The Uniform Grant Guidance (2 CFR 200), released in December 2013, replaced several Office of Management and Budget (OMB) administrative, cost and audit circulars, and as a result, it changed the way many not-for-profit organizations and universities administered their grants.
New awards and funding increments to existing awards to which the federal agency modified the terms and conditions received after December 26, 2014, must follow the administrative requirements and cost principles under Uniform Grant Guidance (UGG). The new Single Audit requirements are effective for fiscal years beginning after December 26, 2014. For most not-for-profit organizations, that means the first time they will be subject to the new Single Audit requirements will be for their upcoming June 30, 2016 year-end.
As not-for-profit organizations prepare for the first Single Audit under UGG, they should look over these and other lessons we learned in year one of UGG.
Lesson 1: Internal Controls Changes Present Opportunities for Revising Risk Management Approach
UGG requires entities to demonstrate effective internal controls over their federal awards. It recommends following one of two previously established internal controls frameworks: the Standards for Internal Control in the Federal Government (Green Book) issued by the Comptroller General of the United States, or the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Most organizations are finding that the internal controls requirement does not significantly alter their approach to oversight, but the changes have presented the opportunity for improvements in the effectiveness and efficiency of their internal controls approach. It is recommended that the parties who will be involved in the administration of federal awards review the current system of internal controls to assess how well the current system is operating. The reviews can include members of the controller’s office, internal audit, human resources and individuals that oversee the programs funded by the federal grants. Together, the group can identify how policies and procedures can be strengthened and how the organization can educate its key personnel about the importance oversight plays in the organization’s risk management.
Lesson 2: Meeting Procurement Standards Requires Significant Resources
Procurement standards in UGG mirrors the language previously used in the OMB Circular A-102 (Grants and Cooperative Agreements with State and Local Governments). Therefore, organizations that did not previously follow this circular face different procurement standards than what they had been using. Purchases of materials and services that cost less than $3,000 (assessed for each individual purchase or service) are now considered micro-purchases and have certain requirements to be met at this acquisition level. Transactions that range from $3,000 to $150,000 are considered small purchases. For small purchases, organizations must solicit an “adequate” number of quotes, which generally means more than one quote.
Universities are especially hard hit by the change because many had classified micro-purchases as transactions less than $10,000. Micro-purchases have an advantage over other types of procurement because they can be made without conducting a competitive bid process. Changing the threshold means that universities and other not-for-profit organizations with higher thresholds will now have to solicit bids for items that previously did not have bid requirements.
Preparing to comply with UGG procurement standards is requiring many not-for-profits to modify policies, redesign purchasing systems, train personnel and bring in additional administrative support.
The OMB has recognized the challenge of the new procurement standards and granted an extension for organizations to prepare to meet the compliance requirements. Federal grant recipients will have two full fiscal years after the effective date of UGG’s administrative requirements to comply with the procurement standard. For example, the second full fiscal year for an organization with a June 30 year end would be the year ending June 30, 2017. During the first year of the extension (i.e. June 30, 2016), organizations will have to document whether they are in compliance with the new or the former standard and demonstrate that they meet that standard. For fiscal years ending June 30, 2018 and thereafter, organizations will have to comply with the new standard.
Not-for-profits and universities have voiced concern that an extension isn’t enough. Several have requested to increase the micro-purchase threshold. In the absence of changes from the OMB, however, organizations should continue to work on bringing their policies up-to-date with UGG.
Lesson 3: Subawards Require More Pre- and Post-Award Oversight
Another change that has added additional oversight for not-for-profits is the new standards for subrecipient monitoring. UGG requires organizations to conduct pre- and post-award assessments for subrecipients of federal awards. The pre-assessment includes prior award experience, prior audit experience, subrecipient staffing and systems and the extent of monitoring that will be involved. Organizations also have to perform specific post-award monitoring procedures that include reviewing financial performance reports, verifying single audit compliance and reviewing findings and corrective actions. The previous requirements were vague about what level of oversight and monitoring was necessary. Although most organizations were performing the now required pre- and post-award monitoring requirements, the fact that these are mandatory procedures requires organizations to have policies and procedures in place and ensure employees responsible for subrecipient monitoring are properly trained in these specific requirements. Also, many organizations did not have this monitoring documented, which we would recommend.
To address the requirements, many organizations have had to create standard processes, risk assessments and other templates to help with pre-award vetting. Organizations should also continue to educate subrecipients about their new processes and UGG requirements so they understand how the UGG affects the subaward process.
Lesson 4: Internal Controls Over Compensation are Key
UGG’s documentation requirements for time and effort reporting are less prescriptive than in previous OMB Circulars and place more emphasis on having internal controls over the compensation process. Organizations must consider four standards for personnel expenses, which are more principles-based than rules-based criteria:
- It is based on records that accurately reflect the work performed;
- It is supported by a system of internal control;
- It is incorporated into official records; and
- It reasonably reflects the total activity for which the employee is compensated.
Because the guidance is less specific, organizations have found it challenging to evaluate whether their current procedures and controls are adequate under the new, more relaxed, standards.
Some organizations have made no changes to their processes and controls because they were deemed adequate under the former, more rigorous, standards. Others have moved to assessing compensation charges to programs on an overall cost certification basis, which has project managers certifying and approving all costs charged to their program, not just those related to payroll.
Use Your Resources
Reaching out to other organizations to discuss how they have approached the key issues under UGG can provide a good basis for how your organization should adjust its current policies and procedures. Advisors experienced with the UGG can also assist.
To learn more about the changes and the Single Audit, please contact us. For additional UGG resources, please see below:
- Federal OMB Grant Rules Overhauled
- OMB Makes Sweeping Changes to A-133 Audit Requirements
- OMB Grant Reform Standardizes Cost Principles
- Implementing the Uniform Grant Guidance
- Preparing for Subpart F of the Uniform Grant Guidance
Michelle Spriggs is a Shareholder in the Not-For-Profit & Education Practice. She can be reached at 774.206.8336 or MSpriggs@cbiztofias.com.
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