oversight

The Arizona Department of Education's Implementation of the Single Audit Act Amendments of 1996.

Published by the Department of Education, Office of Inspector General on 2000-02-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

   The Arizona Department of Education’s Implementation
        of the Single Audit Act Amendments of 1996

                 MANAGEMENT INFORMATION REPORT




                                          ED-OIG/A02-90001
                                           FEBRUARY 2000



Our mission is to promote the efficient                      U.S. Department of Education
and effective use of taxpayer dollars                          Office of Inspector General
in support of American education.                                   New York, New York
                             NOTICE

Statements that financial and/or managerial practices need
improvement or recommendations that costs questioned be refunded
or unsupported costs be adequately supported, and recommendations
for the better use of funds, as well as other conclusions and
recommendations in this report, represent the opinions of the Office
of Inspector General. Determinations on these matters will be made
by the appropriate Education Department officials.
The Arizona Department of Education’s Implementation
of the Single Audit Act Amendments of 1996                      ED-OIG/A02-90001




The Arizona Department of Education’s Implementation of
       the Single Audit Act Amendments of 1996

TABLE OF CONTENTS

Summary………………………………………………………………………………….1

Background……………………………………………………………………………….2

Areas of Concern…………………………………………………………………………3

     Arizona Department of Education’s Oversight of LEA Programs..………………….3

     Unallowable Audit Costs……………………………………………………………..4

Objectives, Scope, and Methodology…………...………………………………………..5
The Arizona Department of Education’s Implementation
of the Single Audit Act Amendments of 1996                                      ED-OIG/A02-90001




SUMMARY

The Single Audit Act Amendments of 1996 were enacted on July 5, 1996 and apply to
non-Federal entities with respect to fiscal years beginning after June 30, 1996. In
response to the Single Audit Act Amendments of 1996, the Office of Management and
Budget issued a revised Circular A-133 retitled “Audits of States, Local Governments,
and Non-Profit Organizations,” which established uniform audit requirements for non-
Federal entities that administer Federal awards and implemented the Single Audit Act
Amendments of 1996.

This Management Information Report presents the areas of concern identified in our
survey of the Arizona Department of Education’s implementation of the Single Audit Act
Amendments of 1996. The objectives of the survey were to:

     •    Determine if the Arizona Department of Education is using single audits to
          manage U.S. Department of Education (ED) programs.

     •    Evaluate the impact of the new provisions of the Single Audit Act Amendments
          of 1996 (primarily the change in the dollar threshold for determining if an entity is
          subject to a single audit, and the use of a risk-based approach in identifying major
          programs) on the Arizona Department of Education’s use of single audits.

In general, we concluded that the Arizona Department of Education uses single audits of
local education agencies (LEAs) to correct deficiencies identified. In addition, Arizona
Department of Education officials state that they rely heavily on single audit findings for
monitoring LEAs. However, the Arizona Department of Education does not make other
use of the audits, such as analyses of findings statewide to identify possible patterns of
noncompliance. While not required under the Single Audit Act Amendments of 1996,
the use of single audits to identify possible patterns of noncompliance could ultimately
lead to improved program performance. We also concluded that the new provisions in
the Single Audit Act Amendments of 1996 had little or no impact on the Arizona
Department of Education’s use of single audits.

The survey identified two areas of concern:

I. The Arizona Department of Education Special Education and Vocational Education
   program offices do not have plans for expanded monitoring of LEAs no longer
   subject to a single audit.

          •    We recommend that the ED Chief Financial Officer, with the assistance of ED
               program officials, ensure that the Arizona Department of Education provide
               appropriate oversight for subrecipients expending less than $300,000 per year
               in Federal awards, in accordance with the Education Department General
               Administrative Regulations (34 C.F.R. Section 80.40(a)) and Circular A-133
               (Subpart D, Section 400(d)(3)).



