Understanding Grant Audits: An Overview for For-Profit Entities

Grant audits are a critical component of financial management for for-profit entities that receive federal funding. These audits ensure accountability, transparency and compliance with regulatory requirements. Our recent Virtual Summer CPE Series gave us the opportunity to discuss the topic in-depth with a number of for-profit entities navigating the complexities surrounding this unique type of audit. Below offers some of the highlights of what we covered.

Why Grant Audits Are Necessary

Grant audits are triggered when a for-profit entity expends federal funds exceeding certain thresholds:

• For fiscal years ending prior to October 1, 2024, the threshold is $750,000.
• The threshold increases to $1 million for fiscal years ending on or after October 1, 2024 — e.g., December 31, 2025, and June 30, 2026, year-ends.

The primary goals of grant audits include assessing the entity's use of grant funds to ensure compliance, accountability and proper use of resources.

Key Areas of Assessment

During a grant audit, several key areas are evaluated, including:

• Eligibility and Compliance: Ensuring the entity meets the eligibility criteria and complies with the terms and conditions of the grant.
• Financial Management: Assessing the entity's financial management systems to ensure they are adequate for managing federal funds.
• Allowable Expenses: Verifying expenses charged to the grant are allowable under the grant agreement and relevant regulations.
• Documentation and Recordkeeping: Evaluating the entity's documentation and recordkeeping practices to ensure they are sufficient to support grant expenditures.
• Internal Controls and Risk Management: Assessing the entity's internal controls and risk management processes to identify potential weaknesses.

Preparing for Grant Audits

To prepare for a grant audit, for-profit entities should take several steps:

1. Read the Grant Agreement: Understand the terms and conditions of the grant, including any specific requirements or restrictions.
2. Document Policies and Procedures: Maintain clear, comprehensive documentation of policies and procedures related to grant management, including areas such as capitalization/equipment management, cost allocation and procurement.
3. Train Staff: Ensure all staff involved in the grant process are trained on grant requirements, policies and procedures.
4. Properly Account for Grant Expenditures: Implement robust accounting systems to track and report grant expenditures accurately.

Common Issues Encountered During Grant Audits

Some of the most common issues encountered during grant audits include:

• Failing to prepare the Schedule of Expenditures of Federal Awards (SEFA) properly
• Missing formal policy documentation
• Lacking evidence of reviews and approvals
• Allocating indirect costs improperly
• Requesting reimbursement before costs are incurred
• Filing reports late
• Missing support for direct payroll costs
• Skipping competitive bids in procurement
• Monitoring subrecipients inadequately
• Recognizing the need for a grant audit too late

By understanding these common pitfalls, for-profit entities can take proactive steps to mitigate risks and ensure a smooth grant audit process.

Grant audits are a critical aspect of financial management for for-profit entities receiving federal funding. By understanding the importance of these audits, preparing effectively and avoiding common pitfalls, your organization can ensure compliance, maintain transparency and optimize their financial operations.

Contact Marie Brilmyer, Tina Dzik, Sean Kilcher or a member of your service team to discuss this topic further.

In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.