Since 2009, the current administration has issued a number of memorandums with a common theme of maintaining accountability over the $600 billion in federal grants spent each year, while at the same time reducing the onerous requirements that have not necessarily produced better outcomes. The reform of audit requirements and grant policies are being made to increase the effectiveness of federal programs, reduce unnecessary regulatory and administrative burden and to reduce cost to state and local governments. The OMB has issued for comment an Advance Notice of Proposed Guidance titled, “Reform of Federal Policies Relating to Grants and Cooperative Agreements; Cost Principles and Administrative Requirements,” to describe the proposed changes and seek public feedback.
Some of the key changes being contemplated for Single Audits include the following:
Increased Single Audit Threshold
Entities currently are required to have a Single Audit if they expend $500,000 or more in federal assistance. The proposed changes would raise the threshold to $1,000,000 in federal awards. The limit has not been raised since 2003.
A New Category of Single Audit Responsibility
For those entities expending between $1 million and $3 million in federal awards, a Single Audit would be required; however, major program audit procedures would be focused on testing only two compliance requirements—allowable and unallowable costs and one additional requirement that would be selected by the federal agency responsible for the program. The proposal is silent regarding the level of testing of internal control over compliance that would be expected.
Changes for Larger Single Audits
For entities expending more than $3 million in federal awards, a full Single Audit would be required. However, the proposal identifies certain reforms that may strengthen the audits.
- Streamlining the universal compliance requirements in the compliance supplement. An emphasis on streamlining the universal compliance requirements to focus on subsets of compliance requirements that federal agencies believe most effectively address improper payments, waste, fraud, abuse, and program performance and requiring additional testing for those requirements. At the same time, the proposal indicates that other compliance requirements could be made optional for testing or the auditor could be directed to perform less testing on those requirements.
- Strengthening audit follow-up by federal agencies. OMB is considering ideas for making federal agencies more accountable for audit follow-up and audit resolution. Some of the ideas include: the requirement of agencies to designate a senior accountability official; implementing audit-risk metrics such as timeliness of submission; and encouraging agencies to take a more active approach to resolving findings.
- Reducing burdens on pass-through entities and subrecipients. The ideas discussed in this section involve making more explicit the existing requirements that federal agencies are responsible for the coordination of additional federal agency audits of recipient entities. In addition, for entities that receive a majority of funds directly from the federal government, but also other awards from a pass-through entity, the reform proposal would require the federal government to perform audit follow-up for all funds, both direct and subawards, when the findings are not specific to the program delivery of the subawards. However, once the federal government has resolved the "general" findings, it would be up to the pass-through entity to follow up to ensure that the subrecipient complies with the audit resolution.
Reforms to the Cost Principles
Potential changes to the cost principles (i.e., OMB Circular A-21, Cost Principles for Educational Institutions, OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, OMB Circular A-122, Cost Principles for Non-Profit Organizations, and The Cost Principles for Hospitals) are being considered. Some proposals include:
- Consolidation of all cost principles into a single document and ensuring limited variations by type of entity.
- Using flat rates instead of negotiated rates for indirect costs
- Exploring alternatives to time-and-effort reporting requirements for salaries and wages through the use of pilot projects
- Some other specific changes
Reforms to the Administrative Requirements
The changes to the administrative requirements (i.e., the government-wide common rule implementing OMB Circular A-102, Grants and Cooperative Agreements with State and Local Governments, OMB Circular A-110, Uniform Administrative Requirements for Certain Grants and Other Agreements with Institutions of Higher Education, Hospitals, and other Non-Profit Organizations, and OMB Circular A-89, Catalog of Federal Domestic Assistance) are items that would change the above mentioned circulars. A few items discussed include:
- Combining a consolidated set of administrative requirements
- Increasing pre-award considerations to include consideration of the merit of each proposal and financial risk
- Changes to communication of funding opportunities.
Many of these provisions go beyond the simple question of when a Single Audit is required. The proposed changes may have a significant impact on how you administer your federal grants in the future. The OMB is also asking whether those reviewing the Advance Notice have other suggestions for reforms that should be considered by OMB as it considers ways to relieve administrative burden. It is also asking for feedback in terms of whether you believe the proposals discussed in the document would result in reduced burden. To access the Advance Notice click here. Comments are due by March 29, 2012.
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