GAQC Alert No. 118 


    OMB Issues Compliance Supplement Addendum #1 and

    Other Recovery Act News

    DEAR CENTER MEMBERS

    Late yesterday, the Office of Management Budget (OMB) issued the long awaited addendum to the March 2009 Compliance Supplement titled, Compliance Supplement Addendum #1 (the Addendum). The purpose of this GAQC Alert is to provide you with information about the Addendum that you need to be aware of and also other recent activities relating to the American Recovery and Reinvestment Act of 2009 (the Recovery Act). After reading this Alert you will:

    • Understand the Addendum and its effect on your June 30, 2009, single audits and thereafter;
    • Be in a position to talk to your clients that have or will be receiving Recovery Act funds about their reporting responsibilities going forward. The first reporting will be as of September 30, 2009, and due on October 10, 2009; and
    • Learn about recent Congressional activity and potential future changes to the Single Audit Act.

    See the recently launched Recovery Act Resource Center on the GAQC Web site for more information, background, and related tools on the Recovery Act.

    Compliance Supplement Addendum #1

    As noted in GAQC Alert #112 , due to the limited time between the enactment of the Recovery Act and the issuance of the March 2009 Compliance Supplement , OMB was not able to fully incorporate needed Recovery Act guidance. At that time, OMB was only able to include Appendix VII, Other OMB Circular A-133 Advisories in the Supplement that provided some initial guidance and informed auditors to be on the lookout for future addendum to the Supplement relating to the Recovery Act. Yesterday's issuance is the first of such addendum to the Compliance Supplement to be issued by OMB.

    The Addendum is Effective for June 30 th Single Audits with Recovery Act Expenditures. The first thing you should be aware of, even if you have already started your June 30 th single audits, is that the Addendum is effective for audits of fiscal years beginning after June 30, 2008 (that is, for your June 30, 2009, single audits and year-ends thereafter), where your clients have expended Recovery Act funds. It should be used in conjunction with other Parts and Appendices of the Compliance Supplement in determining the appropriate audit procedures to support the auditor's opinion on compliance for each major program with expenditures of Recovery Act awards. The guidance in Part 5, Clusters of Programs, of the Addendum includes critical information on how Recovery Act programs are to be clustered which will have an effect on your major program determination process. See Appendix VII, Other OMB Circular A-133 Advisories of the Supplement for previously issued OMB guidance on the impact of Recovery Act expenditures on major program determination. Also, click here to access several nonauthoritative examples developed by the GAQC to illustrate the effect of Recovery awards on planning a single audit.

    Matrix of Compliance Requirements Updated . The Addendum includes a new updated Part 2, Matrix of Compliance Requirements, to show new Recovery Act programs, new clusters, and pre-existing programs that now have Recovery Act funds associated with them under a pre-existing CFDA number. All of these additions are identified by bold lettering and the types of compliance requirements applicable to them are identified.

    Guidance Added for Certain Types of Compliance Requirements. The Addendum adds new guidance to Part 3, Compliance Requirements, for the following types of compliance requirements. You should refer to Part 3 for the full description of this new guidance (changed areas are noted with bold lettering).

    1. Activities Allowed or Unallowed – identifies a new cross-cutting unallowable activity for all Recovery Act funded awards;
    2. Davis-Bacon Act – identifies the Recovery Act and related OMB implementing guidance as another source of requirements for Davis-Bacon compliance;
    3. Procurement and Suspension and Debarment – adds guidance on the Buy-American provisions of the Recovery Act, an additional Recovery Act-related audit objective, and related suggested audit procedures;
    4. Reporting – clarifies that the reporting requirements imposed by Section 1512 of the Recovery Act are not applicable for audit periods with ending dates in June, July, and August of 2009 and that an additional Addendum will be issued by September 30, 2009 (the first reporting period for reports required by Section 1512) identifying compliance requirements, audit objectives, and suggested audit procedures for reports required by Section 1512. See the section of this Alert titled, OMB Issues Reporting Guidance, for information on recently issued implementing guidance issued by OMB to assist entities that have to report under Section 1512.
    5. Subrecipient Monitoring – Adds a new pass-through entity responsibility to identify to first-tier subrecipients the requirement to register in the Central Contractor Registration and a new suggested audit procedure relating to the requirement that pass-through entities separately identify to each subrecipient certain information at the time of the subaward and disbursement of Recovery Act funds.
    6. Special Tests and Provisions – Adds new special tests and provisions that apply to all programs with Recovery Act expenditures (as well as new audit objectives and suggested audit procedures) relating to requirements for separate accountability for Recovery Act funding; presentation matters relating to the Schedule of Expenditures of Federal Awards (SEFA) and the Data Collection Form (DCF); and requirements for recipients to separately identify (and document) to each subrecipient at the time of a subaward (a) federal award and CFDA numbers, and (b) the amount of Recovery Act funds, as well as requiring subrecipients to meet the SEFA and DCF presentation requirements described above. Auditors should consider these special tests and provisions along with Part 4, Agency Program Requirements, guidance (or Part 7, Guidance for Programs Not Included, for any programs not included in the Compliance Supplement) for each program with Recovery Act expenditures.

