Guidelines for Examination of Entities Receiving Financial Assistance from Governmental Sources

On September 1, 1986, the State Board of Accounts became responsible for establishing Uniform Compliance Guidelines for the examination of government funded entities. Shortly before the end of that year, our first issue entitled, Guidelines for Examination of Entities Receiving Financial Assistance from Governmental Sources was released. The Guidelines have been reissued several times over the years. Those of you familiar with previous issues realize the central role played by the State Board of Accounts in the audit of public funds disbursed by nongovernmental entities. Through the annual reporting process and our involvement in approving audit contracts with independent public accountants, we have attempted to ensure entities subject to federal or state audit requirements, have met these requirements as efficiently and inexpensively as possible.

Reports on internal control and compliance in accordance with Government Auditing Standards (GAS) issued by the Comptroller General of the United States (as revised) are no longer required of entities that do not receive federal funds or whose federal funds expended falls below the Single Audit threshold in effect for the audit period. In these instances an audit performed in accordance with generally accepted auditing standards (GAAS) will satisfy the State audit requirement under Indiana Code (IC) 5-11-1-9. Funding agencies should be contacted to ensure that this type of audit also satisfies their requirements. All reports are required to contain a schedule of grant activity or a listing of all federal, state and local grants as detailed on page H-1. In addition, a copy of any separate communication to the entity's governance or management needs to be submitted along with the report.

It has, and will continue to be our policy, that one and only one appropriate audit need ever be performed of any entity receiving government financial assistance. It is, therefore, imperative that entities, their funding agencies, and their independent auditors exercise diligence in determining applicable audit requirements, prior to commencing the audit process. Through adherence to our Guidelines, and with the cooperation of all parties involved, one audit can and will satisfy the needs of everyone.

We would like to thank the entities, funding agencies, and independent public accountants (IPAs) for the cooperation and assistance they have provided. We hope these Guidelines will assist you in successfully addressing your responsibilities.

Paul D. Joyce, C.P.A.
State Examiner

The following definitions apply to this section of the manual:

• Organization.  A provider of goods, services, or other benefits to a governmental unit.
• Contractor.  An organization that receives a contract for the purpose of providing goods and services for the awarding governmental unit's own use.  The contract creates a procurement relationship with the contractor.  [based on 2 CFR 200.22 and 200.330(b)]
• Subrecipient.  An organization that receives a contract for the purpose of carrying out a portion of a governmental unit's grant requirement, statutory responsibility, or plan.  [based on 2 CFR 200.330(a)]
• Entity.  "As used in this article, 'entity' means any provider of goods, services, or other benefits that is:  (1) maintained in whole or in part at public expense; or (2) supported in whole or in part by appropriations or public funds or by taxation.  The term does not include the state or a municipality (as defined in this section)."  [IC 5-11-1-16(e)]

Regardless of the final determination of a contractor or subrecipient relationship, the agreement will be included in the examination procedures applied at the governmental unit level.  The determination that a subrecipient relationship exists may require the "entity" to be examined separately pursuant to IC
5-11-1-9.

Questions Based on Indiana case law:

Affirmative responses in this section may indicate a contractor relationship:

• Does a written agreement between the parties exist?
• Does the document refer to the amounts paid as "fees for services"?
• Is the amount paid negotiated between the parties for services performed?
• Does the document contain an objective measure of performance?
• Is there a direct relationship between the amount paid and the amount of services received?
• Do federal tax forms describe the compensation as fee for service rather than as contri­butions, indirect support, etc.?
• Does the amount paid under the document fluctuate from payment to payment?
• Is an itemized bill submitted to the governmental unit for services performed?

Other factors from Indiana case law to be considered by the Indiana State Board of Accounts to determine whether the arrangement is a fee for service contract or a grant or subsidy situation include:

• Express language of the document creating the arrangement.
• How references to payments are memorialized in Board minutes.
• Whether itemized claims were submitted by the non-profit organization pursuant to IC
  36-10-9-9 if applicable.
• Whether the document requires a fixed percentage of money paid to non-profit organization regardless of non-profit organization's performance.
• Payment amounts were not dependent on non-profit organization's performance, but rather, payments depended on the amount of annual tax collected by the government entity having the arrangement with the organization.

Questions Derived from Uniform Guidance (2 CFR 200.330):

Affirmative responses in this section may indicate a contractor relationship:

• 200.330(b)(4) - Does the organization provide goods or services for the governmental unit's own use?

• 200.330(b)(4) - Does the organization provide services to clients or participants as desig­nated by the governmental unit (or at the direction of the governmental unit) without making programmatic decisions?

