[Federal Register Volume 60, Number 200 (Tuesday, October 17, 1995)]
[Proposed Rules]
[Pages 53717-53724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25120]



=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF AGRICULTURE

Office of Finance and Management

7 CFR Parts 3015, 3016, and 3050


Audit Requirements for OMB Circular A-128

AGENCY: Office of Finance and Management, USDA.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule simplifies USDA audit requirements for 
State, local, and Indian Tribal governments that receive USDA financial 
assistance or cost-type contracts and defines USDA responsibilities for 
implementing and monitoring those requirements.

DATES: Comments must be submitted on or before December 18, 1995.

ADDRESSES: Comments may be mailed to Lennetta Elias, Audit Liaison 
Team, Federal Assistance and Fiscal Policy Division, Office of Finance 
and Management, Room 3031 South Building, 14th and Independence Ave., 
SW., Washington, DC 20250.

FOR FURTHER INFORMATION CONTACT: Lennetta Elias on (202) 720-0979.

SUPPLEMENTARY INFORMATION: 

Executive Order 12866

    This proposed rule was reviewed under Executive Order 12866 and it 
was determined that it is not a significant regulatory action. This 
proposed rule will not have an annual effect on the national economy of 
$100 million or more or adversely affect in a material way the economy, 
a sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or State, local, or tribal 
governments or communities; create a serious inconsistency or otherwise 
interfere with an action taken or planned by another agency; materially 
alter the budgetary impact of entitlements, grants, user fees, or loan 
programs or the rights and obligations of recipients thereof; or raise 
novel legal or policy issues arising out of legal mandates, the 
President's priorities, or the principles set forth in this Executive 
order.

Executive Order 12612

    USDA evaluated this proposed rule under Executive Order 12612, 
pertaining to Federalism. This proposed rule will affect State, local, 
and Indian Tribal governments receiving financial assistance. This 
proposed rule will increase their administrative discretion with regard 
to the conduct of audits. For this reason, USDA has determined that 
this proposed rule will not have sufficient Federalism implications to 
warrant the preparation of a Federalism Assessment.

Executive Order 12778

    The following information is given in compliance with Executive 
Order 12778. All State and local laws and regulations that are in 
conflict with this proposed rule are preempted. No retroactive effect 
is to be given to this. This rule does not require administrative 
proceedings before parties may file suit in court.

Regulatory Flexibility Act

    This proposed rule was reviewed with regard to the requirements of 
Public Law (Public Law 96-354. The Department of Agriculture (USDA) 
certifies that this proposed rule will not, under the criteria of the 
Regulatory Flexibility Act, have a significant economic impact on a 
substantial number of small entities because it does not affect the 
amount of funds provided in the covered programs, but rather simplifies 
and consolidates administrative and procedural requirements.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 
3507), any applicable reporting and recordkeeping provisions required 
by this proposed rule must be submitted to the Office of Management and 
Budget (OMB) and will not be effective until OMB approves them. USDA 
certifies that this proposed rule does not impose any reporting or 
recordkeeping requirements under the Paperwork Reduction Act of 1980.

Background

    This proposed rule amends title 7, Code of Federal Regulations 
(CFR), parts 3015 and 3016. The single audit requirements found in 
Secs. 3015.70 through 3015.76 of subpart I, part 3015, are moved to 7 
CFR part 3050, Audits of State, local, and Indian Tribal governments. 
Sections 3015.70 through 3015.76 of Subpart I are reserved for future 
use. Section 3015.1 is revised to delete the audit provisions. As 
identified in OMB Circular A-133 

[[Page 53718]]
``Audits of Institutions of Higher Education and Other Nonprofit 
Institutions of Higher Education and Other Nonprofit Institutions,'' 
USDA proposes to include in the coverage of this rule Federal cost-type 
contracts used to buy services or goods for the use of the Federal 
Government. A reference is added to 7 CFR 3016.26, subpart C, citing 
USDA's regulations that implement OMB Circular A-128, Audits of State 
and local governments, dated April 12, 1984.
    USDA issued its final rule to implement the Single Audit Act (7 CFR 
part 3015, subpart I) on January 14, 1986 (51 FR 1485). Since that 
time, there have been concerns expressed that USDA's rule was unduly 
complicated and difficult to interpret. Although the requirements set 
forth in 7 CFR part 3015, subpart I, remain the same, this proposed 
rule simplifies the language for easier implementation by State, local, 
and Indian Tribal governments. This proposed rule also moves the audit 
requirements from 7 CFR part 3015, subpart I to 7 CFR part 3050. Until 
this proposed rule becomes final, the audit requirements for State, 
local and Indian Tribal governments set forth in 7 CFR part 3015, 
Subpart I, shall continue to be observed.

List of Subjects

7 CFR Part 3015

    Accounting, Grant programs--Agriculture, Indians, Insurance, 
Intergovernmental relations, Loan programs, Reporting and recordkeeping 
requirements, Surety bonds.

7 CFR Part 3016

    Accounting, Grant programs--Agriculture, Indians, Intergovernmental 
relations, Reporting and recordkeeping requirements.

7 CFR Part 3050

    Accounting, Indians, Intergovernmental relations, Grant program--
Agriculture.

    Issued at Washtington, D.C.
    Approved: September 21, 1995.
Anthony A. Williams,
Chief Financial Officer.
Dan Glickman,
Secretary of Agriculture.

