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

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 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.


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 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


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.


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


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 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.


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 individual’s
total institutional time


Key Points – Effort Reporting
“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
“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 Institution’s 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. 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

How To Prepare For A Federal Audit

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How To Prepare For A Federal Audit