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Recent Audit and OMB DevelopmentsMichael Brustein, Esq.

mbrustein@bruman.com

Brustein & Manasevit, PLLC

Spring 2012 Forum

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Recent Audit Resolution Developments1. Shift of Focus from Compliance to Results

2. ED Monitoring – “Active Engagement”

3. Reshaping Policies without Congressional Approval

4. OMB Reform Idea Package (RIP)

5. Back Peddling on Linkage of Obligations

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Compliance Versus Results

Audit Versus Monitoring

Shift of Focus?

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Beltway “Noise”

Program Success Trumps All

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March 2, 2012 OSEP Announcement:Monitoring will shift from compliance focus to one driven by results change in mission?

*OSEP will not conduct verification visits in 2012-2013

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Will OESE/OPE/OVAE follow?

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What about OIG?

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Camden, NJ Audit March 2012(A02K0014)Designate Camden as High RiskImpose Special ConditionsAppoint 3rd Party ServicerRescind Camden “Flexibilities” on Schoolwide

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What about Single Audit?Keep an eye on “Compliance Supplement”

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ED MonitoringOIG Report # I13K0002http://www2.ed.gov/about/offices/list/oig/aireports/i13k0002.pdf

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ED identified Grantees as – “High Risk”“At Risk”

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New ED Policy:Discontinue “At Risk’ Formula Grantees: “Active Engagement”Discretionary Grantees: “Evidence of Risk”

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“Active Engagement” and “Evidence of Risk” not High Risk but requires ED action

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Of the 50 SEAs and 10 Territories:4 are High Risk20 are Active Engagement

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SEAs only formally notified if High Risk not active engagement

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High Risk:

DCGuam

VIDEAmerican Samoa

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Active Engagement:CA BIEMarianas FLGA HI IL LA

MI MS NJNYPAPRTNTX

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Risk Mitigation for Discretionary GrantsMore Frequent ReviewsOn-site VisitsSpecial ConditionsHigh Risk Designation

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Reshaping Policies

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Is Congress on board?

“We Can’t Wait” Crusade!

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Obama taking advantage of dysfunction in Congress to

reshape policies

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Congress Approval Rating Lower than BP, Paris Hilton, and Hugo Chavez

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Query

If Congress is supposed to write the law, and ED is supposed to enforce that law, why are so many current policies undertaken without Congressional authority?

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GEPA defines “regulation” to cover generally applicable rules prescribed by the Secretary.

Sec. 437(a)

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All regulations must contain the statutory cite upon which they are based.

Sec 437(b) of GEPA

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1965 ESEA“Nothing in this Act shall authorize a federal official to mandate, direct, or control” a state’s, local educational agency’s or school’s curriculum

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GEPANo provision of any applicable program shall be construed to authorize any federal agency or official to exercise any direction, supervision or control over the curriculum, program of instruction, or selection of instructional materials

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Same provision in “Department of Education Organization Act”

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Is the current reshaping of policy consistent with ESEA, GEPA, DEOA?

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RTT funds awarded to States that committed to Common Core State Standards Initiative

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NCLB Waivers contingent on adoption of Common Core Standards or endorsed by institutions of higher education

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Obama Executive Order 13563

“Regulatory Review”

33“R.I.P”OMB Advance Notice of Proposed Rulemaking

Release of A

dvance N

otice 2/12

Public C

omm

ent

Notice of P

roposed C

hange

Com

ment

Final R

ule

Delayed E

ffective D

ate

7/1/13 Earliest

Effective D

ate

Potential R

escission by N

ew A

dministration

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Council on Financial Assistance Reform (COFAR)10 members from largest grant making agencies: HHS, AG, ED, Energy, HS, HUD, DOL, DOT

35Expect Revisions to:

1) Cost PrinciplesA-21A-87A-122

2) Administrative PrinciplesA-110A-102

3) Federal Agency Audit ResolutionA-50

4) Single AuditA-133

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Super CircularIncrease consistencyDecrease complexity

But allows for disparate treatment depending on type of entity

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Will the shifting of Audit Thresholds reduce burden on SEAs?

