Specifically, there are two types of audits that all grants, cooperative agreements and similar assistance awards are subject to:

Uniform Guidance Audits as required by the National Institutes of Health (NIH), Department of Energy (DOE), U.S. Department of Agriculture (USDA) and National Science Foundation (NSF). For this whitepaper, we will use the abbreviation “UGA.”

The annual incurred cost submission. A sample of this document can be found at www.jamesoncpa.com. This “true up” report is the primary document used by the government auditors to negotiate final grant costs, including indirect costs.

This whitepaper will initially explore UGA requirements, including dollar thresholds and due dates. Then we will address the most common UGA findings.

Later, we’ll discuss a disturbing trend we’ve noticed. We’ve coined the term “Inadvertent Fraud” to describe the phenomena. As the competition for grant funding has intensified over the years, we’ve noticed an alarming number of grantees who bid indirect cost rates below their funding agency’s indirect rate audit thresholds (aka “safe rates”).

Backing into an indirect rate that mathematically falls below the agency’s safe rate allows the grantee to avoid a pre-award indirect rate audit. However, avoiding the scrutiny of the indirect rate audit seems to lead to complacency surrounding the proper accounting for grant funds as grantees feel like they must be “ok” – or someone from the government would have said something

GRANT AUDIT REQUIREMENTS

All Grants Subject to Uniform Guidance Audits (UGA)

If a grantee has annual expenditures that exceed $750,000 on all of its federally funded awards, then it is subject to a UGA.

The awardee is required to hire and pay for a CPA firm professionally qualified to conduct this type of audit, which encompasses both financial and compliance components. Some good news – the audit fee is an allowable cost.

Once the audit is complete, the awardee submits the audit report to the funding agency identifying any “findings”, which are violations of laws, regulations or the provisions of the grant.

The auditor’s report is reviewed by the Inspector General’s Office (IG) for quality control purposes and the CPA firm’s work papers may be audited by the IG.

Finally, the funding agency follows-up on the findings with the grantee to ensure they have been remedied. Failure to properly respond could result in the agency freezing existing funding.

We occasionally receive calls from grantees who are trying to avoid being subject to audit. Regardless of how much funding has been drawn from NIH’s Payment Management System (PMS) or DoE’s Automatic Standard Applications for Payment System (ASAP) or any other government payment system, you are required to be audited based on expenditures, in accordance with generally accepted accounting principles (GAAP). This includes your reimbursable, allowable costs according to the Federal Acquisition Regulations (FAR).

Whether you are audited or not, you are still required to follow the rules.

COMMON UNIFORM GUIDANCE AUDIT (UGA)FINDINGS

The objective of a UGA is to ensure the recipient of federal funds has not violated any laws, regulations, the provisions of the grant, or any of the 12 compliance requirements. It is important to note that any overdraws or overbillings that occur must be repatriated immediately, and funds can be clawed back. Listed are some of the more common findings:

Issues with Subcontractor Monitoring

Sub-recipients of federal funds are required to comply with the terms and conditions of the prime recipient’s award. Prime recipients that pass funds through to a sub-recipient have a fiduciary responsibility to make sure the subcontract agreement contains the proper legal language informing the sub-recipient of their obligations. The most common audit findings we see relate to:

Issues with Consultant Documentation

A subcontractor has a clearly defined scope of work on a project. Relationships with consultants are generally less structured and more informal. In order for the government to be assured that real work has taken place and that you aren’t just writing a check to a colleague, consultant’s invoices are required to be very detailed and must include a clear description of what grant number they worked on, what they did, when they did it, and the hourly rate charged. Additionally, there should be a written consulting agreement.

Improper Allocation of Cost Sharing

Some government agencies require the grantee to share the cost of the research and development effort. This is referred to as cost sharing. Think of this as the grantee and the federal government proportionally sharing in each dollar of a project’s total funding. As an example, an award may be granted with a 30% cost share. That means the grantee and/or its sub-recipients must fund $0.30 for every $0.70 of government funding toward the $1.00 of total project funding. Certain types of funding vehicles have mandatory cost share provisions. As an example, ARPA-E awards typically come with a 5% – 50% cost share requirement embedded in their cooperative agreements.

Salaries in Excess of Agency Specific Caps

Most government funding agencies place a limit on the maximum compensation allowed to be charged to their projects. In order to compete for the best talent, we find grantees unknowingly pay employees in excess of the compensation limits and try to charge the government because they are not aware of the caps on compensation, or don’t know how to properly handle the excess compensation.

