Financial Management & Audits

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In addition to a well-planned project, your organization's financial management systems must meet certain requirements in order for you to receive and manage Federal grant funds. Financial systems must follow a number of guidelines. Also, a sound financial management system should maintain records that adequately identify the source and application of funds for federally sponsored activities. All organizations that receive Federal funds are subject to basic audit requirements. These audits are intended only to examine the federally funded parts of an organization's operations and are not designed to identify unrelated problems. The audits are necessary to make sure that Federal dollars have been spent properly on legitimate costs. Therefore, it is extremely important for grant recipients to keep accurate records of all transactions conducted with Federal funds.

Federal agencies have banking standards and accounting and cost principles.

Federal awarding agencies do not require separate depository accounts for funds provided to a recipient, but you are accountable for the receipt, obligation, and expenditure of funds. Advances of Federal funds must be deposited and maintained in insured, interest-bearing accounts. Cost principles for nonprofit organizations can be found in 2 CFR 230. Questions about specific requirements for accounting methods and fiscal reporting should be directed to your assigned Federal grants management officer.

Most Federal agencies will reimburse their share of indirect costs.

Most Federal awarding agencies consider activities conducted by recipients that result in indirect charges a necessary and appropriate part of grants and will reimburse their share of those indirect costs. The appropriate share is either a fixed amount as specified in statute or in regulations, or is determined based on a rate negotiated by a cognizant agency with an applicant/grantee and reflected in a formal rate agreement.

To simplify relations between Federal grantees and awarding agencies, OMB established the cognizant agency concept, whereby a single agency represents all others in dealing with grantees in common areas. The cognizant agency reviews and approves grantees' indirect cost rates. Approved rates must be accepted by other agencies, unless specific program regulations restrict the recovery of indirect costs.

The cognizant agency for nonprofit organizations is determined by calculating which Federal agency provides the most grant funding. The Department of the Interior is the cognizant agency for all Indian tribal governments. For hospitals, HHS serves as the main cognizant agency. HHS is also the cognizant agency for all states and most cities. The cognizant agencies for community-based organizations are HHS and the Department of Labor.

To establish an indirect cost rate for your organization, contact your cognizant agency to initiate the application process. Indirect cost rate agreements are negotiated by a division within the agency. You will find a sample indirect cost proposal format for nonprofit organizations at http://rates.psc.gov/fms/dca/np_exall2.html.

Should You Apply for a Federal Indirect Rate?

  1. Consider the amount of the award and the actual amount of indirect costs that may be recovered.
  2. Consider the amount of time your organization will have to invest in preparing and submitting the indirect rate proposal and negotiating the indirect rate.
Click to open interactivity Expenses associated with your project can be shared with your awarding agency.

Expenses associated with your project can be shared with your awarding agency.

Download this Federal Cost-Sharing Requirements guide to help you navigate your costs.

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Earnings generated through an activity supported by a public grant are considered program income.

Program income is defined in 45 CFR 74 as income earned by the recipient that is directly generated by a supported activity or earned as a result of the award. Program income includes, but is not limited to, income from fees for services performed, the use or rental of real or personal property acquired under Federally funded projects, the sale of commodities or items fabricated under an award, license fees and royalties on patents and copyrights, and interest on loans made with award funds. Interest earned on advances of Federal funds is not program income. Except as otherwise provided in the terms and conditions of the award, program income also does not include the receipt of principal on loans, rebates, credits, discounts, etc., or interest earned on any of them. Furthermore, program income does not include taxes, special assessments, or levies and fines raised by government recipients.

Program income earned during the project period is retained by your organization for use as specified by the Federal awarding agency in the award document. In the event that the Federal awarding agency does not specify in its regulations or the terms and conditions of the award how program income is to be used, the regulations in 2 CFR 215 will provide you with specific instructions.

Organizations must submit financial reports to the Federal awarding agency.

Financial reporting requirements for your project are specified in your award package issued by the Federal awarding agency. For more detailed information about requirements for financial management systems, payment methods and rules for cost sharing and matching requirements, accounting for program income, and establishing fund availability, see OMB Circular A-110, subpart C.

You will likely be required to submit financial reports to both the Federal awarding agency and the Division of Payment Management. The Federal Financial Report is the financial reporting form for most of these reports. It combines the PSC 272, previously used by DPM, and the SF 269, used by grants management offices. DPM has fully implemented the switch to the FFR; however, many grants management offices may still be using the SF 269. Be sure to use whichever financial report is required by the grants officer.

The Federal awarding agency determines the Financial Status Report deadlines. The Division of Payment Management requires you to submit quarterly reports (FFR) that certify the disbursement of the funds within fifteen calendar days of the end of each quarter. It is important to remember that you must submit financial reports to the awarding agency and DPM on time, even if no activity has occurred during the reporting period.

Programs receiving public money are audited at the Federal government´s discretion.

Most organizations are not audited by the government itself, although the Federal government has the right to audit any program that receives public money at any time. For example, charities that spend less than $300,000 per year in Federal funds are generally asked only to perform a “self-audit.” Larger grants (those over $300,000 per year) require an audit by a private, independent legal or accounting firm.

Non-Federal organizations that expend $300,000 or more per year in Federal awards are required to have a single or program-specific audit conducted for that year. Non-Federal entities that expend less than $300,000 per year in Federal awards are exempt from Federal audit requirements for that year, but they must make records available for review or audit by appropriate officials of the Federal agency and Government Accountability Office (GAO). The scope of a single audit or program-specific audit includes a purposeful review of the following information:

  • Financial statements. To determine that you conformed to generally accepted accounting principles and that the schedule of expenditures of Federal awards is presented fairly in relation to your financial statements.
  • Internal control. To assess effectiveness in detecting noncompliance with the agreement. Also, to assess compliance with generally accepted accounting principles and control risk for major programs.
  • Compliance. To determine whether you have complied with laws, regulations, and the provisions of contracts or grant agreements that may have a direct and material effect on each of your major programs.
  • Audit follow-up. The auditor will follow up on prior audit findings from your organization and (as a current-year audit finding) report indications of prior misrepresentation.
  • Data collection form. The auditor will complete and sign specified sections of the data collection form.

OMB Circular A-133 governs audit procedures. Consult the OMB Circular A-133 for specific information.

The Federal awarding agency or any authorized representatives is entitled to all of your program´s records.

Financial records, supporting documents, statistical records, and all other records pertinent to an award must be retained for a period of three years from the date of submission of the final expenditure report. Some exceptions may apply given litigation, property records, and agency transference. See 2 CFR 215.53 for specific details.

If authorized, copies of original records may be substituted for the original records. The Federal awarding agency may request transfer of certain records to its custody from recipients when it determines that the records possess long-term retention value.        

As long as records are maintained, the Federal awarding agency, or any of its duly authorized representatives, has the right of timely and unrestricted access to any books, documents, papers, or other records of recipients that are pertinent to the awards in order to make audits, examinations, excerpts, transcripts, and copies of such documents. This right also includes timely and reasonable access to personnel for interviews and discussion related to such documents.