How to Prepare for a Federal Audit or
Monitoring Visit
Bonnie Graham, Esq.
[email protected]
Steven Spillan, Esq.
[email protected]
Brustein & Manasevit, PLLC
Fall Forum 2014
• Texas School District Security Manager
embezzled over $2.5 million by filing false
invoices over a 5-year period
• Wisconsin School District employee created
bogus purchase orders to use district funds
for vacations and household items over a 13year period
• New York SES providers falsified student
attendance records and submitted claims for
reimbursement for tutoring services they did
not provide
Brustein & Manasevit, PLLC
Ripped from the Headlines
2
Ohio Department of Education’s Administration
of RTT
• Finding 1: Improve Accuracy of Reported
Performance data
• Reported meeting target for 2011-2012, but
included info after June 30, 2012
• Reported meeting target but did not have any
supporting documentation
• E.g., 76% of LEAs/charters offered new teacher
program; ODE reported 100% - assumed
remaining 24% did not have new teachers
Brustein & Manasevit, PLLC
Recent Audits
3
Ohio Department of Education’s
Administration of RTT
• Finding 2: Did Not Ensure LEAs Complied with
Federal Fiscal Requirements
• Maintenance of excess cash
• Funds used for unallowable activities
• Unused tablets reassigned to non-RTT use
• Salaries not benefiting RTT program
• Shirts, gift cards, other promo items
• Costs not adequately documented
• Allocation of costs to incorrect grants
Brustein & Manasevit, PLLC
Recent Audits
4
Recent Audits
Brustein & Manasevit, PLLC
Los Angeles Unified School District Internal
Controls over Nonpayroll Purchases
• No findings!!!
5
“When we had concerns regarding specific
purchases under the four cost types, we
asked for more information from LAUSD
officials and obtained reasonable
responses.”
Brustein & Manasevit, PLLC
Recent Audits
6
Audit
1. OIG Audit
2. A-133 Audit
Monitoring
3.Federal
4.State
Brustein & Manasevit, PLLC
Non-Compliance Findings
7
• Required – 200.328
Brustein & Manasevit, PLLC
•Preparation is key to successful
outcome
•Self assessment – critical
8
• Identify potential trouble spots
• Review significant violations
from other processes
• Review prior findings
• Conduct self assessment
Brustein & Manasevit, PLLC
Self Assessment
9
Brustein & Manasevit, PLLC
Audit violations deemed
“significant” by the U.S.
Department of Education
10
10.Late or No Submission of
Required Reports,
Inaccuracies, Inconsistence
11.Audits of Subrecipient
Unresolved
12.Lack of Subrecipient
Monitoring
13.Drawdown before funds
are needed or more than
90 days after the end of
funding period
14.Large Carryover Balances
15.Lack of valid, reliable or
complete performance
data
Brustein & Manasevit, PLLC
1. Time Distribution
2. MOE
3. Supplement Not
Supplant
4. Unallowable Expenses
5. Procurement
Irregularity
6. Ineligible Students
7. Lack of Accountability
for
Equipment/Materials
8. Lack of Appropriate
Record Keeping
9. Record Retention
Problems
11
1. OIG Audit
• Notice of Audit: Correspondence
2. A-133 Audit
• Prior Audits (Findings)
• A-133 Compliance Supplement
Brustein & Manasevit, PLLC
Evaluate Areas to be Examined
12
3. 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
Evaluate Areas to be Examined
(cont.)
13
[T]he independent public accountant determined that
LAUSD staff had erroneously charged more than $84,000 to
the Federal Teacher Incentive Fund grant ... LAUSD reported
to the independent public accountant that it implemented
monitoring and review procedures, including a monthly
tracking system for the program expenditures, biweekly
budget meetings, and a review process for budget reports.
Although we did not verify that the corrective actions were
implemented, the actions should improve controls over the
Federal Teacher Incentive Fund grant program expenditures
and help ensure that errors of this type do not occur in the
future.
Brustein & Manasevit, PLLC
Remedy Problem Areas or Develop
Corrective Action Plan
14
Critical – have in place at time of
visit, even if implementation will
be in the future
• Specific Measurable Objectives
• Timelines
• Clear Lines of Responsibility
Brustein & Manasevit, PLLC
Corrective Action Plan
15
•Secure Space
•Copy Machine
Brustein & Manasevit, PLLC
Logistics
16
Audit Records
• GEPA 20 USC 1232(f) requires that ED and
its representatives (which arguably includes
single 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”
• UGG 200.336 also provides audit access to
records without qualifiers.
• If requested records are not provided, likely
receive an audit limitation.
Brustein & Manasevit, PLLC
• Can the auditee refuse to provide the
auditors with requested documents?
