Uniform Guidance Compliance: Watch Out for Three Danger Zones
Federal funding in response to the COVID-19 pandemic has meant that more nonprofits have found themselves subject to the Uniform Guidance for Federal Awards — the rules and requirements for obtaining federal grants. If they spent $750,000 or more in federal awards in a fiscal year, they’re also facing single audits, possibly for the first time.
Single audits combine an annual financial statement audit with an examination of an organization’s compliance with its federal grant fund requirements.
Even long-time recipients of federal awards can trip up when it comes to single audits. Here are three areas your nonprofit should watch closely to reduce the possibility of costly penalties and reputational harm.
1. Cost Allocation
Nonprofits can struggle with the distinction between direct and indirect costs. Direct costs are those that can be:
- Identified specifically with a particular “final cost objective” (that is, a particular award, project, service or other activity), or
- Directly assigned to such activities relatively easily with a high degree of accuracy.
Indirect costs are those that are incurred for common or joint objectives and aren’t readily identified with a particular final cost objective.
You must treat costs that you incur for the same purpose in like circumstances consistently as either direct or indirect. If a type of charge is direct for one federal contract, it can’t be categorized as indirect for another. Developing and enforcing a clear cost allocation policy will help preempt this type of error (which can cause problems in single audits).
Another problem area relates to indirect cost rates, whether negotiated or the de minimis rate of 10% of modified total direct costs (MTDC). Think of that figure as a ceiling, not an allowance. You can’t charge more than what you actually incurred in indirect costs, even if that amount falls below the assigned percentage of MTDC. If you overcharge, you may have to refund the difference.
2. Time and Effort Reporting
Salaries, wages and benefits charged to a federal award must be supported by “time and effort” documentation that accurately reflects the work performed. Time and effort reporting often is a fertile area for auditor findings because it’s not nearly as simple as it seems.
For starters, you can’t base it on budgeted amounts. Your reporting must reflect the actual time and effort expended. Moreover, you must record time and effort for specific cost objectives, rather than just the award. Some awards may have more than one cost objective — for example, a grant might cover both administrative and program costs.
Finally, 100% of an employee’s time charges must equal the employee’s compensated time. Even with overtime, an employee can’t report 80% of time for one objective and 40% for another.
3. Subrecipient Monitoring
If you’re a “pass-through entity” (PTE) that relays part of a federal award to other entities, you’re required to monitor those subrecipients. A PTE is a nonfederal entity that provides a subaward to a subrecipient to carry out part of a federal program. This obligation includes two potential pitfalls.
First is a pre-award assessment. Examine a subrecipient’s risk of noncompliance with all the subaward’s requirements to determine the appropriate monitoring procedures to ensure compliance. You’ll need to individualize the assessment, as opposed to, for example, assigning risk level based solely on the amount of the subaward. Your assessment should consider factors such as:
- The location of the work,
- The subrecipient’s internal controls, and
- Whether the subrecipient has an existing relationship with the PTE.
Second, the monitoring procedures should be commensurate with the level of risk. They shouldn’t be the same for every subrecipient. And it’s not enough to require regular reports from your subrecipients. You also must review them and ensure that the subrecipients remedy any issues.
The Uniform Guidance contains a sprawling array of requirements — and they’re regularly updated and revised. Contact us and we can help your nonprofit stay on the right side of the rules and avoid adverse audit findings.
SIDEBAR: Get the Documentation Right
The importance of maintaining and assembling adequate documentation in anticipation of a single audit can’t be overstated. Not only will good preparation expedite the process, but it also will send the audit team a clear message about your commitment to transparency.
But just what is “adequate documentation”? It requires much more than your current financial statements and Schedule of Expenditures of Federal Awards (commonly known as the SEFA).
For purposes of a single audit, your documentation should include your written policies and procedures for the handling of federal awards (for example, procurement and subrecipient monitoring procedures). You’ll also need to provide accounting records, along with supporting documentation to show that all payments, procurements, contracts and grants to subrecipients are necessary, reasonable and allocable.
Your auditors will want to see the award letter or grant agreement for each federal award, too. They’ll use these to identify the specific deadlines, terms and other requirements they must check in addition to the general Uniform Guidance requirements.