Strengthening Nonprofit Accountability: Notes on the Upcoming Changes to Federal Award GuidelinesBy Benetech, posted on November 6, 2014
Benetech is a nonprofit that receives federal funding in support of its work, and therefore our Finance team has had the opportunity to familiarize ourselves with the upcoming changes to federal award guidelines that will take effect in December. In this post, I’d like to share key issues we’ve learned, with the hope that our nonprofit peers find this account useful. We believe that it’s worth learning more about these changes now rather than being surprised later—and that it’s well worth aiming for a special status that will save you money on your audits.
For some nonprofits the news about the upcoming changes is actually good. Right now, any nonprofit that receives more than $500,000 in federal funding annually is required to conduct a “single audit.” A single audit is an additional level of scrutiny beyond a standard public accountant audit and encompasses both financial and compliance components. As of December 26 of this year, the threshold amount of annual federal funding requiring single audit increases to $750,000.
The objective of the single audit is to assure the Federal Government that an award is being utilized properly, efficiently, and for the purpose intended. The single audit must be submitted to the Federal Audit Clearinghouse within thirty days after receipt of the auditor’s report or nine months after the fiscal year end date (whichever comes first). Single audits must be performed in accordance with Government Auditing Standards (GAS). Certified Public Accountants (CPAs) who perform these audits must obtain peer reviews to ensure this standard is being met. Additionally, auditors must have a current CPA license, which means they are current with their training and continuing education.
In 1990, the US Office of Management and Budget (OMB) issued OMB Circular A-133, which provides guidelines and rules for the single audit of nonprofits. Recently some changes have been made to the circular in an effort to make the single audit more comprehensive and efficient.
While we at Benetech are not OMB rules and regulations professionals, we do continually research federal rules and regulations in order to stay up to date on compliance requirements as nonprofit practitioners. Benetech’s Finance team has had a track record of staying aware of these requirements: our latest audit was completed in May of this year, and we were pleased when we again received a clean audit with no findings or deficiencies. What we share here represents our understanding of the changes and is meant only to increase awareness of them, not as financial or legal advice. If you need such help, please consult a compliance professional for your organization.
The following is a brief summary of the key components of a single audit and the changes to it, effective of December 26, 2014, from our point of view as an organization subject to these rules:
- Organizations receiving awards under $750,000 will no longer be required to have a single audit. As a result of this threshold change, it is estimated that approximately 5,000 entities within the United States will no longer be required to have a single audit. It is important to note that (a) not being subject to a single audit does not exclude an organization from following the federal regulations, and (b) that if an organization received $500,000 in 2014 prior to December 26, the single audit is required.
- Before a nonprofit engages an auditor, they will now need to get a “peer review” from the Audit firm. The Government Accountability Office requires peer reviews as one of the conditions for CPA’s to perform audit engagements and issue reports under their accountability standards.
- Before the auditor starts the audit of the federal program they will determine if the client is either a “low risk” or “high risk” auditee. The OMB circular A-133 lists a number of requirements the client needs to satisfy in order for it to be classified as a “low risk auditee.” Some of the requirements, which must be met for each of the preceding two years, are:
- Single audits performed annually in accordance with federal requirements;
- Audits submitted on time to the Federal Audit Clearing House;
- No “deficiencies” that result in “material weaknesses” in the internal controls;
- Unqualified opinions from the auditors on the organization’s audited financial statements and expenditures of Federal awards;
- No “findings” in any areas audited.
- If classified as “low risk,” the auditor will need to examine only 20% of the transactions within the federal program(s) under audit, as opposed to 40% if classified “high risk.” This means that the auditors would spend half the time on the testing of federal items of a low risk auditee, resulting in both lower cost and work disruption for the nonprofit.
- Once the “risk status” has been assessed, the auditor will have to determine which federal programs to audit, among all the federal program awards received by the auditee—i.e., classify the program as Type A or B. While the criteria for determination is beyond the scope of this discussion, once identified it helps the auditor focus on the larger, Type A programs.
- While the auditor needs to examine the organization’s financial transactions for compliance with federal rules and regulations, they also have to audit the financial statements of the nonprofit. The auditor needs to ensure that the financial statements present fairly, in all material respects, the financial position of the organization. In addition, the nonprofit needs to prepare a Schedule of Federal Expenditure, which is audited as well.
- There are significant new requirements for sub-recipient monitoring and management, procurement standards, requirements for written procedures for cash management, budget versus actual comparisons, and determination of cost allowability, among others.
Nonprofit finance professionals will be busy preparing for, and implementing, these new requirements over the next several months. However, if we are diligent at setting up policies and procedures—then strictly require compliance within our organizations—we can aim for clean audits. Clean audits lower audit costs and increase a nonprofit’s prospects of continuing to receive federal awards.
There are many checks and balances to ensure the taxpayer’s money is spent well. It is very important for a nonprofit to manage these funds efficiently in order to better serve its beneficiaries. The government and the auditors make sure this happens through the single audit—a program that’s unique to the United States.
We urge nonprofits that receive federal funding to learn about the latest regulations and requirements, so that we can all keep doing what we do best: make the world a better place for all humanity.
The two links below are golden, will provide a wealth of information, likely save you hours of research, and they’re directly from the source! Save these links!
http://www.gpo.gov/fdsys/pkg/FR-2013-12-26/pdf/2013-30465.pdf: this 103 page-long document points out most of the new regulations.
https://cfo.gov/wp-content/uploads/2013/01/2-C.F.R.-200-FAQs-2-12-2014.pdf: this page is updated often—consult it frequently.
I’d like to thank Benetech Senior Accountant, Viji Dilip, for her contributions to this blog post.