President signs Single Audit Act of 1996.

President Clinton signed into law an act that changes certain audit requirements for not-for-profit organizations and state and local governments that receive federal assistance. S 1579, the Single Audit Act Amendments of 1996, will save millions of dollars and reduce the auditing burdens on small not-for-profits and state and local governments by increasing the threshold that triggers an audit requirement, and it will improve the oversight of federal assistance by focusing on programs that present to the government the greatest financial risks. It amends the Single Audit Act of 1984, which replaced the multiple grant-by-grant audit of federal assistance with annual entitywide audits. It is effective for fiscal years beginning after June 30, 1996.

The 1996 act extends the audit requirements to not-for-profits previously subject to single audit requirements under Office of Management and Budget (OMB) Circular A-133, Audits of Institutions of Higher Education and Other Nonprofit Organizations. The Single Audit Act of 1984 applied only to state and local governments. OMB Circular A-128, Audits of State and Local Governments, will be rescinded and the OMB will revise circular A-133 so it will implement the law, such as replacing the term nonprofit with nonfederal entity.

Helping the smaller entities

S 1579 relieves thousands of state and local governments and not-for-profits of the federal audit requirements by raising the dollar threshold for requiring a single audit from $100,000 to $300,000. Nonetheless, the General Accounting Office estimated that a $300,000 threshold would cover 95% of all direct federal assistance to local government. "It just wasn't cost-effective for entities under the $300,000 threshold to endure the auditing and paperwork burdens of the Single Audit Act," said Jerry C. Skelly, CPA, and assistant director of the GAO.

Risky choices

The act requires that auditors assess the risk of programs for entities above the threshold and select the riskiest programs for testing. Before the 1996 law, auditors had to perform tests of the largest, but not necessarily the riskiest, programs that entities administer. Now auditors will evaluate a major program on the basis of its prior audit history, federal oversight and the inherent risk of the program.

The American Institute of CPAs supported the concept of a risk-based approach but was opposed to the concept of the auditor having the responsibility to perform the risk assessment, suggesting that the cognizant agency should have the responsibility to determine which programs should be audited. The AICPA currently is working with the GAO and the OMB and the inspectors general to revise existing AICPA guidance to reflect the amendments in the 1996 act and to simplify the single audit reports.

Auditor musts

Auditors are now required to provide a summary of audit results. "Many auditors currently include seven or more separate reports in each single audit report," said Skelly. "The summary, which is a supplement to the audit report, should highlight important information and allow audit report users to see the overall results of an audit more quickly."

The 1996 act also shortens the time frame for audit reports from 13 to 9 months. An entity will be allowed a two-year transition period to meet the shortened deadline and may petition its federal agency for a waiver that would give it 13 months to submit the report.

Another amendment requires auditors to make their working papers available to federal agencies or the U.S. comptroller general as part of a quality review program, to resolve audit find - "We made this statement broad, because we couldn't anticipate all circumstances in the future when the federal government might want to look at workpapers," said Skelly. The AICPA opposed the broad language of the workpaper provisions, because there was concern that a federal agency could ask for copies of more than what was needed to support a specific objective.

OMB Flexibility

The 1996 act gives the OMB the opportunity to amend the audit provision with changing circumstances. For example, rather than locking the audit threshold into law, it gives the OMB the authority to revise the threshold every two years (the threshold cannot fall below $300,000). It also gives the OMB the authority to revise the risk-based program selection criteria. "We think the risk-based approach is great, but if for some reason it does not work, the OMB can make changes rather than having these provisions embedded in law," said Skelly. The OMB also is authorized to permit pilot projects to test alternative ways of achieving the goals of the single audit process.