• 200.330(b)(5) - Does the governmental unit develop the scope of work and terms and con­ditions of the agreement to meet the governmental unit's needs?

Note regarding answers related to 2 CFR 200.330(b)(5).  If the scope of the contract is per the governmental unit's terms and not general guidance from a grant program, statute, or plan, then the contract may be indicative of a contractor.  

• 200.330(b)(1) - Is the organization's normal business to provide the goods or services being purchased in the agreement?

• 200.330(b)(2) - Does the organization provide similar goods or services to other organiza­tions?

Affirmative responses in this section may indicate a subrecipient relationship.

• 200.330(a)(1) - Does the organization determine who is eligible to participate in a govern­ment grant, program, or plan?

• 200.330(a)(3) - Does the organization have the ability to make decisions about how ser­vices will be provided to participants in a government grant, program, or plan (e.g., delivery of service, operations, or types of assistance provided within the terms of the agreement)?
• 200.330(a)(2) - Are the scope of work and terms and conditions of the contract the same for the organization as they are for the governmental unit that received the funds (e.g., requirements per a grant award, statute, or governmental unit plan)?

• 200.330(a)(2) - Is the organization carrying out completion of the goal of the grant, statute, or plan as stated in the grant, statute, or plan?

Notes for answers related to 2 CFR 200.330(a)(2). The following type of arrangement is an example of what may tend to show a subrecipient relationship:  if the organization is providing a service that carries out a goal within the scope of the grant, statute, or plan.  For example, if the scope of the agreement is per the grant, statute, or plan terms without any specific direction from the governmental unit; the organization makes the decisions on how best to accomplish the goal rather than the governmental unit; or the organization may also provide programmatic or progress reports to ensure compliance with grant, statute, or plan requirements.

Alternatively, if the organization is providing a service for the governmental unit to meet the goal of a grant, statute, or plan, it may indicate a contractor.

Sources:

State Board of Accounts v. Indiana University Foundation, 647 N.E. 2d 342 (Ind. Ct. App. 1995)

Indiana Convention and Visitors Association, Inc. v. Indianapolis Newspaper, Inc., 577 N.E. 2d 208 (Ind. 1991)

Perry County Economic Development Corporation v. Kempf, 712 N.E. 2d 1020 (Ind. Ct. App. 1999)

Indiana Code 5-11-1

Uniform Guidance 2 CFR 200.330

Final Determination - Contractor or Subrecipient Relationship

It will be the determination of the Indiana State Board of Accounts and not the entity as to whether the funding arrangement meets the definition of fees for services.  A copy of the document - grant or contract, and invoices and bills, correspondence between the parties, Board or Trustee meeting minutes, and other information may be required to be submitted and will be reviewed to determine the proper cate­gorization of funding.

Government Providers of Financial Assistance

Government providers of financial assistance to entities are required to include wording in their contracts, agreements, or other funding documents that the entity must allow for audits by our department or on behalf of our department.  Such documents must also require compliance with the annual reporting requirement (Form E‑1) in accordance with IC 5-11-1-4 discussed elsewhere in these Guidelines.

Government providers of financial assistance should also assist recipients and subrecipients, when requested, in determining their audit requirements.  It is also their responsibility to inform entities of any federal funds being passed through to them so the entities can, in turn, report these funds accurately in the annual financial report due in accordance with IC 5-11-1-4 and other financial documents.

By statutory definition, funding received from state and local governments outside of Indiana or from other nongovernmental entities are not considered financial assistance for purposes of defining an entity and the resulting reporting and audit requirements.  Please confirm with the entity that provided you funding their status as a governmental unit or nongovernmental entity if you are uncertain as the ramifi­cations can be significant.

Our involvement in the audit process is triggered by the filing of the Entity Annual Report (E-1) as required by IC 5-11-1-4.  Based on the financial information reported, we advise the entity if an audit is required, or if they qualify for a tentative waiver in accordance with IC 5-11-1-9.  Although we realize many entities begin arranging for their audit prior to their fiscal year end, it is not possible for us to make a final determination prior to reviewing the E‑1.  An entity that routinely requires an audit under our thresholds can submit their audit contract for our review prior to submission of the E-1; however, final audit requirement determination under our statute will be made following the submission of the E-1.

Once an entity is notified of their audit requirement, they should confirm with their funding agencies the type of audit required and begin the process of evaluating and selecting an auditor if they have not already done so.

After the entity has selected an auditor, a copy of the contract (or engagement letter) should be submitted to the Indiana State Board of Accounts for review and approval.  Only contracts that include language that both parties will comply with the provisions of State Examiner Directive 2015-2 and include the same as an attachment to the contract will obtain approval.

