Pennsylvania CPA Journal
Most auditors will have only started working through their first audits under the 2024 revisions to 2 CFR Part 200. They may find it is actually leading to additional work in the first year.
In a year marked by the longest federal government shutdown on top of the process of consolidating and closing multiple federal agencies, the accountants and auditors of entities that receive federal grants have been looking forward to something that might be a bright spot. That silver lining has taken the form of the most substantial update to Uniform Guidance in little over a decade.
The 2024 revisions to the Uniform Guidance (2 CFR Part 200) have several key elements that are meant to reduce administrative workload and update compliance requirements. While the revised guidance became effective for fiscal years beginning on or after Oct. 1, 2024, most auditors will have only started working through their first audits under the new requirements over the past few months.
One of the most significant impacts for grant-receiving organizations and their external auditors is the increase in the single audit threshold from $750,000 to $1 million in annual federal expenditures. In a way, this has provided an opportunity for some organizations to reduce administrative workload by not undergoing the annual single audit. Without the audit requirement, an organization might see a reduction in hours spent related to preparing compliance testing selections, internal control documentation, and additional reporting requirements. The time saved may allow organizations to redirect the additional time and resources to the grants to achieve more efficiency and help with other operational support services.
While this might reduce the number of annual audits completed, it does not relieve the organization of their responsibility to comply with all the applicable award requirements. A potential risk facing an organization could be the notion that when program or finance staff believe that an external party might not be reviewing the individual awards during a grant cycle short cuts could creep in. It is important for finance and governance to reiterate that although an award will not be subject to an audit it still requires the organization to ensure the compliance process and that internal controls do not suffer from this perceived notion.
Another impactful revision is the opportunity for an organization to select the 15% de minimis indirect cost rate. Prior to the revision, the de minimis indirect cost rate was 10%. This change will be particularly helpful for those organizations that do not have a negotiated indirect cost rate or subrecipients that have struggled to recover their administrative costs in the past. Organizations that have negotiated indirect costs are allowed to switch to the new de minimis only after their negotiated indirect cost rate agreement (NICRA) has expired. Organizations that have an NICRA should conduct a careful evaluation, working with their external auditors to determine if potentially switching to the de minimis cost rate is the most effective option.
Another meaningful change relates to procurement standards and the capitalization of equipment thresholds. Procurement has long been an area of high risk with government programs due to the micropurchase threshold, small purchases, and the competitive and sealed bid process. These procurement processes have led to frequent audit findings surrounding lack of documentation for bids and quotes from vendors, as well as using outdated policies. The updated guidance aims to streamline the purchasing process by increasing the procurement thresholds and eliminating unnecessary administrative burdens without forgoing the intended principles of Uniform Guidance. The increase in capitalization policy should align more with the threshold policies commonly used for nonfederal purchases. This should provide a reduction in administrative workload for tracking lower-cost items while maintaining appropriate controls over federally funded assets.
Together these changes are designed to help eliminate workload and improve consistency at all levels of the grant cycle. However, success will be determined by the effectiveness of organizational planning and governance. The board of directors and management must continue to reinforce the importance of maintaining compliance with federal award stipulations since these organizations are stewards of public trust. Leadership must consider if additional training is needed as the new guidance is implemented.
Audit firms will need to carefully incorporate not only these revisions into their planning but how management has implemented the new guidance. One of the first major steps firms will need to stress during the planning process is making sure the major program determination is completed correctly with the new thresholds for selections of Type A and Type B programs. Using the latest compliance supplement, evaluate prior-year audit findings and how the organization corrected findings during the year. Auditors must assess whether organizations were eligible to elect the de minimis rate and if it is being applied consistently and correctly across all federal awards.
These changes very well could reduce workload, eventually. The transition to the new guidance, as surely some are learning, might actually lead to additional work in the first year. But with proper planning, updating policies and procedures, and working together as a team, both auditors and grant-receiving organizations will in time see the benefits of the revised guidance.
Salvatore J. Spera, CPA, is an audit manager in the nonprofit practice at Tait Weller & Baker LLP in Philadelphia. He can be reached at sspera@taitweller.com.