how to prepare for a federal audit
DESCRIPTION
How to Prepare for a Federal Audit - SRA. Learn how to identify key areas that auditors review during a Federal Audit, including:* Effort Reporting* Direct vs. Indirect Charging of Costs* Pro-Active: Effort Reporting and F6B Clean-up* Sub-grantee MonitoringFor more information visit http://www.mhm-pc.com or call (301) 951-3636.TRANSCRIPT
How to Prepare fora Federal Audit
Wilfredo Corps, CGFM, Director Mayer Hoffman McCann P.C.
Government Services
SRA Annual MeetingOctober 24, 2011
Montreal
Mayer Hoffman McCann P.C.An Independent CPA Firm
Objectives
To identify key areas that auditors review during a Federal Audit, including:
Effort Reporting
Direct vs. Indirect Charging of Costs
Pro-Active: Effort Reporting and F6B Clean-up
Sub-grantee Monitoring
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Federal Audits
What is the auditor’s goal?
The auditor has the responsibility of providing his/her opinion regarding the auditee’s compliance with rules and regulations related to the award(s) under audit.
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Federal Audits
Types of Audits
Full scope
Limited scope
Agreed Upon Procedures
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Selection Process –Why Were You Selected?
Single Audit Findings
Budget Time and Cost Increases
Relationship with Agency Program Personnel
Performance Measures
Large Percentage of Funding to Sub-grantees
Internal Control Weaknesses (IC Questionnaires)
Large number of grants to agency (lots of exposure)
Particularly large grant/contract
Referrals/Allegations
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Ways to Deter Selection Communicate reasons why findings don’t pertain to
division(s) obtaining funding and/or Corrective Action Plans as soon as developed
Realistic Budgets and Time Constraints Timely Reporting, Open & Honest Communication, Proactive
Approach Analyze performance measures ongoing to determine
strengths and weaknesses. Be flexible to “re-think” approach for optimum results
Develop robust sub-grantee monitoring controls and communicate these to the Agency
Work with internal and external auditors to determine where weaknesses exist and be diligent in closing gaps
Pre-audit surveys, risk assessments
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Auditor’s Expectations
How to prepare?
Understand the rules and regulations that your organization have to abide by and ensure that all staff understand the importance of being compliant.
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Auditor Expectations Positive initial interaction (i.e., phone, email,
entrance conference)
Quick and easy audit trail
Interviews with personnel, i.e. understanding of FCTR/FSR cycle; disbursement cycle; payroll cycle; cost sharing cycle (corroborate interviews with established policies)
Prior internal and external audit reports
Supporting documentation
Accuracy of cost coding – direct versus indirect
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Auditor Red Flags Delay in Start Date Inconsistency in management/staff responses Reluctant
• Vague answers• Delays in fieldwork• Delays in auditor requests/questions
High Personnel Turnover Frequent change of Audit Firms Switch in accounting systems High dollar amounts under “Other” or
“Miscellaneous” cost categories Large number of adjusting journal entries
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Key Areas To Know
Effort Reporting&
OMB Requirements
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Importance of Effort Reporting Always has been a significant audit area
• Salaries and related fringe benefits typically account for over 75% of direct costs charged to Federal grants/contracts
• Effort Reporting are the procedures and controls for tracking, approving, and reporting salaries and related fringe benefits by project/activity
Sponsored awards usually amount to significant $
More scrutiny - Federal grants/contracts are a significant portion of the stimulus package
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Federal agencies specifically targeting effort reporting during recent years• NSF currently performing audits of 30
universities (5 per year) since 2007 Fines could be significant and inconvenient
to the recipients• Northwestern University - $5.5 million (2003)• East Carolina University - $2.4 million (2004)• John Hopkins University - $2.6 million (2004)• Dartmouth - $37,780 (2005)• University of Connecticut - $2.5 million (2006)
Importance of Effort Reporting
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More Susceptible to Fraud
Charging more salary to a Federal award than the amount certified
Fraud violations may subject institutions and individuals to both civil actions and/or criminal prosecution
Over commitments
Compensation packages – Institutional Base Salary
Importance of Effort Reporting
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Requirements OMB Circular A-21 (Higher Education
Institutions)
OMB Circular A-122 (Non-Profit Organizations)
• www.whitehouse.gov/omb/circulars
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OMB Circular A-21 (Higher Education)
J10b(1)(c) states:In the use of any methods for apportioning salaries, it is recognized that, in an academic setting, teaching, research, service, and administration are often inextricably intermingled. A precise assessment of factors that contribute to costs is not always feasible, nor is it expected. Reliance, therefore, is placed on estimates in which a degree of tolerance is appropriate.
