[Senate Report 104-266]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 401
104th Congress                                                   Report
                                 SENATE  
 2d Session                                                     104-266
_______________________________________________________________________


 
                  SINGLE AUDIT ACT AMENDMENTS OF 1996

                               __________

                              R E P O R T

                                 of the

         COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE

                              to accompany

                                S. 1579

TO STREAMLINE AND IMPROVE THE EFFECTIVENESS OF CHAPTER 75 OF TITLE 31, 
 UNITED STATES CODE (COMMONLY REFERRED TO AS THE ``SINGLE AUDIT ACT'').




                  May 13, 1996.--Ordered to be printed
                   COMMITTEE ON GOVERNMENTAL AFFAIRS

   TED STEVENS, Alaska, Chairman
JOHN GLENN, Ohio                     WILLIAM V. ROTH, Jr., Delaware
SAM NUNN, Georgia                    WILLIAM S. COHEN, Maine
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DAVID PRYOR, Arkansas                THAD COCHRAN, Mississippi
JOSEPH I. LIEBERMAN, Connecticut     JOHN McCAIN, Arizona
DANIEL K. AKAKA, Hawaii              BOB SMITH, New Hampshire
BYRON L. DORGAN, North Dakota        HANK BROWN, Colorado
    Albert L. McDermott, Staff 
             Director
       John Mercer, Counsel
  Leonard Weiss, Minority Staff 
             Director
  Michal Sue Prosser, Chief Clerk
                                                       Calendar No. 401
104th Congress                                                   Report
                                 SENATE

 2d Session                                                     104-266
_______________________________________________________________________


                  SINGLE AUDIT ACT AMENDMENTS OF 1996

                                _______


                  May 13, 1996.--Ordered to be printed

_______________________________________________________________________


Mr. Stevens, from the Committee on Governmental Affairs, submitted the 
                               following

                              R E P O R T

                         [To accompany S. 1579]

    The Committee on Governmental Affairs, to which was 
referred S. 1579, the ``Single Audit Act Amendments of 1996'' 
to reduce the burden on State and local governments and 
nonprofit organizations and improve the effectiveness of 
oversight of Federal assistance, having considered that 
legislation which is within the jurisdiction of the Committee, 
reports favorably and recommends that the bill do pass.

                                CONTENTS

                                                                   Page
  I. Purpose..........................................................1
 II. Summary..........................................................2
III. Need for legislation.............................................2
 IV. Legislative history of S. 1579..................................11
  V. Section-by-section analysis.....................................13
 VI. Regulatory impact...............................................22
VII. Cost impact.....................................................23
VIII.Text of S. 1579, as reported....................................24

 IX. Changes to existing law.........................................32

                               I. Purpose

    This bill amends the Single Audit Act of 1984 (P.L. 98-502) 
to reduce the burden on State and local governments and 
nonprofit organizations and improve the effectiveness of 
oversight of Federal assistance.

                              II. Summary

    The ``Single Audit Act Amendments of 1996'' (S. 1579) 
amends the Single Audit Act of 1984 (P.L. 98-502). The 1984 Act 
replaced multiple grant-by-grant audits of Federal assistance 
programs with an annual entity-wide audit process for State and 
local governments that receive Federal financial assistance. S. 
1579 streamlines the Act, updates its requirements, and 
provides for more flexibility in both compliance and 
administration. The bill's major reforms would:

                         improve audit coverage

    The bill would improve single audit coverage and simplify 
Federal rules by placing State and local governments, and 
colleges and universities and other nonprofit grantees, under 
the same single audit process.

                             Reduce Burdens

    The bill would raise the single audit threshold from 
$100,000 to $300,000. It would also eliminate the $25,000 
threshold for requiring that entities either have the financial 
audits required by the laws governing Federal financial 
assistance or a single audit under the Act. These changes would 
reduce audit and paperwork burdens, while preserving audit 
coverage of the vast majority of Federal assistance.

                      improve audit effectiveness

    The bill would establish a risk-based approach for 
selecting programs for detailed audit testing, rather than 
relying solely on dollar criteria.

                     improve single audit reporting

    The bill would improve the contents and timeliness of 
single audit reports to make them more useful.

                  increase administration flexibility

    The bill would provide more flexibility for OMB to revise 
specific requirements within the statutory single audit 
framework.
    In sum, the legislation would improve accountability for 
hundreds of billions of dollars of Federal assistance, while 
also reducing auditing and paperwork burdens on grant 
recipients.

                       III. Need for Legislation

                             a. background

    The Single Audit Act of 1984 was designed to improve 
accountability over the Federal assistance provided annually to 
State and local governments, which was approximately $225 
billion for fiscal year 1995. The Act established a structured 
approach of entity-wide audits to simplify overlapping audit 
requirements and improve grantee-organization administrative 
controls. This change eliminated serious gaps in audit coverage 
and reduced duplication of audit effort.
    The Act also prompted improvements in State and local 
governments' financial management over Federal assistance. The 
Act did so by placing responsibilities on the audited entities 
and their auditors. For example, it requires entities to 
prepare financial statements, arrange for an audit, and develop 
corrective action plans to resolve audit findings. The Act 
requires auditors to expand a traditional financial statement 
audit to include additional testing of the entity's internal 
controls over Federal programs and the entity's compliance with 
requirements for those programs.
    The Act is built on the premise that prevention, rather 
than detection, of problems is of utmost importance. 
Consequently, the auditor reporting on internal controls over 
Federal assistance and the entity developing corrective action 
plans to fix problems are particularly important features. Over 
time, such actions will lead to fewer problems involving the 
administration of Federal assistance and strengthened 
accountability over such assistance.
    The Congress established a $100,000 threshold in the 1984 
Act, based upon the amount of Federal assistance an entity 
received during a year either directly from the Federal 
government or passed through another non-Federal entity, to 
determine whether an entity would be required to have a single 
audit. An entity that receives $25,000 to $100,000 must arrange 
for either a financial or financial and compliance audit in 
accordance with the laws governing the Federal programs under 
which it receives financial assistance or a comprehensive 
single audit of the entire entity. Many entities that receive 
$25,000 to $100,000 opt for a single audit. Since the 
thresholds are established in the Act, they can only be charged 
by amending the Act.
    Single audits are designed to give program managers and 
others reasonable assurance about an entity's management of 
Federal programs and, when necessary, to provide the foundation 
for other oversight activities, including program manager 
reviews, additional audits, or investigations. The Act 
specifically preserves Federal agencies' rights to build on the 
results of single audits, including the right to review and 
obtain copies of auditors' working papers for purposes 
consistent with the purposes of the Act.
    In 1990, the Office of Management and Budget (OMB) extended 
the single audit concept to nonprofit organizations. It did so 
by issuing OMB Circular A-133, ``Audits of Institutions of 
Higher Education and Other Nonprofit Organizations.'' OMB 
circulars are administrative guidance used by agencies to 
structure their rules. OMB issues such administrative circulars 
after a process that includes issuing an exposure draft and 
obtaining comments from interested parties. OMB revised 
Circular A-133 on April 19, 1996, pursuant to its authority 
under 31 U.S.C. 503, 1111, and various Executive Orders. The 
requirements of the Circular, which again only apply to 
nonprofit organizations receiving Federal financial assistance, 
are consistent with the provisions of the current legislation 
(which again covers both State and local governments and 
nonprofit organizations). The Committee understands that OMB 
intends to revise the Circular again once the current 
legislation is enacted into law to provide uniform guidance in 
one circular for both State and local governments and nonprofit 
organizations.
    The National State Auditors Association (NSAA), the 
President's Council on Integrity & Efficiency (PCIE), and U.S. 
General Accounting Office (GAO) issued studies during the past 
several years which called for improvements in the single audit 
process. All three studies called for changes that would 
require amending the Single Audit Act of 1984. The NSAA study 
(Position Paper: Single Audit Act, NSAA, February 4, 1993) 
stated that ``changes could improve the functioning of the 
Act.'' The PCIE study (Study on Improving the Single Audit 
Process, PCIE Standards Committee, September 30, 1993) stated 
that ``Federal agencies, independent public accountants, State 
auditors, and State and local program managers have expressed 
concerns that while the Act is working, the process needs to be 
improved.''
    The GAO study was initiated at the request of Senator 
Glenn, then Chairman of the Committee. In 1994, GAO reported 
that State and local government officials that were interviewed 
believed the single audit process has contributed to improving 
their entities' financial management practices. The entities 
have installed new accounting systems, begun having annual 
comprehensive financial statement audits, adopted or 
accelerated the adoption of generally accepted accounting 
principles, improved systems for tracking Federal funds, 
strengthened administrative controls over Federal programs, and 
increased oversight of entities to whom they distributed 
Federal funds (Single Audit: Refinements Can Improve 
Usefulness, GAO/AIMD-94-133, June 21, 1994).
    Despite these reported improvements, GAO found that a 
number of issues burden the single audit process, hinder the 
usefulness of its reports, and limit its impact. Specifically, 
under the Act, entities are selected for audit based on 
prescribed dollar thresholds, which have not changed since 
passage of the Act in 1984. Because the thresholds have not 
changed, many entities receiving relatively small amounts of 
Federal assistance are subject to audits.
    According to oversight officials and program managers 
contacted by GAO, several issues hinder the usefulness of 
single audit reports. Because the reports do not include 
summaries of the auditors' conclusions, the most important 
findings are not highlighted. In addition, single audit reports 
are not required to be issued until 13 months after the end of 
the period under review. Such a long time frame limits the 
usefulness of the reports.
    In conducting its study, GAO surveyed Federal managers for 
12 programs, State managers in all 50 States, and worked with 
other stakeholders in the single audit process, including OMB, 
the PCIE, the American Institute of Certified Public 
Accountants, the Federal Grants Network, the Government Finance 
Officers Association, the National Association of State 
Comptrollers, and the NSAA. GAO also reviewed a random sample 
of single audit reports.
    When Senator Glenn released the GAO study in 1994, he 
called for a ``strengthening'' of the Act. GAO subsequently 
assisted the Committee in developing legislative language to 
implement recommendations to improve the single audit process. 
Several preliminary drafts were circulated for comment.
    The bill was supported at the Committee's December 14, 
1995, financial management hearing by Charles A. Bowsher 
(Comptroller General), G. Edward DeSeve (OMB Comptroller), and 
Kurt R. Sjoberg (California State Auditor). The Comptroller 
General strongly supported the single audit concept and said 
that the legislation to amend the Single Audit Act would 
strengthen the single audit process while at the same time 
reducing the burden on State and local governments and 
nonprofit organizations. Mr. DeSeve agreed that the amendments 
are needed. Mr. Sjoberg said the State auditor community 
believes that the Act has been a success and fully met its 
objectives. He added that the State auditors believe that 
changes in the auditing profession and in Federal, State and 
local governments' financial management necessitate 
improvements to the Act.
    The NSAA and the PCIE Audit Committee endorsed the bill in 
letters to the Committee. The NSAA letter stated that the 
``legislation is an excellent measure that deserves to be 
passed into law as soon as possible.'' The PCIE letter said 
that the audit committee ``believes that the improvements to 
the Single Audit Act of 1984 contained in the proposed 
amendments will result in significantly more effective and 
efficient auditing of Federal program funds at State and local 
governments and nonprofit organizations and we urge that they 
be passed as soon as possible.''
    In summary, stakeholder groups support the single audit 
concept as an appropriate means of applying audit resources to 
help provide accountability over the hundreds of billions of 
dollars in Federal assistance provided annually to State and 
local governments and nonprofit organizations and they endorse 
the proposed amendments to strengthen the single audit process.

                           b. the legislation

    The Single Audit Amendments of 1996 would improve the Act 
in five important ways. It would: (1) Improve audit coverage of 
Federal assistance; (2) Reduce Federal audit burdens on State 
and local governments and universities and other nonprofit 
grantee organizations; (3) Improve audit effectiveness through 
a risk-based approach for audit testing; (4) Improve the 
contents, timeliness, and utility of single audit reporting; 
and (5) Increase administrative flexibility to modify single 
audit requirements as conditions change.

1. Improve audit coverage

    The bill would improve audit coverage of Federal assistance 
by including in the single audit process all State and local 
governments and nonprofit organizations that receive Federal 
assistance. Currently, the Act only applies to State and local 
governments. Nonprofit organizations are subject 
administratively to single audits under OMB Circular A-133.
    The Circular A-133 provisions differ in several respects 
from the Act. For example, different dollar criteria are used 
to determine which programs must be tested (major programs). 
For entities that expend between $100,000 and $100,000,000 in 
Federal financial assistance, a major program under the Act is 
one for which program expenditures exceed the greater of 
$300,000 or 3 percent of the entity's expenditures. A major 
program under Circular A-133 is one for which the nonprofit 
organization expends the greater of $100,000 or 3 percent of 
the organization's Federal program expenditures. Furthermore, 
Circular A-133 requires all research and development awards to 
be treated as a single program for audit purposes and allows 
the entity to elect a program-specific audit if the entity 
administers only one Federal program, regardless of the amount 
of expenditures by that program. The Act does not include those 
provisions.
    Including nonprofit organizations under the Act would 
result in a common set of single audit requirements for Federal 
assistance. Thus, Federal assistance would be subject to the 
same audit provisions regardless of whether it is administered 
by a State or local government or a nonprofit organization. 
Consequently, auditors would no longer be faced with different 
provisions for conducting single audits depending simply on the 
type of organization that is audited.

