The federal Office of Management and Budget (OMB) has opened for public comment proposed guidance on Circular A-133, Proposed OMB Uniform Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards. The guidance was borne out of ongoing efforts to improve the efficiency and transparency of funding for government agencies and relates specifically to federal grants.
The overall goal of the proposed revisions is to eliminate unnecessary and duplicative requirements and focus on areas that will achieve better outcomes at a lower cost. Here are 12 noteworthy takeaways from the OMB proposal:
1. Single Audit Threshold: OMB proposed an increase to the single audit threshold from $500,000 to $750,000. All entities with federal expenditures less than $750,000 would no longer be subject to a single audit, although they would still be required to make their records available for review or audit by appropriate officials of federal agencies, pass-through entities, and the Government Accountability Office.
2. Type A/B Program Determination: OMB suggested revising the minimum threshold for Type A/B program determination from $300,000 to $500,000. This change, along with items 3 through 6 below, will likely reduce the number of programs that the auditor is required to test.
3. High-Risk Type A Program Criteria: If a Type A program has not been audited as a major program in at least one of the two most recent audit periods (or in the most recent audit period in the case of a biennial audit) it will be considered high-risk. In addition, in the most recent period that the program was audited it shall not have: (a) failed to receive an unqualified opinion; (b) had a material weakness in internal control; or (c) had questioned costs exceeding 5 percent of the program’s expenditures or it will be considered high-risk.
4. High-Risk Type B Programs: The agency will seek to reduce the number of high-risk Type B programs to be audited as major programs from at least one-half to at least one-fourth of the number of low-risk Type A programs. In addition, small Type B programs would now have a flat 25 percent of the Type A/B program threshold. Small Type B programs are not subject to the risk criteria and are not selected for testing in a single audit.
5. Percentage of Coverage Changes: OMB proposed a reduction in the total amount of expenditures of federal awards tested in any given year from 50 percent of total federal expenditures (normal) and 25 percent (low-risk auditees), to 40 percent (normal) and 20 percent (low-risk auditees). This is the last criteria applied in major program determination, and it will reduce the amount of programs selected for testing among auditees with numerous low risk programs.
6. Low-Risk Auditee Status: The office offered potential revisions to the criteria used to determine low-risk auditee status that would more clearly include timely data-collection form submissions as a requirement. In addition, OMB suggested adding other criteria around whether the auditors had included in their report that there was substantial doubt about the auditee’s ability to continue as a going concern which would mean the entity could not be considered a low-risk auditee. The proposal also takes away the options for waivers that were available previously.
7. Compliance Requirements: OMB proposed reducing the number of compliance requirements to be tested from 14 types to six types to focus the auditor’s attention on the compliance requirements of greatest risk. The six types of compliance requirements that would remain as part of a single audit are: Activities Allowed or Unallowed and Allowable Costs/Cost Principles; Cash Management; Eligibility Reporting; Subrecipient Monitoring; Special Tests; and, Provisions.
The proposed guidance notes that the compliance requirement for allowable costs may still include some testing of period of availability and matching. The proposal does allow federal agencies to request that certain deleted compliance requirements that are considered essential to the oversight of the program be tested as part of the Special Tests and Provisions requirement. This change is not included in the draft proposal but would be implemented through the OMB Compliance Supplement that would be issued once the proposed changes become final.
8. Auditor Findings: OMB may require increased detail to be reported in auditor findings.
9. Questioned Costs: The threshold for reporting questioned costs will increase from $10,000 to $25,000 under the proposed rules.
10. OMB Circulars: OMB will consolidate the eight existing OMB Circulars into one document, including OMB Circular A-133 and the various cost principles. As part of this process, the cost principles will be consolidated into one document and will contain very few variations between types of entities. If the proposal is adopted, OMB has stated that the following OMB Circulars will be superseded:
A-21, Cost Principles for Educational Institutions; A-87, Cost Principles for State, Local and Indian Tribal Governments; A-89, Federal Domestic Assistance Program Information; A-102, Awards and Cooperative Agreements with State and Local Governments; A-110, Uniform Administrative Requirements for Awards and Other Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations; A-122, Cost Principles for Non-Profit Organizations; and, A-133, Audits of States, Local Governments and Non-Profit Organizations
The proposed guidance also contains numerous potential changes to the guidelines regarding the accounting for and charging of indirect costs and time and effort reporting.
Some of the more significant proposed changes with regard to indirect costs include: An option for extending negotiated rates for up to four years, subject to approval of the indirect cost cognizant or oversight agency for the entity; and, imposing a requirement that pass-through entities will need to honor the indirect cost rates negotiated at the federal level, negotiate a rate in accordance with federal guidelines or provide the minimum flat rate. This requirement is aimed at ensuring that entities that receive federal funds primarily through pass-through arrangements are being appropriately reimbursed for allowable costs associated with these arrangements.
11. Payroll Cost Validation: With regard to the time and effort reporting the proposal contains possible alternatives to the current reporting requirements for validating the costs of salaries and wages. The proposal consolidates the reporting requirements to eliminate variances between types of entities and clarifies that automated payroll systems that contain the required information and have clear internal controls that govern these systems can be utilized thereby reducing duplication.
12. Administrative Requirements: There are also a number of changes being proposed to the administrative requirements. The goal is to update the processes to reflect current and future business practices which encompass electronic submissions of information as well as the use of information technology to move, store and share data.
There is no stated effective date within the proposed guidance, and the document states that the final effective date will be included in the final guidance once issued by OMB. Read the proposed guidance in its entirety on OMB’s website at http://1.usa.gov/10nFzhI NPT
Laurie Arena Rocha is an assurance partner and a nonprofit and education industry group audit leader for BDO USA, LLP. She is based in the Washington, D.C., area and her email is [email protected]