GAQC Alert No. 123 

    September 11, 2009 

    DEAR CENTER MEMBERS

    The purpose of this GAQC Alert is to provide you with updated information that the Office of Management and Budget (OMB) has asked us to relay to our members relating to major program determination when an entity has expended funds received under the American Recovery and Reinvestment Act of 2009 (the Recovery Act). After reading this Alert you will be aware of:

    • The federal government's latest thinking on the effect on major program determination when Type A programs that have both Recovery Act and non-Recovery Act expenditures. Keep in mind that this information could affect your June 30, 2009, single audits that may already be underway, and your future single audits;

    • Other recent Recovery Act activities including a Senate oversight hearing held yesterday; and

    • Recovery Act resources available to you on the GAQC Web site

    The Issue OMB is Clarifying and Why

    When OMB issued the 2009 Compliance Supplement, it added Appendix VII, Other OMB Circular A-133 Advisories, to include coverage of the effect of the Recovery Act on single audits. Included in Appendix VII is guidance on the effect of major program determinations when Recovery Act funds are involved. The area that OMB has asked us to forward its clarification on relates to the guidance in Appendix VII relating to when one Catalog of Federal Domestic Assistance (CFDA) number is being used for both Recovery Act Funds and non-Recovery Act funds. The Appendix states that the auditor should consider all Federal programs with expenditures of Recovery Act funds to be programs of higher risk in accordance with sections .525(c)(2) and .525(d) of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. It also states that when performing the risk-based approach under section .520(c)(1), Type A programs with expenditures of Recovery Act funds should not be considered low-risk except when the auditor determines, and clearly documents the reasons, that the expenditures of Recovery Act funds is low-risk for the program.

    Many questions have arisen on this guidance, specifically whether auditors are able to use the guidance in Appendix VII to classify a Type A program as low-risk when a small amount of Recovery Act awards were expended by an entity. For example, consider a situation where a particular Type A program with an existing CFDA number has $3 million of total expenditures for a year of which $10,000 of Recovery Act expenditures were included. The question at hand has been whether the auditor could document that because the Recovery Act expenditures were such a small dollar amount of the total expenditures for the program that it would be a low-risk Type A program (assuming that the program would not otherwise be considered high-risk). Generally, the confusion on the answer to this question has resulted from the wording of Appendix VII versus public remarks that certain federal agency representatives have made which have implied that any Recovery Act expenditures, no matter how small, would "taint" a Type A program and should keep it from being considered low-risk.

    OMB Clarifications

    The following includes the clarifying information sent to the GAQC from OMB. OMB asked us to send it to our members and has indicated that it will be issuing it more formally in a future addendum to the Compliance Supplement.

    During recent discussions with members of the audit community, there have been inconsistent interpretations on the treatment of Type A programs with a small amount of Recovery Act expenditures. The following are further OMB clarifications on whether a Type A program with a small amount of Recovery expenditures could be considered a low-risk program.

    Appendix VII to the March 2009 Compliance Supplement states "the auditor should consider all Federal programs with expenditures of Recovery Act awards to be programs of higher risk." There is no de minimus threshold for this presumption. Appendix VII further states: "Type A programs with expenditures of Recovery Act awards should not be considered low-risk except when the auditor determines, and clearly documents the reasons, that the expenditures of Recovery Act awards is low-risk for the program." For those uncommon instances when a Recovery Act program is considered low-risk, the auditor must consider and clearly document all the qualitative and quantitative factors supporting the decision. OMB is providing the following examples of factors affecting an auditor's consideration of whether a program is low-risk in this situation.

    • The June 2009 Addendum to the Compliance Supplement states: "At many entities, awards funded by Recovery Act funds will result in material increases in funding, which may result in a material increase in the level of resources needed by management to properly manage, monitor, and account for Federal awards and effectively operate internal control. As part of the consideration of internal control over compliance, auditors should consider "capacity" issues…" Therefore, while de minimus levels of Recovery Act expenditures in the current year may be a quantitative factor indicating low risk, the anticipated large funding increases in subsequent periods would be a strong qualitative factor that would not support a designation of a program as low-risk.

    • The lack of findings in prior audits of the program may indicate a low-risk program. However, the auditor must consider the new compliance requirements that are specific to all Recovery Act awards which would not support a designation of a program as low-risk.

    • The auditor must consider qualitative factors such as the unprecedented levels of transparency and accountability for Recovery Act funds established by Congress and the administration which would not support a designation of a program as low-risk.

    When documenting the instances when a program receiving Recovery Act funds is low-risk, the audit documentation should consider those quantitative and qualitative factors which both support and would not support a designation of a program as low-risk.