2. Reduce Federal burden

    The bill would simultaneously reduce the Federal burden on 
thousands of State and local governments and nonprofit 
organizations and their auditors, and ensure audit coverage 
over the vast majority of Federal assistance provided to those 
organizations. It would do so by raising the dollar threshold 
for requiring a single audit from $100,000 to $300,000. The 
NSAA noted that the higher threshold would relieve many State 
and local governments of Federal audit mandates. Nonetheless, 
GAO estimated that a $300,000 threshold would cover 95 percent 
of all direct Federal assistance to local governments. The 95 
percent coverage is commensurate with the coverage planned at 
the $100,000 threshold when the Act was passed in 1984. Thus, 
exempting thousands of entities from single audits would reduce 
audit and paperwork burdens, but not significantly diminish the 
percentage of Federal assistance covered by single audits.
    Entities whose Federal expenditures are less than the 
$300,000 audit threshold are exempt from Federally mandated 
financial audit coverage. This also eliminates the $25,000 
threshold which requires entities to have a financial audit in 
accordance with the laws governing each Federal financial 
assistance program the entity administers. Entities receiving 
less than $300,000 in Federal assistance still must comply with 
Federal requirements to maintain records and permit access to 
records, and are still subject to monitoring by the funding 
organization, whether Federal, State, local, or nonprofit. 
Moreover, both the 1984 Act and the current legislation 
recognize that funding organizations are free to conduct or 
arrange for audits as a part of such monitoring.
    The $300,000 threshold is consistent with the 1984 
congressional intent to have audit thresholds that could 
provide very broad coverage (thus the GAO estimate of 95% audit 
coverage), yet free the smallest recipients from 
disproportionately burdensome audit requirements. Again, 
Congress intended programmatic monitoring to ensure 
accountability for funds given to those smaller recipients. The 
current legislation, therefore, maintains the congressional 
intent of the 1984 Act, recognizing increased funding levels.

3. Improve audit effectiveness

    The bill would improve audit effectiveness by directing 
audit resources to the areas of greatest risk. GAO, NSAA, and 
PCIE all support adoption of a risk-based program selection 
approach. Currently, auditors must perform tests of the 
largest--but not necessarily the riskiest--programs that an 
entity administers. This testing can involve assessing 
eligibility of participants, allowability of costs, and 
adequacy of matching funds.
    The bill would require auditors to assess the risk of the 
entity's programs and select the riskiest programs for testing. 
As the President of the NSAA said, ``It makes good economic 
sense to concentrate audits were increased corrective action 
and recoveries are likely to result.''
    The Act's original program selection criteria are highly 
effective in ensuring that significant proportions of Federal 
assistance were subjected to audit testing. However, the result 
was that the same programs were likely to be tested each year. 
Consequently, the great majority of programs were likely to not 
be selected for testing. In 1994, GAO reported that in a sample 
of single audit reports, only 17 percent of the 526 Federal 
programs operated by 210 State and Local governments met the 
program selection criteria. But those programs contributed over 
90 percent of the $15 billion of Federal expenditures for those 
governments. Adoption of a risk-based problem selection 
approach would allow auditors to use their professional 
judgment and target audit resources at the areas presenting the 
greatest risk to the Federal government. Over time, a greater 
proportion of programs will be selected for testing.
    The risk-based program selection approach is subject to a 
limitation on the number of programs that must be tested during 
an audit. The limitation is designed to preclude a significant 
increase in the number of programs tested due to the adoption 
of a risk-based program selection approach. As described above, 
only a small percentage of programs qualify for testing under 
the current dollar-driven program selection approach. For a 
large entity, such as a State government, hundreds of Federal 
programs may have received little or no recent auditor testing. 
Since the absence of recent audit testing is a factor 
indicating higher risk, an auditor could be faced with the 
prospect of having to test many more programs than would have 
been tested under the dollar-driven approach.
    The limitation on the number of programs that must be 
tested is based upon the amount of the non-Federal entity's 
total Federal expenditures. The auditor must determine the 
number of programs that meet specified criteria based upon 
expenditures. That determination establishes the maximum number 
of programs that must be tested. However, the auditor is not 
required to test those specific programs. For example, if an 
entity operated 60 Federal programs and 20 of those programs 
met the dollar criteria, then the auditor would have to test a 
maximum of 20 programs. However, the determination of which 
programs to test would be based upon risks as discussed above.
    The bill allows the Director to establish criteria under 
which a group of related programs, such as research and 
development, student financial aid, or school breakfast and 
lunch programs, could be considered a single program for audit 
purposes. Such combinations of similar programs would produce 
efficiencies in the audit testing of Federal awards.
    Auditors are required to test the internal controls and 
compliance with laws and regulations that the entity has 
established for the programs that provide at least 50 percent 
of the entity's Federal expenditures, or lesser percentage 
established by the OMB Director. Internal controls are intended 
to help prevent problems from occurring. Compliance testing 
includes determining whether the entity complied with specific 
program requirements, such as participant eligibility and 
allowability of costs. The results of such tests provide 
important insights about the entity's management of the 
programs.
    Single audits are intended to facilitate, rather than 
inhibit, other oversight activities, including program reviews, 
additional audits, and investigations of suspect grantees. 
Single audits are not intended to answer all questions about an 
entity's stewardship of Federal programs. Rather, when the 
audits disclose problems with the entity's internal controls, 
compliance with laws or regulations, or its financial 
management activities, they can provide leads which prompt 
follow-on oversight.
    Program managers can benefit from single audit reports even 
if their programs are not tested during the audit. The results 
of testing of other Federal programs can provide insights into 
the entity's stewardship over Federal assistance. And the 
findings can directly result in other audits. GAO reported that 
the Department of Health and Human Service's Office of 
Inspector General conducted audits based upon leads in single 
audit reports. Those ``build-upon'' audits identified $360 
million in cost containment recommendations.
    Effective use of single audits is largely dependent upon 
Federal agencies' ability to have access to the auditors' 
working papers which describe the scope of the work and 
document the results of the work, including any problems found. 
Mr. Sjoberg, the State Auditor of California, in testifying at 
the Committee's December 14, 1995 hearing, said that the 
``build-upon'' concept, where Federal agency officials would 
review his office's working papers, allowed the Federal 
officials to determine what work had been performed and to 
avoid unnecessary duplication of effort.
    The bill reinforces the Federal government's right to 
review and obtain copies of working papers. Such access is 
necessary to plan additional Federally-sponsored ``build-upon'' 
audits, to assess the quality of the auditors' work, and to 
resolve audit findings. The ability to gain access to the 
working papers and to make copies is important to help Federal 
agencies use the single audit results in carrying out oversight 
of Federal programs in the most efficient and effective manner 
and to assess the quality of the work conducted by non-Federal 
auditors. Federal agencies should be judicious in their 
exercise of this authority.

4. Improve single audit reporting

    The bill would greatly improve the usefulness of single 
audit reports by requiring auditors to provide a summary of 
audit results. The NASA study stated that ``the complexity of 
the reports makes it difficult for the average reader to 
understand what has been audited and reported.'' 
Interpretations of current rules lead auditors to include 7 or 
more separate reports in each single audit report. Such a large 
number of separate reports tends to confuse rather than inform 
users. A summary of the audit results would highlight important 
information and thus enable users to quickly discern the 
overall results of an audit. The summary information would 
supplement rather than supplant the detailed supporting 
information in the auditors' reports that would be needed to 
resolve audit findings. Federal managers surveyed by GAO 
overwhelmingly supported the summary reporting. They said that 
summary reporting would save them time and enable them to 
quickly focus on any problems the auditors found.
    The reports would also be due sooner--9 months after the 
year end rather than the current 13 months. The timing of the 
single audit reports was debated amount stakeholder groups. The 
debate centered upon the time-value of the information versus 
the effort necessary to shorten the reporting time frame. 
Federal managers that GAO surveyed strongly supported a shorter 
time frame. State auditors who conduct thousands of single 
audits each year were concerned about their ability to complete 
the audits in the originally proposed 6-month reporting time 
frame but agreed to the 9-month time frame.
    The bill contains two provisions to ameliorate the impact 
on the auditors of shortening the reporting time frame. First, 
it requires OMB to establish a transition period of not less 
than 2 years for entities to comply with the new reporting time 
frame. Second, it authorizes Federal agencies to grant waivers 
to the shortened time frame. The addition of those provisions 
addressed the State auditors' concerns and they subsequently 
supported the bill as written.
    The Comptroller General, in his December 14, 1995 testimony 
before the Committee, stated that ``oversight of the hundreds 
of billions of Federal dollars covered by the single audit 
process is degraded by reports that are issued more than a year 
after the end of the period audited. Over time, I hope that it 
will be the rule, rather than the exception, for the audit 
reports to be submitted in less than 9 months.''

5. Increase administrative flexibility

    The bill would enable the single audit process to evolve 
with changing circumstances. For example, rather than lock 
specific dollar amount audit thresholds into law, OMB would 
have the authority to revise the audit threshold every 2 years. 
However, the threshold cannot be lower than the $300,000 
established in this legislation.
    The OMB Director could revise criteria for selecting 
programs for auditing testing. The risk-based program selection 
criteria that OMB would be required to develop under the 
legislation may need to be changed if Federal programs and 
funding approaches change. For example, changes in Federal 
programs to establish performance measures rather than strict 
compliance requirements may necessitate new selection criteria.
    The OMB Director would also be authorized to permit pilot 
projects to test alternative ways of achieving the goals of the 
single audit process. For example, OMB could permit a State 
auditor to employ different criteria in using a risk-based 
approach to select programs for testing. The pilot projects 
would not be OMB-mandated. Rather, it is anticipated that non-
Federal entities and their auditors would propose projects. 
Additionally, the OMB Director would be required to establish 
criteria for findings that must be reported in single audit 
reports. Auditors and program managers welcome such a change. 
Currently, auditors must report all findings--regardless of the 
significance of the issue or amount of questioned costs that 
may be involved. For example, documenting and resolving an 
inconsequential finding, such as a $25 questioned cost or the 
filing of a Federal report 1 day after it is due, is expensive 
and of limited utility in the management of Federal programs.
    The bill would delete the requirement that the OMB Director 
designate ``cognizant agencies'' to provide technical 
assistance to entities subject to the Act. Rather than make 
specific designations of agencies to provide technical 
assistance, the OMB Director would be required to prescribe 
criteria for determining such agencies. The revised approach 
would enable Federal agencies, non-Federal entities and their 
auditors to determine the appropriate Federal agency without 
having to rely on the OMB Director to make specific 
assignments.
    The bill authorizes the OMB Director to designate a 
clearinghouse to accept copies of audit reports prepared in 
accordance with the Act, to identify recipient entities that 
have not submitted required reports, and to conduct studies to 
assist the Director. The Director should share information on 
entities that have not complied with the audit provisions of 
the Act with Federal funding agencies and establish sanctions 
for entities which repeatedly fail to comply with the 
requirements of the Act. The Federal funding agencies should 
take appropriate steps to prompt the non-Federal entities to 
comply with the Act. The Director should also consider 
establishing sanctions for Federal funding agencies that fail 
to take appropriate steps to encourage full compliance with the 
Act by recipient entities.
    By giving OMB authority to revise specific requirements 
within the statutory single audit framework to reflect changing 
circumstances that affect accountability for Federal 
assistance, the single audit process can maintain its 
effectiveness.
    The bill relieves the OMB Director of submitting an annual 
report to Congress on implementation of the Single Audit Act. 
However, the Director would still be expected to apprise the 
Congress with respect to problems that arise in implementing 
the Act's provisions. Of particular importance would be 
entities that habitually fail to comply with the requirements 
of the Act. Such notification could be accomplished under other 
OMB reporting to the Congress.

                   conclusion: good government reform

    The Committee believes that the Single Audit Act of 1984 
has provided a solid foundation for ensuring accountability for 
the more than $200 billion provided State and local governments 
each year by the Federal government and that it has prompted 
financial management improvements by those entities. Studies by 
GAO, NASAA, and PCIE have confirmed this judgment. These 
studies, however, have also identified areas where the single 
audit process can be strengthened while reducing Federal burden 
on State and local governments and nonprofit organizations.
    The current legislation reflects the considered judgment of 
the Committee, GAO, OMB, and the stakeholder community as to 
specific changes to improve the 1984 Act. Accordingly, the 
legislation expands the Act's scope, raises the single audit 
threshold, establishes a risk-based approach to audit testing, 
improves the usefulness of reporting, increases administrative 
flexibility, and otherwise updates and streamlines the Act.

