Final Rule

19905

Rules and Regulations

Federal Register
Vol. 83, No. 88
Monday, May 7, 2018

This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents.

DEPARTMENT OF AGRICULTURE
Rural Utilities Service

FOR FURTHER INFORMATION CONTACT:

7 CFR Part 1773
RIN 0572–AC33

Policy on Audits of RUS Borrowers
and Grantees
Rural Utilities Service, USDA.
Final rule with request for
comment.

AGENCY:
ACTION:

The Rural Utilities Service
(RUS) is amending its regulations
regarding its Policy on Audits to
incorporate 2011 revisions to the
Generally Accepted Government
Auditing Standards (GAGAS) issued by
the Government Accountability Office
(GAO), the clarified audit standards
issued by the American Institute of
Certified Public Accountants (AICPA) in
2011, and Uniform Administrative
Requirements, Cost Principles, and
Audit Requirements for Federal Awards,
Subpart F, Audit Requirements, issued
by the Office of Management and
Budget on December 26, 2013, and
adopted by USDA on December 26,
2014. RUS is also expanding and
clarifying its regulations to: include
grant recipients, amend its peer review
requirements, amend its reporting
requirements, expand the options for
the electronic filing of audits, and
clarify a number of existing audit
requirements, and is amending the title
to reflect this change.
DATES: Effective Date: Rule will become
effective on July 6, 2018 and is
applicable for financial audits for
periods ending on or after December 15,
2018.
Comment Date: Comments must be
received by RUS on or before June 6,
2018.
ADDRESSES: Submit comments by either
of the following methods:
• Federal eRulemaking Portal at
https://www.regulations.gov/. Follow
instructions for submitting comments.

daltland on DSKBBV9HB2PROD with RULES

SUMMARY:

VerDate Sep<11>2014

16:29 May 04, 2018

• Postal Mail/Commercial Delivery:
Please send your comments addressed
to Thomas P. Dickson, Acting Director,
Program Development and Regulatory
Analysis, Rural Utilities Service, U.S.
Department of Agriculture, 1400
Independence Avenue SW, STOP 1522,
Room 5164–S, Washington, DC 20250–
1522.
Additional information about Rural
Development and its programs is
available on the internet at https://
www.rd.usda.gov/.

Jkt 244001

William Chris Colberg, Acting Chief,
Technical Accounting and Auditing
Staff, Program Accounting Services
Division, Rural Utilities Service, U.S.
Department of Agriculture, 1400
Independence Avenue SW, STOP 1523,
Washington, DC 20250–1523.
Telephone: (202) 720–1905.
SUPPLEMENTARY INFORMATION:

Executive Order 12866
This final rule has been determined to
be not significant for the purposes of
Executive Order 12866 and, therefore,
has not been reviewed by the Office of
Management and Budget (OMB).
Executive Order 12372
This final rule is excluded from the
scope of Executive Order 12372,
Intergovernmental Consultation, which
may require consultation with state and
local officials. See the final rule related
notice entitled, ‘‘Department Programs
and Activities Excluded from Executive
Order 12372’’ (50 FR 47034) advising
that RUS loans and loan guarantees
were not covered by Executive Order
12372.
Executive Order 12988
This final rule has been reviewed
under Executive Order 12988, Civil
Justice Reform. RUS has determined
that this final rule meets the applicable
standards provided in section 3 of the
Executive Order. In addition, all state
and local laws and regulations that are
in conflict with this rule will be
preempted, no retroactive effect will be
given to this rule, and, in accordance
with section 212(e) of the Department of
Agriculture Reorganization Act of 1994
(7 U.S.C. 6912(e)), administrative appeal
procedures, if any, must be exhausted
before an action against the Department
or its agencies may be initiated.

PO 00000

Frm 00001

Fmt 4700

Sfmt 4700

Regulatory Flexibility Act Certification
RUS has determined that this final
rule will not have significant impact on
a substantial number of small entities
defined in the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.). The RUS loan
programs provide borrowers with loans
at interest rates and terms that are more
favorable than those generally available
from the private sector. Borrowers, as a
result of obtaining federal financing,
receive economic benefits that exceed
any direct cost associated with RUS
regulations and requirements.
National Environmental Policy Act
Certification
RUS has determined that this final
rule will not significantly affect the
quality of the human environment as
defined by the National Environmental
Policy Act of 1969 (42 U.S.C. 4321 et
seq.). Therefore, this action does not
require an environmental impact
statement or assessment.
Catalog of Federal Domestic Assistance
The programs described by this final
rule are listed in the Catalog of Federal
Domestic Assistance under Numbers
CFDA 10.751, Rural Energy Savings
Program; CFDA 10.787, Broadband
Initiatives Program; CFDA 10.850, Rural
Electrification Loans and Loan
Guarantees; CFDA 10.851, Rural
Telephone Loans and Loan Guarantees;
CFDA 10.855, Distance Learning and
Telemedicine Loans and Grants; CFDA
10.857, Bulk Fuel Revolving Fund
Grants; CFDA 10.858, Denali
Commission Grants and Loans; CFDA
10.859, Assistance to High Energy Cost
Rural Communities; CFDA 10.861,
Public Television Station Digital
Transition Grant Program; and, CFDA
10.863, Community Connect Grant
Program. The General Services
Administration (GSA) website at http://
www.cfda.gov contains a PDF file
version of the CFDA catalog. The print
edition of the catalog may be purchased
from the U.S. Government Publishing
Office (GPO) by calling (202) 512–1800
or toll free at 1–866–512–1800, or by
ordering it online at http://
bookstore.gpo.gov.
Information Collection and
Recordkeeping Requirements
The reporting and recordkeeping
requirements contained in this final rule
have been approved by the Office of

E:\FR\FM\07MYR1.SGM

07MYR1

19906

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

Management and Budget (OMB) under
OMB Control Number 0572–0095,
pursuant to the Paperwork Reduction
Act of 1995 (44 U.S.C Chapter 35). This
final rule contains no new reporting or
recordkeeping burdens under OMB
Control Number 0572–0095 that would
require approval under the Paperwork
Reduction Act.
Send questions or comments
regarding this burden or any other
aspect of these collections of
information, including suggestions for
reducing the burden, to Thomas P.
Dickson, Acting Director, Program
Development and Regulatory Analysis,
Rural Utilities Service, U.S. Department
of Agriculture, 1400 Independence
Avenue SW, Stop 1522, Room 5164–S,
Washington, DC 20250–1522.
Unfunded Mandates
This final rule contains no Federal
mandates (under the regulatory
provision of title II of the Unfunded
Mandates Reform Act of 1995) for state,
local, and tribal governments or the
private sector. Thus, this final rule is
not subject to the requirements of
sections 202 and 205 of the Unfunded
Mandates Reform Act of 1995.

daltland on DSKBBV9HB2PROD with RULES

Comments
We invite you to participate in this
rulemaking by submitting written
comments, data, or views before the
noted deadline. We will consider the
comments we received and may
conduct additional rulemaking based on
the comments.
Background
7 CFR part 1773, Policy on Audits of
RUS Borrowers and Grantees (Part
1773), implements the standard RUS
security instrument provision requiring
RUS electric and telecommunications
borrowers and grantees to prepare and
furnish to RUS, at least once during
each 12-month period, a full and
complete report of its financial
condition, operations, and cash flows,
in form and substance satisfactory to
RUS; audited and certified by an
independent audit organization,
satisfactory to RUS, and accompanied
by a report of such audit, in form and
substance satisfactory to RUS. This rule
is amended to include coverage of all
grantees and the title of Part 1773 is
revised to reflect this change.
This rule amends Part 1773 to
incorporate the 2011 revisions to
GAGAS by the GAO issued in December
2011. The 2011 revision contains major
changes that reinforce the principles of
transparency and accountability and
provide the framework for high-quality
government audits that add value. This