The auditor should advise the entity and the Indiana State Board of Accounts of the date, time, and location of the entity's exit conference upon completion of the field work.  The issued audit report and any separate written communication from the auditor to the entity, such as a governance/management letter, is to be submitted to the Indiana State Board of Accounts.  Providing these documents to the Indiana State Board of Accounts is a responsibility of the auditor.  These files should be submitted as an unlocked PDF file either in the upload files section of the Gateway or via email to notforprofit@sboa.in.gov.  Unlocked files allow us to upload the report to our website for public inspection, and separate report and governance/ management letter files lessen the possibility that internal communications not meant for public release become public.

The Indiana State Board of Accounts performs a quality control review of the audit report, during which, we review for sufficiency in scope and adequacy in quality and evaluate any findings of noncom­pliance for further action required of this department.  If we determine an on-site review of the auditor's workpapers is necessary, the auditor will be assessed a fee.

Upon completion of the quality control review, the audit report is made available for public inspec­tion by this department.  In most instances, our review will be separate and distinct from any audit review/ resolution process administered by a funding agency.

The coordination and administration of entity audits is somewhat complex.  Audits may be initiated and administrated by the Indiana State Board of Accounts; by state or local government funding agencies; or by entities themselves. Audits may be performed by the Indiana State Board of Accounts; private exam­iners hired by this department; or private examiners approved by the Indiana State Board of Accounts and hired by funding agencies or entities.  Audit costs are the responsibility of the entity examined regardless of who is performing the audit.

It is unlikely that the Indiana State Board of Accounts will perform many of these audits.  It is also unlikely there will be more than a few instances in which we initiate and administrate the audit process.  However, coordination of these audits with the Indiana State Board of Accounts is required.  We, therefore, require the submission of all entity audit contracts to us for approval. Contracts with no reference to or acknowledgment of the responsibility of the Indiana State Board of Accounts in this process via reference to State Examiner Directive 2015-2 and inclusion of the same as a contract amendment will be rejected.

The primary responsibility for ensuring the appropriateness, timeliness, and completeness of an entity's audit rests with the entity itself.  However, successful completion of the audit process cannot be accomplished without the direct cooperation and assistance of funding agencies, independent auditors, and the Indiana State Board of Accounts.  Due to the complexity of government regulations and the uniqueness of existing arrangements and relationships between funding agencies and entities, it is imperative that entities and their auditors confirm in advance the type and scope of audit necessary to satisfy all parties involved.  This extra effort during the preliminary phase of the audit process will ensure that one and only one audit need be performed.

To be considered for audit services, a respondent must:

1. Be a certified public accountant (CPA) and licensed to practice in the State of Indiana or have a CPA license from a state that has been determined to be in substantial equivalence with the CPA licensure requirements of the State of Indiana in accordance with IC
   25-2.1-4-10(a);
2. Meet independence requirements of the American Institute of Certified Public Accountants (AICPA) and the Generally Accepted Government Auditing Standards (GAGAS) issued by the Comptroller General of the United States, as applicable;
3. If performing audits under GAGAS, meet continuing professional education requirements in accordance with Government Auditing Standards issued by the Comptroller General of the United States;
4. Obtain an external peer review at least once every three years and attain a rating of Pass or Pass with Deficiencies;
5. Understand applicable uniform compliance guidelines, policies, and directives established by the Indiana State Board of Accounts.

State agencies are required to use the RFP process if they contract for audits of entities they fund.  They are required to submit the RFP to the Indiana State Board of Accounts for approval prior to issuance.  In addition, the Indiana State Board of Accounts will review the evaluation method used in selecting the successful respondent.

Local governments contracting for audits of entities they fund and entities contracting for their own audit are not required to issue RFPs. However, the Indiana State Board of Accounts does recommend the RFP process for anyone soliciting audit services.

As discussed previously, the audits of entities receiving financial assistance will be performed pri­marily by Independent Public Accountants (IPAs) authorized or designated by the Indiana State Board of Accounts.

To obtain approval for the audit, the audit contract (or engagement letter) must be submitted to the Indiana State Board of Accounts prior to signing.  The audit organization should also provide their most recent external peer review report and any letter of comment.