                   IV. Legislative History of S. 1579

    Senator Glenn worked with GAO, OMB, PCIE, NSAA and other 
groups to develop a series of drafts of proposed amendments to 
the Single Audit Act that were widely circulated to interested 
parties during the period from March through December 1995. The 
proposed amendments were based primarily upon recommendations 
included in GAO and PCIE reports on implementation of the 
single audit process. The drafts were revised to ensure that 
the resulting bill fulfilled the goals of reducing burdens on 
State and local governments and nonprofit organizations, 
improving accountability over Federal assistance, and providing 
increased flexibility to the single audit process.
    The draft legislation was considered at a hearing of the 
Committee on December 14, 1995. Witnesses discussiong single 
audit issues and the proposed bill were Charles A. Bowsher, 
Comptroller General of the United States, G. Edward DeServe, 
Controller, Office of Federal Financial Management, Office of 
Management and Budget, and Kurt R. Sjoberg, State Auditor of 
California and Chair, National State Auditors Association 
Single Audit Committee.
    Mr. Bowsher said that the Single Audit Act has both 
prompted financial management improvements by State and local 
governments and fostered improved accountability over the 
hundreds of billions of dollars that the Federal government 
provides to State and local governments and nonprofit 
organizations each year. Mr. Bowsher said that GAO's 1994 
report to the Committee on the Single Audit Act's 
implementation discussed the Act's role in helping 
institutionalize fundamental elements of good financial 
management in State and local governments, such as preparing 
financial statements in accordance with generally accepted 
accounting principles, obtaining annual independent 
comprehensive audits, assessing internal controls and 
compliance with laws and regulations, monitoring subrecipients, 
tracking Federal funds, and resolving audit findings.
    In discussing the Act's role in promoting accountability 
over Federal assistance, Mr. Bowsher said that the Act provides 
a structured approach to achieve audit coverage over the 
thousands of State and local governments that receive Federal 
financial assistance. Moreover, particularly in the case of 
block grants--where the Federal financial role diminishes and 
management and outcomes of Federal assistance programs depend 
heavily on the overall State of local government controls--the 
single audit process provides accountability of focusing the 
auditor on the controls affecting the integrated Federal and 
State funding streams.
    Mr. Bowsher fully supported the proposed amendments and 
commented about several of the major provisions. He said that 
expanding the Single Audit Act to include nonprofit 
organizations, as well as State and local governments, would 
accomplish what this Committee contemplated when the Act was 
initially debated: uniform single audit requirements for State 
and local governments and nonprofit organizations.
    Mr. Bowsher said that raising the minimum audit threshold 
from $25,000 to $300,000 would exempt thousands of entities 
from Federally mandated financial audits while still covering 
95 percent of Federal assistance to State and local 
governments. By revising the program selection criteria to 
employ a risk-based approach, Mr. Bowsher said the proposed 
amendments would increase the effectiveness of the single audit 
process.
    Mr. Bowsher said that single audit reports would be made 
more useful by enacting the provisions that would require 
auditors to provide a summary of the results of their work 
concerning the audited entity's financial statements, internal 
controls, and compliance with laws and regulations and by 
requiring that the reports be submitted within 9 months after 
the year end rather than the 13 months currently allowed. Mr. 
Bowsher added that he hoped that it will be the rule, rather 
than the exception, for the audit reports to be submitted in 
less than 9 months. He said the auditor's summary would make 
the reports more useful to program managers.
    Finally, Mr. Bowsher said that the proposed amendments 
would provide greater flexibility than the current Act allows 
in carrying out this important oversight activity. The proposed 
amendments do so by providing the OMB Director authority to 
adjust some aspects of the single audit process to mesh with 
changing circumstances without increasing the burden on non-
Federal entities.
    In summary, Mr. Bowsher said that the years of experience 
under the Single Audit Act has shown that the single audit 
process is a highly effective way to provide accountability for 
Federal awards to State and local governments and that the 
proposed amendments would strengthen this important 
accountability tool and reduce the burden on thousands of 
entities.
    Mr. DeSeve said that he, too, supported the proposed 
amendments to the Single Audit Act. He said that the current 
$25,000 audit threshold is too low and that the proposed 
$300,000 threshold is appropriate. Mr. DeServe added the 
threshold should be evaluated every 2 years to determine 
whether it should be raised.
    Mr. Sjoberg also supported the proposed changes to the 
Single Audit Act. He said that the State auditor community 
believes that the Act has been a success and fully met its 
objectives. He added that the State auditors believe that 
changes in the auditing profession and in Federal, State and 
local governments' financial management necessitate 
improvements to the Act. He commented favorably about the open 
and constructive dialog that formed the basis of the proposed 
amendments. Mr. Sjoberg said that the Committee staff, OMB, and 
GAO officials willingly obtained the views of the NSAA and 
other professional groups on how the Act should be amended and, 
in doing so, fostered positive Federal/State relations.
    Mr. Sjoberg specifically addressed two provisions of the 
proposed legislation: audit thresholds and program selection 
criteria. He said that the proposal to raise the threshold to 
$300,000 would relieve small local governments from Federal 
audit mandates and thus generate savings in reduced audit 
costs. Mr. Sjoberg also said that the proposed changes to be 
criteria for determining the number of programs that must be 
tested during a single audit of a State government would reduce 
audit costs in larger States while only minimally reducing 
audit coverage of Federal program expenditures.
    In connection with the proposed adoption of a risk-based 
program section approach, Mr. Sjoberg said that it makes good 
economic sense to allow auditors to focus audit resources where 
the potential for return is greatest. He contrasted the risk-
based approach with the current program selection approach 
which may result in the auditor testing the same grants year 
after year even when the potential risk is low.
    Following the hearing, Mr. Anthony Verdecchia, President of 
the NSAA submitted a letter on January 29, 1996, to the 
Committee stating that the ``the Association has voted 
unanimously to support the proposed bill to amend the Single 
Audit Act of 1984.'' Mr. Verdecchia's letter also states that 
``the proposed legislation is an excellent measure that 
deserves to be passed into law as soon as possible.'' The 
legislation was also endorsed by the Audit Committee of the 
PCIE (letter from Valerie Lau, Chair, Audit Committee, March 
12, 1996).
    After review of the record of the December 14, 1995, 
Committee hearing and all other comments, the legislation was 
introduced, as S. 1579, on February 27, 1996, by Senator Glenn, 
and co-sponsored by Senators Stevens, Levin, Cochran, Pryor, 
Cohen, Lieberman, and Brown. Subsequently, Senator Grassley 
joined as a co-sponsor of the bill. On March 28, 1996, 
Representative Horn introduced legislation identical to S. 1579 
in the House of Representatives (H.R. 3184).
    S. 1579 was considered by the Committee during a mark-up on 
April 18, 1996. After a discussion of the bill and needed minor 
technical corrections, the Committee by voice vote adopted a 
technical amendment offered by Senator Glenn. Following 
adoption of the technical amendment, the Committee, by 
unanimous voice vote, ordered S. 1579 as amended reported 
favorably to the Senate.

                     V. Section-by-Section Analysis

                    section 1. short title; Purposes

    Section 1 states the purposes of the Single Audit Act 
Amendments of 1996: to promote sound financial management, 
including effective internal controls, with respect to Federal 
awards administered by non-Federal entities; establish uniform 
requirements for audits of Federal awards administered by non-
Federal entities; promote the efficient and effective use of 
audit resources; reduce burdens on State and local governments, 
Indian tribes, and nonprofit organizations; and ensure that 
Federal departments and agencies, to the maximum extent 
practicable, rely upon and use audit work done pursuant to 
chapter 75 of title 31, United States Code (as amended by the 
Act).

          section 2. Amendment to title 31, United States Code

    This section replaces chapter 75 of title 31, United States 
Code, which was established under the Single Audit Act of 1984. 
As a result of the substantive changes to chapter 75 made by 
the Single Audit Act Amendments of 1996, some reorganization 
and technical changes also were necessary. The substantive 
changes are discussed below.

Section 7501. Definitions

    Amendments to section 7501 reflect the new terms used in 
the Act as well as some technical changes to terms retained in 
the Act. Most of these amendments are self-explanatory. The 
definitions now contained in subsection (a) are discussed 
below.
    Paragraph (1) ``Comptroller General;'' is unchanged from 
current law.
    Paragraph (2) ``Director;'' is unchanged from current law.
    Paragraph (3) modifies the definition of ``Federal agency'' 
to delete a citation to the United States Code.
    Paragraph (4) defines ``Federal awards'' to reflect the 
decision for the Single Audit Act to cover certain nonprofit 
organizations. The use of the term ``Federal awards'' and its 
definition here to include cost-reimbursement contracts as well 
as Federal financial assistance is in response to the fact that 
nonprofit organizations often receive much of their funding 
through cost-reimbursement contracts for research and 
development activities.
    Paragraph (5) modifies the definition of ``Federal 
financial assistance'' to change the focus from the Federal 
agency that provides the assistance to the non-Federal entity 
that receives the assistance. As amended, ``Federal financial 
assistance'' also includes food commodities and other 
assistance and excludes amounts received as reimbursement for 
services rendered to individuals in accordance with guidance 
issued by the Director of the Office of Management and Budget 
(OMB).
    Paragraph (6) defined ``Federal program'' to mean all 
Federal awards to a non-Federal entity assigned a single number 
in the Catalog of Federal Domestic Assistance or encompassed in 
a group of numbers or other category as defend by the Director. 
The use of this term in the Act and its definition here is 
intended to give the Director the flexibility to facilitate 
more efficient audit testing by having related programs grouped 
as a single program.
    Paragraph (7) modifies the definition of ``generally 
accepted government auditing standards'' to reflect terminology 
in the 1994 version of Government Auditing Standards issued by 
the Comptroller General.
    Paragraph (8) ``independent auditor;'' is unchanged from 
current law.
    Paragraph (9) ``Indian tribe;'' is unchanged from current 
law.
    Paragraph (10) changes the definition of ``internal 
controls'' to reflect recent agreements in the financial 
management community on a common definition of internal 
controls, and to provide a standard against which non-Federal 
entities can assess and determine how to improve their 
controls. The definition is consistent with the definition of 
internal control contained in Internal Control--Integrated 
Framework issued in 1992 by the Committee of Sponsoring 
Organizations of the Treadway Commission and subsequently 
adopted by Statement of Auditing Standards No. 78 issued in 
December 1995 by the Auditing Standards Board (AICPA). These 
sources should be consulted for a full description and 
discussion of internal controls.
    Paragraph (11) reflects a modification in the definition of 
``local government'' that is intended to increase audit 
efficiency by allowing the Director to specify criteria for 
allowing the grouping of local governments for audit purposes.
    Paragraph (12) reflects a change in the definition of 
``major program'' from one based on size to one identified 
according to risk-based criteria prescribed by the Director. 
The determination of what Federal programs are ``major'' is 
important because the testing of major programs during single 
audits is required. In contrast to the current dollar-driven 
approach will allow auditors to use their professional judgment 
and target audit resources at the areas presenting the greatest 
risk to the Federal government. Authorizing the Director to 
prescribed criteria will allow for changes as conditions 
warrant.
    Paragraph (13) adds a definition of ``non-Federal entity'' 
to address all the entities subject to the Act with one term. 
Under current law, State and local governments are subject to 
the Single Audit Act. Nonprofit organizations are 
administratively subject to the single audit process under OMB 
Circular A-133, ``Audits of Institutions of Higher Education 
and Other Nonprofit Organizations.'' Amending the Act to 
include nonprofit organizations as well as State and local 
governments will help to ensure uniformity of audits and reduce 
the burden on the auditing community by placing all non-Federal 
entities that receive Federal awards under the same single 
audit requirements.
    Paragraph (14) adds a definition of ``nonprofit 
organization'' to make clear which entities would be affected 
by expanding the Act to cover nonprofit organizations.
    Paragraph (15) adds a definition of ``pass-through entity'' 
to describe a non-Federal entity that receives a Federal award 
that it then provides to a subrecipient to carry out a Federal 
program.
    Paragraph (16) defines ``program-specific audit'' to mean 
an audit of one Federal program. The term is used elsewhere in 
the Act to describe audits that may be conducted under certain 
circumstances in lieu of a single audit.
    Paragraph (17) defines ``recipient'' to mean a non-Federal 
entity that receives awards directly from a Federal agency to 
carry out a Federal program. This term was used, but not 
defined, in Public Law 98-502.
    Paragraph (18) defines ``single audit'' to mean an audit of 
a non-Federal entity that includes both the entity's financial 
statements and Federal awards. This term was used, but not 
defined, in Public Law 98-502.
    Paragraph (19) ``State'' is unchanged from current law.
    Paragraph (20) modifies the original definition of 
``subrecipients'' to include nonprofit organizations under the 
term ``non-Federal entity.''
    The definition of ``cognizant agency'' is omitted from 
section 7501. The term is no longer used in the Act and instead 
section 7504 requires the Director to prescribe criteria for 
determining which agencies would provide technical assistance 
and assist non-Federal entities in complying with the 
requirements of the single audit process. The definition of 
``generally accepted accounting principles'' is omitted because 
it is a widely understood term.
    The definition of ``public accountants'' is also omitted in 
favor of a definition of ``independent auditor.'' The former 
definition of public accountants required that they meet the 
qualification standards included in generally accepted 
government auditing standards. That requirement is maintained 
because the Act states in section 7502(c) that audits conducted 
under the Act shall be conducted by an independent auditor in 
accordance with generally accepted government auditing 
standards which describe auditor qualification requirements.
    Section 7501 also is amended by adding subsections (b)-(d), 
which establish parameters for the number of programs that will 
be identified as major under the risk-based criteria and 
therefore subject to testing.
    Under subsection (b), a non-Federal entity's expenditures 
for each Federal award is compared with a dollar threshold 
based on the entity's total expenditures for all Federal 
programs. The number of programs exceeding that threshold 
serves as a cap on the number of programs that may be required 
to be tested as major programs under the Director's risk-based 
selection criteria. This provision is designed to ensure that a 
significant increase in the number of programs tested does not 
result from the change from a dollar-driven approach to a risk-
based approach.
    Subsection (c) sets forth a minimum testing requirement 
that when the total expenditures of a non-Federal entity's 
major programs are less than 50 percent of the non-Federal 
entity's total expenditures of all Federal awards, the auditor 
must select and test additional programs as major programs as 
necessary to achieve audit coverage of at least 50 percent of 
Federal expenditures by the non-Federal entity. This subsection 
also authorizes the Director to lower the percentage of Federal 
expenditures that major programs must provide, enabling the 
Director to reduce the audit burden on entities that have had 
good audit results.
    Subsection (d) provides that in making the calculations 
required by section 7501(b), loan or loan guarantee programs as 
specified by the Director will be excluded. Because they can be 
so large, including loan or loan guarantee programs in the 
section 7501(b) calculation of total expenditures for all 
Federal programs would in some cases significantly increase the 
section 7501(b) threshold and reduce the number of programs for 
``cap'' purposes. This could result in reducing the number of 
programs that would be classified as major for a particular 
non-Federal entity. Therefore, under subsection (d), the 
Director may provide for the exclusion of loan or loan 
guarantee programs in determining the section 7501(b) cap when 
their inclusion would cause a reduction in the number of 
programs identified as major.