    For the reasons set forth in the preamble, title 7, chapter XXX of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 3015--UNIFORM FEDERAL ASSISTANCE REGULATIONS

    1. The authority citation for part 3015 continues to read as 
follows:

    Authority: 5 U.S.C. 301.

    2. Subpart I, consisting of Sec. 3015.70 through 3015.76 and 
Appendixes A and B is removed and reserved.
    3-4. Section 3015.1, paragraphs (a)(2) and (b), are revised to read 
as follows:

Subpart A--General


Sec. 3015.1  Purpose and scope of this part.

    (a) * * *
    (2) Additionally, this subpart establishes intergovernmental review 
provisions required by Executive Order 12372 for any programs listed in 
the Federal Register as covered and policy on competition in awarding 
discretionary grants and cooperative agreements.
* * * * *
    (b) These rules supersede and take precedence over individual USDA 
agency regulations and directives dealing with the administration of 
grants and cooperative agreements to the extent such regulations and 
directives are inconsistent with this part, unless such inconsistency 
is based on a statutory provision or an exception has been obtained 
from OMB. (See Sec. 3015.3) Definitions for the terms used are set 
forth in Appendix A in this part.
* * * * *

PART 3016--UNIFORM ADMINISTRATIVE REQUIREMENTS FOR GRANTS AND 
COOPERATIVE AGREEMENTS TO STATE AND LOCAL GOVERNMENTS

    5. The authority citation for part 3016 continues to read as 
follows:

    Authority: 5 U.S.C. 301.

    2. Section 3016.26 is revised to read as follows:


Sec. 3016.26  Non-Federal audit.

    (a) Basic rule. Recipients and subrecipients are responsible for 
obtaining audits in accordance with USDA's implementing regulations set 
forth in 7 CFR parts 3050 and 3051.
    (b) Commercial contractors (private for-profit and private and 
governmental organizations) providing goods and services to State, 
local, and Indian Tribal governments are not required to have a single 
audit performed. State, local and Indian Tribal governments should use 
their own procedures to ensure that the contractor has complied with 
laws and regulations affecting the expenditure of Federal funds.
    6. A new part 3050 is added to read as follows:

PART 3050--AUDITS OF STATE, LOCAL, AND INDIAN TRIBAL GOVERNMENTS

Sec.
3050.1  Purpose.
3050.2  Policy.
3050.3  Scope.
3050.4  Definitions.
3050.5  Basic requirements.
3050.6  Assignment of responsibilities.
Appendix A to Part 3050--OMB Circular A-128, Audits of State and 
Local Governments

    Authority: 5 U.S.C. 301 and 31 U.S.C. 7505.


Sec. 3050.1  Purpose.

    This part establishes audit requirements for State, local, and 
Indian Tribal governments that receive from USDA direct (receipient) or 
indirect (subrecipient) financial assistance or cost-type contracts 
used to buy service or goods for the use of the Federal Government, and 
assigns USDA agency responsibilities for implementing and monitoring 
those requirements. Additionally, this part implements the audit 
requirements and policies contained in OBM Circular A-128, ``Audits of 
State and Local Governments.''


Sec. 3050.2  Policy.

    USDA requires audits from those governmental entities that receive 
financial assistance or cost-type contracts from USDA awarding agencies 
and that are subject to the requirements of OMB Circular A-128, 
included herein as appendix A of this part.


Sec. 3050.3  Scope.

    This part applies whenever USDA provides financial assistance or 
cost-type contracts directly or indirectly to State, local, and Indian 
Tribal governments. USDA Office of Finance and Management (OFM) must 
approve any proposed exception to or deviation from this part. Any 
approved exceptions to this part based on statute, or other approved 
deviations, will be promulgated through USDA agency-specific program 
regulations. The required audits will expand on the traditional 
financial statement audit by requiring additional work on internal 
control systems, compliance testing, and reporting on the Federally 
assisted programs.


Sec. 3050.4  Definitions

    Exclusive of the definitions contained in appendix A of this part, 
the following definitions apply.
    Agency means an organizational entity of USDA (e.g., the Forest 
Service) that reports to the Secretary of Agriculture, is recognized by 
the USDA 

[[Page 53719]]
Office of Personnel as an agency, and is included on USDA's list of 
agencies.
    Awarding agency means the USDA agency awarding financial assistance 
or cost-type contracts to a recipient.
    Financial assistance means assistance provided by a USDA awarding 
agency in the form of grants, contracts, loans, loan guarantees, 
property, cooperative agreements, food stamps and food commodities, 
interest subsidies, insurance, direct appropriations or cost-type 
contracts, but does not include direct Federal cash assistance to 
individuals.
    General oversight means where an audit agency has not been assigned 
cognizance, the Office of Inspector General (OIG) for Federal Agencies 
with the predominant amount of Federal funding shall provide technical 
assistance to the State, local, and Indian Tribal governments. Where 
there is no direct funding, OIG for Federal Agencies having the 
predominant indirect funding provide the general oversight 
responsibilities.
    Lead agency means either the USDA awarding agency providing the 
majority of financial assistance or cost-type contracts to State, 
local, or Indian Tribal governments or a specific USDA awarding agency 
with a special program interest or other established relationship.
    Recipient means a State, local, or Indian Tribal government that 
receives financial assistance or cost-type contracts directly from 
USDA.


Sec. 3050.5  Basic requirements.

