83_FR_19993 83 FR 19905 - Policy on Audits of RUS Borrowers and Grantees

83 FR 19905 - Policy on Audits of RUS Borrowers and Grantees

DEPARTMENT OF AGRICULTURE
Rural Utilities Service

Federal Register Volume 83, Issue 88 (May 7, 2018)

Page Range19905-19915
FR Document2018-09501

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.

Federal Register, Volume 83 Issue 88 (Monday, May 7, 2018)
[Federal Register Volume 83, Number 88 (Monday, May 7, 2018)]
[Rules and Regulations]
[Pages 19905-19915]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-09501]



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Rules and Regulations
                                                Federal Register
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under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 

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

[[Page 19905]]



DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1773

RIN 0572-AC33


Policy on Audits of RUS Borrowers and Grantees

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule with request for comment.

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SUMMARY: 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.
     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/.

FOR FURTHER INFORMATION CONTACT: 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.

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.thefederalregister.org.

Information Collection and Recordkeeping Requirements

    The reporting and recordkeeping requirements contained in this 
final rule have been approved by the Office of

[[Page 19906]]

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.

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 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 Sec.  1773.21. RUS is also adding a requirement to the 
reporting package for a schedule of findings and recommendations in 
Sec.  1773.34.
    Due to the state boards of accountancy having now adopted peer 
review requirements as part of the CPA licensing requirements for 
performing attestation services, this amended rule significantly 
streamlines the RUS peer review monitoring included in Sec.  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,

[[Page 19907]]

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-program-discrimination-complaint-usda-customer 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: [email protected].
    USDA is an equal opportunity provider, employer, and lender.

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.

0
For the reasons set forth in the preamble, RUS revises 7 CFR part 1773 
to read as follows:

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.
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]
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


Sec.  1773.1  General.

    (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 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.


Sec.  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.

[[Page 19908]]

    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 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).

Subpart B--RUS Audit Requirements


Sec.  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 Sec.  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 Sec.  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.

[[Page 19909]]

    (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 Sec.  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.


Sec.  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 Sec.  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 Sec.  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 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 Sec.  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, 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 Sec.  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.


Sec.  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 
Sec.  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

[[Page 19910]]

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.


Sec.  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 Sec.  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;
    (4) That the auditor acknowledges that it is required under Sec.  
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.


Sec.  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 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.


Sec.  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.


Sec.  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;

[[Page 19911]]

    (2) AA-PARA; and
    (3) OIG, as follows:
    (i) For all audits performed in accordance with Sec.  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-OIG-Audit, 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 Sec.  1773.3 
report to the appropriate office based on location. See https://www.usda.gov/oig/national.htm to determine the correct reporting 
location.


Sec.  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.


Sec. Sec.  1773.11-1773.19  [Reserved]

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


Sec.  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 Sec.  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 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''.


Sec.  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 
Sec.  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.


Sec. Sec.  1773.22-1773.29  [Reserved]

Subpart D--RUS Reporting Requirements


Sec.  1773.30   [Reserved]


Sec.  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. 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.


Sec.  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:

[[Page 19912]]

    ``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.


Sec.  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 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 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:

[[Page 19913]]

    (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 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.


Sec.  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 Sec.  1773.4(j).


Sec. Sec.  1773.35-1773.37   [Reserved]

Subpart E--RUS Audit Requirements and Documentation


Sec.  1773.38  Scope of engagement.

    The audit requirements set forth in Sec.  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.


Sec.  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 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

[[Page 19914]]

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;
    (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.


Sec.  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.


Sec.  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.


Sec.  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.


Sec.  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.


Sec.  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

[[Page 19915]]

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.


Sec.  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.


Sec. Sec.  1773.46-1773.48  [Reserved]


Sec.  1773.49   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



                                                                                                                                                                                            19905

                                             Rules and Regulations                                                                                         Federal Register
                                                                                                                                                           Vol. 83, No. 88

                                                                                                                                                           Monday, May 7, 2018



                                             This section of the FEDERAL REGISTER                      • Postal Mail/Commercial Delivery:                  Regulatory Flexibility Act Certification
                                             contains regulatory documents having general            Please send your comments addressed
                                             applicability and legal effect, most of which
                                                                                                                                                              RUS has determined that this final
                                                                                                     to Thomas P. Dickson, Acting Director,                rule will not have significant impact on
                                             are keyed to and codified in the Code of                Program Development and Regulatory
                                             Federal Regulations, which is published under                                                                 a substantial number of small entities
                                                                                                     Analysis, Rural Utilities Service, U.S.               defined in the Regulatory Flexibility Act
                                             50 titles pursuant to 44 U.S.C. 1510.
                                                                                                     Department of Agriculture, 1400                       (5 U.S.C. 601 et seq.). The RUS loan
                                             The Code of Federal Regulations is sold by              Independence Avenue SW, STOP 1522,                    programs provide borrowers with loans
                                             the Superintendent of Documents.                        Room 5164–S, Washington, DC 20250–                    at interest rates and terms that are more
                                                                                                     1522.                                                 favorable than those generally available
                                                                                                       Additional information about Rural                  from the private sector. Borrowers, as a
                                             DEPARTMENT OF AGRICULTURE                               Development and its programs is                       result of obtaining federal financing,
                                             Rural Utilities Service                                 available on the internet at https://                 receive economic benefits that exceed
                                                                                                     www.rd.usda.gov/.                                     any direct cost associated with RUS
                                             7 CFR Part 1773                                         FOR FURTHER INFORMATION CONTACT:                      regulations and requirements.
                                                                                                     William Chris Colberg, Acting Chief,                  National Environmental Policy Act
                                             RIN 0572–AC33
                                                                                                     Technical Accounting and Auditing                     Certification
                                             Policy on Audits of RUS Borrowers                       Staff, Program Accounting Services
                                                                                                     Division, Rural Utilities Service, U.S.                 RUS has determined that this final
                                             and Grantees
                                                                                                     Department of Agriculture, 1400                       rule will not significantly affect the
                                             AGENCY:Rural Utilities Service, USDA.                   Independence Avenue SW, STOP 1523,                    quality of the human environment as
                                                   Final rule with request for
                                             ACTION:                                                 Washington, DC 20250–1523.                            defined by the National Environmental
                                             comment.                                                Telephone: (202) 720–1905.                            Policy Act of 1969 (42 U.S.C. 4321 et
                                                                                                                                                           seq.). Therefore, this action does not
                                             SUMMARY:    The Rural Utilities Service                 SUPPLEMENTARY INFORMATION:
                                                                                                                                                           require an environmental impact
                                             (RUS) is amending its regulations                       Executive Order 12866                                 statement or assessment.
                                             regarding its Policy on Audits to
                                             incorporate 2011 revisions to the                         This final rule has been determined to              Catalog of Federal Domestic Assistance
                                             Generally Accepted Government                           be not significant for the purposes of                   The programs described by this final
                                             Auditing Standards (GAGAS) issued by                    Executive Order 12866 and, therefore,                 rule are listed in the Catalog of Federal
                                             the Government Accountability Office                    has not been reviewed by the Office of                Domestic Assistance under Numbers
                                             (GAO), the clarified audit standards                    Management and Budget (OMB).                          CFDA 10.751, Rural Energy Savings
                                             issued by the American Institute of                     Executive Order 12372                                 Program; CFDA 10.787, Broadband
                                             Certified Public Accountants (AICPA) in                                                                       Initiatives Program; CFDA 10.850, Rural
                                             2011, and Uniform Administrative                          This final rule is excluded from the                Electrification Loans and Loan
                                             Requirements, Cost Principles, and                      scope of Executive Order 12372,                       Guarantees; CFDA 10.851, Rural
                                             Audit Requirements for Federal Awards,                  Intergovernmental Consultation, which                 Telephone Loans and Loan Guarantees;
                                             Subpart F, Audit Requirements, issued                   may require consultation with state and               CFDA 10.855, Distance Learning and
                                             by the Office of Management and                         local officials. See the final rule related           Telemedicine Loans and Grants; CFDA
                                             Budget on December 26, 2013, and                        notice entitled, ‘‘Department Programs                10.857, Bulk Fuel Revolving Fund
                                             adopted by USDA on December 26,                         and Activities Excluded from Executive                Grants; CFDA 10.858, Denali
                                             2014. RUS is also expanding and                         Order 12372’’ (50 FR 47034) advising                  Commission Grants and Loans; CFDA
                                             clarifying its regulations to: include                  that RUS loans and loan guarantees                    10.859, Assistance to High Energy Cost
                                             grant recipients, amend its peer review                 were not covered by Executive Order                   Rural Communities; CFDA 10.861,
                                             requirements, amend its reporting                       12372.                                                Public Television Station Digital
                                             requirements, expand the options for                                                                          Transition Grant Program; and, CFDA
                                             the electronic filing of audits, and                    Executive Order 12988
                                                                                                                                                           10.863, Community Connect Grant
                                             clarify a number of existing audit                        This final rule has been reviewed                   Program. The General Services
                                             requirements, and is amending the title                 under Executive Order 12988, Civil                    Administration (GSA) website at http://
                                             to reflect this change.                                 Justice Reform. RUS has determined                    www.cfda.gov contains a PDF file
                                             DATES: Effective Date: Rule will become                 that this final rule meets the applicable             version of the CFDA catalog. The print
                                             effective on July 6, 2018 and is                        standards provided in section 3 of the                edition of the catalog may be purchased
                                             applicable for financial audits for                     Executive Order. In addition, all state               from the U.S. Government Publishing
                                             periods ending on or after December 15,                 and local laws and regulations that are               Office (GPO) by calling (202) 512–1800
                                             2018.                                                   in conflict with this rule will be                    or toll free at 1–866–512–1800, or by
                                                Comment Date: Comments must be                       preempted, no retroactive effect will be              ordering it online at http://
                                             received by RUS on or before June 6,                    given to this rule, and, in accordance
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                                                                                                                                                           bookstore.gpo.gov.
                                             2018.                                                   with section 212(e) of the Department of
                                                                                                     Agriculture Reorganization Act of 1994                Information Collection and
                                             ADDRESSES: Submit comments by either
                                                                                                     (7 U.S.C. 6912(e)), administrative appeal             Recordkeeping Requirements
                                             of the following methods:
                                                • Federal eRulemaking Portal at                      procedures, if any, must be exhausted                   The reporting and recordkeeping
                                             https://www.regulations.gov/. Follow                    before an action against the Department               requirements contained in this final rule
                                             instructions for submitting comments.                   or its agencies may be initiated.                     have been approved by the Office of


