Advisory Report 96-3
August 10, 1996
OMB Circular A-133 Revised; Single Audit Act Amended
The Office of Management and Budget (OMB) released a final revision of OMB Circular A-133, “Audits of Institutions of Higher Education and Other Non-Profit Institutions,” on April 30 (Federal Register, page 19134). Subsequently, amendments to the Single Audit Act of 1984 were enacted reflecting the changes made to A-133 and extending coverage of the law to nonprofit entities in addition to state and local governments.
The revision of Circular A-133:
• raises the threshold for when an entity is required to have an audit from $25,000 to $300,000;
• shortens the deadline for submission of audits from 13 months to 9 months after the end of the fiscal year;
• institutes a new risk-based approach to determination of which programs are audited as major programs; and
• reformats the circular to conform to the federal government’s “common rule” format, making it easier for federal agencies to codify its provisions in their regulations.
Federal agencies are directed to promulgate regulations adopting the standards in A-133 that are to apply to nonprofit organizations no later than November 30, 1996, so that they will apply to audits of fiscal years ending on or after June 30, 1997. A provision (§___.305(b)) prohibiting the same auditor from preparing an institution’s indirect cost proposal and performing the audit will not take effect until fiscal years ending on or after June 30, 1999.
The final revision of A-133 is based on changes proposed on March 17, 1995 (Federal Register, page 14595) and supersedes the prior version issued in 1990. It applies to nonprofit organizations, including independent colleges and universities, that expend federal funds received either directly from a federal agency or as a subrecipient. It does not currently apply to public institutions, which are audited under OMB Circular A-128, “Audits of State and Local Governments.” However, OMB noted in the preamble that it planned to seek modifications to the Single Audit Act—which passed both houses of Congress in June virtually without opposition—so that one circular could cover state and local governments and nonprofit organizations. Several revisions of A-133 were designed to make this easier to accomplish.
The Single Audit Act (P.L. 98-502), which serves as the statutory basis for Circular A-128, has until now only applied to audits of state and local government entities expending federal funds. Circular A-133 was promulgated by OMB administratively to impose similar requirements on institutions of higher education and other nonprofit organizations that receive federal funds. The Single Audit Act Amendments of 1996, which President Clinton signed on July 6, 1996, bring nonprofit organizations under the same audit requirements as state and local governments. Audits of fiscal years beginning after June 30, 1996, are covered under the new law. Because the change in the law was anticipated when A-133 was revised in April, few additional changes will be required to A-133 in order to conform. It is likely that OMB will extend coverage of A-133 to state and local government entities and eliminate A-128 in the near future.
The Single Audit Act Amendments includes the following provisions that differ from those found in the revised A-133.
• Entities with total federal expenditures of less than $300,000 are exempt from the audit requirements of the Single Audit Act and any other program-specific statute or regulation. While A-133 raises the audit threshold for single audits, it could not provide exemptions from other requirements. Sec. 7502(a)(2)(A)
• The Director of OMB is required to review the $300,000 threshold every two years and may adjust it upward as appropriate. Sec. 7502(a)(3)
• State or local governments that are required by constitution or statute, in effect on January 1, 1987, to undergo audits less frequently than annually may be audited biennially. Nonprofit organizations that had biennial audits for all biennial periods ending between July 1, 1992, and January 1, 1995, are also permitted to continue to have audits performed biennially. Sec. 7502(b)
• A two-year transition period from the effective date of the amendments is provided before auditees must meet a nine-month submission deadline. Sec. 7502(h)(2)(A)
• The OMB Director is authorized to conduct pilot projects to test alternative methods of achieving the purposes of the Single Audit Act. Sec. 7502(j)
This report highlights significant changes to Circular A-133. A copy of the April 30 Federal Register notice is reprinted at the end of the report. Readers may also find it useful to review OMB’s explanation of the changes as they were proposed last year; the proposed revisions were provided in NACUBO’s Special Action Report 95-1 (April 12, 1995). A copy of the Single Audit Act Amendments of 1996 is also included in this report following the Federal Register notice.