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Single Audit Threshold

a) Under $1 million in total federal expenditures:No single auditAugmented pass-through role

b) Between $1 million and $3 millionMore “focused” single audit

c) Over $3 millionFull single audit

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“Focused Single Audit” ($1 to $3 Million)Single auditors to review2 Compliance Requirements

1) Allowable/Unallowable

2) Federal agency determines – but priority on risk of improper payments, or fraud, waste, abuse

(look to Compliance Supplement)

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Can SEA impose additional compliance requirements??

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“Full Single Audit” Over $3 Million

“Universal Compliance Requirements”1. Allowable Costs2. Eligibility3. Reporting4. Subrecipient Monitoring5. Period of Availability of Federal Funds6. Procurement Practices Comply with

Suspension/Debarment

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Federal Agencies to identify “non-universal” elements, with focus on preventing fraud, waste, abuse

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CAROICOFAR “encourages” federal agencies to engage in CAROI

Collaborative approach envisioned more as a mediation process between agency and recipient with informal assistance as needed

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Pass-Through AgenciesAttempt to reduce burden on pass-through (SEA)

Federal Agencies to better coordinate review of subrecipient internal controls when 2 or more federal agencies funding

e.g. Philadelphia

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If entity receives majority of Fed $ directly, not from pass-through, then Federal Agency to conduct follow-up on internal controls

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OMB wants pass-through to focus on programmatic requirements of subawards

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Increasing Threshold would increase burden on SEA for monitoring and

Limited Scope Audits

???

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If single audits are effective tool to obtain compliance, fewer audits would

put SEA at greater risk

???

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OMB proposes that single audits be digitized into a searchable database to support analysis of audit results by pass-through entities

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Indirect CostOMB proposing a mandatory flat indirect cost rate discounted from recipient’s already negotiated rate

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Indirect CostsOMB – Reduce burden on time associated with indirect cost calculation and negotiation – reduce overall indirect costs, more $ for program

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Indirect CostDiscounted Rates 4 years with minimal documentation, or raised through negotiation with full documentation

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Time and EffortOMB seeking alternative mechanisms to PARs

Grantee and OIG communities to submit alternative mechanisms

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Applicant’s Financial RiskOMB recommends Agencies to consider applicant’s financial risk prior to making the award (for non-formula grants)

Indicators of RiskPast financial performancePast programmatic performanceInternal controls

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Brief Tutorial on:FIFO – See AppendixTydings and Linkage – See Appendix

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Linking Expenditures to Grant Funds

Do Not Leave $ on the Table!

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2 Separate Scenarios

A. The difficult one:

Liquidating obligations more than 90 days after the close of the obligation period

B. The easier one:

Linking transactions to a grant period after funds are no longer available for obligation “Roll Forward”

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Late LiquidationsWithin 1st 18 months after the close of the obligation periodat discretion of program office

After 1st 18 months, OCFO decision

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Roll ForwardNot up to program office or OCFOED Policy on valid obligation

1. A transaction giving rise to an obligation within period of availability

2. Linking of the transaction with funds available during period of availability

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Linking can occur long after funds are no longer available for obligation as long as clear documentation that the transaction occurred during the 27-month Tydings period

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Process of “deobligating” and “reobligating” is a valid method of linkage if obligations are timely and the adjustments are part of the normal accounting practice and not manipulative.

- Appeal of State of California

Doc. No. 12(122)83

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“The legally relevant question is when the obligation arose, not in what account the obligation may have been initially recorded.”

- Appeal of State of California

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Deobligate/ReobligateOn 7/1/11, obligations could be charged to FY 10 (3 months) FY 11 (15 months) or FY 12 (27 months)

If FY 09 obligations not yet liquidated, and incurred during FY 10 Tydings period, deobligate FY 12, then FY 11, then FY 10

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Remember:Obligations must be during a period of availability

Must be for allowable costs (no supplanting)

Not manipulative to avoid repayment of lapsed funds

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Questions?

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