The 12 Areas of Federal Grant Compliance

Blog
May 22, 2018

When designing or improving your organization’s internal controls over federal grant compliance, it’s helpful to always have an auditor’s perspective. Understanding what your auditor is looking for in a Single Audit can help you develop better processes.

The Compliance Supplement, or “The Supplement,” is a yearly publication by the Office of Management and Budget that provides guidance to auditors conducting Single Audits under Uniform Guidance. The Supplement states, “As a condition of receiving federal awards, non-federal entities agree to comply with laws regulation, and the provisions of grant agreements and contracts, and to maintain internal control to provide reasonable assurance of compliance with these requirements.”

Section 3.1 of the Supplement addresses 12 areas of compliance and the related audit objectives that the auditor must consider, as applicable, in performing a Single Audit. An organization with federal grants needs to ensure that there are sufficient internal controls in each of these areas:

  1. Activities Allowed or Unallowed – Activities charged to a federal grant must be reasonable for the performance of the award and conform to any limitations or exclusions noted in the award. Activities must also conform to generally accepted accounting principles (GAAP) and be adequately documented. Poor or lacking documentation can lead to questioned costs.
  2. Allowable Costs & Cost Principles – Both direct and indirect costs must be reasonable for the performance of the award, conform to any limitations or exclusions noted in the award, conform to GAAP, and be adequately documented. Cost principles are detailed in OMB Circular A-110 or 2 CFR part 215.27. Allowability of costs is detailed in OMB Circular A-122 or 2 CFR part 230. The organization needs to have policies and procedures in place that would prevent an unallowable cost from being charged through to the federal grant.
  3. Cash Management – Organizations that are recipients of federal funding must minimize the time federal funds are held in advances. Many grants are cost-reimbursement only, requiring the organization to spend money upfront. If advances are allowed, the organization should have controls in place to ensure that the funds are expended in a reasonable amount of time, generally 30 days. A grant may require that advance funds be placed in an interest-bearing account and the interest should either be paid back to the government or spent towards the program objective.
  4. Eligibility – Individuals, groups, or sub-recipients to whom organizations may provide scholarships, subgrants, financial awards, or services must not be barred from receiving federal funding and must fit the parameters as defined in the grant award. For example, if there is a grant award to help serve underprivileged kids in a specific region or area, the organization has the responsibility to ensure that the kids participating in the program qualify for the services.
  5. Equipment and Real Property Management – Equipment purchased with federal funds must be tracked and inventoried. The award document will generally specify if equipment purchases are allowed and whether the asset vests with the recipient or the government when the project is complete.
  6. Matching, Level of Effort, Earmarking – An award may require an organization to contribute its own resources to the grant program in a specified dollar or ratio. An auditor is going to look at how matching requirements are met and tracked, and how the organization ensures that the funds are not from federal funding.
  7. Period of Performance of Federal Funds – Expenditures of federal funds must occur during the specified award period. Any pre-award costs or carryover balances must be authorized by the awarding federal agency. An organization needs to be careful with wrap up and close out of federal awards to ensure that all related liabilities are accrued for in the period of performance. All obligations must be liquidated within 90 calendar days after the end date.
  8. Procurement, Suspension, and Debarment – Procurement has undergone some changes and requirements have become more stringent. Procurement policies must be formalized in writing and appropriate price analysis or bidding must be conducted and documented. Procurement procedures must incorporate reviewing potential contracting parties in the System for Award Management (sam.gov)to ensure that federal funding is not being passed to debarred or suspended people or entities. Auditors will test that the organization has policies, that the policies are compliant, and are being followed.
  9. Program Income – Any program income earned during the project period must be retained by the recipient and used in accordance with the terms and conditions of the award. For example, this would apply if an organization had a grant to put on a workshop and then were allowed to charge registration fees for that workshop. The registration revenue would be considered program income. An auditor will test how program income is tracked and what the procedures are in place to ensure that it is spent in accordance with the award terms.
  10. Reporting – Every award has specific reporting requirements that may vary. Some will require quarterly financial and progress reports and others may only require close-out reports. It is the organization’s responsibility to ensure that reporting requirements are understood and met in accordance with deadlines.
  11. Subrecipient Monitoring – Previous wording on sub-recipient monitoring stated that recipients must have “adequate monitoring” over entities it grants sub-awards to. Current language states that the monitoring must be “robust.” An organization is not turning over responsibility when it makes a sub-award. They must ensure that the sub-recipient is aware that it is federal funding and understand the applicable requirements. The pass-through organization must evaluate the risk of the sub-recipient’s noncompliance and monitor financial and programmatic progress. The sub-recipient is then required to get a Single Audit under Uniform Guidance if they have met or exceeded the $750,000 threshold. The pass-through entity needs to obtain the audit report and issue management decisions for any specific findings.
  12. Special Tests and Provisions – This is a catch-all compliance area that would address any specific requirements detailed in the grant that may be unique to the program or organization.

Keep in mind that these compliance areas are how an auditor approaches federal grant compliance. Make sure that your organization has designed effective controls for each area that pertains to your specific grant program. It is imperative that you document decisions and processes and keep a clear audit trail of activity. If you have any questions, please contact our nonprofit specialists or Carol Barnard at 301.231.6200.