Federal awards and nonprofits: Five steps to compliance
For a nonprofit organization, obtaining federal award funding for the first time is a major undertaking — and the work does not end there. All too often, organizations are ill-equipped to manage the compliance requirements and find themselves struggling in an environment where they must be reactive rather than proactive in addressing compliance needs.
The set of regulations governing federal awards, Section 2 CFR 200 of the U.S. Tax Code, is commonly referred to as Uniform Guidance, or UG. One widely known compliance requirement is that a nonprofit must obtain an annual audit under government rules. This is commonly referred to as a single-audit (in addition to the financial audit) once the organization has expended more than $750,000 in federal funds in a single fiscal year. For organizations that are first-time federal award recipients, this seems like a high dollar amount.
However, it is important to understand that the rules outlined in UG apply from the day the first dollar is spent. The requirement to track time by program and to maintain certain internal controls, to name just two, are part of the organization’s obligations under the federal awards without regard to the amount of funding obtained.
Below are five easy steps to make it easier for nonprofit recipients of federal funding to be compliant and ensure their continued success. Most of these suggestions are general best practices for any organization but are particularly relevant with federal awards.
1. Ensure that the timekeeping system is compliant with UG requirements and that it includes an audit trail. Nonprofits will need to track each employee’s time based on their level of effort working on federal award(s). If they already have a timekeeping system in place, they need to make sure that it has features that auditors will certainly look for such as an audit trail, timestamps and the ability to lock timesheets. Depending on who their cognizant agency is, the organization may need their timekeeping system to comply with their specific requirements. For example, Department of Defense awards will need to be compliant under the Defense Contract Audit Agency.
2. Make sure the entire team is trained. A federal award is unlike a private grant. There are rules about what can be spent under the award and what the organization can spend as part of its indirect costs that may be reimbursed by the cognizant agency. Nonprofits should invest in training the entire team – not just those in finance. Their program staff need to understand these regulations and be partners with their finance team to ensure the success of the organization as recipients of federal funds. They should leverage the knowledge of existing staff who have familiarity with the requirements, or bring in experts to advise them.
3. Read and understand the award(s). This may seem obvious, but it is important that the individuals responsible for monitoring the budget for the award understand the specific terms and conditions of the award. Some have very detailed guidelines from how reporting is to be provided to whether or not certain travel is allowed under the budget. It is the responsibility of the organization to monitor these and to have systems in place to be able to do so.
4. Monitor their indirect rate. There are several ways that nonprofit organizations may be permitted to charge an indirect rate on their expenses when they request reimbursement on a federal award. No matter what the agreement is, if they are assigned an indirect rate, they are obligated to monitor what their actual rate is and ensure that they are not charging their agency more than what their organization has incurred in overhead costs. This is a common pitfall for many organizations, and can lead to nonprofits having to pay back funds to the agency.
5. It’s not just about $750,000. No, nonprofits do not need to get a single audit until their organization has reached the threshold of expending $750,000 of federal funds. But their obligations for compliance begin the day they spend the first dollar of that award. When they cross that threshold, the single audit may extend further back in time, and they will then be responsible for any compliance problems. Their first federal award should be the starting point for improving their compliance to ensure their organization’s success under the terms of federal awards.
These are just a few common areas where organizations find themselves in trouble. Federal awards can do so much to help nonprofits fulfill their mission, but the risks of not understanding the organization’s responsibilities under these awards can have serious consequences.