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An independent audit may be arranged with the federal assistance that non-federal entities receive or cost charged to the grant retainage (a retainage administer in the form of grants, loans, loan guaran- of 5 percent held from all reimbursements). tees, property, cooperative agreements, interest sub- "Letters of noncompliance" may be sent to sidies, insurance, food commodities, direct appropri- all state agencies that provide funding to that ations, and other assistance. The monitoring process subrecipient, with a warning sent to the sub- includes identifying and ensuring that subrecipients recipient that further consequences will result of federal awards have met the audit requirements for if the subrecipient is not in compliance with that fiscal year. Although most state DOTs include state DOT requirements. this requirement in their state management plans and in subrecipients' grant agreements, many state DOTs do not appear to have standard operating procedures Subrecipient Financial Audit Manuals for assuring compliance. or Guidelines Thirty-nine state DOTs responded to the ques- State Requirements tion, "Does your state have any audit manuals/ guidelines that CPA firms must follow?" The question Six states cited statutes or laws requiring finan- applied to OMB Circular A-133 and other financial cial audits of subrecipients and an additional four audits. Of the respondents, 22 state DOTs (56 per- states described state administrative policies ad- cent) indicated that they do not have audit manuals/ dressing financial audit requirements above and be- guidelines that auditing firms must follow for sub yond the OMB Circular A-133 requirements. recipient financial audits. Several states indicated that Using the results of the survey, the research they rely on other sources, such as contractor's state team sought to identify state DOTs whose financial licensing board standards, state internal audits, OMB auditing requirements represented best practices Circulars, or standards as determined by the secretary to be considered for more detailed description. In or commissioner of the state DOT. recommending state DOTs for further study, the re- Seven states had their own guidelines that audit search team considered firms were required to follow. Three of these states geography--all regions of the United States; (Michigan, New York, and West Virginia) cited state agency size--representing differing resource statutes that contained subrecipient audit require- levels, as measured by the amount of state ments. The remaining four states (Alaska, Maine, funding available for transit; and North Carolina, and Oregon) identified adminis- financial auditing best practices--based on trative policies, usually issued by the state's chief brief descriptions of the state DOT's financial financial officer, as the source of financial audit auditing requirements or practices. guidelines. One state (Alaska) identified an audit manual available on the state's Department of Ad- Ultimately, four agencies (from Kentucky, ministration (DOA) website. The website included Ohio, Oregon, and New York State) were selected links for downloadable software for the independent from among the candidate state DOTs (see Table 2). auditors to use for state programs, and the auditors These agencies represent a cross-section of agencies were referred to the federal guidelines for federal that have implemented procedures and practices for funding. This guidance appeared to be intended for requiring subrecipients to conduct annual financial consultants and architects. audits and for reviewing the audits to ensure that program funds are used for their intended purposes. The research team reviewed the materials refer- State DOT Best Practices enced in the survey responses, examined documents available on the state DOT websites, and conducted Federal Requirements telephone interviews with the selected state DOTs to (OMB Circular A-133) better understand the different policies and procedures Most state DOTs reported only following federal used to monitor or conduct financial auditing of sub- OMB Circular A-133 requirements. OMB Circular recipients. Brief descriptions of each state's approach A-133 places responsibility on pass-through entities, to auditing subrecipients follow, with selected sample such as state DOTs, to monitor all subrecipients of documents reproduced in Appendix C. 10

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Table 2 State DOTs selected for case studies, ranked by agency size. State DOT Region Agency Size* Highlights KYTC, Office of South Small (less than Model for smaller state DOTs that may lack staff Transportation $1 million) or resources to conduct in-depth audit reviews or Delivery financial audits of subrecipients. Procedures for monitoring OMB Circular A-133 audit requirements provide an easy-to-use frame- work and tracking spreadsheets adaptable for use by other small state agencies. Procedures also provide documentation that KYTC is fulfilling its OMB Circular A-133 obli- gation to monitor its subrecipients. Oregon DOT, Public West Medium Model for medium-sized state DOTs. Transit Division ($1 million to Implemented electronic reporting procedures for $50 million) all DOT subrecipients, as well as a special Pre- Award Audit Questionnaire for New Subrecipients. Ohio DOT, Midwest Large (greater than Model for medium-sized state DOTs. Office of Transit $50 million to Created an Oversight Audit Program for its rural $500 million) (Section 5311) subrecipients. In 2012, a state auditor dedicated to the Section 5311 program is expected to complete 120 desk audits and five site audits. New York State DOT, East Largest (greater than Model for large state DOTs; the Bureau of Pub- Bureau of Public $500 million) lic Transportation works closely with a Contract Transportation Audit Bureau (CAB) that is also part of the state DOT. Administers more than $4 billion in state Mass Transportation Operating Assistance and $33 mil- lion in FTA funding annually. In addition to moni- toring subrecipient compliance with OMB Circular A-133 audit requirements, New York State DOT has a state single audit requirement for agencies that receive $100,000 or more in state transporta- tion assistance. A 34-page Guidance for Auditors developed by the state's CAB contains specific information that other state DOTs could use as a basis for providing uniform auditing requirements at the state level. The guidelines also incorporate OMB Circular A-133 requirements where applicable. *Based on amount of state funding available for public transportation listed in the AASHTO 2010 Survey of State Funding for Public Transportation. 11