How to Prepare for a Federal Audit or Monitoring Visit

1. How to Prepare for a Federal Audit or Monitoring Visit Brette Kaplan, Esq. bkaplan@bruman.com Brustein & Manasevit, PLLC Steven Spillan, Esq. Spring Forum 2014 sspillan@bruman.com

2. Ripped from the Headlines • Former Secretary of a SEA found guilty of stealing federal funds used for financing political campaigns through kickbacks from contracts with vendors. • Sentenced to 12 years in prison

3. Ripped from the Headlines • Former State Superintendent indicted by a federal grand jury for embezzling more than $600,000 in federal education funds for her campaign for governor and plastic surgery. • Sentenced to 8 years in prison, fined $414,000, 3 years probation and 100 community service hours upon release

4. Non-Compliance Findings Audit • OIG Audit • A-133 Audit Monitoring 3.Federal 4.State Brustein & Manasevit, PLLC

5. Preparation • Key to successful outcome • Self assessment - critical Brustein & Manasevit, PLLC

6. Self Assessment • Identify potential trouble spots • Review significant violations from other processes • Review prior findings • Conduct self assessment Brustein & Manasevit, PLLC

7. Review of 27 OIG Audit Reports • $1,398,564 unallowable personnel costs • Employee compensation charged to grants in which the employee did not work on • $826,183 unallowable non-personnel costs • Unnecessary or unreasonable to carry out the grant or not-for-program purposes • $810,055 unallowable non-personnel costs • Contracts were: missing required elements; unfulfilled; not approved; or included expenditures that exceeded the contract amounts Brustein & Manasevit, PLLC

8. Review of 27 OIG Audit Reports (cont.) • $66,666,155inadequately documented personnel costs • Time and effort documentation (both semi-annual certifications and PARs) were missing, incomplete, inaccurate, or untimely • $16,010,550 inadequately documented non-personnel costs • Missing or inaccurate supporting documentation • $2,693,004 in lost or unaccounted for property • Improper inventory control systems • $2,504,617 unallowable supplanting of Federal grant funds Brustein & Manasevit, PLLC

9. Review of 27 OIG Audit Reports (cont.) • Pervasive non-compliance issues • Inadequate policies and procedures (34 times) • No policies and procedures (15 times) • Not understanding the regulations and guidance (10 times) • Policies in place, but not followed (5 times) Brustein & Manasevit, PLLC

10. Audit violations deemed “significant” by the U.S. Department of Education Brustein & Manasevit, PLLC

11. Time Distribution MOE Supplement Not Supplant Unallowable Expenses Procurement Irregularity Ineligible Students Lack of Accountability for Equipment/Materials Lack of Appropriate Record Keeping Record Retention Problems • Late or No Submission of Required Reports, Inaccuracies, Inconsistence • Audits of Subrecipient Unresolved • Lack of Subrecipient Monitoring • Drawdown before funds are needed or more than 90 days after the end of funding period • Large Carryover Balances • Lack of valid, reliable or complete performance data Brustein & Manasevit, PLLC

12. Evaluate Areas to be Examined • OIG Audit • Notice of Audit: Correspondence • A-133 Audit • Prior Audits (Findings) • A-133 Compliance Supplement Brustein & Manasevit, PLLC

13. Evaluate Areas to be Examined (cont.) • Monitoring • ESEA Flexibility Monitoring; SASA Guide • CrEAG; RDA • Perkins IV Checksheets • Request for documents Make a separate set of copies of all documents provided to ED Brustein & Manasevit, PLLC

14. Remedy Problem Areas AND / OR Develop Corrective Actions (Plans) Brustein & Manasevit, PLLC

15. Corrective Action Plan Critical – in place at time of visit – even if implementation - FUTURE • Specific Measurable Objectives • Timelines • Clear Lines of Responsibility Brustein & Manasevit, PLLC

16. Brustein & Manasevit, PLLC Preparation for Visit

17. Logistics • Secure Space • Copy Machine Brustein & Manasevit, PLLC

18. Audit Records • Can the auditee refuse to provide the auditors with requested documents? • GEPA 20 USC 1232(f) requires that ED and its representatives (which arguably includes A-133 auditors) “shall have access, for the purpose of audit examination, to any records maintained by a recipient that may be related, or pertinent to, grants” • EDGAR 80.26(b)(5) also indicates audit access to records without qualifiers. • If requested records are not provided, likely receive an audit limitation. Brustein & Manasevit, PLLC

19. Communication with Staff • Formal (governmental) inquiry • Provide any information within personal knowledge • No guessing • No speculation • No time to settle grudges • No gossip Brustein & Manasevit, PLLC

20. Identify Key Staff(Audit Committee) • Audit Manager: • Key contact for all questions, interview arrangements, documents requests, logistical arrangements • Agency Leadership: • Entrance, exit conference Brustein & Manasevit, PLLC

21. Identify Key Staff(Audit Committee) • Relevant Staff: • Assure staff are prepared for interview • Subject matter awareness • Terminology/Definitions • Time and Effort • Necessary and Reasonable • Inventory • Familiarity with job description • Familiarity with prior problem areas • Familiarity with likely areas of inquiry Brustein & Manasevit, PLLC

