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Single Audit Problems for Cash Management Caused by the Compliance Supplement

When performing a Single Audit, auditors rely on the guidance in the Office of Management and Budget (OMB) Compliance Supplement, which is incorporated by reference into 2 CFR Part 200 of the Uniform Guidance as Appendix XI. The Compliance Supplement outlines specific audit steps to be followed by auditors as they perform their testing. It also defines the 12 Compliance Requirements that are to be audited, such as Allowable Costs/Cost Principles, Reporting, Subrecipient Monitoring, and Cash Management. As someone who reviews a lot of Single Audits for purposes of subrecipient monitoring, I noticed a large number of universities had received audit findings related to the Cash Management Compliance Requirement for drawing down funds (i.e. billing/invoicing) prior to paying for an expense. This appeared to start about a year after the Uniform Guidance was first released on December 26, 2014. This article will go over the reason for these audit findings and help you understand the differences in language between the Uniform Guidance and the Compliance Supplement, which OMB should correct.

The reason behind these audit findings is found in Part 3’s Cash Management section of the Compliance Supplement, which states that “program costs must be paid by non-federal entity funds before submitting a payment request.” This language existed in the Compliance Supplement prior to the implementation of the Uniform Guidance, but seemed to get attention, for one reason or another, after the Uniform Guidance was released. In the most recent version of the Compliance Supplement dated August 2020, this section states, “The reimbursement payment method is the preferred payment method if (a) the non-federal entity cannot the meet the requirements in 2 CFR section 200.305(b)(1) for advance payment, (b) the federal awarding agency sets a specific condition for use of the reimbursement or (3) if requested by the non-federal entity (2 CFR sections 200.305(b)(3) and 200.207)). The reimbursement payment method also may be used on a federal award for construction or for other construction activity as specified in 2 CFR section 200.305(b)(3), program costs must be paid by non-federal entity funds before submitting a payment request (2 CFR section 200.305(b)(3)), i.e., the non-federal entity must disburse funds for program purposes before requesting payment from the federal awarding agency or pass-through entity.”

The problem with this part of the Compliance Supplement is that 2 CFR 200.305(b)(3) of the Uniform Guidance does not actually state this. The Council on Governmental Relations (COGR), an advocacy association whose membership includes many top research universities and medical centers, has unsuccessfully requested OMB to add a definition to the Compliance Supplement clarifying what it means for a cost to be paid. I spoke with several of my institution’s subrecipients that received this audit finding which led me to submit my own request to OMB requesting a change to the language in the Compliance Supplement.  My proposed approach is different than that of COGR.

I took a broader approach to this issue and looked at the Uniform Guidance as a whole. When recipients draw down funds or invoice federal sponsors on a cost reimbursable basis, they are invoicing for expenditures. The “Certifications” section of the UG (2 CFR 200.415) states the language that must be certified when submitting reports and submitting a voucher requesting payment. Within that language recipients are certifying expenditures they invoice for, which aligns with drawing down funds based on expenditures, as opposed to what has already been paid, as the Compliance Supplement wrongly states.

Though easy to miss, the UG has an actual definition for the term expenditures (2 CFR 200.34), and the definition can differ based on whether you prepare reports on a cash or accrual basis. This definition does not distinguish the type of “reports” that it is referring to, whether it’s your entity’s annual financial reports or the Federal Financial Report (SF-425).  If your entity is using a cash basis to report expenditures, then you must have actually paid for an expense before invoicing or drawing down funds for reimbursement. If you’re using an accrual basis to report expenditures, then expenses just have to be incurred in order to count as an expenditure. For the accrual basis, 2 CFR 200.34’s definition even states that expenditures include, “the net increase or decrease in the amounts owed by the non-Federal entity for: (i) Goods and other property received; (ii) Services performed by employees, contractors, subrecipients, and other payees.” For example, in accrual accounting an expense is incurred when goods or services are received, regardless of when you receive an invoice from your vendor or subrecipient and regardless of when you actually pay the vendor, subrecipient, or even your own employees.

This problem would be solved if OMB were to replace this incorrect language with a reference to 2 CFR 200.34’s definition of expenditures. In the comment I submitted to OMB regarding the Compliance Supplement, I requested the language be revised as follows:

Current language: “Program costs must be paid by non-federal entity funds before submitting a payment request.”

Proposed language: “Program costs must be expensed, as defined by 2 CFR 200.34, by the non-federal entity before submitting a payment request.”

OMB said this would be considered for the 2021 Compliance Supplement, but there are no guarantees that they will change their language. If auditors propose giving you a finding related to this issue, I encourage you to show them that the Compliance Supplement currently conflicts with the regulations set forth in the Uniform Guidance, and remind them that the Uniform Guidance takes precedence over the Compliance Supplement. You are welcome to cite this article in support of your position.

Below is the full comment that I submitted to OMB, as well as the applicable regulations for your reference.