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                                             19906                Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

                                             Management and Budget (OMB) under                       revision to GAGAS incorporates the                    requirements as part of the CPA
                                             OMB Control Number 0572–0095,                           AICPA Statements on Auditing                          licensing requirements for performing
                                             pursuant to the Paperwork Reduction                     Standards. The 2011 revisions to                      attestation services, this amended rule
                                             Act of 1995 (44 U.S.C Chapter 35). This                 GAGAS were effective for financial                    significantly streamlines the RUS peer
                                             final rule contains no new reporting or                 audits for periods ending on or after                 review monitoring included in § 1773.5
                                             recordkeeping burdens under OMB                         December 15, 2012.                                    by removing much of the guidance
                                             Control Number 0572–0095 that would                        The professional standards and                     previously provided with regard to
                                             require approval under the Paperwork                    guidance contained in GAGAS provide                   auditor participation in an approved
                                             Reduction Act.                                          a framework for conducting high quality               peer review program. RUS will no
                                                Send questions or comments                           audits with competence, integrity,                    longer require that all auditors submit
                                             regarding this burden or any other                      objectivity, and independence. These                  copies of their peer review reports but
                                             aspect of these collections of                          standards are used by auditors of                     reserves the right to request said reports
                                             information, including suggestions for                  entities that receive government awards               on a case by case basis. It also removes
                                             reducing the burden, to Thomas P.                       and audit organizations performing                    the option of requesting a waiver of the
                                             Dickson, Acting Director, Program                       GAGAS audits. GAGAS contains                          peer review requirement, relying instead
                                             Development and Regulatory Analysis,                    standards for audits as well as                       on the requirements of the state boards
                                             Rural Utilities Service, U.S. Department                requirements and guidance dealing with                of accountancy and the guidance
                                             of Agriculture, 1400 Independence                       ethics, independence, auditors’                       provided within the peer review
                                             Avenue SW, Stop 1522, Room 5164–S,                      professional judgment and competence,                 programs themselves.
                                             Washington, DC 20250–1522.                              quality control, performance of the                      Due to the scope and pervasiveness of
                                                                                                     audit, and reporting.                                 the revisions being implemented, Part
                                             Unfunded Mandates                                          This rule amends Part 1773 to                      1773 as revised is being published in its
                                               This final rule contains no Federal                   incorporate the clarified audit standards             entirety in this final rule.
                                             mandates (under the regulatory                          issued by the AICPA in October 2011.                     In this revision to Part 1773, all
                                             provision of title II of the Unfunded                   The purpose of redrafting the auditing                sample reports and financial statements
                                             Mandates Reform Act of 1995) for state,                 standards was for clarity and                         will be combined into four appendices
                                             local, and tribal governments or the                    convergence although there were some                  which will be available in RUS Bulletin
                                             private sector. Thus, this final rule is                changes and additions in terms of                     1773–1, Policy on Audits of RUS
                                             not subject to the requirements of                      requirements. The clarified standards                 Borrowers and Grantees. Appendix A of
                                             sections 202 and 205 of the Unfunded                    also introduced new terminology and                   RUS Bulletin 1773–1 contains the
                                             Mandates Reform Act of 1995.                            new audit reports by adding extra                     sample reports, financial statements and
                                                                                                     paragraphs and segregating sections of                schedule of findings and
                                             Comments                                                the report under subheadings.                         recommendations for electric borrowers;
                                               We invite you to participate in this                     In 2013, the Office of Management                  Appendix B contains similar samples
                                             rulemaking by submitting written                        and Budget (OMB) revised uniform                      for telecommunications borrowers;
                                             comments, data, or views before the                     administrative requirements, cost                     Appendix C for broadband borrowers;
                                             noted deadline. We will consider the                    principles, and audit requirements for                and Appendix D contains sample
                                             comments we received and may                            Federal awards by issuing 2 CFR part                  reports for grantees. Appendices A
                                             conduct additional rulemaking based on                  200, which served to consolidate and                  through D will not be printed in the
                                             the comments.                                           replace OMB Circulars A–21, A–87, A–                  Code of Federal Regulations; however,
                                                                                                     89, A–102, A–110, A–122, and A–133.                   these appendices are available at
                                             Background                                              2 CFR part 200 was adopted by USDA                    https://www.regulations.gov/ for review
                                                7 CFR part 1773, Policy on Audits of                 in December 2014. The portion of this                 and comment in conjunction with the
                                             RUS Borrowers and Grantees (Part                        CFR applicable to audits, Subpart F, is               comment period for this final rule. Only
                                             1773), implements the standard RUS                      recognized and adopted by this revision               Subparts A through E will be published
                                             security instrument provision requiring                 to Part 1773.                                         in the Code of Federal Regulations. The
                                             RUS electric and telecommunications                        This rule revises all subparts to                  appendices are included in RUS
                                             borrowers and grantees to prepare and                   encompass grantees, to remove most                    Bulletin 1773–1, Policy on Audits of
                                             furnish to RUS, at least once during                    references to Rural Telephone Bank                    RUS Borrowers and Grantees, which
                                             each 12-month period, a full and                        (RTB), to conform the language used to                contains all of Part 1773, including
                                             complete report of its financial                        generally accepted auditing standards                 subparts A through E and the
                                             condition, operations, and cash flows,                  (GAAS) issued by the AICPA and                        appendices. Publishing Part 1773 in
                                             in form and substance satisfactory to                   GAGAS. This rule adds, changes or                     bulletin form provides the RUS audit
                                             RUS; audited and certified by an                        deletes definitions as appropriate to                 policy in an easy to read format. This
                                             independent audit organization,                         clarify certain existing information.                 publication is available on RUS’ website
                                             satisfactory to RUS, and accompanied                    Perhaps most importantly, this rule                   at https://www.rd.usda.gov/
                                             by a report of such audit, in form and                  replaces the RUS management letter                    publications/regulations-guidelines/
                                             substance satisfactory to RUS. This rule                with a report on compliance with                      rural-utilities-service-audit.
                                             is amended to include coverage of all                   aspects of contractual agreements and
                                             grantees and the title of Part 1773 is                  regulatory requirements based on the                  USDA Non-Discrimination Statement
                                             revised to reflect this change.                         requirements found in AU–C 806 of                        In accordance with Federal civil
                                                This rule amends Part 1773 to                        GAAS. This rule also provides                         rights law and U.S. Department of
                                             incorporate the 2011 revisions to                                                                             Agriculture (USDA) civil rights
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                                                                                                     information on the electronic filing of
                                             GAGAS by the GAO issued in December                     annual audits in § 1773.21. RUS is also               regulations and policies, the USDA, its
                                             2011. The 2011 revision contains major                  adding a requirement to the reporting                 Agencies, offices, and employees, and
                                             changes that reinforce the principles of                package for a schedule of findings and                institutions participating in or
                                             transparency and accountability and                     recommendations in § 1773.34.                         administering USDA programs are
                                             provide the framework for high-quality                     Due to the state boards of accountancy             prohibited from discriminating based on
                                             government audits that add value. This                  having now adopted peer review                        race, color, national origin, religion, sex,


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                                                                  Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations                                           19907

