How to Prepare for a Federal Audit or Monitoring Visit

Brette Kaplan, Esq.bkaplan@bruman.com Brustein & Manasevit, PLLC Steven Spillan, Esq. Spring Forum 2014sspillan@bruman.com

Ripped from the Headlines

• Former Secretary of a SEA found guilty of stealing federal funds used for financing political campaigns through kickbacks from contracts with vendors.• Sentenced to 12 years in prison

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Ripped from the Headlines• Former State Superintendent indicted by a

federal grand jury for embezzling more than $600,000 in federal education funds for her campaign for governor and plastic surgery.• Sentenced to 8 years in prison, fined

$414,000, 3 years probation and 100 community service hours upon release

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Non-Compliance Findings

Audit1.OIG Audit2.A-133 AuditMonitoring3.Federal4.State

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Preparation

•Key to successful outcome •Self assessment - critical

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Self Assessment

• Identify potential trouble spots• Review significant violations

from other processes• Review prior findings• Conduct self assessment

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Review of 27 OIG Audit Reports$1,398,564 unallowable personnel costs

Employee compensation charged to grants in which the employee did not work on

$826,183 unallowable non-personnel costs Unnecessary or unreasonable to carry out the grant

or not-for-program purposes$810,055 unallowable non-personnel costs

Contracts were: missing required elements; unfulfilled; not approved; or included expenditures that exceeded the contract amounts

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Review of 27 OIG Audit Reports (cont.)• $66,666,155 inadequately documented personnel costs• Time and effort documentation (both semi-annual

certifications and PARs) were missing, incomplete, inaccurate, or untimely

• $16,010,550 inadequately documented non-personnel costs• Missing or inaccurate supporting documentation

• $2,693,004 in lost or unaccounted for property • Improper inventory control systems

• $2,504,617 unallowable supplanting of Federal grant funds

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Review of 27 OIG Audit Reports (cont.)• Pervasive non-compliance issues• Inadequate policies and procedures (34 times)• No policies and procedures (15 times)• Not understanding the regulations and guidance (10

times)• Policies in place, but not followed (5 times)

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Audit violations deemed “significant” by the U.S. Department of Education

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1. Time Distribution2. MOE3. Supplement Not

Supplant4. Unallowable Expenses5. Procurement

Irregularity6. Ineligible Students7. Lack of Accountability

for Equipment/Materials

8. Lack of Appropriate Record Keeping

9. Record Retention Problems

10.Late or No Submission of Required Reports, Inaccuracies, Inconsistence

11.Audits of Subrecipient Unresolved

12.Lack of Subrecipient Monitoring

13.Drawdown before funds are needed or more than 90 days after the end of funding period

14.Large Carryover Balances15.Lack of valid, reliable or

complete performance data

Evaluate Areas to be Examined

1. OIG Audit• Notice of Audit: Correspondence

2. A-133 Audit• Prior Audits (Findings)• A-133 Compliance Supplement

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Evaluate Areas to be Examined (cont.)3. Monitoring• ESEA Flexibility Monitoring; SASA Guide• CrEAG; RDA• Perkins IV Checksheets • Request for documents

Make a separate set of copies of all documents provided to ED

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Remedy Problem Areas

AND / OR

Develop Corrective Actions (Plans) Brus

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Corrective Action Plan

Critical – in place at time of visit – even if implementation - FUTURE

•Specific Measurable Objectives•Timelines•Clear Lines of Responsibility

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PREPARATION FOR VISIT

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Logistics

•Secure Space•Copy Machine

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Audit Records

• Can the auditee refuse to provide the auditors with requested documents? • GEPA 20 USC 1232(f) requires that ED and

its representatives (which arguably includes A-133 auditors) “shall have access, for the purpose of audit examination, to any records maintained by a recipient that may be related, or pertinent to, grants” • EDGAR 80.26(b)(5) also indicates audit

access to records without qualifiers. • If requested records are not provided, likely

receive an audit limitation.

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Communication with Staff

• Formal (governmental) inquiry•Provide any information within

personal knowledge• No guessing• No speculation

•No time to settle grudges•No gossip

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Identify Key Staff(Audit Committee)

•Audit Manager:•Key contact for all questions, interview

arrangements, documents requests, logistical arrangements

•Agency Leadership:• Entrance, exit conference

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Identify Key Staff(Audit Committee)• Relevant Staff: • Assure staff are prepared for interview• Subject matter awareness• Terminology/Definitions• Time and Effort• Necessary and Reasonable• Inventory

• Familiarity with job description• Familiarity with prior problem areas• Familiarity with likely areas of inquiry

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The Visit• Entrance Conference• Leadership• Set positive tone

• Audit Manager• Review process/logistics• Request all interview requests go through

manager• Request periodic updates (especially

problem areas)• Do not wait for exit conference

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The Visit

•Keep extra copy of all documents supplied!!!•Debrief staff after interviews•Clear up misunderstandings

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Exit Conference•Press for specifics• If issues:•Documents requested?• List and send

•Potential noncompliance findings•Review carefully • If confirmed, develop corrective

actions proactively

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Next Steps

•OIG Audit, A-133 Audit•Draft Audit Report•Final Audit Report•Final determination (ED, State

Agency)•Respond carefully at each level•Problems always easier to resolve

at earliest level

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For example: Alabama Audit

Cash Management Findings•Draft Audit Report - October 2011 • Alabama Response: Policies and procedures,

internal controls

•Final Audit Report – February 2012• Alabama Response: Disagreed with some findings,

but addressed OIG concerns; acknowledged Federal requirements; implemented corrective actions.

