Preparing for SingleAudits

If you are not familiar with what a Single Audit entails, chances are your school district has not historically expended a significant amount of federal awards that are subject to Uniform Guidance. However, with the influx of federal funding to address the impact of COVID-19, more school districts were required to undergo a Single Audit than in the past. When participating in federal awards, it is important to know when a Single Audit is required and how to properly prepare for it.

A Single Audit is required when your school district expends $750,000 or more in federal awards within a fiscal year. In addition to the audit of the financial statements, a Single Audit is an audit of a recipient’s federal award program(s) conducted in accordance with 2 Code of Federal Regulations (CFR) Part 200 (Uniform Guidance). The scope of the audit includes all federal awards received by the entity and its aim is to test compliance with the award terms and conditions based upon the audit requirement established by Uniform Guidance, which includes reviewing an entity’s internal controls over the federal award program(s) and testing compliance.

By Stephanie Jacobs, CPA MANAGER BAKER TILLY US, LLP

You may be wondering whether all the school district’s federal awards will be audited during the Single Audit. The simple answer is no. Auditors are required to determine major programs subject to audit using a risk-based approach as outlined in the Uniform Guidance. A major program is the term used to identify the Federal awards that the auditor has determined the need to audit and will issue an opinion over compliance on those programs. During the audit of a major program, auditors are also required to gain an understanding of and test internal controls over compliance.

Auditee Responsibilities

Once the school district accepts federal awards, they also accept certain responsibilities related to the award. The first of which is establishing a system of internal control over the compliance requirements applicable to each federal award to ensure the school district stays in compliance with the applicable requirements year-round, not just at the end of the year. This system of internal control will contain written policies and procedures. For some requirements such as procurement, the Uniform Guidance establishes that there must be a written procurement policy that conforms to the procurement standards outlined. For other requirements, it may just be a best practice to establish written policies and procedures so that all program officials are aware of the steps taken to ensure compliance with the requirements of the federal awards. Regardless of which policies and procedures are written, for an auditor to test that the system of internal control is being followed, there must be auditable evidence that the control was performed.

Additionally, the school district is responsible for appropriately accounting for the costs of the federal awards in a manner that the costs of each award can be easily identified. Establishing a subset of account numbers that are utilized to track expenditures associated with each specific federal award is a best practice to ensure that federally funded expenditures are adequately tracked throughout the year. Aligning internal budgetary controls with the federal award allocation will allow for the school district to ensure that expenditures are only incurred by the school district for an amount equal to the federally funded awards allocation. This best practice will also allow for the district to review the utilization of the federally funded award to ensure that funding is utilized in accordance with the award agreement and provisions. During the audit of the major program(s), your auditor will request general ledger detail of the Federal award expenditures.

Furthermore, information an auditor will typically ask for relates to the reimbursement claims and related support, grant agreements, grant budgets, grant amendments and communications from the funding agency. A best practice would be to maintain this information in a file for each award so that when the auditor asks for this information, it is readily available.

Lastly, once you are aware your school district is required to obtain a Single Audit, what do you need to do? The school district must procure a qualified auditor to perform the audit. The procurement of the auditor must follow the procurement standards outlined in the Uniform Guidance (2 CFR §200.318 through §200.327). In requesting proposals of audit services, 2 CFR §200.509 requires that the objectives and scope of the audit are made clear and that the school district must request a copy of the audit organization’s peer review report. When evaluating the proposals for audit services, the school district should consider the responsiveness to the request for proposal, relevant experience, availability of staff, the results of peer review and external quality control reviews and price.

Frequently Audited Major Programs

There is typically a commonality in which federal awards are audited the most often at school districts. Before the COVID-19 pandemic, these included the Child Nutrition Cluster, which includes the School Breakfast Program (Assistance Listing Number (ALN) 10.553), National School Lunch Program (ALN 10.555), Special Milk Program for Children (ALN 10.556), Summer Food Service Program for Children (ALN 10.559) and the Fresh Fruit and Vegetable Program (ALN 10.582); Title I Grants to Local Educational Agencies (ALN 84.010); and the Special Education Cluster (IDEA), which includes Special Education – Grants to States (ALN 84.027) and Special Education –Preschool Grants (ALN 84.173).

