Back to the Basics – The Federal Single Audit and the American Recovery and Reinvestment Act

A federal single audit is required if a not-for-profit organization expends $500,000 or more in a year in federal awards. In the past, certain not-for-profits did not expend enough federal awards to “trigger” a federal single audit. However, with the availability of federal funding under the American Recovery and Reinvestment Act (ARRA), many not-for-profits have applied for and have been awarded ARRA funding.

As a result, some nonprofit organizations are expending $500,000 or more in federal awards for the first time, which requires a federal single audit. If your organization is in this situation, it is important to understand the basic requirements of a federal single audit and your responsibilities.

A federal single audit includes an audit of the organization’s financial statements and the federal awards. The Office of Management and Budget (OMB) Circular A-133 sets forth the standards of a federal single audit.

OMB Circular A-133 describes the overall audit requirements including the basis for determining federal awards expended, subrecipient and vendor determination, audit costs, and audit frequency. Your responsibilities under the federal single audit are also defined in this Circular and primarily include the following.

Identify All Awards
Identify all federal awards received and expended and prepare a schedule of expenditure of federal awards (SEFA) for the period covered by your organization’s financial statements. The SEFA should list individual federal programs by federal agency, the name of the pass-through entity for federal awards received as a subrecipient, identification number assigned by the pass-through entity, and the catalog of financial domestic assistance (CFDA) number.

Federal agencies are required to specifically identify federal awards including ARRA awards regardless of whether the funding was provided under a new or existing CFDA number. Federal awards under ARRA must be separately identified in the SEFA by inclusion of the prefix “ARRA” as the first characters in the name that identifies the federal program.

Importance of Internal Control
An organization is required to maintain internal control over federal programs that provides reasonable assurance that the organization is managing federal awards in compliance with laws, regulations, and the provisions of contract or grant agreements. It is critical for management to establish internal controls for each compliance requirement that could have a material effect on each of its federal programs.

Internal controls must primarily ensure that:

• transactions are properly recorded and accounted for;
• transactions are in compliance with laws, regulations and provisions of the contract or grant agreement; and
• federal funds and property are safeguarded against loss from unauthorized use and disposition.

External auditors performing a federal single audit must obtain an understanding of internal controls and test the internal controls. Therefore, internal controls that are not appropriately designed or operating may result in the reporting of significant deficiencies or material weaknesses in the auditor’s report.

Compliance and Transparency
Organizations must also comply with the laws, regulations, and provisions of contracts or grant agreements related to each federal program. The key to compliance is obtaining an understanding of these laws, regulations, and provisions before applying for federal awards.

There are 14 types of compliance requirements, although all requirements may not apply. The core requirements that generally are applicable to federal awards include activities allowed or unallowed, allowable costs/cost principles, cash management, period of availability of federal funds, procurement and suspension, and debarment and reporting.

ARRA awards are subject to unprecedented accountability and transparency requirements that will require additional accounting and reporting procedures. This includes maintaining records to separately identify the source and application of ARRA awards.

Your financial management system must permit the preparation of the required “Section 1512” reports that are mandated under the ARRA and must insure that the funds can be adequately identified to establish they were used for authorized purposes and allowable costs.

Auditor Selection
Ensure that your federal single is performed by a qualified independent auditor that has federal single audit experience and submitted when due. OMB Circular A-133 includes guidance for auditor selection.

The audit is due within the earlier of 30 days after receipt of the auditor’s report or nine months after the end of the audit period. Be aware that federal single audit reports will be publicly available for years ending on or after September 30, 2009 through the Federal Audit Clearinghouse.

Conclusion
One of the keys to a successful federal single audit is to start planning early and designate an individual to be responsible for grant management and compliance. A complete understanding of the additional compliance requirements before applying for ARRA awards is critical.

Further information on the federal single audit and ARRA is located on Cherry, Bekaert & Holland’s Government Services blog. The blog includes timely posts on stimulus spending updates from the Government Accountability Office (GAO) and OMB. A comprehensive list of other resources is also available.