How To Prepare For A Federal Audit

How to Prepare for a Federal Audit
Wilfredo Corps, CGFM, Director Mayer Hoffman McCann P.C. Government Services SRA Annual Meeting October 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

Federal Audits
What is the auditors goal?
The auditor has the responsibility of providing his/her opinion regarding the auditees compliance with rules and regulations related to the award(s) under audit.

Federal Audits
Types of Audits
Full scope Limited scope Agreed Upon Procedures

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

Ways to Deter Selection

Communicate reasons why findings dont 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

Auditors 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.

Auditor Expectations
Positive initial interaction (i.e., phone, email, entrance
conference)
Quick and easy audit trail Interviews with personnel, i.e. understanding of Prior internal and external audit reports
FCTR/FSR cycle; disbursement cycle; payroll cycle; cost sharing cycle (corroborate interviews with established policies)
Supporting documentation
Accuracy of cost coding direct versus indirect

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

Key Areas To Know
Effort Reporting & OMB Requirements

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


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)


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

Requirements
OMB Circular A-21 (Higher Education Institutions)
OMB Circular A-122 (Non-Profit Organizations) www.whitehouse.gov/omb/circulars

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.

OMB Circular A-21

(Higher Education)
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-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.

OMB Circular A-122

(Non-profits) 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

Additional OMB Requirements

Change in Level of Effort
OMB Circular A-110 requires grantees to obtain the sponsoring agencys 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.

Risks of Non-Compliance
Cost disallowances and fines
Withholding of payments Designation as a High Risk Organization
Special monitoring
Embarrassment to parties involved

Audit Areas of Concern

Institutional 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

Audit Areas of Concern

Individual 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

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.)

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

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


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


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


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

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

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

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

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

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

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

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

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 individuals total institutional time

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

Key Areas
Direct vs. Indirect Charging of Costs

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

Charging of Costs
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
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
Document Cost Accounting Standards (CAS) exclusions
Establish Institutional policies/procedures

Ambiguity vs. Detailed/Specific

Pro-active: Effort and F6B Clean-up

Select a sample (50-75 transactions)
Document the Charges Determine the errors Compare results to the Institutions tolerance for risk Corrective Action Plan Obtain Senior Level Support Determine project team Obtain outside help where appropriate Document, Document, Document

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?

Key Areas
Sub-grantee Monitoring

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

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.

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

Audit Results
Questioned Cost
Unsupported cost claimed Unallowable Not reasonable Unallocable
Internal Control Compliance

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

How Do You Know When 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

Audit Resolution
Agency Program Personnel VS OIG Personnel

If you have questions, contact:

Wilfredo Corps, CGFM, Director
CBIZ 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. Wilfredos 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).
wcorps@cbiz.com (301) 951-3636
Ext. 6709
Mayer Hoffman McCann P.C. | CBIZ MHM, LLC

3 Bethesda Metro Center, Bethesda, MD 20814 9755 Patuxent Woods Drive, Suite 200, Columbia MD 21046

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Mayer Hoffman McCann P.C.

Direct vs. Indirect Charging of Costs

Mayer Hoffman McCann P.C.

Mayer Hoffman McCann P.C.

Mayer Hoffman McCann P.C.

Selection Process Why Were You Selected?

Large number of grants to agency (lots of exposure)

Mayer Hoffman McCann P.C.

Ways to Deter Selection

Mayer Hoffman McCann P.C.

Mayer Hoffman McCann P.C.

Mayer Hoffman McCann P.C.

Auditor Red Flags

Mayer Hoffman McCann P.C.

Key Areas To Know

Effort Reporting & OMB Requirements

Mayer Hoffman McCann P.C.

Importance of Effort Reporting

Sponsored awards usually amount to significant $

Mayer Hoffman McCann P.C.

Importance of Effort Reporting

Fines could be significant and inconvenient to the recipients

Mayer Hoffman McCann P.C.

Importance of Effort Reporting

Compensation packages Institutional Base Salary

Mayer Hoffman McCann P.C.

Mayer Hoffman McCann P.C.

OMB Circular A-21

Mayer Hoffman McCann P.C.

OMB Circular A-21

(b) The method must recognize the principle of after-the-fact

Mayer Hoffman McCann P.C.

OMB Circular A-122

7. Compensation for personal services

Mayer Hoffman McCann P.C.

OMB Circular A-122

Mayer Hoffman McCann P.C.

Additional OMB Requirements

Any changes must be approved in writing by the sponsoring agency.

Mayer Hoffman McCann P.C.

Mayer Hoffman McCann P.C.

Audit Areas of Concern

Mayer Hoffman McCann P.C.

Audit Areas of Concern

Mayer Hoffman McCann P.C.

Auditor Red Flags

Mayer Hoffman McCann P.C.

PIs with a substantial amount of projects

Mayer Hoffman McCann P.C.

Effective Effort Reporting Systems

It needs to include all institutional activities and defined

Mayer Hoffman McCann P.C.

Effective Effort Reporting Systems

Mayer Hoffman McCann P.C.

Effective Effort Reporting Systems

Mayer Hoffman McCann P.C.

Effective Effort Reporting Systems

Should be defined in the Institutional Base Salary

Mayer Hoffman McCann P.C.

How To Determine Salary Charges to Grants

Mayer Hoffman McCann P.C.

Who is an Appropriate Certifier?