                                             gender identity (including gender                       1773.7 Audit standards.                               Requirements for Federal Awards) (2
                                             expression), sexual orientation,                        1773.8 Audit date.                                    CFR 200.500–200.521).
                                             disability, age, marital status, family/                1773.9 Disclosure of fraud and                           (c) This part further sets forth the
                                                                                                         noncompliance with provisions of laws,
                                             parental status, income derived from                                                                          criteria for selecting auditors
                                                                                                         regulations, contracts, and loan and grant
                                             public assistance programs, political                       agreements.                                       satisfactory to RUS and certain audit
                                             beliefs, or reprisal or retaliation for prior           1773.10 Access to audit-documentation.                procedures and audit documentation
                                             civil rights activity, in any program or                1773.11–1773.19 [Reserved]                            that must be performed and prepared
                                             activity conducted or funded by USDA                                                                          before an audit report will be accepted
                                                                                                     Subpart C—RUS Requirements for the
                                             (not all bases apply to all programs).                  Submission and Review of the Reporting                by RUS.
                                             Remedies and complaint filing                           Package                                                  (d) Failure to provide an audit in
                                             deadlines vary by program or incident.                                                                        compliance with this part is a serious
                                                                                                     1773.20 The auditor’s submission of the
                                                Persons with disabilities who require                    reporting package.
                                                                                                                                                           violation of the RUS Security
                                             alternative means of communication for                  1773.21 Auditee’s review and submission               Agreement. RUS relies on audited
                                             program information (e.g., Braille, large                   of the reporting package.                         financial statements in order to assess
                                             print, audiotape, American Sign                         1773.22–1773.29 [Reserved]                            and monitor the financial condition of
                                             Language, etc.) should contact the                      Subpart D—RUS Reporting Requirements
                                                                                                                                                           its borrowers and grantees and to fulfill
                                             responsible Agency or USDA’s TARGET                                                                           its fiduciary responsibilities.
                                                                                                     1773.30 [Reserved]                                       (e) RUS reserves the right to suspend
                                             Center at (202) 720–2600 (voice and
                                                                                                     1773.31 Auditor’s report on the financial
                                             TTY) or contact USDA through the                            statements.
                                                                                                                                                           its acceptance of audits performed by
                                             Federal Relay Service at (800) 877–8339.                1773.32 Report on internal control over               auditors who, in the opinion of RUS, are
                                             Additionally, program information may                       financial reporting and on compliance             not meeting the requirements of this
                                             be made available in languages other                        and other matters.                                part or with unresolved disputes or
                                             than English.                                           1773.33 Report on compliance with aspects             issues until such time that the matter
                                                To file a program discrimination                         of contractual agreements and regulatory          can be resolved to RUS’ satisfaction.
                                             complaint, complete the USDA Program                        requirements.
                                             Discrimination Complaint Form, AD–                      1773.34 Schedule of findings and                      § 1773.2   Definitions.
                                                                                                         recommendations.                                     As used in this part:
                                             3027, found online at https://                          1773.35–1773.37 [Reserved]
                                             www.ascr.usda.gov/filing-program-                                                                                2 CFR part 200, subpart F means 2
                                             discrimination-complaint-usda-                          Subpart E—RUS Audit Requirements and                  CFR part 200, Uniform Administrative
                                             customer and at any USDA office or                      Documentation                                         Requirements, Cost Principles and
                                             write a letter addressed to USDA and                    1773.38 Scope of engagement.                          Audit Requirements for Federal Awards,
                                             provide in the letter all of the                        1773.39 Utility plant and accumulated                 subpart F, Audit Requirements, as
                                             information requested in the form. To                       depreciation.                                     adopted by USDA in 2 CFR part 400.
                                                                                                     1773.40 Regulatory assets.                               AA–PARA means RUS Assistant
                                             request a copy of the complaint form,                   1773.41 Extraordinary retirement losses.
                                             call (866) 632–9992. Submit your                                                                              Administrator, Program Accounting and
                                                                                                     1773.42 Clearing accounts.                            Regulatory Analysis.
                                             completed form or letter to USDA by:                    1773.43 Capital and equity accounts.
                                                (1) Mail: U.S. Department of                                                                                  Administrator means the
                                                                                                     1773.44 Long-term debt.
                                             Agriculture, Office of the Assistant                    1773.45 Regulatory liabilities.                       Administrator of RUS.
                                             Secretary for Civil Rights, 1400                        1773.46–1773.48 [Reserved]                               Affiliated company means a company
                                             Independence Avenue SW, Washington,                     1773.49 OMB Control Number.                           that directly or indirectly through one or
                                             DC 20250–9410;                                                                                                more intermediaries, control or are
                                                                                                       Authority: 7 U.S.C. 901 et seq., 7 U.S.C.
                                                (2) fax: (202) 690–7442; or                          1921 et seq., 7 U.S.C. 6941 et seq.                   controlled by, or are under common
                                                (3) email: program.intake@usda.gov.                                                                        control with, the auditee.
                                                USDA is an equal opportunity                         Subpart A—General Provisions                             AICPA means the American Institute
                                             provider, employer, and lender.                                                                               of Certified Public Accountants.
                                                                                                     § 1773.1   General.                                      ASC means the Accounting Standards
                                             List of Subjects in 7 CFR Part 1773                        (a) This part implements the                       Codification issued by the Financial
                                               Accounting, Auditing, Electric power,                 standards for audits required by the loan             Accounting Standards Board.
                                             Grants, Loan programs—broadband,                        and grant agreements of Rural Utilities                  Audit means an examination of
                                             Loan programs—communications, Loan                      Service (RUS) electric and                            financial statements by an independent
                                             programs—energy, Reporting and                          telecommunications borrowers and                      auditor for the purpose of expressing an
                                             recordkeeping requirements, Rural                       grantees. The provisions require                      opinion on the fairness with which
                                             areas, Telephone.                                       auditees to prepare and furnish to RUS,               those statements present financial
                                             ■ For the reasons set forth in the                      at least once during each 12-month                    position, results of operations, and
                                             preamble, RUS revises 7 CFR part 1773                   period, a full and complete report of its             changes in cash flows in accordance
                                             to read as follows:                                     financial condition, operations, and                  with accounting principles generally
                                                                                                     cash flows, in form and substance                     accepted in the United States of
                                             PART 1773—POLICY ON AUDITS OF                           satisfactory to RUS, audited and                      America (GAAP) and for determining
                                             RUS BORROWERS AND GRANTEES                              certified by an independent auditor,                  whether the auditee has complied with
                                                                                                     satisfactory to RUS, and accompanied                  applicable laws, regulations, and
                                             Subpart A—General Provisions                            by a report of such audit, in form and                provisions of loan or grant contracts and
                                             Sec.                                                    substance satisfactory to RUS.                        grant agreements that could have a
                                             1773.1 General.                                            (b) This part is based on the
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                                                                                                                                                           material effect on the financial
                                             1773.2 Definitions.                                     requirements of GAGAS in effect at the                statements.
                                             Subpart B—RUS Audit Requirements                        time of the audit and applicable RUS                     Audit date means the ‘‘as of’’ date
                                             1773.3 Annual audit.                                    regulations and subpart F (Audit                      established by the auditee.
                                             1773.4 Auditee’s responsibilities.                      Requirements) of 2 CFR part 200                          Audit documentation has the same
                                             1773.5 Qualifications of an auditor.                    (Uniform Administrative Requirements,                 meaning as defined in the AICPA’s
                                             1773.6 Auditor communication.                           Cost Principles, and Audit                            professional auditing standards.


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                                             19908                Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

                                                Auditee means an RUS borrower and/                   action of a regulator as defined by                   Subpart B—RUS Audit Requirements
                                             or grantee that is required to submit an                FASB.
                                             annual audit as a condition of the                                                                            § 1773.3   Annual audit.
                                                                                                        Related party has the same meaning
                                             award.                                                  as defined by FASB.                                      (a) Each auditee must have its
                                                Auditor means government auditors                       Reporting package means:                           financial statements audited annually
                                             as well as certified public accounting                                                                        by an auditor selected by the auditee
                                                                                                        (1) The auditor’s report on the
                                             firms that perform audits using                                                                               and approved by RUS as set forth in
                                                                                                     financial statements;
                                             generally accepted government auditing                                                                        § 1773.4. All auditees must submit
                                                                                                        (2) The report on internal control over            audited financial statements on a
                                             standards (GAGAS).                                      financial reporting and on compliance
                                                BCAS means Broadband Collection                                                                            comparative basis covering two
                                                                                                     and other matters;                                    consecutive 12 month periods, unless
                                             and Analysis System (or successor
                                                                                                        (3) The report on compliance with                  the entity has not been in existence for
                                             system).
                                                Borrower means an entity that has an                 aspects of contractual agreements and                 two consecutive 12-month audit
                                             outstanding RUS or Federal Financing                    regulatory requirements;                              periods. Consolidated statements of the
                                             Bank (FFB) loan or loan guarantee.                         (4) The schedule of findings and                   parent are not an acceptable
                                                CPA means a Certified Public                         recommendations; and                                  replacement for an audit of the auditee.
                                             Accountant.                                                (5) All supplemental schedules and                    (b) Each auditee must establish an
                                                DCS means the Data Collection                        information required by this part.                    annual audit date within 12 months of
                                             System (or successor system).                              RUS means the Rural Utilities                      the date of the first advance and must
                                                FASB means Financial Accounting                      Service, an agency of the United States               prepare annual financial statements for
                                             Standards Board.                                        Department of Agriculture.                            the audit date established. Each auditee
                                                FFB means the Federal Financing                         RUS Bulletin 1773–1, Policy on                     must notify the AA–PARA of the audit
                                             Bank, a body corporate and                              Audits of RUS Borrowers and Grantees,                 date at least 90 days prior to the selected
                                             instrumentality of the United States of                 is a publication prepared by RUS that                 audit date.
                                             America under the general supervision                   contains the RUS regulation 7 CFR part                   (c) Auditees must furnish a reporting
                                             of the Secretary of the Department of the               1773 and exhibits of sample audit                     package to RUS within 120 days of the
                                             Treasury.                                               reports, financial statements, reports on             audit date. (See § 1773.21). Until all
                                                Fraud has the same meaning as                        internal control over financial reporting             loans made or guaranteed by RUS are
                                             defined in the AICPA’s professional                     and on compliance and other matters,                  repaid and unliquidated obligations
                                             auditing standards.                                     report on compliance with aspects of                  rescinded, auditees that are borrowers
                                                GAAP has the same meaning as                         contractual agreements and regulatory                 must continue to provide annual
                                             defined in accounting standards issued                  requirements, and schedule of findings                audited financial statements. Auditees
                                             by the Government Accounting                            and recommendations used in preparing                 that are grantees must furnish annual
                                             Standards Board (GASB) and the                          audits of RUS borrowers and grantees.                 audited financial statements in the year
                                             Financial Accounting Standards Board                    This bulletin is available on the internet            of the first advance and until all funds
                                             (FASB).                                                 at https://www.rd.usda.gov/                           have been advanced or rescinded, and
                                                GAGAS means generally accepted                       publications/regulations-guidelines/                  all financial compliance requirements
                                             government auditing standards as set                    bulletins/program-accounting.                         have been fully satisfied.
                                             forth in Government Auditing                                                                                     (d) In addition to the requirements of
                                                                                                        RUS security agreement means a loan
                                             Standards, issued by the Comptroller                                                                          this part, certain auditees may be
                                                                                                     agreement, grant agreement, mortgage,
                                             General of the United States,                                                                                 subject to the Single Audit Act. An
                                                                                                     security agreement, or other form of
                                             Government Accountability Office.                                                                             auditee that is defined as a Non-Federal
                                                                                                     agreement that governs the terms and
                                                GAO means the United States                                                                                Entity as defined in 2 CFR 200.69 means
                                                                                                     conditions of, or provides security for,
                                             Government Accountability Office.                                                                             a state, local government, Indian tribe,
                                                                                                     loan and/or grant funds provided by
                                                GASB means Government Accounting                                                                           institution of higher education (IHE), or
                                                                                                     RUS to the auditee.
                                             Standards Board.                                                                                              nonprofit organization that carries out a
                                                                                                        Significant deficiency has the same                Federal award as a recipient or
                                                Governance board means the
                                                                                                     meaning as defined in the AICPA’s                     subrecipient and is required to meet the
                                             auditee’s board of directors, managing
                                                                                                     professional auditing standards.                      requirements of this part as follows:
                                             members, or other official body charged
                                             with governance.                                           Single Audit Act means Single Audit                   (1) Borrowers and/or grantees
                                                Grantee means an entity that has a                   Act of 1984 (31 U.S.C. 7501 et seq.) as               expending the threshold established for
                                             continuing responsibility under a grant                 implemented by 2 CFR part 200, subpart                the Single Audit Act (currently
                                             agreement with RUS.                                     F.                                                    $750,000) or more in Federal awards
                                                Illegal act has the same meaning as                     State means any state or territory of              during the year must have an audit
                                             defined by the Public Company                           the United States, or the District of                 performed in accordance with the
                                             Accounting Oversight Board.                             Columbia.                                             Single Audit Act. See 2 CFR 200.502,
                                                Material weakness has the same                          Uniform System of Accounts means,                  Basis For Determining Federal Awards
                                             meaning as defined in the AICPA’s                       for telecommunications borrowers,                     Expended, for guidance in determining
                                             professional auditing standards.                        Bulletin 1770B–1, Accounting                          annual expenditures. The audited
                                                OIG means the Office of the Inspector                Requirements for RUS                                  financial statements must be submitted
                                             General, United States Department of                    Telecommunications Borrowers (https://                to RUS and to the Federal Audit
                                             Agriculture.                                            www.rd.usda.gov/files/UTP_Bulletins_                  Clearinghouse.
                                                                                                     1770B-1.pdf), and for electric borrowers,                (2) For auditees expending less than
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                                                OMB means The Office of
                                             Management and Budget.                                  as contained in 7 CFR part 1767,                      the threshold for expenditure in Federal
                                                Regulatory asset means an asset                      Accounting Requirements for RUS                       awards during the year, RUS reserves its
                                             resulting from an action of a regulator as              Electric Borrowers, subpart B—Uniform                 right under 2 CFR 200.503, Relationship
                                             defined by FASB.                                        System of Accounts, Bulletin 1767B–1,                 to other audit requirements, to arrange
                                                Regulatory liability means a liability               (https://www.rd.usda.gov/files/UPA_                   for an audit performed in accordance
                                             imposed on a regulated enterprise by an                 Bulletin_1767B-1.pdf).                                with this part.