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J10b(2) states in part:(2) Criteria for Acceptable Methods.
(a) The payroll distribution system will (i) be incorporated into the official
records of the institution;
(ii) reasonably reflect the activity for which the employee is compensatedby the institution; and
(iii) encompass both sponsored and all other activities on an integrated basis
(b) The method must recognize the principle of after-the-fact
confirmation or determination so that costs distributed
represent actual costs…
OMB Circular A-21 (Higher Education)
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OMB Circular A-122 (Non-profits)
7.Compensation for personal services
m. Support of salaries and wages.
1. Charges to awards for salaries and wages, whether treated as direct costs or indirect costs, will be based on documented payrolls approved by a responsible official(s) of the organization. The distribution of salaries and wages to awards must be supported by personnel activity reports.
2. Reports reflecting the distribution of activity of each employee must be maintained for all staff members (professionals and nonprofessionals) whose compensation is charged, in whole or in part, directly to awards.
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Time Sheets/Effort Reports• Must be prepared at least monthly and coincide
with at least one pay period
• Must be signed by the employee or someone familiar with their responsibilities having first hand knowledge
• Must be prepared by employees included within the indirect cost pool
OMB Circular A-122 (Non-profits)
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Additional OMB RequirementsChange in Level of Effort
OMB Circular A-110 requires grantees to obtain the sponsoring agency’s approval in writing if the PI or key personnel specifically named in the Notice of Grant Award (NGA) will:
• Withdraw from the project entirely;• Be absent from the project during any continuous period of 3
months or more; or• Reduce time devoted to the project, by 25 percent or more,
from the level approved at the time of award. The 25 percent includes time charged directly to the grant and time claimed as match.
Any changes must be approved in writing by the sponsoring agency.
Note – Key personnel named in the NGA could differ from key personnel identified in the proposal.
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Risks of Non-Compliance
Cost disallowances and fines
Withholding of payments
Designation as a “High Risk Organization”
Special monitoring
Embarrassment to parties involved
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Audit Areas of ConcernInstitutional Disallowances can occur if:
Efforts reports are certified by individuals other than the employee or someone with suitable means of verification of 100 percent of the employees time
The effort report does not encompass all the activities performed by the employees under their terms of employment
The level of effort reported do not appear reasonable, given the responsibilities of the individuals
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Audit Areas of ConcernIndividual Disallowances can occur if:
The effort report certified by the individual is
found to be falsified (fraud)
The levels of effort reported do not appear
reasonable
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Auditor Red Flags Late effort reports Effort report certified by someone without
suitable means of verification Faculty and PI Effort Forms not self certified Percentage of salary charged to non-sponsored
and administrative projects is not reasonable based on the required activity (unreasonably low)
Too many post certification revisions Inconsistencies between the different reports
(such as, payroll distribution, outside activity reports, leave reports, other support forms, etc.)
