A grant audit, also known as a compliance audit or program-specific audit, is a type of financial audit conducted on organizations that receive grants or funding from federal sources, such as government agencies. The purpose of a grant audit is to ensure the funds provided are used according to the terms and conditions specified in the grant agreement.
For-profit entities that receive federal funds may not be aware that if they have federal expenditures in excess of $750,000 in their fiscal year, they may be subject to a grant audit. (Nonprofit organizations that meet the threshold will generally require a Single Audit.) Below provides a foundational understanding of grant audits in the event your organization may need one.
Why Is a Grant Audit Necessary?
A grant audit is necessary in today's environment for several reasons:
- Provide Accountability and Transparency. Grant audits help ensure accountability and transparency in the use of public or donor funds. With increasing scrutiny on how organizations use grant money, conducting audits provides assurance to grantors, stakeholders and the public that the funds are being used appropriately and in accordance with the grant agreement.
- Help Comply with Regulations. Grant audits help organizations demonstrate compliance with applicable laws, regulations and guidelines. Grantors often have specific requirements and restrictions on how funds should be used, and audits ensure organizations are adhering to these rules. Non-compliance can result in financial penalties, reputational damage or even the loss of future funding opportunities.
- Mitigate Risk. Grant audits help identify and mitigate financial and operational risks associated with grant-funded projects. By examining financial records, internal controls and processes, auditors can identify potential fraud, mismanagement or inadequate financial controls. Addressing these risks helps protect the organization's reputation and helps ensure the effective and efficient use of grant funds.
- Evaluate Performance. Grant audits assess the performance and outcomes achieved by organizations with grant funds. This evaluation helps determine whether the organization has met the goals and objectives outlined in the grant agreement. It provides valuable insights into the effectiveness and impact of the funded activities, allowing organizations to make improvements and demonstrate the value they bring to the community or beneficiaries.
- Comply with Donor Expectations. Many grantors require organizations to undergo audits as a condition for receiving funding. By conducting grant audits, organizations fulfill these requirements and maintain a positive relationship with the grantor. It also enhances the organization's credibility and increases the likelihood of securing future grants or funding opportunities.
- Boost Stakeholder Confidence. Grant audits enhance stakeholder confidence in the organization's financial management and governance. Audited financial statements and audit reports provide assurance to donors, investors, board members and the public that the organization is operating with integrity and financial prudence.
What Does a Grant Audit Assess?
During a grant audit, the auditor examines your financial records, transactions and activities related to the grant to assess compliance with the grant agreement and applicable regulations. The audit typically focuses on the following four areas:
- Eligibility and Compliance. The auditor verifies your organization meets the eligibility criteria for receiving the grant and that it has complied with all the requirements outlined in the agreement. This includes ensuring that:
- Funds are used for the intended purposes,
- The organization has provided the required reports and documentation, and
- Your organization is following any restrictions or conditions imposed by the grantor.
- Financial Management. The auditor reviews your organization’s financial management practices, including budgeting, accounting and internal controls. They assess the accuracy and reliability of financial statements, examine the use of grant funds, and evaluate the adequacy of financial systems and processes in place to track and report on grant-related activities.
- Allowable Expenses. The auditor examines the expenses your organization incurred when using the grant funds to determine if they are reasonable, necessary and allowable under the grant agreement. The auditor will ensure the expenses align with the grant's objectives and that you are maintaining proper documentation and supporting evidence.
- Performance and Outcomes. In some cases, a grant audit may also assess the performance and outcomes your organization has achieved by using the grant funds. This involves evaluating whether the organization has met the goals and objectives outlined in the grant agreement, and assessing the effectiveness and impact of the funded activities.
How are Grant Audit Findings Communicated?
The findings and recommendations of a grant audit are typically documented in the audit report, which is shared with both your organization and the grantor. The report will highlight any instances of non-compliance, financial mismanagement or areas for improvement.
Much like with a financial statement audit, a grant audit will help ensure your organization is compliant, transparent and ultimately accountable to your stakeholders — helping protect your organization's reputation and ensure the effective and responsible use of federal grant funds. Working with an audit team that has deep expertise in various types of fund audits will streamline the process and lessen the burden on your organization.
Contact Marie Brilmyer or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.