Section 7502. Audit requirements; exemptions

    Sections 7502(a) will substitute a single dollar threshold 
of $300,000 for determining which entities must receive audits 
under the Act in place of the multiple, lower thresholds 
contained in current law. The basis of the threshold is also 
changed from receipts to expenditures, to ensure that the audit 
will be conducted for the fiscal period during which the non-
Federal entity used the Federal awards.
    Subsection (a)(1) requires non-Federal entities that expend 
$300,000 or more in Federal awards under more than one program 
to have a single audit. Non-Federal entities that expend 
$300,000 or more in Federal awards under only one program, and 
are not required to otherwise have a financial statement audit, 
may elect to have a program-specific audit consistent with 
guidance prescribed by the Director. Subsection (a)(2) exempts 
non-Federal entities expending a total amount of Federal awards 
less than $300,000 from complying with all Federal financial 
audit requirements. Subsection (a)(3) requires the Director to 
review the threshold every 2 years and allows the Director to 
adjust it as necessary, provided that the threshold may not be 
less than $300,000. This minimum threshold is a significant 
increase over the thresholds in current law.
    Under current law, entities that receive $100,000 or more 
in Federal financial assistance in a year are required to have 
a single audit, even if they administer only one program, and 
entities receiving $25,000 to $100,000 in Federal financial 
assistance must have either a single audit or a financial audit 
in accordance with the laws governing each Federal financial 
assistance program that the entity administers.
    Subsection (b)(1) states the requirement for annual audits 
under the Act. However, subsection (b)(2) preserves State and 
local governments' right established under the original Act to, 
under specified circumstances, have biennial rather than annual 
audits. Similarly, subsection (b)(3) preserves nonprofit 
organizations' right established under OMB Circular A-133 to, 
under specified circumstances, have biennial rather than annual 
audits. However, subsection (b) prohibits other non-Federal 
entities from adopting biennial audits. Thus, this subsection 
preserves, but does not extend, the prerogative to have 
biennial audits.
    Subsection (c) requires the audits to be conducted by an 
independent auditor and in accordance with generally accepted 
government auditing standards. It would also allow the Director 
to authorize audits of information on program performance, 
which are excluded by current law. This change reflects the 
increased attention to performance of Federal programs and is 
consistent with the objectives of the Government Performance 
Results Act of 1993 which is intended to, among other things, 
initiated program performance reform in part by setting program 
goals, measuring program performance against the goals, and 
reporting publicly on the progress. Auditors can play an 
important role in assessing the reliability of the reported 
performance information.
    Several provisions contained in current law are ineffective 
or unnecessary, and will be eliminated by enactment of the 
Single Audit Act Amendments of 1996. For example, current 
section 7502(d)(3) has been ineffective because it requires 
that when transactions are selected as part of the single 
audit, not because they are from major programs but pursuant to 
other requirements of section 7502, the auditor must test the 
transactions for compliance with laws and regulations and 
report any noncompliance. This requirement could result in the 
auditor having to test a few transactions from a non-major 
program even when such testing would not provide useful 
information about how the program was being administered. 
Further, it was interpreted to require auditors to report all 
findings, regardless of materiality. As a result, single audit 
reports often contain numerous inconsequential findings that 
are costly to document and divert attention from more 
significant findings. Also, current section 7502(d)(4) is an 
example of an unnecessary provision; it requires auditors to 
use professional judgment in selecting and testing 
transactions. Government Auditing Standards require auditors to 
exercise sound professional judgment in conducting audits.
    Subsection (e) establishes the auditor's responsibilities. 
In addition to restatements or technical revisions of 
responsibilities already required by current law, including 
expressing an opinion on the financial statements, subsection 
(e) also codifies a requirement administratively imposed by the 
Director for the auditor to express an opinion on whether the 
schedule of expenditures of Federal awards is fairly presented 
in all material respects in relation to the financial 
statements. Subsection (e) also expressly states that the 
auditor must obtain an understanding of the internal controls 
over the compliance requirements for each major program, assess 
control risk, and test the controls unless the controls are 
deemed to be ineffective.
    Subsection (f) is designed to help ensure that non-Federal 
entities and their subrecipients understand and comply with 
requirements for the Federal awards they receive. Subsection 
(f)(1) requires Federal agencies to provide recipients with the 
source and identifying number of the Federal awards and the 
requirements governing the use of the awards and the 
requirements of the Act, and review recipients' audit reports 
to determine whether prompt and appropriate corrective actions 
to resolve audit findings pertaining to Federal awards have 
been taken. Subsection (f)(2) places similar responsibilities 
on pass-through entities with respect to their subrecipients; 
subsection (f)(2) also requires that pass-through entities 
monitor each subrecipient's use of Federal awards through site 
visits, limited scope audits, or other means, and the 
subrecipients to permit the pass-through entity's auditor to 
have access to the subrecipient's records and financial 
statements as may be necessary for the pass-through entity to 
comply with the Act.
    Subsection (g) is designed to provide more useful single 
audit reports by requiring the auditor to include in the single 
audit report a summary of the results concerning the entity's 
financial statements internal controls, and compliance with 
laws and regulations.
    Subsection (h) describes the content, destination, and time 
frame of the reporting package that a non-Federal entity must 
submit. The reporting package is to include the non-Federal 
entity's financial statements, schedule of expenditures of 
Federal awards, corrective action plan to resolve auditor's 
findings, and the auditor's reports. The package is to be 
transmitted to a Federal clearinghouse, designated by the 
Director, for subsequent distribution. Use of the clearinghouse 
should reduce the administrative burden on non-Federal entities 
by shifting the burden of distributing single audit reports 
from non-Federal entities to the Federal government. To 
increase the usefulness of the reports, the reporting package's 
time frame is shortened from the previously allowed 13 months 
after the end of the entity's fiscal year or years audited to 
the earlier of 30 days after the entity receives the report 
from the auditor or 9 months after the end of the year or years 
audited. Subsection (h) also authorizes a Federal agency to 
authorize a longer reporting time frame when the 9-month time 
frame would place an undue burden on the non-Federal entity. In 
addition, the Director is required to establish a transition 
period of not less than 2 years for non-Federal entities to 
achieve the 9-month reporting time frame. Entities would 
continue to have 13 months to submit their reporting package 
during the transition period.
    Subsection (i) reflects a modification to current law by 
requiring non-Federal entities to submit a plan for corrective 
actions if the auditor identifies audit findings, as defined by 
the Director, including material noncompliance with individual 
compliance requirements for a major program or a material 
weakness in the non-Federal entity's internal controls. Current 
law requires corrective action plans only if the auditor finds 
a material noncompliance or material weakness. By authorizing 
the Director or define the audit findings for which corrective 
action plans will be required, subsection (i) will help to 
ensure that appropriate attention will be given to problems 
that are important, through not in a technical sense material.
    Subsection (j) authorizes the Director, in consultation 
with the Chair and Ranking Minority Member of the Committee on 
Governmental Affairs of the Senate and the Chair and Ranking 
Minority Member of the Committee on Government Reform and 
Oversight of the House of Representatives, to approve pilot 
projects to test alternative methods of achieving the purposes 
of the Act. Such pilot projects, which would be voluntary 
undertakings by non-Federal entities, would provide a means of 
assessing new ways of testing and reporting on Federal awards.

Section 7503. Relation to other audit requirements

    The Single Audit Act Amendments of 1996 essentially restate 
the current law contained in subsections (a) through (d) of 
section 7503.
    Subsection (a) preserves the Act's policy that audits 
conducted under the Act would be in lieu of audits that a non-
Federal entity would be required to have under other Federal 
law or regulation. It also states that Federal agencies should 
rely on and use the audits to the extent they provide 
information the agencies need to carry out their 
responsibilities.
    Subsection (b) preserves Federal agencies' rights to 
conduct or arrange for additional audits which are necessary 
for the agency to carry out its responsibilities under Federal 
law or regulation and requires the agencies to plan the audits 
to avoid duplication of other audits of Federal awards. It 
proscribes non-Federal entities from constraining Federal 
agency efforts to carry out or arrange for additional audits.
    Subsection (c) states that the Act does not limit 
inspectors general or Federal agencies' authority to conduct or 
arrange for audits or evaluations of Federal awards.
    Subsection (d) preserves the original Act's provision that 
exempts non-Federal entities from complying with provisions of 
other Federal laws or regulations that require the non-Federal 
entity to undergo a financial audit if the entity has an audit 
under the Act even though not required to have such an audit.
    Subsection (e) is amended by adding a statement making 
clear that to prevent duplication, any Federal funding agency 
conducting or arranging for an audit of a non-Federal entity in 
addition to the audit under this Act must coordinate the audit 
with the single Federal agency determined in accordance with 
section 7504 to be responsible for assisting the non-Federal 
entity with implementation of chapter 75.
    Subsection (f) is a new provision requiring auditors to 
make their working papers available to Federal agencies or the 
Comptroller General as part of a quality review program, to 
resolve audit findings or for other purposes consistent with 
the purposes of the Act. Subsection (f) makes clear that access 
to working papers includes the right to obtain copies, and is 
designed to help Federal agencies assess audit quality, resolve 
audit findings, and build upon the results of single audits.
    It is the Committee's intent that Federal agencies be 
judicious in the exercise of the authority for reviewing and 
obtaining copies of non-Federal auditor working papers. It is 
also the Committee's intent that Federal agencies recognize 
that working papers may contain trade secrets and confidential 
commercial and financial information and should treat such 
information obtained from the working papers as confidential 
under the Freedom of Information Act.

Section 7504. Federal agency responsibilities and relations with non-
        Federal entities

    Subsection (a) is amended to have each Federal agency 
responsible for monitoring the use of Federal awards that the 
agency provides to non-Federal entities and assessing the 
quality of audits conducted under the Act when the agency is 
the single Federal Agency determined under criteria specified 
by the Director. The original Act assigned audit-related 
responsibilities, as well as the responsibility for 
coordinating additional audits that build upon the required 
audits, to cognizant agencies as determined by the Director. 
The deletion of existing provisions in section 7504 regarding 
the build upon nature of the additional audits conducted by 
cognizant agencies is in no way intended to suggest that 
agencies should eliminate or minimize the additional build upon 
work. The stated purposes of the bill make it clear that 
Federal agencies are to make efficient and effective use of the 
audits conducted under the Act and that the agencies should 
rely on and use the audits.
    Subsection (b) is added to give the Director the authority 
to prescribe criteria for determining the single Federal agency 
that would be responsible for providing technical assistance to 
non-Federal entities and help them implement the Act. Under 
current law, the Director must make specific agency 
assignments.
    Subsection (c) is added to require the Director to 
designate a Federal clearinghouse to receive copies of 
reporting packages developed in accordance with this Act. The 
clearinghouse would be expected to identify recipients that did 
not undergo an audit in accordance with the Act even though 
they were required to do so. The clearinghouse would also 
perform analyses to assist the Director in carrying out 
responsibilities under the Act.

Section 7505. Regulations

    This section is restated essentially as it is in current 
law, except for references to amendments made in other 
sections.
    Subsection (a) requires the Directors to consult with 
groups involved with the single audit process, including the 
Comptroller General, other Federal, State, and local government 
officials as well as representatives of nonprofit 
organizations. It also requires each Federal agency to 
promulgate necessary amendments to conform its regulations with 
requirements of the Act and the Director's guidance.
    Subsection (b) concerns the use of Federal awards to pay a 
share of the cost of audits conducted under this chapter. Under 
subsection (b), the percentage of the audit cost charged to 
Federal awards generally cannot be greater than the ratio of 
the entity's Federal awards expended to its total expenditures. 
A greater percentage of the audit cost may be charged to 
Federal awards only if the entity can demonstrate that the cost 
of auditing the Federal awards was higher. Subsection (b) is 
modified to prohibit such use when an entity's expenditure of 
Federal awards is less than $300,000 (or such higher threshold 
specified by the Director under section 7502(a)). This 
provision is added to preclude the charging to Federal awards 
the cost of comprehensive audits of entities that have 
comparatively small amounts of Federal expenditures. However, 
the Director may allow recipients to charge to their Federal 
awards the cost of limited scope audits to monitor 
subrecipients in accordance with section 7502(f)(2).
    Subsection (c) maintains a provision of the original Act 
which mandates that the Director's guidance shall include 
provisions to ensure that small businesses and business 
concerns owned and controlled by socially and economically 
disadvantaged individuals will have the opportunity to 
participate in contracts for the conduct of audits under the 
Act.

Section 7506. Monitoring responsibilities of the Comptroller General

    This section maintains the Comptroller General's 
responsibility under current law to monitor legislation and 
identify inconsistencies with the Single Audit Act.
    Subsection (a) preserves the Comptroller General's 
responsibility to monitor bills and resolutions introduced in 
Congress that contain provisions requiring audits of Federal 
awards. Subsection (b) requires the Comptroller General to 
notify in writing the committee that reported the bill or 
resolution as well as the Committee on Governmental Affairs of 
the Senate or the Committee on Government Reform and Oversight 
of the House of Representatives if the provisions are 
inconsistent with the provisions of this bill.

Section 7507. Effective date

    The requirements of this Act shall apply to any non-Federal 
entity's fiscal year beginning after June 30, 1996.
    Former subsection (b) requiring the Director to submit an 
annual report to the Congress on operations under the Act is 
deleted.

                  section 3. transitional application

    This section makes clear that for fiscal years beginning 
before July 1, 1996, State and local governments shall continue 
following the requirements in current law without regard to the 
single Audit Act Amendments of 1996.

                         VI. Regulatory Impact

    In compliance with paragraph 11(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee has considered the 
regulatory impact of S. 1579. The legislation is designed to 
reduce the Federally-mandated burden on State and local 
governments and nonprofit organizations that receive Federal 
assistance by raising the dollar threshold which subjects 
entities to Federal audit requirements. The bill would also 
improve the accountability over Federal assistance by focusing 
audit resources on the areas of greatest risk and improve the 
content and timing of auditors' reporting. Finally, it would 
make the underlying single audit process more flexible so that 
appropriate changes can be made to deal with changing 
circumstances involving Federal assistance. These provisions 
will have the following impact on the public:

                           regulatory impact

    The legislation would require OMB to revise its guidance 
for implementing single audit requirements. However, since the 
legislation would consolidate all single audit requirements 
under one statute, OMB would be able to consolidate two current 
grants management circulars into one circular. Other 
streamlining provisions, as well as the new higher single audit 
threshold, would also result in less regulatory impact across 
State and local governments and nonprofit organizations that 
receive Federal assistance. There should be no regulatory 
impact on the general public.

