The New "Super-Circular" - What You Need to Know Now

By: Eric Berman

At the end of December, the White House Office of Management and Budget (OMB) and the United States Chief Financial Officers Council - Council on Financial Assistance Reform (COFAR) announced seemingly sweeping reforms of federal grant operations.

The goal of the reform is to streamline and improve administration of federal grant operations from application to 'close-out,' modernize and improve cost accounting and focus the single audit to where there is the most need for improvement.

The reforms are being implemented throughout 2014, initially by federal agencies which must publish procedural guidance no later than December 26, 2014. Audits will be affected by the reforms for years beginning on or after December 26, 2014. That means for a December 31st entity, the first audit period that the reforms will be effective will be as of January 1, 2015 through December 31, 2015. For a June 30th fiscal year end, the audit period will be from July 1, 2015 through June 30, 2016.

Administration of Federal Grants 

Some of the initial policies and regulatory guidance provided by federal agencies will likely be in conflict of interest policies. When applying for a federal grant, state and local governments, non-profit entities and government contractors will have new disclosure with regard to all violations of federal law, including fraud, bribery and gratuity violations potentially affecting a federal award.

A new type of federal award is established by the reforms entitled "fixed amount awards." These fixed amount grants will have accountability provisions established in the award language. The accountability will consist of performance milestones and results that must be reported to the federal agencies. Any changes in the project funded by a fixed award will require further approval from the federal agency.

For the majority of grants - competitive grants - federal agencies will be required to post notices of all grant opportunities on http://www.grants.gov. Thus, much of the political influence on competitive grants may be removed. Grant opportunities must be publicized for a minimum of 60 days unless determined by a federal agency head to be of such a need that only a 30-day exposure is necessary.

Applying for a new grant will be streamlined as the federal government will move toward a uniform application similar to applying for admission to a college or university. The review of the application will also be streamlined and more transparent, taking into account audit risk. This review process is already in place for research and development grants and now will be in place for all competitive grants. The potential recipient may have to show that they are financially stable, have quality accounting and financial reporting systems and have had strong performance with federal money in the past, as well as other factors. Therefore, if an entity has a number of audit findings related to the administration of a grant being applied for, the findings will be a negative in receiving future grants.

Direct and indirect recipients of federal funds must comply with grant award provisions and will remain subject to testing for effective internal controls. Direct recipients of grants will still be responsible for monitoring sub-recipients.

Cost Accounting Provisions

Cost Accounting and cost recovery (also known as federal participation or receipt of federal funds) provisions are also being streamlined. Property and equipment purchased from a federal award will now have a $5,000 threshold to require depreciation. Therefore, most personal computers and similar technology that is used as part of a federal program may likely be expensed starting on January 1, 2015. However, the recipient must have a consistent policy of capitalization. Shared services, strategic sourcing and non-competitive micro-purchasing (e.g. p-cards) are encouraged in the new provisions.

Other provisions are changing with regard to indirect rate setting and cost recovery. Starting on December 26, 2014, negotiated rates must be accepted by all federal agencies unless exempted by statute. For example, a rate negotiated with the U.S. Department of Health and Human Services must also be accepted by the Department of Justice.

There is also a relaxing of certain policies. For example, providers of required training for the administration of federal awards must make available 'family friendly' provisions, including child care services. There are provisions to allow for pilot tests of relaxed time and attendance recording to prove maintenance of effort. The costs of an audit even for a non-federal entity will now be allowable as long as the costs are included in an indirect cost pool. Fringe benefits will now be allowable costs on a GAAP basis, rather than a cash basis. This will be very important as entities implement the new defined benefit pension standards as well as the forthcoming changes to the defined benefit health care standards.

Finally, indirect rates for new grantees will receive a 10% overhead rate. The 10% rate may continue indefinitely. This will be a great enhancement for many small recipients that need to fund administrative costs. For grantees with negotiated rates, the current rate may continue for four years (until December 26, 2018 or as directed in the grant award.) However, any future negotiation will require more paperwork to substantiate the rate. 

Audit Provisions

The greatest focus of the "super-circular" changes has been to the audit provisions. First and foremost, the threshold for a single audit will rise to $750,000 in federal expenditures in any year. The OMB estimates that 5,000 entities nationwide, out of 45,000 current single audits, may no longer be subjected to a federal single audit upon implementation. The major program and risk assessment determination will also change slightly.

Also of great importance, starting in 2014, audit submissions of financial reports attached to the data collection form must be a text-based Adobe portable document file (PDF) that is unlocked and unencrypted. Personally identifiable information must not be included in the submission. Tribal governments, however, have certain exemptions to this rule with regard to confidential business information. Auditees will now be subject to the cooperative audit resolution process with federal agencies. Federal agencies will engage auditees to remediate findings on a more streamlined basis and to reduce questioned costs. The questioned cost reporting threshold will also rise from the current $10,000 to $25,000.

Next Steps  

• When you are applying for a federal grant, make sure your entity is aware of the administrative responsibilities for compliance. This includes maintaining records, bank accounts and other provisions of the grant detailed in the grant application.
• Develop the skills and knowledge necessary for operating and reporting in accordance with the award. Ensure that your personnel have the proper training to comply with the federal award provisions.
• If your entity is passing federal funds to another entity, the federal award provisions must also be adhered to by the recipient entity. Sub-recipient monitoring procedures will need to be enhanced to give assurance that the federal award provisions are complied with by all sub-recipients.
• Make sure that costs are charged to federal awards in accordance with the new provisions. Some formerly unallowable costs have been reformed while others are no longer allowable. Changes will need to be understood by program management.
• There will be further changes detailed within the forthcoming Compliance Supplement. The auditing of federal awards may focus more on fraud, waste and abuse rather than the traditional so-called cross-cutters. These changes will be released during the spring of 2014 and implemented during 2015 audits.

If you have questions or would like to learn more, please contact Eric Berman.