1

When the Auditor Comes KnockingWhat We’ve LearnedHow to Prepare

NASTID San Diego, CAFebruary 2014

Leigh M. Manasevit, Esq.

Brustein & Manasevit, PLLC

lmanasevit@bruman.com

2

Non-Compliance Findings – 4 Sources

1. OIG Audit

2. A-133 Audit

Monitoring

3.Federal

4.State

3

Preparation

Key to successful outcome Self assessment - critical

4

Self Assessment

Identify potential trouble spotsReview significant violations from other processes

Review prior findingsConduct self assessment

Review of 27 OIG Audit Reports

$1,398,564 unallowable personnel costs Employee compensation charged to grants in which the

employee did not work on$826,183 unallowable non-personnel costs

Unnecessary or unreasonable to carry out the grant or not-for-program purposes

$810,055 unallowable non-personnel costsContracts were: missing required elements; unfulfilled;

not approved; or included expenditures that exceeded the contract amounts

5

Review of 27 OIG Audit Reports (cont.)

$66,666,155 inadequately documented personnel costsTime and effort documentation (both semi-annual

certifications and PARs) were missing, incomplete, inaccurate, or untimely

$16,010,550 inadequately documented non-personnel costsMissing or inaccurate supporting documentation

$2,693,004 in lost or unaccounted for property Improper inventory control systems

$2,504,617 unallowable supplanting of Federal grant funds

6

Review of 27 OIG Audit Reports (cont.)

Pervasive non-compliance issuesInadequate policies and procedures (34 times)No policies and procedures (15 times)Not understanding the regulations and guidance

(10 times)Policies in place, but not followed (5 times)

7

Audit violations deemed “significant” by the U.S. Education Department

8

Significant Violations

1. Time Distribution

2. MOE

3. Supplement, not supplant

4. Unallowable Expenses

9

Significant Violations

5. Procurement Irregularity

6. Ineligible Students

7. Lack of Accountability for Equipment/Materials

10

Significant Violations

8. Lack of Appropriate Record Keeping

9. Record Retention Problems

10.Late or no Submission of Required Reports, Inaccuracies, Inconsistence

11.Audits of Subrecipient Unresolved11

Significant Violations

12.Lack of Subrecipient Monitoring

13.Drawdown before they 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

12

13

Significant Violations – Specific to Title I

Equitable ServicesParental Involvement (including

notices)Skipping SchoolsSchool Allocations

SASA Monitoring Guide http://www2.ed.gov/programs/sif/sigmontool2012.pdf

14

Evaluate Areas to be Examined

1. OIG Audit Notice of Audit: Correspondence

2. A-133 Audit Prior Audits (Findings)

15

Evaluate Areas to be Examined (cont.)

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

16

Remedy Problem Areas

AND / OR

Develop Corrective Actions (Plans)

17

Corrective Action Plan

Critical – in place at time of visit – even if implementation - FUTURE

Specific Measurable ObjectivesTimelinesClear Lines of Responsibility

18

Example – Time and Effort

LEA – Self assessmentNumerous employees paid from program they previously (no longer) work on

19

Example – Time and Effort (cont.)

Remedy and Corrective ActionChange payment sources to reflect current assignment

or Reassign employees back to prior program

ANDReimburse improperly charged program

20

Example – Time and Effort (cont.)

Corrective Action Plan - FUTUREReview all employees (federally paid) to assure alignment –

Correct the misalignmentsAssign specific individual/office responsibility for future reviews

In-service training

21

Example – Equitable Services

LEA self assessment

A. Private schools contract directly for Title II services

B. Consultation occurs late in the year

22

Example – Title I Equitable Services

A. Corrective Action - Contracting Review all programs providing

equitable services funds Review all contracting processes Immediately cease allowing

• Privates to contract • Notice to private schools – Re:

contracting process

23

Example – Title I Equitable Services (cont.)

In-service training for all program personnel involved

Assure all procurement for goods/services to private schools procured at LEA level

24

Example – Title I Equitable Services (cont.)

B. Corrective Action - Consultation Assure consultation will begin early

in the year Plan schedule for following year Assure clear lines of authority to

schedule/conduct consultation

25

Preparation for Visit

26

Logistics

Secure SpaceCopy Machine

27

Audit Records

Can the auditee refuse to provide the auditors with requested documents? GEPA 20 USC 1232(f) requires that ED and its

representatives (which arguably includes A-133 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”

EDGAR 80.26(b)(5) also indicates audit access to records without qualifiers. • If requested records are not provided, likely receive an audit limitation.

