Federal awards can be invaluable resources to help accomplish an organization’s goals. These awards can take the form of direct payments, direct loans, loan guarantees, or assets directly transferred to an organization. They can be given directly by a federal agency or passed through another entity, such as a state government, to the receiving organization. All of these awards come with requirements that dictate how they must be used, the internal controls that must be in place in the receiving organization, and the documentation that must be maintained to demonstrate compliance.
Failure to comply with award requirements may result in the award being recouped, a decrease in the likelihood of future award applications being approved, or findings being reported in your audited financial statements.
This article will be the first in a series that will focus on providing you with the knowledge necessary to develop a compliance program for your federal awards and the audit requirements that may come with them.
Federal Compliance Guidance
The starting point in developing your compliance program is to understand what is required by the award. Each federal award will have unique compliance requirements. This information can be obtained from the following sources:
Authorizing Legislation – The authorizing legislation for the federal award program takes top priority in the complicated hierarchy of rules and regulations for their usage. The federal agency administering the program will pass down these stipulations through notice of funding opportunity guidance. This notice is released when soliciting applications. The legislation will determine the priorities for selection, eligible uses of funds, and—in certain cases—add legislatively specific guidelines for the award.
Code of Federal Regulations (CFR) – 2 CFR section 200 (commonly referred to as the “Uniform Guidance”) contains the rules for administrative requirements, cost principles, and audit requirements for federal awards. The section is divided into 50 titles that represent broad areas subject to federal regulation. The CFR applies to all federal funding unless contradicted by the authorizing legislation for the awards.
Award Agreement Terms and Conditions – In addition to conditions at the federal and program level, there may also be terms and conditions specific to the award recipient. Federal agencies can put additional requirements or waivers in place for recipients.
The Office of Management and Budget Compliance Supplement (Compliance Supplement) is an annually updated guide that outlines the compliance requirements and provides audit guidance for all federal programs. Part 2 contains the matrix of compliance requirements that indicates, by program, which requirements must be tested by the auditor when applicable to the award. Parts 3 and 6 provide general guidance on the compliance requirements and your organization’s internal controls. Parts 4 and 5 provide additional guidance on objectives, procedures, and compliance and audit requirements specific to certain programs.
Audit Requirements
An organization that expends $1,000,000 of federal awards during its fiscal year must have a single or program-specific audit conducted in accordance with the provisions of 2 CFR section 200. The audit threshold went into effect for fiscal years beginning October 1, 2024. Prior to October 1, 2024, the audit threshold was $750,000.
Single audits are comprised of two sections:
- An audit of the organization’s financial statements.
- Testing of the organization’s internal controls over compliance and the compliance with the requirements of their federal awards
The objectives of a single audit are to determine if the award recipient:
- Prepared financial statements which are presented fairly and in accordance with generally accepted accounting principles (GAAP).
- Has a system of internal controls over federal awards that is sufficiently designed and implemented to ensure compliance and verify the operating effectiveness of those controls.
- Expended federal awards in accordance with the terms of award agreements, program requirements, and those provisions of federal law or regulations that could have a direct and material effect on the financial statements or on the financial assistance awards tested.
The compliance supplement provides guidance to the auditor on what aspects of the auditees’ federal award compliance should be considered The compliance requirements fall into the following categories:
- Activities allowed and unallowable
- Allowable costs/cost principles
- Cash management
- Eligibility
- Equipment and real property management
- Matching level of effort earmarking
- Period of availability of federal funds/period of performance
- Procurement, suspension, and department
- Program income
- Reporting
- Subrecipient monitoring
- Special tests and provisions
The federal agency that has oversight of the program may chose up to six of the above compliance requirements for the auditor to focus on during the audit (activities allowed/unallowable and allowable costs/cost principles count as one). If a federal agency chooses not to “pick six,” then all the compliance requirements must be considered by the auditor for testing.
In future articles, we will look at each of the above compliance requirements in more detail.
If you have any questions, please reach out to your DZA contact.