Augusta University requests a change in the Cash Management section of Part 3 of the 2020 Compliance Supplement to align the Compliance Supplement to the regulations in 2 CFR 200. Page 86 of the Compliance Supplement states:

The reimbursement payment method is the preferred payment method if (a) the non-federal entity cannot the meet the requirements in 2 CFR section 200.305(b)(1) for advance payment, (b) the federal awarding agency sets a specific condition for use of the reimbursement or (3) if requested by the non-federal entity (2 CFR sections 200.305(b)(3) and 200.207)). The reimbursement payment method also may be used on a federal award for construction or for other construction activity as specified in 2 CFR section 200.305(b)(3), program costs must be paid by non-federal entity funds before submitting a payment request (2 CFR section 200.305(b)(3)), i.e., the non-federal entity must disburse funds for program purposes before requesting payment from the federal awarding agency or pass-through entity.

The sentence, “program costs must be paid by non-federal entity funds before submitting a payment request,” is not part of 2 CFR 200.305(b)(3), and we request it to be removed.

The term “Expenditures” are defined in 2 CFR 200.34, and the timing of when a cost is truly an expenditure depends on whether non-federal entities use the cash or accrual basis in preparing its reports. If non-federal entities are using the “cash” basis, then expenditures that are eligible to be billed/invoiced for would use the criteria in 2 CFR 200.34(b), and the costs that have been paid via cash disbursement would be the non-federal entity’s true expenditures. In contrast, if non-federal entities are preparing reports on an accrual basis, then the criteria in 2 CFR 200.34(c) would apply, and under this method a cost does not necessarily have to be paid via cash disbursement in order for it to count as an expenditure. The current language in the 2020 Compliance Supplement does not recognize this distinction in the definition of expenditures and how the basis of reports can drive when a cost is considered an expenditure.

This perspective of the regulations is further supported by 2 CFR 200.415 “Certifications” which stipulates the language that must be certified by the non-federal entity when submitting a report or voucher requesting payment (i.e. invoice/bill). The language in 2 CFR 200.415 states the following:

“By signing this report, I certify to the best of my knowledge and belief that the report is true, complete, and accurate, and the expenditures, disbursements and cash receipts are for the purposes and objectives set forth in the terms and conditions of the Federal award. I am aware that any false, fictitious, or fraudulent information, or the omission of any material fact, may subject me to criminal, civil or administrative penalties for fraud, false statements, false claims or otherwise. (U.S. Code Title 18, Section 1001 and Title 31, Sections 3729-3730 and 3801-3812).”

The fact that the certification language is having the non-federal entity certify its expenditures for purposes of requesting payments, without dictating the basis of recognizing expenditures under the cash or accrual method, means that costs do not necessarily have to be “paid” before submitting a request for reimbursement. Part 3 of the Compliance Supplement needs to recognize this fact. We recommend replacing the, “program costs must be paid by non-federal entity funds before submitting a payment request,” part of the sentence with the following:

“Program costs must be expensed, as defined by 2 CFR 200.34, by the non-federal entity before submitting a payment request” 

Applicable regulations from 2 CFR 200:

1. The charges may be reported on a cash or accrual basis, as long as the methodology is disclosed and is consistently applied.
2. For reports prepared on a cash basis, expenditures are the sum of:
   1. Cash disbursements for direct charges for property and services;
   2. The amount of indirect expense charged;
   3. The value of third-party in-kind contributions applied; and
   4. The amount of cash advance payments and payments made to subrecipients.
3. For reports prepared on an accrual basis, expenditures are the sum of:
   1. Cash disbursements for direct charges for property and services;
   2. The amount of indirect expense incurred;
   3. The value of third-party in-kind contributions applied; and
   4. The net increase or decrease in the amounts owed by the non-Federal entity for:
      1. Goods and other property received;
      2. Services performed by employees, contractors, subrecipients, and other payees; and
      3. Programs for which no current services or performance are required such as annuities, insurance claims, or other benefit payments.

2 CFR 200.305(b)(3) Reimbursement is the preferred method when the requirements in paragraph (b) cannot be met, when the Federal awarding agency sets a specific condition per §200.207 Specific conditions, or when the non-Federal entity requests payment by reimbursement. This method may be used on any Federal award for construction, or if the major portion of the construction project is accomplished through private market financing or Federal loans, and the Federal award constitutes a minor portion of the project. When the reimbursement method is used, the Federal awarding agency or pass-through entity must make payment within 30 calendar days after receipt of the billing, unless the Federal awarding agency or pass-through entity reasonably believes the request to be improper.

Required certifications include:

1. To assure that expenditures are proper and in accordance with the terms and conditions of the Federal award and approved project budgets, the annual and final fiscal reports or vouchers requesting payment under the agreements must include a certification, signed by an official who is authorized to legally bind the non-Federal entity, which reads as follows: “By signing this report, I certify to the best of my knowledge and belief that the report is true, complete, and accurate, and the expenditures, disbursements and cash receipts are for the purposes and objectives set forth in the terms and conditions of the Federal award. I am aware that any false, fictitious, or fraudulent information, or the omission of any material fact, may subject me to criminal, civil or administrative penalties for fraud, false statements, false claims or otherwise. (U.S. Code Title 18, Section 1001 and Title 31, Sections 3729-3730 and 3801-3812).”

Authored by Jason Guilbeault, CRA, Director of Post Award Services
Augusta University
SRAI Distinguished Faculty