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

revision to GAGAS incorporates the
AICPA Statements on Auditing
Standards. The 2011 revisions to
GAGAS were effective for financial
audits for periods ending on or after
December 15, 2012.
The professional standards and
guidance contained in GAGAS provide
a framework for conducting high quality
audits with competence, integrity,
objectivity, and independence. These
standards are used by auditors of
entities that receive government awards
and audit organizations performing
GAGAS audits. GAGAS contains
standards for audits as well as
requirements and guidance dealing with
ethics, independence, auditors’
professional judgment and competence,
quality control, performance of the
audit, and reporting.
This rule amends Part 1773 to
incorporate the clarified audit standards
issued by the AICPA in October 2011.
The purpose of redrafting the auditing
standards was for clarity and
convergence although there were some
changes and additions in terms of
requirements. The clarified standards
also introduced new terminology and
new audit reports by adding extra
paragraphs and segregating sections of
the report under subheadings.
In 2013, the Office of Management
and Budget (OMB) revised uniform
administrative requirements, cost
principles, and audit requirements for
Federal awards by issuing 2 CFR part
200, which served to consolidate and
replace OMB Circulars A–21, A–87, A–
89, A–102, A–110, A–122, and A–133.
2 CFR part 200 was adopted by USDA
in December 2014. The portion of this
CFR applicable to audits, Subpart F, is
recognized and adopted by this revision
to Part 1773.
This rule revises all subparts to
encompass grantees, to remove most
references to Rural Telephone Bank
(RTB), to conform the language used to
generally accepted auditing standards
(GAAS) issued by the AICPA and
GAGAS. This rule adds, changes or
deletes definitions as appropriate to
clarify certain existing information.
Perhaps most importantly, this rule
replaces the RUS management letter
with a report on compliance with
aspects of contractual agreements and
regulatory requirements based on the
requirements found in AU–C 806 of
GAAS. This rule also provides
information on the electronic filing of
annual audits in § 1773.21. RUS is also
adding a requirement to the reporting
package for a schedule of findings and
recommendations in § 1773.34.
Due to the state boards of accountancy
having now adopted peer review

PO 00000

Frm 00002

Fmt 4700

Sfmt 4700

requirements as part of the CPA
licensing requirements for performing
attestation services, this amended rule
significantly streamlines the RUS peer
review monitoring included in § 1773.5
by removing much of the guidance
previously provided with regard to
auditor participation in an approved
peer review program. RUS will no
longer require that all auditors submit
copies of their peer review reports but
reserves the right to request said reports
on a case by case basis. It also removes
the option of requesting a waiver of the
peer review requirement, relying instead
on the requirements of the state boards
of accountancy and the guidance
provided within the peer review
programs themselves.
Due to the scope and pervasiveness of
the revisions being implemented, Part
1773 as revised is being published in its
entirety in this final rule.
In this revision to Part 1773, all
sample reports and financial statements
will be combined into four appendices
which will be available in RUS Bulletin
1773–1, Policy on Audits of RUS
Borrowers and Grantees. Appendix A of
RUS Bulletin 1773–1 contains the
sample reports, financial statements and
schedule of findings and
recommendations for electric borrowers;
Appendix B contains similar samples
for telecommunications borrowers;
Appendix C for broadband borrowers;
and Appendix D contains sample
reports for grantees. Appendices A
through D will not be printed in the
Code of Federal Regulations; however,
these appendices are available at
https://www.regulations.gov/ for review
and comment in conjunction with the
comment period for this final rule. Only
Subparts A through E will be published
in the Code of Federal Regulations. The
appendices are included in RUS
Bulletin 1773–1, Policy on Audits of
RUS Borrowers and Grantees, which
contains all of Part 1773, including
subparts A through E and the
appendices. Publishing Part 1773 in
bulletin form provides the RUS audit
policy in an easy to read format. This
publication is available on RUS’ website
at https://www.rd.usda.gov/
publications/regulations-guidelines/
rural-utilities-service-audit.
USDA Non-Discrimination Statement
In accordance with Federal civil
rights law and U.S. Department of
Agriculture (USDA) civil rights
regulations and policies, the USDA, its
Agencies, offices, and employees, and
institutions participating in or
administering USDA programs are
prohibited from discriminating based on
race, color, national origin, religion, sex,

E:\FR\FM\07MYR1.SGM

07MYR1

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations
gender identity (including gender
expression), sexual orientation,
disability, age, marital status, family/
parental status, income derived from
public assistance programs, political
beliefs, or reprisal or retaliation for prior
civil rights activity, in any program or
activity conducted or funded by USDA
(not all bases apply to all programs).
Remedies and complaint filing
deadlines vary by program or incident.
Persons with disabilities who require
alternative means of communication for
program information (e.g., Braille, large
print, audiotape, American Sign
Language, etc.) should contact the
responsible Agency or USDA’s TARGET
Center at (202) 720–2600 (voice and
TTY) or contact USDA through the
Federal Relay Service at (800) 877–8339.
Additionally, program information may
be made available in languages other
than English.
To file a program discrimination
complaint, complete the USDA Program
Discrimination Complaint Form, AD–
3027, found online at https://
www.ascr.usda.gov/filing-programdiscrimination-complaint-usdacustomer and at any USDA office or
write a letter addressed to USDA and
provide in the letter all of the
information requested in the form. To
request a copy of the complaint form,
call (866) 632–9992. Submit your
completed form or letter to USDA by:
(1) Mail: U.S. Department of
Agriculture, Office of the Assistant
Secretary for Civil Rights, 1400
Independence Avenue SW, Washington,
DC 20250–9410;
(2) fax: (202) 690–7442; or
(3) email: program.intake@usda.gov.
USDA is an equal opportunity
provider, employer, and lender.

1773.7 Audit standards.
1773.8 Audit date.
1773.9 Disclosure of fraud and
noncompliance with provisions of laws,
regulations, contracts, and loan and grant
agreements.
1773.10 Access to audit-documentation.
1773.11–1773.19 [Reserved]

List of Subjects in 7 CFR Part 1773
Accounting, Auditing, Electric power,
Grants, Loan programs—broadband,
Loan programs—communications, Loan
programs—energy, Reporting and
recordkeeping requirements, Rural
areas, Telephone.
■ For the reasons set forth in the
preamble, RUS revises 7 CFR part 1773
to read as follows:

(a) This part implements the
standards for audits required by the loan
and grant agreements of Rural Utilities
Service (RUS) electric and
telecommunications borrowers and
grantees. The provisions require
auditees to prepare and furnish to RUS,
at least once during each 12-month
period, a full and complete report of its
financial condition, operations, and
cash flows, in form and substance
satisfactory to RUS, audited and
certified by an independent auditor,
satisfactory to RUS, and accompanied
by a report of such audit, in form and
substance satisfactory to RUS.
(b) This part is based on the
requirements of GAGAS in effect at the
time of the audit and applicable RUS
regulations and subpart F (Audit
Requirements) of 2 CFR part 200
(Uniform Administrative Requirements,
Cost Principles, and Audit

daltland on DSKBBV9HB2PROD with RULES

PART 1773—POLICY ON AUDITS OF
RUS BORROWERS AND GRANTEES
Subpart A—General Provisions
Sec.
1773.1 General.
1773.2 Definitions.
Subpart B—RUS Audit Requirements
1773.3 Annual audit.
1773.4 Auditee’s responsibilities.
1773.5 Qualifications of an auditor.
1773.6 Auditor communication.

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

Subpart C—RUS Requirements for the
Submission and Review of the Reporting
Package
1773.20 The auditor’s submission of the
reporting package.
1773.21 Auditee’s review and submission
of the reporting package.
1773.22–1773.29 [Reserved]
Subpart D—RUS Reporting Requirements
1773.30 [Reserved]
1773.31 Auditor’s report on the financial
statements.
1773.32 Report on internal control over
financial reporting and on compliance
and other matters.
1773.33 Report on compliance with aspects
of contractual agreements and regulatory
requirements.
1773.34 Schedule of findings and
recommendations.
1773.35–1773.37 [Reserved]
Subpart E—RUS Audit Requirements and
Documentation
1773.38 Scope of engagement.
1773.39 Utility plant and accumulated
depreciation.
1773.40 Regulatory assets.
1773.41 Extraordinary retirement losses.
1773.42 Clearing accounts.
1773.43 Capital and equity accounts.
1773.44 Long-term debt.
1773.45 Regulatory liabilities.
1773.46–1773.48 [Reserved]
1773.49 OMB Control Number.
Authority: 7 U.S.C. 901 et seq., 7 U.S.C.
1921 et seq., 7 U.S.C. 6941 et seq.

Subpart A—General Provisions
§ 1773.1

PO 00000

General.

