Act When required by this Act, DOL, or other legislation All laborers and mechanics employed by contractors or subcontractors must be paid not less than established for the locality Slide 46 E. Eligibility Unique to each program Criteria for determining if individuals, groups or subrecipients can participate and the amounts for which they qualify F. Equipment and Real Property Management OMB Costs Principles Circulars (A-87, A-122, or A-21) CFR Title 25 Part 900.51-60 for DOI stipulates requirements for property management CFR=Admin law by agency http://www.access.gpo.gov/nara/cfr/cfr-table-search.html Slide 47 G. Matching, Level of Effort, Earmarking Unique to each program Matching to provide contributions (usually non- federal) of a specified amount or percentage to match Federal awards. It may be allowable costs incurred or in-kind contributions Level of effort refers to (a) specified level of service to perform, (b) specified level of expenditures and (c) Federal funds to supplement and not supplant non-Federal funding of services Earmarking refers to amount or percentage of funding that must be used for specified activities ( Head start example ) Slide 48 H. Period of Availability of Federal Funds Award may specify a time period during which the entity may use the funds Any funds appropriate under an ISDEAA contract or compact or a Tribally Controlled Schools Act grant are available until expended (25 USC 450I(c)(b)(9)). I. Procurement and Suspension and Debarment Procurement OMB Cost Principles Circulars (A-87, A-122 or A-21) Suspension and Debarment Prohibited from contracting or making subawards to parties that are suspended or debarred. Threshold $100,000 Slide 49 J. Program Income Gross income generated by the Federal Program Examples: Fees for services Use of rental property Sale of commodities or items fabricated under the grant agreement Deduct from program outlays If specified, an award may: Add to project budget or Use as a match Slide 50 K. Real Property Acquisition Relocation Assistance Uniform and equitable treatment of persons displaced by federally-assisted programs from their homes, businesses or farms Requirements for appraisals and property acquisitions L. Reporting Standard financial reporting forms authorized by OMB SF-269, SF-425, SF-1512, SD-270, SF-271, SF-272 Reporting under Payment Management System (PMS) Performance Reporting Special Reporting Slide 51 M. Subrecipient Monitoring Passing dollars through to another entity Pass through entity is responsible for: Provide the CFDA title and number, award name and name of Federal agency Monitor that subrecipient administers funds in compliance Ensure required audits performed Evaluate impact on pass through entities ability to comply Slide 52 N. Special Tests and Provisions Unique to the Federal program Found in laws, regulations, and provisions of the contract/grant Examples: Background investigations Certified payrolls performed Slide 53 Establish and maintain internal control designed to reasonably ensure compliance with Federal laws, regulations, and program compliance requirements (A-102 & A-110) A-133 requires auditors to obtain an understanding of the organizations internal controls over Federal programs. Intended to assist the entities and their auditors in complying with these requirements. Slide 54 Objectives of these internal controls Transactions properly recorded and accounted for to: Permit reliable financial statements and Federal reports Maintain accountability over assets; and Demonstrate compliance with laws, regulations, and other compliance requirements. Slide 55 Transactions are executed in compliance with: Laws, regulations, and provisions of contract or grant agreements that could have a direct and material effect on the Federal program; and Any other laws and regulations identified in compliance supplements Funds, property, and other assets are safeguarded against loss from unauthorized use or disposition Slide 56 Describes the characteristic of internal control to each of the 5 components: 1. Control Environment 2. Risk Assessment 3. Control Activities 4. Information and Communication 5. Monitoring Slide 57 Provides objectives of internal control and examples of characteristics specific to 13 of the 14 compliance requirements (Omits Special Tests and Provisions) Slide 58 Identify: 1. All federal awards received, expended, and the program under which received 2. CFDA title and number 3. Award number 4. Year 5. Name of Federal Agency and 6. Name of pass through entity Slide 59 Maintain internal controls over Federal programs Compliance with laws, regulations, contracts and grant agreements Prepare financial statements and the Schedule of Expenditures of Federal Awards (SEFA) Ensure audits are performed and submitted when due Follow up - corrective action on audit findings Prepare summary of prior audit findings and corrective action plan Submit the data collection form Slide 60 Auditee to prepare Auditor to determine if presented fairly in all material respects in relation to the financial statements Auditor to issue a report on the schedule Slide 61 a) Same period as the financial statements b) Programs listed individually by federal agency c) ARRA programs specifically identified d) Each program within a cluster to be listed separately and the cluster subtotaled e) Catalog of Federal Domestic Assistance (CFDA#) f) Name of pass-through entity, if a subrecipient, and identifying numberNote to describe accounting policy g) Amounts provided to subrecipients h) Total Federal awards expended during the period i) Value of awards of noncash assistance, insurance or loans and guarantees Slide 62 Corrective Action Plan At completion of the audit Addresses each audit finding in CY report Shall provide who, how, when: Name of contact person responsible for action plan Corrective action planned Anticipated completion date If you dont agree with the finding or believe corrective action is not required Explain with specific reasons Slide 63 Pass-Through Entity Responsibilities Identify award detail (Includes CFDA#) to subrecipient Advise subrecipient of Federal requirements Monitor the activities to ensure compliance Ensure audit is done if expending $500,000 or more of Federal dollars Issue management decision on audit findings within 6 months Slide 64 OMB Circular A-133 Compliance Supplement Available at: http://www.whitehouse.gov/omb/circulars_default http://www.whitehouse.gov/omb/circulars_default A-133 A-87 A-122 A-21 Others Slide 65 Why is this important? What does it mean to you? Slide 66 To stay in good standing with grantor To remain eligible for future funding To avoid having to pay Federal dollars back To avoid findings or questioned costs To further provide your service and meet the entitys mission Slide 67