What Triggers Uniform Guidance Audits of NIH and DOE Grant Funding Awards and What is Audited?

Many of you will probably know the Uniform Guidance Audits, formerly known as OMB A-133 audits. Here’s a chance to go deeper and learn about the UGA, the audit process, findings and possible pitfalls.

WHO IS REQUIRED TO HAVE A UNIFORM GUIDANCE AUDIT?

The list of those who are required to have a Uniform Guidance Audit is long.

• If you are an NIH or DOE grantee and you have an SBIR or STTR Phase I or Phase II grant, as well as NIH R01 and U01 grants, and DOE EERE grants — the requirement will be embedded in your notice of grant award or cooperative agreement.
• We also see these type of audit requirements with a lot of grants and co-op agreements coming from the Army Medical Research Office.
• There are also a host of other agency grant and co-op funding vehicles, which are also subject to one of these types of audit mechanisms.

WHAT TRIGGERS AN OMB A-133/UNIFORM GUIDANCE AUDIT?

Just because you have one or more of the awards above, doesn’t necessarily mean you’re going to be audited. Let’s talk about what triggers one of these audits to take place.

It all comes down to the amount you expend in your fiscal year.

Let’s say, you’ve spent $750,000 or more in federal funds during your company’s fiscal year. This $750,000 includes both direct, indirect and fixed fee amounts and it also includes amounts paid to subcontractors. If you exceed this $750,000 threshold you’re going to have to have an audit at the end of your company’s fiscal year.

The $750,000 threshold is measured based on your company’s fiscal year. So it doesn’t matter what the budget period is on your contract or grant. You have to measure it based on your company’s fiscal year.

NIH and DOE have payment systems called the Payment Management System and ASAP System, respectively.  I have had clients ask me, “I only draw $748,000 in federal funds, do I still have to have the audit?” The answer is yes. If you’ve earned that much in grant money, just because you haven’t drawn the funds down doesn’t mean it’s exempt from audit.

WHAT IS THE UNIFORM GUIDANCE AUDIT PROCESS?

Step 1.  Engage an accounting firm

The first thing you’re going to have to do is find an independent accounting firm that does this type of audit. Not many firms are qualified to perform these audits, as they require a deeper understanding of government grant accounting. This is one of Jameson & Company’s areas of expertise.

Once you secure a qualified accounting firm, you’ll receive an engagement letter that details the terms and conditions of how the audit will be performed and who is responsible for what.

As a rule:

• Clients are responsible for the financial statement and the information in it
• Auditors are responsible for making an opinion on those financial statements and disclosures

Step 2.  Audit planning

After the engagement letter is squared away, the auditor you hire will develop a plan for what he or she will test during the audit. During this planning phase, the auditor will ask you a number of questions:

They will want to know about your accounting system.

• What accounting system do you have in place?
• How does your accounting system work?
• How do you account for costs from your grant?

They will want to know about company culture.

• How does your company work from day to day?
• Who’s responsible for the accounting transactions

These questions will help the auditor determine how much risk they assess to the overall project and how much they have to test.

Your auditor will also ask you a number of fraud-related questions. Know that this is a requirement on any audit and these questions are asked to determine whether there is potential for fraud; they are not accusing you of doing wrong. However, if they hear something problematic or questionable, this will direct their testing.

Step 3: Testing selections

After the audit planning is complete, your auditor will make his or her selections for testing. You have NO ability to dictate or sway what they test.  Keep in mind, you have hired an independent auditor, as mandated by the UGA. This auditor is working on behalf of the Federal Government, not you, so they will test what needs to be tested.

Normally, you can count on the auditor testing about 60 transactions. In many cases, he or she will be able to use the same transactions for both internal control testing and compliance testing.

Step 4: Fieldwork begins

After the selections are made, field work begins. This is where the auditor examines the underlying documentation for the transactions being tested.

If he or she finds any issues with the charges on the grant, there are two choices:

1. Try to resolve the problem
2. Write it up in the report

This is an important consideration when it comes to choosing your independent auditor. It’s always best to have someone who’s an expert and knows how to resolve government award accounting issues.

Step 5. Final report          

After all the field work is completed, the final report is then issued and sent to the agency which mandated the audit.

Step 6. Agency review

Most agencies have an audit resolution office. Here, they’ll read your report and if there are any audit findings, they’ll contact you to make sure that you have fixed the problem. If you haven’t, then further investigation and action is taken.

WHAT WILL AN AUDITOR USUALLY TEST DURING A UGA AUDIT?

As we discussed earlier, your auditor will ask you key questions and develop an audit plan based on your answers and their experience. As a rule, the following represent the key areas that they will test as part of that plan.

Costs and how they comply with FAR part 31

The first thing that they’re going to look at are costs that are charged to the grant and whether they are allowable or unallowable according to the Federal Acquisition Regulations (FAR) part 31 and the granting agency’s policy and procedure manuals.