The COVID-19 pandemic produced legislation authorizing additional federal awards that have been frequently audited. The Education Stabilization Fund, which includes subprograms, such as the Elementary and Secondary School Emergency Relief (ESSER, including ESSER I and II) (ALN 84.425D), the Governor’s Emergency Education Relief (GEER, including GEER

Compliance Requirement Brief Explanation

Activities Allowed or Unallowed

Allowable Costs/Cost Principles (2 CFR 200, Subpart E)

This requirement includes the activities the federal award is allowed to be spent on, which could include salaries/wage, supplies, equipment, etc.

This requirement includes a couple of different areas.

• Costs must meet the basic guidelines, which include that the costs have to be necessary and reasonable, treated consistently, be adequately documented, etc. (2 CFR §200.402 through §200.411) as well as the requirements outlined in general provisions for selected items of costs (2 CFR §200.421 through §200.476) (i.e., time and effort reporting).

• Indirect costs must be supported by an indirect cost rate proposal and the rate must be applied appropriately.

Cash Management (2 CFR §200.305)

Eligibility

Equipment and Real Property Management (2 CFR §200.310 through §200.316)

Matching, Level of Effort, Earmarking

If an award is on a reimbursement basis, this requirement means that the costs included on the reimbursement request (claim) have been paid for prior to requesting reimbursement.

This requirement includes specific criteria for determining whether an individual, group of individuals or subrecipients can participate in a program and the amount for which they qualify.

Equipment and real property purchased with federal awards must be included on a listing with specific information included (2 CFR §200.313(d)). If any equipment or real property that was purchased with federal awards is disposed of, there are requirements to ensure the federal agency gets the share of the disposition.

The matching requirement refers to when an award includes a local share of the project. This is not a frequent occurrence in the programs applicable to school districts. The level of effort requirement refers to maintaining a certain level of expenditures of non-federal funds and not supplanting services with federal funds. The earmarking requirement refers to when an award includes a minimum or maximum level of expenditures on certain types of costs, such as administrative or a non-public share.

Period of Performance

Procurement and Suspension and Debarment

(Procurement - 2 CFR §200.317 through §200.326)

(Suspension and Debarment – 2 CFR Part 180)

Program Income

This requirement refers to the period in which costs can be incurred.

The procurement requirement refers to the standards that must be followed when procuring goods or services.

The suspension and debarment requirement refers to ensuring the district does not contract with or subaward federal awards to entities that are suspended or debarred from doing business with the federal government.

Program income is gross income earned that is directly generated by a supported activity or earned as a result of the federal award during the period of performance (i.e., paid breakfasts or lunches for the Child Nutrition programs (ALNs 10.553 and 10.555) or revenue generated as a result of a 21st Century Community Learning Center program (ALN 84.287) activity).

Reporting

Subrecipient Monitoring

(2 CFR §200.331 through §200.333)

Special Tests and Provisions

This requirement refers to financial and programmatic reports that are required to be submitted to the grantor agency.

This requirement refers to procedures a pass-through entity must do if a subaward is created. There are specific requirements, such as specific award information that must be identified to the subrecipient, identifying the risk of a subrecipient, monitoring of the award and any follow-up as necessary.

These requirements are unique to each federal program and do not fit under one of the above compliance requirements.

I and II) (ALN 84.425C) and the American Rescue Plan – Elementary and Secondary School Emergency Relief (ARP ESSER) (ALN 84.425U) have been audited frequently within the last two years. Additionally, the Emergency Connectivity Fund (ALN 32.009) has also been audited as a major program since its creation.

Additionally, due to a change in regulations, the Universal Service Fund – Schools and Libraries (commonly known as E-Rate) (ALN 32.004) will be subject to audit starting with school year 2022-2023. The program has historically not been subject to Single Audit, but the Federal Communications Commission, the federal agency responsible for this program, has updated SAM.gov which specifies that this program is subject to the Single Audit moving forward. Once the pandemic funding ceases to exist, this program may put many school districts over the federal expenditure threshold that would require a Single Audit.

Typically, the Emergency Connectivity Fund and the E-Rate programs are administered by the IT department with the help of a consultant. It is very important to have well established controls over these programs to minimize noncompliance and audit findings related to a lack of internal controls over these programs. The school district’s business office should review internal processes and policies to ensure expenditures and award agreements associated with these federally funded programs are in place to ensure appropriate internal controls are implemented for compliance with the awards provisions.