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For example: Alabama Audit

“With all these facts and circumstances, we find that the State has been willing to implement and to also require the prime recipients and subrecipients to implement corrective action that complies with the draw down, transfer, disbursement and maintenance of excess Federal grant funds and the internal control requirements applicable to Federal grant funds. Therefore, we do not request the State, prime recipients, or subrecipients to refund any of the Federal grant funds they have received . . . It is our determination that this finding is resolved.”

•Program Determination Letter – May 2013

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Next Steps

•ED can: •Accept finding as is•Accept finding but reduce or

eliminate liability•Reject finding• Letter of final audit determination

• Establishes prima facie case• 34 CFR 81.34

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Review by ED• ED accepts finding with $ liability•Appeal to Office of Hearings and Appeals

(OHA), 34 CFR 81.37

•Administrative Law Judges (ALJs) are independent

•Caution – • Time limits•Other Rules of Procedure for Appeals

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Review by ED

•ALJ Decision •Appeal to Secretary

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AUDIT DEFENSE AND RESOLUTION

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Common Defenses

•Harm to the Federal interest•Equitable offset•Statute of limitations

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Harm to the Federal Interest 34 CFR 81.32 and Appendix

• “A recipient that made an unallowable expenditure or otherwise failed to account properly for funds shall return an amount that is proportional to the extent of the harm its violation caused to an identifiable Federal interest associated with the program . . . ”

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Harm – Always

• Ineligible Beneficiaries•Example: IDEA, Part B program funds for students without a disability

•Unauthorized activities• Example: Migrant funds used for local

agency staff to attend conference unrelated to Migrant program

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Harm - Always (cont.)

• Fiscal• Set-aside• Example: SEA spends more than 10% on

Perkins state leadership• MOE• Comparability• Supplanting• Excess cost• Matching

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Possible No HarmMay argue “no harm” if:•Did not obtain required prior approval•Missing required time and effort documentation•Missing evidence of procurementCaution: ED takes more limited view – may require litigation

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ALJ Decisions - Reconstruction• Application of the New York State Department of

Education, No. 90-70-R (April 21, 1994)

• After-the-fact affidavits and other pertinent documentation are admissible as evidence.

• Consolidated Appeals of the Florida Department of Education, Nos. 29(293)88 & 33(297)88 (June 26, 1990)

• Accepted affidavits completed by supervisors years later as credible and useful evidence.

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Equitable OffsetIn effect, an equitable offset permits the substitution of any costs paid under the grant that are subsequently disallowed with otherwise allowable expenditures paid by the grantee, and thereby reduces or eliminates a liability due to ED.

Application of Pittsburg Pre-School Community Council, Docket No 09-20-R (May 16, 2012)

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Statute of Limitations

No recipient under an applicable program shall be liable to return funds which were expended in a manner not authorized by law more than 5 years before the recipient received written notice of a preliminary departmental decision.

•20 USC 1234a(k); 34 CFR 81.31(c)

•For purposes of measuring the statute of limitations, funds are “expended” as of the date of obligation.

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Resolution Strategies

•CAROI•Compromise•Settlement•Litigation

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Monitoring Findings

•Opportunity to Respond •Generally, Corrective Actions•No Liability

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Changes Under Omni Circular?• 200.513: The federal awarding agency

must use cooperative audit resolution to improve federal program outcomes

• Cooperative Audit Resolution: means the use of audit follow-up techniques which promote prompt corrective action by improving communication, fostering collaboration, promoting trust and developing an understanding between the Federal agency and non-Federal entity (200.25).

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Omni Circular Changes

• The auditor must report (for major programs):• Significant deficiencies and material weaknesses in

internal controls • Significant instances of abuse • Material noncompliance• Known questioned costs > $25,000

• Auditor will not normally find questioned costs for a program that is not audited as a “major program”• NEW: But if auditor becomes aware of questioned

costs > $25,000 for non-major program, must report

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Omni Circular Changes

• Possible Elimination of 7 Compliance Requirements:• Davis-Bacon Act;• Equipment and Real Property Management;• Level of Effort, Earmarking;• Period of Availability of Federal Funds (except

where tested to verify allowable/ unallowable costs);• Procurement, Suspension and Debarment;• Program Income; and• Real Property Acquisition Relocation Assistance.

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Questions??

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Disclaimer

This presentation is intended solely to provide general information and does not constitute legal advice. Attendance at the presentation or later review of these printed materials does not create an attorney-client relationship with Brustein & Manasevit, PLLC. You should not take any action based upon any information in this presentation without first consulting legal counsel familiar with your particular circumstances.

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