If you’re a for-profit company, the backbone of what’s allowable and what’s unallowable goes back to Federal Acquisition Regulations, part 31.

This section of the FAR will list all sorts of potential cost items and whether they are allowable or unallowable.

Adherence to the rules. FAR vs. Agency-specific supplemental policy and procedure manual

Nearly every funding agency has its own supplemental policy and procedure manual, which can override the FAR.

For instance, the FAR includes internal research and development costs as an allowable expense item. But in NIH’s supplemental policy and procedure manual, it states that the NIH will not pay for internal R & D as part of your indirect rates. Instead, you have to put it in the denominator when calculating your indirect cost rates so it can absorb its proportionate share of the company’s indirect cost.

When your auditor is going through and testing transactions, he’s using his understanding of these rules to determine if what you charged the government is reasonable.

Accurate and compliant timekeeping and labor distribution procedures

Most likely, the next thing your auditor will look at is your timekeeping and labor distribution procedures. We get questions about this every week from potential clients and it comes up all the time when we’re doing presentations. Here’s the bottom line:

Everyone in your organization has to keep time sheets if you want their salaries reimbursed under your grant.

Whether the charges are indirect or direct, whether it’s the receptionist at the front desk or the Ph.D. working directly on the grant, everybody has to keep time sheets

General ledger that matches information in time sheets

In addition, salaries have to be distributed in the company’s general ledger based on the information that’s on the time sheets.

For example: You have a person who makes $1,000 a week. On their time sheet for the week, they’ve charged 20 hours directly to the grant and 20 hours to vacation time. The auditor will expect the general ledger to show a $500 charge directly to the grant and then $500 charge to vacation time for the week.

Timesheets that are accurate and show accountability.  

Timesheets have to be signed by both the employee and supervisor. If there are any corrections on the timesheet, they have to be scratched out in pen and initialed by the employee.

Of course, many businesses use automated timekeeping systems but the concept is the same. Both the employee and the supervisor must have password-protected signatures in an electronic time-keeping system, and there must be a forensic audit trail created by corrections made to the time sheets, and annotations have to be made to explain those corrections.

A thorough, accurate and provable direct equipment inventory

If you have budgeted items in your grant for direct equipment—items that are more than $5,000— then you have to keep an inventory of those items because you don’t have perfect title to the direct equipment. The government reserves the right to take that equipment back at the end of the grant.

You must maintain a listing of direct equipment. Most likely, the auditor will take a sample of several items and ask, “where is this on the laboratory floor?”  He’ll walk out just to make sure the equipment exists and that you haven’t sold it.  It’s a great idea to have a tagging system.

Funding agency and grant-specific salary caps

Next, the auditor will make sure you’re aware of any salary caps that exist under the grants in the agencies that are funding your innovation. For instance, NIH has a salary cap.  That means you can only charge them so much in direct labor.  Anything above the salary cap becomes an unallowable cost.

Accurate and provable SF-425/FFR reporting

If you’re using the Payment Management System or ASAP, you have to submit a quarterly SF-425 aka Federal Financial Report (FFR). This report details all of the actual spending on your grant or grants in accordance with FAR Part 31 and the applicable agency regs.

One of the common mistakes we see with SF-425 reports is clients simply reporting spending amounts earned to be exactly equal to the amounts that were drawn. This may be improper. You have to be able to report what’s actually been spent on the grant regardless of how much money you have drawn down.

Negotiated indirect cost rate and indirect cost charges to the grant

During a Uniform Guidance Audit, the auditor will take a careful look at your indirect cost rate. He or she will make sure that charges for the indirect cost side of the equation did not exceed any negotiated indirect rate agreements that you have with your funding agency.

If you’re an SBIR grantee, you may have taken the 40% maximum “safe” indirect cost rate. That 40% acts as a cap as to your indirect charges on the grant.  Your auditor will test to make sure you are not charging in excess of the 40%.

If you have an NIH grant and you want to charge more than the 40%, you have to negotiate with the folks at the Division of Financial Advisory Services (DFAS) in order to get a negotiated indirect rate agreement letter.

The DOE doesn’t have a rate negotiation arm per se.  For the most part, your auditor would look to make sure that the indirect cost charges for their grants is allowable and reasonable.

Draw down procedures from the Payment Management System or the ASAP System

When you have grant funding, you may wonder, “Can I draw down all of the money now?”

The answer is no!

You can only draw down money that you’ve earned.  As you spend the money, you’re able to draw down funds and be reimbursed from the Payment Management System and ASAP Systems.

Draw down example 1. We had a client who was really conservative. He didn’t want to draw down a single dime until he was 100% sure that it was audited and accepted by the federal government. He went two years, and once everything was audited and squared away, he drew down $1.2 million from the Payment Management System.  It set off every bell and whistle in the place!

