Threshold requirements of Circular A-133. (Auditing)by Staples, Catherine L.
To provide support for the above position, we begin by providing a brief chronological history of Federal audit requirements and then compare the requirements of OMB Circular A-133 to OMB Circular A-128, Audits of State and Federal Governments. Next, the college and university environment, and its relationship to the development of OMB Circular A-133 is explored. Finally, the topic of self-governance for non-fort-profit organizations is discussed.
OMB Circular A-133: Dateline
An overview of the Federal audit requirements history will give back- ground for our position.
1965 -- OMB Circular A-73 defined audit requirements and called for coordinated audits of grants at the Federal level. This circular was unsuccessful due to 1) the lack of uniformity in legal requirements at various departments; 2) the lack of necessary audit procedures; and 3) the lack of uniformity of reporting methods.
1971--OMB Circular A-102 set audit requirements for grants to state and local governments (Attachment G). This circular made OMB responsible for setting standards. The concept of organization-wide audits was suggested, but no guidance was given to show how the audits were to be performed.
1972--First version of GAO Government Audit Standards was issued. This addressed professional qualification as well as work performed and provided guidelines for evaluation of audit work.
1979 -- The Joint Financial Management Improvement Program issued its report recommending ways to overcocme current governmental auditing problems. The recommendations were 1) establish uniform audit guidelines; 2) create central oversight agencies; and 3) allow audit costs to be reimbursed. These changes results in Attachment P to OMB Circular A-102, and now required organization-wide audits.
1979 through 1984 -- Attachment P (organization-wide) audits are performed. However, delays in naming "cognizant agencies" and identifying key compliance issues created auditing and reporting problems. Additionally, no guidance was given on the responsibility for subrecipients and the resolution of deficient audit findings was poor.
From this climate, a movement grew for legislation that would establish procedures and frameworks for governmental audits, allow for partial reimbursement for audit costs, assign responsibility for subrecipient reporting, and establish authority for dealing with the adequacy of audit work.
1984 -- The Single Audit Act was signed into law. The Act established uniformed audit requirements for state and local governments and Indian tribes that receive Federal financial assitance. This Act established 1) uniform audit requirements for audits of Federal funds received by state and local governments, 2) "cognizant agencies" appointed by OMB, and 3) thresholds used to determine if single audits were required.
1985 -- OMB Circular A-133 applies of State And Federal Governments, superseded audit requirements of A-102. The circular declared that the cognizant agency must 1) act as a liaison between auditors, 2) make quality reviews, and 3) report illegal acts and irregularities. OMB Circular A-128 stated a preference for organization-wide audits but allowed audits to be confined to departments affected by receipt of Federal funds.
1990 -- OMB Circular A-133 applies to colleges and universities, hospitals, and other not-for-profit entities. It is similar to OMB Circular A-128, however, because of the differences in programs and accounting techniques at colleges and hospitals, separate guidance was needed.
Prior to OMB Circular A-133, not-for-profit organizations were audited in accordance with OMB Circular A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations. While OMB Circular A-110 provided for consistency and uniformity among Federal agencies for the administration of grants, it provided limited guidance for conducting audits. This caused audits to be inconsistent and lack uniformity. OMB Circular A-133 provides for audit consistency and uniformity of nonprofit organizations as well as defines Federal responsibilities for implementing and monitoring these audit requirements.
Comparing of OMB Circulars A-128 and A-133
Although they are very similar, distinct differences between OMB Circulars A-128 and A-133 exist. For instance, threshold requirements for the performance of a "single audit" under the two circulars are the same with one exception. OMB Circular A-128 requires a single audit if a state orr local government receives $100,000 or more, while OMB Circular A-133 allows a nonprofit institution receiving $100,000 or more (in the same program) to choose either an organization-wide audit or an audit of the specific program. Further, OMB Circular A-128 audits apply to "Federal financial assistance," while OMB Circular A-133 applies to "Federal awards" which include both Federal financial assistance and federal cost-type contracts. Federal cost-type contracts include contracts to buy goods and services.
In OMB Circular A-128, major programs are defined as the greater of $300,000 or 3% of total Federal expenditures, while OMB Circular A-133 defines major programs as the larger of $100,000 or 3% of total Federal expenditures. Annual audits are required under OMB Circular A-128, while OMB Circular A-133 allows the recipient to choose annual or biennial audits. The oversight agency is chosen based on the agency providing the most funds under OMB Circular A-128. Under OMB Circular A-133 the choice of the oversight agency is based upon the agency providing the most direct funds. "Direct" is defined as those funds which flow straight to the recipient from the Federal government.