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                                                                  Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations                                               19909

                                                (3) Within 30 days of the audit date,                the auditee, in writing, if the selection             the auditee must include the original
                                             auditees must notify the AA–PARA, in                    or change in auditor is not satisfactory.             investment, advances, dividends
                                             writing, of the total Federal awards                       (2) Notification to RUS that the same              declared or paid in the current and prior
                                             expended during the year and must                       auditor has been selected for succeeding              years and the net investment. For
                                             state whether the audit will be                         audits of the auditee’s financial                     investments recorded on the equity or
                                             performed in accordance with the                        statements is not required; however, the              consolidated basis, the auditee must
                                             Single Audit Act, or this part.                         procedures outlined in this part must be              include the ownership percentage,
                                                (i) An auditee electing to comply with               followed for each new auditor selected,               original investment, advances,
                                             this part must select an auditor that                   even though such auditor may                          dividends declared or paid in the
                                             meets the qualifications set forth in                   previously have been approved by RUS                  current and prior years, and current and
                                             § 1773.5.                                               to audit records of other RUS auditees.               prior years’ earnings and losses,
                                                (ii) If an audit is performed in                     Changes in the name of an auditor are                 including accumulated losses in excess
                                             accordance with the Single Audit Act,                   considered to be a change in the auditor.             of the original investment.
                                             the auditor’s reporting on the financial                   (d) Audit engagement letter. The                      (h) Scope limitations. The auditee
                                             statements that meet the requirements of                auditee must enter into an audit                      will not limit the scope of the audit to
                                             the Single Audit Act, will be sufficient                agreement with the auditor that                       the extent that the auditor is unable to
                                             to satisfy the auditee’s obligations under              complies with § 1773.6 prior to the                   provide an unqualified opinion that the
                                             this part.                                              initiation of the audit.                              financial statements are presented fairly
                                                (e) Subpart F of 2 CFR part 200 does                    (e) Debarment certification. The                   in conformity with GAAP due to the
                                             not apply to audits of RUS electric and                 auditee must obtain, from the selected                scope limitation.
                                             telecommunications cooperatives and                     auditor, a lower tier covered transaction
                                                                                                                                                              (i) Submission of reporting package.
                                             for-profit telecommunications borrowers                 certification (Form AD–1048,
                                                                                                                                                           The auditee must submit to RUS the
                                             unless the borrower has contractually                   Certification Regarding Debarment,
                                                                                                                                                           required reporting package as set forth
                                             agreed with another Federal agency (e.g.                Suspension, Ineligibility and Voluntary
                                                                                                                                                           in § 1773.21.
                                             Federal Emergency Management                            Exclusion—Lower Tier Covered
                                                                                                     Transactions), as required by Executive                  (1) A reporting package that fails to
                                             Agency) to provide a financial audit                                                                          meet the requirements detailed in this
                                             performed in accordance with 2 CFR                      Orders 12549 and 12689, Debarment
                                                                                                     and Suspension, and any rules or                      part will be returned to the auditee with
                                             part 200, subpart F. In no circumstance                                                                       a written explanation of noncompliance.
                                             will an auditee be required to submit                   regulations issued thereunder.
                                                                                                        (f) Peer review report. The auditee                   (2) The auditee must, within 30 days
                                             separate audits performed in accordance                                                                       of the date of the letter or email
                                             with this part and 2 CFR part 200,                      must obtain, from the selected auditor,
                                                                                                     a copy of the auditor’s current approved              detailing the noncompliance, submit a
                                             subpart F.                                                                                                    corrected reporting package to RUS.
                                                                                                     peer review report.
                                             § 1773.4   Auditee’s responsibilities.                     (g) Preparation of schedules. The                     (3) If a corrected reporting package is
                                                (a) Selection of a qualified auditor.                auditee must prepare any schedules that               not received within 30 days of the date
                                             The auditee’s governance board is                       are required by the auditor to perform                of the letter or email detailing the
                                             responsible for the selection of a                      the audit, including a schedule of                    noncompliance, RUS will take
                                             qualified auditor that meets the                        deferred debits and deferred credits and              appropriate action, depending on the
                                             requirements set forth in § 1773.5. When                a detailed schedule of investments in                 severity of the noncompliance.
                                             selecting an auditor, the auditee should                subsidiary and affiliated companies                      (j) Submission of a plan of corrective
                                             consider, among other matters:                          accounted for on the cost, equity, or                 action. If the auditor’s report contains
                                                (1) The qualifications of auditors                   consolidated basis. The detailed                      findings and recommendations but does
                                             available to do the work;                               schedule of investments can be                        not include the auditee’s response, the
                                                (2) The auditor’s experience in                      included in the notes to the financial                auditee must submit written responses
                                             performing audits of utilities, related                 statements or as a separate schedule as               to RUS within 180 days of the audit
                                             industries, or in the case of grantees,                 long as all information required is                   date. The written responses must
                                             experience in auditing entities                         adequately disclosed. Samples of these                address:
                                             comparable to the grantee; and                          schedules can be found in Appendices                     (1) The corrective action already taken
                                                (3) The auditor’s ability to complete                A–D, of RUS Bulletin 1773–1.                          or planned, or the reason the auditee
                                             the audit and submit the reporting                         (1) The schedule of deferred debits                believes no action is necessary; and
                                             package within 90 days of the audit                     and deferred credits must include a                      (2) The status of corrective action
                                             date.                                                   description of the deferral and a                     taken on previously reported findings
                                                (b) Board approval of selection. The                 notation as to whether the deferral has               and recommendations.
                                             board’s approval of an auditor must be                  received written approval from RUS. If
                                                                                                     a determination is made that prior                    § 1773.5   Qualifications of the auditor.
                                             recorded by a board resolution that
                                             states:                                                 written approval is not required, cite the               Auditors that meet the qualifications
                                                (1) The auditor represents that it                   specific authority for the deferral.                  criteria of this section and enter into an
                                             meets RUS qualifications to perform an                     (2) The schedule of investments must               audit engagement with the auditee that
                                             audit; and                                              include investments in subsidiary and                 complies with § 1773.6, will be
                                                (2) The auditee and auditor will enter               affiliated companies, corporations,                   considered satisfactory to RUS.
                                             into an audit engagement in accordance                  limited liability corporations and                       (a) Licensing. Auditors that audit the
                                             with § 1773.6.                                          partnerships, joint ventures, etc.                    financial statements of an RUS auditee
                                                                                                     accounted for on either the cost, equity              must be licensed to perform attestation
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                                                (c) Notification of selection. When the
                                             initial selection or subsequent change of               or on a consolidated basis. For all                   engagements in the United States of
                                             an auditor has been made, the auditee                   investments, the auditee must list the                America. Auditors do not have to be
                                             must notify the AA–PARA, in writing,                    name of the entity, ownership                         licensed by the state in which the
                                             at least 90 days prior to the audit date.               percentage, and the principal business                auditee is located; however, auditors
                                                (1) Within 30 days of the date of                    in which the entity is engaged. For                   must abide by the rules and regulations
                                             receipt of such notice, RUS will notify                 investments recorded on the cost basis,               of professional conduct promulgated by


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                                             19910                Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