Frm 00003

Fmt 4700

Sfmt 4700

19907

Requirements for Federal Awards) (2
CFR 200.500–200.521).
(c) This part further sets forth the
criteria for selecting auditors
satisfactory to RUS and certain audit
procedures and audit documentation
that must be performed and prepared
before an audit report will be accepted
by RUS.
(d) Failure to provide an audit in
compliance with this part is a serious
violation of the RUS Security
Agreement. RUS relies on audited
financial statements in order to assess
and monitor the financial condition of
its borrowers and grantees and to fulfill
its fiduciary responsibilities.
(e) RUS reserves the right to suspend
its acceptance of audits performed by
auditors who, in the opinion of RUS, are
not meeting the requirements of this
part or with unresolved disputes or
issues until such time that the matter
can be resolved to RUS’ satisfaction.
§ 1773.2

Definitions.

As used in this part:
2 CFR part 200, subpart F means 2
CFR part 200, Uniform Administrative
Requirements, Cost Principles and
Audit Requirements for Federal Awards,
subpart F, Audit Requirements, as
adopted by USDA in 2 CFR part 400.
AA–PARA means RUS Assistant
Administrator, Program Accounting and
Regulatory Analysis.
Administrator means the
Administrator of RUS.
Affiliated company means a company
that directly or indirectly through one or
more intermediaries, control or are
controlled by, or are under common
control with, the auditee.
AICPA means the American Institute
of Certified Public Accountants.
ASC means the Accounting Standards
Codification issued by the Financial
Accounting Standards Board.
Audit means an examination of
financial statements by an independent
auditor for the purpose of expressing an
opinion on the fairness with which
those statements present financial
position, results of operations, and
changes in cash flows in accordance
with accounting principles generally
accepted in the United States of
America (GAAP) and for determining
whether the auditee has complied with
applicable laws, regulations, and
provisions of loan or grant contracts and
grant agreements that could have a
material effect on the financial
statements.
Audit date means the ‘‘as of’’ date
established by the auditee.
Audit documentation has the same
meaning as defined in the AICPA’s
professional auditing standards.

E:\FR\FM\07MYR1.SGM

07MYR1

daltland on DSKBBV9HB2PROD with RULES

19908

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

Auditee means an RUS borrower and/
or grantee that is required to submit an
annual audit as a condition of the
award.
Auditor means government auditors
as well as certified public accounting
firms that perform audits using
generally accepted government auditing
standards (GAGAS).
BCAS means Broadband Collection
and Analysis System (or successor
system).
Borrower means an entity that has an
outstanding RUS or Federal Financing
Bank (FFB) loan or loan guarantee.
CPA means a Certified Public
Accountant.
DCS means the Data Collection
System (or successor system).
FASB means Financial Accounting
Standards Board.
FFB means the Federal Financing
Bank, a body corporate and
instrumentality of the United States of
America under the general supervision
of the Secretary of the Department of the
Treasury.
Fraud has the same meaning as
defined in the AICPA’s professional
auditing standards.
GAAP has the same meaning as
defined in accounting standards issued
by the Government Accounting
Standards Board (GASB) and the
Financial Accounting Standards Board
(FASB).
GAGAS means generally accepted
government auditing standards as set
forth in Government Auditing
Standards, issued by the Comptroller
General of the United States,
Government Accountability Office.
GAO means the United States
Government Accountability Office.
GASB means Government Accounting
Standards Board.
Governance board means the
auditee’s board of directors, managing
members, or other official body charged
with governance.
Grantee means an entity that has a
continuing responsibility under a grant
agreement with RUS.
Illegal act has the same meaning as
defined by the Public Company
Accounting Oversight Board.
Material weakness has the same
meaning as defined in the AICPA’s
professional auditing standards.
OIG means the Office of the Inspector
General, United States Department of
Agriculture.
OMB means The Office of
Management and Budget.
Regulatory asset means an asset
resulting from an action of a regulator as
defined by FASB.
Regulatory liability means a liability
imposed on a regulated enterprise by an

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

action of a regulator as defined by
FASB.
Related party has the same meaning
as defined by FASB.
Reporting package means:
(1) The auditor’s report on the
financial statements;
(2) The report on internal control over
financial reporting and on compliance
and other matters;
(3) The report on compliance with
aspects of contractual agreements and
regulatory requirements;
(4) The schedule of findings and
recommendations; and
(5) All supplemental schedules and
information required by this part.
RUS means the Rural Utilities
Service, an agency of the United States
Department of Agriculture.
RUS Bulletin 1773–1, Policy on
Audits of RUS Borrowers and Grantees,
is a publication prepared by RUS that
contains the RUS regulation 7 CFR part
1773 and exhibits of sample audit
reports, financial statements, reports on
internal control over financial reporting
and on compliance and other matters,
report on compliance with aspects of
contractual agreements and regulatory
requirements, and schedule of findings
and recommendations used in preparing
audits of RUS borrowers and grantees.
This bulletin is available on the internet
at https://www.rd.usda.gov/
publications/regulations-guidelines/
bulletins/program-accounting.
RUS security agreement means a loan
agreement, grant agreement, mortgage,
security agreement, or other form of
agreement that governs the terms and
conditions of, or provides security for,
loan and/or grant funds provided by
RUS to the auditee.
Significant deficiency has the same
meaning as defined in the AICPA’s
professional auditing standards.
Single Audit Act means Single Audit
Act of 1984 (31 U.S.C. 7501 et seq.) as
implemented by 2 CFR part 200, subpart
F.
State means any state or territory of
the United States, or the District of
Columbia.
Uniform System of Accounts means,
for telecommunications borrowers,
Bulletin 1770B–1, Accounting
Requirements for RUS
Telecommunications Borrowers (https://
www.rd.usda.gov/files/UTP_Bulletins_
1770B-1.pdf), and for electric borrowers,
as contained in 7 CFR part 1767,
Accounting Requirements for RUS
Electric Borrowers, subpart B—Uniform
System of Accounts, Bulletin 1767B–1,
(https://www.rd.usda.gov/files/UPA_
Bulletin_1767B-1.pdf).

PO 00000

Frm 00004

Fmt 4700

Sfmt 4700

Subpart B—RUS Audit Requirements
§ 1773.3

Annual audit.

(a) Each auditee must have its
financial statements audited annually
by an auditor selected by the auditee
and approved by RUS as set forth in
§ 1773.4. All auditees must submit
audited financial statements on a
comparative basis covering two
consecutive 12 month periods, unless
the entity has not been in existence for
two consecutive 12-month audit
periods. Consolidated statements of the
parent are not an acceptable
replacement for an audit of the auditee.
(b) Each auditee must establish an
annual audit date within 12 months of
the date of the first advance and must
prepare annual financial statements for
the audit date established. Each auditee
must notify the AA–PARA of the audit
date at least 90 days prior to the selected
audit date.
(c) Auditees must furnish a reporting
package to RUS within 120 days of the
audit date. (See § 1773.21). Until all
loans made or guaranteed by RUS are
repaid and unliquidated obligations
rescinded, auditees that are borrowers
must continue to provide annual
audited financial statements. Auditees
that are grantees must furnish annual
audited financial statements in the year
of the first advance and until all funds
have been advanced or rescinded, and
all financial compliance requirements
have been fully satisfied.
(d) In addition to the requirements of
this part, certain auditees may be
subject to the Single Audit Act. An
auditee that is defined as a Non-Federal
Entity as defined in 2 CFR 200.69 means
a state, local government, Indian tribe,
institution of higher education (IHE), or
nonprofit organization that carries out a
Federal award as a recipient or
subrecipient and is required to meet the
requirements of this part as follows:
(1) Borrowers and/or grantees
expending the threshold established for
the Single Audit Act (currently
$750,000) or more in Federal awards
during the year must have an audit
performed in accordance with the
Single Audit Act. See 2 CFR 200.502,
Basis For Determining Federal Awards
Expended, for guidance in determining
annual expenditures. The audited
financial statements must be submitted
to RUS and to the Federal Audit
Clearinghouse.
(2) For auditees expending less than
the threshold for expenditure in Federal
awards during the year, RUS reserves its
right under 2 CFR 200.503, Relationship
to other audit requirements, to arrange
for an audit performed in accordance
with this part.

