We want our Governmental Audit Quality Center (GAQC) member firms to know that the GAQC team has been closely monitoring the impact of the recently passed American Recovery and Reinvestment Act of 2009 (the Recovery Act) on upcoming single audits. While we do not have many significant details to report at this early stage, the purpose of this GAQC Alert is to inform our members about what we do know at this point. Future GAQC Alerts will be issued as new developments occur.
As you have probably seen on the front pages of newspapers around the country, one aspect of the Recovery Act will result in approximately $300 billion dollars in additional federal funds being passed down from federal agencies to entities that are generally subject to single audit such as state and local governments and institutions of higher education. In some cases, Recovery Act funds have already begun flowing to these entities. These federal funds are intended to either supplement existing federal programs (e.g., existing block grants for states), create new programs, or to provide more broad fiscal relief. In some cases, the funds will be passed directly to states or institutions of higher education and spent at that level. In other cases, direct recipients of Recovery Act federal funds will pass the funds through to subrecipients such as local governments or not-for-profit organizations.
We are still trying to ascertain the impact the Recovery Act funds will have on June 30, 2009, year-end single audits. At this time, federal agencies are focused on taking steps (e.g., developing modified award documents) that will allow them to quickly provide funds to various recipients for the purposes identified in the Recovery Act. Once they have completed these steps, the funds will begin to flow out. How much will be spent by recipients prior to June 30, 2009, remains to be seen. However, it is much more likely that significant Recovery Act funds will be expended for year ends after June 30, 2009. Therefore, there is likely to be a larger impact on single audits performed for years ending after June 30, 2009.
What We Know Today
Recovery Web Site. The Recovery Act mandates that there be an unprecedented amount of oversight and transparency around the spending of all funds associated with the law. The Office of Management and Budget (OMB) has set up a Web site (www.recovery.gov) that will be a central point for the transparency part of the mandate. Member firms performing single audits of entities receiving Recovery Act funding (or potentially receiving Recovery Act funds in the future) should bookmark this Web site and check it regularly as it includes links to other Web sites for federal agency-specific Recovery Act guidance, as well as updates and other important information.
Initial OMB Guidance to Federal Agencies. You should also be aware the OMB has issued initial guidance to the federal agencies (the OMB guidance) regarding how they should carry out programs and activities relating to the Recovery Act. Click here to view guidance. More detailed guidance is expected to be issued by OMB in 30-60 days. If your clients have received Recovery Act funds or will be receiving such funds in the future, you should consider reviewing this initial OMB guidance document in detail. Chapter 5 of the OMB guidance, which covers grants and cooperative agreements, should be of particular interest. The OMB guidance addresses many issues and responsibilities including the following:
· Recipients are generally required to clearly distinguish Recovery Act funds from non-Recovery Act funds. New programs or existing programs that have significant changes in compliance requirements will be identified with a new Catalog of Federal Domestic Assistance (CFDA) number. For existing programs without significant compliance requirement changes, OMB is currently working with the federal agencies to determine how to enable separate identification of Recovery Act funding by recipients. For example, it may be that new CFDA numbers will be created for existing programs so that the funding can be tracked separately. Otherwise, federal agencies will have to identify existing programs with Recovery Act dollars in some other way. Decisions reached in this area will impact major program determination going forward and we expect that OMB will provide additional guidance in the future (for example, how and whether to cluster Recovery Act funds with non-Recovery Act funds).
· Federal agencies will be performing risk assessments on Recovery Act programs and potentially designating some programs as high-risk for single audit purposes. Such designations will also affect major program determination and the scope of the audit going forward.
· There will be extensive reporting to federal agencies required from prime recipients (defined in the OMB guidance) of Recovery Act funding. It is still unclear as to the level of reporting that will have to be made by first tier subrecipients versus second and later tier subrecipients. The award documents associated with Recovery Act funds, as well as the next OMB guidance document, will likely go into more detail on this requirement. However, for those grantees required to report, the reporting will have to be made to the federal agency providing the award within 10 days of each calendar quarter beginning with the June 30, 2009, quarter-end.