                                             the accountancy board of the state in                      (4) That the auditor acknowledges                  charged with governance should be
                                             which the auditee is located.                           that it is required under § 1773.7 to                 informed.
                                                (b) Independence. Auditors must be                   contact RUS if the auditor is unable to                 (3) After informing the auditee’s
                                             independent as determined by the                        resolve scope limitations imposed by                  management and/or those charged with
                                             standards for independence in the                       the auditee, or if such limitations in                governance, if the scope limitation is
                                             AICPA Code of Professional Conduct                      scope violate this part. Acceptance of                not adequately resolved, the auditor
                                             and in GAGAS in effect at the time of                   the engagement letter by the auditee is               should immediately contact the AA–
                                             the audit.                                              required, thus granting the auditor                   PARA.
                                                (c) Peer review requirement. Auditors                permission to directly notify the AA–
                                             must be enrolled and participating in a                                                                       § 1773.8   Audit date.
                                                                                                     PARA as needed;
                                             peer review program, and must have                         (5) That the auditee and auditor                     (a) The annual audit must be
                                             undergone a satisfactory peer review of                 acknowledge that RUS will consider the                performed as of the end of the same
                                             their accounting and audit practice. The                auditee to be in violation of its RUS                 calendar month each year unless prior
                                             peer review must be in effect at the date               Security Agreement and this part if the               approval to change the audit date is
                                             of the audit report opinion.                            auditee fails to have an audit performed              obtained, in writing, from RUS.
                                                (1) Peer review reports. RUS reserves                and documented in compliance with                       (1) An auditee may request a change
                                             the right to request peer review reports                GAGAS and this part;                                  in the audit date by writing to the AA–
                                             from selected auditors.                                    (6) That the auditor represents that it            PARA at least 60 days prior to the
                                                (2) Peer review requirements for new                 meets the requirements under this part                currently approved audit date,
                                             auditors. New auditing firms must meet                  to perform the audit;                                 providing justification for the change.
                                             the requirements of their state board of                   (7) That the auditor will perform the                (2) The time period between the prior
                                             accountancy with regard to enrolling in                 audit and will prepare the reporting                  audit date and the newly requested
                                             a peer review program, timing of the                    package in accordance with the                        audit date must be no longer than
                                             first peer review, and any other peer                   requirements of this part;                            twenty-three months.
                                             review requirements.                                                                                            (3) Comparative financial statements
                                                                                                        (8) That the auditor will document the
                                                                                                     audit work performed in accordance                    must be prepared and audited for the 12
                                             § 1773.6   Auditor communication.
                                                                                                     with GAGAS, and the requirements of                   months ending as of the new audit date
                                                (a) GAGAS and AICPA standards                                                                              and for the 12 months immediately
                                             require that the auditor communicate                    this part; and
                                                                                                                                                           preceding that period.
                                             with the auditee the auditor’s                             (9) That the auditor will make all
                                             understanding of the services to be                     audit documentation, including the                    § 1773.9 Disclosure of fraud, and
                                             performed and document that                             reporting package available to RUS or its             noncompliance with provisions of laws,
                                             understanding through a written                         representatives (including but not                    regulations, contracts, and loan and grant
                                             communication to those charged with                     limited to OIG and GAO), upon request,                agreements.
                                             governance. To be acceptable to RUS,                    and will permit the photocopying of all                  (a) In accordance with GAGAS, the
                                             the auditor’s communication must take                   such audit documentation.                             auditor is responsible for planning and
                                             the form of an audit engagement letter                     (b) A copy of the audit engagement                 performing the audit to provide
                                             prepared by the auditor and must be                     letter must be available at the auditee’s             reasonable assurance about whether the
                                             formally accepted by the governance                     office for inspection by RUS personnel.               financial statements are free of material
                                             board or an audit committee                             One copy of the current audit                         misstatement due to error or fraud. The
                                             representing the governance board. In                   engagement letter must be maintained                  auditor must also plan the audit to
                                             addition to the requirements of the                     in the auditor’s audit documentation.                 provide reasonable assurance of
                                             AICPA’s professional auditing standards                                                                       detecting material misstatements
                                                                                                     § 1773.7   Audit standards.                           resulting from violations of provisions
                                             and GAGAS, the engagement letter must
                                             also include the following:                               (a) The audit of the financial                      of laws, regulations, contracts or loan
                                                (1) The nature of planned work and                   statements must be performed in                       and grant agreements that could have a
                                             level of assurance to be provided related               accordance with GAGAS and this part                   direct and material effect on the
                                             to internal control over financial                      in effect at the audit date unless the                financial statements.
                                             reporting and compliance with laws,                     auditee is directed otherwise, in writing,               (b) If specific information comes to
                                             regulation, and provision of contracts or               by RUS.                                               the auditor’s attention that provides
                                             grant agreements;                                         (b) The audit of the financial                      evidence concerning the existence of
                                                (2) That the auditee and auditor                     statements must include such tests of                 possible violations of provisions of
                                             acknowledge that the audit is being                     the accounting records and such other                 laws, regulations, contracts or loan and
                                             performed and that the reporting                        auditing procedures that are sufficient               grant agreements that could have a
                                             package is being issued to enable the                   to enable the auditor to express an                   material indirect effect on the financial
                                             auditee to comply with the provisions of                opinion on the financial statements and               statements, the auditor should apply
                                             RUS’s security instrument which                         to issue the required reporting package.              audit procedures specifically directed to
                                             requires compliance with this part;                       (c)(1) The auditee will not limit the               ascertaining whether a violation of
                                                (3) That the auditor acknowledges the                scope of the audit to the extent that the             provisions of laws, regulations, contract
                                             mandatory reporting requirements for                    auditor is unable to meet RUS audit                   or grant agreements has occurred.
                                             fraud, illegal acts, or noncompliance                   requirements without prior written                       (c) Pursuant to the terms of its audit
                                             with provisions of laws, regulations,                   approval of the AA–PARA.                              engagement letter with the auditee, the
                                             contracts, and grant agreements in                        (2) If the auditor determines during                auditor must immediately report, in
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                                             § 1773.9. Acceptance of the engagement                  the audit that an unqualified opinion                 writing, all instances of fraud, illegal
                                             letter by the auditee is required, thus                 cannot be issued due to a scope                       acts, and all indications or instances of
                                             granting the auditor permission to                      limitation imposed by the auditee, the                noncompliance with laws, whether
                                             directly notify the appropriate officials               auditor should use professional                       material or not, to:
                                             which may include but is not limited to                 judgment to determine what levels of                     (1) The president of the auditee’s
                                             the governance board, RUS, and OIG;                     the auditee’s management and/or those                 governance board;


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                                                                  Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations                                            19911

                                               (2) AA–PARA; and                                      with governance must include, but are                 The report must include the manual or
                                               (3) OIG, as follows:                                  not limited to the matters to be                      printed signature of the auditor, cover
                                               (i) For all audits performed in                       communicated as prescribed in the                     all statements presented, and refer to the
                                             accordance with § 1773.3(d) (audits                     AICPA’s professional standards AU–C                   separate report on internal controls over
                                             conducted in accordance with 2 CFR                      Section 260, ‘‘The Auditor’s                          financial reporting and on compliance
                                             part 200 ‘‘Uniform Administrative                       Communication with Those Charged                      and other matters and the report on
                                             Requirements, Cost Principles, and                      with Governance’’.                                    compliance with aspects of contractual
                                             Audit Requirements for Federal                                                                                agreements and regulatory requirements
                                             Awards’’), report to the USDA–OIG-                      § 1773.21 Auditee’s review and                        issued in conjunction with the auditor’s
                                             Audit, National Single Audit                            submission of the reporting package.
                                                                                                                                                           report on the financial statements. The
                                             Coordinator for USDA, 401 W.                               (a) The auditee’s governance board                 auditor’s report on the financial
                                             Peachtree St NW, Room 2328, Atlanta,                    should note and record receipt of the                 statements should also state that the
                                             GA 30308,                                               reporting package and any action taken                report on internal controls over
                                               (ii) For all other audits conducted in                in response to the reporting package in               financial reporting and on compliance
                                             accordance with § 1773.3 report to the                  the minutes of the board meeting at                   and other matters is an integral part of
                                             appropriate office based on location. See               which such reporting package is                       a GAGAS audit, and in considering the
                                             https://www.usda.gov/oig/national.htm                   presented.                                            results of the audit, that this report
                                             to determine the correct reporting                         (b) The auditee must furnish RUS                   should be read along with the auditor’s
                                             location.                                               with an electronic copy of the reporting              report on the financial statements.
                                                                                                     package within 120 days of the audit
                                             § 1773.10   Access to audit documentation.              date as provided for in § 1773.3.                     § 1773.32 Report on internal control over
                                               Pursuant to the terms of this part and                   (c) The auditee must furnish AA–                   financial reporting and on compliance and
                                             the audit engagement letter, the auditor                PARA with a copy of its plan for                      other matters.
                                             must make all audit documentation                       corrective action, if any, within 180                    (a) As required by GAGAS, the
                                             available to RUS, or its designated                     days of the audit date.                               auditor must prepare a written report
                                             representative, upon request and must                      (d) The auditee must include in the                describing the scope of the auditor’s
                                             permit RUS, or its designated                           reporting package a copy of each special              testing of internal control over financial
                                             representative, to photocopy all audit                  report, summary of recommendations or                 reporting and of compliance with
                                             documentation.                                          similar communications, if any,                       provisions of laws, regulations,
                                                                                                     received from the auditor as a result of              contracts, and loan and grant
                                             §§ 1773.11–1773.19      [Reserved]
                                                                                                     the audit.                                            agreements, and that the tests provided
                                             Subpart C—RUS Requirements for the                         (e) All required submissions to RUS                sufficient, appropriate evidence to
                                             Submission and Review of the                            described in paragraphs (b) through (d)               support opinions on the effectiveness of
                                             Reporting Package                                       of this section should be furnished                   internal control and on compliance with
                                                                                                     electronically. The electronic copy must              provisions of laws, regulations,
                                             § 1773.20 The auditor’s submission of the               be provided in a Portable Document                    contracts, and loan and grant
                                             reporting package.                                      Format (PDF). Auditees with a                         agreements. This report must include
                                                (a) Time limit. Within 90 days of the                designation from 0001 through 0199 in                 the manual or printed signature of the
                                             audit date, the auditor must deliver the                the Electric program and 500 through                  auditor and must include the following
                                             reporting package to the auditee’s                      699 in the Telecommunications                         items as appropriate:
                                             governance board. At a minimum,                         programs shall upload the reporting                      (1) Significant deficiencies and
                                             copies should be provided for each                      package to the DCS or its successor                   material weaknesses in internal control;
                                             member of the governance board and                      system. Borrowers and/or grantees with                   (2) Instances of fraud and
                                             the manager. The auditor must also                      a designation from 1100 through 1199,                 noncompliance with provisions of laws
                                             provide an electronic copy of the audit                 1300 through 1399, and 1400 through                   or regulations that have a material effect
                                             which meets the requirements of                         1499 in the Broadband program shall                   on the audit and any other instances
                                             § 1773.21 for subsequent transmittal to                 upload the reporting package to the                   that warrant the attention of those
                                             RUS.                                                    BCAS or its successor system. All other               charged with governance;
                                                (b) Communication with the                           borrowers and/or grantees may upload                     (3) Noncompliance with provisions of
                                             governance board. In addition to                        their reporting package through DCS or                contracts or grant agreements that have
                                             providing sufficient copies of the                      its successor system. Specific                        a material effect on the audit; and
                                             reporting package for each member of                    instructions for submission are available                (4) Abuse that has a material effect on
                                             the auditee’s governance board, RUS                     from the Technical Accounting and                     the audit.
                                             requires that the auditor report all audit              Auditing Staff.                                          (b) When the auditor detects instances
                                             findings to the auditee’s governance                                                                          of noncompliance or abuse that have an
                                             board. RUS recommends that audit                        §§ 1773.22–1773.29       [Reserved]                   effect on the financial statements that
                                             findings also be communicated orally                                                                          are less than material but warrant the
                                             unless oral communication would not                     Subpart D—RUS Reporting                               attention of those charged with
                                             be adequate. If the information is                      Requirements                                          governance, they should communicate
                                             communicated orally, the auditor must                   § 1773.30    [Reserved]                               those findings in writing to those
                                             document the communication by                                                                                 charged with governance in a separate
                                             appropriate memoranda or notations in                   § 1773.31 Auditor’s report on the financial           communication. If the auditor has
                                                                                                     statements.                                           issued a separate communication
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                                             the audit documentation. If the auditor
                                             communicates in writing, a copy of the                    The auditor must prepare a written                  detailing immaterial instances of
                                             written communication must be                           report on comparative balance sheets,                 noncompliance or abuse, the report on
                                             included in the auditor’s audit                         statements of revenue and patronage                   internal controls over financial
                                             documentation.                                          capital (or statement of operations                   reporting and on compliance and other
                                                (c) Matters to be communicated.                      customary to the type of entity                       matters must be modified to include a
                                             Matters communicated to those charged                   reporting) and statements of cash flows.              statement such as:


