For-profit organizations that receive grants must establish a cost accounting system that complies with the Cost Principles in FAR part 31.2, read our article Which Cost Accounting Regulations Apply When You Have Grants and Federal Contracts. Additionally, a for-profit organization with a grant must also comply with the 2 CFR 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and agency supplements for all other requirements under the grant, cooperative agreement, or subaward. While there are similarities between the FAR and 2 CFR 200 requirements – for example: written policies and procedures, accounting by project, and timekeeping practices, there are differences as well – the requirement for audit is one.
What are the Audit Requirements?
Under 2 CFR 200.501(b) A non-Federal entity (i.e., a company performing a grant) that expends $750,000 or more during the fiscal year in Federal funds from its grants (yes, FAR based contracts are not included in this calculation) must have a single or program specific audit conducted. 200.501(h) states this part does not apply to for-profit organizations and requires the agency or higher-level organization to establish the appropriate audit requirement.
Since I am a for-profit company that means I am off the hook for an audit, right? And, I only have to follow requirements from the agency or higher-level organization. This is where the “not so fast” part comes in.
Wait a minute, I am covered because DCAA performs an audit of my annual incurred cost submission – doesn’t that count? Well not really. First of all, DCAA may not be performing an audit of your incurred cost submission but merely issuing a low-risk memorandum where they accept your indirect rates with no audit steps. In addition, a DCAA audit doesn’t address the “audit” requirements in the 2 CFR 200.514 regulations when you receive Federal funds from a grant.
What is the Audit Requirement?
If that were only a simple question to answer. A for-profit organization awarded a grant or subaward under a grant (yes, this includes cooperative agreements) needs to review all the Code of Regulations referenced in the agreement documentation.
For example, the Department of Energy (DOE) makes the requirements placed on a for-profit organization clear in the DOE supplemental regulations. Your agreement documentation will simply refer to 2 CFR 910. When you go to 2 CFR 910.501 it states:
(a) Audit required. “A for-profit entity that expends $750,000 or more during the non-Federal entity's fiscal year in DOE awards must have a compliance audit conducted for that year in accordance with the provisions of this Part.”
(b) Compliance audit. “A compliance audit should comply with the applicable provisions in § 910.514—Scope of Audit.”
For the most part, for-profit organizations are required to have a compliance audit which is basically the same as a “Single Audit.”
As there is a clear expectation of an audit, if it is not clear from the agreement documents, get the awarding agency or higher-tier organization to put it in writing.
Let’s Define Federal Funds
These are funds received in support of a grant, cooperative agreement, or subaward. Federal funds do not include funds for payment of goods and services under procurement contracts under a grant/subaward, or FAR based contracts or subcontracts.
What Does a Compliance Audit Entail?
2 CFR 200.514 addresses the scope of the audit, and it is more in-depth than a financial statement audit or even a DCAA incurred cost audit. It must:
- Be conducted in accordance with Generally Accepted Government Auditing Standards (GAGAS),
- Determine that the financial statements are presented in accordance with generally accepted accounting principles,
- Include a schedule of expenditures of Federal awards, and
- Obtain an understanding and test internal controls over compliance for each Federal Program.
Both the auditing standards for DCAA and a CPA require internal controls to be considered. However, it is up to the auditor to decide whether or not to test internal control. When you are required to get an audit under a grant your internal controls must be tested as part of the audit.
Is the Cost of an Audit an Allowable Direct Cost to a Grant?
The cost principles in 2 CFR 200 Subpart E states that the cost of audit services is allowable. Although the cost of a required audit for a for-profit organization should be an allowable cost – the cost of an audit is not specifically addressed in FAR Part 31.2 cost principles. The question of assigning the audit cost as direct or indirect cost cannot be addressed simply and is outside the scope of this article.
Takeaways
As a recipient of a grant or subrecipient of a subaward, we recommend you read the regulations before you apply for the grant so you can understand, prepare, and implement the administrative requirements before applying or receiving the award. Federal agencies tend to just state in the funding opportunity announcement or grant award document – follow 2 CFR 200 and the agency supplement. Then we see the recipient of the grant/pass-through entity follow suit and cite the same overarching regulation in the subaward. Grants are not like FAR based contracts that contain applicable clauses with instructions on what is required. This means you are required to read and understand 2 CFR 200, so you know what applies outside of the Cost Principles in Subpart E.
If the Federal expenditures of your grant/subaward exceeds the dollar threshold (generally $750,000 of Federal expenditures in a year) you will be required to obtain a compliance audit which can be costly. On a positive note, the Office of Budget and Management (OMB) is looking at increasing the threshold for a single/compliance audit to $1,000,000 but that may not occur until next year. Remember there is no fee/profit on a grant or subaward so the cost of an audit can impact your bottom line. As a for-profit recipient of a grant or subaward you need to understand the audit and other grant requirements. A compliance audit can be a costly surprise if you weren’t expecting it.
How Redstone GCI Can Help
Redstone can assist your company by developing policies and procedures tailored to meet grant requirements. We can help establish an accounting system or provide ongoing monthly accounting services. Additionally, we offer support by reviewing agreement documentation before the award is finalized and ensuring post-award compliance, including preparing quarterly SF425 reports and reviewing invoices. Redstone GCI also provides training on FAR and grant compliance to help your team stay informed and compliant.
