Auditing

Best Practice: Federal Grant Compliance Program

A "best practice" is the most effective way to achieve the desired outcome applicable to most organizations.  Our goal is to develop a compliance program for federal grants applicable to nonprofit organizations.  The desired outcome is transparency and accountability to the federal government and general public [taxpayers].  For those having federal grants, we follow the maxim "it is in our best interest to protect the government's interest".

So what is an effective mechanism to attain the desired outcome of accountability and transparency for nonprofit organizations having federal grants?  Simple!  Develop an on-going Federal Grants Compliance Program (FGCP).  The secret is in the program, i.e. "a plan or system under which action may be taken towards a goal". 

These are the components of a program to effectively administer federal grants within a nonprofit organization in order to comply with OMB Circulars A-110 (grants management), A-122 (cost recovery) and A-133 (audit surveillance). 

  • Internal committee
  • Code of ethics and professional conduct
  • Segregation of federal grant functions
  • On-going training
  • Internal and external reporting>

1. Internal Committee

The purpose of the committee is to have on-going dialogue on how to continually improve and address federal grant compliance matters from a "total organization" perspective to ensure no aspect is missed.  The committee should develop yearly compliance goals and meet throughout the year to evaluate and document outcomes.  The committee is comprised of the director of finance, grants administrator, general counsel or someone from the executive staff, and program director of federal grants.  Someone on the committee, perhaps legal counsel or their assistant should maintain the files for the FGCP.  Sometimes the internal committee may wish to include an outside consultant to provide a more independent and objective perspective.

2. Code of Ethics

Most organizations have a Standards of Business Conduct or Code of Ethics.  Though you may already have something in place, it needs to be modified to include federal issues such as no gratuities to federal workers or grants officers, no intentional labor mischarging, certification of time, etc.  There must be a standard of professional conduct with respect to federal grants that all personnel of the organization will read, understand and abide.

3. Segregation of Federal Grant Functions

Just as accounting functions must have segregation of duties to avoid improprieties such as embezzlement, direct program personnel working on federal awards must have a limitation of their sphere of responsibilities to afford a system of checks and balances.  Consider compartmentalizing certain grant functions, such as proposals, billing / draws, and operations.  The program director is responsible for the technical proposal but consider limiting involvement with the grant cost proposal and budget. 

Direct grant personnel should only prepare the direct labor and other non-labor direct costs for the SF 424a budget line items.  All of the line items for fringe benefits, and indirect rates should be prepared by finance and provided to program director in accordance with his/her time schedule for submitting the grant proposal.  Finance should ensure that the entire SF 424a budget line items can reconcile or have a cross-walk to their natural accounts.

The grants administrator and/or general counsel should look over the entire grant proposal from a compliance standpoint to see if it has any additional compliance requirements placed on their organization such as Equal Employment Opportunity, Drug Free Workplace, Fly American Act and so forth.  Controls should be in place so that the program director cannot submit the grant proposal until it has been reviewed and approved by the members of the compliance committee.  However, the reviewers have to understand that the grant proposal has a very tight time schedule and they must review the grant proposal documents within established schedule.  Once the grant is awarded, copies of the grant documents should be provided to and retained by finance, grants administration, general counsel and of course, the program director.

4. Ongoing Training

There should be annual training for all personnel that are involved with federal grants: the program director, finance and accounting personnel, grants administrators, and general counsel, especially personnel directly working on the grant so they will follow the timekeeping rules and code of ethics.  Personnel may attend seminars through a variety of venues with respect to grants management, compliance and audit.  If the organization hires a consultant to provide in-house training, someone from the internal committee must retain the training materials and a list of attendees.  This provides documentation that organizational personnel regularly receive compliance training.  In the event of an irregularity, it will become apparent that management takes compliance seriously, which, may provide a limited veil of protection against federal litigation.

5. Internal & External Reporting

Whether or not automated, your organization must develop a federal grant report to track and manage your actual costs to the grant budget.  Such a report would include: prior year, month-to-date, year-to-date, and inception-to-date cost.  The grant report will cover multiple fiscal years since awards rarely start and end along a fiscal year.  The grant report should have the period of performance, the granting agency, authorized funding, and backlog.  The direct line items should cross-walk to your natural accounts and the indirect rate should be applied at provisional and adjusted to actual at year-end.  The grant report would also have a cumulative grant budget to compare with inception-to-date cost to perform variance analysis.

Although a Statement of Functional Expense (SFE) is only required for health and welfare organizations per FASB 117, it is recommend that your organization consider developing it as a part of the yearly financial statement audit.  If an organization will be submitting an annual Indirect Cost Rate Proposal (ICRP) to the awarding [federal] agency, they often require that the total expenses of the ICRP reconciles to the audited SFE.  Once the direct and indirect programs are aligned in SFE format, it will facilitate the development of an indirect cost rate.