Arizona’s First University.
Sponsored Projects: Financial Compliance and Audit
Jing Liu
Assistant Director, Sponsored Projects
626-6442, jingliu@email.arizona.edu
Topics
• Financial Compliance
–
–
–
–
–
Why compliance matters
Consequences of non-compliance
Regulations and policies to comply with
How to ensure compliance
Common areas of financial compliance
2
Topics (Cont’d)
• Audit
–
–
–
–
–
–
–
Why audit
Types of audit
Types of auditor
Audit process
Audit findings
Roles and responsibilities
Audit tips
3
Arizona’s First University.
Financial Compliance
Why Compliance Matters?
• Maintain trust between sponsors/public and the
University
• Provide stewardship to safeguard research
investment
• Avoid consequences of non-compliance
5
Consequences of Non-Compliance
• More scrutiny by Federal auditors and increased
administrative costs
• Audit findings and cost disallowance
• Loss of administrative flexibilities: eg. automatic carryover
and no cost extension
• Withholding of future awards
• Multi-million dollars to settle lawsuits
• Criminal/civil/administrative penalties
• Negative publicity and damage to the University’s and PIs’
reputation
–
–
–
–
–
Sponsors
Donors
Faculty
Staff
Students
6
Examples of litigations and audits
• Multi-million dollar lawsuits
–
–
–
–
–
–
–
–
–
–
Aug. 13, Emery University, $1.5 million
July. 13, Northwestern University, $3 million
Oct. 12, University of the District of Columbia, $0.5 million
Feb. 10, Fort Valley State University, $0.5 million
Dec. 08, Yale University, $7.6 million
July 08, St. Louis University, $1 million
April 06, Clark Atlanta University, $5 million
Jan. 06, University of Connecticut, $2.5 million
Dec. 05, Rush University, $1 million
June 05, Cornell University, $4.3 million
7
Examples of litigations and audits (Cont’d)
• Multi-million dollar lawsuits (Cont’d)
–
–
–
–
–
June 05, Mayo Foundation, $6.5 million
March 05, Florida International University, $11.5 million
July 04, Harvard University, $2.5 million
March 04, John Hopkins University, $2.6 million
Feb. 04, Lawrence Livermore National Lab operated by UC,
$3.9 million
– Sept. 03, University of South Florida, $4.1 million
– Feb. 03, Northwestern University, $5.5 million
8
Examples of litigations and audits (Cont’d)
• Numerous audits conducted by NIH OIG and NSF OIG or
their contracted CPA firms in recent years
• Areas of focus:
–
–
–
–
–
–
–
–
–
Allowability: for example, computer purchases
Cost transfer
Effort reporting
Cost share
Subrecipient monitoring
Administrative costs
Faculty salary
ARRA awards
Service centers
• NIH OIG Audit Reports:
– https://oig.hhs.gov/reports-and-publications/oas/nih.asp
• NSF OIG Audit Reports
– http://www.nsf.gov/oig/pubs.jsp
9
Regulations and Policies to Comply With
• Federal Regulations
– OMB Circular A-21: Cost Principles for Educational
Institutions
– OMB Circular A-110: Uniform Administrative
Requirements for Grants and Agreements With
Institutions of Higher Education, Hospitals, and Other
Non-Profit Organizations
– OMB Circular A-133: Audits of States, Local
Governments, and Non-Profit Organizations
– FAR: Federal Acquisition Regulation
– Agency policy guidelines
• Terms and Conditions of grants and contracts
• ABOR and University Policies
10
How do we comply?
• Strong internal controls
– Establish and maintain policies and procedures
• Current
• Compliant
• Communicated and understood
• Follow the policies and procedures
– Adequate systems
– Clearly defined roles and responsibilities
– Sufficient training
– Monitoring programs
– Sufficient documentation
– Understand Federal regulations and policies
11
Basic Spending Principles
• Allowability
• Reasonableness
– Necessary
– Arm’s length transaction*
– The prudent person test
– Consistent with policies and procedures
• Allocability
– Chargeable or assignable to a project in proportion to the
benefit received
– Reasonable allocation basis without undue effort or cost
– May not shift costs to eliminate deficit or for convenience
– Documentation
• Consistent Treatment of Costs
• See Appendix A: A-21 Section C1-4
*
A transaction in which the buyers and sellers act independently of each other and
have no relationship to each other.
