Audit Resolution Under the Uniform Grant Guidance Presented by Michael Brustein, Esq. Jennifer Castillo, Esq. Brustein & Manasevit, PLLC Fall Forum 2014

The Uniform Grant Guidance: 1)“Right-sizes the footprint of oversight and single audit requirements” 2)Focus audits where there is greatest risk of fraud, waste and abuse Brustein & Manasevit, PLLC 2

3 HOW???

1.Makes single audits available online 2.Encourages a cooperative approach to audit resolution 3.Raises threshold to $750,000 4.Places focus on internal control deficiencies that have been identified as material weaknesses Brustein & Manasevit, PLLC 4

Internal control deficiencies remain a moving target Brustein & Manasevit, PLLC 5

OMB / COFAR have not finalized guidance on oversight of single audit vs. pass-through responsibility Who is responsible for which internal controls? Brustein & Manasevit, PLLC 6

Notice of Intent fr Compliance requirements will be “streamlined” Brustein & Manasevit, PLLC 7

Audit focus should be on Allowable costs / activities Eligibility Reporting Selection of subs Monitoring Cash management Procurement Brustein & Manasevit, PLLC 8

NPRM fr 7295 Proposed limiting audit review of internal controls in compliance supplement from 14 to 7 Brustein & Manasevit, PLLC 9

The Proposed Seven Deadly Sins 1.Activities Allowed or Unallowed 2.Allowable Costs (and Matching) 3.Cash Management (Minimizing time) 4.Eligibility 5.Reporting (financial and performance) 6.Subrecipient Monitoring 7.Requirements Unique to the Program Brustein & Manasevit, PLLC 10

The Seven Controls Proposed to be Voted off the Island 1.Davis-Bacon 2.Inventory Management 3.MOE / Earmarking 4.Period of Availability of Funds 5.Procurement 6.Program Income 7.Real Property Acquisition Brustein & Manasevit, PLLC 11

But who is responsible for oversight of these seven??? Pass-Through Brustein & Manasevit, PLLC 12

And where will the resources come from? Brustein & Manasevit, PLLC 13

Final Guidance  “While most commenters were in favor of the proposed reduction of the number of types of compliance requirements in the compliance supplement, many voiced concern about the process that would implement such changes” – 78 CFR Brustein & Manasevit, PLLC 14

No changes made at this time COFAR recommends further outreach Brustein & Manasevit, PLLC 15

May 2014 Compliance Supplement Silent Brustein & Manasevit, PLLC 16

OMB / COFAR FAQ 8/14/14  Look to the 2015 Compliance Supplement on the streamlining of compliance requirements (P. 15) Brustein & Manasevit, PLLC 17

While final chapter is yet to be written, we recommend every non-federal entity has fundamental understanding of the following four legal authorities Brustein & Manasevit, PLLC 18

1.Uniform Guidance – Subpart F 2.Compliance Supplement 3.Generally Accepted Government Auditing Standards (Yellow Book) 4.EDGAR / GEPA Enforcement Provisions Brustein & Manasevit, PLLC 19

UNIFORM GUIDANCE SUBPART F Brustein & Manasevit, PLLC 20

Federal Agency Responsibility Cognizant agency for audit – TA to auditees – Quality control – Advice to auditors – Notice to auditors of audit deficiencies – Coordinate management decisions Brustein & Manasevit, PLLC 21

Federal Agency Responsibilities Awarding agency responsibility – Ensure completion of audits – timely – TA to auditees and auditors – Follow up – ensure corrective action – Management decision – Monitor corrective action – Use CAROI Brustein & Manasevit, PLLC 22

CAROI Cooperative Audit Resolution Oversight Initiative – Developed with ED and pilot states – Adopted by ED as standard audit resolution Brustein & Manasevit, PLLC 23

CAROI Historically:  Rejected by most other agencies  Labor  Agriculture  Health Human Services Brustein & Manasevit, PLLC 24

Uniform Grant Guidance Applies CAROI To all federal agencies Government wide policy Brustein & Manasevit, PLLC 25

CAROI Audit and follow up that promotes prompt corrective action Improve communication Foster collaboration Promote trust Develop federal – non federal agency understanding Brustein & Manasevit, PLLC 26

CAROI (cont.) Basis – Leadership commitment to program integrity – Partnership, federal Non federal and auditors – Focus Current conditions and cooperative action Brustein & Manasevit, PLLC 27

CAROI (cont.) Message: – Continued failure to correct unacceptable Brustein & Manasevit, PLLC 28

CAROI (cont.) Prompt corrective action as shown by audits – Federal agencies offer – Appropriate relief Past non- compliance Brustein & Manasevit, PLLC 29

CAROI (cont.) Federal agency responsibilities – Use CAROI to improve outcomes Audit resolution Follow up Corrective action Brustein & Manasevit, PLLC 30

CAROI (cont.)  Management Decision  Audit finding sustained or not sustained  Reasons for decision  Expected action Repayment?  Corrective action  Appeal available  6 months of filing with Federal Audit Clearing House (FAC) Brustein & Manasevit, PLLC 31

The Office of Management and Budget (OMB) A-133 Compliance Supplement What is it?

Who does it apply to? Expend more than $500k ($750k under Uniform Grant Guidance) Covers 150 major programs Brustein & Manasevit, PLLC 33

Why is the Compliance Supplement important?

