GAQC Alert No. 189 


    GAQC Alert
     
    OMB Issues Advance Notice of Changes Being Considered for A-133 and Cost Principles
           
      AICPA  
    March 2, 2012
    GAQC Alert #189
     
     
    In This Alert
       
    Summary of the Advance Notice
    Commenting on the Advance Notice
    How to Find the Advance Notice
    Looking Forward
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    Dear Center Members
    Important Note:  While the GAQC Alert below refers to a comment deadline of March 29, 2012, the U.S. Office of Management and Budget is extending the comment deadline to April 30, 2012.

    As we alerted you to in GAQC Alert #188, the U. S. Office of Management and Budget (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 (including Single Audit Act) (Advance Notice). After reading this GAQC Alert, you will be aware of the following:
    A summary of the Advance Notice as it relates to OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations (Circular A-133), the cost principles, administrative requirements, and other areas;
    The GAQC comment plans and a suggestion that you inform your clients of this important notice and encourage them to provide feedback to OMB, as well as consider providing feedback from your firm or state audit organization (SAO) perspective;
    How to find the Advance Notice; and
    What is expected when looking forward in the process.
    Summary of the Advance Notice
    The federal government spends more than $600 billion annually in the form of grants and cooperative agreements. OMB and the federal agencies have been talking for some time about how grant policies can be reformed to increase the efficiency and effectiveness of federal programs, as well as to eliminate unnecessary and duplicative requirements and focus in on areas that emphasize achieving better outcomes at a lower cost. Improving federal oversight has also been included in the discussion. OMB has issued the Advance Notice to more fully describe the reform ideas it is contemplating so that the public can provide feedback. Keep in mind that this is the first step in the process. OMB will consider the feedback received on the Advance Notice and move to the next step—that is, developing proposed revisions to various federal regulations.

    The following describes some of the key ideas for single audits that are covered in the Advance Notice:

    Single Audit Threshold for Audit Increased. Entities that expend less than $1,000,000 in federal awards would not be required to undergo a single audit. This would represent an increase from the current threshold for single audits of $500,000, which was established in 2003. The GAQC performed a quick analysis of the 2010 Federal Audit Clearinghouse (FAC) database and believes that just over 10,000 auditees would no longer be required to have a single audit.

    A New Category of Single Audit. For those entities expending between $1 million and $3 million in federal awards, a single audit would be required, but major program audit procedures would be focused on testing only two compliance requirements—that is, 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. The GAQC quick analysis of the 2010 FAC database shows that approximately 16,000 auditees would fall into this category.

    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 indicates that federal agencies may identify subsets of compliance requirements that they believe most effectively address improper payments, waste, fraud, abuse, and program performance and require 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. The proposal also states that federal agencies could move compliance requirements that would no longer be "universal" to a specific program's special tests and provisions compliance requirement, if a requirement is deemed to be relevant to preventing waste, fraud, and abuse for that program. The GAQC quick analysis of the 2010 FAC database indicates that just over 17,000 audits would fall into this category.

    Audit Follow-Up by Federal Agencies. OMB is considering ideas for making federal agencies more accountable for audit follow-up and audit resolution. Among the ideas discussed, the proposal mentions that the federal government might digitize single audit reports into a searchable database to support analysis by federal agencies.

    Pass-Through Entities and Subrecipients. The ideas discussed in this section call for more federal coordination regarding additional federal agency audits of recipient entities. Further, for entities that receive a majority of funds directly from the federal government and some other awards from a pass-through entity, the suggestion is for 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.

    Changes to the Cost Principles. While of primary concern to your clients, you may want to become aware of the 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) as ultimately, any changes to the cost principles could affect the allowability testing you perform in the future. In large part, the ideas for change relate to consolidating the cost principles into a single document and ensuring limited variations by type of entity. Other ideas discussed include 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; and other changes for specific cost elements.

    Reforms to the Administrative Requirements. In large part, 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 suggestions for federal agency change. For example, the Advance Notice discusses combining a consolidated set of administrative requirements; increasing pre-award considerations to include consideration of the merit of each proposal and financial risk; and changes to communication of funding opportunities.

    OMB Looking for Other Alternatives and Answers on Burden Reduction. 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. If you have any thoughts or suggestions in this area, in addition to providing feedback to OMB, please consider passing them along to the GAQC. See the following section of this Alert, "Commenting on the Advance Notice," for more information about commenting and timing requirements.
    Commenting on the Advance Notice
    Comments on the Advance Notice are due to OMB by March 29, 2012. The GAQC plans to comment, primarily on the sections of the Advance Notice concerning ideas for change to the single audit process. Once our comment letter is finalized, we will post it to our Web site and communicate to you that it is available. We also encourage your firm or SAO to comment directly to OMB on the proposal. If you have ideas regarding the proposal that you believe would be helpful to the GAQC as it develops its comment letter, please send them to gaqc@aicpa.org no later than Monday, March 12. We apologize for this short turnaround. However, it is necessary in light of the limited 30-day timeframe for commenting and the process that needs to occur for the GAQC to issue a formal letter.

    As a client service, you should consider making your clients aware of the Advance Notice, particularly because the ideas in the Advance Notice, if they were to be adopted, could have significant implications for grantees. You might want to consider forwarding your clients this GAQC Alert with an encouragement for them to comment. The GAQC believes that it is important for OMB to hear from the grantee community at large.
    How to Find the Advance Notice
    You can access the Advance Notice in several ways. First, you can access a PDF version of the Advance Notice from the Federal Register. Second, you can access an online version of the Advance Notice from the Federal Register that includes sublinks to various sections of the proposal for easy navigating. Finally, OMB has a PDF version of the Advance Notice on its Web site.
    Looking Forward
    Once the comment period expires, OMB will consider the comments received and begin preparing specific revisions to various existing requirements including Circular A-133, the cost principles, and more. Future Federal Register notices, with additional requests for comment, will be issued later this year. The GAQC will be monitoring activities in this area and participating fully in the process. Certainly, communication with our members throughout this process will be one of our highest priorities.
     
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    Sincerely,

    AICPA Governmental Audit Quality Center

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