Audit and Accounting System
Requirements
Department of Health & Human Services
National Institutes of Health / OD / OALM / OAMP
Division of Financial Advisory Services
Hruta Virkar, CPA
Chief – Special Reviews Branch
16th Annual NIH SBIR/STTR Conference
Presentation Objectives
• Understand the audit requirements of
for-profit organizations
• Understand the requirements of an
adequate accounting system
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Roles and Responsibilities
Grants Management Officer (GMO) – responsible for the business
management of the grant, including review, negotiation, award
administration, and interpretation of policies and provisions.
Program Official – answers your scientific questions and discusses
funding alternatives.
Principal Investigator (PI) – is accountable for the research and takes
direct responsibility for completion of the funded project, directing the
research and reporting directly to the funding agency.
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Roles and Responsibilities
– Cont.
Grants Management Specialist (GMS) –
evaluates grant applications for administrative
content and compliance with statutes,
regulations and guidelines, and negotiates grant
awards.
Grantee Organization – is legally responsible for
the proper conduct and execution of the project
and provides fiscal management of the project.
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Audit? Who said anything
about having an audit?
The Department of Health and Human Services (HHS)
did!
HHS specifies requirements for audits of for-profit
organizations in Title 45 CFR Part 74.26 (d)
http://www.ecfr.gov/cgi-bin/textidx?SID=51fce90de204d8ce7c9c64aae71f1e9f&tpl=/ecf
rbrowse/Title45/45cfr74_main_02.tpl
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Audit Requirements
A for-profit organization is required to have an
audit if:
• it expended $500,000 or more under HHS
awards in its Fiscal Year
AND
• at least one of the awards is an HHS grant
WAIT – Haven't the requirements changed?
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Audit Requirements –
Cont.
• Title 45 CFR Part 74.26 provides for-profit
organizations with two options regarding the type of
audit that will satisfy the audit requirements either:
- a financial related audit of the HHS awards in
accordance with Generally Accepted
Government Auditing Standards (GAGAS),
OR
- an audit that meets the requirements
contained in OMB Circular No. A-133
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Audit Requirements –
Cont.
• The audit period is the awardee’s Fiscal Year – not the grant
budget period, the grant project period or the Government’s
Fiscal Year.
• Audits must be completed and submitted within:
 30 days after receipt of the auditor’s report
OR
 9 months after the end of the audit period
Whichever is earlier
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Audit Requirements –
Cont.
A for-profit organization is subject to audit requirements for a
non-Federal audit if, during its Fiscal Year, it expended
$500,000 or more under HHS awards and at least one award
is an HHS grant or sub grant. Therefore, the organization must
have one grant or sub grant in order to be required to obtain
a non-Federal audit, but other HHS awards are included in
the threshold calculations and the scope of the audit.
Your grant-related records must be available to NIH officials
for review or audit even if the above audit requirements are
not met.
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The Audit Process
 The audit is typically conducted by an independent CPA firm, and tends to
be more extensive and scrutinizing than a traditional audit of your financial
statements.
 In addition to examining your financial statements and controls for evidence
of general GAGAS (Yellow Book) compliance, an A-133 audit delves into
specific issues related to the control of funds provided by the Federal
government. These issues include:
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Proper classification and documentation of allowable and unallowable costs
Cash Management
Period of availability of Federal funds
Reporting
Procurement and Suspension and Debarment
Internal Controls
Compliance with laws, regulations, contracts and grant agreements
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The Audit Process – Cont.
 Audit reports of for-profit organizations should be submitted directly to:
Department of Health and Human Services
Office of Inspector General
Office of Audit Services
National External Audit Review Center (NEARC)
1100 Walnut Street, Suite 850
Kansas City, MO 64106-2197
Phone: 800-732-0679 or 816-426-7725
 HHS identifies organizations not meeting audit requirements. Failure to comply may
jeopardize eligibility to receive future HHS awards.
 For more information about audit requirements, see the information posted at the NIH
Division of Financial Advisory Services website, Non-Federal Audit Requirements for
Commercial (For-Profit) Organizations http://oamp.od.nih.gov/dfas/faq/for-profitaudits
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The Audit Process – Cont.
What happens once the audit report is submitted to NEARC?
 The National External Audit Review Center will process the
audit report – checking for adequacy and identifying audit
findings.
 NEARC will code each finding for tracking purposes. The
Transmittal Letter identifying each coded finding is sent to the
auditee. The auditee has 30 days to respond to the
Transmittal Letter. A copy of the Transmittal Letter and the
audit report is also sent to the respective awarding
components.
 The Special Reviews Branch of DFAS is responsible for
resolving findings coded by NEARC relating to NIH awards.
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Why is an Audit
Important?
 Federal agencies look at the audit report as a “report
card” of how the organization spends its money
 The organization is responsible for ensuring that the
reported expenditures are compliant with the terms and
conditions of the award and applicable Federal cost
principles.
 It strengthens the relationship of trust that exists
between the Federal agency and the recipient
organization.
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Selecting an Auditor
 There are many external audit (CPA) firms in the market, but the
question is “which one will you choose?”
 For small business owners, here are some important tips for
choosing an external auditor or audit firm:
- Professional license requirements to perform an audit;
- Auditor’s independence;
- Audit reputation and track record;
- Qualifications of the audit firm and the audit team;
- The right auditor for your business type and size; and
- The audit fee.
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Selecting an Auditor – Cont.
 Resources for finding external auditors/CPA firms:
- State Accountancy Boards
- Government Audit Quality Center
(http://www.aicpa.org/INTERESTAREAS/GOVERNMENTA
LAUDITQUALITY/RESOURCES/AUDITEERESOURCECE
NTER/Pages/AuditeeResourceCenter.aspx)
- Your state's website for the society of CPAs
Do not choose a CPA by pricing alone. CPAs with low pricing may have limited
experience in your industry and may not be up-to-date on audit requirements
relevant to your business and the Federal government.
