OMB Circular A-133 requires higher education and nonprofit institutions that expend a specific threshold of federal funds to annually undergo a detailed, organization-wide audit that complies with the criteria established under its provisions.
The Office of Management & Budget (OMB) has revised OMB Circular A-133 in the Federal Register entitled "Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards." This guidance supersedes and combines the requirements of eight existing OMB Circulars (A-21, A-50, A-87, A-89, A-102, A-110, A-122 and A-133) into a streamlined format that aims to improve both clarity and accessibility. The new guidance will be effective for all federal awards or funding increments provided after December 26, 2014. The revised audit requirements will apply to audits of fiscal years beginning after December 26, 2014; therefore the first audits subject to a single audit under the new requirements will be for the year ending December 31, 2015.
This reform seeks to strengthen oversight of federal funds with the goal, of eliminating waste, fraud and abuse.
The following is a summary of the changes to the audit requirements of OMB A-133:
|Single Audit Threshold||Greater than $500,000 in federal awards expended||Greater than $750,000 in federal awards expended|
|Minimum threshold for determining Type A/B programs for organizations that expend between $750,000 and $25 million in federal awards||$300,000||$750,000|
|Classification of Type A programs as high risk||
Criteria remains unchanged - to be considered low-risk, a
program must have been audited as a major program in at least one of the two most recent audit periods and have been found to have
no findings or internal control deficiencies
|Only if in the most recent audit period, an organization failed to receive an unqualified opinion, had a material weakness in internal control or had questioned costs exceeding five percent of the program's expenditures|
|Percentage of coverage required in a single audit||50% for high-risk auditees and 25% for low-risk auditees||40% for high-risk auditees and 20% for low-risk auditees|
|Questioned cost threshold for reporting auditor findings||$10,000||$25,000|
Administrative Requirements - Some of the key changes include:
1) Increase in uniformity aimed at standardization in the federal awarding process.
2) Federal funding applicants will be evaluated based on merits and risks associated with a potential federal award. There will be more accountability based on performance and results.
3) More guidance will be provided for measuring performance to help entities improve program outcomes.
4) Internal controls should be in compliance with the internal control requirements issued by the Government Accountability Office (GAO) and by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Organizations should be familiar with the internal control requirements of the GAO and COSO and determine whether their current internal control design and operating effectiveness comply with these requirements.
5) There is updated guidance on procurement and conflicts of interest.
6) There is an increase in oversight of sub-recipients. Pass-through entities will have to monitor sub-recipients by analyzing reports they submit and performing other procedures to ensure compliance with program requirements and achievement of the performance goals of the award.
Cost Principles - Some of the key changes include the following:
1) Direct costs - Clarifies the circumstances under which it is allowable to directly charge administrative support costs. Salaries of administrative and clerical staff may be treated as direct costs if (i) the services are integral to a project or activity; (ii) the individuals involved can be identified specifically with the project or activity; (iii) the costs are included expressly in the budget or have the prior written approval of the federal awarding agency; and (iv) the costs are not recovered as indirect costs.
2) Indirect costs - Provides for a de minimis indirect cost rate of 10 percent of modified total direct costs for entities that have never had a negotiated indirect cost rate. In addition, the regulations allow for a one-time extension without further negotiation of a federally approved negotiated indirect cost rate for up to four years.
3) Time and effort reporting - The OMB is trying to focus on broad principles of how an entity may establish internal controls to validate personnel-related costs and allow entities to document personnel costs by using performance-based reporting (based on milestones) rather than time-and-effort reports.
Audit Reports Publicly Available - Audit reports will now be publicly available on-line in the Federal Audit Clearinghouse repository.
We recommend that not-for-profits that receive either direct or pass-through federal funds review their compliance requirements under such programs to determine the impact of the changes to the administrative requirements, cost principles, and audit requirements for federal awards as outlined by OMB and implement the required changes to existing practices.
For more information, please contact Amish Mehta at (212) 842-7099 or your Friedman LLP professional or engagement partner.