March 11, 2019
By Tom Netznik, CPA | Nonprofit Audit Manager
Whether your organization has historically provided sub-awards to domestic or international nonprofit organizations or is new to these types of transactions, there are important steps you should take to not only ensure compliance with federal regulations, but also protect your organization from possible loss due to unallowable or questioned costs incurred by the sub-recipient or misappropriation of assets. Before you sign your next sub-recipient agreement, make sure your organization has considered several key areas that will facilitate compliance with the federal award.
The quiz below outlines several important considerations for the primary recipients of federal awards. Answer these questions to determine whether your organization could be at risk.
1. Does your organization understand the difference between a sub-recipient and a contractor? Yes/No
The distinction not only affects the selection of the organization/vendor who will become the sub-recipient, but also defines what is required of your organization and dictates the best practices that should be followed over the life of the agreement.
- Under the Uniform Guidance, 2 CFR 200 §75.351, the circular defines:
Sub-award as a transaction to have a purpose of carrying out a portion of a Federal award and creates a Federal assistance relationship with the sub-recipient.
- Contract as a transaction for the purpose of obtaining goods and services for the non-Federal entity’s own use and creates a procurement relationship with the contractor.
2. Does your organization understand the applicability of Uniform Guidance to sub-recipients? Yes/No
Under uniform guidance, Subpart F, nonprofit entities that incurred expenditures in excess of $750,000 in any given year are required to have a single audit or program specific audit. This requirement is not only applicable to U.S entities but also for international nonprofits. Through your communication with the sub-recipient, this should be analyzed on an annual basis during the life of the award.
3. Has your organization designed and implemented a formal policy and procedures manual specifically for sub-recipient monitoring? Yes/No
The policies and procedures manual should define the process all personnel should use in the selection and analysis of the sub-recipient as well as the appropriate reporting and communications that must take place during the life of the award to ensure your organization stays informed of the progress made on the tasks assigned.
4. Does your organization have a formal risk assessment process that includes a questionnaire for potential sub-recipients? Yes/No
As part of a formal risk assessment, your organization should develop a questionnaire to vet potential sub-recipients. This questionnaire should be designed not only to better understand the capabilities of the organization and the sub-recipient’s history with federal assistance, but also ensure the organization understands what is required of them should they be awarded these funds.
Some of the questions to consider. Does the potential sub-recipient:
- Have written policies and procedures manuals to appropriately manage the project? Do they clearly define the roles and responsibilities of management and the organization?
- Have a formal accounting system that can adequately track and report expenses incurred during the project?
- Conduct an annual audit?
- Currently (or recently) receive any type of federal assistance, and are they aware of the requirements and guidelines set forth by those agreements? If so, has the organization triggered a Single Audit under the Uniform Guidance because the sub-recipient spent over $750,000 in recent years?
5. Does your organization monitor sub-recipients’ internal controls? Yes/No
Obtaining an audit report and management letter or the single audit of the organization can provide valuable information into the controls and capacity of the organization. If recommendation or findings have been reported, it is important to analyze how these deficiencies could affect the federal project should the organization receive these funds.
6. Does your organization conduct due diligence on potential sub-recipients? Yes/No
Prior to selection, your organization should obtain necessary approval from the donor and conduct due diligence to ensure that the organization is not suspended or debarred from conducting business with the U.S. Government or on a terrorist sanctions list. These screenings should not only be performed on the organization itself, but also on key members of its management. This background check can be completed using online databases available through SAM.GOV and the U.S. Department of The Treasury.
7. Does your organization tailor monitoring based on the risk level of the sub-recipient? Yes/No
Once your organization selects the sub-recipient, you should then use your formal risk assessment to decide what level of monitoring will be necessary. Your agreement with the sub-recipient should clearly define these tailored terms and ensure that all federal pass-through funds are clearly identified in the agreement. 2 CFR 200. §75.352 details the information required to pass-through to the sub-recipient.
If your organization does not have history with the sub-recipient, or this would be the first time obtaining a federal award, you may decide to expand monitoring procedures or implement a reimbursement basis for expenditures.
- Some items that may be tailored due to a high-risk sub-recipient:
Frequency and detail of financial and programmatic reporting
- Completion of site visits
- The level of detail required to be submitted with the financial reports for expenditures incurred
- Providing sub-recipients with training and technical assistance on program-related matters
8. Has your organization implemented a formal site visit checklist? Yes/No
Your organization should establish and implement a formal site visit checklist that details expectations and procedures to be applied during these visits. Should there be findings or recommendations that arise during these visits, your organization should require the sub-recipients to submit formal responses and action plans to correct any deficiencies. Additionally, your organization should implement a formal follow-up procedure with the sub-recipient to ensure recommendations are addressed in a timely manner.
9. Does your organization know how to handle fraud or misuse of federal funds by the sub-recipient? Yes/No
If while monitoring a sub-recipient your organization becomes aware of any fraud, or significant misuse of federal funds or material non-compliance, you should communicate these issues directly with the donor immediately. As you conduct additional investigations into the matters, it is important to keep the agency or funder aware of progress and any conclusions. If your organization is aware of a change in allowability of an expenditure previously reported with the specific sub-recipient, the expense should be removed from the award and reporting to the donor should be adjusted appropriately.
If you answered “no” to any of these questions, your organization should revisit its federal sub-awards to make sure those responsible within the organization and the sub-recipient’s organization understand all the requirements, implement appropriate policies and procedures, and identify possible risk areas. For questions about sub-recipient compliance and your organization, contact Tom Netznik, CPA, Nonprofit Audit Manager at firstname.lastname@example.org or 301-951-9090.