E:\FR\FM\07MYR1.SGM

07MYR1

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations
(3) Within 30 days of the audit date,
auditees must notify the AA–PARA, in
writing, of the total Federal awards
expended during the year and must
state whether the audit will be
performed in accordance with the
Single Audit Act, or this part.
(i) An auditee electing to comply with
this part must select an auditor that
meets the qualifications set forth in
§ 1773.5.
(ii) If an audit is performed in
accordance with the Single Audit Act,
the auditor’s reporting on the financial
statements that meet the requirements of
the Single Audit Act, will be sufficient
to satisfy the auditee’s obligations under
this part.
(e) Subpart F of 2 CFR part 200 does
not apply to audits of RUS electric and
telecommunications cooperatives and
for-profit telecommunications borrowers
unless the borrower has contractually
agreed with another Federal agency (e.g.
Federal Emergency Management
Agency) to provide a financial audit
performed in accordance with 2 CFR
part 200, subpart F. In no circumstance
will an auditee be required to submit
separate audits performed in accordance
with this part and 2 CFR part 200,
subpart F.

daltland on DSKBBV9HB2PROD with RULES

§ 1773.4

Auditee’s responsibilities.

(a) Selection of a qualified auditor.
The auditee’s governance board is
responsible for the selection of a
qualified auditor that meets the
requirements set forth in § 1773.5. When
selecting an auditor, the auditee should
consider, among other matters:
(1) The qualifications of auditors
available to do the work;
(2) The auditor’s experience in
performing audits of utilities, related
industries, or in the case of grantees,
experience in auditing entities
comparable to the grantee; and
(3) The auditor’s ability to complete
the audit and submit the reporting
package within 90 days of the audit
date.
(b) Board approval of selection. The
board’s approval of an auditor must be
recorded by a board resolution that
states:
(1) The auditor represents that it
meets RUS qualifications to perform an
audit; and
(2) The auditee and auditor will enter
into an audit engagement in accordance
with § 1773.6.
(c) Notification of selection. When the
initial selection or subsequent change of
an auditor has been made, the auditee
must notify the AA–PARA, in writing,
at least 90 days prior to the audit date.
(1) Within 30 days of the date of
receipt of such notice, RUS will notify

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

the auditee, in writing, if the selection
or change in auditor is not satisfactory.
(2) Notification to RUS that the same
auditor has been selected for succeeding
audits of the auditee’s financial
statements is not required; however, the
procedures outlined in this part must be
followed for each new auditor selected,
even though such auditor may
previously have been approved by RUS
to audit records of other RUS auditees.
Changes in the name of an auditor are
considered to be a change in the auditor.
(d) Audit engagement letter. The
auditee must enter into an audit
agreement with the auditor that
complies with § 1773.6 prior to the
initiation of the audit.
(e) Debarment certification. The
auditee must obtain, from the selected
auditor, a lower tier covered transaction
certification (Form AD–1048,
Certification Regarding Debarment,
Suspension, Ineligibility and Voluntary
Exclusion—Lower Tier Covered
Transactions), as required by Executive
Orders 12549 and 12689, Debarment
and Suspension, and any rules or
regulations issued thereunder.
(f) Peer review report. The auditee
must obtain, from the selected auditor,
a copy of the auditor’s current approved
peer review report.
(g) Preparation of schedules. The
auditee must prepare any schedules that
are required by the auditor to perform
the audit, including a schedule of
deferred debits and deferred credits and
a detailed schedule of investments in
subsidiary and affiliated companies
accounted for on the cost, equity, or
consolidated basis. The detailed
schedule of investments can be
included in the notes to the financial
statements or as a separate schedule as
long as all information required is
adequately disclosed. Samples of these
schedules can be found in Appendices
A–D, of RUS Bulletin 1773–1.
(1) The schedule of deferred debits
and deferred credits must include a
description of the deferral and a
notation as to whether the deferral has
received written approval from RUS. If
a determination is made that prior
written approval is not required, cite the
specific authority for the deferral.
(2) The schedule of investments must
include investments in subsidiary and
affiliated companies, corporations,
limited liability corporations and
partnerships, joint ventures, etc.
accounted for on either the cost, equity
or on a consolidated basis. For all
investments, the auditee must list the
name of the entity, ownership
percentage, and the principal business
in which the entity is engaged. For
investments recorded on the cost basis,

PO 00000

Frm 00005

Fmt 4700

Sfmt 4700

19909

the auditee must include the original
investment, advances, dividends
declared or paid in the current and prior
years and the net investment. For
investments recorded on the equity or
consolidated basis, the auditee must
include the ownership percentage,
original investment, advances,
dividends declared or paid in the
current and prior years, and current and
prior years’ earnings and losses,
including accumulated losses in excess
of the original investment.
(h) Scope limitations. The auditee
will not limit the scope of the audit to
the extent that the auditor is unable to
provide an unqualified opinion that the
financial statements are presented fairly
in conformity with GAAP due to the
scope limitation.
(i) Submission of reporting package.
The auditee must submit to RUS the
required reporting package as set forth
in § 1773.21.
(1) A reporting package that fails to
meet the requirements detailed in this
part will be returned to the auditee with
a written explanation of noncompliance.
(2) The auditee must, within 30 days
of the date of the letter or email
detailing the noncompliance, submit a
corrected reporting package to RUS.
(3) If a corrected reporting package is
not received within 30 days of the date
of the letter or email detailing the
noncompliance, RUS will take
appropriate action, depending on the
severity of the noncompliance.
(j) Submission of a plan of corrective
action. If the auditor’s report contains
findings and recommendations but does
not include the auditee’s response, the
auditee must submit written responses
to RUS within 180 days of the audit
date. The written responses must
address:
(1) The corrective action already taken
or planned, or the reason the auditee
believes no action is necessary; and
(2) The status of corrective action
taken on previously reported findings
and recommendations.
§ 1773.5

Qualifications of the auditor.

Auditors that meet the qualifications
criteria of this section and enter into an
audit engagement with the auditee that
complies with § 1773.6, will be
considered satisfactory to RUS.
(a) Licensing. Auditors that audit the
financial statements of an RUS auditee
must be licensed to perform attestation
engagements in the United States of
America. Auditors do not have to be
licensed by the state in which the
auditee is located; however, auditors
must abide by the rules and regulations
of professional conduct promulgated by

E:\FR\FM\07MYR1.SGM

07MYR1

19910

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

the accountancy board of the state in
which the auditee is located.
(b) Independence. Auditors must be
independent as determined by the
standards for independence in the
AICPA Code of Professional Conduct
and in GAGAS in effect at the time of
the audit.
(c) Peer review requirement. Auditors
must be enrolled and participating in a
peer review program, and must have
undergone a satisfactory peer review of
their accounting and audit practice. The
peer review must be in effect at the date
of the audit report opinion.
(1) Peer review reports. RUS reserves
the right to request peer review reports
from selected auditors.
(2) Peer review requirements for new
auditors. New auditing firms must meet
the requirements of their state board of
accountancy with regard to enrolling in
a peer review program, timing of the
first peer review, and any other peer
review requirements.

daltland on DSKBBV9HB2PROD with RULES

§ 1773.6

Auditor communication.

(a) GAGAS and AICPA standards
require that the auditor communicate
with the auditee the auditor’s
understanding of the services to be
performed and document that
understanding through a written
communication to those charged with
governance. To be acceptable to RUS,
the auditor’s communication must take
the form of an audit engagement letter
prepared by the auditor and must be
formally accepted by the governance
board or an audit committee
representing the governance board. In
addition to the requirements of the
AICPA’s professional auditing standards
and GAGAS, the engagement letter must
also include the following:
(1) The nature of planned work and
level of assurance to be provided related
to internal control over financial
reporting and compliance with laws,
regulation, and provision of contracts or
grant agreements;
(2) That the auditee and auditor
acknowledge that the audit is being
performed and that the reporting
package is being issued to enable the
auditee to comply with the provisions of
RUS’s security instrument which
requires compliance with this part;
(3) That the auditor acknowledges the
mandatory reporting requirements for
fraud, illegal acts, or noncompliance
with provisions of laws, regulations,
contracts, and grant agreements in
§ 1773.9. Acceptance of the engagement
letter by the auditee is required, thus
granting the auditor permission to
directly notify the appropriate officials
which may include but is not limited to
the governance board, RUS, and OIG;

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

(4) That the auditor acknowledges
that it is required under § 1773.7 to
contact RUS if the auditor is unable to
resolve scope limitations imposed by
the auditee, or if such limitations in
scope violate this part. Acceptance of
the engagement letter by the auditee is
required, thus granting the auditor
permission to directly notify the AA–
PARA as needed;
(5) That the auditee and auditor
acknowledge that RUS will consider the
auditee to be in violation of its RUS
Security Agreement and this part if the
auditee fails to have an audit performed
and documented in compliance with
GAGAS and this part;
(6) That the auditor represents that it
meets the requirements under this part
to perform the audit;
(7) That the auditor will perform the
audit and will prepare the reporting
package in accordance with the
requirements of this part;
(8) That the auditor will document the
audit work performed in accordance
with GAGAS, and the requirements of
this part; and
(9) That the auditor will make all
audit documentation, including the
reporting package available to RUS or its
representatives (including but not
limited to OIG and GAO), upon request,
and will permit the photocopying of all
such audit documentation.
(b) A copy of the audit engagement
letter must be available at the auditee’s
office for inspection by RUS personnel.
One copy of the current audit
engagement letter must be maintained
in the auditor’s audit documentation.
§ 1773.7

Audit standards.