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                                             19912                Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

                                                ‘‘We noted certain immaterial                        on such completed construction from                   recent December 31 Financial and
                                             instances of noncompliance [and/or                      the date the plant was placed in service;             Operating Report Electric Distribution
                                             abuse], which we have reported to the                      (3) Currently and systematically                   or Financial and Operating Report
                                             management of (auditee’s name) in a                     record and properly price retirements of              Electric Power Supply was not in
                                             separate letter dated (month, day,                      plant;                                                agreement with the auditee’s audited
                                             20XX).’’                                                   (4) Properly account for the                       records. If the auditee represents that an
                                                (c) If the auditor has issued a separate             accumulated provision for depreciation                amended report has been filed as of
                                             letter to management to communicate                     accounts associated with retirements of               December 31, the comments must relate
                                             other matters involving the design and                  plant or properly disclose any unusual                to the amended report; and
                                             operation of the internal control over                  charges or credits to such accounts; and                 (iii) The requirement for an auditee to
                                             financial reporting, the report on                         (5) Obtain RUS approval for the sale,              use depreciation rates that are within
                                             internal controls over financial                        lease or transfer of capital assets secured           the ranges established by RUS for each
                                             reporting and on compliance and other                   under the RUS security agreement when                 primary plant account (See RUS
                                             matters must be modified to include a                   approval is required, and properly                    Bulletin 183–1, Depreciation Rates and
                                             statement such as:                                      handle any proceeds from the sale or                  Procedures at https://www.rd.usda.gov/
                                                ‘‘However, we noted other matters                    lease of plant, material or scrap in                  files/UPA_Bulletin_183-1.pdf), or with
                                             involving the internal control over                     conformance with RUS requirements.                    the requirements of the state regulatory
                                             financial reporting that we have                           (d) Materials control. Comment on                  body having jurisdiction over the
                                             reported to the management of                           whether, during the course of the audit,              auditee’s depreciation rates in
                                             (auditee’s name) in a separate letter                   anything came to the auditor’s attention              computing monthly accruals.
                                             dated (month, day, 20XX).’’                             to indicate that the control over                        (2) For telecommunications auditees,
                                                (d) The report must contain the status               materials and supplies was not                        provisions related to:
                                             of known but uncorrected deficiencies                   adequate.                                                (i) The requirement for an auditee to
                                             from prior audits that affect the current                  (e) Compliance with RUS loan and
                                                                                                                                                           obtain written approval of the
                                             audit objective.                                        security instrument provisions.
                                                                                                                                                           mortgagees to enter into any contract,
                                                                                                     Comment on whether, during the course
                                             § 1773.33 Report on compliance with                                                                           agreement or lease between the auditee
                                                                                                     of the audit, anything came to the
                                             aspects of contractual agreements and                                                                         and an affiliate other than as allowed
                                                                                                     auditor’s attention to indicate that the
                                             regulatory requirements.                                                                                      under 7 CFR part 1744, subpart E; and
                                                                                                     following provisions of RUS’ loan and
                                                The auditor must prepare a report on                                                                          (ii) The requirement for an auditee to
                                                                                                     security instruments have not been
                                             compliance with aspects of contractual                                                                        prepare and furnish mortgagees annual
                                                                                                     complied with:
                                             agreements and regulatory requirements                     (1) For electric auditees, provisions              or periodic financial and operating
                                             that includes, at a minimum, comments                   related to:                                           reports on the auditee’s financial
                                             on:                                                        (i) The requirements for an auditee to             condition and operations accurately and
                                                (a) Audit procedures. State whether                  obtain written approval of mortgagees to              within the required deadlines. The
                                             the audit has been performed in                         enter into any contract for the                       auditor shall comment on whether,
                                             accordance with this part;                              management, operation, or maintenance                 during the course of the audit, anything
                                                (b) Special reports. State whether any               of the auditee’s system if the contract               came to the auditor’s attention to
                                             special reports, summaries of                           covers all or substantially all of the                indicate that the information
                                             recommendations, or similar                             electric system. For purposes of this                 represented by the auditee as having
                                             communications were furnished to the                    part, the following contracts shall be                been submitted to RUS in its most
                                             auditee’s management during the course                  deemed as requiring RUS approval:                     recent December 31 Operating Report
                                             of the audit or during interim audit                       (A) Management contracts in which                  for Telecommunications Borrowers was
                                             work, and provide a description of the                  the auditee has contracted to have                    not in agreement with the auditee’s
                                             information furnished;                                  another auditee or other entity manage                audited records. If the auditee
                                                (c) Accounting and records. Comment                  its affairs;                                          represents that an amended report has
                                             on whether, during the course of the                       (B) Operations and maintenance                     been filed as of December 31, the
                                             audit, anything came to the auditor’s                   contracts in which the auditee has                    comments must be related to the
                                             attention to indicate that the auditee did              contracted to have another auditee or                 amended report.
                                             not maintain adequate and effective                     other entity operate and/or maintain all                 (3) For Broadband auditees,
                                             accounting procedures and records and                   or substantially all of the physical plant            provisions relating to the requirement
                                             utilize adequate and fair methods for                   facilities of the auditee.                            for an auditee to prepare and furnish
                                             accumulating and recording labor,                          (C) Operations and maintenance                     mortgagee quarterly or periodic
                                             material, and overhead costs, and for                   contracts in which the auditee has                    financial and operating reports on the
                                             distributing these costs to construction,               contracted to operate and maintain the                auditee’s financial condition and
                                             retirement, and maintenance or other                    physical plant facilities of another                  operations accurately and within the
                                             expense accounts. Where appropriate,                    auditee or other utility system;                      required deadlines. The auditor shall
                                             comment on whether anything came to                        (ii) The requirement for an auditee to             comment on whether, during the course
                                             the auditor’s attention to indicate that                prepare and furnish mortgagees annual                 of the audit, anything came to the
                                             the auditee did not:                                    or periodic financial and operating                   auditor’s attention to indicate that the
                                                (1) Establish continuing property                    reports on the auditee’s financial                    information represented by the auditee
                                             records (CPRs) that are updated on a                    condition and operations accurately and               as having been submitted to RUS in its
                                                                                                     within the required deadlines. The                    most recent BCAS filing was not in
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                                             current basis, at least annually, and are
                                             reconciled with the controlling general                 auditor shall comment on whether,                     agreement with the auditee’s audited
                                             ledger plant accounts;                                  during the course of the audit, anything              records. If the auditee represents that an
                                                (2) Promptly clear construction                      came to the auditor’s attention to                    amended report has been filed, the
                                             clearing accounts of costs of completed                 indicate that the information                         comments must be related to the
                                             construction to the proper classified                   represented by the auditee as having                  amended report.
                                             plant accounts and accrue depreciation                  been submitted to RUS in its most                        (4) For grantees, provisions related to:


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                                                                  Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations                                          19913