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The Arizona Department of Education’s Implementation
of the Single Audit Act Amendments of 1996                                              ED-OIG/A02-90001


II. Fifteen LEAs in Arizona with fiscal year 1997 Federal expenditures of less than
    $300,000 included unallowable audit costs in their fiscal year 2000 indirect cost
    pools. An Arizona Department of Education Audit Services Unit representative
    concurred that these audit costs are unallowable under the Single Audit Act
    Amendments of 1996 and agreed to remove them from the fiscal year 2000 and 2001
    indirect cost pools.

          •    We recommend that the ED Chief Financial Officer ensure the Arizona
               Department of Education’s completion of the proposed corrective actions.

BACKGROUND

The Single Audit Act Amendments of 1996 were enacted on July 5, 1996 and apply to
non-Federal entities with respect to fiscal years beginning after June 30, 1996. In
response to the Single Audit Act Amendments of 1996, the Office of Management and
Budget issued a revised Circular A-133 retitled “Audits of States, Local Governments,
and Non-Profit Organizations,” which established uniform audit requirements for non-
Federal entities that administer Federal awards and implemented the Single Audit Act
Amendments of 1996.1 As a result of consolidating the audit requirements for state and
local governments with those of other non-Federal entities, the revised Circular A-133
replaced Circular A-128 “Audits of State and Local Governments.” One of the more
significant revisions in the Single Audit Act Amendments of 1996 and Circular A-133 is
that the dollar threshold for entities required to submit single audits was increased from
$25,000 to $300,000 in annual expenditures of Federal awards. Another significant new
provision is identifying major programs using risk-based program selection criteria;
previously, major programs were identified based solely upon the amount of Federal
awards expended by the entity.

In Arizona, the Arizona Department of Education and Auditor General share oversight
responsibilities for single audits of local education agencies. The Arizona Department of
Education Audit Services Unit tracks the receipt of LEA audit reports and the audit
finding resolution process. The Arizona Department of Education program offices are
responsible for monitoring LEAs, eliciting the appropriate corrective actions from
auditees, and determining when LEAs have satisfactorily resolved audit findings. The
Auditor General reviews LEA single audit contracts, single audit reports, audit work
papers, and the State’s Uniform System of Financial Records Compliance Questionnaire
to determine if LEAs and their independent public accountants have complied with the
Single Audit Act Amendments of 1996 and the State’s Uniform System of Financial
Records requirements.


1
  ED amended Title 34 Code of Federal Regulations Section 80.26, effective September 29, 1997, to codify
the revised Circular A-133, so as to apply to audits of fiscal years beginning after June 30, 1996. The
amended 34 C.F.R. Section 80.26(a) states, “Basic Rule. Grantees and subgrantees are responsible for
obtaining audits in accordance with the Single Audit Act Amendments of 1996 (31 U.S.C. 7501-7507) and
revised OMB Circular A-133, ‘Audits of States, Local Governments, and Non-Profit Organizations.’ The
Audits shall be made by an independent auditor in accordance with generally accepted government auditing
standards covering financial audits.”

                                                       2
The Arizona Department of Education’s Implementation
of the Single Audit Act Amendments of 1996                                      ED-OIG/A02-90001


AREAS OF CONCERN

In the course of conducting our survey, we discovered two areas of concern, which are
discussed below.

I. ARIZONA DEPARTMENT OF EDUCATION’S OVERSIGHT OF LEA PROGRAMS

The Single Audit Act Amendments of 1996 increased the threshold that triggers an audit
requirement from $25,000 to $300,000 in annual Federal award expenditures.
The new threshold resulted in approximately 70 Arizona LEAs losing oversight formerly
provided by single audits. This increased the number of LEAs in Arizona without single
audit coverage to approximately 110 out of 234 LEAs.

According to Arizona Department of Education officials, they rely heavily on single audit
findings for monitoring LEAs. In addition, the Arizona Department of Education’s
monitoring of LEAs includes site-visits, technical assistance, and self-assessments.
Arizona Department of Education officials provided us with program monitoring
instruments and reported that Vocational Education and Special Education programs are
on a 5 and 6 year monitoring cycle, respectively. Arizona Department of Education
officials intend these monitoring procedures to cover approximately 95 percent of Federal
awards.