(a) The audit of the financial
statements must be performed in
accordance with GAGAS and this part
in effect at the audit date unless the
auditee is directed otherwise, in writing,
by RUS.
(b) The audit of the financial
statements must include such tests of
the accounting records and such other
auditing procedures that are sufficient
to enable the auditor to express an
opinion on the financial statements and
to issue the required reporting package.
(c)(1) The auditee will not limit the
scope of the audit to the extent that the
auditor is unable to meet RUS audit
requirements without prior written
approval of the AA–PARA.
(2) If the auditor determines during
the audit that an unqualified opinion
cannot be issued due to a scope
limitation imposed by the auditee, the
auditor should use professional
judgment to determine what levels of
the auditee’s management and/or those

PO 00000

Frm 00006

Fmt 4700

Sfmt 4700

charged with governance should be
informed.
(3) After informing the auditee’s
management and/or those charged with
governance, if the scope limitation is
not adequately resolved, the auditor
should immediately contact the AA–
PARA.
§ 1773.8

Audit date.

(a) The annual audit must be
performed as of the end of the same
calendar month each year unless prior
approval to change the audit date is
obtained, in writing, from RUS.
(1) An auditee may request a change
in the audit date by writing to the AA–
PARA at least 60 days prior to the
currently approved audit date,
providing justification for the change.
(2) The time period between the prior
audit date and the newly requested
audit date must be no longer than
twenty-three months.
(3) Comparative financial statements
must be prepared and audited for the 12
months ending as of the new audit date
and for the 12 months immediately
preceding that period.
§ 1773.9 Disclosure of fraud, and
noncompliance with provisions of laws,
regulations, contracts, and loan and grant
agreements.

(a) In accordance with GAGAS, the
auditor is responsible for planning and
performing the audit to provide
reasonable assurance about whether the
financial statements are free of material
misstatement due to error or fraud. The
auditor must also plan the audit to
provide reasonable assurance of
detecting material misstatements
resulting from violations of provisions
of laws, regulations, contracts or loan
and grant agreements that could have a
direct and material effect on the
financial statements.
(b) If specific information comes to
the auditor’s attention that provides
evidence concerning the existence of
possible violations of provisions of
laws, regulations, contracts or loan and
grant agreements that could have a
material indirect effect on the financial
statements, the auditor should apply
audit procedures specifically directed to
ascertaining whether a violation of
provisions of laws, regulations, contract
or grant agreements has occurred.
(c) Pursuant to the terms of its audit
engagement letter with the auditee, the
auditor must immediately report, in
writing, all instances of fraud, illegal
acts, and all indications or instances of
noncompliance with laws, whether
material or not, to:
(1) The president of the auditee’s
governance board;

E:\FR\FM\07MYR1.SGM

07MYR1

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations
(2) AA–PARA; and
(3) OIG, as follows:
(i) For all audits performed in
accordance with § 1773.3(d) (audits
conducted in accordance with 2 CFR
part 200 ‘‘Uniform Administrative
Requirements, Cost Principles, and
Audit Requirements for Federal
Awards’’), report to the USDA–OIGAudit, National Single Audit
Coordinator for USDA, 401 W.
Peachtree St NW, Room 2328, Atlanta,
GA 30308,
(ii) For all other audits conducted in
accordance with § 1773.3 report to the
appropriate office based on location. See
https://www.usda.gov/oig/national.htm
to determine the correct reporting
location.
§ 1773.10

Access to audit documentation.

Pursuant to the terms of this part and
the audit engagement letter, the auditor
must make all audit documentation
available to RUS, or its designated
representative, upon request and must
permit RUS, or its designated
representative, to photocopy all audit
documentation.
§§ 1773.11–1773.19

[Reserved]

Subpart C—RUS Requirements for the
Submission and Review of the
Reporting Package

daltland on DSKBBV9HB2PROD with RULES

§ 1773.20 The auditor’s submission of the
reporting package.

(a) Time limit. Within 90 days of the
audit date, the auditor must deliver the
reporting package to the auditee’s
governance board. At a minimum,
copies should be provided for each
member of the governance board and
the manager. The auditor must also
provide an electronic copy of the audit
which meets the requirements of
§ 1773.21 for subsequent transmittal to
RUS.
(b) Communication with the
governance board. In addition to
providing sufficient copies of the
reporting package for each member of
the auditee’s governance board, RUS
requires that the auditor report all audit
findings to the auditee’s governance
board. RUS recommends that audit
findings also be communicated orally
unless oral communication would not
be adequate. If the information is
communicated orally, the auditor must
document the communication by
appropriate memoranda or notations in
the audit documentation. If the auditor
communicates in writing, a copy of the
written communication must be
included in the auditor’s audit
documentation.
(c) Matters to be communicated.
Matters communicated to those charged

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

with governance must include, but are
not limited to the matters to be
communicated as prescribed in the
AICPA’s professional standards AU–C
Section 260, ‘‘The Auditor’s
Communication with Those Charged
with Governance’’.
§ 1773.21 Auditee’s review and
submission of the reporting package.

(a) The auditee’s governance board
should note and record receipt of the
reporting package and any action taken
in response to the reporting package in
the minutes of the board meeting at
which such reporting package is
presented.
(b) The auditee must furnish RUS
with an electronic copy of the reporting
package within 120 days of the audit
date as provided for in § 1773.3.
(c) The auditee must furnish AA–
PARA with a copy of its plan for
corrective action, if any, within 180
days of the audit date.
(d) The auditee must include in the
reporting package a copy of each special
report, summary of recommendations or
similar communications, if any,
received from the auditor as a result of
the audit.
(e) All required submissions to RUS
described in paragraphs (b) through (d)
of this section should be furnished
electronically. The electronic copy must
be provided in a Portable Document
Format (PDF). Auditees with a
designation from 0001 through 0199 in
the Electric program and 500 through
699 in the Telecommunications
programs shall upload the reporting
package to the DCS or its successor
system. Borrowers and/or grantees with
a designation from 1100 through 1199,
1300 through 1399, and 1400 through
1499 in the Broadband program shall
upload the reporting package to the
BCAS or its successor system. All other
borrowers and/or grantees may upload
their reporting package through DCS or
its successor system. Specific
instructions for submission are available
from the Technical Accounting and
Auditing Staff.
§§ 1773.22–1773.29

[Reserved]

Subpart D—RUS Reporting
Requirements
§ 1773.30

[Reserved]

§ 1773.31 Auditor’s report on the financial
statements.

The auditor must prepare a written
report on comparative balance sheets,
statements of revenue and patronage
capital (or statement of operations
customary to the type of entity
reporting) and statements of cash flows.

PO 00000

Frm 00007

Fmt 4700

Sfmt 4700

19911

The report must include the manual or
printed signature of the auditor, cover
all statements presented, and refer to the
separate report on internal controls over
financial reporting and on compliance
and other matters and the report on
compliance with aspects of contractual
agreements and regulatory requirements
issued in conjunction with the auditor’s
report on the financial statements. The
auditor’s report on the financial
statements should also state that the
report on internal controls over
financial reporting and on compliance
and other matters is an integral part of
a GAGAS audit, and in considering the
results of the audit, that this report
should be read along with the auditor’s
report on the financial statements.
§ 1773.32 Report on internal control over
financial reporting and on compliance and
other matters.