Re-budgeting grants

Different grant funding vehicles have different rules as to how much you can re-budget from one category to another without agency permission. If you exceed the cap, your auditor will look to make sure you have written permission in place for funds re-budgeted. Most research and development grants will allow for re-budgeting.  There’s an understanding that research doesn’t always go as predicted so agencies are usually flexible.

Period of performance requirements

Each grant that you receive will state a specific budget period of performance. Your auditor will check to ensure that your spending stays within this time frame.

Some grants will allow for pre-award charges. That’s taken into consideration as well. NIH, for instance, allows you to spend money 90 days before the project period begins. However, you are spending at risk before you get the award and back dating documents is a no-no.

Sub-recipient monitoring

This is a hot-button topic.  For sub-recipient charges to be allowable, you have to have a subcontract agreement in place with the sub-recipient. You’re also required to monitor the subcontractor and determine whether they are charging the proper amounts on their part of the grant.

Sub-recipients are subject to the same cost requirements that you are and they also have to have an OMB Uniform Guidance Assistance audits or DOE assisted audit. As the prime grantee, you are required to make sure they are following the rules. This means you should:

• Inquire whether your subcontractor has their audits done.
• Request a copy of the audit to make sure there are no improprieties on their end.

Consulting costs

In order for consulting costs to be allowable, they have to be supported by a consulting agreement. This agreement should detail the scope of work that’s going to be performed and the hourly rate that they are going to charge.

When your consultant provides you with an invoice for their work, that invoice should detail the hours worked, multiplied by the hourly rate and give the total charge. It should also annotate what was accomplished, and you should get a copy of any reports or significant notes that they produce.

As you can see, there’s a lot that can be tested during a Uniform Guidance Audit (aka OMB A-133), and there’s a lot that you are responsible for to keep straight.

WHAT HAPPENS IF YOUR UNIFORM GUIDANCE AUDIT DOESN’T GO WELL?

If there are audit findings, they’re typically going to come in one of two different flavors.

Internal control issues and what they can mean to your UGA.

If the controls in the accounting system that you have in place are not set up properly to account for your grant or contracts, then you may have what is called internal control findings.

Monetary findings and what they can mean to your UGA.

If there are cost charging or monetary findings, those findings will also be written into the audit report.  If it’s determined that you’ve overcharged the government – you will be required to give the money back.

How Uniform Guidance Audit findings are handled

First, the auditor will detail everything that was wrong during your audit in a list format, then submit it to the funding agency.

You will have to come up with a corrective action plan for the audit findings and submit that to your granting agency as well.

Then the people at the government audit resolution office will call you and verify that you have made the necessary corrections in order to avoid future findings.

THE DIFFERENCE BETWEEN NON-PROFIT AND FOR-PROFIT GOVERNMENT GRANT AWARD ACCOUNTING

We see this quite a bit: Individuals frequently spin out of universities and hospitals.  They’re used to the non-profit way of dealing with timekeeping and labor accounting.

In the non-profit world, a lot of the labor accounting is based on percentage of effort. So they are used to submitting proposals that say 30% of my salary is going to be captured under one grant and another 70% is going to be captured under another grant. There’s very little need for time sheets after the fact because you have that support documented.

CFR 548 and For-Profit Government Award Accounting

When you are a for-profit company profit, you’re subject to CFR 548 which requires that everyone keeps time sheets and that grant charges be based on “real life” time and not on percentages of effort and support.

APPLYING FINAL INDIRECT COST RATES TO GRANT CHARGES

This is pivotal: When you have a cost reimbursement grant, you have to apply your ACTUAL rates to the grant charges at the end of your year.  We see grantees fail to do this – they do not apply final indirect cost rates to their grant charges.

Your indirect cost rates are measured based on your company’s fiscal year. So, for example, if you have an indirect rate agreement letter with DFAS that says you can apply 60% to your direct costs, you will charge your grant at 60% during the year.  However, let’s suppose at the end of the year, you calculate your final actual indirect rate and you come in at 55%. You have to credit back the grant the difference between the 60% billed during the year and the 55% you actually incurred.

These are cost reimbursement type grants. You are not allowed to build profits by under-running your indirect cost rates. The same is true if you overrun your indirect rates a little bit. However, overruns are subject to any caps that you might have in your rate agreement letters.

HOW JAMESON & COMPANY CAN HELP WITH YOUR UGA.

As government grant accounting experts with over 40 years of experience assisting our clients by becoming part of their internal financial team.  We work with you to make sure that internal controls are in place and running properly and that charges are properly accounted for.  We typically help our clients hire the independent CPA firms and represent the client during the audit.

To learn about JamesonWorx, our FAR Part 31 compliant accounting system using Quickbooks Online, check out this blog.

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