However, through our conversations with Arizona Department of Education officials, we
learned that there are no written comprehensive monitoring policies and procedures in
place. In addition, we determined that the Arizona Department of Education Special
Education and Vocational Education program offices do not have plans for expanded
monitoring of LEAs no longer subject to a single audit. The loss of single audit oversight
of LEAs decreases the probability of detecting fraud, waste, abuse, and mismanagement
of Federal awards. Comprehensive monitoring policies and procedures are needed to
ensure that Federal awards are administered in accordance with program requirements.

The Single Audit Act Amendments of 1996 [31 U.S.C. Section 7502(f)(2)(B)] state “each
pass-through entity shall monitor the subrecipient’s use of Federal awards through site-
visits, limited scope audits, or other means.” When issuing the final revision of Circular
A-133, the Office of Management and Budget recommended that state education
agencies and other pass-through entities should review and possibly expand their
subrecipient monitoring to address the loss of single audit oversight resulting from the
Single Audit Act Amendments of 1996. Specifically, a response in the Public Comments
and Responses issued with the final revision of Circular A-133 (issued June 30, 1997)
states:

          In light of the increased threshold that triggers an audit requirement under
          the Circular to $300,000 or more in Federal awards expended per year,
          pass-through entities will need to make appropriate changes in their
          agreements with subrecipients to reflect that Circular A-133 audits no
          longer will be required for non-Federal entities with total Federal awards
          expended of less than $300,000 annually.

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The Arizona Department of Education’s Implementation
of the Single Audit Act Amendments of 1996                                      ED-OIG/A02-90001




          Since pass-through entities are held accountable for Federal awards
          administered by their subrecipients, they also need to review their overall
          subrecipient monitoring process and decide what, if any, additional
          monitoring procedures may be necessary to ensure subrecipient
          compliance.

In a December 1, 1999, letter regarding the issues covered in this report, the Arizona
Department of Education informed us that the Title I program office is piloting a
comprehensive monitoring program “to meet the additional oversight requirements
resulting from the increase in dollar unit threshold for single audits."

     Recommendation

     We recommend that the ED Chief Financial Officer, with the assistance of ED
     program officials, ensure that the Arizona Department of Education provide
     appropriate oversight for subrecipients expending less than $300,000 per year in
     Federal awards, in accordance with the Education Department General
     Administrative Regulations (34 C.F.R. Section 80.40(a)) and Circular A-133 (Subpart
     D, Section 400(d)(3)).

II. UNALLOWABLE AUDIT COSTS

We discovered 15 LEAs in Arizona with fiscal year 1997 Federal expenditures of less
than $300,000 that included unallowable audit costs in their fiscal year 2000 indirect cost
pools. Circular A-133, Subpart B, Section 230 (b) states that a non-Federal entity
expending less than $300,000 per year from Federal awards shall not charge audit costs
to a Federal award. A representative of the Arizona Department of Education Audit
Services Unit explained that before Circular A-133 went into effect, ED approved their
plan for including these audit expenses in the indirect cost rate calculation for all LEAs.
However, the Arizona Department of Education Audit Services Unit representative
concurred that these audit costs are unallowable under the Single Audit Act Amendments
of 1996 and initiated corrective action. The corrective action included:

•    For the 15 LEAs in question, recalculating their fiscal year 2000 indirect cost rates
     after excluding from their indirect cost pools the unallowable fiscal year 1997 audit
     costs, which total $100,091.

•    For LEAs with less than $300,000 in Federal expenditures, excluding fiscal year 1998
     audit costs from their indirect cost pools prior to calculating their fiscal year 2001
     indirect cost rates.