· Federal agencies are required to initiate additional oversight to address the unique implementation risks of the Recovery Act. The expectation in this area is that federal agencies, in some cases partnering with states receiving federal funds, will establish defined strategies to prevent or timely detect waste, fraud, or abuse. Significant dollars were provided to federal agencies to carry out this oversight function (e.g., to hire additional staff to ensure enough resources are available for oversight). The oversight will likely occur during the award periods, as the money is being spent, well before the single audit is performed.
· Federal agencies are also expected to use the single audit process as a means of promoting accountability for Recovery funds. In part, the OMB guidance states that this will occur through federal agency Offices of Inspectors General (OIGs) reaching out to the auditing profession and providing technical assistance and training. Additionally, the OIGs are charged with performing follow-up reviews of single audit quality with emphasis on Recovery Act funds and to report the results of those reviews on www.recovery.gov. The OMB guidance states that the quality reviews will likely occur for years ending between June 30, 2010 and 2011, which will cover the majority of the Recovery Act awards. Clearly, this increased federal scrutiny will add to the existing high-risk nature of these single audit engagements and should be a consideration for firms as they go through the engagement risk assessment process.
· The Federal Audit Clearinghouse (FAC) is also required to make publicly available on the internet all single audit reports filed with the FAC for fiscal years ending September 30, 2009, and later. There will be a link from www.recovery.gov to the single audit reports. It is unclear at this time whether the reports required to be made public are only those with Recovery Act funds. Additional clarity on this point will likely come with the follow-up OMB guidance. In any event, you should be aware that in many cases your audit reports and the Schedule of Findings and Questioned Costs may be made publicly available going forward.
Impact on the OMB Compliance Supplement. The 2009 OMB Compliance Supplement (Compliance Supplement) will be issued within its normal timeframe (Spring 2009) and will include some initial Recovery Act guidance. OMB is likely to add an Appendix to the 2009 Compliance Supplement describing certain high-level Recovery Act considerations and informing auditors that they will need to watch for periodic additions to the Compliance Supplement for Recovery Act matters during the course of the next year. Such additions will likely be made on the OMB Web site and may include additional or more detailed guidance on certain compliance requirements and related audit procedures in Part 3 and new program additions or revised program sections in Part 4. We have already had several discussions with OMB on this topic and will continue to meet with them to iron out some of the practical issues with having a Compliance Supplement that is continually updated.
Congressional Interest. The Congress is very committed to ensuring that Recovery Act funds are spent appropriately and that every effort be made to ensure that there is minimal waste, fraud, or abuse associated with these funds. Just last week, the Senate Committee on Homeland Security and Governmental Affairs held a hearing titled, Follow the Money: Transparency and Accountability for Recovery and Reinvestment Spending, where the OMB, the Government Accountability Office, and a representative of the OIG community discussed the challenges with oversight, as well as their commitment to making it work. Additional hearings are most certain to be held in the future so that Congress can monitor Recovery Act activity. This may include a focus on single audits and their role in the process.
Going Forward
Based on the information provided to date, it is clear the Recovery Act funds will have a significant impact on many of your single audits. While the Recovery Act may not have an immediate impact on your June 30, 2009, single audits, it is likely that many of our member firms will have clients that receive Recovery Act funds at some point in the future. Therefore, it is not too soon to begin tuning in to what is happening in this area. Further, as a client service, you may want to consider advising your clients about the significant responsibilities they will be undertaking upon receipt of Recovery Act funds. For example, you may want to advise your clients that they should consider the following:
· That control procedures in place over federal expenditures are appropriate, working properly, and designed to prevent unallowable expenditures.
· Whether additional controls and system requirements will be needed to ensure that Recovery Act funds are able to be separately identified and tracked.
· If applicable, whether new controls will need to be established to meet the stringent reporting requirements back to federal agencies.
· If Recovery Act funds will be passed down to subrecipients, that controls are in place to ensure appropriate subrecipient monitoring and also whether any new controls will need to be established related to new subrecipient reporting responsibilities.
As noted earlier, we will be keeping you advised about new developments in this area through future GAQC Alerts. Also, we are in the process of planning a Center call on the Recovery Act and potential implications for single audits and will let you know the date as soon as we have the details worked out