Does your nonprofit receive federal grant funding? If so, you should be aware of changes rolled out by the federal government over the past two years that affect the way organizations receive, use and report these grant funds.
Starting in December 2013, the White House Office of Management & Budget unveiled new rules, titled Uniform Administrative Requirements, Cost Principles, & Audit Requirements of Federal Awards, or Uniform Grant Guidance for short, that streamlined the administration and strengthened the oversight of federal grants. These rules took effect December 26, 2014, and over the course of this year, nonprofits have adopted them as they receive new federal grants or replenishments of existing grants.
The Uniform Grant Guidance addresses the following key issues:
- Internal control clarification
- Procurement standards
- Subrecipient monitoring
- Cost principles – direct and indirect costs
- Audit requirements
Let’s take a closer look at each of these issues and how they impact recipients of federal grants.
Internal control clarification
The Uniform Grant Guidance clarifies that recipients of federal grant dollars must establish and maintain effective internal controls to provide reasonable assurance that they are managing the grant in compliance with federal regulations and terms. The internal controls established should be in accordance with the guidance in Standards for Internal Control in the Federal Government issued by the Comptroller General of the United States and the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Under the Uniform Grant Guidance, recipients are required to follow five general standards:
- The entity must maintain written policies and procedures over procurement.
- Costs incurred must be considered necessary and cost effective.
- Procurement transactions must provide for full and open competition.
- Written standards of conduct covering conflict of interest must be maintained.
- The entity must also maintain documentation supporting that it performed cost and price analysis as well as vendor selection.
There are five available methods of procurement for each purchase:
- Micro purchases: This method is to be used for purchases less than $3,000. No competitive quotes are required.
- Small purchases: This method is to be used for purchases between $3,000 and $150,000. Rate quotes must be obtained from an adequate number of qualified sources; however, no cost or price analysis is required.
- Sealed bids: This method is to be used for purchases greater than $150,000. Two or more qualified bidders are required and the price is considered a major factor.
- Competitive proposals: This method is to be used for purchases greater than $150,000. The recipient entity must have a written policy in place for evaluation and review of bid proposals.
- Sole source: This method can be used for purchases of any amount, provided the purchase is unique and there is no competition. The federal agency that awarded the grant must first authorize the transaction.
Due to the significant procurement process changes contained in the Uniform Grant Guidance, the federal government provides a grace period of one full fiscal year after the effective date (December 26, 2014) of the new regulations. Keep in mind that this grace period applies to only compliance with the new procurement standards, not the rest of the Uniform Grant Guidance.
If you distribute any of your federal grant funding to another vendor or organization (known as subrecipients), you have new monitoring responsibilities under the Uniform Grant Guidance. You are now required to:
- Communicate with subrecipients to ensure that the grant is used in compliance with applicable federal requirements.
- Perform risk assessments on each subrecipient to determine the appropriate monitoring needed to avoid noncompliance.
- Ensure financial and performance reports for subrecipients are filed appropriately.
- Ensure subrecipients are taking appropriate action to follow up on detected deficiencies.
- Provide indirect cost rate information to subrecipients.
Cost principles – direct and indirect costs
Under the Uniform Grant Guidance, a majority of non-federal entities that have never received a negotiated indirect cost rate are now permitted to charge a de minimis rate of ten percent of modified total direct costs. Any entity with a federally-negotiated indirect cost rate may apply for a one-time extension of the current negotiated rate for a period of up to four years. Federal agencies will be required to accept an entity’s negotiated cost rate unless statute or regulation allows for an exception.
While there are some similarities to the existing single audit model, the Uniform Grant Guidance makes a few key changes to audit requirements, including:
- Increasing the audit threshold from $500,000 to $750,000. This means that if your federal grant dollars spent are less than $750,000, your organization is exempt from federal audit requirements for that year.
- Increasing the minimum dollar threshold to distinguish between Type A and Type B programs from $300,000 to $750,000, as well as changing other factors that determine a program’s risk factor (like severity of audit findings and elimination of inherent risk assessment).
- Decreasing the minimum audit coverage for low-risk entities from 25 percent to 20 percent, and the coverage for higher risk entities from 50 percent to 40 percent. Another change is that in order for an entity to achieve low-risk status, its auditor must not have reported a substantial doubt about its ability to continue as a going concern for each of the two previous audit periods.
- Increasing the threshold for reporting known and likely questioned costs from $10,000 to $25,000.
Effective date and next steps
The new Uniform Grant Guide regulations apply to all new federal grants made after December 26, 2014 and to funding increments to existing awards made after that date. The new audit requirements of the Uniform Grant Guide are effective for fiscal years beginning on or after December 26, 2014.
Organizations subject to A-133 requirements should note the full list of updates to the OMB Circulars and consider the impact internally and on future audits. You can review documents related to the Uniform Grant Guidance here.
There are many changes and updates to digest in the Uniform Grant Guide. RKL’s team of experts is available to walk you through the changes and what they mean for your not-for-profit’s accounting and record-keeping procedures. Contact Douglas L. Berman, RKL’s Not-for-Profit Industry Group leader, at 717.843.3804 or firstname.lastname@example.org.
Contributed by Erika R. Schachle, CPA, Manager in RKL’s Audit Services Group. Erika specializes in serving the accounting needs of not-for-profit organizations, including financial reporting and GAAP audits.