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Types of Audit Findings
 Misuse of funds
 Untimely submission of audit reports
 Unallowable costs
 Misallocation of costs
 Accelerated expenditures
 Large unobligated balances
 Cost transfers
 Conflict of interest
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Common Contributors
to Audit Findings
 Inadequate resources
 Lack of understanding of roles and
responsibilities
 Outdated or non-existent policies and procedures
 Inadequate staff training and education
 Inadequate accounting system
 Inadequate time and attendance system
 Inadequate segregation of duties
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Accounting System
Fundamentals
 Grantees need adequate accounting systems to ensure
that grants are used for intended purposes and in
accordance with regulations.
 An adequate accounting system enables NIH to decide
whether to award the grant, and whether conditions
should be added.
 An adequate accounting system provides the Federal
agency with confidence that grantees have, or will have,
adequate internal controls to ensure accountability for all
funds, property, and other assets.
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Accounting System
 Issues that you must address before receiving an award:
– Project cost accounting system
Your accounting system must be able to accumulate and segregate
costs by project, i.e. the system must identify receipts and
expenditures for each grant.
– Segregation of direct and indirect costs
A review of your Chart of Accounts should demonstrate that
Direct and indirect costs are segregated; and
Unallowable costs have been separately identified.
– Adequate timekeeping system
All timesheets must
Have a labor distribution system for ALL employees; and
- Account for total hours (direct, indirect and paid absences).
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Accounting System
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Accounting System
Sample Chart of Accounts
Account Category
Current Assets
Account Code
Account Title
1000
1020
1040
1060
Cash
Accounts Receivables
Inventory - Work in Progress
Prepayments
1100
1101
1110
1111
1200
1201
Equipment - Lab
Accumulated Depreciation - Lab Equipment
Equipment - Office
Accum. Depre. - Office Equipment
Leasehold Improvements
Accum. Depre. - Leasehold Improvements
1800
Deposits
2000
2010
2030
Current Notes Payable
Accounts Payable
Accrued Wages and Payroll Taxes Withheld
2100
Notes Payable
3000
3001
Common Stock
Retained Earnings
4000
4010
4020
Commercial Sales
Grant Revenue
Interest Income
5000
5100
5200
5300
5400
5500
5600
Direct Labor
Consultants
Equipment
Materials and Supplies
Travel
Other / Miscellaneous
Consortium / Contractual
Property, Plant & Equip.
Other Assets
Current Liabilities
Long Term Liabilities
Equity
Revenue
Direct Program Costs
Sample Chart of Accounts
Account Category
Account Code
Fringe Benefit Costs
6010
6015
6020
6025
6030
6035
Indirect Costs
7000
7110
7120
7130
7140
7150
7160
7170
7180
7190
7200
7210
7220
7230
7240
7250
7260
7270
7280
7290
7300
7310
Unallowable Costs
9000
9010
9015
Account Title
Vacations
Holidays
Sick Leave
Payroll Taxes
401(k) Plan
Group Insurance
Indirect Labor
Amortization - Leasehold Improvements
Depreciation - Lab Equipment
Depreciation - Office Equipment
Rent
Utilities
Telephone
Equipment Rental
Expendable Equipment
Repair & Maintenance
General lab Supplies
Office Supplies
Travel
Consultants
Waste Disposal
Training
Legal & Accounting
Liability Insurance
Licenses
Dues & Subscriptions
Postage
Recruitment/Relocation
Interest Expense
Contributions
Exhibits
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Accounting System
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Accounting System
Timekeeping – exceeding standard hours:
A salaried employee that works a standard 40 hour week earns $10
per hour, or $400 per week (40 hrs. x $10/hr). Suppose that
employee works 50 hrs. in any given week as follows:
 NIH Grant = 40 hours
 Other – non-Federal (IR&D) = 10 hours
Q1: How many hours should be recorded on the
timesheet?
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Accounting System
Timekeeping – exceeding standard hours:
A salaried employee that works a standard 40 hour week earns $10
per hour, or $400 per week (40 hrs. x $10/hr). Suppose that
employee works 50 hrs. in any given week as follows:
 NIH Grant = 40 hours
 Other – non-Federal (IR&D) = 10 hours
Q2: How much salary should be charged to the
NIH Grant?
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Consequences of Lack of
Compliance
Special Terms and Conditions on
awards
Loss of carryover authority
Cost disallowances
Suspension and/or termination of
award
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2 CFR Part 200 – New Audit
requirements
A non-Federal entity that expends $750,000 or more during the
non-Federal entity’s fiscal year in federal awards must have a
Single or program-specific audit conducted.
Impact:
Increases sub recipient monitoring burden
and
Reduces audit costs for organizations with less than $750,000 in
expenditures (reduces audit burden for approximately 5,000
while maintaining Single Audit coverage for over 99% of the
Federal dollars currently covered).
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Effective/Applicability Date
 Uniform implementation December 26, 2014 – applicable to
new awards and to incremental funding awarded on or after
December 26, 2014.
 Effective for non-Federal entity’s first Fiscal Year or biennial
period beginning on or after December 26, 2014.
First year example:
 FY beginning January 1, 2015 and ending December 31,
2015.
EARLY IMPLEMENTATION IS NOT PERMITTED!
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Additional Information
• Visit our website at:
http://oamp.od.nih.gov/dfas
• Contact:
Hruta Virkar, CPA
Branch Chief, Special Reviews
301-496-4137
Hruta.Virkar@nih.gov
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Questions?
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