Whatever the new normal looks like, ask yourself, “have I taken the time to assess whether the control environment has changed?” and “have I considered implementing new controls or enhancing existing internal controls?”
Upon meeting with clients to kick off the new audit season, there is a phrase that is often circled around: “the new normal.” What is the new normal and what does it look like? For some of my clients, this new normal can look very different from the old normal, while for others it may have no significant impact. Whatever the new normal looks like, ask yourself, “have I taken the time to assess whether the control environment has changed?” and “have I considered implementing new controls or enhancing existing internal controls?” It is likely that you have already considered these questions and changes may or may not have been implemented as a result. For example, some districts still have some remote employees while others are back to an “in person” work environment. This is the new normal.
As we know, the new normal was forced on us as a consequence of the global pandemic. This pandemic also brought us an abundance of new grants and, as we know, grants are attached to compliance requirements. For some entities, this new funding has triggered a single audit for the first time, thus, the new normal proves to be significantly different for them. Regardless of whether your district has experienced a single audit before, school districts are having to stay abreast the latest developments for various grants. Luckily, the Texas Education Agency (TEA) is providing a plethora of resources to help school districts with the never-ending compliance requirements. As such, the grant compliance has become a bit more burdensome and at times difficult to keep up with. Additionally, many school districts across the state are facing staffing shortages in key positions, which has increased the stress levels for many school districts.
As a school district, if you exceeded $750,000 in federal funds in the past, you should have been subject to a single audit under the Uniform Guidance. If that is the case, it is likely that you are familiar with the process. The auditor will select major programs based on a risk assessment and perform testing procedures over those compliance requirements that are subject to audit according to the applicable Office of Budget and Management Compliance Supplement. As such, not all programs will be tested each year. Additionally, the auditor is only required to perform procedures that the federal agency (e.g. U.S. Department of Education) has deemed as subject to audit.
We need to be very careful, because the concept of “subject to audit” only applies to external auditors as they perform their audits. Therefore, school districts need to comply with 100% of the grant requirements as stipulated in the grant application. If you are in doubt, please refer to TEA’s General and Fiscal Guidelines and the specific provisions and assurances for your grant. For example, the 2022 OMB Compliance Supplement shows that auditors are not required to test procurement for ESSER I, II, or III. However, TEA has asked school districts for procurement documentation during their monitoring visits.
At the conclusion of your audit, your auditor might issue their report over your major programs without any findings; however, this will only be true for those specific programs and compliance requirements that your auditor deemed necessary and appropriate to test. As a school district, you might still be subject to an audit or review by the granting agency and this could lead to findings if the district is not properly prepared. It is imperative for school districts to have proper grant personnel with the proper knowledge and ability to identify the compliance requirements applicable. Once those compliance requirements are identified, the district needs to make sure they are in compliance and that there are controls in place over those compliance requirements.
Whatever this new normal may look like, changes can be expected in your internal controls. As you scramble to try and be compliant with all the grant requirements, it is important that you and your team focus on controls over those compliance requirements as well. Depending on what the compliance requirement is, make sure there are proper controls in place around that requirement and that there is a proper audit trail. Some of these might be easier to document than others. For example, the audit trail for a control on the allowability of a particular expenditure can be easily demonstrated by simply having the grant manager sign off on a purchase order or invoice.
But what if all you have to show is an allocation on an excel spreadsheet? Spreadsheets are harder to sign off on because these typically do not track changes or approvals. By providing a spreadsheet to an auditor, you might be able to demonstrate compliance; however, an auditor is also required to test whether there are any controls over that compliance requirement. Are you able to demonstrate to the auditor that someone with the appropriate level of knowledge, other than the preparer, reviewed and approved that spreadsheet schedule? If not, this might be an indicator of an internal control issue. In this particular example, an email chain between the preparer and the reviewer might be sufficient evidence to demonstrate that this spreadsheet was properly reviewed and approved. The actual control will look different from client to client. However, at the end of the day, your auditor wants to see that the district is in compliance and that there is a monitoring process with proper controls that will keep your district in compliance.
As you proceed with preparations for your upcoming audit, make sure you keep in mind what your auditor is going to be expecting from you. Remember, our goal is not to issue findings but we are required to perform adequate procedures to form an opinion on whether or not you are in compliance and whether or not there are proper controls in place around those compliance requirements. School districts receive a significant portion of their funding through TEA. As a pass-through entity, TEA has the responsibility to monitor those school districts as subrecipients. Therefore, if you have a question regarding any of your grants, you can always reach out to TEA or another pass-through entity. You can also reach out to the federal granting agency directly if there is no pass-through entity.
Finally, auditors are not three-headed monsters and can be a great resource. You should reach out as you are transitioning into this new normal. I always take it as a good sign when my clients reach out to me throughout the year with questions. This shows that they are putting forth the effort to make sure they address difficult issues early. This also allows me, an auditor, to develop an expectation regarding what can be expected when the audit begins. This type of communication typically leads to a good audit.