    New Program Sections Added to Part 4. A number of new Recovery Act programs or revised program sections were added to the Compliance Supplement through the Addendum (note that the revised Table of Contents in the Addendum identifies new or revised programs in bold lettering). These program sections include new Recovery Act programs, new or modified clusters, as well as existing programs that now have Recovery Act funds and related new compliance requirements associated with them under a pre-existing CFDA number. Changes made to existing programs or clusters for Recovery Act implications are highlighted in bold lettering in each Part 4 program section. Agencies that have issued new program sections include the Department of Education, the Department of Homeland Security, the Department of Housing and Urban Development, the Department of Labor, and the Environmental Protection Agency. Note that while the Department of Health and Human Services (HHS) does not include any new program sections in Part 4 of the Addendum, they have revised a number of clusters (identified in Part 5 of the Addendum) for new Recovery Act programs. Those new clusters are not included in Part 4 of the Addendum because HHS Recovery Act programs do not have any additional compliance requirements beyond those identified in Part 4 of the March 2009 Compliance Supplement. However, auditors should be aware of the revised HHS clusters as they may impact major program determination and other single audit procedures performed.

    Clusters Have Been Revised for Effect of Recovery Act Programs. Part 5 of the Addendum identifies cluster changes due to the Recovery Act. Revisions are noted by bold lettering. Further, guidance is provided on Recovery Act funds for the Federal Pell Grant Program (FPG) and the Federal Work-Study (FWS) Program in that Recovery Act disbursements relating to these programs was made without separate identification of the Recovery Act portions to auditees. Since it is not possible for auditees to separately identify Recovery Act expenditures for these programs, the Addendum states that all expenditures for FPG and FWS should be reported as part of the Student Financial Aid cluster under CFDA numbers 84.063 and 84.033, respectively.

    New General Guidance for Internal Control Added to Part 6. Of special interest to auditors, the Addendum revises Part 6, Internal Control, to emphasize several points relating to internal control testwork related to each major program funded with Recovery Act funds.

    1. The effects of the Recovery Act on single audits will increase as calendar year 2009 progresses and Recovery Act expenditures increase.
    2. Auditors are encouraged to promptly inform auditee management and those charged with governance, during the audit engagement, of identified control deficiencies related to Recovery Act funding that are, or likely to be, significant deficiencies or material weaknesses. The idea behind this is for auditees to have the opportunity to begin focusing on correcting such deficiencies as soon as possible to help ensure proper accountability and transparency of Recovery Act funds. The form of this interim communication is up to the auditor's judgment. However, keep in mind that regardless of how such an interim communication might be made that auditors still must communicate such matters via the normal reporting process (that is, in the schedule of findings and questioned costs and the single audit reporting on internal control over compliance) at the end of the audit.
    3. When gaining an understanding of internal control over Activities Allowed or Unallowed/Allowable Costs and Cost Principles and Eligibility, the auditor should consider the entity's internal control environment and internal control established to address the risks arising from Recovery Act funding (e.g., rapid growth of a program, new and/or increased activities, changes in regulatory environment, or new personnel); and
    4. When considering the likelihood and magnitude of control deficiencies, auditors should consider not only the volume of activity exposed to the deficiency in the current period, but also the volume of activity expected in the future.