                            economic impact

    The legislation's reduction of audit and paperwork burdens, 
its higher single audit threshold, and other streamlining 
amendments would lessen the economic impact of the Act on 
entities that receive Federal assistance. While the legislation 
would adversely impact auditors whose clients would be exempted 
from Federal single audit requirements, entities thus exempted 
would be able to apply funds that would have paid for the 
audits to support program activities. Thus, in total, the 
economic impact of the Single Audit Act on the general public, 
i.e., the ultimate beneficiaries of Federal assistance, would 
be improved by this legislation.

                             privacy impact

    The legislation would have no adverse impact on 
individuals' personal privacy. Audits conducted under this 
legislation would focus on organizations that administer 
Federal programs rather than the beneficiaries of such 
programs.

                            paperwork impact

    The legislation would significantly reduce the paperwork 
burden on State and local governments and nonprofit 
organizations that receive Federal assistance by exempting 
thousands of such entities from Federal single audit 
requirements and otherwise streamlining the single audit 
process. Other paperwork requirements associated with 
administering Federal programs would not be changed by the 
legislation.

                            VII. Cost Impact

    In accordance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the Committee was provided the 
following estimate of the cost of S. 1579, as prepared by the 
Congressional Budget Office.

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, April 26, 1996.
Hon. Ted Stevens,
Chairman, Committee on Governmental Affairs,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
reviewed S. 1579, the Single Audit Act Amendments of 1996, as 
ordered reported by the Senate Committee on Governmental 
Affairs on April 18, 1996. CBO estimates that S. 1579 would not 
significantly affect spending by the federal government. 
Because the bill would not affect direct spending or receipts, 
pay-as-as-go procedures would not apply.

                              Bill Purpose

    S. 1579 would:
          Increase from $100,000 in annual awards to $300,000 
        in annual expenditures the dollar threshold at which a 
        nonfederal entity has to undergo an independent audit 
        of its operations and use of federal funds;
          Substitute risk for program size in selecting major 
        programs for auditing in addition to the comprehensive 
        single audit;
          Extend the coverage of the Single Audit Act to 
        include educational institutions are required by OMB 
        Circular A-133 but not by law;
          Shorten the amount of time between the end of an 
        audit period and the submission of the audit report 
        from 13 months to 9 months; and
          Require that the Director of the Office of Management 
        and Budget designate a federal clearinghouse to receive 
        copies of the audit reports, to identify entities that 
        do not comply with the single audit requirement, and to 
        provide analyses requested by the Director.

                        federal budgetary impact

    CBO estimates that S. 1579 would not significantly affect 
federal spending because the bill would primarily affect the 
need for an regulation of audits conducted by nonfederal 
entities. Any small increase in spending from designating a 
federal clearinghouse or from providing technical assistance 
and other information to nonfederal entities would be subject 
to the availability of appropriated funds.

                           mandates statement

    Section 4 of Public Law 104-4 excludes from the application 
of that law provisions that require ``compliance with 
accounting and auditing procedures with respect to grants or 
other money or property provided by the federal government.'' 
CBO has determined that all provisions of S. 1579 fit within 
that exclusion.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is John R. 
Righter.
            Sincerely,
                                             James L. Blum,
                                    (for June E. O'Neill, Director)

                   VIII. Text of S. 1579, as Reported

  A BILL To streamline and improve the effectiveness of chapter 75 of 
  title 31, United States Code (commonly referred to as the ``Single 
                              Audit Act'')

  Be it enacted by the Senate and House of Representatives of 
the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; PURPOSES.

  (a) Short Title.--This Act may be cited as the ``Single Audit 
Act Amendments of 1996''.
  (b) Purposes.--The purposes of this Act are to--
          (1) promote sound financial management, including 
        effective internal controls, with respect to Federal 
        awards administered by non-Federal entities;
          (2) establish uniform requirements for audits of 
        Federal awards administered by non-Federal entities;
          (3) promote the efficient and effective use of audit 
        resources;
          (4) reduce burdens on State and local governments, 
        Indian tribes, and nonprofit organizations; and
          (5) ensure that Federal departments and agencies, to 
        the maximum extent practicable, rely upon and use audit 
        work done pursuant to chapter 75 of title 31, United 
        States Code (as amended by this Act).

SEC. 2. AMENDMENT TO TITLE 31, UNITED STATES CODE.

  Chapter 75 of title 31, United States Code, is amended to 
read as follows:

              ``CHAPTER 75--REQUIREMENTS FOR SINGLE AUDITS

``Sec.

``7501. Definitions.
``7502. Audit requirements; exemptions.
``7503. Relation to other audit requirements.
``7504. Federal agency responsibilities and relations with non-Federal 
          entities.
``7505. Regulations.
``7506. Monitoring responsibilities of the Comptroller General.
``7507. Effective date.

``Sec. 7501. Definitions

  ``(a) As used in this chapter, the term--
          ``(1) `Comptroller General' means the Comptroller 
        General of the United States;
          ``(2) `Director' means the Director of the Office of 
        Management and Budget;
          ``(3) `Federal agency' has the same meaning as the 
        term `agency' in section 551(1) of title 5;
          ``(4) `Federal awards' means Federal financial 
        assistance and Federal cost-reimbursement contracts 
        that non-Federal entities receive directly from Federal 
        awarding agencies or indirectly from pass-through 
        entities;
          ``(5) `Federal financial assistance' means assistance 
        that non-Federal entities receive or administer in the 
        form of grants, loans, loan guarantees, property, 
        cooperative agreements, interest subsidies, insurance, 
        food commodities, direct appropriations, or other 
        assistance, but does not include amounts received as 
        reimbursement for services rendered to individuals in 
        accordance with guidance issued by the Director;
          ``(6) `Federal program' means all Federal awards to a 
        non-Federal entity assigned a single number in the 
        Catalog of Federal Domestic Assistance or encompassed 
        in a group of numbers or other category as defined by 
        the Director;
          ``(7) `generally accepted government auditing 
        standards' means the government auditing standards 
        issued by the Comptroller General;
          ``(8) `independent auditor' means--
                  ``(A) an external State or local government 
                auditor who meets the independence standards 
                included in generally accepted government 
                auditing standards; or
                  ``(B) a public accountant who meets such 
                independence standards;
          ``(9) `Indian tribe' means any Indian tribe, band, 
        nation, or other organized group or community, 
        including any Alaskan Native village or regional or 
        village corporation (as defined in, or established 
        under, the Alaskan Native Claims Settlement Act) that 
        is recognized by the United States as eligible for the 
        special programs and services provided by the United 
        States to Indians because of their status as Indians;
          ``(10) `internal controls' means a process, effected 
        by an entity's management and other personnel, designed 
        to provide reasonable assurance regarding the 
        achievement of objectives in the following categories:
                  ``(A) Effectiveness and efficiency of 
                operations.
                  ``(B) Reliability of financial reporting.
                  ``(C) Compliance with applicable laws and 
                regulations;
          ``(11) `local government' means any unit of local 
        government within a State, including a county, borough, 
        municipality, city, town, township, parish, local 
        public authority, special district, school district, 
        intrastate district, council of governments, any other 
        instrumentality of local government and, in accordance 
        with guidelines issued by the Director, a group of 
        local governments;
          ``(12) `major program' means a Federal program 
        identified in accordance with risk-based criteria 
        prescribed by the Director under this chapter, subject 
        to the limitations described under subsection (b);
          ``(13) `non-Federal entity' means a State, local 
        government, or nonprofit organization;
          ``(14) `nonprofit organization' means any 
        corporation, trust, association, cooperative, or other 
        organization that--
                  ``(A) is operated primarily for scientific, 
                educational, service, charitable, or similar 
                purposes in the public interest;
                  ``(B) is not organized primarily for profit; 
                and
                  ``(C) uses net proceeds to maintain, improve, 
                or expand the operations of the organization;
          ``(15) `pass-through entity' means a non-Federal 
        entity that provides Federal awards to a subrecipient 
        to carry out a Federal program;
          ``(16) `program-specific audit' means an audit of one 
        Federal program;
          ``(17) `recipient' means a non-Federal entity that 
        receives awards directly from a Federal agency to carry 
        out a Federal program;
          ``(18) `single audit' means an audit, as described 
        under section 7502(d), of a non-Federal entity that 
        includes the entity's financial statements and Federal 
        awards;
          ``(19) `State' means any State of the United States, 
        the District of Columbia, the Commonwealth of Puerto 
        Rico, the Virgin Islands, Guam, American Samoa, the 
        Commonwealth of the Northern Mariana Islands, and the 
        Trust Territory of the Pacific Islands, any 
        instrumentality thereof, any multi-State, regional, or 
        interstate entity which has governmental functions, and 
        any Indian tribe; and
          ``(20) `subrecipient' means a non-Federal entity that 
        receives Federal awards through another non-Federal 
        entity to carry out a Federal program, but does not 
        include an individual who receives financial assistance 
        through such awards.
  ``(b) In prescribing risk-based program selection criteria 
for major programs, the Director shall not require more 
programs to be identified as major for a particular non-Federal 
entity, except as prescribed under subsection (c) or as 
provided under subsection (d), than would be identified if the 
major programs were defined as any program for which total 
expenditures of Federal awards by the non-Federal entity during 
the applicable year exceed--
          ``(1) the larger of $30,000,000 or 0.15 percent of 
        the non-Federal entity's total Federal expenditures, in 
        the case of a non-Federal entity for which such total 
        expenditures for all programs exceed $10,000,000,000;
          ``(2) the larger of $3,000,000, or 0.30 percent of 
        the non-Federal entity's total Federal expenditures, in 
        the case of a non-Federal entity for which such total 
        expenditures for all programs exceed $100,000,000 but 
        are less than or equal to $10,000,000,000; or
          ``(3) the larger of $300,000, or 3 percent of such 
        total Federal expenditures for all programs, in the 
        case of a non-Federal entity for which such total 
        expenditures for all programs equal or exceed $300,000 
        but are less than or equal to $100,000,000.
  ``(c) When the total expenditures of a non-Federal entity's 
major programs are less than 50 percent of the non-Federal 
entity's total expenditures of all Federal awards (or such 
lower percentage as specified by the Director), the auditor 
shall select and test additional programs as major programs as 
necessary to achieve audit coverage of at least 50 percent of 
Federal expenditures by the non-Federal entity (or such lower 
percentage as specified by the Director), in accordance with 
guidance issued by the Director.
  ``(d) Loan or loan guarantee programs, as specified by the 
Director, shall not be subject to the application of subsection 
(b).