Federal Financial Report (SF-425)

In general, grant provisions require the grantee to reconcile its drawdowns to its actual disbursements (direct and indirect) on a quarterly basis. The reconciliation is reported on the Federal Financial Report (SF-425), also known as an FFR, which is due within 30 days of each quarter end. Frequently, we find grantees do not file an FFR or file it late – both of which are considered minor audit findings that must be reported as UGA findings.

You can download the report here. Pay careful attention to Line 13, which when signed, certifies the accuracy of the report and can put grantees at risk of inadvertent fraud. (More information on this to come.)

Overdrawing Funds (overbilling the government)

As discussed above, NIH and DOE grantees are allowed to electronically draw funds from the agencies’ online payment systems. Billing the government, or “drawing down funds” is as simple as logging in, entering the amount requested, and presto – the funds arrive in your bank account the next business day. Funds should only be drawn down as disbursements are incurred and released to vendors. Drawdowns work on the honor system.

Overdrawing funds is one of the most severe findings, and funding agencies require the immediate repayment of funds. Overdrawing occurs in two common forms: overdrawing for direct costs and overdrawing for indirect costs.

OVERDRAWING FOR DIRECT COSTS.

Grantees are allowed to draw funds for direct costs incurred (actually spent and released to the vendor), yet we occasionally find grantees drawing funds for costs to be incurred in the future. We also see situations where the grantee draws lump sums of money, say $100,000, to bridge cash shortages even though their actual grant expenses incurred may be much less. This is usually a symptom of having an inadequate indirect cost rate which we discuss in the Resources section found on our website.

OVERDRAWING FOR INDIRECT COSTS.

This finding is much more common! The government will reimburse grantees for indirect costs, or costs that are not directly related to a specific project, but rather, benefit all projects or the company as a whole. When a grant is proposed, the grantee includes an indirect cost rate in its proposal to cover such expenses. This “provisional” indirect rate is typically a percentage of direct costs and is a temporary billing rate that must eventually be trued-up to actual expenses.

Sometimes an indirect cost rate will be negotiated prior to the award being funded. Other times, no negotiation is required, because the agency will approve very low indirect rates with “no questions asked”. For example, NIH SBIR grantees that propose an indirect rate of 40% or less do not have to negotiate their indirect rate – it is accepted as proposed. This can be known as a “safe rate”, but our observance leads us to believe that this can be anything but “safe”.

“INADVERTENT FRAUD”

Some grantees may commit “inadvertent fraud” as a result of not monitoring their actual indirect cost rate, and not maintaining proper job cost reports on an ongoing basis. The FAR requires indirect costs to ultimately be reported and reimbursed at the lower of actual costs, or the capped provisional indirect rate.

Follow the potential trap:

You receive a grant and think of it as “free money.”

You requested a very low provisional indirect cost rate in your proposal, so you didn’t have to negotiate your indirect cost rate before your award is funded.

Because you didn’t go through the indirect rate negotiation audit process, it’s not obvious that you are still required to calculate actual indirect rates and adjust your billings at the end of the year.

You establish a billing relationship with the PMS or the ASAP systems whereby you push a button and whatever you requested shows up in your bank account the next day.

When you file the FFR on a quarterly basis, you simply fill in whatever amounts you have drawn as being “earned”.

Drawdowns should be based on revenue recognized in accordance with generally accepted accounting principles (GAAP) – from properly maintained job cost reports, including properly maintained job cost reports and indirect rate calculations. Grantees must also consider the FAR, Agency supplemental regulations, vehicle funding restrictions, and any cost sharing language or restrictions placed in each specific grant award.

“Inadvertent fraud” may be committed when signing the certification located on line 13 of the Federal Financial Form (SF 425): (see box to the right)

HOW TO MANAGE YOUR RISK

As experts in government grant accounting, with over 30 years of experience, clients from coastto-coast, and over $4 billion in awards managed, we know all the agencies, regulations, and how to help you avoid the pitfalls. We also know how to help you manage risk in accordance with your business goals.

Find Out if You Qualify for a FREE RISK AND COMPLIANCE ANALYSIS

Our insights as they relate to your specific business situation can help you better manage your award and avoid the peril of an audit. For details, contact Ryan at 781-862-5170, ext. 2106 or email ryan@jamesoncpa.com. It could be a game-changer.

Get Educated

To avoid the landmines and pitfalls that come with grant funding, visit the resources center at jamesoncpa.com. You’ll find whitepapers, blogs, videos, webinars and other helpful information.