    (a) USDA requires an audit from State, local Indian Tribal 
government under the following conditions:
    (1) Mandatory. State, local Indian Tribal governments that receive 
$100,000 or more of total financial assistance or cost-type contracts 
during a fiscal year shall have an audit in accordance with the 
requirements of appendix A of this part.
    (2) Optional. State, local Indian Tribal governments that receive 
between $25,000 and $100,000 of total financial assistance or cost-type 
contracts during a fiscal year shall have either an audit in accordance 
with this part or a program-specific audit performed in accordance with 
the relevant USDA awarding agency laws and regulations governing 
individual programs. Program-specific audits shall be performed in 
accordance with the Government Auditing Standards covering financial 
audits issued by the Comptroller General of the United States. In 
addition, the program-specific audit shall be performed in accordance 
with any applicable USDA audit guide, compliance tests contained in the 
OMB Compliance Supplement for the specific program involved, and any 
program-specific audit regulations. If the program is not covered by 
paragraphs (a)(1) through (a)(3) of this section, the auditor shall 
design appropriate compliance tests to review program operations in 
accordance with the Government Auditing Standards.
    (3) Exclusion. State, local Indian Tribal governments that receive 
less than $25,000 in total financial assistance or cost-type contracts 
in a fiscal year are exempt from compliance with Federal audit 
requirements. However, records must be available for review by 
appropriate officials of USDA, the General Accounting Office (GAO), or 
a subgranting entity. These entities shall be governed by the audit 
requirements prescribed by State, local, or Indian Tribal government 
laws or regulations.
    (b) Nothing in this part exempts State, local, or Indian Tribal 
governments from maintaining records of financial assistance or cost-
type contracts and/or from providing access to such records to Federal 
Agencies, as provided for in Federal law, program regulations, or in 7 
CFR part 3016.
    (c) It is not intended that audits required by this part be 
separate and apart from audits performed in accordance with State, 
local, or Indian Tribal government laws. To the extent feasible, the 
audit work required by this part should be done in conjunction with 
those audits.
    (d) An audit made in accordance with this part shall be in lieu of 
any financial audit required under individual USDA awards. To the 
extent that an audit made in accordance with this part provides USDA 
agencies with the information and assurances they need to carry out 
their overall responsibility, they shall rely upon and use such 
information. However, a USDA agency shall make any additional audits or 
reviews necessary to carry out responsibilities under Federal law and 
regulation. Any additional USDA audits or reviews shall be planned and 
carried out in such a way as to build upon work performed by the 
independent auditor.


Sec. 3050.6  Assignment of responsibilities.

    (a) OFM shall:
    (1) Assure USDA awarding agency implementation and compliance with 
this part; and
    (2) Coordinate, consolidate, and prepare any reports on the 
effectiveness of implementing this part.
    (b) Each USDA awarding agency shall:
    (1) Assure that governmental entities implement and comply with 
this part.
    (2) Require as a term of any USDA financial assistance or cost-type 
contracts to State, local, and Indian Tribal governments that single 
audits be conducted in a timely manner in accordance with the 
requirements of this part, and be submitted to a designated official in 
the USDA awarding agency and the OMB assigned cognizant agency, if one 
has been assigned, and OIG. The audit report shall be due within 30 
days after the completion of the audit. The audit should be completed 
and the report submitted not later than 13 months after the end of the 
recipient's fiscal year unless a longer period is agreed to between the 
cognizant or awarding agency and the recipient.
    (3) Require that the recipient maintain records to identify the 
source and amounts of financial assistance or cost-type contracts 
received by using the Catalog of Federal Domestic Assistance numbers.
    (4) Provide a copy of this part to recipients or subrecipients, 
upon request.
    (5) Ensure required audits are conducted and audit reports are 
received from recipients or subrecipients, upon request.
    (6) Determine if an audit report adequately addresses the agency's 
needs. If not, determine if a followup audit is necessary and advise 
OIG.
    (7) Ensure that appropriate action is taken on all audit findings 
and recommendations pursuant to the Supplemental Appropriations and 
Rescission Act of 1980 (Public Law 96-304, 94 Stat. 857); OMB Circular 
A-50, ``Audit Followup;'' and Departmental Regulation 1720-1 which 
prescribes USDA's internal process for audit followup, management 
decisions, and final action.
    (8) Coordinate with the recipient to seek corrective action on 
system deficiencies and resolution of other cross-cutting issues 
identified in the audit. Seek the views of affected Federal Agencies 
before entering into negotiations and obtain their concurrence before 
entering into a final agreement.
    (9) Take appropriate action when the recipient either neglects to 
resolve findings or the report does not meet the requirements of OMB 
Circular A-128, including the imposition of sanctions. If USDA awarding 
agencies incur costs, the recipient shall not charge USDA for the cost 
of any audit that did not meet USDA requirements. However, if there was 
an indirect cost plan with audit costs included, the following year's 
indirect cost plan will offset the cost.

