OMB Releases 2013 Compliance Supplement

omb_0The Office of Management (OMB) released the final the 2013 OMB Circular A-133 Compliance Supplement on July 2, which can be accessed at http://www.whitehouse.gov/omb/circulars/a133_compliance_supplement_2013.

The revised Supplement is effective for audits of fiscal years beginning after June 30, 2012. Appendix V lists the changes to the Supplement.

Preparing for a Single Audit

Under the guidance of the Single Audit Act; OMB Circular A-133, Audits of States, Local Governments, and Non-profit Organizations, nonfederal entities that expend $500,000 or more of federal awards in a fiscal year are required to have a single or program-specific audit. A single audit is an examination of the organization’s compliance with the federal requirements applicable to awards. This includes an examination of the controls in place to ensure compliance. The key to a successful single audit is to be well-prepared.

At the time a grant is first awarded, and periodically thereafter, the organization should review the applicable grant requirements to identify its compliance requirements. The grant agreement will identify many of the requirements, and the Catalog of Federal Domestic Assistance (CFDA) has additional guidance. A review of the OMB Circular A-133 compliance supplement will identify compliance requirements that may not have been specifically stated in the grant contract. OMB Circular A-122 Cost Principles for Non-Profit Organizations also provides guidance on determining costs applicable to grants.

Once the compliance requirements are identified, an analysis of internal controls appropriate to meet the objectives should be performed. Management should determine whether the controls that are in place are operating effectively. These controls should also be well documented. Using the COSO (Committee of Sponsoring Organizations) internal control framework to evaluate and document the adequacy of controls can be helpful.

As the end of the year and the single audit approaches, the organization should prepare the Schedule of Expenditures of Federal Awards (SEFA). This will help the organization get a sense of which federal programs may be audited as major programs during the single audit. A final reconciliation of the SEFA to the total award expenditures can be done when the year-end accounting is completed.

The AICPA Governmental Audit Quality Center website has two practice aids for auditees that may be helpful. The Worksheet for Identifying Federal Program Information  is intended to assist the auditee in accumulating and documenting important information for each of its federal awards. This information could be provided to the auditor at the beginning of the single audit. The Auditee Disclosure Checklist for the SEFA intended to assist auditees with preparing a SEFA that includes all of the elements required by Circular A-133. These can be accessed through the AICPA website.

Board Responsibilities and Legal Accountability

The members of nonprofit boards have a number of responsibilities. One of those is addressing the legal accountability of the organization. A nonprofit must follow the applicable local, state and federal laws. These encompass issues such as governance, solicitation of funds, service delivery, personnel, and other areas. Each member of the board should be aware of the laws and regulations that govern the organization and be certain that a process is in place to ensure the nonprofit remains in compliance.

Nonprofit organizations can run afoul of legal restrictions in a number of ways. Examples include fraud and embezzlement, telemarketing scams, misappropriation of funds, excessive compensation, using charitable funds inappropriately, participating in prohibited transactions, and others. Penalties vary, depending on the nature and reason for the illegal activity. Consequences could include fines, restitution, revocation of tax-exempt status, or other actions. And of course, there may be irreparable damage to the organization’s reputation.

Nonprofit leadership requires an understanding of legal compliance. This is a complex and extensive area, and legal noncompliance is not always easily detected. Some organizations are lulled by the thought that since they are nonprofit, no one would consider doing anything illegal. Others are simply unaware of the requirements that govern their activities. Creating strong internal controls, communicating clear expectations regarding behavior and legal compliance, and employing the oversight of skilled, involved and informed board members are pieces of an effective program to ensure legal compliance.