What are good practices for municipalities to put in place after completing a federal audit to better position them for future federal audits?

A municipality may be subject to various audits by federal and/or local oversight agencies including a city comptroller and federal Offices of the Inspector General (“OIG”). If a municipality receives federal grant funds from multiple sources of funding, more than one federal OIG might audit the grant funds.

Depending on the amount of federal grant money received, municipalities might also be subject to a single or programmatic audit. For example, the Code of Federal Regulations, 2 CFR § 200.501(a), requires single audits when:

A non-federal entity that expends $750,000 or more during the non-federal entity’s fiscal year in Federal awards must have a single or program-specific audit conducted for that year in accordance with the provisions of this part.[1]

When the single audit threshold is met, and if all federal funds received are from one program, a municipality may elect to have a program-specific audit conducted instead of a single audit:

When an auditee expends Federal awards under only one Federal program (excluding [Research & Development (“R&D”)]) and the Federal program's statutes, regulations, or the terms and conditions of the Federal award do not require a financial statement audit of the auditee, the auditee may elect to have a program-specific audit conducted in accordance with § 200.507. A program-specific audit may not be elected for R&D unless all of the Federal awards expended were received from the same Federal agency, or the same Federal agency and the same pass-through entity, and that Federal agency, or pass-through entity in the case of a subrecipient, approves in advance a program-specific audit.[2]

For the full list of audit requirements, review 2 CFR § 200.501(a) – (h).[3]  

The Code of Federal Regulations also provides guidance to an auditee on any follow up and corrective action the auditee may need to take following a federal audit:

[T]he auditee must prepare, in a document separate from the auditor's findings described in § 200.516, a corrective action plan to address each audit finding included in the current year auditor’s reports. The corrective action plan must provide the name(s) of the contact person(s) responsible for corrective action, the corrective action planned, and the anticipated completion date. If the auditee does not agree with the audit findings or believes corrective action is not required, then the corrective action plan must include an explanation and specific reasons.[4]

Regardless of the audit requirements or which oversight entity is performing the audit, it is a good practice to establish a corrective action plan after an audit is completed. A corrective action plan memorializes how the municipality addressed the findings and recommendations of the audit. In addition, it is a good practice for municipalities to review all of the internal oversight deficiencies and any material weaknesses identified through the audit to determine if they exist in other grant programs. This will allow the municipality to implement the relevant enhancements in other grant programs to address internal oversight shortcomings uniformly.

Additionally, the municipality may find it useful to prepare a Schedule of Expenditures of Federal Awards,[5] identify major programs likely to be audited based on the dollar amount expended and the audit risk associated with any of its major grant programs and review applicable Single Audit Compliance Supplements for those programs.[6]

Lastly, the municipality may also find it beneficial to visit the websites of various OIGs to identify program audits of areas of interest or concern to the municipality. Collectively, during future audits, this will demonstrate to oversight entities how the municipality was proactively engaged in the audit process and improved across all grant programs.