Highlights of Changes to A-133
Format. OMB has dropped the numbered paragraph style used for A-133 in the past, reformatting the circular in standard federal regulatory format. The “common rule” format with section numbers designated but part numbers left blank (§___.555) has been utilized so that federal agencies can easily insert the A-133 requirements into their regulations. The circular is now organized into five subparts: General, Audits, Auditees, Federal Agencies and Pass-Through Entities, and Auditors.
Subpart A provides definitions of key terms used in Circular A-133. Many of the definitions appeared previously in paragraph 1 but several are new, including ones for “internal control over Federal programs” and “questioned cost.”
Audit Threshold. The new A-133 raises the threshold for determining whether a nonprofit organization must be audited from $25,000 to $300,000 in federal awards expended in a year (§___.200). This should serve to limit the number of organizations required to be audited. Organizations that expend more than $300,000 must have a single audit conducted, unless they only receive awards from one federal program in which case they may elect to have a program-specific audit conducted. Provisions covering program-specific audits are in §___.235.
Guidance on determining federal awards expended is provided in §___.205. Generally, the determination should be based on when the activity related to the award occurs. Particular types of awards are also addressed, including loans and loan guarantees, endowment funds, free rent, noncash assistance, Medicare, and Medicaid. It is possible for an organization to be a recipient, a subrecipient, and a vendor. Federal awards expended as a recipient or subrecipient are subject to audit under A-133, but payments for goods and services provided as a vendor are not. Criteria for distinguishing awards from payments for goods and services are provided in §___.210.
Audit Frequency. Single audits under A-133 must be performed annually (§___.220). A federal agency or pass-through agency may allow an organization that elects to have a program-specific audit to do so biennially, with the audit covering both years. OMB had suggested that some low-risk auditees be allowed to perform audits on a triennial basis in the proposed changes, but no change was made due to opposition from federal agencies. (The Single Audit Act Amendments includes provisions exempting certain entities from the annual audit requirement.)
Auditor Selection. Organizations must follow the procurement standards in OMB Circular A-110, “Uniform Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations,” in arranging for audit services, as required under the current A-133 standard. The provisions of current paragraph 11 concerning small and minority audit firms have not been incorporated in §___.305 of the revised circular except by reference as these requirements are covered in A-110.
Beginning with the fiscal year ending on or after June 30, 1999, institutions that recovered more than $1 million in indirect costs during the prior year will not be allowed to engage the auditor who prepared the indirect cost proposal to perform the A-133 audit (§___.305(b)). According to OMB, this restriction is intended to eliminate the appearance of a conflict of interest because the auditor acts as an advocate of the institution when preparing the indirect cost proposal. The restriction applies to the base year used in preparation of the indirect cost proposal and any subsequent years in which it is used to recover costs. It does not apply to auditors who prepared the disclosure statements required by A-21, “Cost Principles for Educational Institutions,” however.
Schedule of Expenditures. New detail is provided in §___.310 on the contents of a schedule of expenditures of federal awards that the auditee must prepare for the period covered by its financial statements.
Audit Findings Follow-up. The audited institution must prepare a summary schedule of prior audit findings and a corrective action plan to be submitted as part of the audit report package. Detailed requirements for the summary schedule are included in §___.315(b). The institution may state that past audit findings are no longer valid or do not warrant further action and include its reasons on the schedule. A valid reason, according to §___.315(b)(4), is that two years have passed since the audit report was submitted, the federal agency or pass-through entity is not currently following up with the auditee on the finding, and a management decision was not issued.
Report Submission. Institutions are responsible for submitting the reporting package on the audit to the central clearinghouse designated by OMB (§___.320). The reporting package must include:
(1) the certification form (see below);
(2) the institution’s financial statements and the schedule of expenditures of federal awards;
(3) the summary schedule of prior audit findings;
(4) the auditor’s report; and
(5) the corrective action plan.