Compliance Requirements Subject to Audit

Once the auditor has determined a program to be major, they are responsible for auditing the school district’s compliance with the program requirements and the related controls. Refer to the list on the previous page are the compliance requirements that are potentially subject to audit. However, the exact procedures depend on specific awards, recipient characteristics and the auditor’s risk assessment. The list on the previous page only contains the requirements auditors are responsible for auditing, it does not include all the requirements with which the auditee is required to comply.

With the increase of federally funded programs and changes in the requirements of the Single Audit provisions, there is a higher probability that your school district may require a Single Audit. While this increased funding provides significant funding opportunities to school districts for improved programming, there is an increased administrative burden to ensure appropriate internal controls are implemented and that compliance with federal rules and regulations are achieved. Effectively planning for the utilization of these federal awards and implementing internal controls to address specific compliance requirements tailored to each award is a best practice that school districts should implement. This process will allow the school district to reduce the risk that potential questioned costs could be identified during the audit of the federal award, which could result in the recovery of funding by federal agencies. These practices will also allow for the school district to manage the utilization of federally funded awards and ensure that the amount of funding allocated has been utilized for the benefit of students and the community.

By Matt Geerdes, CPA SENIOR MANAGER CROWE LLP

Readers of the financial statements for a school district in Illinois often have questions about what they are viewing.

Questions like:

• How do these financial statements compare to other surrounding districts?

• Is our district management being a good steward of taxpayer resources and using them in a manner to properly educate our children?

• Are there other items out there that could impact a district’s operations that maybe aren’t reported on the financial statements?

This last question is the one we will focus on for this article.

To set the stage, keep in mind that accounting standard setters for entities like state and local governments and school districts, the Government Accounting Standards Board (GASB), listen to concerns submitted by users of financial statements. These users can be members of an entity’s management that prepare the statements, members of an entity’s governance, investors who purchase securities issued by an entity to raise capital (i.e., a purchaser of a district’s general obligation bonded debt) and the general public. While the specific rules issued by the GASB and its corporate counterpart the Financial Accounting Standards Board (FASB) have differences, the GASB and the FASB have the same goal in mind — and that is to address the continuous need for financial statement users who are looking for relevant information to assess historical performance and help make current and future decisions.

Reporting Items that Have Impact

A recent theme that the standard setters have been addressing in their rulemaking is the impact of items that were not required to be reported on a district’s financial statements but had an impact on operations. Many of the recent GASB pronouncements have been added to clarify the accounting rules for certain areas of a district’s operations and to make sure that items that may have been considered “off-balance-sheet”, but had a significant impact on a district, should be reported in a manner that users can see how these items affect performance. There are several items that districts now report in their financial statements that previously may have been “off-balance-sheet.”

Accounting Topic GASB Pronouncement

Pension Liabilities and Related Information

GASB Statement No. 68, Accounting and Financial Reporting for Pensions –An Amendment of GASB Statement No. 27

Other Post Employment Benefit Liabilities and Related Information

GASB Statement No. 75, Accounting and Financial Reporting for Post Employment Benefits Other Than Pensions

Asset Retirement Obligations

GASB Statement No. 83, Certain Asset Retirement Obligations

Resources Held for Others (Such as Student Activity Funds)

Leases – Lessor and Lessee Requirements

Issuance and Reporting of Conduit Debt Obligations

GASB Statement No. 84, Fiduciary Activities

GASB Statement No. 87, Leases

GASB Statement No. 91, Conduit Debt Obligations

Current Impact

Current and long-term pension obligations for the Illinois Municipal Retirement Fund and Teacher’s Retirement System are now reported on the financial statements along with applicable disclosures for short-term and long-term funding requirements (previously these disclosures were required but were limited in form).

Similar to pensions, obligations for retiree health care under the Teacher Health Insurance Security Fund and District sponsored plans that were previously limited (and in many cases were not reported) are now included in required disclosures and certain financial statement line items.

While these have limited applicability to Illinois school districts, when present these are now required to be reported on the financial statements with related disclosures.

Districts now have to report certain student activity funds as part of the Education Fund due to the change in the definition of a fiduciary activity by the GASB.

Leases that previously had limited/no disclosures or financial statement reporting are now reported.