``Sec. 7502. Audit requirements; exemptions

  ``(a)(1)(A) Each non-Federal entity that expends a total 
amount of Federal awards equal to or in excess of $300,000 or 
such other amount specified by the Director under subsection 
(a)(3) in any fiscal year of such non-Federal entity shall have 
either a single audit or a program-specific audit made for such 
fiscal year in accordance with the requirements of this 
chapter.
  ``(B) Each such non-Federal entity that expends Federal 
awards under more than one Federal program shall undergo a 
single audit in accordance with the requirements of subsections 
(b) through (i) of this section and guidance issued by the 
Director under section 7505.
  ``(C) Each such non-Federal entity that expends awards under 
only one Federal program and is not subject to laws, 
regulations, or Federal award agreements that require a 
financial statement audit of the non-Federal entity, may elect 
to have a program-specific audit conducted in accordance with 
applicable provisions of this section and guidance issued by 
the Director under section 7505.
  ``(2)(A) Each non-Federal entity that expends a total amount 
of Federal awards of less than $300,000 or such other amount 
specified by the Director under subsection (a)(3) in any fiscal 
year of such entity, shall be exempt for such fiscal year from 
compliance with--
          ``(i) the audit requirements of this chapter; and
          ``(ii) any applicable requirements concerning 
        financial audits contained in Federal statutes and 
        regulations governing programs under which such Federal 
        awards are provided to that non-Federal entity.
  ``(B) The provisions of subparagraph (A)(ii) of this 
paragraph shall not exempt a non-Federal entity from compliance 
with any provision of a Federal statute or regulation that 
requires such non-Federal entity to maintain records concerning 
Federal awards provided to such non-Federal entity or that 
permits a Federal agency, pass-through entity, or the 
Comptroller General access to such records.
  ``(3) Every 2 years, the Director shall review the amount for 
requiring audits prescribed under paragraph (1)(A) and may 
adjust such dollar amount consistent with the purposes of this 
chapter, provided the Director does not make such adjustments 
below $300,000.
  ``(b)(1) Except as provided in paragraphs (2) and (3), audits 
conducted pursuant to this chapter shall be conducted annually.
  ``(2) A State or local government that is required by 
constitution or statute, in effect on January 1, 1987, to 
undergo its audits less frequently than annually, is permitted 
to undergo its audits pursuant to this chapter biennially. 
Audits conducted biennially under the provisions of this 
paragraph shall cover both years within the biennial period.
  ``(3) Any nonprofit organization that had biennial audits for 
all biennial periods ending between July 1, 1992, and January 
1, 1995, is permitted to undergo its audits pursuant to this 
chapter biennially. Audits conducted biennially under the 
provisions of this paragraph shall cover both years within the 
biennial period.
  ``(c) Each audit conducted pursuant to subsection (a) shall 
be conducted by an independent auditor in accordance with 
generally accepted government auditing standards, except that, 
for the purposes of this chapter, performance audits shall not 
be required except as authorized by the Director.
  ``(d) Each single audit conducted pursuant to subsection (a) 
for any fiscal year shall--
          ``(1) cover the operations of the entire non-Federal 
        entity; or
          ``(2) at the option of such non-Federal entity such 
        audit shall include a series of audits that cover 
        departments, agencies, and other organizational units 
        which expended or otherwise administered Federal awards 
        during such fiscal year provided that each such audit 
        shall encompass the financial statements and schedule 
        of expenditures of Federal awards for each such 
        department, agency, and organizational unit, which 
        shall be considered to be a non-Federal entity.
  ``(e) The auditor shall--
          ``(1) determine whether the financial statements are 
        presented fairly in all material respects in conformity 
        with generally accepted accounting principles;
          ``(2) determine whether the schedule of expenditures 
        of Federal awards is presented fairly in all material 
        respects in relation to the financial statements taken 
        as a whole;
          ``(3) with respect to internal controls pertaining to 
        the compliance requirements for each major program--
                  ``(A) obtain an understanding of such 
                internal controls;
                  ``(B) assess control risk; and
                  ``(C) perform tests of controls unless the 
                controls are deemed to be ineffective; and
          ``(4) determine whether the non-Federal entity has 
        complied with the provisions of laws, regulations, and 
        contracts or grants pertaining to Federal awards that 
        have a direct and material effect on each major 
        program.
  ``(f)(1) Each Federal agency which provides Federal awards to 
a recipient shall--
          ``(A) provide such recipient the program names (and 
        any identifying numbers) from which such awards are 
        derived, and the Federal requirements which govern the 
        use of such awards and the requirements of this 
        chapter; and
          ``(B) review the audit of a recipient as necessary to 
        determine whether prompt and appropriate corrective 
        action has been taken with respect to audit findings, 
        as defined by the Director, pertaining to Federal 
        awards provided to the recipient by the Federal agency.
  ``(2) Each pass-through entity shall--
          ``(A) provide such subrecipient the program names 
        (and any identifying numbers) from which such 
        assistance is derived, and the Federal requirements 
        which govern the use of such awards and the 
        requirements of this chapter;
          ``(B) monitor the subrecipient's use of Federal 
        awards through site visits, limited scope audits, or 
        other means;
          ``(C) review the audit of a subrecipient as necessary 
        to determine whether prompt and appropriate corrective 
        action has been taken with respect to audit findings, 
        as defined by the Director, pertaining to Federal 
        awards provided to the subrecipient by the pass-through 
        entity; and
          ``(D) require each of its subrecipients of Federal 
        awards to permit, as a condition of receiving Federal 
        awards, the independent auditor of the pass-through 
        entity to have such access to the subrecipient's 
        records and financial statements as may be necessary 
        for the pass-through entity to comply with this 
        chapter.
  ``(g)(1) The auditor shall report on the results of any audit 
conducted pursuant to this section, in accordance with guidance 
issued by the Director.
  ``(2) When reporting on any single audit, the auditor shall 
include a summary of the auditor's results regarding the non-
Federal entity's financial statements, internal controls, and 
compliance with laws and regulations.
  ``(h) The non-Federal entity shall transmit the reporting 
package, which shall include the non-Federal entity's financial 
statements, schedule of expenditures of Federal awards, 
corrective action plan defined under subsection (i), and 
auditor's reports developed pursuant to this section, to a 
Federal clearinghouse designated by the Director, and make it 
available for public inspection within the earlier of--
          ``(1) 30 days after receipt of the auditor's report; 
        or
          ``(2)(A) for a transition period of at least 2 years 
        after the effective date of the Single Audit Act 
        Amendments of 1996, as established by the Director, 13 
        months after the end of the period audited; or
          ``(B) for fiscal years beginning after the period 
        specified in subparagraph (A), 9 months after the end 
        of the period audited, or within a longer timeframe 
        authorized by the Federal agency, determined under 
        criteria issued under section 7504, when the 9-month 
        timeframe would place an undue burden on the non-
        Federal entity.
  ``(i) If an audit conducted pursuant to this section 
discloses any audit findings, as defined by the Director, 
including material noncompliance with individual compliance 
requirements for a major program by, or reportable conditions 
in the internal controls of, the non-Federal entity with 
respect to the matters described in subsection (e), the non-
Federal entity shall submit to Federal officials designated by 
the Director, a plan for corrective action to eliminate such 
audit findings or reportable conditions or a statement 
describing the reasons that corrective action is not necessary. 
Such plan shall be consistent with the audit resolution 
standard promulgated by the Comptroller General (as part of the 
standards for internal controls in the Federal Government) 
pursuant to section 3512(c).
  ``(j) The Director may authorize pilot projects to test 
alternative methods of achieving the purposes of this chapter. 
Such pilot projects may begin only after consultation with the 
Chair and Ranking Minority Member of the Committee on 
Governmental Affairs of the Senate and the Chair and Ranking 
Minority Member of the Committee on Government Reform and 
Oversight of the House of Representatives.

``Sec. 7503. Relation to other audit requirements

  ``(a) An audit conducted in accordance with this chapter 
shall be in lieu of any financial audit of Federal awards which 
a non-Federal entity is required to undergo under any other 
Federal law or regulation. To the extent that such audit 
provides a Federal agency with the information it requires to 
carry out its responsibilities under Federal law or regulation, 
a Federal agency shall rely upon and use that information.
  ``(b) Notwithstanding subsection (a), a Federal agency may 
conduct or arrange for additional audits which are necessary to 
carry out its responsibilities under Federal law or regulation. 
The provisions of this chapter do not authorize any non-Federal 
entity (or subrecipient thereof) to constrain, in any manner, 
such agency from carrying out or arranging for such additional 
audits, except that the Federal agency shall plan such audits 
to not be duplicative of other audits of Federal awards.
  ``(c) The provisions of this chapter do not limit the 
authority of Federal agencies to conduct, or arrange for the 
conduct of, audits and evaluations of Federal awards, nor limit 
the authority of any Federal agency Inspector General or other 
Federal official.
  ``(d) Subsection (a) shall apply to a non-Federal entity 
which undergoes an audit in accordance with this chapter even 
though it is not required by section 7502(a) to have such an 
audit.
  ``(e) A Federal agency that provides Federal awards and 
conducts or arranges for audits of non-Federal entities 
receiving such awards that are in addition to the audits of 
non-Federal entities conducted pursuant to this chapter shall, 
consistent with other applicable law, arrange for funding the 
full cost of such additional audits. Any such additional audits 
shall be coordinated with the Federal agency determined under 
criteria issued under section 7504 to preclude duplication of 
the audits conducted pursuant to this chapter or other 
additional audits.
  ``(f) Upon request by a Federal agency or the Comptroller 
General, any independent auditor conducting an audit pursuant 
to this chapter shall make the auditor's working papers 
available to the Federal agency or the Comptroller General as 
part of a quality review, to resolve audit findings, or to 
carry out oversight responsibilities consistent with the 
purposes of this chapter. Such access to auditor's working 
papers shall include the right to obtain copies.

``Sec. 7504. Federal agency responsibilities and relations with non-
                    Federal entities

  ``(a) Each Federal agency shall, in accordance with guidance 
issued by the Director under section 7505, with regard to 
Federal awards provided by the agency--
          ``(1) monitor non-Federal entity use of Federal 
        awards, and
          ``(2) assess the quality of audits conducted under 
        this chapter for audits of entities for which the 
        agency is the single Federal agency determined under 
        subsection (b).
  ``(b) Each non-Federal entity shall have a single Federal 
agency, determined in accordance with criteria established by 
the Director, to provide the non-Federal entity with technical 
assistance and assist with implementation of this chapter.
  ``(c) The Director shall designate a Federal clearinghouse 
to--
          ``(1) receive copies of all reporting packages 
        developed in accordance with this chapter;
          ``(2) identify recipients that expend $300,000 or 
        more in Federal awards or such other amount specified 
        by the Director under section 7502(a)(3) during the 
        recipient's fiscal year but did not undergo an audit in 
        accordance with this chapter; and
          ``(3) perform analyses to assist the Director in 
        carrying out responsibilities under this chapter.

``Sec. 7505. Regulations

  ``(a) The Director, after consultation with the Comptroller 
General, and appropriate officials from Federal, State, and 
local governments and nonprofit organizations shall prescribe 
guidance to implement this chapter. Each Federal agency shall 
promulgate such amendments to its regulations as may be 
necessary to conform such regulations to the requirements of 
this chapter and of such guidance.
  ``(b)(1) The guidance prescribed pursuant to subsection (a) 
shall include criteria for determining the appropriate charges 
to Federal awards for the cost of audits. Such criteria shall 
prohibit a non-Federal entity from charging to any Federal 
awards--
          ``(A) the cost of any audit which is--
                  ``(i) not conducted in accordance with this 
                chapter; or
                  ``(ii) conducted in accordance with this 
                chapter when expenditures of Federal awards are 
                less than amounts cited in section 
                7502(a)(1)(A) or specified by the Director 
                under section 7502(a)(3), except that the 
                Director may allow the cost of limited scope 
                audits to monitor subrecipients in accordance 
                with section 7502(f)(2)(B); and
          ``(B) more than a reasonably proportionate share of 
        the cost of any such audit that is conducted in 
        accordance with this chapter.
  ``(2) The criteria prescribed pursuant to paragraph (1) shall 
not, in the absence of documentation demonstrating a higher 
actual cost, permit the percentage of the cost of audits 
performed pursuant to this chapter charged to Federal awards, 
to exceed the ratio of total Federal awards expended by such 
non-Federal entity during the applicable fiscal year or years, 
to such non-Federal entity's total expenditures during such 
fiscal year or years.
  ``(c) Such guidance shall include such provisions as may be 
necessary to ensure that small business concerns and business 
concerns owned and controlled by socially and economically 
disadvantaged individuals will have the opportunity to 
participate in the performance of contracts awarded to fulfill 
the audit requirements of this chapter.

``Sec. 7506. Monitoring responsibilities of the Comptroller General

  ``(a) The Comptroller General shall review provisions 
requiring financial audits of non-Federal entities that receive 
Federal awards that are contained in bills and resolutions 
reported by the committees of the Senate and the House of 
Representatives.
  ``(b) If the Comptroller General determines that a bill or 
resolution contains provisions that are inconsistent with the 
requirements of this chapter, the Comptroller General shall, at 
the earliest practicable date, notify in writing--
          ``(1) the committee that reported such bill or 
        resolution; and
          ``(2)(A) the Committee on Governmental Affairs of the 
        Senate (in the case of a bill or resolution reported by 
        a committee of the Senate); or
          ``(B) the Committee on Government Reform and 
        Oversight of the House of Representatives (in the case 
        of a bill or resolution reported by a committee of the 
        House of Representatives).

``Sec. 7507. Effective date

  ``This chapter shall apply to any non-Federal entity with 
respect to any of its fiscal years which begin after June 30, 
1996.''.

SEC. 3. TRANSITIONAL APPLICATION.

  Subject to section 7507 of title 31, United States Code (as 
amended by section 2 of this Act) the provisions of chapter 75 
of such title (before amendment by section 2 of this Act) shall 
continue to apply to any State or local government with respect 
to any of its fiscal years beginning before July 1, 1996.

                      IX. Changes to Existing Law

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, changes in existing law made by 
S. 1579, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
material is printed in italic, existing law in which no change 
is proposed is shown as roman):



                      TITLE 31, UNITED STATES CODE



               CHAPTER 75--REQUIREMENTS FOR SINGLE AUDITS

Sec.

7501. Definitions.
7502. Audit requirements; exemptions.
7503. Relation to other audit requirements.
7504. [Cognizant agency responsibilities.] Federal agency 
          responsibilities and relations with non-Federal entities.
7505. Regulations.
7506. Monitoring responsibilities of the Comptroller General.
7507. Effective date[; report].