22. The Visit • Entrance Conference • Leadership • Set positive tone • Audit Manager • Review process/logistics • Request all interview requests go through manager • Request periodic updates (especially problem areas) • Do not wait for exit conference Brustein & Manasevit, PLLC

23. The Visit • Keep extra copy of all documents supplied!!! • Debrief staff after interviews • Clear up misunderstandings Brustein & Manasevit, PLLC

24. Exit Conference • Press for specifics • If issues: • Documents requested? • List and send • Potential noncompliance findings • Review carefully • If confirmed, develop corrective actions proactively Brustein & Manasevit, PLLC

25. Next Steps • OIG Audit, A-133 Audit • Draft Audit Report • Final Audit Report • Final determination (ED, State Agency) • Respond carefully at each level • Problems always easier to resolve at earliest level Brustein & Manasevit, PLLC

26. For example: Alabama Audit Cash Management Findings • Draft Audit Report - October 2011 • Alabama Response: Policies and procedures, internal controls • Final Audit Report – February 2012 • Alabama Response: Disagreed with some findings, but addressed OIG concerns; acknowledged Federal requirements; implemented corrective actions. Brustein & Manasevit, PLLC

27. For example: Alabama Audit “With all these facts and circumstances, we find that the State has been willing to implement and to also require the prime recipients and subrecipients to implement corrective action that complies with the draw down, transfer, disbursement and maintenance of excess Federal grant funds and the internal control requirements applicable to Federal grant funds. Therefore, we do not request the State, prime recipients, or subrecipients to refund any of the Federal grant funds they have received . . . It is our determination that this finding is resolved.” • Program Determination Letter – May 2013 Brustein & Manasevit, PLLC

28. Next Steps • ED can: • Accept finding as is • Accept finding but reduce or eliminate liability • Reject finding • Letter of final audit determination • Establishes prima facie case • 34 CFR 81.34 Brustein & Manasevit, PLLC

29. Review by ED • ED accepts finding with $ liability • Appeal to Office of Hearings and Appeals (OHA), 34 CFR 81.37 • Administrative Law Judges (ALJs) are independent • Caution – • Time limits • Other Rules of Procedure for Appeals Brustein & Manasevit, PLLC

30. Review by ED • ALJ Decision • Appeal to Secretary Brustein & Manasevit, PLLC

31. Brustein & Manasevit, PLLC Audit Defense and Resolution

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

33. Harm to the Federal Interest 34 CFR 81.32 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 with the program . . . ” Brustein & Manasevit, PLLC

34. Harm – Always • Ineligible Beneficiaries • Example: IDEA, Part B program funds for students without a disability • Unauthorized activities • Example: Migrant funds used for local agency staff to attend conference unrelated to Migrant program Brustein & Manasevit, PLLC

35. Harm - Always (cont.) • Fiscal • Set-aside • Example: SEA spends more than 10% on Perkins state leadership • MOE • Comparability • Supplanting • Excess cost • Matching Brustein & Manasevit, PLLC

36. Possible No Harm May argue “no harm” if: • Did not obtain required prior approval • Missing required time and effort documentation • Missing evidence of procurement Caution: ED takes more limited view – may require litigation Brustein & Manasevit, PLLC

37. ALJ Decisions - Reconstruction • Application of the New York State Department of Education, No. 90-70-R (April 21, 1994) • After-the-fact affidavits and other pertinent documentation are admissible as evidence. • Consolidated Appeals of the Florida Department of Education, Nos. 29(293)88 & 33(297)88 (June 26, 1990) • Accepted affidavits completed by supervisors years later as credible and useful evidence. Brustein & Manasevit, PLLC

38. 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 09-20-R (May 16, 2012) Brustein & Manasevit, PLLC

39. 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

40. Resolution Strategies • CAROI • Compromise • Settlement • Litigation Brustein & Manasevit, PLLC

41. Monitoring Findings • Opportunity to Respond • Generally, Corrective Actions • No Liability Brustein & Manasevit, PLLC

42. Changes Under Omni Circular? • 200.513: The federal awarding agency must use cooperative audit resolution to improve federal program outcomes • Cooperative Audit Resolution: means the use of audit follow-up techniques which promote prompt corrective action by improving communication, fostering collaboration, promoting trust and developing an understanding between the Federal agency and non-Federal entity (200.25). Brustein & Manasevit, PLLC

43. Omni Circular Changes • The auditor must report (for major programs): • Significant deficiencies and material weaknesses in internal controls • Significant instances of abuse • Material noncompliance • Known questioned costs > $25,000 • Auditor will not normally find questioned costs for a program that is not audited as a “major program” • NEW: But if auditor becomes aware of questioned costs > $25,000 for non-major program, must report Brustein & Manasevit, PLLC

44. Omni Circular Changes • Possible Elimination of 7 Compliance Requirements: • Davis-Bacon Act; • Equipment and Real Property Management; • Level of Effort, Earmarking; • Period of Availability of Federal Funds (except where tested to verify allowable/ unallowable costs); • Procurement, Suspension and Debarment; • Program Income; and • Real Property Acquisition Relocation Assistance. Brustein & Manasevit, PLLC

45. Questions?? Brustein & Manasevit, PLLC

46. Disclaimer This presentation is intended solely to provide general information and does not constitute legal advice. Attendance at the presentation or later review of these printed materials 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, PLLC