17
• Formal (governmental) inquiry
• Provide any information within
personal knowledge
• No guessing
• No speculation
• No time to settle grudges
• No gossip
Brustein & Manasevit, PLLC
Communication with Staff
18
Identify Key Staff
(Audit Committee)
• Key contact for all questions, interview
arrangements, documents requests,
logistical arrangements
• Agency Leadership:
• Entrance, exit conference
Brustein & Manasevit, PLLC
• Audit Manager:
19
Identify Key Staff
(Audit Committee)
• 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
• Relevant Staff:
20
• 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
The Visit
21
•Keep extra copy of all
documents supplied!!!
• Debrief staff after interviews
• Clear up misunderstandings
Brustein & Manasevit, PLLC
The Visit
22
• Press for specifics
• If issues:
• Documents requested?
• List and send
•Potential noncompliance findings
• Review carefully
• If confirmed, develop corrective
actions proactively
Brustein & Manasevit, PLLC
Exit Conference
23
• OIG Audit, Single 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
Next Steps
24
• ED can:
• Accept finding as is
• Accept finding but reduce or
eliminate liability
• Reject finding
• Letter of final audit determination
Brustein & Manasevit, PLLC
Next Steps
• Establishes prima facie case
• 34 CFR 81.34
25
For example: California Audit
Cash Management Findings
• Noted significant concerns regarding calculation of interest
and high cash balances
• Identified $1.5 million in unremitted interest from FY 2004
through 2007 due to netting
• CDE Cash Management Audit: March 2009
•
•
•
•
No agency-wide cash management system
Nonexistent or inadequate cash management procedures
Internal processes caused significant delays in disbursement
Cash management requirements not met
Brustein & Manasevit, PLLC
• LAUSD Cash Management Audit: Dec 2008
26
For example: California Audit
•
•
•
•
•
•
Established cash management task force
Developed policies and procedures
Implemented pilot project using web-based reporting system
System reviewed by state auditor
Worked with RMS and OIG to develop guidance
Added cash management to fiscal monitoring
Brustein & Manasevit, PLLC
CDE Response
Program Determination Letter – July 2014
• Sustained findings, accepted corrective actions
• Interest liability paid for 2011, 2012, and 2013
• No recovery for 2005-2008 due to statute of limitations
27
• 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
Review by ED
28
Review by ED
Brustein & Manasevit, PLLC
• ALJ Decision
• Appeal to Secretary
29
Brustein & Manasevit, PLLC
AUDIT DEFENSE AND RESOLUTION
30
• Harm to the Federal interest
• Equitable offset
• Statute of limitations
Brustein & Manasevit, PLLC
Common Defenses
31
• “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
Harm to the Federal Interest
34 CFR 81.32 and Appendix
32
• 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
Harm – Always
33
Harm - Always (cont.)
• Set-aside
• Example: SEA spends more than 10% on
Perkins state leadership
• MOE
• Comparability
• Supplanting
• Excess cost
• Matching
Brustein & Manasevit, PLLC
• Fiscal
34
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
Possible No Harm
35
ALJ Decisions - Reconstruction
• 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
• Application of the New York State Department of
Education, No. 90-70-R (April 21, 1994)
36
Reconstruction (cont.)
• ODE Audit: OIG did not accept affidavits from Ohio
staff as adequate support for reported
performance data on RTT objectives
Brustein & Manasevit, PLLC
• Reconstruction sufficient for performance
documentation?
37
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
Equitable Offset
38
Equitable Offset (cont.)
Pennsylvania Decision: New Test (??):
a) Acted in good faith and in a manner consistent with its
responsibilities as a fiduciary of Federal funds, and
b) Did not act in a grossly negligent or intentionally
improper manner, nor with deliberate disregard for the
regulations and statutes.
(2) The expenditures proposed as offset:
a) Support legislative goals and programmatic purposes of
original grant, and
b) Fulfill the technical requirements of the grant.
Brustein & Manasevit, PLLC
(1) The grantee:
39
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.
• Appeal of the State of Michigan, Docket No. 8(272)88, 6 (September 14,
1989)
Brustein & Manasevit, PLLC
Statute of Limitations
40
• CAROI
• Compromise
• Settlement
• Litigation
Brustein & Manasevit, PLLC
Resolution Strategies
41
• Opportunity to Respond
• Generally, Corrective Actions
• No Liability
Brustein & Manasevit, PLLC
Monitoring Findings
42
Changes Under Uniform Grant
Guidance?
• 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
• 200.513: The Federal awarding agency
must use cooperative audit resolution to
improve federal program outcomes
43
• 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
Uniform Grant Guidance
Changes
44
Uniform Grant Guidance
Changes
•
•
•
•
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
• Possible Elimination of 7 Compliance
Requirements:
45
Brustein & Manasevit, PLLC
46
Questions??
.
This presentation is intended solely to provide general
information and does not constitute legal advice or a legal
service. This presentation does not create a client-lawyer
relationship with Brustein & Manasevit, PLLC and,
therefore, carries none of the protections under the D.C.
Rules of Professional Conduct. Attendance at this
presentation, a later review of any printed or electronic
materials, or any follow-up questions or communications
arising out of this presentation with any attorney at
Brustein & Manasevit, PLLC does not create an attorneyclient 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
Disclaimer
47