Control Levers and Buttons Feature

Uniform Grant Guidance: Internal Controls and Subrecipient Monitoring

by Grant Lam
June 29, 2015

At a high level, the comprehensive new Uniform Grant Guidance (UGG) released by the Office of Management and Budget (OMB) is meant to remove unnecessary burdensome administrative requirements and minimize the time that grant recipients must spend with the administration of federal funds.

At the same time, the guidance requires nonprofits to rethink the way they approach internal controls and how they monitor subrecipients of the federal funds they are entrusted with.

Tighten Up Internal Controls
UGG calls for grant recipients to implement sound internal controls that provide reasonable assurance that they comply with grant terms and conditions throughout the entire federal awards process. That means having controls in place from the very start of the award process—not as an afterthought when preparing for an audit of the program months or years later.

So, a nonprofit research institution would need to have controls in place when it first begins to engage with labs, partners and vendors to ensure that only allowable costs will be charged to the research grant.

UGG requires recipients of federal awards to:

  • Evaluate and monitor compliance with terms and conditions of federal awards. You’ll need to fully understand all of the compliance requirements as they pertain to your particular award and have processes in place to evaluate whether you are adhering to them.
  • Take prompt action on audit findings. This entails remediating any adverse findings and putting controls and processes in place to ensure that the issue is not repeated.
  • Take reasonable measures to safeguard personal and sensitive information. Data security is especially important for patient or participant files. In the case of sensitive electronic data, you’ll want to work with your auditors and IT staff to ensure that appropriate IT controls are in place.

Recommendation: Consult the Committee of Sponsoring Organizations (COSO) and the U.S. Government Accountability Office’s Green Book for guidance on establishing solid internal controls. Also, be sure you can thoroughly document the implementation of your processes and procedures as evidence of your commitment to strong internal controls.

Subrecipient Monitoring
Under UGG, passthrough entities must identify and clearly communicate compliance requirements to their subrecipients to ensure that the sub award is used only for authorized purposes and in full compliance with all regulations, terms and conditions. Pass-through entities must also provide indirect cost rate information to any subrecipients. (Note: UGG provides an opportunity for first-time award recipients to receive a de minimis indirect cost rate of 10% of modified total direct costs, if the entity has never had a negotiated indirect cost rate.)

Another important change is that pass-through entities are required to assess the risk of noncompliance from their subrecipients. This includes looking at things like prior experience with sub awards, results of past audits, recent changes in personnel or systems, and the results of any external federal monitoring. Carefully evaluating these factors will indicate the level of risk—and the corresponding amount of monitoring you’ll need to carry out.

A passthrough entity must do the following:

  • Review financial and programmatic reports. Ensure that all required reports are completed accurately and in a timely manner.
  • Follow up on deficiencies. You’ll need to confirm that subrecipients are taking timely and appropriate action on any deficiencies detected through audits, onsite reviews and other means.
  • Issue a management decision for audit findings. The management decision must clearly state whether the audit findings are sustained, the reasons for the decision and the expected subrecipient actions. These actions might include repaying disallowed costs, making financial adjustments or other actions.

Recommendation: Understanding your subrecipients and being involved in the work that they do is the key to effective monitoring. That means reviewing invoices, looking at time sheets and reading all required reports. You may also wish to provide training and technical assistance with compliance matters, as well as conduit site visits and periodic status calls. Of course, be sure to thoroughly document every aspect of your monitoring process. 

June 29, 2015

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Grant Lam - Partner, Audit - San Francisco CA
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