All IPAs engaged by the State Examiner or allowed to be engaged in accordance with IC 5-11-1-7(b) must meet the following qualifications:

1. Be a certified public accountant (CPA) and licensed to practice in the State of Indiana or have a CPA license from a state that has been determined to be in substantial equivalence with the CPA licensure requirements of the State of Indiana in accordance with IC
   25-2.1-4-10(a);
2. Meet independence requirements of the American Institute of Certified Public Accountants (AICPA) and the Generally Accepted Government Auditing Standards (GAGAS) issued by the Comptroller General of the United States, as applicable;
3. If performing audits under GAGAS, meet continuing professional education requirements in accordance with Government Auditing Standards issued by the Comptroller General of the United States;
4. Obtain an external peer review at least once every three years and attain a rating of Pass or Pass with Deficiencies;
5. Have no record of performing substandard audits;
6. Understand and comply with applicable uniform compliance guidelines, policies, and direc­tives established by the Indiana State Board of Accounts;
7. Understand the role of the Indiana State Board of Accounts in the audit process and that the IPA is acting as an agent for the State Examiner;

As part of our review of the audit contract, we will review the contract to ensure that the audit being contemplated appears appropriate in relation to the information reported on the E-1 Entity Annual Report.

Upon completion of our review, we will issue a written approval or rejection of the contract.  Our reason(s) for rejecting any audit contract will be stipulated in writing. Contracts with no reference to or acknowledgment of the responsibility of the Indiana State Board of Accounts in this process via reference to State Examiner Directive 2015-2 and inclusion of the same in the contract will be rejected.

Notice to Auditors:

The approval of your audit contract by this department is not an assertion that your audit will satisfy federal funding agencies or other reporting requirements.  Our approval is based on limited knowledge of your client's overall audit requirements and is not to be used as a substitute for thorough planning by you.

The following are the responsibilities of the auditor:

1. The audit will be performed in accordance with auditing standards generally accepted in the United State of America, Government Auditing Standards, (if applicable), and federal Single Audit requirements (if applicable).
2. The Indiana State Board of Accounts will be notified immediately if suspected instances of fraud or abuse are discovered during the course of audit regardless of materiality.
3. The Indiana State Board of Accounts will be notified via email a minimum of five (5) days prior to the date, time, and location of the exit conference.
4. The Indiana State Board of Accounts will be provided a copy of the audit report, as well as any separate communication to the entity's governance and/or management.  The audit report must be submitted in an unlocked pdf file.  These files are to be uploaded in the Gateway (using the Upload Files option) or may be emailed to:  notforprofit@sboa.in.gov.
5. The Indiana State Board of Accounts will be provided the names, postal addresses (prefer­ably office address if they normally receive mail there), and email addresses of the entity's chief executive officer, chief financial officer (if any), and governing board president.
6. Workpapers supporting the audit report will be made available for review by the Indiana State Board of Accounts at the State Examiner's discretion.
7. All correspondence will be via the following email address:  notforprofit@sboa.in.gov.

Due to our oversight responsibility for audits performed in accordance with IC 5‑11‑1‑9, a desk review of the audit report and other documentation required to be submitted is conducted by central office staff. During this review, attention is focused on the appropriateness and completeness of the report presentation. The financial statement opinion and reports on internal control and compliance, if required, are reviewed in detail.  Questioned costs and audit findings are also reviewed for determination of additional work required by our department, if any.

Upon completion of our review, the audit report is made available for public inspection on the Indiana State Board of Accounts' website (www.in.gov/sboa).  The report may be made available before or after completion of a funding agency's audit resolution process.

Furthermore, a quality control review of an auditor's work may be conducted by the Indiana State Board of Accounts.  The primary purpose of a review is to determine the auditor's degree of compliance with appropriate professional standards and the adequacy of audit documentation.  The objective of an audit of financial statements performed in accordance with generally accepted auditing standards (GAAS) is for the auditor to obtain reasonable assurance about whether the financial statements are presented fairly, in all material respects.  Reasonable assurance is reached when the auditor has obtained sufficient (quantity) and appropriate (quality) audit evidence.

Audit evidence is the information used by the auditor in arriving at the conclusions on which the auditor's opinions and reports are based. Audit documentation is the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.  Standards require audit documen­tation to be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing, and extent of the procedures performed; the results of the audit procedures performed and the audit evidence obtained; and the significant findings or issues arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those con­clusions.  In the audit industry, if procedures performed, support obtained, and conclusions reached are not documented, then the presumption is they were not done.

This quality control review may be performed "on‑site" at the auditor's place of business by depart­ment staff.  They are conducted at times mutually agreeable to both the Indiana State Board of Accounts and the Independent Public Accountant. Scheduling flexibility is available, in most cases, to allow for seasonal demands of the profession although unnecessary delays or demonstrated noncooperation by an auditor may result in rejection of future audit contracts.  The review is generally completed within one day and should require minimal assistance from the auditor.  Upon completion, an exit conference is held where the results of the review are discussed.

We are required by statute to charge an entity for the cost of this review.  The cost for this review is above and beyond any audit fees due the auditor.