1 Recent Audit and OMB Developments Michael Brustein, Esq. Brustein & Manasevit, PLLC Spring 2012 Forum

2 Recent Audit Resolution Developments 1.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

3 Compliance Versus Results Audit Versus Monitoring Shift of Focus?

4 Beltway “Noise” Program Success Trumps All

5 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

6 Will OESE/OPE/OVAE follow?

7 What about OIG?  Philadelphia  Detroit  Los Angeles  Camden  Houston  Kiryas Joel

8 Camden, NJ Audit March 2012 (A02K0014)  Designate Camden as High Risk  Impose Special Conditions  Appoint 3 rd Party Servicer  Rescind Camden “Flexibilities” on Schoolwide

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

10 ED Monitoring  OIG Report # I13K0002  g/aireports/i13k0002.pdf g/aireports/i13k0002.pdf

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

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

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

14  Of the 50 SEAs and 10 Territories:  4 are High Risk  20 are Active Engagement

15  SEAs only formally notified if High Risk not active engagement

16 High Risk:  DC  Guam  VIDE  American Samoa

17 Active Engagement:  CA  BIE  Marianas  FL  GA  HI  IL  LA  MI  MS  NJ  NY  PA  PR  TN  TX

18 Risk Mitigation for Discretionary Grants  More Frequent Reviews  On-site Visits  Special Conditions  High Risk Designation

19 Reshaping Policies

20 Is Congress on board? “We Can’t Wait” Crusade!

21 Obama taking advantage of dysfunction in Congress to reshape policies

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

23 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?

24 GEPA defines “regulation” to cover generally applicable rules prescribed by the Secretary. Sec. 437(a)

25 All regulations must contain the statutory cite upon which they are based. Sec 437(b) of GEPA

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

27 GEPA  No 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

28  Same provision in “Department of Education Organization Act”

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

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

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

32 Obama Executive Order “Regulatory Review”

33 “R.I.P” OMB Advance Notice of Proposed Rulemaking Release of AdvanceNotice 2/12 Public Comment Notice of ProposedChange Comment Final RuleDelayed EffectiveDate 7/1/13 EarliestEffective Date Potential Rescission byNew Administration

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

35 Expect Revisions to: 1)Cost Principles  A-21  A-87  A-122 2)Administrative Principles  A-110  A-102 3)Federal Agency Audit Resolution  A-50 4)Single Audit  A-133

36 Super Circular  Increase consistency  Decrease complexity But allows for disparate treatment depending on type of entity

37  Will the shifting of Audit Thresholds reduce burden on SEAs?

38 Single Audit Threshold a)Under $1 million in total federal expenditures:  No single audit  Augmented pass-through role b)Between $1 million and $3 million  More “focused” single audit c)Over $3 million  Full single audit

39 “Focused Single Audit” ($1 to $3 Million)  Single auditors to review  2 Compliance Requirements 1)Allowable/Unallowable 2)Federal agency determines – but priority on risk of improper payments, or fraud, waste, abuse (look to Compliance Supplement)

40  Can SEA impose additional compliance requirements??

41 “Full Single Audit” Over $3 Million “Universal Compliance Requirements” 1.Allowable Costs 2.Eligibility 3.Reporting 4.Subrecipient Monitoring 5.Period of Availability of Federal Funds 6.Procurement Practices Comply with Suspension/Debarment

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

43 CAROI  COFAR “encourages” federal agencies to engage in CAROI  Collaborative approach envisioned more as a mediation process between agency and recipient with informal assistance as needed

44 Pass-Through Agencies  Attempt 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

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

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

47 Increasing Threshold would increase burden on SEA for monitoring and Limited Scope Audits ???

48 If single audits are effective tool to obtain compliance, fewer audits would put SEA at greater risk ???

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

50 Indirect Cost  OMB proposing a mandatory flat indirect cost rate discounted from recipient’s already negotiated rate

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

52 Indirect Cost  Discounted Rates4 years with minimal documentation, or raised through negotiation with full documentation

53 Time and Effort  OMB seeking alternative mechanisms to PARs  Grantee and OIG communities to submit alternative mechanisms

54 Applicant’s Financial Risk  OMB recommends Agencies to consider applicant’s financial risk prior to making the award (for non-formula grants)  Indicators of Risk  Past financial performance  Past programmatic performance  Internal controls

55 Brief Tutorial on:  FIFO – See Appendix  Tydings and Linkage – See Appendix

56 Linking Expenditures to Grant Funds Do Not Leave $ on the Table!

57 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”

58 Late Liquidations  Within 1 st 18 months after the close of the obligation periodat discretion of program office  After 1 st 18 months, OCFO decision

59 Roll Forward  Not up to program office or OCFO  ED 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

60  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

61  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

62  “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

63 Deobligate/Reobligate  On 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

64 Remember:  Obligations must be during a period of availability  Must be for allowable costs (no supplanting)  Not manipulative to avoid repayment of lapsed funds

65 Questions?

66 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.