Sec. 7501. Definitions

    (a) As used in this chapter, the term--
          [(1) `cognizant agency' means a Federal agency which 
        is assigned by the Director with the responsibility for 
        implementing the requirements of this chapter with 
        respect to a particular State or local government.]
          ([2]1) `Comptroller General' means the Comptroller 
        General of the United States[.];
          ([3]2) `Director' means the Director of the Office of 
        Management and Budget[.];
          ([5]3) `Federal agency' has the same meaning as the 
        term `agency' in section 551(1) of title 5[,];[United 
        States Code.]
          (4) Federal awards' means Federal financial 
        assistance and Federal cost-reimbursement contracts 
        that non-Federal entities receive directly from Federal 
        awarding agencies or indirectly from pass-through 
        entities;
          ([4]5) `Federal financial assistance' means 
        assistance [provided by a Federal agency] that non-
        Federal entities receive or administer in the form of 
        grants, [contracts,] loans, loan guarantees, property, 
        cooperative agreements, interest subsidies, insurance, 
        food commodities, [or] direct appropriations, or other 
        assistance, but does not include [direct Federal cash 
        assistance to individuals.] amounts received as 
        reimbursement for services rendered to individuals in 
        accordance with guidance issued by the Director;
          (6) `Federal program' means all Federal awards to a 
        non-Federal entity assigned a single number in the 
        Catalog of Federal Domestic Assistance or encompassed 
        in a group of numbers or other category as defined by 
        the Director;
          [(6) `generally accepted accounting principles' has 
        the meaning specified in the generally accepted 
        government auditing standards.]
          (7) `generally accepted government auditing 
        standards' means the government auditing standards [for 
        audit of governmental organizations, programs, 
        activities, and functions,] issued by the Comptroller 
        General[.];
          (8) `independent auditor' means--
                  (A) an external State or local government 
                auditor who meets the independence standards 
                included in generally accepted government 
                auditing standards[,]; or
                  (B) a public accountant who meets such 
                independence standards[.];
          ([10]9) `Indian tribe' means any Indian tribe, band, 
        nation, or other organized group or community, 
        including any Alaskan Native village or regional or 
        village corporation (as defined in, or established 
        under, the Alaskan Native Claims Settlement Act) that 
        is recognized by the United States as eligible for the 
        special programs and services provided by the United 
        States to Indians because of their status as 
        Indians[.];
          ([9] 10) `internal controls' means [the plan of 
        organization and methods and procedures adopted by 
        management to ensure that] a process, effected by an 
        entity's management and other personnel, designed to 
        provide reasonable assurance regarding the achievement 
        of objectives in the following categories: [--]
                  (A) [resource use is consistent with laws, 
                regulations, and policies;] Effectiveness and 
                efficiency of operations.
                  (B) [resources are safeguarded against waste, 
                loss, and misuse; and] Reliability of financial 
                reporting.
                  (C) [reliable data are obtained, maintained, 
                and fairly disclosed in reports.] Compliance 
                with applicable laws and regulations;
          (11) `local government' means any unit of local 
        government within a State, including a county, borough, 
        municipality, city, town, township, parish, local 
        public authority, special district, school district, 
        intrastate district, council of governments, [and] any 
        other instrumentality of local government[.] and, in 
        accordance with guidelines issued by the Director, a 
        group of local governments;
          (12) `major [Federal assistance] program' means a 
        Federal program identified in accordance with risk-
        based criteria prescribed by the Director under this 
        chapter, subject to the limitations described under 
        subsection (b); [any program for which total 
        expenditures of Federal financial assistance by the 
        State or local government during the applicable year 
        exceed--]
          [(A) $20,000,000 in the case of a State or local 
        government for which such total expenditures for all 
        programs exceed $7,000,000,000;]
          [(B) $19,000,000 in the case of a State or local 
        government for which such total expenditures for all 
        programs exceed $6,000,000,000 but are less than or 
        equal to $7,000,000,000;]
          [(C) $16,000,000 in the case of a State or local 
        government for which such total expenditures for all 
        programs exceed $5,000,000,000 but are less than or 
        equal to $6,000,000,000;]
          [(D) $13,000,000 in the case of a State or local 
        government for which such total expenditures for all 
        programs exceed $4,000,000,000 but are less than or 
        equal to $5,000,000,000;]
          [(E) $10,000,000 in the case of a State or local 
        government for which such total expenditures for all 
        programs exceed $3,000,000,000 but are less than or 
        equal to $4,000,000,000;]
          [(F) $7,000,000 in the case of a State or local 
        government for which such total expenditures for all 
        programs exceed $2,000,000,000 but are less than or 
        equal to $3,000,000,000;]
          [(G) $4,000,000 in the case of a State or local 
        government for which such total expenditures for all 
        programs exceed $1,000,000,000 but are less than or 
        equal to $2,000,000,000;]
          [(H) $3,000,000 in the case of a State or local 
        government for which such total expenditures for all 
        programs exceed $100,000,000 but are less than or equal 
        to $1,000,000,000; and]
          [(I) the larger of (i) $300,000, or (ii) 3 percent of 
        such total expenditures for all programs, in the case 
        of a State or local government for which such total 
        expenditures for all programs exceed $100,000 but are 
        less than or equal to $100,000,000.]
          [(13) `public accountants' means those individuals 
        who meet the qualification standards included in 
        generally accepted government auditing standards for 
        personnel performing government audits.]
          (13) `non-Federal entity' means a State, local 
        government, or nonprofit organization;
          (14) `nonprofit organization' means any corporation, 
        trust, association, cooperative, thirty-two or other 
        organization that--
                  (A) is operated primarily for scientific, 
                educational, service, charitable, or similar 
                purposes in the public interest;
                  (B) is not organized primarily for profit; 
                and
                  (C) uses net proceeds to maintain, improve, 
                or expand the operations of the organization;
          (15) `pass-through entity' means a non-Federal entity 
        that provides Federal awards to a subrecipient to carry 
        out a Federal program;
          (16) `program-specific audit' means an audit of one 
        Federal program;
          (17) `recipient' means a non-Federal entity that 
        receives awards directly from a Federal agency to carry 
        out a Federal program;
          (18) `single audit' means an audit, as described 
        under section 7502(d), of a non-Federal entity that 
        includes the entity's financial statements and Federal 
        awards;
          ([14]19) `State' means any State of the United 
        States, the District of Columbia, the Commonwealth of 
        Puerto Rico, the Virgin Islands, Guam, America Samoa, 
        the Commonwealth of the Northern Mariana Islands, and 
        the Trust Territory of the Pacific Islands, any 
        instrumentality thereof, any multi-State, regional, or 
        interstate entity which has governmental functions, and 
        any Indian tribe [.]; and
          ([15]20) `subrecipient' means a[ny person or 
        government department, agency, or establishment] non-
        Federal entity that receives Federal [financial 
        assistance] awards through [a State or local 
        government,] another non-Federal entity to carry out a 
        Federal program, but does not include an individual 
        [that] who receives financial assistance through such 
        [assistance] awards.
    (b) In prescribing risk-based program selection criteria 
for major programs, the Director shall not require more 
programs to be identified as major for a particular non-Federal 
entity, except as prescribed under subsection (c) or as 
provided under subsection (d), than would be identified if the 
major programs were defined as any program for which total 
expenditures of Federal awards by the non-Federal entity during 
the applicable year exceed--
          (1) the larger of $30,000,000 or 0.15 percent of the 
        non-Federal entity's total Federal expenditures, in the 
        case of a non-Federal entity for which such total 
        expenditures for all programs exceed $10,000,000,000;
          (2) the larger of $3,000,000, or 0.30 percent of the 
        non-Federal entity's total Federal expenditures, in the 
        case of a non-Federal entity for which such total 
        expenditures for all programs exceed $100,000,000 but 
        are less than or equal to $10,000,000,000; or
          (3) the larger of $300,000, or percent of such total 
        Federal expenditures for all programs, in the case of a 
        non-Federal entity for which such total expenditures 
        for all programs equal or exceed $300,000 but are less 
        than or equal to $100,000,000.
    (c) When the total expenditures of a non-Federal entity's 
major programs are less than 50 percent of the non-Federal 
entity's total expenditures of all Federal awards (or such 
lower percentage as specified by the Director), the auditor 
shall select and test additional programs as major programs as 
necessary to achieve audit coverage of at least 50 percent of 
Federal expenditures by the non-Federal entity (or such lower 
percentage as specified by the Director), in accordance with 
guidance issued by the Director.
    (d) Loan or loan guarantee programs, as specified by the 
Director, shall not be subject to the application of subsection 
(b).

Sec. 7502. Audit requirements; exemptions

    (a)(1)(A) Each [State and local government] non-Federal 
entity [which] that [receives] expends a total amount of 
Federal [financial assistance] awards equal to or in excess of 
[$100,000] $300,000 or such other amount specified by the 
Director under subsection (a)(3) in any fiscal year of such 
[government] non-Federal entity shall have [an audit] either a 
single audit or a program-specific audit made for such fiscal 
year in accordance with the requirements of this chapter [and 
the requirements of the regulations prescribed pursuant to 
section 7505 of this title].
    (B) Each such non-Federal entity that expends Federal 
awards under more than one Federal program shall undergo a 
single audit in accordance with the requirements of subsections 
(b) through (i) of this section and guidance issued by the 
Director under section 7505.
    (C) Each such non-Federal entity that expends awards under 
only one Federal program and is not subject to laws, 
regulations, or Federal award agreements that require a 
financial statement audit of the non-Federal entity, may elect 
to have a program-specific audit conducted in accordance with 
applicable provisions of this section and guidance issued by 
the Director under section 7505.
    [(B) Each State and local government that receives a total 
amount of Federal financial assistance which is equal to or in 
excess of $25,000 but less than $100,000 in any fiscal year of 
such government shall--]
          [(i) have an audit made for such fiscal year in 
        accordance with the requirements of this chapter and 
        the requirements of the regulations prescribed pursuant 
        to section 7505 of this title; or]
          [(ii) comply with any applicable requirements 
        concerning financial or financial and compliance audits 
        contained in Federal statutes and regulations governing 
        programs under which such Federal financial assistance 
        is provided to that government.]
    ([C]2)(A) Each [State and local government] non-Federal 
entity that [receives] expends a total amount of Federal 
[financial assistance which is] awards of less than [$25,000] 
$300,000 or such other amount specified by the Director under 
subsection (a)(3) in any fiscal year of such [government] 
entity, shall be exempt for such fiscal year from compliance 
with--
          (i) the audit requirements of this chapter; and
          (ii) any applicable requirements concerning financial 
        [or financial and compliance] audits contained in 
        Federal statutes and regulations governing programs 
        under which such Federal [financial assistance is] 
        awards are provided to that [government] non-Federal 
        entity.
    (B) The provisions of [clause] subparagraph (A)(ii) of this 
[sub]paragraph [do] shall not exempt a [State or local 
government] non-Federal entity from compliance with any 
provision of a Federal statute or regulation that requires such 
[government] non-Federal entity to maintain records concerning 
Federal [financial assistance] awards provided to such 
[government] non-Federal entity or that permits a Federal 
agency, pass-through entity, or the Comptroller General access 
to such records.
    (3) Every 2 years, the Director shall review the amount for 
requiring audits prescribed under paragraph (1)(A) and my 
adjust such dollar amount consistent with the purposes of this 
chapter, provided the Director does not make such adjustments 
below $300,000.
    [(2) For purposes of this section, a State or local 
government shall be considered to receive Federal financial 
assistance whether such assistance is received directly from a 
Federal agency or indirectly through another State or local 
government.]
    (b)(1) Except as provided in paragraphs (2) and (3), audits 
conducted pursuant to this chapter shall be conducted annually.
    (2) [If a) A State or local government that is required[--]
          [(A)] by constitution or statute, [as] in effect on 
        [the date of enactment of this chapter, or] January 1, 
        1987,
          [(B) by administrative rules, regulations, 
        guidelines, standards, or policies, as in effect on 
        such date,] to [conduct] undergo its audits less 
        frequently than annually, [the cognizant agency for 
        such government shall, upon request of such government, 
        permit the government to conduct] is permitted to 
        undergo its audits pursuant to this chapter biennially. 
        [, except as provided in paragraph (3). Such a] Audits 
        conducted biennially under the provisions of this 
        paragraph shall cover both years within the biennial 
        period.
    (3) Any [State or local government] nonprofit organization 
that had biennial audits for all biennial periods ending 
between July 1, 1992, and January 1, 1995, is permitted, [under 
clause (B) of paragraph (2),] to [conduct] undergo  its audits 
pursuant to this chapter biennially. [by reason of the 
requirements of a rule, regulation, guideline, standard, or 
policy, shall, or any of its fiscal years beginning after 
December 31, 1986, conduct such audits annually unless such 
State or local government codifies a requirement for biennial 
audits in its constitution or statutes by January 1, 1987.] 
Audits conducted biennially under the provisions of this 
paragraph shall cover both years within the biennial period.
    (c) Each audit conducted pursuant to subsection (a) shall 
be conducted by an independent auditor in accordance with 
generally accepted government auditing standards, except that, 
for the purposes of this chapter, [such standards shall not be 
construed to require economy and efficiency] performance 
audits, [program results audits, or program evaluations] shall 
not be required except as authorized by the Director.
    (d)[(1)] Each single  audit conducted pursuant to 
subsection (a) for any fiscal year shall--
          (1) cover the [entire State or local government's] 
        operations of the entire non-Federal entity; or
          (2) [except that,] at the option of such [government] 
        non-Federal entity[--]
          [(A)] such audit [may,] shall include a series of 
        audits that [except as provided in paragraph (5),] 
        cover [only each] departments, agenc[y]ies, [or 
        establishment] and other organizational units which 
        [received,] expended[,] or otherwise administered 
        Federal [financial assistance] awards during such 
        fiscal year[,] provided that each such audit shall 
        encompass the financial statements and schedule of 
        expenditures of Federal awards for each such 
        department, agency, and organizational unit, which 
        shall be considered to be a non-Federal entity.
    (e) The auditor shall--
          (1) determine whether the financial statements are 
        presented fairly in all material respects in conformity 
        with generally accepted accounting principles;
          (2) determine whether the schedule of expenditures of 
        Federal awards is presented fairly in all material 
        respects in relation to the financial statements taken 
        as a whole;
          (3) with respect to internal controls pertaining to 
        the compliance requirements for each major program--
                  (A) obtain an understanding of such internal 
                controls;
                  (B) assess control risk; and
                  (C) perform tests of controls unless the 
                controls are deemed to be ineffective; and
          (4) determine whether the non-Federal entity has 
        complied with the provisions of laws, regulations, and 
        contracts or grants pertaining to Federal awards that 
        have a direct and material effect on each major 
        program. [and
          [(B) such audit may exclude public hospitals and 
        public colleges and universities.]
          [(2) Each such audit shall encompass the entirety of 
        the financial operations of such government or of such 
        department, agency, or establishment, whichever is 
        applicable, and shall determine and report whether--]
          [(A)(i) the financial statements of the government, 
        department, agency, or establishment present fairly its 
        financial position and the results of its financial 
        operations in accordance with generally accepted 
        accounting principles; and]
          [(ii) the government, department, agency, or 
        establishment has complied with laws and regulations 
        that may have a material effect upon the financial 
        statements;]
          [(b) the government, department, agency, or 
        establishment has internal control systems to provide 
        reasonable assurance that it is managing Federal 
        financial assistance programs in compliance with 
        applicable laws and regulations; and]
          [(C) the government, department, agency, or 
        establishment has complied with laws and regulations 
        that may have a material effect upon each major Federal 
        assistance program.]
    [In complying with the requirements of subparagraph (C), 
the independent auditor shall select and test a representative 
number of transactions from each major Federal assistance 
program.]
    [(3) Transactions selected from Federal assistance 
programs, other than major Federal assistance programs, 
pursuant to the requirements of paragraphs (2)(A) and (2)(B) 
shall be tested for compliance with Federal laws and 
regulations that apply to such transactions. Any noncompliance 
found in such transactions by the independent auditor in making 
determinations required by this paragraph shall be reported.]
    [(4) The number of transactions selected and tested under 
paragraphs (2) and (3), the selection and testing of such 
transactions, and the determinations required by such 
paragraphs shall be based on the professional judgment of the 
independent auditor.]
    [(5) Each State or local government which, in any fiscal 
year of such government, receives directly from the Department 
of the Treasury a total of $25,000 or more under chapter 67 of 
this title (relating to general revenue sharing) and which is 
required to conduct an audit pursuant to this chapter for such 
fiscal year shall not have the option provided by paragraph 
(1)(A) for such fiscal year.]
    [(6) A series of audits of individual departments, 
agencies, and establishments for the same fiscal year may be 
considered to be an audit for the purpose of this chapter.]
    ([e]f)(1) Each Federal agency which provides Federal awards 
to a recipient shall--
          (A) provide such recipient the program names (and any 
        identifying numbers) from which such awards are 
        derived, and the Federal requirements which govern the 
        use of such awards and the requirements of this 
        chapter; and (b) review the audit of a recipient as 
        necessary to determine whether prompt and appropriate 
        corrective action has been take with respect to audit 
        findings, as defined by the Director, pertaining to 
        Federal awards provided to the recipient by the Federal 
        agency.
    ([1]2) Each [State and local government] pass-through 
entity [subject to the audit requirements of this chapter, 
which receives Federal financial assistance and provides 
$25,000 or more of such assistance in any fiscal year to a 
subrecipient,] shall--
          (A) provide such subrecipient the program names (and 
        any identifying numbers) from which such assistance is 
        derived, and the Federal requirements which govern the 
        use of such awards and the requirements of this 
        chapter;
          (B) monitor the subrecipient's use of Federal awards 
        through site visits, limited scope audits, or other 
        means;
          (C) [(A) if the subrecipient conducts an audit in 
        accordance with the requirements of this chapter,] 
        review [such] the audit of a subrecipient as necessary 
        to [and ensure] determine whether [that] prompt and 
        appropriate corrective action [is taken on] has been 
        taken with respect to audit findings, as defined by the 
        Director, pertaining [instances of material 
        noncompliance with applicable laws and regulations with 
        respect] to Federal [financial assistance] awards 
        provided to the subrecipient by the [state or local 
        government] pass-through entity; [or] and [.]
    ([2]D) [Each such State and local government shall] require 
each of its subrecipients of Federal [assistance,] awards 
[through such government] to permit, as a condition of 
receiving [funds from such] Federal [assistance,] awards, the 
independent auditor of the [State or local government] pass-
through entity to have such access to the subrecipient's 
records and financial statements as may be necessary for the 
[State or local government] pass-through entity to comply with 
this chapter.
          [(B) if the subrecipient does not conduct an audit in 
        accordance with the requirements of this chapter--]
                  [(i) determine whether the expenditures of 
                Federal financial assistance provided to the 
                subrecipient by the State or local government 
                are in accordance with applicable laws and 
                regulations; and]
                  [(ii) ensure that prompt and appropriate 
                corrective action is taken on instances of 
                material noncompliance with applicable laws and 
                regulations with respect to Federal financial 
                assistance provided to the subrecipient by the 
                State or local government.]
    (g)(1) The auditor shall report on the results of any audit 
conducted pursuant to this section, in accordance with guidance 
issued by the Director.
    (2) When reporting on any single audit, the auditor shall 
include a summary of the auditor's results regarding the non-
Federal entity's financial statements, internal controls, and 
compliance with laws and regulations.
    ([f]h) The non-Federal entity shall transmit the reporting 
package, which shall include the non-Federal entity's financial 
statements, schedule of expenditures of Federal awards, 
corrective action plan defined under subsection (i), and 
auditor's reports  [made on any audit conducted] developed 
pursuant to this section, [shall, within thirty days after 
completion of such report, be transmitted to [the appropriate 
Federal officials] a Federal clearinghouse designated by the 
Director, and [made] make it available [by the State or local 
government] for public inspection within the earlier of [.]--
          (1) 30 days after receipt of the auditor's report; or
          (2)(A) for a transition period of at least 2 years 
        after the effective date of the Single Audit Act 
        Amendments of 1996, as established by the Director, 13 
        months after the end of the period audited; or
          (B) for fiscal years beginning after the period 
        specified in subparagraph (A), 9 months after the end 
        of the period audited, or within a longer timeframe 
        authorized by the Federal agency, determined under 
        criteria issued under section 7504, when the 9-month 
        timeframe would place an undue burden on the non-
        Federal entity.
    ([g]i) If an audit conducted pursuant to this section 
discloses any audit findings, as defined by the Director, 
including [finds any] material noncompliance with [applicable 
laws and regulations] individual compliance requirements for a 
major program by, or [material weakness] reportable conditions 
in the internal controls of, the [State or local government] 
non-Federal entity with respect to the matters described in 
subsection [(d)(2)](e), the [State or local government] non-
Federal entity shall submit to [appropriate] Federal officials 
designated by the Director, a plan for corrective action to 
eliminate such [material noncompliance] audit findings or 
[weakness] reportable conditions or a statement describing the 
reasons that corrective action is not necessary. Such plan 
shall be consistent with the audit resolution standard 
promulgated by the Comptroller General (as part of the 
standards for internal controls in the Federal Government) 
pursuant to section 3512 ([b]c) [of this title.]
    (j) The Director may authorize pilot projects to test 
alternative methods of achieving the purposes of this chapter. 
Such pilot projects may begin only after consultation with the 
Chair and Ranking Minority Member of the Committee on 
Governmental Affairs of the Senate and the Chair and Ranking 
Minority Member of the Committee on Government Reform and 
Oversight of the House of Representatives.