    Auditors should be aware that the justification and related documentation for considering a program with Recovery Act funds as a low-risk program will be subject to a review by Federal auditors. OMB has instructed Offices of Inspector General (OIGs) to perform quality control reviews to ensure single audits are properly performed and improper payments and other noncompliance are fully reported. OIGs will perform follow-up reviews of single audit quality with emphasis on Recovery Act funds and report the results on Recovery.gov. In addition, for fiscal years ending September 30, 2009, and later, all single audit reports filed with the Federal Audit Clearinghouse (FAC) will be made publicly available on the internet. The separate presentation on the Data Collection Form of Recovery Act expenditures will enable OIGs, GAO, and Federal program officials to easily identify programs with Recovery Act expenditures that were not considered major programs.

    GAQC Thoughts on the Above OMB Clarifications

    In light of the above OMB clarifications, auditors should consider carefully whether a low-risk designation is appropriate for Type A programs with existing CFDA numbers that have any amount of Recovery Act expenditures. If a decision is reached by an auditor that a low-risk designation is appropriate for such a Type A with Recovery Act expenditures, the auditor should carefully document the factors that led into that decision, keeping in mind the above OMB clarifying guidance and that the federal OIGs will likely to be monitoring low-risk Type A determinations for ARRA expenditures using information from the FAC database. The expenditures of ARRA funds will be apparent in the FAC due to the required separate presentation on the SEFA and the data collection form.

    Members should also consider listening again to our archived conference call titled, The Recovery Act and Its Potential Impact on 2009 Single Audits. During that call, the presenter from the Department of Health and Human Services discussed his views on the question that OMB is providing clarification on above (his comments can be found at the 43 minute mark and again at the 1 hour and 34 minute mark during the call). Generally, he stated that in his view even $10 of Recovery Act expenditures made under a particular CFDA number would trigger higher risk and that if he were making the determination he would consider it a high-risk Type A program. Later in the call he provided further clarification that cautioned auditors not just to focus on quantitative considerations in making the high-risk versus low-risk assessment and stressed the importance of qualitative factors. His remarks are generally reflective of what other federal agency representatives have been stating publicly in recent weeks. Note that the GAQC has left this call open to the public so members might also consider inviting clients to listen to the call, particularly those that that are questioning why certain programs are being designated as major.

    A Word on Type B Programs

    At this time, there has been no formal guidance put out by OMB on the affect of Recovery Act funds on Type B program risk assessments. However, during the Center call referred to above, the question was posed to the federal presenters about whether the guidance put out for Type A programs would apply to Type B. Their general view (which can be found at the 1 hour and 41 minute mark during the call) was that auditors should consider Type B programs with existing CFDA numbers that have Recovery Act fund expenditures to be higher risk for the same reasons that OMB suggests that auditors deem Type A programs to be so.

    Other Recovery Act Activities

    Just yesterday, there was another Recovery Act oversight hearing held by the Senate Committee on Homeland Security and Governmental Affairs. The title of the hearing was, Follow the Money: An Update on Stimulus Spending, Transparency, and Fraud Prevention, included the following panelists OMB, the Government Accountability Office, and the chairman of the Recovery Accountability and Transparency Board. As has been the case with each of these oversight hearings, the single audit was raised as an important accountability mechanism and concerns were voiced that the single audit reporting deadline for issuance is too late for the audited entity to take action on deficiencies noted on Recovery Act programs. During the hearing, OMB announced the launch of a pilot project in which auditors of several volunteer states will accelerate their communications with management on identified internal control deficiencies relating to certain higher-risk programs (identified by OMB) with Recovery Act funding. The GAQC has been working with OMB as they have been developing the parameters of the pilot project and we will keep you informed as it progresses. However, at this time, the pilot project will only affect single audits of state governments that volunteer. To access an archive of the hearing and the testimony for each presenter, click here. Also, remember that unrelated to this pilot project, the June 2009 Addendum to the Compliance Supplement (in Part 6) encourages auditors to communicate control deficiencies to auditee management. It states that auditors are encouraged to promptly inform auditee management and those charged with governance during the audit engagement about control deficiencies related to ARRA funding that are, or likely to be, significant deficiencies or material weaknesses in internal control. It also states that the auditor should use professional judgment regarding the form of such interim communications.

    We hope that you have found this Alert helpful in understanding this topic and addressing the latest questions that have been coming up in this area. We will continue to communicate with you going forward as activities on the Recovery Act progress. Also, be sure to keep checking the GAQC Recovery Act Resource Center for the latest information.

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    Sincerely,

    AICPA Governmental Audit Quality Center

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