                                                (i) Recipients of Broadband Initiatives              attention to indicate that the auditee                Accounts or the Federal Acquisitions
                                             Program loans and grants, the                           provided detailed schedule of                         Regulations as required under the RUS
                                             requirement for the recipient to prepare                investments is not accurately presented.              Security Agreement;
                                             and furnish RUS quarterly and annual                    This schedule must be included as                        (3) Reviewed the costs of completed
                                             financial and operating reports on the                  supplemental information or within the                construction and retirement projects to
                                             financial condition and operations of                   notes to the financial statements. The                determine if they were cleared promptly
                                             the auditee accurately and within the                   auditor must state that the audit did not             from the work in progress accounts to
                                             required deadlines. The auditor shall                   disclose any investments in subsidiary                the classified plant in service accounts
                                             comment on whether, during the course                   or affiliated companies.                              and the related depreciation accounts;
                                             of the audit, anything came to the                                                                               (4) Examined direct purchases of
                                             auditor’s attention to indicate that the                § 1773.34 Schedule of findings and                    special equipment and general plant;
                                             information represented by the auditee                  recommendations.                                         (5) Determined the degree of accuracy
                                             as having been submitted to RUS in its                     The auditor must prepare a schedule                and control of costing retirements,
                                             most recent BCAS filing was not in                      of findings and recommendations to be                 including tests of salvage and removal
                                             agreement with the audited records of                   included with the audited financial                   costs;
                                             the auditee. If the auditee represents                  statements. The schedule of findings                     (6) Reviewed the auditee’s work order
                                             that an amended report has been filed,                  and recommendations shall be                          procedures; and
                                             the comments must relate to the                         developed and presented utilizing the                    (7) Reviewed depreciation rates for
                                             amended report. The auditor must state                  elements of a finding discussed in                    adequate support, and compared them
                                             whether the Annual Compliance                           GAGAS and shall include                               to RUS guidelines to determine that
                                             Certificate required by the RUS Security                recommendations for remediation. If the               they were in compliance.
                                             Agreement has been filed in a timely                    schedule does not include responses                      (b) Construction work in progress. (1)
                                             manner with RUS.                                        from management, as well as any                       The audit documentation shall include
                                                (ii) Recipients of all other grant                   planned corrective actions, those items               a summary of open work orders
                                             programs within the electric and                        must be submitted directly to the AA–                 reconciled to the general ledger and
                                             telecommunications programs, the                        PARA by management in accordance                      note on the summary any unusual or
                                             requirements to prepare and furnish                     with § 1773.4(j).                                     atypical projects.
                                             RUS with any required financial                                                                                  (2) The auditor’s audit documentation
                                                                                                     §§ 1773.35–1773.37       [Reserved]
                                             reporting accurately and within                                                                               shall support that the auditor:
                                             required deadlines, as appropriate for                  Subpart E—RUS Audit Requirements                         (i) Reviewed equipment purchases
                                             that specific program. The auditor shall                and Documentation                                     charged to work orders, including
                                             comment on whether, during the course                                                                         payments and receiving reports;
                                             of the audit, anything came to the                      § 1773.38    Scope of engagement.                        (ii) Reviewed contracts showing the
                                             auditor’s attention to indicate that the                   The audit requirements set forth in                scope of the work, the nature of the
                                             information represented by the grantee                  § 1773.39 through 1773.45 must be met                 contract, the contract amount, and
                                             as having been submitted to RUS in its                  annually by the auditor during the audit              scheduled payments and reviewed
                                             most recent filing was not in agreement                 of the RUS auditee’s financial                        supporting documents to determine that
                                             with the audited records of the grantee.                statements. The auditor must exercise                 services contracted for were in fact
                                             If the grantee represents that an                       professional judgment in determining                  rendered;
                                             amended report has been filed, the                      whether any auditing procedures in                       (iii) Reviewed time cards and pay
                                             comments must relate to the amended                     addition to those mandated by GAGAS                   rates for a sample of employees who
                                             report.                                                 or this part should be performed on the               allocate their time to work orders;
                                                (f) Related party transactions.                      auditee’s financial records in order to                  (iv) Reviewed the nature of material
                                             Comment on whether, during the course                   afford a reasonable basis for rendering               and supplies issued to the project,
                                             of the audit, anything came to the                      the auditor’s report on the financial                 traced amounts and quantities to
                                             attention of the auditor to indicate that               statements, report on internal controls               supporting documents, and reviewed
                                             all material related party transactions                 over financial reporting and on                       the reasonableness of clearing rates for
                                             have not been disclosed in the notes to                 compliance and other matters, report on               assignment of stores expense to the
                                             the financial statements in accordance                  compliance with aspects of contractual                work order;
                                             with ASC 850, entitled ‘‘Related Party                  agreements and regulatory                                (v) Reviewed the accuracy of the
                                             Disclosures’’.                                          requirements, and schedule of findings                computation of overheads applied to the
                                                (g) Deferred debits and deferred                                                                           work order; and
                                                                                                     and recommendations.
                                             credits. For electric auditees, comment                                                                          (vi) Reviewed other costs charged to
                                             on whether, during the course of the                    § 1773.39 Utility plant and accumulated               the work order for support and
                                             audit anything came to the attention of                 depreciation.                                         propriety.
                                             the auditor to indicate that the auditee                  (a) General. The audit of these                        (3) The auditor’s audit documentation
                                             provided detailed schedule of deferred                  accounts shall include tests of                       shall support that the auditor:
                                             debits and deferred credits, including,                 additions, replacements, retirements,                    (i) Scheduled payments to contractors
                                             but not limited to, margin stabilization                and changes. The auditor’s audit                      and traced to verify payments and
                                             plans, revenue deferral plans, and                      documentation shall support that the                  supporting invoices;
                                             expense deferrals is not accurately                     auditor:                                                 (ii) Traced contract costs to final
                                             presented. This schedule must be                          (1) Examined direct labor and                       closeout documents, to the general
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                                             included as supplemental information                    material transactions to determine                    ledger, and to the continuing property
                                             or within the notes to the financial                    whether the auditee’s accounting                      records; and
                                             statements; and                                         records reflect a complete accumulation                  (iii) Verified the costs of owner
                                                (h) Investments. For electric and                    of costs;                                             furnished materials, if applicable.
                                             telecommunications auditees, comment                      (2) Examined indirect costs and                        (4) The auditor shall review the
                                             on whether, during the course of the                    overhead charges to determine if they                 auditee’s procedures for unitization and
                                             audit, anything came to the auditor’s                   conform to the Uniform System of                      classification of work order and contract


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                                             19914                Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations

                                             costs. The auditor’s audit                                (3) Reviewed salvage and removal                    § 1773.43   Capital and equity accounts.
                                             documentation shall support that the                    costs; and                                               (a) Capital stock. For privately owned
                                             auditor:                                                  (4) Searched for unrecorded                         companies, the audit documentation
                                               (i) Reviewed the tabulation of record                 retirements.                                          shall include analyses of all stock
                                             units for construction from the work                      (f) Other reserves. The auditor’s audit             transactions during the audit period.
                                             order staking sheets to the tabulation of               documentation shall include an account                The auditor’s audit documentation shall
                                             record units, to the unitization sheets,                analysis for all other material plant                 support that the auditor:
                                             and to the continuing property records;                 reserves, such as the reserve for the                    (1) Reviewed the subsidiary records
                                               (ii) Reviewed the procedures for                      amortization of plant acquisition                     and reconciled them to the general
                                             unitizing and distributing costs of                     adjustments. The auditor’s audit                      ledger control account;
                                             completed construction to the plant                     documentation shall support that                         (2) Reviewed authorizations and
                                             accounts;                                               appropriate tests of transactions were                issuances or redemptions of capital
                                               (iii) Verified that standard costs were               performed.                                            stock for proper approvals by the
                                             being used;                                                                                                   governance board, stockholders,
                                               (iv) Evaluated the basis for                            (g) Narrative. The auditor shall
                                                                                                     include in the audit documentation a                  regulatory commissions and RUS, as
                                             development of standard costs; and                                                                            required;
                                               (v) Determined that costs of                          comprehensive narrative on the scope of
                                                                                                     work performed, observations made,                       (3) Determined that transactions were
                                             completed construction were cleared                                                                           made in accordance with the
                                             promptly from work in progress                          and conclusions reached. Matters
                                                                                                     covered in this narrative shall include:              appropriate provisions of the articles of
                                             accounts.                                                                                                     incorporation, bylaws, and RUS loan
                                               (c) Continuing property records. The                    (1) The nature of construction and
                                                                                                     other additions;                                      documents; and
                                             auditor’s audit documentation shall
                                                                                                       (2) The control over, and the accuracy                 (4) Determined that transactions were
                                             support that the auditor:
                                               (1) Determined whether the                            of pricing retirements;                               recorded in accordance with the
                                             subsidiary plant records agree with the                   (3) The accuracy of distributing costs              Uniform System of Accounts.
                                                                                                                                                              (b) Memberships. For cooperative
                                             controlling general ledger plant                        to classified utility plant accounts;
                                             accounts;                                                                                                     organizations, the audit documentation
                                                                                                       (4) An evaluation of the method of:
                                               (2) Noted differences in the audit                                                                          shall include an analysis of the
                                                                                                       (i) Capitalizing the direct loadings on             membership transactions during the
                                             documentation; and                                      labor and material costs;
                                               (3) Commented, in the report on                                                                             audit period. The auditor’s audit
                                                                                                       (ii) Distributing transportation costs              documentation shall support that the
                                             compliance with aspects of contractual                  and other expense clearing accounts;
                                             agreements and regulatory                                                                                     auditor:
                                                                                                     and                                                      (1) Reviewed the subsidiary records
                                             requirements, on any discrepancies.                       (iii) Capitalizing overhead costs;
                                               (d) Retirement work-in-progress. The                                                                        and reconciled them to the general
                                             auditor’s audit documentation shall                       (5) The tests of depreciation;                      ledger control account; and
                                             support that the auditor:                                 (6) A review of agreements such as                     (2) Determined that transactions were
                                               (1) Determined that plant retirements                 those relating to acquisitions, property              made in accordance with the
                                             are currently and systematically                        sales, and leases which affect the plant              appropriate provisions of the articles of
                                             recorded and priced on the basis of the                 accounts; and                                         incorporation, bylaws, and RUS loan
                                             continuing property records, and                          (7) Notations, if applicable, of RUS                documents.
                                             determined that costs of removal have                   approval of property sales and the                       (c) Patronage capital, retained
                                             been properly accounted for;                            propriety of the disposition of the                   earnings, margins, and other equities.
                                               (2) Explained the method used in                      proceeds.                                             The audit documentation shall include
                                             computing the cost of units of plant                                                                          an analysis of the patronage capital,
                                                                                                     § 1773.40    Regulatory assets.                       retained earnings, margins and other
                                             retired if continuing property records
                                             have not been established and                              The auditor’s audit documentation                  equities, and any related reserve
                                             determined whether costs appeared                       shall support that the auditor tested                 accounts. The auditor’s audit
                                             reasonable; and                                         whether all regulatory assets comply                  documentation shall support that the
                                               (3) Determined the manner in which                    with the requirements of ASC 980. For                 auditor:
                                             net losses due to retirements were                      Electric auditees only, the auditor’s                    (1) Determined that the transactions
                                             accounted for and traced clearing                       audit documentation shall support that                were made in accordance with the
                                             entries to the depreciation reserve, the                all regulatory assets have received RUS               appropriate provisions of the articles of
                                             plant accounts, and the continuing                      approval.                                             incorporation, bylaws, RUS loan
                                             property records.                                                                                             documents, Uniform System of
                                               (e) Provision for accumulated                         § 1773.41    Extraordinary retirement losses.
                                                                                                                                                           Accounts, or orders of regulatory
                                             depreciation. The auditor’s audit                         The auditor’s audit documentation                   commissions;
                                             documentation shall support that the                    shall support that the auditor tested                    (2) Traced payments to underlying
                                             auditor:                                                retirement losses, including any                      support; and
                                               (1) Verified the depreciation accruals                required approval by a regulatory                        (3) Determined whether, under the
                                             for the period, including the                           commission with jurisdiction in the                   terms of the RUS security instrument,
                                             depreciation base;                                      matter, or RUS, in the absence of                     restrictions of retained earnings or
                                               (2) Reviewed the basis of the                         commission jurisdiction.                              margins are required and, if so, whether
                                             depreciation rates, any change in rates                                                                       they have been properly recorded.
                                                                                                     § 1773.42    Clearing accounts.
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                                             and the reason for the change, and, if
                                             appropriate, determined whether the                       The auditor’s audit documentation                   § 1773.44   Long-term debt.
                                             rates are in compliance with RUS                        shall support that the auditor tested all               The auditor’s audit documentation
                                             requirements or with the requirements                   clearing accounts and that transactions               shall support that the auditor:
                                             of the state regulatory body having                     selected for testing were reviewed for                  (a) Confirmed RUS, FFB, and RTB
                                             jurisdiction over the auditee’s                         proper allocation between expense and                 debt to the appropriate confirmation
                                             depreciation rates;                                     capital accounts.                                     schedule (RUS Form 690, Confirmation


