Grantmaking Dos and Don’ts: Staying Audit-Ready and IRS-Compliant as a Private Foundation

Laying the Groundwork for Audit-Ready Grantmaking

Grantmaking is central to a foundation’s mission, but it is also a key area of regulatory and audit scrutiny. From an audit perspective, missing or incomplete documentation could result in management letter comments or audit delays. It can also undermine the integrity of financial statements if grant liabilities are misstated. Below are some grantmaking dos and don’ts to help your foundation avoid common pitfalls and strengthen its grantmaking practices.

DO: Establish and Follow a Written Grant Policy

Every private foundation should have a formal, board-approved grant policy to provide a framework for consistent decision-making, ensuring adherence to regulatory requirements, and demonstrating due diligence to external auditors and the IRS. An effective grant policy should include the following key components:

• Clarity on the types of organizations, causes, or projects the foundation will fund, which should align with the foundations’ mention.
• Eligibility criteria for grantees (e.g. 501(c)(3) public charities).
• Application and review process, including any required documentation from the applicant.
• Grant approval process, including clarity on who has the authority to approve grants at specific dollar thresholds.
• Required documentation for each grant, including items such as the grant application, approval support, signed grant agreement, IRS status verification, follow-up requirements.
• Grant agreement requirements, such as purpose, any restrictions or conditions, and reporting expectations.
• Any grantee monitoring or reporting requirements.
• Recordkeeping and retention guidelines.
• Conflict of interest disclosures.

DON’T: Ignore Documentation Requirements

All grants should be backed up by solid documentation, such as grant applications, board approvals, grant agreements, proof of disbursement, and follow-up reports. During an audit, your auditor will likely request the following items for a selection of grants:

• Grant agreement – This should clearly state the purpose of the grant, the total grant amount and payment schedule, any conditions or contingencies, reporting and monitoring requirements, the duration of the grant, any rights to withhold or reclaim funds, any restrictions on the use of funds, and authorized signatures by both parties.
• Approval support – Examples include copies of board meeting minutes or board resolution documents, signed grant approval memos, email approvals, or internal grant tracking system reports.
• Disbursement support – This helps the auditor gain comfort that the grant was paid out and provides proof of the timing of the payment.

DO: Understand Proper Timing for Grant Recognition

One of the biggest challenges we see with foundation accounting is improper timing of grant expense recognition. A grant becomes a liability of the foundation only when the foundation has made a clear, unconditional commitment to pay.  We often see foundations record grant expense and liabilities immediately upon board approval or budget designation. Board designation is an intent, not an obligation. The liability is created upon the approved grant commitment. We also see foundations recognize conditional grants immediately upon execution of a grant agreement. A conditional grant contains one or more barriers or stipulations that the grantee must meet before the funds become payable. These grants should not be recorded as an expense or liability until the conditions are substantially satisfied.

DON’T: Wait Until the Audit to Get “Audit Ready”

Being audit-ready is an ongoing process, not a last-minute rush. Successful audit preparation depends on collaboration between accounting and program staff. Accounting teams often have the best understanding of financial policies and reporting requirements, while program staff are closest to the grant details and relationships with grantees. Establish shared tracking systems or regular check-ins between the two groups. Train all staff on the important of the above documentation requirements. By incorporating these habits into your foundation’s routine, you will strengthen your overall grant management procedures and will greatly reduce stress during audit season.

Summary and Next Steps: Protecting Your Foundation’s Mission

Grantmaking is vital to your foundation’s missing. It’s not just about who or what you support, but how you give that can determine whether your foundation remains compliant and audit-ready. It is critical to review or establish your grant policies, ensure your documentation practices are robust, and strengthen communication across your teams. These steps will not only help avoid costly or time-consuming audit findings but will also improve your foundation’s overall credibility and impact.

If you want to strengthen your foundation’s grantmaking processes or have questions about audit and compliance requirements, consider an initial conversation with your Keiter Opportunity Advisor| Email | Call: 804.747.0000