Arizona’s First University.

Sponsored Projects: Financial Compliance and Audit

Jing LiuAssistant Director, Sponsored Projects626-6442, jingliu@email.arizona.edu

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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

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Topics (Cont’d)

• Audit– Why audit– Types of audit– Types of auditor– Audit process– Audit findings– Roles and responsibilities– Audit tips

Arizona’s First University.

Financial Compliance

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Why Compliance Matters?

• Maintain trust between sponsors/public and the University

• Provide stewardship to safeguard research investment

• Avoid consequences of non-compliance

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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– NIH Grants Policy

• Salary Transfers: transferring certified costs may be a problem

• Useful resources– OMB Circular A-21– NIH Grants Policy

See Appendix C

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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-the-

fact confirmation is obtained

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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

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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

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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)

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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

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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

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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

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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

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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)

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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/

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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

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SPS Training Opportunities

• Online training material and other resourceshttp://rgw.arizona.edu/research-resources/trainingCheck 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/email-lists/help/subscribe#subscribe

Arizona’s First University.

Audit

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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 fundingWe 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

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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

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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

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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

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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

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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

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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

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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

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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.)

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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/direct-and-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/financial-management/annual-reports

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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

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Questions?