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                                                                  Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Rules and Regulations                                           19915

                                             Schedule Obligation to the FFB; Form                    I. Background Information                             Loan Program during the previous fiscal
                                             614, Confirmation Schedule—Long-term                       The 504 Loan Program is an SBA                     year. The 2016 Act provides that this
                                             Obligation to RUS; or, Confirmation                     financing program authorized under                    limitation may be waived by SBA upon
                                             Schedule for RTB Debt);                                 Title V of the Small Business                         application by a CDC and after
                                               (b) Confirmed other long-term debt                    Investment Act of 1958 (the ‘‘SBIAct’’),              determining that the refinance loan is
                                             directly with the lender;                               15 U.S.C. 695 et seq. The core mission                needed for good cause; and
                                               (c) Examined notes executed or                                                                                 (3) The alternate job retention goal
                                                                                                     of the 504 Loan Program is to provide
                                             cancelled during the audit period; and                                                                        authorized by the Jobs Act for the Debt
                                                                                                     long-term financing to small businesses
                                               (d) Tested accrued interest                                                                                 Refinancing Program is eliminated.
                                                                                                     for the purchase or improvement of                       On May 25, 2016, SBA published an
                                             computations.
                                                                                                     land, buildings, and major equipment,                 interim final rule to implement the 2016
                                             § 1773.45   Regulatory liabilities.                     in an effort to facilitate the creation or            Act (81 FR 33123) and, with the ‘‘zero
                                                The auditor’s audit documentation                    retention of jobs and local economic                  cost’’ requirement satisfied for fiscal
                                             shall support that all regulatory                       development. Under the 504 Loan                       year 2016, SBA began accepting
                                             liabilities comply with the requirements                Program, loans are made to small                      applications for assistance under the
                                             of ASC 980. For electric auditees only,                 business applicants by Certified                      Debt Refinancing Program on June 25,
                                             the auditor’s audit documentation shall                 Development Companies (‘‘CDCs’’),                     2016, the effective date of the interim
                                             document whether all regulatory                         which are certified and regulated by                  final rule. With the ‘‘zero cost’’
                                             liabilities have received RUS approval.                 SBA to promote economic development                   requirement satisfied for fiscal years
                                                                                                     within their community. In general, a                 2017 and 2018, the Debt Refinancing
                                             §§ 1773.46–1773.48      [Reserved]                      project in the 504 Loan Program (a ‘‘504              Program has continued to be in effect
                                                                                                     Project’’) includes: A loan obtained from             without interruption. The regulations
                                             § 1773.49   OMB Control Number.
                                                                                                     a private sector lender with a senior lien            governing this program are found at 13
                                               The information collection                            covering at least 50 percent of the
                                             requirements in this part are approved                                                                        CFR 120.882(g).
                                                                                                     project cost; a loan obtained from a CDC
                                             by the Office of Management and                         (a ‘‘504 Loan’’) with a junior lien                   II. Summary of Comments Received
                                             Budget (OMB) and assigned the OMB                       covering up to 40 percent of the total                   SBA received 49 comments during the
                                             Control Number 0572–0095.                               cost (backed by a 100 percent SBA-                    comment period for the interim final
                                               Date: April 30, 2018.                                 guaranteed debenture); and a                          rule, which closed on July 25, 2016. Of
                                             Kenneth L. Johnson,                                     contribution from the Borrower of at                  the comments received, 44, or 90%,
                                             Administrator, Rural Utilities Service.                 least 10 percent equity.                              were from Certified Development
                                             [FR Doc. 2018–09501 Filed 5–4–18; 8:45 am]                 The Small Business Jobs Act of 2010                Companies, one was from a trade
                                             BILLING CODE P
                                                                                                     (the ‘‘Jobs Act’’), Public Law 111–240,               association, one was from a law firm,
                                                                                                     124 Stat. 2504, enacted on September                  one was from a commercial real estate
                                                                                                     27, 2010, temporarily expanded the                    broker, one was from a financial
                                                                                                     ability of a small business to use the 504            institution, and one was from a private
                                             SMALL BUSINESS ADMINISTRATION
                                                                                                     Loan Program to refinance certain                     citizen. Below is a summary of the
                                             13 CFR Part 120                                         qualifying debt. Prior to the Jobs Act, a             comments received.
                                                                                                     504 Project could include a refinancing
                                             RIN 3245–AG79                                           component only if the project involved                A. Definition of Qualified Debt—Section
                                                                                                     an expansion of the small business and                120.882(g)(15)
                                             Debt Refinancing in 504 Loan Program                                                                             The Jobs Act authorizes the
                                                                                                     the existing indebtedness did not
                                             AGENCY:  U.S. Small Business                            exceed 50% of the project cost of the                 refinancing of ‘‘Qualified Debt’’ which
                                             Administration.                                         expansion. See 13 CFR 120.882(e). The                 is defined to mean, among other factors,
                                             ACTION: Final rule.                                     temporary Jobs Act program authorized                 ‘‘indebtedness’’ that ‘‘was incurred not
                                                                                                     the use of the 504 Loan Program for the               less than 2 years before the date of the
                                             SUMMARY:    This rule finalizes the interim             refinancing of debt where there is no                 application for assistance’’, that ‘‘is a
                                             final rule (IFR) that was published on                  expansion of the small business concern               commercial loan’’, and the proceeds of
                                             May 25, 2016, to implement the debt                     (the ‘‘Debt Refinancing Program’’). That              which were used to acquire an Eligible
                                             refinancing program reauthorized by                     program expired on September 27, 2012.                Fixed Asset. See section
                                             Section 521 of Division E of the                           Section 521 of Division E of the                   502(7)(C)(III)(aa)(AA), (BB), and (DD) of
                                             Consolidated Appropriations Act, 2016.                  Consolidated Appropriations Act, 2016                 the SBIAct. In imposing the two-year
                                             In response to comments received on                     (the ‘‘2016 Act’’), Public Law 114–113,               requirement, Congress clearly did not
                                             the IFR, this final rule makes some                     enacted on December 22, 2015,                         want the Debt Refinancing Program to
                                             additional revisions to the program’s                   reauthorized the Debt Refinancing                     apply to new loans (i.e., loans less than
                                             regulations with respect to the                         Program with three modifications:                     two years old). In implementing this
                                             definition of Qualified debt, the                          (1) The Debt Refinancing Program                   statutory requirement, the current
                                             requirements related to Eligible                        shall be in effect only in those fiscal               regulations define ‘‘Qualified debt’’, in
                                             Business Expenses, the refinancing of                   years during which the cost to the                    part, as a ‘‘commercial loan . . . [t]hat
                                             Projects involving single or limited use                Federal Government of making                          was incurred not less than 2 years
                                             properties, and the disbursement                        guarantees under the Debt Refinancing                 before the date of the application for the
                                             period.                                                 Program and under the 504 Loan                        refinancing available under [the 504
                                                                                                                                                           Debt Refinancing Program]’’. See 13 CFR
daltland on DSKBBV9HB2PROD with RULES




                                             DATES:   This rule is effective June 6,                 Program is zero;
                                                                                                        (2) A CDC is required to limit its                 120.882(g)(15) (definition of ‘‘Qualified
                                             2018.
                                                                                                     financings under the 504 Loan Program                 debt’’). Debt that was refinanced
                                             FOR FURTHER INFORMATION CONTACT:                        so that, during any fiscal year, new                  through the execution of a new Note
                                             Linda Reilly, 504 Program Chief at                      financings under the Debt Refinancing                 within the two year period would not be
                                             linda.reilly@sba.gov or 202–205–9949.                   Program do not exceed 50% of the                      considered Qualified debt under the
                                             SUPPLEMENTARY INFORMATION:                              dollars the CDC loaned under the 504                  current regulations.


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Document Created: 2018-05-05 02:48:49
Document Modified: 2018-05-05 02:48:49
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionRules and Regulations
ActionFinal rule with request for comment.
DatesEffective Date: Rule will become effective on July 6, 2018 and is applicable for financial audits for periods ending on or after December 15, 2018.
ContactWilliam 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.
FR Citation83 FR 19905 
RIN Number0572-AC33
CFR AssociatedAccounting; Auditing; Electric Power; Grants; Loan Programs-Broadband; Loan Programs-Communications; Loan Programs-Energy; Reporting and Recordkeeping Requirements; Rural Areas and Telephone

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