Sec. 7503. Relation to other audit requirements

    (a) An audit conducted in accordance with this chapter 
shall be in lieu of any financial [or financial and compliance] 
audit of [an individual] Federal [assistance program] awards 
which a [State or local government] non-Federal entity is 
required to [conduct] undergo under any other Federal law or 
regulation. To the extent that such audit provides a Federal 
agency with the information it requires to carry out its 
responsibilities under Federal law or regulation, a Federal 
agency shall relay upon the use that information [and plan and 
conduct its own audits accordingly in order to avoid a 
duplication of effort].
    (b) Notwithstanding subsection (a), a Federal agency 
[shall] may conduct or arrange for [any] additional audits 
which are necessary to carry out its responsibilities under 
Federal law or regulation. The provisions of this chapter do 
not authorize and [State or local government] non-Federal 
entity (or subrecipient thereof) to constrain, in any manner, 
such agency from carrying out or arranging for such additional 
audits[.], except that the Federal agency shall plan such 
audits to not be duplicative of other audits of Federal awards.
    (c) The provisions of this chapter do not limit the 
authority of Federal agencies to conduct, or [enter into 
contracts] arrange for the conduct of, audits and evaluations 
of Federal [financial assistance programs] awards, nor limit 
the authority of any Federal agency Inspector General or other 
Federal [audit] official.
    (d) Subsection (a) shall apply to a [Stock or local 
government] non-Federal entity which [conducts] undergoes an 
audit in accordance with this chapter even though it is not 
required by section 7502(a) to [conduct] have such an audit.
    (e) A Federal agency that [performs] provides Federal 
awards and conducts or [contracts] arranges for audits of non-
Federal entities receiving such awards that are in addition to 
the audits [conducted by] of [recipients] non-Federal entities 
conducted pursuant to this chapter shall, consistent with other 
applicable law, arrange for funding the full cost of such 
additional audits. [Such additional audits include economy and 
efficiency audits, program results audits, and program 
evaluations.] Any such additional audits shall be coordinated 
with the Federal agency determined under criteria issued under 
section 7504 to preclude duplication of the audits conducted 
pursuant to this chapter or other additional audits.
    (f) Upon request by a Federal agency or the Comptroller 
General, any independent auditor conducting an audit pursuant 
to this chapter shall make the auditor's working papers 
available to the Federal agency or the Comptroller General as 
part of a quality review, to resolve audit findings, or to 
carry out oversight responsibilities consistent with the 
purposes of this chapter. Such access to auditor's working 
papers shall include the right to obtain copies.

Sec. 7504. [Cognizant agency responsibilities] Federal agency 
                    responsibilities and relations with non-Federal 
                    entities

    (a) [The Director shall designate cognizant agencies for 
audits conducted pursuant to this chapter.] Each Federal agency 
shall, in accordance with guidance issued by the Director under 
section 7505, with regard to Federal awards provided by the 
agency--
          (1) monitor non-Federal entity use of Federal awards, 
        and
          (2) assess the quality of audits conducted under this 
        chapter for audits of entities for which the agency is 
        the single Federal agency determined under subsection 
        (b).
    (b) [A cognizant agency shall--] Each non-Federal entity 
shall have a single Federal agency, determined in accordance 
with criteria established by the Director, to provide the non-
Federal entity with technical assistance and assist with 
implementation of this chapter.
          [(1) ensure that audits are made in a timely manner 
        and in accordance with the requirements of this 
        chapter;]
          [(2) ensure that the audit reports and corrective 
        action plans made pursuant to section 7502 of this 
        title are transmitted to the appropriate Federal 
        officials; and]
          [(3)(A) coordinate, to the extent practicable, audits 
        done by or under contract with Federal agencies that 
        are in addition to the audits conducted pursuant to 
        this chapter; and (B) ensure that such additional 
        audits build upon the audits conducted pursuant to this 
        chapter.]
    (c) The Director shall designate a Federal clearinghouse 
to--
          (1) receive copies of all reporting packages 
        developed in accordance with this chapter;
          (2) identify recipients that expend $300,000 or more 
        in Federal awards or such other amount specified by the 
        Director under section 7502(a)(3) during the 
        recipient's fiscal year but did not undergo an audit in 
        accordance with this chapter; and
          (3) perform analysis to assist the Director in 
        carrying out responsibilities under this chapter.

Sec. 7505. Regulations

    (a) The Director, after consultation with the Comptroller 
General, and appropriate officials from Federal, State, and 
local governments and nonprofit organizations [officials,] 
shall prescribe [policies, procedures, and guidelines] guidance 
to implement this chapter. Each Federal agency shall promulgate 
such amendments to its regulations as may be necessary to 
conform such regulations to the requirements of this chapter 
and of such [policies, procedures, and guidelines] guidance.
    (b)(1) The [policies, procedures, and guidelines] guidance 
prescribed pursuant to subsection (a) shall include criteria 
for determining the appropriate charges to [programs of] 
Federal [financial assistance] awards for the costs of audits. 
Such criteria shall prohibit a [State or local government] non-
Federal entity [which is required to conduct an audit pursuant 
to this chapter] from charging to any [such] Federal [program] 
awards--(A) the cost of any [financial or financial and 
compliance] audit which is--
          (i) not conducted in accordance with this chapter[, 
        and]; or
          (ii) conducted in accordance with this chapter when 
        expenditures of Federal awards are less than amounts 
        cited in section 7502(a)(1)(A) or specified by the 
        Director under section 7502(a)(3), except that the 
        Director may allow the cost of limited scope audits to 
        monitor subrecipients in accordance with section 
        7502(f)(2)(B); and (B) more than a reasonably 
        proportionate share of the cost of any such audit that 
        is conducted in accordance with this chapter.
    (2) The criteria prescribed pursuant to paragraph (1) shall 
not, in the absence of documentation demonstrating a higher 
actual cost, permit [(A) the ratio of (i) the total charges by 
a government to Federal financial assistance programs for] the 
percentage of the cost of audits performed pursuant to this 
chapter[,] charged to Federal awards, [to (ii) the total cost 
of such audits,] to exceed [(B)] the ratio of [(i)] total 
Federal [financial assistance] awards expended by such 
[government] non-Federal entity during the applicable fiscal 
year or years, to [(ii)] such [government's] non-Federal 
entity's total expenditures during such fiscal year or years.
    (c) Such [policies, procedures, and guidelines] guidance 
shall include such provisions as may be necessary to ensure 
that small business concerns and business concerns owned and 
controlled by socially and economically disadvantaged 
individuals will have the opportunity to participate in the 
performance of contracts awarded to fulfill the audit 
requirements of this chapter.

Sec. 7506. Monitoring responsibilities of the Comptroller General

    (a) The Comptroller General shall review provisions 
requiring financial [or financial and compliance] audits of 
[recipients of] non-Federal entities that receive Federal 
[assistance] awards that are contained in bills and resolutions 
reported by the committees of the Senate and the House of 
Representatives.
    (b) If the Comptroller General determines that a bill or 
resolution contains provisions that are inconsistent with the 
requirements of this chapter, the Comptroller General shall, at 
the earliest practicable date, notify in writing--
          (1) the committee that reported such bill or 
        resolution; and
          (2)(A) the Committee on Governmental Affairs of the 
        Senate (in the case of a bill or resolution reported by 
        a committee of the Senate); or
          (B) the Committee on Government [Operations] Reform 
        and Oversight of the House of Representatives (in the 
        case of a bill or resolution reported by a committee of 
        the House of Representatives).

Sec. 7507. Effective date [; report]

    [(a)] This chapter shall apply to any [State or local 
government] non-Federal entity with respect to any of its 
fiscal years which begin after [December 31, 1984] June 30, 
1996.
    [(b) The Director, on or before May 1, 1987, and annually 
thereafter, shall submit to each House of Congress a report on 
operations under this chapter. Each such report shall 
specifically identify each Federal agency or State or local 
government which is failing to comply with this chapter.]
    [(b) The provisions of this Act shall not diminish or 
otherwise affect the authority of the Tennessee Valley 
Authority to conduct its own audits of any matter involving 
funds disbursed by the Tennessee Valley Authority.]
    [(c) The table of chapters for subtitle V of title 31, 
United States Code, is amended by inserting after the item 
relating to chapter 73 the following new item:

[75. Requirements for Single Audits............................... 7501.

    [Approved October 19, 1984.]

                                
