Subrecipient Monitoring from the Auditee and Auditor Perspective

1. Subrecipient Monitoring from the Auditee and Auditor Perspective A Governmental Audit Quality Center Web Event March 7, 2012

2. Administrative Notes Troubleshooting Tips • No Audio? • Ensure that your computer speakers are turned on and that the volume is appropriately set • Check to ensure that audio streaming is enabled on your computer • If the presentation slides stop advancing during the presentation • Close out of the presentation and re-launch the Web event • If you are still having audio or other technical difficulty • Check with your organization’s IT personnel to ensure that the Web event is not being blocked by a firewall • Call the AICPA Service Center at 888.777.7077

3. Administrative Notes • We encourage you to submit your technical questions – please limit your questions to the content of today’s program • Submit your questions during the Web event by clicking on the “Q & A” tab on the lower right portion of your screen and then clicking on “Ask Question” • You can also download slides in PDF or PowerPoint by clicking on “Handouts” tab • This event is being recorded and will be posted in an archived format to the GAQC Web site

4. Continuing Professional Education • There will be a total of 8 participation pop-up markers during the event (i.e., about 1 every 15 minutes) • To obtain CPE, you must click “OK” on 75% of the participation pop-up markers (i.e., 6 of 8) • To track your progress, click on the “Participation” tab on the lower right- portion of your screen to see how many markers have been issued and how many you have clicked on • If you are not receiving CPE for this event, ignore the pop-up markers if they appear

5. Presenters Kevin W. Smith, CPA&Joel M. Black, CPA

6. What will we cover • Roles & Responsibilities • The Subaward Agreement • The Risk Assessment • Monitoring Procedures • Monitoring Follow-Up • Auditor Review of Monitoring Activities

7. Roles & Responsibilities

8. Understanding Compliance • Grants funded by the federal government must be administered according to federal regulations, state laws, and specific terms and conditions of the award • As a prime recipient of funding, the grant recipient is responsible for: • Complying with laws, regulations, rules, and procedures; • Monitoring contractors and sub-recipients; • Fulfilling required reporting; • Accomplishing the goals and objectives of the grant and the awarding agency; and • Communication.

9. Prime recipients are responsible for sub-recipients and contractors. • Regulatory compliance; • Ensuring reporting is completed timely; • Data accuracy and completeness; • Prevention of misuse of funds; • Key steps: • Appropriately define an organization as a sub-recipient or vendor; • Communicate applicable responsibilities and regulations; and • Act promptly when issues are observed.

10. Subrecipient / Vendor Determination • All characteristics need not be present • Judgment should be used in the determination process

11. Subrecipient Characteristics • Provider determines eligibility. • Provider has performance measured against federal program objectives. • Provider responsible for programmatic decisions. • Provider responsible for federal program compliance requirements. • Provider uses federal funds to carry out its own program.

12. Vendor Characteristics • Organization provides the goods and services within normal business operations. • Organization provides similar goods or services to many different purchasers. • Organization operates in a competitive environment. • Organization provides goods or services that are ancillary to the operation of the federal program. • Organization is not subject to compliance requirements of the federal program.

13. The Subaward Agreement

14. Subaward Agreements • Agreements shall outline: • Scope of Work • Budget • Performance Requirements • Program Authorizing Legislation • Program Regulations • Must also include: • CFDA Title and Number (www.CFDA.gov) • Award Name • Name of Federal Agency • Applicable Compliance Requirements • Notification of Annual Risk Assessment

15. Subaward Agreements, Cont. • Key provisions must include minimum administrative requirements: • Financial Management • Procurement • Financial Reports • Program Reports • Records Retention • Cost Allocation • Payment • Matching • Period of Availability • Program Income • Real Property • Equipment • Supplies • Monitoring • Audits • Other

16. Sub-granting and Sub-contracting Federal Awards • Department of Energy Example • Contract provisions • All contracts must include specific language pertaining to, but not limited to, the following areas: • Contract Work Hours and Safety Standards Act • Equal Employment Opportunity • Byrd Anti-Lobbying Amendment • Clean Air Act • ARRA-specific language • Buy America requirements • Davis-Bacon applicability • Limits on use of funds • Reporting requirements • Ownership of materials and products

17. The Risk Assessment

18. What is a Risk Assessment? • Risk assessment is completed annually. • Risk assessment measures two quantities: • Magnitude of the potential loss • Probability that the loss will occur • What is the overall risk assessment for the subrecipient? • Determines frequency of monitoring • Determines depth of monitoring

19. Identify and Limit Risk • Understand sub-recipients’ familiarity with the program and applicable regulations; • Design contracts in accordance with federal regulations and to account for all data and reporting requirements; • Incorporate contract language that allows your organization to amend contracts as additional guidance from the federal government is received; • Review the results of previous audits for any findings that may have resulted; and • Submit timely, detailed enforcement reports to the federal government to demonstrate that sub-recipient monitoring is a priority and is being executed when issues are observed.