12
Common Areas of Financial Compliance
•
•
•
•
•
•
•
•
Cost allowability
Cost transfer
Effort reporting
Cost sharing
Subrecipient monitoring
Recharge centers
Indirect costs and the CAS
Financial report and closeout
13
Cost Allowability
• Allowable, reasonable, allocable, and applied consistently
• Adequate monitoring
–
–
–
–
–
–
–
–
–
–
Document business purpose
Timely review of grant expenditure
Correct errors immediately
Monitor budget to avoid overruns
Sufficiently document direct charging of clerical and
administrative salaries and other admin. costs (see Appendix B)
PI must be informed of expenses and balances
Manage HHS/NIH over-the-cap salary costs
Manage NSF 2-month salary limitation
Avoid excessive cost transfers and untimely transfers: 90
days limit by NIH Grants Policy
Avoid large purchase of equipment and supplies at the end of
a project
14
Cost Allowability (Cont’d)
• Useful resources
– OMB Circular A-21, Section J
– NIH Grants Policy: Cost Considerations
– SPS Direct and Indirect Costs Policy
– FSO Financial Policies and Procedures
– Specific sponsor terms and conditions
15
Cost Transfer
•
•
•
•
Allowable
Allocable: Is the allocation basis reasonable
Timely
Reasons and allocation basis for transfers must be
documented in detail
– OMB Circular A-21
See Appendix C
– NIH Grants Policy
• Salary Transfers: transferring certified costs may be a
problem
• Useful resources
– OMB Circular A-21
– NIH Grants Policy
16
Effort Reporting
• Reflect actual time spent on projects and other university
activities
• 100% university compensated effort included
• Include committed cost sharing
• Completed timely
• Signed by individuals who have the first hand knowledge
or suitable means of verification of the work performed
• Designated official’s signature is valid only when after-thefact confirmation is obtained
17
Effort Reporting (Cont’d)
• Difference between effort reports and payroll distribution
adjusted immediately
• Transfers are generally not allowed once effort is certified
• Useful resource
– OMB Circular A-21, Section J.10
– Research Gateway
– SPS Effort Reporting Policy and Procedure
– SPS online training module
18
Cost Sharing
•
•
•
•
•
•
•
•
•
Commitment met and reported correctly
Allowable
Not funded by other federal sources
Not committed to other grants
Tracked and documented
Third party contribution documented
Prime grantee responsible for meeting the cost sharing
Financials: subaccount required to track UA cost share
Useful resource
–
–
–
–
OMB Circular A-110
NSF Grant Policy Manual
NIH Grants Policy
SPS Cost Sharing Documentation Policy and Procedure
19
Subrecipient Monitoring
• Subrecipient adequately monitored
– Risk level assessment
– Review of A-133 audit report
– Review invoices and supporting documents for
allowability and allocability
– PI confirms technical progress by approving invoices
before payment is processed
– Review cost sharing commitment and supporting
documentation
– Periodic desk reviews or on-site audit
• Useful resource
– OMB Circular A-110
– OMB Circular A-133: compliance supplement
– UA’s Contracting & Research Services (CRS)
20
Recharge Center
• Operated on a break-even basis
• Billing rate(s) should:
– based on actual costs
– does not include unallowable costs
– reviewed and updated at least biennially
– the same for all internal customers
– approved by FSO
• Transactions at arm’s length
• Useful resource
– OMB Circular A-21, Section J.47.
