Subcontract Audits of Universities

1. Subcontract Audits of Universities Michael Terrel, PNNL Cost/Price Gail Lewis, ORNL/CIAD July 16, 2015 Pacific Northwest National Laboratory and Idaho National Laboratory Davenport Hotel, 10 S. Post Street, Spokane, WA 99201

2. Subcontract Audits of Universities • The backbone of any cost type contract is the audit or verification of actual costs incurred and subsequent adjustment of payments to those actual costs. • Most prime contractors have a requirement for this activity on subcontracts built into the prime contract: • (e) Audit of Subcontractors. (1) The Contractor shall provide for— (i) Periodic post-award audit of cost-reimbursement subcontractors at all tiers; …

3. Subcontract Audits of Universities • In audits of some major prime contractors the Office of Inspector General asserted: The contractor did not always conduct or arrange for audits of its subcontractors when costs incurred were a factor in determining the amount payable to subcontractors. • Always results in a lot of audits and expense by both the prime and the sub tier subcontractor.

4. Subcontract Audits of Universities Prior to the Single Audit Act of 1984 the federal government conducted numerous audits of entities by program Anarchy reigned supreme as multiple government audits reviewed the same or similar data, and even occasionally coming up with different results.

5. Subcontract Audits of Universities The Single Audit Act conformed audit requirements for States, local governments and Indian tribal governments. The idea of conducting one audit on a standardized basis that all agencies will live by was born.

6. Subcontract Audits of Universities Since these audits would receive wide use and reliance they needed to be system audits that not only address the current project, but also address the accounting system’s ability to be compliant with government standards. To establish this, in 1985 the Office of Management and Budget issued (OMB) A-128 “Audits of State and Local Governments”.

7. Subcontract Audits of Universities In 1990 OMB A-133 was issued extending the Single Audit concept to non-profit organizations (superseding A-128). Resulting in coverage for the majority of recipients of federally funded cost reimbursement contracts.

8. Subcontract Audits of Universities • Public Law 104-156 (104th Congress) the “Single Audit Act Amendments of 1996”. “The purposes of this Act are to— (1) promote sound financial management, including effective internal controls, with respect to Federal awards administered by non-Federal entities; (2) establish uniform requirements for audits of Federal awards administered by non-Federal entities; (3) promote the efficient and effective use of audit resources; (4) reduce burdens on State and local governments, Indian tribes, and nonprofit organizations; and (5) ensure that Federal departments and agencies, to the maximum extent practicable, rely upon and use audit work done…”

9. Subcontract Audits of Universities “An audit made in accordance with this part shall be in lieu of any financial audit required under individual Federal awards.” “A Federal agency that provides Federal awards and conducts or arranges for audits of non-Federal entities receiving such awards that are in addition to the audits of non-Federal entities conducted pursuant to this chapter shall, consistent with other applicable law, arrange for funding the full cost of such additional audits. Any such additional audits shall be coordinated with the Federal agency determined under criteria issued under section 7504 to preclude duplication of the audits conducted pursuant to this chapter or other additional audits.”

10. Subcontract Audits of Universities • In December 2013 the OMB combined 8 circulars and moved them to Title 2 of Code of Federal Regulations (CFR) • OMB A-21 Cost Principles Educational Institutions • OMB A-50 Audit follow up • OMB A-87 Cost Principles State, Local, and tribal Governments • OMB A-89 Catalog of Federal Domestic Assistance • OMB A-102 Agreements with state and local governments • OMB A-110 Uniform Administrative Requirements • OMB A-122 Cost Principles for Non-Profit Organizations • OMB A-133 Audits of State, Local Government, and non profits

11. Subcontract Audits of Universities • In addition to the move to the CFR: • The threshold was changed from $500K to $750K • The percentage of tests required reduced from 50% to 40% for high risk and 25% to 20% for low risk. • Compliance requirements have been focused from 14 to 6: • Activities Allowed or Un-allowed and Costs/Cost Principles • Cash Management • Eligibility • Reporting • Sub recipient Monitoring • Special Tests and Provisions

12. Subcontract Audits of Universities Even though this is an effective system audit the Office of Inspector General has not accepted it as an adequate to be in compliance with contract audit requirements. The IG audit report 0885 dated April 2013 states: Of the 10 reports we issued over the past 3 years, 9 disclosed a lack of audit coverage of subcontracts and 1 disclosed that subcontract reviews performed did not meet relevant audit standards. One report also disclosed that the M&O contractor's threshold for conducting audits was set at a level that effectively excluded virtually all of its cost-type subcontracts.

13. Subcontract Audits of Universities The results of the audits total $563.5M of “subcontract costs pending audit.” In response to reports like these many prime contractors are scaling up to address these comments. Based on preliminary calculations the costs to address these additional audits subject to A-133 could be close to $1M.

14. Subcontract Audits of Universities PNNL has placed reliance on the OMB A-133 audits for the majority of Cost Reimbursement contracts. During an OIG audit conducted on PNNL in late 2012 for contracts placed in 2010 and 2011 the OIG was not willing to accept the OMB A-133 audits as acceptable. After many discussions with the OIG staff, supervisors, and management, OMB A-133 was accepted, and contracts with contractors that were A-133 covered were exempted from further review in 2013

15. Subcontract Audits of Universities In 2013 PNNL’s OIG Audit report stated: Specifically, 689 of 704 cost reimbursable and Cost Plus Fee subcontracts placed or closed during FYs 2010 and 2011 were with OMB Circular A-133 entities… we eliminated 689 subcontracts since they were awarded to OMB Circular A-133 entities covered under the Single Audit Act and would receive post-award or interim audit coverage. Because the bulk of PNNL cost type contracts are placed with entities covered by A-133, PNNL was not impacted.

16. Subcontract Audits of Universities Unfortunately the acceptance of the A-133 as an adequate systems audit was limited and resulted inconsistent treatment and corrective actions. Anyone want to share stories of fun with the IG?

17. Subcontract Audits of Universities The CIAD leveled a valid argument with the IG which resulted in higher level acceptance.

18. Subcontract Audits of Universities The OIG is now recognizing OMB A-133 audits. Dan Weeber, DOE Assistant Inspector General for Audits and Administration communicated the following in March 2015: In response to your question regarding internal audit’s reliance upon A-133 audits, the Office of Inspector General does not take issue with CIAD’s position that A-133 audits are sufficient to meet the FAR requirements for audits of cost reimbursable contracts, based on the fact that they are designed to test the adequacy of the overall accounting systems and internal controls (i.e., travel, timekeeping, purchasing, etc.,) for all subcontracts with that entity.

19. Subcontract Audits of Universities