20. Risk Assessment May Include… • Size of the award • Percentage of award vs. total federal awards received by the agency • Complexity of award requirements • Single or multi-year award • Subrecipient experience • Prior monitoring / audit results

21. Additional Items to Consider… • Provider History • Policies and Procedures • Financial Stability • Management Systems

22. Risk Assessment • The output should be a report indicating where gaps or deficiencies exist and recommendations for improvement: • What might be found? • Current procurement policies allow for use of unjustified sole sourcing of vendors; • No sub-recipient monitoring plan exists so the organization is unsure when to review sub-recipients and what should be reviewed when on-site; • Financial management systems do not allow for the use of sub-accounts; • Time reporting policies exist, but no one reviews them for accuracy; and • Pre-approval from the federal government for the purchase of equipment and real property was not obtained in all circumstances.

23. Monitoring Procedures

24. Subrecipient Monitoring Compliance Requirements - A pass-through entity is responsible for: • Award Identification • During-the-Award Monitoring • Subrecipient Audits • Ensuring Accountability of For-Profit Subrecipients • Pass-Through Entity Impact • Central Contractor Registration

25. What, Why, Who, and When? • What is monitoring? • A process that evaluates how a grantee is administering a grant according to the requirements of the grant: • Eligibility Determination • Allowability of Services • Allowable Costs • Internal Management Systems • Procurement Policy • Other • Why is monitoring important? • Ensure compliance with federal rules and regulations • Ensure services are provided in accordance with subaward agreement • What is the role of a monitor? • Notification of review • Request necessary policies and documents • Provide technical assistance as needed • When do you monitor? • As deemed necessary based on annual risk assessment

26. Monitoring Plan • Clearly identify necessary activities and responsible parties; • Review debarment lists; • Allow for consistency throughout monitoring activities; • Characteristics include: • Data quality reviews; • Required progress reporting; • Site and desk reviews, potentially critical for large-scale projects; • Compliance auditing; and • Develop corrective action plans.

27. Monitoring Plan • Once the process has concluded, develop and implement an internal action plan: • Revise policies and procedures; • Enforce compliance with the internal requirements; and • Execute ongoing monitoring. • Utilize your internal auditors to conduct regular, detailed reviews; and • Know where others have faltered.

28. How Do You Monitor? • Techniques for conducting monitoring activities • Desk reviews • Executed at the pass-through entity’s site (i.e. not at the sub-recipient’s location); • May include, at a minimum, financial reviews for allowability prior to invoicing the federal government, reviews of progress reports, and assessments of the sub-recipient’s independent audit. • On-site field reviews • Executed periodically and may follow a risk-based approach for scheduling; • Should include sampling contracts, transactions, reviewing supporting documentation, and assessing documented policies and procedures; and • Should involve technical experts if the project is of a technical nature (e.g. construction or energy engineering).

29. Eligibility Determination • Verify that eligibility was properly determined. • Suggested activities: • Review program forms to ensure they capture accurate eligibility requirements. • Review case files, completed applications, and other program records and forms to determine that the subrecipient is appropriately assessing eligibility criteria.

30. Allowability of Services • Verify that services provided were allowable under grant rules and were provided as billed. • Suggested activities: • Review program records as well as brochures and any other materials disseminated to the public. • Review program forms to ensure they capture accurate program services. • Review program records to ensure documentation of service delivery.

31. Allowable Costs • Verify that the cost of goods, services, and property are allowable, in accordance with federal regulations, and expenditures appear to be within the submitted budget. • Suggested activities: • Review purchasing records. • Review monthly expenditure reports. • Review invoices and budgets.

32. Cost Allocation • Verify financial records to assure accounting records identify the source of funds and provide for accurate division of charges and cost as related to the subaward agreement. • Suggested activities: • Review cost allocation methodology. • Observe use of acquired assets to verify they are being used as charged.

33. Cash Management • Verify cash management system provides reasonable assurance that federal funds are drawn down only for immediate needs. (Not applicable for reimbursement basis agreements.) • Suggested activities: • Review start up funds. • Review funding requests vs. expenditures.

34. Program Income • Verify that program income practice provides reasonable assurance income is correctly earned, recorded and used in accordance with the program requirements. • Suggested activity: • Review records to ensure that program income was: • Recorded as earned. • Deposited as collected.