(a) As required by GAGAS, the
auditor must prepare a written report
describing the scope of the auditor’s
testing of internal control over financial
reporting and of compliance with
provisions of laws, regulations,
contracts, and loan and grant
agreements, and that the tests provided
sufficient, appropriate evidence to
support opinions on the effectiveness of
internal control and on compliance with
provisions of laws, regulations,
contracts, and loan and grant
agreements. This report must include
the manual or printed signature of the
auditor and must include the following
items as appropriate:
(1) Significant deficiencies and
material weaknesses in internal control;
(2) Instances of fraud and
noncompliance with provisions of laws
or regulations that have a material effect
on the audit and any other instances
that warrant the attention of those
charged with governance;
(3) Noncompliance with provisions of
contracts or grant agreements that have
a material effect on the audit; and
(4) Abuse that has a material effect on
the audit.
(b) When the auditor detects instances
of noncompliance or abuse that have an
effect on the financial statements that
are less than material but warrant the
attention of those charged with
governance, they should communicate
those findings in writing to those
charged with governance in a separate
communication. If the auditor has
issued a separate communication
detailing immaterial instances of
noncompliance or abuse, the report on
internal controls over financial
reporting and on compliance and other
matters must be modified to include a
statement such as:

E:\FR\FM\07MYR1.SGM

07MYR1

19912

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

‘‘We noted certain immaterial
instances of noncompliance [and/or
abuse], which we have reported to the
management of (auditee’s name) in a
separate letter dated (month, day,
20XX).’’
(c) If the auditor has issued a separate
letter to management to communicate
other matters involving the design and
operation of the internal control over
financial reporting, the report on
internal controls over financial
reporting and on compliance and other
matters must be modified to include a
statement such as:
‘‘However, we noted other matters
involving the internal control over
financial reporting that we have
reported to the management of
(auditee’s name) in a separate letter
dated (month, day, 20XX).’’
(d) The report must contain the status
of known but uncorrected deficiencies
from prior audits that affect the current
audit objective.

daltland on DSKBBV9HB2PROD with RULES

§ 1773.33 Report on compliance with
aspects of contractual agreements and
regulatory requirements.

The auditor must prepare a report on
compliance with aspects of contractual
agreements and regulatory requirements
that includes, at a minimum, comments
on:
(a) Audit procedures. State whether
the audit has been performed in
accordance with this part;
(b) Special reports. State whether any
special reports, summaries of
recommendations, or similar
communications were furnished to the
auditee’s management during the course
of the audit or during interim audit
work, and provide a description of the
information furnished;
(c) Accounting and records. Comment
on whether, during the course of the
audit, anything came to the auditor’s
attention to indicate that the auditee did
not maintain adequate and effective
accounting procedures and records and
utilize adequate and fair methods for
accumulating and recording labor,
material, and overhead costs, and for
distributing these costs to construction,
retirement, and maintenance or other
expense accounts. Where appropriate,
comment on whether anything came to
the auditor’s attention to indicate that
the auditee did not:
(1) Establish continuing property
records (CPRs) that are updated on a
current basis, at least annually, and are
reconciled with the controlling general
ledger plant accounts;
(2) Promptly clear construction
clearing accounts of costs of completed
construction to the proper classified
plant accounts and accrue depreciation

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

on such completed construction from
the date the plant was placed in service;
(3) Currently and systematically
record and properly price retirements of
plant;
(4) Properly account for the
accumulated provision for depreciation
accounts associated with retirements of
plant or properly disclose any unusual
charges or credits to such accounts; and
(5) Obtain RUS approval for the sale,
lease or transfer of capital assets secured
under the RUS security agreement when
approval is required, and properly
handle any proceeds from the sale or
lease of plant, material or scrap in
conformance with RUS requirements.
(d) Materials control. Comment on
whether, during the course of the audit,
anything came to the auditor’s attention
to indicate that the control over
materials and supplies was not
adequate.
(e) Compliance with RUS loan and
security instrument provisions.
Comment on whether, during the course
of the audit, anything came to the
auditor’s attention to indicate that the
following provisions of RUS’ loan and
security instruments have not been
complied with:
(1) For electric auditees, provisions
related to:
(i) The requirements for an auditee to
obtain written approval of mortgagees to
enter into any contract for the
management, operation, or maintenance
of the auditee’s system if the contract
covers all or substantially all of the
electric system. For purposes of this
part, the following contracts shall be
deemed as requiring RUS approval:
(A) Management contracts in which
the auditee has contracted to have
another auditee or other entity manage
its affairs;
(B) Operations and maintenance
contracts in which the auditee has
contracted to have another auditee or
other entity operate and/or maintain all
or substantially all of the physical plant
facilities of the auditee.
(C) Operations and maintenance
contracts in which the auditee has
contracted to operate and maintain the
physical plant facilities of another
auditee or other utility system;
(ii) The requirement for an auditee to
prepare and furnish mortgagees annual
or periodic financial and operating
reports on the auditee’s financial
condition and operations accurately and
within the required deadlines. The
auditor shall comment on whether,
during the course of the audit, anything
came to the auditor’s attention to
indicate that the information
represented by the auditee as having
been submitted to RUS in its most

PO 00000

Frm 00008

Fmt 4700

Sfmt 4700

recent December 31 Financial and
Operating Report Electric Distribution
or Financial and Operating Report
Electric Power Supply was not in
agreement with the auditee’s audited
records. If the auditee represents that an
amended report has been filed as of
December 31, the comments must relate
to the amended report; and
(iii) The requirement for an auditee to
use depreciation rates that are within
the ranges established by RUS for each
primary plant account (See RUS
Bulletin 183–1, Depreciation Rates and
Procedures at https://www.rd.usda.gov/
files/UPA_Bulletin_183-1.pdf), or with
the requirements of the state regulatory
body having jurisdiction over the
auditee’s depreciation rates in
computing monthly accruals.
(2) For telecommunications auditees,
provisions related to:
(i) The requirement for an auditee to
obtain written approval of the
mortgagees to enter into any contract,
agreement or lease between the auditee
and an affiliate other than as allowed
under 7 CFR part 1744, subpart E; and
(ii) The requirement for an auditee to
prepare and furnish mortgagees annual
or periodic financial and operating
reports on the auditee’s financial
condition and operations accurately and
within the required deadlines. The
auditor shall comment on whether,
during the course of the audit, anything
came to the auditor’s attention to
indicate that the information
represented by the auditee as having
been submitted to RUS in its most
recent December 31 Operating Report
for Telecommunications Borrowers was
not in agreement with the auditee’s
audited records. If the auditee
represents that an amended report has
been filed as of December 31, the
comments must be related to the
amended report.
(3) For Broadband auditees,
provisions relating to the requirement
for an auditee to prepare and furnish
mortgagee quarterly or periodic
financial and operating reports on the
auditee’s financial condition and
operations accurately and within the
required deadlines. The auditor shall
comment on whether, during the course
of the audit, anything came to the
auditor’s attention to indicate that the
information represented by the auditee
as having been submitted to RUS in its
most recent BCAS filing was not in
agreement with the auditee’s audited
records. If the auditee represents that an
amended report has been filed, the
comments must be related to the
amended report.
(4) For grantees, provisions related to:

E:\FR\FM\07MYR1.SGM

07MYR1

daltland on DSKBBV9HB2PROD with RULES

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations
(i) Recipients of Broadband Initiatives
Program loans and grants, the
requirement for the recipient to prepare
and furnish RUS quarterly and annual
financial and operating reports on the
financial condition and operations of
the auditee accurately and within the
required deadlines. The auditor shall
comment on whether, during the course
of the audit, anything came to the
auditor’s attention to indicate that the
information represented by the auditee
as having been submitted to RUS in its
most recent BCAS filing was not in
agreement with the audited records of
the auditee. If the auditee represents
that an amended report has been filed,
the comments must relate to the
amended report. The auditor must state
whether the Annual Compliance
Certificate required by the RUS Security
Agreement has been filed in a timely
manner with RUS.
(ii) Recipients of all other grant
programs within the electric and
telecommunications programs, the
requirements to prepare and furnish
RUS with any required financial
reporting accurately and within
required deadlines, as appropriate for
that specific program. The auditor shall
comment on whether, during the course
of the audit, anything came to the
auditor’s attention to indicate that the
information represented by the grantee
as having been submitted to RUS in its
most recent filing was not in agreement
with the audited records of the grantee.
If the grantee represents that an
amended report has been filed, the
comments must relate to the amended
report.
(f) Related party transactions.
Comment on whether, during the course
of the audit, anything came to the
attention of the auditor to indicate that
all material related party transactions
have not been disclosed in the notes to
the financial statements in accordance
with ASC 850, entitled ‘‘Related Party
Disclosures’’.
(g) Deferred debits and deferred
credits. For electric auditees, comment
on whether, during the course of the
audit anything came to the attention of
the auditor to indicate that the auditee
provided detailed schedule of deferred
debits and deferred credits, including,
but not limited to, margin stabilization
plans, revenue deferral plans, and
expense deferrals is not accurately
presented. This schedule must be
included as supplemental information
or within the notes to the financial
statements; and
(h) Investments. For electric and
telecommunications auditees, comment
on whether, during the course of the
audit, anything came to the auditor’s

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

attention to indicate that the auditee
provided detailed schedule of
investments is not accurately presented.
This schedule must be included as
supplemental information or within the
notes to the financial statements. The
auditor must state that the audit did not
disclose any investments in subsidiary
or affiliated companies.
§ 1773.34 Schedule of findings and
recommendations.