[[Page 53720]]

    (10) Establish and maintain appropriate records as to the 
effectiveness of State, local, and Indian Tribal governments in 
carrying out the provisions of this part.
    (11) Where State, local, and Indian Tribal governments receive 
financial assistance or cost-type contracts of less than $100,000, and 
do not obtain audits that meet the requirements of appendix A of this 
part, ensure that Federal funds were spent in accordance with 
applicable laws and regulations. Any of the following can be used to 
determine recipient compliance with Federal requirements:
    (i) Audits obtained by recipients conducted in accordance with the 
Government Auditing Standards issued by the Comptroller General of the 
United States.
    (ii) Any other reasonably acceptable programmatic audit performed 
on the recipient's operations in that fiscal year.
    (iii) Evaluations of recipient operations by USDA awarding agency 
officials.
    (iv) Project audits by Federal auditors or audits obtained by 
recipients.
    (12) Coordinate the responses on audit reports from other USDA 
awarding agencies if assigned as the lead agency.
    (c) OIG shall:
    (1) Provide technical advice and liaison to State, local, and 
Indian Tribal government audit officials; independent auditors; and 
other financial assistance or cost-type contract officials.
    (2) Coordinate with other Federal Agencies to determine general 
oversight responsibility if a cognizant agency has not been designated 
by OMB. When the USDA OIG has general oversight responsibility, OIG 
shall provide technical advice, as appropriate, and may assume 
additional responsibilities such as conducting quality reviews of 
reports and the auditor's work. Any requests received from recipients 
or subrecipients for USDA to provide general oversight should be 
forwarded to the appropriate USDA OIG Regional Office.
    (3) If assigned as the cognizant agency, determine whether audits 
have been performed by independent auditors in accordance with the 
requirements of appendix A of this part.
    (4) Perform or arrange for quality reviews of selected audits and 
provide the results to other affected organizations. Determine whether 
to perform quality reviews of the report and/or the auditor's work in 
cases where audit quality or acceptability appear questionable.
    (5) If assigned as the cognizant agency, advise the recipient and 
awarding agency of any audit not in compliance with appendix A of this 
part. Work with the recipient and auditor to effect appropriate 
corrective action. If corrective action is not taken, notify the 
recipient and other awarding agencies. Major inadequacies or repetitive 
substandard performance by independent auditors shall be referred by 
OIG to appropriate professional bodies for disciplinary action.
    (6) Coordinate, to the extent practicable, audits performed by or 
for Federal Agencies that are in addition to the audits required by 
this part to ensure that the additional audits build upon previous 
audits performed.
    (7) If assigned as the cognizant agency, promptly inform other 
affected Federal Agencies and appropriate Federal law officials of any 
reported illegal acts or irregularities. Also, inform State and local 
law enforcement and prosecuting authorities, if not otherwise advised 
by the recipient, of any violation of law within their jurisdiction.
    (8) When requested by a USDA awarding agency, work with the 
awarding agency to arrange for additional audit coverage, as 
appropriate.
    (9) Maintain appropriate records regarding assigned cognizant 
State, local, and Indian Tribal governments in carrying out the 
provisions of this part.
    (10) Assess the handling of audit reports within USDA for 
compliance with this part.
    (11) Where USDA has been assigned as the cognizant agency, provide 
coordination for USDA agencies and other Federal Agencies.
    (d) State, local, and Indian Tribal governments shall:
    (1) Follow the audit arrangements and requirements set forth in 
this part including the following:
    (i) Use their own procedures to arrange for and prescribe the scope 
of independent audits, provided that such audits comply with the 
requirements set forth in appendix A of this part.
    (ii) Include provisions in audit contracts requiring the audit 
organization to retain audit working papers and reports in accordance 
with appendix A of this part.
    (iii) Ensure that their independent auditor is responsible for:
    (A) Reviewing their systems for monitoring subrecipients and 
obtaining and considering the impact of the subrecipient audit reports. 
Also, include a review of the recipient's system for determining 
whether the subrecipient audit reports comply with Government Auditing 
Standards and generally accepted auditing standards.
    (B) Testing to determine whether systems are functioning in 
accordance with prescribed procedures.
    (C) Commenting on monitoring procedures, if warranted by the 
circumstances.
    (D) Considering whether subrecipient audits require adjustment of 
their financial statements, footnote disclosure, or modification of the 
auditor's report.
    (2) Establish a system for assuring that subrecipients meet the 
requirements of this part.
    (3) Evaluate the acceptability of subrecipient audits.
    (4) Follow-up on the results of subrecipient audits.
    (i) Ensure that subrecipient audit reports are transmitted to the 
recipient. The recipient shall retain all subrecipient audit reports on 
file for 5 years and make them available to OIG and GAO officials or 
their designees upon request.
    (ii) Take appropriate action on subrecipient audits and incorporate 
the results of these audits into their financial records and related 
reports. Questioned costs at the subrecipient level may be contingent 
liabilities as far as the recipient is concerned and should be reported 
as such, when appropriate.
    (iii) Establish a systematic method to assure timely and 
appropriate resolution of audit findings and recommendations.

Appendix A to Part 3050--OMB Circular A-128, Audits of State and 
Local Governments

Executive Office of the President,
Office of Management and Budget, Washington, DC 20603.

Circular No. A-128

April 12, 1985.
To the Heads of Executive Departments and Establishments.
Subject: Audits of State and Local Governments.

    1. Purpose. This Circular is issued pursuant to the Single Audit 
Act of 1984, P.L. 98-502. It establishes audit requirements for 
State and local governments that receive Federal aid, and defines 
Federal responsibilities for implementing and monitoring those 
requirements.
    2. Supersession. The Circular supersedes Attachment P, ``Audit 
Requirements,'' of Circular A-102, ``Uniform requirements for grants 
to State and local governments.''
    3. Background. The Single Audit Act builds upon earlier efforts 
to improve audits of Federal aid programs. The Act requires State or 
local governments that receive $100,000 or more a year in Federal 
funds to have an audit made for that year. Section 7505 of the Act 
requires the Director of the Office of Management and Budget to 
prescribe policies, procedures and guidelines to implement the Act. 
It specifies that the 