Both circulars require the use of Government Auditing Standards (Commonly referred to as the Yellow Book) and the review of internal control. The role of the cognizant agency is almost the same under both circulars, with the exception that the conizant agency must monitor the coordinated audit under OMB Circular A-133.
Under each it is the responsibility of the audit to determine whether the nonprofit's financial statements fairly present its financial position and results of operations in accordance with generally accepted accounting principles. also, the auditor must determine if the internal control structure is such that it provides reasonable assurance that the nonprofit entity is managing Federal awards in compliance with applicable laws and regulations.
Colleges, Universities, and OMB Circular A-133
To understand the development of OMB Circular A-133 and the lower threshold for major program identification, an examin ation of the unique aspects of the relationship of the Federal government to colleges and universities is needed. Federal oversight of student financial aid programs coupled with the definitive scopes of Federal contracts have created a chainging attitude toward oversight. During the 1970's, it was common for Federal auditors to be assigned full-time to well-funded universities. The need to reallocate audit resources to other programs caused this practice to be curtailed. Since 1968, OMB has established policies for audit, audit resolution, and indirect cost rate negotiation for colleges and universities. These unqieus features were recognized and considered when writing the policies for OMB Circular A-133.
Another major consideration when writing OMB Circular A-133 was the Federal government's concern over the amount of Federal payments for overhead allocated to Federally sponsored research. Prior to 1966, a fixed national rate was used to allocate overhead. After 1966, the current policy of negotiated reimbursement rates with individual universities was adopted. During the period from 1970 to 1985, the average overhead allocation rate increased from 22% to 31%. This was viewed as disproportionate growth and recognized as a threat to appropriate levels of research support. In the conference report of the Labor/Health and Human Services Appropriation Bill to 1986, Congress stated, "Containing research costs and payments for allocated overhead should be a high priority of all executive branch agencies."
By lowering the threshold level for major program identification in OMB Circular A-133, Congress may have felt better able to contain overhead costs. However, OMB Circular A-133 applies to colleges and universities and other non-profit organizations.
In today's climate of limited resources, small nonprofit organizations which are included in OMB Circular A-133's category "other nonprofit organizations" are more likely to apply (to compete) for smaller Federal awards than are large nonprofits. Typically small nonprofit organizations have small staffs and small amounts of unrestricted funds with which to serve their intended purpose. When a small nonprofit organization decides it is eligible to apply for a Federal award, it has to weight the costs involved in applying and, if chosen, the additional future administrative costs, including additional audit costs, against the benefits received. OMB Circular A-133 allows certain audit related costs to paid out of the grant award monies, however, the formulas for such allowance rarely cover the actual audit costs. As a result, precious undesignated funds may have to be used to pay part of the increased audit costs. By changing the threshold structure for the OMB Circular A-133 audit requirements, smaller nonprofit organizations may become interested in applying for Federal awards, thus distributing Federal award opportunities to a wider range of entities. By changing the threshold, not only might smaller nonprofits become involved, but the audit resources of the Federal agencies could concentrate on the recipients of large, more material, awards.
Accountability is important and small nonprofit organizations should be held responsible for complying with the laws and regulations; but the cost-benefit constraint has to be applied. Since it costs both the nonprofit organization to have the compliance audit performed and the Federal agencies responsible for reviewing the reports, other reasonable means of assessing compliance need to be found. Self-governance for small nonprofits is one means that could be developed that would add credibility and give them the ability to do their own compliance reporting.
The purpose of a sunset review for a regulation is to determine if it is doing what it is supposed to do. The requirements set forth in OMB Circular A-133 are sound. But with other nonprofit organizations being included along with private program awards being defined at major progrm awards being difined at the $100,000 threshold, the present approach may be doing disservice to small recipients.
An Alternative to the ever expanding Federal reporting requirements is a program of self-governance by those receiving Federal assistance. In 1986, a number of defense contractors adopted an oversight agreement which addressed business ethics, responsibilities, and accountability. The Department of Defense published its Contractor Risk Assessment Guide of self-governance which encourages contractors to develop more effective internal control systems. The use of self-governance by Federal fund recipients would reduce the costs of oversight to both the Federal government and the recipient.
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