The auditor must prepare a schedule
of findings and recommendations to be
included with the audited financial
statements. The schedule of findings
and recommendations shall be
developed and presented utilizing the
elements of a finding discussed in
GAGAS and shall include
recommendations for remediation. If the
schedule does not include responses
from management, as well as any
planned corrective actions, those items
must be submitted directly to the AA–
PARA by management in accordance
with § 1773.4(j).
§§ 1773.35–1773.37

[Reserved]

Subpart E—RUS Audit Requirements
and Documentation
§ 1773.38

Scope of engagement.

The audit requirements set forth in
§ 1773.39 through 1773.45 must be met
annually by the auditor during the audit
of the RUS auditee’s financial
statements. The auditor must exercise
professional judgment in determining
whether any auditing procedures in
addition to those mandated by GAGAS
or this part should be performed on the
auditee’s financial records in order to
afford a reasonable basis for rendering
the auditor’s report on the financial
statements, report on internal controls
over financial reporting and on
compliance and other matters, report on
compliance with aspects of contractual
agreements and regulatory
requirements, and schedule of findings
and recommendations.
§ 1773.39 Utility plant and accumulated
depreciation.

(a) General. The audit of these
accounts shall include tests of
additions, replacements, retirements,
and changes. The auditor’s audit
documentation shall support that the
auditor:
(1) Examined direct labor and
material transactions to determine
whether the auditee’s accounting
records reflect a complete accumulation
of costs;
(2) Examined indirect costs and
overhead charges to determine if they
conform to the Uniform System of

PO 00000

Frm 00009

Fmt 4700

Sfmt 4700

19913

Accounts or the Federal Acquisitions
Regulations as required under the RUS
Security Agreement;
(3) Reviewed the costs of completed
construction and retirement projects to
determine if they were cleared promptly
from the work in progress accounts to
the classified plant in service accounts
and the related depreciation accounts;
(4) Examined direct purchases of
special equipment and general plant;
(5) Determined the degree of accuracy
and control of costing retirements,
including tests of salvage and removal
costs;
(6) Reviewed the auditee’s work order
procedures; and
(7) Reviewed depreciation rates for
adequate support, and compared them
to RUS guidelines to determine that
they were in compliance.
(b) Construction work in progress. (1)
The audit documentation shall include
a summary of open work orders
reconciled to the general ledger and
note on the summary any unusual or
atypical projects.
(2) The auditor’s audit documentation
shall support that the auditor:
(i) Reviewed equipment purchases
charged to work orders, including
payments and receiving reports;
(ii) Reviewed contracts showing the
scope of the work, the nature of the
contract, the contract amount, and
scheduled payments and reviewed
supporting documents to determine that
services contracted for were in fact
rendered;
(iii) Reviewed time cards and pay
rates for a sample of employees who
allocate their time to work orders;
(iv) Reviewed the nature of material
and supplies issued to the project,
traced amounts and quantities to
supporting documents, and reviewed
the reasonableness of clearing rates for
assignment of stores expense to the
work order;
(v) Reviewed the accuracy of the
computation of overheads applied to the
work order; and
(vi) Reviewed other costs charged to
the work order for support and
propriety.
(3) The auditor’s audit documentation
shall support that the auditor:
(i) Scheduled payments to contractors
and traced to verify payments and
supporting invoices;
(ii) Traced contract costs to final
closeout documents, to the general
ledger, and to the continuing property
records; and
(iii) Verified the costs of owner
furnished materials, if applicable.
(4) The auditor shall review the
auditee’s procedures for unitization and
classification of work order and contract

E:\FR\FM\07MYR1.SGM

07MYR1

daltland on DSKBBV9HB2PROD with RULES

19914

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

costs. The auditor’s audit
documentation shall support that the
auditor:
(i) Reviewed the tabulation of record
units for construction from the work
order staking sheets to the tabulation of
record units, to the unitization sheets,
and to the continuing property records;
(ii) Reviewed the procedures for
unitizing and distributing costs of
completed construction to the plant
accounts;
(iii) Verified that standard costs were
being used;
(iv) Evaluated the basis for
development of standard costs; and
(v) Determined that costs of
completed construction were cleared
promptly from work in progress
accounts.
(c) Continuing property records. The
auditor’s audit documentation shall
support that the auditor:
(1) Determined whether the
subsidiary plant records agree with the
controlling general ledger plant
accounts;
(2) Noted differences in the audit
documentation; and
(3) Commented, in the report on
compliance with aspects of contractual
agreements and regulatory
requirements, on any discrepancies.
(d) Retirement work-in-progress. The
auditor’s audit documentation shall
support that the auditor:
(1) Determined that plant retirements
are currently and systematically
recorded and priced on the basis of the
continuing property records, and
determined that costs of removal have
been properly accounted for;
(2) Explained the method used in
computing the cost of units of plant
retired if continuing property records
have not been established and
determined whether costs appeared
reasonable; and
(3) Determined the manner in which
net losses due to retirements were
accounted for and traced clearing
entries to the depreciation reserve, the
plant accounts, and the continuing
property records.
(e) Provision for accumulated
depreciation. The auditor’s audit
documentation shall support that the
auditor:
(1) Verified the depreciation accruals
for the period, including the
depreciation base;
(2) Reviewed the basis of the
depreciation rates, any change in rates
and the reason for the change, and, if
appropriate, determined whether the
rates are in compliance with RUS
requirements or with the requirements
of the state regulatory body having
jurisdiction over the auditee’s
depreciation rates;

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

(3) Reviewed salvage and removal
costs; and
(4) Searched for unrecorded
retirements.
(f) Other reserves. The auditor’s audit
documentation shall include an account
analysis for all other material plant
reserves, such as the reserve for the
amortization of plant acquisition
adjustments. The auditor’s audit
documentation shall support that
appropriate tests of transactions were
performed.
(g) Narrative. The auditor shall
include in the audit documentation a
comprehensive narrative on the scope of
work performed, observations made,
and conclusions reached. Matters
covered in this narrative shall include:
(1) The nature of construction and
other additions;
(2) The control over, and the accuracy
of pricing retirements;
(3) The accuracy of distributing costs
to classified utility plant accounts;
(4) An evaluation of the method of:
(i) Capitalizing the direct loadings on
labor and material costs;
(ii) Distributing transportation costs
and other expense clearing accounts;
and
(iii) Capitalizing overhead costs;
(5) The tests of depreciation;
(6) A review of agreements such as
those relating to acquisitions, property
sales, and leases which affect the plant
accounts; and
(7) Notations, if applicable, of RUS
approval of property sales and the
propriety of the disposition of the
proceeds.
§ 1773.40

Regulatory assets.

The auditor’s audit documentation
shall support that the auditor tested
whether all regulatory assets comply
with the requirements of ASC 980. For
Electric auditees only, the auditor’s
audit documentation shall support that
all regulatory assets have received RUS
approval.
§ 1773.41

Extraordinary retirement losses.

The auditor’s audit documentation
shall support that the auditor tested
retirement losses, including any
required approval by a regulatory
commission with jurisdiction in the
matter, or RUS, in the absence of
commission jurisdiction.
§ 1773.42

Clearing accounts.

The auditor’s audit documentation
shall support that the auditor tested all
clearing accounts and that transactions
selected for testing were reviewed for
proper allocation between expense and
capital accounts.

PO 00000

Frm 00010

Fmt 4700

Sfmt 4700

§ 1773.43

Capital and equity accounts.

