How To Prepare For A Federal Audit

781
-1

Published on

How to Prepare for a Federal Audit - SRA. Learn how 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

For more information visit http://www.mhm-pc.com or call (301) 951-3636.

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
781
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
8
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

How To Prepare For A Federal Audit

  1. 1. 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
  2. 2. 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
  3. 3. Mayer Hoffman McCann P.C.An Independent CPA Firm Federal Audits What is the auditor’s goal?  The auditor has the responsibility of providing his/her opinion regarding the auditee’s compliance with rules and regulations related to the award(s) under audit.
  4. 4. Mayer Hoffman McCann P.C.An Independent CPA Firm Federal Audits Types of Audits  Full scope  Limited scope  Agreed Upon Procedures
  5. 5. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  6. 6. Mayer Hoffman McCann P.C. An Independent CPA Firm Ways to Deter Selection Communicate reasons why findings don’t 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
  7. 7. Mayer Hoffman McCann P.C.An Independent CPA Firm Auditor’s 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.
  8. 8. Mayer Hoffman McCann P.C.An Independent CPA Firm Auditor Expectations  Positive initial interaction (i.e., phone, email, entrance conference)  Quick and easy audit trail  Interviews with personnel, i.e. understanding of FCTR/FSR cycle; disbursement cycle; payroll cycle; cost sharing cycle (corroborate interviews with established policies)  Prior internal and external audit reports  Supporting documentation  Accuracy of cost coding – direct versus indirect
  9. 9. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  10. 10. Mayer Hoffman McCann P.C.An Independent CPA Firm Key Areas To Know Effort Reporting & OMB Requirements
  11. 11. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  12. 12. Mayer Hoffman McCann P.C.An Independent CPA Firm Importance of Effort Reporting 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)
  13. 13. Mayer Hoffman McCann P.C.An Independent CPA Firm Importance of Effort Reporting 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
  14. 14. Mayer Hoffman McCann P.C.An Independent CPA Firm Requirements  OMB Circular A-21 (Higher Education Institutions)  OMB Circular A-122 (Non-Profit Organizations) • www.whitehouse.gov/omb/circulars
  15. 15. Mayer Hoffman McCann P.C.An Independent CPA Firm 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.
  16. 16. Mayer Hoffman McCann P.C.An Independent CPA Firm 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…
  17. 17. Mayer Hoffman McCann P.C. An Independent CPA Firm 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.
  18. 18. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  19. 19. Mayer Hoffman McCann P.C.An Independent CPA Firm Additional OMB Requirements Change in Level of Effort  OMB Circular A-110 requires grantees to obtain the sponsoring agency’s 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.
  20. 20. Mayer Hoffman McCann P.C.An Independent CPA Firm Risks of Non-Compliance  Cost disallowances and fines  Withholding of payments  Designation as a “High Risk Organization”  Special monitoring  Embarrassment to parties involved
  21. 21. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  22. 22. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  23. 23. Mayer Hoffman McCann P.C.An Independent CPA Firm 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.)
  24. 24. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  25. 25. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  26. 26. Mayer Hoffman McCann P.C.An Independent CPA Firm Effective Effort Reporting SystemsSponsored 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
  27. 27. Mayer Hoffman McCann P.C.An Independent CPA Firm Effective Effort Reporting Systems 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
  28. 28. Mayer Hoffman McCann P.C.An Independent CPA Firm Effective Effort Reporting Systems  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
  29. 29. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  30. 30. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  31. 31. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  32. 32. Mayer Hoffman McCann P.C. An Independent CPA Firm 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
  33. 33. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  34. 34. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  35. 35. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  36. 36. Mayer Hoffman McCann P.C.An Independent CPA Firm 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 individual’s total institutional time
  37. 37. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  38. 38. Mayer Hoffman McCann P.C.An Independent CPA Firm Key Areas Direct vs. Indirect Charging of Costs
  39. 39. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  40. 40. Mayer Hoffman McCann P.C. An Independent CPA Firm Charging of Costs (Direct or Indirect) 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
  41. 41. Mayer Hoffman McCann P.C.An Independent CPA Firm Charging of Costs (Direct or Indirect)  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.
  42. 42. Mayer Hoffman McCann P.C.An Independent CPA Firm Charging of Costs (Direct or Indirect)  Document Cost Accounting Standards (CAS) exclusions  Establish Institutional policies/procedures  Ambiguity vs. Detailed/Specific
  43. 43. Mayer Hoffman McCann P.C.An Independent CPA FirmPro-active: Effort and F6B Clean-up  Select a sample (50-75 transactions)  Document the Charges  Determine the errors  Compare results to the Institution’s tolerance for risk  Corrective Action Plan  Obtain Senior Level Support  Determine project team  Obtain outside help where appropriate  Document, Document, Document
  44. 44. Mayer Hoffman McCann P.C.An Independent CPA FirmPro-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?
  45. 45. Mayer Hoffman McCann P.C.An Independent CPA Firm Key Areas Sub-grantee Monitoring
  46. 46. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  47. 47. Mayer Hoffman McCann P.C. An Independent CPA Firm 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.
  48. 48. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  49. 49. Mayer Hoffman McCann P.C.An Independent CPA Firm Audit Results  Questioned Cost • Unsupported cost claimed • Unallowable • Not reasonable • Unallocable  Internal Control  Compliance
  50. 50. Mayer Hoffman McCann P.C. An Independent CPA Firm 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
  51. 51. Mayer Hoffman McCann P.C.An Independent CPA Firm 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
  52. 52. Mayer Hoffman McCann P.C.An Independent CPA Firm Audit Resolution Agency Program Personnel VS OIG Personnel
  53. 53. Mayer Hoffman McCann P.C.An Independent CPA Firm 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. Wilfredo’s 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
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×