In addition to one copy of the reporting package which will be retained by the clearinghouse, the institution must submit enough copies for each federal awarding agency whose funds were related to audit findings or questioned costs identified in the audit or mentioned on the summary schedule of prior audit findings.
Subrecipients should submit a copy of the certification form directly to each pass-through entity, and a copy of the reporting package to any pass-through entity that provided funds related to audit findings or questioned costs.
The deadline for submission of audits and the reporting package to the central clearinghouse has been shortened from thirteen months to nine months (§___.320). Extensions may be granted in advance by the cognizant or oversight agency. If an extension is granted, the institution must promptly notify the clearinghouse and each pass-through entity (§___.300(e)). (The Single Audit Act Amendments allow a two-year grace period before the tighter deadline takes effect. It is not clear how this will impact the A-133 requirement, although statutory provisions generally override regulatory requirements.)
Certification. A new certification form, signed by the chief executive or financial officer of the institution, must be completed and submitted with the reporting package (§___.320). The form, which will be available from the clearinghouse, will certify that the audit was completed in accordance with A-133 requirements and include information about the institution, its federal programs, and the results of the audit.
Subpart D—Federal Agencies and Pass-Through Entities.
Cognizant Agency. Under the current A-133, OMB is responsible for assigning cognizant agencies to “larger” institutions. The revised circular stipulates that, for institutions expending more than $25 million a year in federal awards, the cognizant agency for audit will be the federal agency that provides the most direct funding to the institution, unless OMB makes a different assignment (§___.400). The determination will be made based on which agency supplied the predominant funding to the institution in every fifth year beginning with the fiscal year ending in 1995.
OMB acknowledges in the preamble that the criteria for determination of the cognizant agency in A-133 are not consistent with those in Circular A-21, and may result in an institution’s being assigned one agency as the cognizant agency for audits and another for indirect cost negotiations. OMB notes that the responsibilities of cognizant agencies in these situations are different, and states that the same agency does not need to be cognizant for both.
Audit Findings. To make audit reports more useful, auditors will be required to prepare a single schedule of findings and questioned costs that includes a summary of the auditor’s results and all audit findings (§___.505). Detail is provided in §___.510 on what should be included as audit findings and the specific information that must be reported. A $10,000 threshold is set for reporting known questioned costs for a type of compliance requirement for a major program. Known questioned costs must also be reported when the auditor determines that likely questioned costs are greater than $10,000.
Major Programs. A risk-based approach to determining which federal programs should be identified as major programs will be instituted under the revised A-133. A four-step process is delineated in §___.520 as follows:
Step 1. Designate programs as either Type A (larger) or Type B (smaller) based on total expenditures by the institution during the audit period. Thresholds vary by the size of the institution’s total federal expenditures.
Step 2. Identify low-risk Type A programs. Generally, a Type A program is low-risk if it has been audited as a major program in at least one of the two most recent audit periods and, in the most recent audit period, had no audit findings.
Step 3. Identify high-risk Type B programs. The auditor should use professional judgement and the criteria in §___.525 to evaluate risk. Only Type B programs that meet certain size thresholds need be evaluated.
Step 4. Audit as major programs at least: 1) all Type A programs, except low-risk programs which may be excluded; 2) at least one-half of the Type B programs identified as high-risk (but no more Type B programs are required than low-risk Type A programs); and 3) additional programs as necessary so that the programs audited as major programs encompass at least 50 percent of the institution’s total federal expenditures.
Low-Risk Auditees. For institutions that qualify as low-risk auditees, aggregate expenditures of programs audited as major programs need only represent 25 percent of total federal expenditures. Designation as low-risk is based on criteria in §___.530 pertaining to the outcomes of the institution’s last two audits.
For further information concerning the requirements of Circular A-133, institutions should contact their cognizant or oversight agency for audit or the awarding agency, as appropriate. The contact at NACUBO is Anne Gross, senior program manager, Public Policy and Management Programs. She can be reached at 202-861-2544 or by e-mail at firstname.lastname@example.org.
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