It Can Make Sense to Challenge Federal Grant Audit Findings

It’s OK to disagree with federal grant audit findings. That’s right. It’s OK.

Who says so? The Government Accountability Office (GAO) and the Office of Management and Budget (OMB) — that’s who.

The current federal grant accountability atmosphere is highly charged in some measure because audit findings affecting a limited number of grantees and subgrantees have gotten high profile media attention. And the language that can appear in any audit report involving a federal grant can sound like a fire bell in the night, particularly when read by laymen. The fact that assertions about “significant deficiencies” in internal control or “material noncompliance” with laws and regulations involve auditor judgments is often lost in the discussion.

Because some of these kinds of findings can do considerable harm to the reputation of a federally funded organization, applicable federal policies make clear that an important feature of the audit process is the auditee’s ability to refute or mitigate them when they are not valid or they’re overstated. It’s one thing when the audit finding is accurate and calls for corrective action. That’s when leading the parade to fix the problem is the right strategy to adopt. But it’s quite another when some of the elements of the finding are faulty or its conclusion is suspect.

Unfortunately, management in all too many organizations concurs with a finding at the critical early stages of an audit and then is hard pressed to reverse course when the consequences of that agreement become clear during later stages of audit resolution. There are two key places where going on the record in disagreement with a finding are critical.

The first relates to the auditor’s presentation of the finding in a draft or final audit report. Under generally accepted government auditing standards (GAGAS), auditors are instructed to obtain the oral or written comments of management on any audit findings and to incorporate those into the presentation of the finding in the report.

A wise strategy for the auditee when there is disagreement at this stage is to submit the comments in writing and to request that they be incorporated verbatim into the report (as distinct from inclusion of an edited summary prepared by the auditor). This approach is valid whether the report is prepared by federal auditors operating under the Inspector General Act or by non-federal auditors preparing reports pursuant to the Single Audit Act (as amended) and OMB Circular A-133, since GAGAS applies to both types of engagements.

The second involves only reports prepared under the Single Audit Act and Circular A-133. One of the required components of the audit reporting package that must be submitted to the Federal Audit Clearinghouse, and possibly to others, is a corrective action plan related to any audit findings contained in the report. Under Section 315 (c) of A-133, this document is prepared by the auditee not the auditor.

The instructions state, “At the completion of the audit, the auditee shall prepare a corrective action plan to address each audit finding included in the current year auditor’s reports. The corrective action plan shall 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 that corrective action is not required, then the corrective action plan shall include an explanation and specific reasons” (emphasis added).

In this event, the response on the part of the auditee must be developed and tailored based on the facts and circumstances. For example, the auditee may be choosing to question the interpretation of a law or regulation cited as a criterion for noncompliance or to challenge the auditor’s assertions about the effect that noncompliance may have had. On the other hand, it may agree that the essential elements of the finding are correct but that the auditor’s recommendation for corrective action is not appropriate or is too far reaching.

Clearly, both GAO and OMB anticipate that there will be many cases where auditors and auditees will disagree, and they expect both parties to be able to make their case as to who is correct. Then, the matter ends up in the hands of an official from the federal awarding agency or pass-through entity who must ultimately decide whether the audit finding will be sustained. If the auditee response in disagreement is weak or nonexistent at this stage, there is little question as to how that decision will come out.