How is the Document Organized? Part 1 – Background, Purpose, and Applicability Part 2 – Matrix of Compliance Requirements Part 3 – Compliance Requirements Part 4 – Agency Program Requirements Part 5 – Clusters of Programs Part 6 – Internal Control Part 7 – Guidance for Auditing Programs Not Included in the Compliance Supplement Brustein & Manasevit, PLLC 35

Part 4: Agency Program Requirements Brustein & Manasevit, PLLC 36 The most useful portion for federal education grant recipients is the agency- specific section on the Department of Education

Example: Title I, Part A of the ESEA I.Program Objectives: The objective of this program is to improve the teaching and learning of children who are at risk of not meeting challenging academic standards and who reside in areas with high concentrations of children from low-income families. II.Program Procedures I.Describes ESEA flexibility, Sources of Governing requirements, availability of other program information III.Compliance Requirements Brustein & Manasevit, PLLC37

Example: CAREER AND TECHNICAL EDUCATION—BASIC GRANTS TO STATES (Perkins IV) Program Objectives: Perkins IV provides grants to States and outlying areas to develop the career, technical, vocational, and academic skills of secondary students and postsecondary students … I.Program Procedures: II.Compliance Requirements: I. Matching, Level of Effort, Earmarking I.Level of Effort – Maintenance of Effort Brustein & Manasevit, PLLC 38

Example: 21 Century Learning Centers I.Program Objectives: The objective of this program is to establish or expand community learning centers that provide students with academic enrichment opportunities along with activities designed to complement the students’ regular academic program. II.Program Procedures: I.ESEA Flexibility is Referenced II.Source of Governing Requirement III.Availability of other Program Information III.Compliance Requirements Brustein & Manasevit, PLLC 39

PART 6: Internal Control Five Components of Internal Control that should reasonably assure compliance with the requirements of Federal laws, regulations and program compliance requirements Control Environment Risk Assessment Control Activities Information and Communication Monitoring Brustein & Manasevit, PLLC40

2014 Compliance Supplement Changes from the 2013 Version

What are the next steps for the Compliance Supplement?

The GAO Yellow Book Generally Accepted Government Auditing Standards

Who does it apply to? Single auditors OIG auditors Brustein & Manasevit, PLLC 44

Why is the Yellow Book Important? “We conducted this audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective.” LAUSD OIG Audit report  Noncompliance with the auditing standards may result in failure to establish prima facie case (case dismissed!)  Colorado / Houston PDLs Brustein & Manasevit, PLLC 45

Auditor Findings

How Often is the Yellow Book Updated and How is it Organized? Yellow book last updated in 2011 Organization – Financial audits – Attestation engagements – Performance audits Brustein & Manasevit, PLLC 47

High Standards for Auditors

Continued…

Conceptual Framework for Independence Brustein & Manasevit, PLLC 50

Important Provisions What may cause finding?  Internal control deficiencies  Fraud and illegal acts  Abuse  Violations of contracts or grant agreements Brustein & Manasevit, PLLC 51

What happens when an auditors identify findings? Condition Effect Cause Criteria Recommendation Brustein & Manasevit, PLLC 52

EDGAR GEPA Audit Resolution and Enforcement Brustein & Manasevit, PLLC 53

ED Programmatic Components (OCFO, OESE, OSERS, OPE, OCTAE) Review all external audits (OIG and Single Audits) Brustein & Manasevit, PLLC 54

Audits are recommendation to management Management sustains or rejects audit findings Brustein & Manasevit, PLLC 55

Management sustains audit liability in a Program Determination Letter (PDL) Brustein & Manasevit, PLLC 56

Audit Violations Deemed Significant Brustein & Manasevit, PLLC 57

Significant Violations 1.Time Distribution 2.MOE 3.Supplement, Not Supplant 4.Unallowable Expenses Brustein & Manasevit, PLLC 58

Significant Violations 5.Procurement Irregularity 6.Ineligible Students 7.Lack of Accountability for Equipment/Materials Brustein & Manasevit, PLLC 59

Significant Violations 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 Brustein & Manasevit, PLLC 60

Significant Violations 12.Lack of Subrecipient Monitoring 13.Drawdown before they are needed or more than 90 days after the end of funding period 14.Large Carryover Balances 15.Lack of valid, reliable or complete performance data Brustein & Manasevit, PLLC 61

Triggers EDGAR / GEPA Procedures 34 CFR Part 81 Brustein & Manasevit, PLLC 62

AUDIT DEFENSE AND RESOLUTION Brustein & Manasevit, PLLC 63

Common Defenses Harm to the Federal interest Equitable offset Statute of limitations Brustein & Manasevit, PLLC 64

Harm to the Federal Interest 34 CFR 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 program…” Brustein & Manasevit, PLLC 65

ALJ Decisions - Reconstruction Application of the New York State Department of Education (April 21, 1995) – After-the-fact affidavits and other pertinent documentation are admissible as evidence. Consolidated Appeals of the Florida Department of Education (June 26, 1990) – Accepted affidavits completed by supervisors years later as credible and useful evidence. Brustein & Manasevit, PLLC 66

Equitable Offset In 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 R, May 16, 2012 Brustein & Manasevit, PLLC 67

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. Brustein & Manasevit, PLLC 68

Disclaimer This presentation is intended solely to provide general information and does not constitute legal advice or a legal service. This presentation does not create a client-lawyer relationship with Brustein & Manasevit, PLLC and, therefore, carries none of the protections under the D.C. Rules of Professional Conduct. Attendance at this presentation, a later review of any printed or electronic materials, or any follow-up questions or communications arising out of this presentation with any attorney at Brustein & Manasevit, PLLC 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. Brustein & Manasevit, PLLC69