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Red Flags
No Policies and procedures or not well defined
PIs with 0% effort on their funded awards or 100% on Federal awards
PIs with a substantial amount of projects
Fixed price contracts with zero effort/Clinical Trials with no effort
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Effective Effort Reporting Systems
Salary expenses should be allocated based on level of effort percentages for ALL institutional activities• Total effort should not exceed 100%• Effort is not based on 40 hours per week
It needs to include all institutional activities and defined• Sponsored activities• Non-sponsored activities
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Effective Effort Reporting Systems
Sponsored Activities include: Effort on Federal grants and/or contracts Effort on non-Federal sponsored projects Effort for a specific funded project including:
• Writing progress reports• Holding lab meetings• Presenting research results• Acquiring knowledge related to the scope of work
It needs to include time directly charged to the project and time claimed as match/cost shared committed to the sponsor
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Non-sponsored activities Teaching Attending departmental faculty meetings Serving on university committees Serving on a peer review panel Bid and Proposal costs for competing awards Other institutional activities
Effective Effort Reporting Systems
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It does not include:• Teaching external courses unrelated to the
institution• Working as an external consultant• Work not related to the university or the entity
receiving the funds• May not include faculty practice plans
Should be defined in the Institutional Base Salary
Effective Effort Reporting Systems
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How To Determine Salary Charges to Grants
The salary charge to a grant or contract = Institutional Base Salary (IBS) x Percent of Effort
IBS is the total compensation received from the institution for all services provided
IBS does not include Supplemental Payments, Fringe Benefit Payments, Reimbursable Expenses, and any external pay
Comply with agency salary capitations
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Who is an Appropriate Certifier?
A responsible person with suitable means of verification that the work was performed
First Hand Knowledge
Most common certifiers: Employee Supervisor Principal Investigator
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Frequency of Certifications
Reasonable based on your procedures and controls• Annually with periodic reviews
• Twice a year certification with monthly reviews and adjustments performed
• Quarterly
• Semesters
• Monthly
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Match (Cost Sharing) Time claimed as match must be taken into account
when determining level of effort percentages Costs borne by the institution (typically non
sponsored funds) incurred on the project It represents the commitment from the institution
towards the project It has a significant financial impact on the
department providing funds and on the institution as a whole
When an award is received in which cost sharing was proposed, the cost sharing becomes a binding commitment that the institution must provide as part of the performance of the sponsored project
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Independent Internal Evaluation
OMB states the Effort Reporting System must ALLOW for an independent evaluation
We recommend this be performed at least once a year• Inspector Generals are interpreting the OMB as this
being a requirement• Assessment tool to determine if your Effort Reporting
System is compliant with the OMB Circulars
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Policies and Procedures
Must be compliant with OMB requirements
Must be well defined• Definitions of terms (i.e., institutional base salary,
allowable working schedules)• Frequency and timeliness of certifications• Frequency and timeliness of adjustments• Independent evaluation of Effort Reporting System
Roles/Responsibilities/Expectations Defined
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New Award Tips
Administrative staff should work with the PI or the department administrator to verify the effort levels listed on the Notice of Grant Award
Adjust effort levels, while doing this review, in order to correct any over-commitment problem ahead of time
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Key Points – Effort Reporting
Effort Reporting Systems are being highly scrutinized
Ensure compliance with OMB Circulars and minimize “Audit Issues”
• The certifying of effort reports must be somebody with suitable means of verification
• Effort is not based on a 40 hour week, but rather on the individual’s total institutional time
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Key Points – Effort Reporting
Ensure compliance with OMB Circulars and minimize “Audit Issues” (continued)
• Effort Reporting tracks the reasonable approximation of actual activity on projects not budget
• Must be well defined in your Policies and Procedures Manual
• PI should have a minimum level of effort where there is no direct salary allowed on grant
• Keep records for at least three years after the submission of the final FSR
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Key Areas
Direct vs. Indirect Charging of Costs
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Charging of Costs(Direct or Indirect)
FY11 DHHS OIG Work plan Admin & Clerical salaries
Inconsistent charging practices
Dartmouth – sampled over 200 transactions
Increased Federal Audits
Task Force on Cost Principles to Reduce Admin burden
Is the University Reactive or Proactive?