35. Internal Management Systems • Verify that sufficient internal management systems are in place to ensure subrecipient has effective control over and accountability for all funds, property, and other assets. • Suggested activities: • Review subrecipient’s procedure manual and or operating policies. • Review subrecipient’s inventory report/listing. • Review prior audits and corrective action plans.

36. Procurement Policy • Verify that the subrecipient’s procurement policy represents an acceptable level of internal control and is in accordance with federal procurement requirements. • Suggested activities: • Review any codes of conduct. • Review transactions

37. During-the-Award Monitoring Factors that may affect the nature, timing, and extent of during-the-award monitoring: • Program complexity • Percentage passed through • Amount of awards • Subrecipient risk

38. Agreed-upon Procedures Engagements A pass-through entity may arrange for agreed-upon procedures engagements for certain aspects of subrecipient activities, such as eligibility determinations. Since the pass-through entity determines the procedures to be used and compliance areas to be tested, these agreed-upon procedures engagements enable the pass-through entity to target the coverage to areas of greatest risk.

39. Reports • Verify financial and other reports are supported by underlying accounting or performance records and are submitted in accordance with the provisions of the subaward agreement. • Suggested activity: • Review records to ensure: • Timeliness • Accuracy • Completeness

40. Sub-granting and Sub-contracting Federal Awards • Progress reports and performance metrics are frequently being required. • Recipients must report on progress toward achieving objectives and provide justification for variation from identified milestones. • Consider the Performance Metrics and Benefits Plan for the SGIG • Must specify two types of measures: build and impact metrics; • Report to the Data Hub; and • DOE may be involved to ensure alignment with federal goals and objectives.

41. Sub-granting and Sub-contracting Federal Awards • Examples of Reporting Systems

42. Monitoring Results • Upon conclusion of monitoring: • Findings will be completed by the reviewer and signed by the director of the agency or designee. • A copy will be mailed to the subrecipient identifying any deficiencies. • Immediate action should be taken to correct issues involving ineligible uses of federal funds. • A corrective action plan should be developed by the subrecipient within 60 days from the issuance of the review findings to address deficiencies or noncompliance issues.

43. Monitoring Results, continued • Review corrective action plans based on the pass-through entity’s monitoring work or the results of independent audits; • Sanction subrecipients as allowed by federal regulations if they are found to be in noncompliance • Withhold payments • Require that sub-recipient reimburse the pass-through entities • Terminate the contract • Report noncompliance or sanctioning activities to the federal government for follow-up when required. • Document the execution of monitoring activities and corrective action taken.

44. Monitoring Follow-Up

45. Monitoring Follow-Up • Why is follow-up important? • Identify recurring problems to a program • Example: Incorrect eligibility determinations could result in unallowable charges to federal program. • Identify recurring problems with a subrecipient • Example: Subrecipient that fails to correct monitoring findings is at risk of incurring additional unallowable costs or audit findings.

46. Auditor Review of Monitoring Activities

47. Audit Objectives • Internal Control to support a low control risk assessment. • Compliance

48. Audit Planning Considerations • Effect of pass-through awards on the determination of major programs • Expenditure is based on when the activity related to the award occurs • Federal awards are deemed to be expended by the pass-through entity when the funds are disbursed to subrecipients, regardless of when subrecipients expend the federal funds • Materiality • Matter of professional judgment – influenced by the auditor’s perception of the needs of a reasonable person who will rely upon the auditor’s work

49. Control Objectives • To provide reasonable assurance that Federal award information and compliance requirements are identified to subrecipients, subrecipient activities are monitored, subrecipient audit findings are resolved, and the impact of any subrecipient noncompliance on the pass-through entity is evaluated. • The pass-through entity should perform procedures to provide reasonable assurance that the subrecipient obtained required audits and takes appropriate corrective action on audit findings.

50. Control Environment • Establishment of “tone at the top” of management’s commitment to monitoring subrecipients. • Management’s intolerance of overriding established procedures to monitor subrecipients. • Entity’s organizational structure and its ability to provide the necessary information flow to monitor subrecipients are adequate. • Sufficient resources dedicated to subrecipient monitoring. • Knowledge, skills, and abilities needed to accomplish subrecipient monitoring tasks defined. • Individuals performing subrecipient monitoring possess knowledge, skills, and abilities required. • Subrecipients demonstrate that: • They are willing and able to comply with the requirements of the award, and • They have accounting systems, including the use of applicable cost principles, and internal control systems adequate to administer the award. • Appropriate sanctions taken for subrecipient noncompliance.