The U.S. Office of Management and Budget (OMB) released the new “Super Circular” in December 2013. The Super Circular consolidates and streamlines eight Federal regulations including OMB Circulars A-110, A-122 and A-133 into a single guide. The OMB’s and the Council of Financial Assistance Reform’s (COFAR) focus was to:
- Eliminate duplicative and conflicting guidance
- Focus on performance over compliance accountability
- Encourage efficient use of information technology
- Provide for consistent and transparent treatment of costs
- Strengthen oversight
- Reduce waste, fraud and abuse
The Super Circular (codified at 2 CFR Part 200) is made up of three parts: changes to administrative requirements, changes to cost principles and single audit requirements. The guidance applies to state and local governments, institutes of higher education, Not-for-Profit organizations and subrecipients who receive federal awards directly or through pass-through agencies. The guidance is effective for all federal awards issued after December 26, 2014. Single audit changes are effective for fiscal years beginning after December 26, 2014.
The goal is to reduce the administrative burden for those receiving federal awards and focus on the operation of the federal programs by minimizing time spent complying with unnecessary administrative requirements and focusing more on performance outcomes. Internal control guidance was added to the administrative requirements with specific direction on compliance with the internal controls systems. Organizations must now establish and maintain effective internal controls over federal awards and evaluate and monitor compliance with the federal awards. It is no longer sufficient to say that controls are in place and that they are being monitored. Organizations will need to formalize policies and procedures, comply with these procedures and monitor these controls by effectively documenting the monitoring process. The guidance on subrecipient monitoring did not change, rather the monitoring requirements and the documentation of the subrecipients vs. contractors (previously vendors) determination is now a “must”. It is highly recommended organizations document their conclusions on contractor or subrecipient status. Subrecipient monitoring also must be documented and individual subrecipient’s risk evaluated and documented in order to access how much monitoring is necessary for a given subrecipient. Revisions to the procurement process were also expanded. The major changes include records must be maintained for all procurements, guidance on the use of noncompetitive procurements, five different methods for procurement procedures and contracting with small and minority businesses.
The OMB converged the language of the cost principles from the previous circulars, but the principles were not necessarily changed. Emphasis is again placed on the internal control system for assurance that costs are accurate, allowable and properly allocated. Changes to indirect cost rules were also made with a focus to ensure adequate indirect cost recovery. The new guidance expands on negotiated indirect cost rates, the requirement for federal agencies to accept negotiated rates, the provisions for the election to use the 10% de minimis cost rate for those who have not had a negotiated indirect cost rate, discussion that agencies may apply for a negotiated rate at any time and that existing rates may be extended for up to four years. The Super Circular also discusses guidance on other costs. It reiterates focus on internal controls in place to ensure that charges to federal awards for salaries and wages are based on records that accurately reflect the work performed. Also, it touches upon budgets and the internal controls in place to ensure amounts charged to federal awards are proper.
Single audit changes
The audit requirement threshold was raised from $500,000 to $750,000 in federal expenditures during the fiscal year. The objective is to focus government’s attention where it is most needed to prevent waste, fraud and abuse. This is a significant change for smaller not-for-profits that receive only small amounts of federal funding. This would significantly reduce costs for these entities. OMB estimates there will be approximately 5,000 fewer single audits as a result of the higher threshold. Though the coverage of funds audited will decrease from 99% coverage of funds audited to 87% under the new Super Circular. The low risk auditee coverage will also change. Currently, the low risk coverage requirement of federal programs to be tested is 25%. This will change to 20%. Also, the coverage requirement for a non-low risk auditee will change from 50% coverage to 40%. The type A program threshold was also raised from $300,000 to $750,000 for entities with less than $25 million in federal funding. The questioned costs threshold for reporting was changed from $10,000 to $25,000 of known and likely questioned costs. Agencies are no longer required to identify more high risk Type B programs than at least 25% of low risk A programs. The B floor also changed to 25% of Type A threshold. Under the reporting of prior year findings, any repeat findings are required to be identified as such, along with the prior finding reference number.
What do all these changes mean to your organization? Recipients of federal awards will have to understand and implement the new Super Circular. Though the single audit requirements don’t take effect until fiscal years beginning in 2015, many of the changes will have to be implemented and documented internally by the agencies before they take effect. Understanding the implementation dates will be critical. We recommend that you be proactive and begin the process of implementing and documenting internal control processes, as well as other steps necessary to be in compliance with the new Super Circular guidance.
[authorblurb name=”Monica Barcelo” image=”8649″ url=”/about/leadership-team/monica-barcelo/” text=”is a Senior Manager for BeachFleischman’s business services practice. She has over 19 years of experience in public and private accounting.”]