– FRS Departmental Manual, Section 18
– FSO: Rate Analysis Team
21
Indirect Costs and the CAS
• Indirect cost proposal documented carefully
• Indirect cost rate applied correctly and consistently to
grants
• Disclosure Statement (DS-2) consistent with actual
practice
• Cost Accounting Standard (CAS) applied to educational
institutions
– 501: consistency in estimating, accumulating and
reporting costs
– 502: consistency in allocating costs incurred for the
same purpose
22
Indirect Costs and the CAS (Cont’d)
– 505: accounting for unallowable costs
– 506: consistency in using the same cost accounting
period
• Useful resource
– OMB Circular A-21
– FSO: Rate Analysis Team
23
Financial Reports and Closeout
• Federal Financial Report (FFR) submitted on time
• FFR accurate and complete
– No unallowable costs
– Cost sharing captured and reported
– Subcontract costs allowable and accurate
– Program income included
– Indirect costs charged correctly
• Closeout
– Charges and transfers made near and after the grant
end date should be sufficiently documented and
justified
– Overruns to be removed
– Unallowable costs to be removed
24
Other Areas of Compliance
•
•
Equipment purchases: contact SPS Property Officer
Clinical trials and fixed price contracts
–
–
–
–
•
Price budgeted with costs in mind
Solid billing and A/R systems
Avoid cross-subsidization from other grants
Avoid large percentage of residuals which could trigger
detailed reviews
Specific compliance items worth remembering
–
–
–
–
–
–
NSF: voluntary cost share is not allowed
NIH: genomic array costs (NOT-OD-10-097)
Fly America Act exception: Waiver form (see Appendix D)
NIH Cap
NSF 2-month Salary Limitation
Supplemental Compensation (see Appendix E)
25
Other Areas of Compliance – Cont’d
• Research compliance: Research Compliance Services
– Biosafety & Biosecurity
– Chemical Safety & Medical Gas Information
– Conflict of Interest (COI)
– Export Controls (ITAR/ERA)
– Health Information Privacy (HIPPA)
– Human Subjects Protection
– Animal Care and Use
– Radiation, Chemical & Biological Safety
– Research Integrity
– http://rgw.arizona.edu/
26
Recent Areas of Focus by Feds
• ARRA Funding: reporting and allowability
• FFATA (Federal Funding Accountability and
Transparency Act)
• Conflict of Interests
• Recharge Centers
• Faculty Base Salary (See Appendix E)
• Effort Reporting
• Subrecipient Monitoring
• Administrative Costs
• Research Integrity
27
SPS Training Opportunities
• Online training material and other resources
http://rgw.arizona.edu/research-resources/training
Check UAccess Learning training web site for live sessions
• NCURA tapes or CD-Rom
• Subcontracts: contact Contracting & Research Services (CRS)
• Indirect cost rate and recharge centers: contact FSO Rate Study
Team
• To request training sessions be presented at your location:
contact Marcel Villalobos or Jennifer Brown at 626-6000 or via
email messages
• To subscribe RAMTALK:
http://uits.arizona.edu/services/email/emaillists/help/subscribe#subscribe
28
Arizona’s First University.
Audit
Why Audit?
Sponsors love audit because:
• Monitor whether we are in compliance
– Are we capable of managing sponsored funding
according to the regulations and policies (Internal
Control)
– Have we used sponsored funding according to the
regulations and policies (Compliance)
• Decide the risk of future funding
We need audit because:
• Let the public know that we are in compliance and our
financial statements present the University’s financial
position fairly
• Establish a good track record and reputation
30
Types of Audit
•
•
•
•
•
•
•
•
Financial Statements
A-133 (aka. Single Audit)
Project financial
Program performance
Disclosure Statement – 2 (DS-2)
F&A rate agreement (indirect cost rate)
System and performance audit/review
Special audit: eg. cost sharing, cost transfer, effort
reporting, subcontract costs, administrative salaries, etc.
