Optimizing audit and monitoring effectiveness under changes to OMB Circular A-133.

• Author: Melton, Robert W.

Subgrantees expending less than $300,000 in federal funds annually are no longer required to conduct conforming audits; however, government pass-through agencies must employ effective monitoring or agreed-upon procedures to fulfill their responsibilities.

In 1997, the single audit process underwent significant changes that affect all state and local governments that receive federal funds and have injected new uncertainties and risks into the subgrant monitoring process. The single audit began with the U.S. Single Audit Act of 1984, which was implemented by the Office of Management and Budget (OMB) Circular A-128 (for state and local governments) and Circular A-133 (for nonprofit organizations). The guidance was changed pursuant to the Single Audit Act Amendments of 1996. In June 1997, OMB rescinded Circular A-128 and issued a new Circular A-133 which is applicable to governments and nonprofit organizations. The new Circular A-133 is effective for fiscal years ending June 30, 1997 and thereafter.

The circular's most wide-ranging change affecting subgrants was the raising of the threshold for subgrants requiring conforming audits from $25,000 to $300,000. This change was estimated to reduce the annual number of conforming grantee audits from 26,000 to 16,000 - a 28 percent decrease. Before congratulating OMB on this move toward efficiency and economy, one must consider that OMB estimated that the average burden of hours required to conform with the new regulations would decrease by less than 5 percent.

State/Local Implications

With the increase in the threshold to $300,000 come new implications for state and local government officials. The responsibility for ensuring funds are properly used is not reduced. Instead of relying on the single audit, a government must devise other systems to fulfill its responsibilities:

* monitoring or

* using agreed-upon procedures by a CPA.

If state and local government officials do not implement such alternative actions, federal funds could be jeopardized.

The positive aspect of this change is that costs of A-133 audits, no longer required, could be absorbed into grantees' operating programs. This allows more direct federal assistance to reach its intended beneficiaries, rather than being expended on administrative costs of monitoring (through audit requirements) the expenditure of those funds. The downside is that pass-through agencies will have less assurance from independent auditors that subgrantees are properly managing and accounting for their federal grants, and the pass-through agencies will still have primary liability to the federal government for disallowed costs. A-133's revisions are, in a sense, echoing a complaint common to administrators: they give pass-through agencies more responsibility and less authority over their subgrantees.

The revision to A-133 was carefully worded, specifically to prevent pass-through agencies from enforcing more stringent audit requirements on their subgrantees. A pass-through agency cannot arbitrarily require a subgrantee expending less than $300,000 in federal assistance in a year to have an independent audit performed - and charge the cost of the audit to the grant. A pass-through agency can, however, arrange to have a subgrantee audited at the pass-through agency's own expense. Since most state and local governmental units face economic conditions similar to those that prompted the revisions to A-133, the expectation was that few state and local governments would expend their own resources for audits that the federal grantor agency does not require.

Under these new conditions, how can a pass-through agency maintain, economically and efficiently, a reasonable level of assurance of subgrantees' performance, when the subgrantee's annual federal expenditures fall below the $300,000 threshold? Through effective, systematic monitoring and limited-scope audits.

Systematic monitoring facilitates efficient use of available monitoring resources. Most pass-through agencies already apply some systematic methods. An effective system of monitoring should incorporate features associating a level of effort dedicated to monitoring a subgrantee, relevant to risks involved with...