[[Page 53721]]
Director shall designate ``cognizant'' Federal agencies, determine 
criteria for making appropriate charges to Federal programs for the 
cost of audits, and provide procedures to assure that small firms or 
firms owned and controlled by disadvantaged individuals have the 
opportunity to participate in contracts for single audits.
    4. Policy. The Single Audit Act requires the following:
    a. State or local governments that receive $100,000 or more a 
year in Federal financial assistance shall have an audit made in 
accordance with this Circular.
    b. State or local governments that receive between $25,000 and 
$100,000 a year shall have an audit made in accordance with this 
Circular, or in accordance with Federal laws and regulations 
governing the programs they participate in.
    c. State or local governments that receive less than $25,000 a 
year shall be exempt from compliance with the Act and other Federal 
audit requirements. These State and local governments shall be 
governed by audit requirements prescribed by State or local law or 
regulation.
    d. Nothing in this paragraph exempts State or local governments 
from maintaining records of Federal financial assistance or from 
providing access to such records to Federal agencies, as provided 
for in Federal law or in Circular A-102, ``Uniform requirements for 
grants to State or local governments.''
    5. Definitions. For the purpose of this Circular the following 
definitions from the Single Audit Act apply:
    a. ``Cognizant agency'' means the Federal agency assigned by the 
Office of Management and Budget to carry out the responsibilities 
described in paragraph 11 of this Circular.
    b. ``Federal financial assistance'' means assistance provided by 
a Federal agency in the form of grants, contracts, cooperative 
agreements, loans, loan guarantees, property, interest subsidies, 
insurance, or direct appropriations, but does not include direct 
Federal cash assistance to individuals. It includes awards received 
directly from Federal agencies, or indirectly through other units of 
State and local governments.
    c. ``Federal agency'' has the same meaning as the term `agency' 
in section 551(1) of Title 5, United States Code.
    d. ``Generally accepted accounting principles'' has the meaning 
specified in the generally accepted government auditing standards.
    e. ``Generally accepted government auditing standards'' means 
the Standards For Audit of Government Organizations, Programs, 
Activities, and Functions, developed by the Comptroller General, 
dated February 27, 1981.
    f. ``Independent auditor'' means:
    (1) a State or local government auditor who meets the 
independence standards specified in generally accepted government 
auditing standards; or
    (2) a public accountant who meets such independence standards.
    g. ``Internal controls'' means the plan of organization and 
methods and procedures adopted by management to ensure that:
    (1) resource use is consistent with laws, regulations, and 
policies;
    (2) resources are safeguarded against waste, loss, and misuse; 
and
    (3) reliable data are obtained, maintained, and fairly disclosed 
in reports.
    h. ``Indian tribe'' means any Indian tribe, band, nations, or 
other organized group or community, including any Alaskan Native 
village or regional or village corporations (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.
    i. ``Local government'' means any unit or local government 
within a State, including a county, a 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.
    j. ``Major Federal Assistance Program,'' as defined by P.L. 98-
502, is described in the Attachment to this Circular.
    k. ``Public accountants'' means those individuals who meet the 
qualification standards included in generally accepted government 
auditing standards for personnel performing government audits.
    l. ``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, and any multi-State, regional, or 
interstate entity that has governmental functions and any Indian 
tribe.
    m. ``Subrecipient'' means any person or government department, 
agency, or establishment that receives Federal financial assistance 
to carry out a program through a State or local government, but does 
not include an individual that is a beneficiary of such a program. A 
subrecipient may also be a direct recipient of Federal financial 
assistance.
    6. Scope of audit. The Single Audit Act provides that:
    a. The audit shall be made by an independent auditor in 
accordance with generally accepted government auditing standards 
covering financial and compliance audits.
    b. The audit shall cover the entire operations of a State or 
local government or, at the option of that government, it may cover 
departments, agencies or establishments that received, expended, or 
otherwise administered Federal financial assistance during the year. 
However, if a State or local government receives $25,000 or more in 
General Revenue Sharing Funds in a fiscal year, it shall have an 
audit of its entire operations. A series of audits of individual 
departments, agencies, and establishments for the same fiscal year 
may be considered a single audit.
    c. Public hospitals and public colleges and universities may be 
excluded from State and local audits and the requirements of this 
Circular. However, if such entities are excluded, audits of these 
entities shall be made in accordance with statutory requirements and 
the provisions of Circular A-110, ``Uniform requirements for grants 
to universities, hospitals, and other nonprofit organizations.''
    d. The auditor shall determine whether:
    (1) 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;
    (2) the organization has internal accounting and other control 
systems to provide reasonable assurance that it is managing Federal 
financial assistance programs in compliance with applicable laws and 
regulations; and
    (3) the organization has complied with laws and regulations that 
may have material effect on its financial statements and on each 
major Federal assistance program.
    7. Frequency of audit. Audits shall be made annually unless the 
State or local government has, by January 1, 1987, a constitutional 
or statutory requirement for less frequent audits. For those 
governments, the cognizant agency shall permit biennial audits, 
covering both years, if the government so requests. It shall also 
honor requests for biennial audits by governments that have an 
administrative policy calling for audits less frequent than annual, 
but only for fiscal years beginning before January 1, 1987.
    8. Internal control and compliance reviews. The Single Audit Act 
requires that the independent auditor determine and report on 
whether the organization has internal control systems to provide 
reasonable assurance that it is managing Federal assistance programs 
in compliance with applicable laws and regulations.
    a. Internal control review. In order to provide this assurance 
the auditor must make a study and evaluation of internal control 
systems used in administering Federal assistance programs. The study 
and evaluation must be made whether or not the auditor intends to 
place reliance on such systems. As part of this review, the auditor 
shall:
    (1) Test whether these internal control systems are functioning 
in accordance with prescribed procedures.
    (2) Examine the recipient's system for monitoring subrecipients 
and obtaining and acting on subrecipient audit reports.
    b. Compliance review. The law also requires the auditor to 
determine whether the organization has complied with laws and 
regulations that may have a material effect on each major Federal 
assistance program.
    (1) In order to determine which major programs are to be tested 
for compliance, State and local governments shall identify in their 
accounts all Federal funds received and expended and the programs 
under which they were received. This shall include funds received 
directly from Federal agencies and through other State and local 
governments.
    (2) The review must include the selection and testing of a 
representative number of charges from each major Federal assistance 
program. The selection and testing of transactions shall be based on 
the auditor's professional judgment considering such factors as the 
amount of expenditures for the program and the individual awards; 
the 