(a) Capital stock. For privately owned
companies, the audit documentation
shall include analyses of all stock
transactions during the audit period.
The auditor’s audit documentation shall
support that the auditor:
(1) Reviewed the subsidiary records
and reconciled them to the general
ledger control account;
(2) Reviewed authorizations and
issuances or redemptions of capital
stock for proper approvals by the
governance board, stockholders,
regulatory commissions and RUS, as
required;
(3) Determined that transactions were
made in accordance with the
appropriate provisions of the articles of
incorporation, bylaws, and RUS loan
documents; and
(4) Determined that transactions were
recorded in accordance with the
Uniform System of Accounts.
(b) Memberships. For cooperative
organizations, the audit documentation
shall include an analysis of the
membership transactions during the
audit period. The auditor’s audit
documentation shall support that the
auditor:
(1) Reviewed the subsidiary records
and reconciled them to the general
ledger control account; and
(2) Determined that transactions were
made in accordance with the
appropriate provisions of the articles of
incorporation, bylaws, and RUS loan
documents.
(c) Patronage capital, retained
earnings, margins, and other equities.
The audit documentation shall include
an analysis of the patronage capital,
retained earnings, margins and other
equities, and any related reserve
accounts. The auditor’s audit
documentation shall support that the
auditor:
(1) Determined that the transactions
were made in accordance with the
appropriate provisions of the articles of
incorporation, bylaws, RUS loan
documents, Uniform System of
Accounts, or orders of regulatory
commissions;
(2) Traced payments to underlying
support; and
(3) Determined whether, under the
terms of the RUS security instrument,
restrictions of retained earnings or
margins are required and, if so, whether
they have been properly recorded.
§ 1773.44

Long-term debt.

The auditor’s audit documentation
shall support that the auditor:
(a) Confirmed RUS, FFB, and RTB
debt to the appropriate confirmation
schedule (RUS Form 690, Confirmation

E:\FR\FM\07MYR1.SGM

07MYR1

Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations
Schedule Obligation to the FFB; Form
614, Confirmation Schedule—Long-term
Obligation to RUS; or, Confirmation
Schedule for RTB Debt);
(b) Confirmed other long-term debt
directly with the lender;
(c) Examined notes executed or
cancelled during the audit period; and
(d) Tested accrued interest
computations.
§ 1773.45

Regulatory liabilities.

The auditor’s audit documentation
shall support that all regulatory
liabilities comply with the requirements
of ASC 980. For electric auditees only,
the auditor’s audit documentation shall
document whether all regulatory
liabilities have received RUS approval.
§§ 1773.46–1773.48
§ 1773.49

[Reserved]

OMB Control Number.

The information collection
requirements in this part are approved
by the Office of Management and
Budget (OMB) and assigned the OMB
Control Number 0572–0095.
Date: April 30, 2018.
Kenneth L. Johnson,
Administrator, Rural Utilities Service.
[FR Doc. 2018–09501 Filed 5–4–18; 8:45 am]
BILLING CODE P

SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245–AG79

Debt Refinancing in 504 Loan Program
U.S. Small Business
Administration.
ACTION: Final rule.
AGENCY:

This rule finalizes the interim
final rule (IFR) that was published on
May 25, 2016, to implement the debt
refinancing program reauthorized by
Section 521 of Division E of the
Consolidated Appropriations Act, 2016.
In response to comments received on
the IFR, this final rule makes some
additional revisions to the program’s
regulations with respect to the
definition of Qualified debt, the
requirements related to Eligible
Business Expenses, the refinancing of
Projects involving single or limited use
properties, and the disbursement
period.

daltland on DSKBBV9HB2PROD with RULES

SUMMARY:

DATES:

This rule is effective June 6,

2018.
FOR FURTHER INFORMATION CONTACT:

Linda Reilly, 504 Program Chief at
linda.reilly@sba.gov or 202–205–9949.
SUPPLEMENTARY INFORMATION:

VerDate Sep<11>2014

16:29 May 04, 2018

Jkt 244001

I. Background Information
The 504 Loan Program is an SBA
financing program authorized under
Title V of the Small Business
Investment Act of 1958 (the ‘‘SBIAct’’),
15 U.S.C. 695 et seq. The core mission
of the 504 Loan Program is to provide
long-term financing to small businesses
for the purchase or improvement of
land, buildings, and major equipment,
in an effort to facilitate the creation or
retention of jobs and local economic
development. Under the 504 Loan
Program, loans are made to small
business applicants by Certified
Development Companies (‘‘CDCs’’),
which are certified and regulated by
SBA to promote economic development
within their community. In general, a
project in the 504 Loan Program (a ‘‘504
Project’’) includes: A loan obtained from
a private sector lender with a senior lien
covering at least 50 percent of the
project cost; a loan obtained from a CDC
(a ‘‘504 Loan’’) with a junior lien
covering up to 40 percent of the total
cost (backed by a 100 percent SBAguaranteed debenture); and a
contribution from the Borrower of at
least 10 percent equity.
The Small Business Jobs Act of 2010
(the ‘‘Jobs Act’’), Public Law 111–240,
124 Stat. 2504, enacted on September
27, 2010, temporarily expanded the
ability of a small business to use the 504
Loan Program to refinance certain
qualifying debt. Prior to the Jobs Act, a
504 Project could include a refinancing
component only if the project involved
an expansion of the small business and
the existing indebtedness did not
exceed 50% of the project cost of the
expansion. See 13 CFR 120.882(e). The
temporary Jobs Act program authorized
the use of the 504 Loan Program for the
refinancing of debt where there is no
expansion of the small business concern
(the ‘‘Debt Refinancing Program’’). That
program expired on September 27, 2012.
Section 521 of Division E of the
Consolidated Appropriations Act, 2016
(the ‘‘2016 Act’’), Public Law 114–113,
enacted on December 22, 2015,
reauthorized the Debt Refinancing
Program with three modifications:
(1) The Debt Refinancing Program
shall be in effect only in those fiscal
years during which the cost to the
Federal Government of making
guarantees under the Debt Refinancing
Program and under the 504 Loan
Program is zero;
(2) A CDC is required to limit its
financings under the 504 Loan Program
so that, during any fiscal year, new
financings under the Debt Refinancing
Program do not exceed 50% of the
dollars the CDC loaned under the 504

PO 00000

Frm 00011

Fmt 4700

Sfmt 4700

19915

Loan Program during the previous fiscal
year. The 2016 Act provides that this
limitation may be waived by SBA upon
application by a CDC and after
determining that the refinance loan is
needed for good cause; and
(3) The alternate job retention goal
authorized by the Jobs Act for the Debt
Refinancing Program is eliminated.
On May 25, 2016, SBA published an
interim final rule to implement the 2016
Act (81 FR 33123) and, with the ‘‘zero
cost’’ requirement satisfied for fiscal
year 2016, SBA began accepting
applications for assistance under the
Debt Refinancing Program on June 25,
2016, the effective date of the interim
final rule. With the ‘‘zero cost’’
requirement satisfied for fiscal years
2017 and 2018, the Debt Refinancing
Program has continued to be in effect
without interruption. The regulations
governing this program are found at 13
CFR 120.882(g).
II. Summary of Comments Received
SBA received 49 comments during the
comment period for the interim final
rule, which closed on July 25, 2016. Of
the comments received, 44, or 90%,
were from Certified Development
Companies, one was from a trade
association, one was from a law firm,
one was from a commercial real estate
broker, one was from a financial
institution, and one was from a private
citizen. Below is a summary of the
comments received.
A. Definition of Qualified Debt—Section
120.882(g)(15)
The Jobs Act authorizes the
refinancing of ‘‘Qualified Debt’’ which
is defined to mean, among other factors,
‘‘indebtedness’’ that ‘‘was incurred not
less than 2 years before the date of the
application for assistance’’, that ‘‘is a
commercial loan’’, and the proceeds of
which were used to acquire an Eligible
Fixed Asset. See section
502(7)(C)(III)(aa)(AA), (BB), and (DD) of
the SBIAct. In imposing the two-year
requirement, Congress clearly did not
want the Debt Refinancing Program to
apply to new loans (i.e., loans less than
two years old). In implementing this
statutory requirement, the current
regulations define ‘‘Qualified debt’’, in
part, as a ‘‘commercial loan . . . [t]hat
was incurred not less than 2 years
before the date of the application for the
refinancing available under [the 504
Debt Refinancing Program]’’. See 13 CFR
120.882(g)(15) (definition of ‘‘Qualified
debt’’). Debt that was refinanced
through the execution of a new Note
within the two year period would not be
considered Qualified debt under the
current regulations.

E:\FR\FM\07MYR1.SGM

07MYR1