                                                       4
The Arizona Department of Education’s Implementation
of the Single Audit Act Amendments of 1996                                                    ED-OIG/A02-90001


The costs for fiscal year 1997 audits were included in the indirect cost pools the Arizona
Department of Education used to calculate fiscal year 2000 indirect cost rates.2 Upon
being notified of the unallowable audit costs that the survey team identified, the Arizona
Department of Education initiated the removal of the unallowable audit costs from the
indirect cost pools. According to the Arizona Department of Education Audit Services
Unit representative, the indirect cost rates were corrected prior to their application in
fiscal year 2000. Upon completion, the corrective action results in no unallowable audit
costs being charged to Federal awards.

     Recommendation

     We recommend that the ED Chief Financial Officer ensure the Arizona Department
     of Education’s completion of the corrective action.

OBJECTIVES, SCOPE, AND METHODOLOGY

Our survey reviewed the Arizona Department of Education’s implementation of the
Single Audit Act Amendments of 1996. The survey covered the significant revisions to
the Single Audit Act, primarily the change in the dollar threshold for entities subject to a
single audit, and the use of a risk-based approach in identifying major programs. The
objectives of the survey were to:

     •    Determine if the Arizona Department of Education is using single audits to
          manage ED programs.

     •    Evaluate the impact of the new provisions of the Single Audit Act Amendments
          of 1996 on the Arizona Department of Education’s use of single audits.

Our work consisted primarily of interviews with officials from the Arizona Department
of Education, Arizona Auditor General, LEAs, and independent public accountants that
perform single audits of LEAs, as well as reviews of documents provided by the officials.
We conducted the survey’s fieldwork in Arizona during the period March 9 through
March 25, 1999. The period covered by the survey was July 1, 1996 through June 30,
1997, the Arizona Department of Education’s fiscal year 1997. Our work was conducted
in accordance with the Government Auditing Standards appropriate to the survey’s scope.
Management Information Reports are intended to provide information for use by
decision-makers and are not audit or investigative reports.



2
  OMB Circular A-87 “Cost Principles for State, Local, and Indian Tribal Governments” permits the use of
fixed indirect cost rates. A fixed indirect cost rate is agreed to in advance, based upon an estimate of future
costs, but is not retroactively adjusted. When the difference between the estimated and actual costs for the
period is determined, an adjustment is made to the rate for future years to compensate for the difference
between the costs used to establish the fixed rate and the actual costs incurred. Fixed cost rates are used
exclusively by state and local governments due to their lasting relationship with, and continuous funding
by, the Federal government. The Arizona Department of Education uses a fixed indirect cost rate. In
developing their indirect cost rate for fiscal year 2000, the Arizona Department of Education used fiscal
year 1997 costs as an estimate for fiscal year 2000 costs.

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The Arizona Department of Education’s Implementation
of the Single Audit Act Amendments of 1996                             ED-OIG/A02-90001


In a December 1, 1999, letter, which is attached, the Arizona Department of Education
responded to summaries of our survey’s areas of concern. We considered their comments
in preparing this Management Information Report.




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The Arizona Department of Education’s Implementation
of the Single Audit Act Amendments of 1996                      ED-OIG/A02-90001




                                     REPORT DISTRIBUTION LIST

                                                                             No. of
Office of the Chief Financial Officer                                        Copies

Thomas P. Skelly                                                                   1
Chief Financial Officer, Acting

Office of Elementary and Secondary Education

Michael Cohen                                                                      1
Assistant Secretary

Office of Special Education and Rehabilitative Services

Judith E. Heumann                                                                  1
Assistant Secretary

Office of Vocational and Adult Education

Patricia W. McNeil                                                                 1
Assistant Secretary

Office of Inspector General (electronically)

Inspector General                                                                  1

Assistant Inspector General for Audit                                              1

Assistant Inspector General for Investigations                                     1

Assistant Inspectors General for Operations                                  1 each

Director, Advisory and Assistance, State and Local Team                            1

Director, Planning, Analysis and Management Services                               1

Regional Inspectors General for Audit                                        1 each

Team Leader, Advisory and Assistance, Non-Federal Audit Team                       1




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