28

Communication with Staff

Formal (governmental) inquiryProvide any information within

personal knowledgeNo guessingNo speculation

No time to settle grudgesNo gossip

29

Identify Key Staff(Audit Committee)

Audit Manager:Key contact for all questions, interview arrangements, documents requests, logistical arrangements

Agency Leadership:Entrance, exit conference

30

Audit Manager - Role

Key contact for allQuestionsInterview arrangementsDocument requestsLogistical arrangements

31

Relevant Staff Interviews - Preparation

Assure staff are prepared for interview

Subject matter awarenessKey terms•Time and Effort•Necessary and Reasonable•Inventory

32

Relevant Staff Interviews - Preparation (cont.)

Familiarity with job descriptionFamiliarity with prior problem areas

Familiarity with likely areas of inquiry

33

The Visit

Entrance ConferenceLeadership•Set positive tone

Audit Manager•Review process/logistics

Auditors generally appreciate prior organization

34

The Visit

•Request all interview requests go through manager

•Arrange for copying•Keep extra copy of all docs supplied

35

The Visit

Request periodic updates•Especially problem areas

Do not wait for exit conference•(Up to auditors)

36

The Visit

Keep extra copy of all documents supplied!!!

Debrief staff after interviewsClear up misunderstandings

37

Exit Conference

Press for specificsIf issues:

Documents requested?•List and send

38

Exit Conference

Potential non compliance findings•Review carefully – •If confirmed

Develop corrective action proactively

39

Next Steps

OIG AuditPoint SheetsDraft Audit ReportFinal Audit Report

40

Next Steps

OIG AuditRespond carefully at each levelProblems always easier to resolve at earliest level

41

For example: Alabama Audit

Cash Management FindingsDraft Audit Report - October 2011

Alabama Response: Policies and procedures, internal controls

Final Audit Report – February 2012Alabama Response: Disagreed with some

findings, but addressed OIG concerns; acknowledged Federal requirements; implemented corrective actions.

42

For example: Alabama Audit

“With all these facts and circumstances, we find that the State has been willing to implement and to also require the prime recipients and subrecipients to implement corrective action that complies with the draw down, transfer, disbursement and maintenance of excess Federal grant funds and the internal control requirements applicable to Federal grant funds. Therefore, we do not request the State, prime recipients, or subrecipients to refund any of the Federal grant funds they have received . . . It is our determination that this finding is resolved.”

Program Determination Letter – May 2013

43

Audit Recommendations Ultimately Decided by USED

Audit Recommendations in state administered programs addressed to SEA

44

Next Steps

ED can: Accept finding as isAccept finding but•Reduce or eliminate liability

Reject findingLetter of final audit determination

•Establishes prima facie case• 34 CFR 81.34

45

Examples:

ED Require SEA to recover $X from LEA Y

ED Require SEA to require LEA YTo support salary expenditures

ED to impose high risk status on SEA X due to LEA Y extensive non compliance

46

Next Steps

AuditsLetter of final audit determinationAppeal

Office of Hearings and Appeals (ED)

47

Harm to the Federal Interest 34 CFR 81.32 and Appendix

“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 program…”

48

Harm – Always

Ineligible BeneficiariesExample: Title I, Part C funds for non migrant students

49

Harm – Always (cont.)

Unauthorized activitiesExample: Title II, Part A funds used to pay salary of regular Ed teacher (not CSR)

Example: Title I funds pay for attendance at a conference unrelated to teaching educationally disadvantaged students

50

Harm Always (cont.)

FiscalSet-aside•Example: LEA spends less than 100% of its Title I parental involvement

MOEComparabilitySupplanting

51

Possible:No Harm

LEA requires prior SEA approval for expenditure

LEA makes expenditure without approval

52

Possible:No Harm- Prior Approval (cont.)

No harm possible if –Action was not intentional violationAction was isolated – not a patternExpenditure would have been granted if sought

Expenditure allowable under the program

53

Possible:No Harm

LEA operates a schoolwide program

SW teachers must keep time and effort semi-annually

SW teachers fail to keep time and effort

LEA establishes by schedules

54

Possible:No Harm

Teacher affidavitsAttendance sheetsSupervisory affidavitsThat teachers taught in the schoolwide full-time

No harm finding possible although time and effort violation

55

Possible:No Harm

Caution: ED takes more limited view – may require litigation

56

ALJ Decisions - Reconstruction

Application of the New York State Department of Education (April 21, 1995)After-the-fact affidavits and other

pertinent documentation are admissible as evidence.

Consolidated Appeals of the Florida Department of Education (June 26, 1990)Accepted affidavits completed by

supervisors years later as credible and useful evidence.

57

Equitable Offset

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

58

Statute of Limitations

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.

59

Monitoring Findings

Opportunity to respond GenerallyNo Liability

60

Questions???

61

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 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 does not create an attorney-client relationship with Brustein & Manasevit.  You should not take any action based upon any information in this presentation without first consulting legal counsel familiar with your particular circumstances.