• Desk Review: mostly project specific or pertain to a special area
• Internal audit
• Internal review
31
Types of Auditors
•
•
•
•
•
•
•
•
•
•
Inspector Generals of federal agencies
AZ Auditors General
Federal agencies
Any other sponsors
General Accounting/Accountability Office
HHS DCA (division of cost allocation)
Public accounting firms
ABOR auditors
Internal auditors
Financial Service Office (FSO) and Sponsored Projects
(SPS) financial compliance units
32
Audit Process
• SPS receives engagement letter or notice of an audit:
(External financial audits are coordinated by SPS and FSO
financial compliance officers. )
• SPS and FSO prepare for the audit
– Provide financial records and supporting documentation
to the auditor
– Provide policy manuals and explain procedures and
practices to the auditor
– Notify parties involved (PIs, business officers, etc.)
• Entrance conference
– Auditor explains audit scope and purpose
– Auditor assesses basic organization information
– Audit coordination work arranged
33
Audit Process (Cont’d)
• Auditors’ field work
– Internal control assessment
– Test of transactions
– Resolve questions
• Exit conference
– Summarize initial findings
– Arrange follow-up works
• Management representation letter
• Draft report and findings
• Final audit report and findings
• University response and follow-up actions
• Final audit report with the university response published and
distributed
34
Audit Findings
• Internal Control:
– Material weakness: “…is a deficiency, or combination of
deficiencies, in internal control, such that there is a
reasonable possibility that a material misstatement of the
entity's financial statements will not be prevented, or detected
and corrected on a timely basis."
– Significant deficiency: “…is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a
material weakness, yet important enough to merit attention by
those charged with governance.
• Compliance with applicable laws, regulations, and policies
• Questioned Costs
35
Roles and Responsibilities
• Central
– Coordinates financial audits
– Provides files, books, and support for transactions
– Work with departments and PIs to provide additional
information
– Provides response to audit findings
– Ensures follow up actions are implemented
• Departments and PIs
– Be ready for interviews and questions
– Provide files not maintained by central
– Work with central financial to implement auditor’s
recommendations
– Coordinate project performance reviews and site visits from
sponsors
36
Roles and Responsibilities (Cont’d)
• Auditors
– Clarify audit scope and objectives
– Conduct audit
– Issue audit opinions
– Provide recommendation to improve internal controls
– Follow up with implementation of recommendation
37
Audit Tips
• Documentation is the key: business purposes
• Audit interview: it’s a risk assessment process
– Be prepared: have all documents ready
– Be professional and well organized
– Be serious about internal control
• Do tell the truth
• Answer what is asked
• Contact SPS or FSO financial compliance officer when
– Contacted directly by auditors for questions and documentation
(except SAS 99 fraud detection interviews)
– Aware of problems or issues
• Notify SPS financial compliance officer for project
performance site visit (because most performance visits
involve financial reviews.)
38
Useful Web Sites
•
•
•
•
•
•
•
•
•
•
Research Gateway: http://rgw.arizona.edu/
Financial Policy and Procedure Manuals: http://policy.fso.arizona.edu/
Direct and Indirect Cost Policy: http://rgw.arizona.edu/documents/directand-indirect-costs-sponsored-agreements
A-21: http://www.whitehouse.gov/omb/circulars_a021_2004
A-110: http://www.whitehouse.gov/omb/circulars_a110
NIH Grants Policy: http://grants.nih.gov/grants/policy/nihgps_2012/
NSF Grants Policy:
http://www.nsf.gov/publications/pub_summ.jsp?ods_key=papp
FSO Compliance & Internal Control:
http://www.fso.arizona.edu/compliance
AZ A-133 audit reports: http://www.gao.az.gov/financials/
UA annual financial reports: http://www.fso.arizona.edu/financialmanagement/annual-reports
39
List of Attachment
•
•
•
•
•
Appendix A: A-21 Section C.1-4
Appendix B: A-21 Section F.6 and Exhibit C
Appendix C: Federal cost transfer policies
Appendix D: Fly America Act Waiver Checklist
Appendix E: UA Compensation Definitions for Faculty and
Appointed Professionals
40
Questions?
41