For many not-for-profits, federal funding is vital for sustaining programming and operations. However, the funding could carry requirements for compliance and financial reporting.
For example, if a not-for-profit entity expends $750,000 or more in federal funds in its fiscal year, this will trigger the requirement for a single audit under the Uniform Guidance for testing of the entity compliance with federal award requirements.
Furthermore, federal funding expenditures can trigger a single audit in one year and not another year depending on the $750,000 threshold. Many not-for-profit entities also realize the requirement for first year single audit. This was the reality for many not-for-profits receiving federal COVID relief funding. COVID relief funding may not be on an ongoing basis, but it could push federal expenditures past the $750,000 threshold during a single fiscal year.
Although these entities may or may not need a single audit in future fiscal years, they should still be prepared for this possibility with proper internal controls and documentation to be in compliance with federal requirements.
Lessons Learned From Single Audits
When not-for-profit staff are not on top of the single audit preparation and requirements, we have seen a few common mistakes in controls, documentation and reporting. They include:
Insufficient internal control design and implementation over compliance – For general preparation before a single audit, the entity should hire and/or train personnel who are familiar with the Uniform Guidance. This will help them develop strong internal controls and maintain sufficient documentation over federal compliance requirements. The auditors are required to test internal control over compliance in addition to the compliance with federal requirements. Findings reported in the compliance are often as the result of insufficient internal control policies and implementation.
Incomplete or inaccurate schedule of award of federal expenditures – The schedule of expenditures of federal awards is an important schedule to present as part of the single audit reports in which the auditors review and select major programs for testing. The amount to be included in the schedule of expenditures of federal awards is not straightforward and may not be transparent from the financial statements because federal awards can be in various forms such as grants, loans, loan guarantees, insurance, endowments and other non-cash assistance.
Note: COVID-19 pandemic-related fundings are required to be separately identified in the schedule of expenditures of federal awards, and some of the new COVID-19 awards have specific reporting guidance for amounts to be included in the schedule. In addition, most of the COVID-19 programs are identified as higher risk by federal agencies, which has significant implications on major program determination and increase the likelihood of these programs of being selected as major program for testing.
Incorrect amounts or identification of federal awards subsequently discovered could lead to additional testing of different or additional major programs. To ensure completeness and accuracy of the schedule of expenditures of federal awards, an entity should check with the funders/grantor(s) to determine if any portion of the award is federally funded (if such information is not clearly stated in the award or grant agreements). It is the entity’s responsibility to properly report this information correctly, and they should reach out to grantors early to avoid delay during the audit.
Inadequate subrecipient monitoring – Entities receiving funding may be passing funding down to subrecipients for the first time due to increased pandemic-related funding of the past few years. There are certain responsibilities outlined in the Uniform Guidance for the passthrough entity to monitor and ensure subrecipient compliance with federal awards. This may be challenging when the entities find themselves subject to this requirement for the first time and need to establish monitoring controls and procedures on short notice.
Uniform Guidance and Single Audit Compliance Updates
Uniform Guidance compliance requirements are ever evolving. It can be challenging for entities that are not required to have a single audit every year to keep up with the changes. The annual OMB Compliance Supplements and their addendums, which are mainly guides to assist auditors in performing the single audit, also provide updates and specific guidance on reporting and compliance of federal awards. In addition, federal agency handbooks or memorandums and grant agreements also have certain specific compliance requirements. That is quite a lot of information to gather and check for updates each year.
Some of the information is in general form that requires the entities or auditors to research other sources such as the federal codes or to contact federal agencies’ single audit coordinators for clarification and applicability.
Therefore, auditors who regularly perform the single audit for not-for-profit entities are a good resource for understanding your organization’s responsibilities. Reach out to us at LvHJ if you are unsure whether or not your entity may fall under the requirements for a single audit now or in the future.