While these have limited applicability to Illinois school districts, when present, there are now required disclosures that were previously inconsistent in practice, with potential reporting on the financial statements if the district may have a responsibility for future repayment.

GASB Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457

There is limited applicability to Illinois school districts, but it could be appliable based on any changes to current retirement plan governance as well as the structure of a district’s plan that could meet the definition of a fiduciary activity per GASB Statement No. 84 (i.e. where the district is the trustee of the plan assets and would report an obligation to the participants).

So, does that mean that with the adoption of these standards, there aren’t any more items that may be “off-balance-sheet” and the situation is going to stay that way? Not quite. Below are several items currently “off-balance-sheet” that GASB has addressed with standards that will have future reporting implementation.

Accounting Topic GASB Pronouncement Future Impact

Public-Private and Public-Public Partnerships and Availability Payment Arrangements

GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements

Subscription-Based Information Technology Arrangements

GASB Statement No. 96, Subscription-Based Technology Arrangements

This standard is required to be implemented for Illinois school districts for the fiscal year ending June 30, 2023. It may not be as relevant for Illinois school districts but could occur and thus districts need to assess their arrangements with outside entities that could fall into the scope of this guidance.

This standard is required to be implemented for Illinois school districts for the fiscal year ending June 30, 2023. Similar to leases, districts will need to review their software agreements and technology contracts to determine future required accounting, such as contracts with general ledger software providers and enterprise resource planning software providers.

Certain Types of Compensated Absences That May Not Be Accounted For Currently (Such As Sabbaticals)

GASB Statement No. 101, Compensated Absences

This standard is required to be implemented for Illinois school districts for the fiscal year ending June 30, 2025, which will require districts to assess the types of leave offered to employees, how they are accounted for internally as well as how required obligations are calculated for financial statement presentation.

GAAP, Cash/Modified Cash and Regulatory Reporting Models

The manner in which these topics are reported on the financial statements and/or disclosed in the footnotes is dependent upon a district’s adopted reporting model, with the three models used in Illinois school districts being:

1. GAAP (Generally Accepted Accounting Principles) Model — Reports all activities on an accrual basis and follows all GASB pronouncements.

2. Cash/Modified Cash Model — Reports cash and certain assets/liabilities on the financial statements but includes disclosures as required with a key disclosure being what is/what is not included in the adopted accounting policies.

X While this is not a full GAAP presentation, it is considered acceptable to the Illinois State Board of Education and many users of the financial statements, as the auditor’s report typically will include an unmodified (or clean) opinion with an explanation, since the reporting model still follows the basic GAAP provisions of GASB.

3. Regulatory Model — Uses reporting forms from the Illinois State Board of Education’s Form 50-35 and can include cash basis or accrual basis reporting. Disclosures are also included as to how this reporting model differs from the GAAP model.

X The auditor’s report will contain an adverse opinion as it pertains to GAAP as this presentation is not in line with the GAAP model but normally will also contain an unmodified report on a regulatory basis.

Monitoring the GASB Requirements

Standard setters continue to listen to constituents as well as perform post implementation reviews of issued standards, which include items that were previously considered “off-balance sheet” items. That will necessitate districts to monitor requirements from the GASB, as management is ultimately responsible for the adoption and presentation of activity within financial statements based on adopted accounting policies required by the standard setters. Remember, auditors do NOT set policy, they only render opinions on the financial statement presentation!

Some other items to keep in mind:

• For items that are still “off-balance sheet”, such as construction commitments and unused letters of credit, most of these items require disclosure in the current reporting framework. A common theme of these disclosures (as well as a common question from users) is a discussion on how future expenditures will be funded, regardless of the reporting model.

• Districts who report financial statements on basis other than GAAP (cash basis or regulatory basis accepted by the Illinois State Board of Education) do need to monitor accounting developments as well. While the liabilities above would not be reported on the financial statements due to the adopted accounting policies, constituents may be asking about how the district is considering funding obligations that aren’t reported. Will it be tax increases, grants or other revenue sources? Those obligation payments WILL have to be reported on a cash basis as expenditures, so reporting will occur in some form sooner or later!

If you have questions, please do not hesitate to reach out to the Illinois ASBO Accounting, Auditing and Financial Reporting PDC Members. They will be happy to address any questions you may have.

By Melissa Morgese DIRECTOR