Defined Policies & Procedures/DS-2
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Ensure compliance with OMB Circulars and minimize “Audit Issues”
Costs charged to federal sponsored agreements must be allowable, allocable and reasonable
Meet the definition of either direct or indirect costs and charged accordingly
Charging of Costs(Direct or Indirect)
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A-21 f6b compliance for indirect costs (Facilities & Administrative costs [F&A])
1. In developing the departmental administration cost pool, special care should be exercised to ensure that costs incurred for the same purpose in like circumstances are treated consistently as either direct or F&A (Facilities & Administrative [Indirect]) costs.
2. The salaries of administrative and clerical staff should normally be treated as F&A costs. Direct charging of these costs may be appropriate where a major project or activity explicitly budgets for administrative or clerical services and individuals involved can be specifically identified with the project or activity.
Charging of Costs(Direct or Indirect)
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Document Cost Accounting Standards (CAS) exclusions
Establish Institutional policies/procedures
Ambiguity vs. Detailed/Specific
Charging of Costs(Direct or Indirect)
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Pro-active: Effort and F6B Clean-up Select a sample (50-75 transactions) Document the Charges Determine the errors Compare results to the Institution’s tolerance
for risk Corrective Action Plan Obtain Senior Level Support Determine project team Obtain outside help where appropriate Document, Document, Document
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Pro-active: Effort and F6B Clean-up Each Sample as a separate audit/file – DIG
DEEP Gather supporting Data in Central Office Obtain additional data from Academic
Department(s) Conduct follow up meeting/Interviews with PI
and Academic Business Manager Corrective Action Plan Develop-Update Policies/Procedures Provide Appropriate Training Document, Document, Document Provide Auditor with outcome?
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Key Areas
Sub-grantee Monitoring
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Key Facts Grantees should have strong
methodology related to Sub-grantee monitoring, to include:
• How often the reviews will occur
• Types of monitoring (i.e., desk review, site visit, etc.)
• Who will be monitored
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OMB Circular A-133
OMB Circular A-133, Subpart D .400 states in part:
Pass-through entities shall advise subrecipients of requirements imposed on them by Federal laws, regulations, and the provisions of contracts or grant agreements as well as any supplemental requirements imposed by the pass-through entity.
Pass-through entities shall monitor the activities of
subrecipients as necessary to ensure that Federal awards are used for authorized purposes in compliance with laws, regulations, and the provisions of contracts or grant agreements and that performance goals are achieved.
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Keep in mind…
All Findings will be addressed to YOU, the Grantee
Being as Proactive as your resources and finances allow
Auditors will sympathize more with proactive organizations
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Audit Results
Questioned Cost• Unsupported cost claimed • Unallowable• Not reasonable• Unallocable
Internal Control
Compliance
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Tricks During the Audit Have PBC list ready and organized in the order requested.
Have color coded post-its marking each item requested
Be prepared for the worst – identify documents/records that are in storage and be ready for easy retrieval
Have cost principles visible to auditors at person(s) cubicles who will be interviewed
Request status meetings
Request potential findings be prepared and submitted for review during fieldwork
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How Do You KnowWhen You Are In Trouble?
When your auditors are OIG instead of accounting firms
When your sample has been expanded
Duplicative questions
Closed doors
Partner and/or Agency onsite
Lack of findings being communicated
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Audit Resolution
Agency Program PersonnelVS
OIG Personnel
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If you have questions, contact:
Wilfredo Corps, CGFM, DirectorCBIZ MHM Mid-Atlantic Government Services Practice
Wilfredo Corps has considerable experience with special projects as required by the CFO Act as well as experience with federal government costs incurred audits and agreed-upon procedures reviews. He has served as audit manager and responsible individual to oversee and coordinate multiple teams with multiple professionals on numerous engagements. Wilfredo’s professional experience before joining Mayer Hoffman McCann P.C. includes positions with BearingPoint, a private consulting firm, Reed and Associates, CPAs, and the Defense Contract Audit Agency (DCAA).
Mayer Hoffman McCann P.C. | CBIZ MHM, LLC3 Bethesda Metro Center, Bethesda, MD 208149755 Patuxent Woods Drive, Suite 200, Columbia MD 21046
[email protected](301) 951-3636
Ext. 6709