[[Page 53722]]
newness of the program or changes in its conditions; prior experience 
with the program, particularly as revealed in audits and other 
evaluations (e.g., inspections, program reviews); the extent to 
which the program is carried out through subrecipients; the extent 
to which the program contracts for goods or services; the level to 
which the program is already subject to program reviews or other 
forms of independent oversight; the adequacy of the controls for 
ensuring compliance; the expectation of adherence or lack of 
adherence to the applicable laws and regulations; and the potential 
impact of adverse findings.
    (a) In making the test of transactions, the auditor shall 
determine whether:

--the amounts reported as expenditures were for allowable services, 
and
--the records show that those who received services or benefits were 
eligible to receive them.

    (b) In addition to transaction testing, the auditor shall 
determine whether:

--matching requirements, levels of effort and earmarking limitations 
were met,
--Federal financial reports and claims for advances and 
reimbursements contain information that is supported by the books 
and records from which the basic financial statements have been 
prepared, and
--amounts claimed or used for matching were determined in accordance 
with OMB Circular A-87, ``Cost principles for State and local 
governments,'' and Attachment F of Circular A-102, ``Uniform 
requirements for grants to State and local governments.''

    (c) The principal compliance requirements of the largest Federal 
aid programs may be ascertained by referring to the Compliance 
Supplement for Single Audits of State and Local Governments, issued 
by OMB and available from the Government Printing Office. For those 
programs not covered in the Compliance Supplement, the auditor may 
ascertain compliance requirements by researching the statutes, 
regulations, and agreements governing individual programs.
    (3) Transactions related to other Federal assistance programs 
that are selected in connection with examinations of financial 
statements and evaluations of internal controls shall be tested for 
compliance with Federal laws and regulations that apply to such 
transactions.
    9. Subrecipients. State or local governments that receive 
Federal financial assistance and provide $25,000 or more of it in a 
fiscal year to a subrecipient shall:
    a. determine whether State or local subrecipients have met the 
audit requirements of this Circular and whether subrecipients 
covered by Circular A-110, ``Uniform requirements for grants to 
universities, hospitals, and other nonprofit organizations,'' have 
met that requirement;
    b. determine whether the subrecipient spent Federal assistance 
funds provided in accordance with applicable laws and regulations. 
This may be accomplished by reviewing an audit of the subrecipient 
made in accordance with this Circular, Circular A-110, or through 
other means (e.g., program reviews) if the subrecipient has not yet 
had such an audit;
    c. ensure that appropriate corrective action is taken within six 
months after receipt of the audit report in instances of 
noncompliance with Federal laws and regulations;
    d. consider whether subrecipient audits necessitate adjustment 
of the recipient's own records; and
    e. require each subrecipient to permit independent auditors to 
have access to the records and financial statements as necessary to 
comply with this Circular.
    10. Relation to other audit requirements. The Single Audit Act 
provides that an audit made in accordance with this Circular shall 
be in lieu of any financial or financial compliance audit required 
under individual Federal assistance programs. To the extent that a 
single audit provides Federal agencies with information and 
assurances they need to carry out their overall responsibilities, 
they shall rely upon and use such information. However, a Federal 
agency shall make any additional audits which are necessary to carry 
out its responsibilities under Federal law and regulation. Any 
additional Federal audit effort shall be planned and carried out in 
such a way as to avoid duplication.
    a. The provisions of this Circular do not limit the authority of 
Federal agencies to make, or contract for audits and evaluations of 
Federal financial assistance programs, nor do they limit the 
authority of any Federal agency Inspector General or other Federal 
audit official.
    b. The provisions of this circular do not authorize any State or 
local government or subrecipient thereof to constrain Federal 
agencies, in any manner, from carrying out additional audits.
    c. A Federal agency that makes or contracts for audits in 
addition to the audits made by recipients pursuant to this Circular 
shall, consistent with other applicable laws and regulations, 
arrange for funding the cost of such additional audits. Such 
additional audits include economy and efficiency audits, program 
results audits, and program evaluations.
    11. Cognizant agency responsibilities. The Single Audit Act 
provides for cognizant Federal agencies to oversee the 
implementation of this Circular.
    a. The Office of Management and Budget will assign cognizant 
agencies for States and their subdivisions and larger local 
governments and their subdivisions. Other Federal agencies may 
participate with an assigned cognizant agency, in order to fulfill 
the cognizance responsibilities. Smaller governments not assigned a 
cognizant agency will be under the general oversight of the Federal 
agency that provides them the most funds whether directly or 
indirectly.
    b. A cognizant agency shall have the following responsibilities:
    (1) Ensure that audits are made and reports are received in a 
timely manner and in accordance with the requirements of this 
Circular.
    (2) Provide technical advice and liaison to State and local 
governments and independent auditors.
    (3) Obtain or make quality control reviews of selected audits 
made by non-Federal audit organizations, and provide the results 
when appropriate, to other interested organizations.
    (4) Promptly inform other affected Federal agencies and 
appropriate Federal law enforcement officials of any reported 
illegal acts or irregularities. They should also inform State or 
local law enforcement and prosecuting authorities, if not advised by 
the recipient, of any violation of law within their jurisdiction.
    (5) Advise the recipient of audits that have been found not to 
have met the requirements set forth in this Circular. In such 
instances, the recipient will be expected to work with the auditor 
to take corrective action. If corrective action is not taken, the 
cognizant agency shall notify the recipient and Federal awarding 
agencies of the facts and make recommendations for followup action. 
Major inadequacies or repetitive substandard performance of 
independent auditors shall be referred to appropriate professional 
bodies for disciplinary action.
    (6) Coordinate, to the extent practicable, audits made by or for 
Federal agencies that are in addition to the audits made pursuant to 
this Circular; so that the additional audits build upon such audits.
    (7) Oversee the resolution of audit findings that affect the 
programs of more than one agency.
    12. Illegal acts or irregularities. If the auditor becomes aware 
of illegal acts or other irregularities, prompt notice shall be 
given to recipient management officials above the level of 
involvement. (See also paragraph 13(a)(3) below for the auditor's 
reporting responsibilities.) The recipient, in turn, shall promptly 
notify the cognizant agency of the illegal acts or irregularities 
and of proposed and actual actions, if any. Illegal acts and 
irregularities include such matters as conflicts of interest, 
falsification of records or reports, and misappropriations of funds 
or other assets.
    13. Audit Reports. Audit reports must be prepared at the 
completion of the audit. Reports serve many needs of State and local 
governments as well as meeting the requirements of the Single Audit 
Act.
    a. The audit report shall state that the audit was made in 
accordance with the provisions of this Circular. The report shall be 
made up of at least:
    (1) The auditor's report on financial statements and on a 
schedule of Federal assistance; the financial statements; and a 
schedule of Federal assistance, showing the total expenditures for 
each Federal assistance program as identified in the Catalog of 
Federal Domestic Assistance. Federal programs or grants that have 
not been assigned a catalog number shall be identified under the 
caption ``other Federal assistance.''
    (2) The auditor's report on the study and evaluation of internal 
control systems must identify the organization's significant 
internal accounting controls, and those controls designed to provide 
reasonable assurance that Federal programs are being managed in 
compliance with laws and regulations. It must also identify the 
controls that were evaluated, the controls that were not evaluated, 
and the material weaknesses identified as a result of the 
evaluation.
    (3) The auditor's report on compliance containing:

--a statement of positive assurance with respect to those items 
tested for 

[[Page 53723]]
compliance, including compliance with law and regulations pertaining to 
financial reports and claims for advances and reimbursements;
--negative assurance on those items not tested;
--a summary of all instances of noncompliance; and
--an identification of total amounts questioned, if any, for each 
Federal assistance award, as a result of noncompliance.

    b. The three parts of the audit report may be bound into a 
single report, or presented at the same time as separate documents.
    c. All fraud abuse, or illegal acts or indications of such acts, 
including all questioned costs found as the result of these acts 
that auditors become aware of, should normally be covered in a 
separate written report submitted in accordance with paragraph 13f.
    d. In addition to the audit report, the recipient shall provide 
comments on the findings and recommendations in the report, 
including a plan for corrective action taken or planned and comments 
on the status of corrective action taken on prior findings. if 
corrective action is not necessary, a statement describing the 
reason it is not should accompany the audit report.
    e. The reports shall be made available by the State or local 
government for public inspection within 30 days after the completion 
of the audit.
    f. In accordance with generally accepted government audit 
standards, reports shall be submitted by the auditor to the 
organization audited and to those requiring or arranging for the 
audit. In addition, the recipient shall submit copies of the reports 
to each Federal department or agency that provided Federal 
assistance funds to the recipient. Subrecipients shall submit copies 
to recipients that provided them Federal assistance funds. The 
reports shall be sent within 30 days after the completion of the 
audit, but no later than one year after the end of the audit period 
unless a longer period is agreed to with the cognizant agency.
    g. Recipients of more than $100,000 in Federal funds shall 
submit one copy of the audit report within 30 days after issuance to 
a central clearinghouse to be designated by the Office of Management 
and Budget. The clearinghouse will keep completed audits on file and 
follow up with State and local governments that have not submitted 
required audit reports.
    h. Recipients shall keep audit reports on file for three years 
from their issuance.
    14. Audit Resolution. As provided in paragraph 11, the cognizant 
agency shall be responsible for monitoring the resolution of audit 
findings that affect the programs of more than one Federal agency. 
Resolution of findings that relate to the programs of a single 
Federal agency will be the responsibility of the recipient and that 
agency. Alternate arrangements may be made on a case-by-case basis 
by agreement among the agencies concerned.
    Resolution shall be made within six months after receipt of the 
report by the Federal departments and agencies. Corrective action 
should proceed as rapidly as possible.
    15. Audit workpapers and reports. Workpapers and reports shall 
be retained for a minimum of three years from the date of the audit 
report, unless the auditor is notified in writing by the cognizant 
agency to extend the retention period. Audit workpapers shall be 
made available upon request to the cognizant agency or its designee 
or the General Accounting Office, at the completion of the audit.
    16. Audit Costs. The cost of audits made in accordance with the 
provisions of this Circular are allowable charges to Federal 
assistance programs.
    a. The charges may be considered a direct cost or an allocated 
indirect cost, determined in accordance with the provision of 
Circular A-87, ``Cost principles for State and local governments.''
    b. Generally, the percentage of costs charged to Federal 
assistance programs for a single audit shall not exceed the 
percentage that Federal funds expended represent of total funds 
expended by the recipient during the fiscal year. The percentage may 
be exceeded, however, if appropriate documentation demonstrates 
higher actual cost.
    17. Sanctions. The Single Audit Act provides that no cost may be 
charged to Federal assistance programs for audits required by the 
Act that are not made in accordance with this Circular. In cases of 
continued inability or unwillingness to have a proper audit, Federal 
agencies must consider other appropriate sanctions including:

--Withholding a percentage of assistance payments until the audit is 
completed satisfactorily,
--Withholding or disallowing overhead costs, and
--Suspending the Federal assistance agreement until the audit is 
made.

    18. Auditor Selection. In arranging for audit services State and 
local governments shall follow the procurement standards prescribed 
by Attachment O of Circular A-102, ``Uniform requirements for grants 
to State and local governments.'' The standards provide that while 
recipients are encouraged to enter into intergovernmental agreements 
for audit and other services, analysis should be made to determine 
whether it would be more economical to purchase the services from 
private firms. In instances where use of such intergovernmental 
agreements are required by State statutes (e.g., audit services) 
these statutes will take precedence.
    19. Small and Minority Audit Firms. Small audit firms and audit 
firms owned and controlled by socially and economically 
disadvantaged individuals shall have the maximum practicable 
opportunity to participate in contracts awarded to fulfill the 
requirements of this Circular. Recipients of Federal assistance 
shall take the following steps to further this goal:
    a. Assure that small audit firms and audit firms owned and 
controlled by socially and economically disadvantaged individuals 
are used to the fullest extent practicable.
    b. Make information on forthcoming opportunities available and 
arrange timeframes for the audit so as to encourage and facilitate 
participation by small audit firms and audit firms owned and 
controlled by socially and economically disadvantaged individuals.
    c. Consider in the contract process whether firms competing for 
larger audits intend to subcontract with small audit firms and audit 
firms owned and controlled by socially and economically 
disadvantaged individuals.
    d. Encourage contracting with small audit firms or audit firms 
owned and controlled by socially and economically disadvantaged 
individuals which have traditionally audited government programs 
and, in such cases where this is not possible, assure that these 
firms are given consideration for audit subcontracting 
opportunities.
    e. Encourage contracting with consortiums of small audit firms 
as described in paragraph (a) above when a contract is too large for 
an individual small audit firm or audit firm owned and controlled by 
socially and economically disadvantaged individuals.
    f. Use the services and assistance, as appropriate, of such 
organizations as the Small Business Administration in the 
solicitation and utilization of small audit firms or audit firms 
owned and controlled by socially and economically disadvantaged 
individuals.
    20. Reporting. Each Federal agency will report to the Director 
of OMB on or before March 1, 1987, and annually thereafter on the 
effectiveness of State and local governments in carrying out the 
provisions of this Circular. The report must identify each State or 
local government or Indian tribe that, in the opinion of the agency, 
is failing to comply with the Circular.
    21. Regulations. Each Federal agency shall include the 
provisions of this Circular in its regulations implementing the 
Single Audit Act.
    22. Effective date. This Circular is effective upon publication 
and shall apply to fiscal years of State and local governments that 
begin after December 31, 1984. Earlier implementation is encouraged. 
However, until it is implemented, the audit provisions of Attachment 
P to Circular A-102 shall continue to be observed.
    23. Inquiries. All questions or inquiries should be addressed to 
Financial Management Division, Office of Management and Budget, 
telephone number 202/395-3993.
    24. Sunset review date. This Circular shall have an independent 
policy review to ascertain its effectiveness three years from the 
date of issuance.
David A. Stockman,
Director.

Circular A-128 Attachment

Definition of Major Program as Provided in P.L. 98-502

    ``Major Federal Assistance Program,'' for State and local 
governments having Federal assistance expenditures between $100,000 
and $100,000,000, means any program for which Federal expenditures 
during the applicable year exceed the larger of $300,000, or 3 
percent of such total expenditures.
    Where total expenditures of Federal assistance exceed 
$100,000,000, the following criteria apply:

                                                                        

[[Page 53724]]
------------------------------------------------------------------------
  Total expenditures of federal financial assistance     Major federal  
                   for all programs                        assistance   
------------------------------------------------------ program means any
                                                          program that  
           more than                but less than           exceeds     
------------------------------------------------------------------------
$100 million..................  1 billion............  $3 million.      
1 billion.....................  2 billion............  4 million.       
2 billion.....................  3 billion............  7 million.       
3 billion.....................  4 billion............  10 million.      
4 billion.....................  5 billion............  13 million.      
5 billion.....................  6 billion............  16 million.      
6 billion.....................  7 billion............  19 million.      
over 7 billion................  .....................  20 million.      
------------------------------------------------------------------------


[FR Doc. 95-25120 Filed 10-16-95; 8:45 am]
BILLING CODE 3410-90-M