    Child Nutrition Cluster Revised. While not related to the Recovery Act, the Addendum does update the Department of Agriculture Child Nutrition Cluster (CFDA numbers 10.553, 10.555, 10.556, and 10.559). The change made modifies section III.N.1, Special Tests and Provisions, Verification of Free and Reduced Price Applications, to reflect statutory changes not included in the March 2009 Compliance Supplement.

    OMB Issues Reporting Guidance

    In June 2009, OMB issued a document titled, Implementing Guidance for the Reports on Use of Funds Pursuant to the American Recovery and Reinvestment Act of 2009. The new guidance supplements the reporting guidance described in Section 1512 of the Recovery Act for recipients of grants, loans, and other forms of assistance, and goes into great detail about the reporting for both prime recipients (defined as non-federal entities that receive Recovery Act funding as federal awards in the form of grants, loans, or cooperative agreements directly from the federal government) and subrecipients (defined as non-federal entities that are awarded Recovery Act funding through a legal instrument from the prime recipient to support the performance of the substantive project or program for which the prime recipient received Recovery Act funding). You should refer your clients that are receiving Recovery Act funding to this new OMB implementing reporting guidance in its entirety so that they can become familiar with it. The following are several key points you and your clients should be aware of:

    1. The first required reporting is due 10 days after September 30, 2009 (i.e., October 10, 2009) and, will not be covered as part of your June 30, 2009, single audits. However, the reporting requirements outlined in Section 1512 of the Recovery Act are applicable from the date of the enactment of the Recovery Act. Therefore, the first required reporting will include not only activity for the quarter-ended September 30, 2009, but also any activity that occurred for the quarter ended June 30, 2009 (i.e., the first reporting submission will be cumulative for both quarters).
    2. The Recovery Act may contain additional recipient reporting responsibilities (beyond that in Section 1512) that are specific to certain federal programs. Recipients will have to comply with any reporting as outlined in the award agreement, which may result in the submission of similar data to the federal awarding agency.
    3. Prime recipients (as defined above) of all federal programs identified in Supplement 1 to the Implementing Guidance titled, List of Programs Subject to Recipient Reporting, are required to report.
    4. There are a number of required reporting elements that are described in Section 2 of the document (specifically in question 2.3). For prime recipients, they include, among other things, information about the Recovery Act awards received and expended, project descriptions, jobs created information, and recipient officer names and compensation (Top 5). Section 5 of the document includes information on preparing jobs creation estimates. Prime recipients also have to report 3 additional data elements associated with any vendors receiving funds for any payments greater than $25,000. Additionally, prime recipients are responsible for reporting certain data elements for subrecipients but may delegate the reporting to subrecipients that receive all or a portion of Recovery funding from the prime recipient. If such reporting is delegated, it must be done in time for the subrecipient to prepare for the reporting, including registering in the system. Among the subrecipient data elements are information about the Recovery Act awards received and also subrecipient officer names and compensation (Top 5). There are exceptions provided for subrecipient payments of less than $25,000.
    5. Report submissions will be submitted through a new Web site: www.federalreporting.gov. However, reports submitted will be made public through www.recovery.gov and on individual federal agency Web sites.

    Recent House Hearing on Recovery Act Progress

    The Congress is committed to ensuring that Recovery Act funds are spent appropriately and that every effort be made to ensure that there is minimal waste, fraud, or abuse associated with these funds. In early July, the House Committee on Oversight and Government Reform held a hearing titled, Tracking the Money: Preventing Waste, Fraud, and Abuse of Recovery Act Funding, where the OMB, the Government Accountability Office, and various governors from states around the country discussed the challenges with oversight, as well as their commitment to making it work. Several panelists raised single audits as an important accountability mechanism but also raised several concerns about the timeliness of single audits and other issues. One of the results of this increased Congressional attention on single audits could be proposals to amend the Single Audit Act. We are monitoring this area very closely and will inform you of developments as soon as we become aware of them. Additional hearings are also certain to be held in the future so that Congress can continue to monitor Recovery Act activity. To access the recent House hearing and related testimony, click here.

    Going Forward

    As you can see from the above, there continues to be a lot of activity in this area. We do not expect that to change anytime soon so please monitor future GAQC Alerts for continual updates as we are committed to timely communications with you going forward as Recovery Act activities progress.

    Sincerely,

    AICPA Governmental Audit Quality Center

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