Author: Eric D. Turner, CPA
At some point, nearly every startup company discovers the need to search for funding. Startups often look to banks, angel investors, or equity options to procure the funds available to establish or expand their business. As an alternative, grants may be sought after as a way to raise capital without surrendering equity in the company or incurring interest expense. There are many grants available to support research and development in hopes of leading to innovative solutions that enhance economic security and improve the quality of life or for performing clinical studies that improve health and save lives. These types of grants are highly sought after by technology companies through the National Institute of Standards and Technology (“NIST”) and the National Institutes of Health (“NIH”), or similar granting agencies. Companies will put much effort into applying for these grants, but regularly do not consider the implications and regulations that follow the receipt of the grant awards, which can expose companies to the risk of noncompliance with the grant and even termination of funds.
Governmental granting agencies are charged with the fiduciary responsibility to monitor that taxpayer’s money is used appropriately and to require proper accountability from the grant recipient. Acceptance of a government grant creates a legal obligation on the part of the grantee to use the funds in accordance with the terms of the grant agreement and to comply with the grant’s provisions and conditions. The grantee thus assumes full responsibility for the conduct of the project activities and becomes accountable for meeting governmental standards in areas of financial management, internal control, reporting, and audits. Failure to meet these standards may result in increased oversight, an assessment of penalties and fees, or termination of funding.
Recordkeeping: Recipients must have accounting structures that provide accurate and complete information about all financial transactions related to each project supported by grant funding. Compliance within grant agreements typically give more consideration towards expenditures of awarded funds. Recordkeeping over expenditures at a minimum should be as detailed as the cost categories identified within the budget that is approved as part of the grant application process. Accurate recordkeeping at this level will be helpful for preparing reports required by the grant agreement and show good faith efforts towards expending funds on reasonable and allowable costs. If an entity receives multiple grants from the same agencies, these funds must be accounted for separately and cannot be combined. Another focus is to ensure that costs are incurred during the allowed grant period and that any reimbursements must be requested and obligations paid within the time period specified within the grant, which will typically extend a few months past the end of the grant period to allow for proper cutoff and receipt of vendor invoices. Records must be maintained on a current basis and balanced monthly as a best practice. The accrual method of accounting will likely be accepted; however, grantees will need to refer to their specific agreements to determine that another methodology is not being requested that could potentially lead to the need for maintaining reconciliation procedures with the recipient’s ordinary financial management system.
Maintaining Appropriate Support: The accounting records must be supported by an appropriate level of source documentation, which includes but is not limited to cancelled checks, invoices, bank deposit slips, contracts, and personnel expense reports. Many grants will provide schedules to be used to document specific costs such as allocation of payroll or other areas that are to be explicitly certified. All support should be examined to determine whether costs are reasonable, allowable, and properly allocated to stay in compliance with the related grant. Additionally, many grants will state the period for which supporting documentation must be retained; however, it is best practice to retain support for no less than three years to comply with the Internal Revenue Service’s open audit period.
Entities planning on receiving grants need good internal control systems to ensure that funds are properly used and achieve the particular results of the grant’s purpose. Most internal control procedures that are already implemented for an entity will also apply and be effective for transactions directly related to grants. As a gold standard, entities may want to subscribe to the internal control framework drafted by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”); though entities may be limited to implementing these standards on a piecemeal basis because of the comprehensive nature of the COSO standards. The ability of an entity to implement these standards is further affected by budgetary constraints and the size of the entity.
The following best practices are effective techniques that can be easily implemented at virtually no additional cost to the existing accounting functions:
- Record cash receipts of grant funds immediately and deposit daily. If funds are not wired directly into the bank account, then the person receiving and recording the cash receipts should be segregated.
- Monthly reconciliations of bank accounts should be performed by a person that does not have check signing capabilities.
- After invoices are recorded, a separate party should approve the invoice for payment along with determining whether costs are reasonable and allowable. At this time the invoices should be initialed and dated to document the approval. Checks should only be issued for approved invoices, which should then be marked as paid.
- Employees with edit/change authority over payroll should not be authorized check signors for the bank account used to disburse payroll.
- Monthly or quarterly budgets should be examined to determine that grant expenditures are not expected to exceed the approved amount as these funds may not be recoverable from the granting agency. An analytical examination at this level may also help discover erroneous postings.
Reporting requirements can range from monthly to annually reports and will vary under each grant agreement. It is important to understand the reporting requirements of the grant as failure to comply can result in delayed payments and/or denial of eligibility for future grants. Frequently, specialized annual reports are required to be submitted using formats specified within the grant agreement. It is important that reports submitted can be reconciled back to the financial management system and that appropriate supporting documentation is in place to sustain the amounts being communicated. This becomes of the upmost importance when an audit is a requirement of the grant agreement.
Grants may contain a requirement for the entity to have program specific audits or audits of the entire entity performed by an independent public accounting firm, engaged by the grantee organization. Grantee organizations often bear the cost of the audit; however, the fees are often allowable as charges to the grant when an audit is required as part of the grant agreement. If a grant award is expected and audit fees are an allowable cost, then seeking a request for proposal from an independent accounting firm at the point of application can assist with establishing a realistic budget for approval by the granting agency. Also, grantees should attempt to perform program specific audits whenever possible as program specific audits incur lower fees.
Office of Management and Budget Circular A-133 is the definitive Federal regulation concerning audits of states, local governments, and non-profit organizations. The basis for the audit requirement under these guidelines is set as a specific dollar amount of funds expended during the audit year. States, local governments, and non-profit organizations that expend $500,000 or more in a year in Federal awards must have an audit conducted for that year in accordance with the provisions of Circular A-133.
Compliance as defined by the NIH is the effective management of public funds to maximize research outcomes and the avoidance of fraud, institutional mismanagement, and poor management of federal funds. Grantees are responsible for safeguarding assets, expending funds within the authorized purpose, and developing and implementing systems to ensure proper stewardship of those funds. Special attention should be given to the following areas as they represent common areas of non-compliance:
- Excessive time elapsing between the receipt of requested funds from the grantor and the company’s disbursement of those funds to vendors.
- Costs deemed to be unallowable or not reasonable. Expenditures made that do not comply with the special terms and conditions of the award.
- Failing to submit required periodic reports on a timely basis, including required support.
- Inadequate system to track manage, or account for costs and/or assets.
- Inaccurate effort reporting.
- Delinquent closeout reporting.
- Inadequate sub-recipient monitoring. Appropriate Level of Support
- Misallocation of costs or the lack of documentation surrounding how amounts are being allocated. Typically relates to salary and administrative/clerical items.
- Not being able to provide appropriate reconciliations or segregation of expense accounts as they relate to general purpose spending of the company verse expenditures of the grant.
Questions? Contact your Keiter representative, or call 804.747.0000.