Is Your Organization Making These Single Audit Errors?

Think of a single audit as your organization’s federal funding report card — except the stakes are far higher than any school assessment. A single audit examines not just your nonprofit’s financial statements, but your entire federal award management system. It scrutinizes your internal controls, evaluates your compliance with federal regulations, and determines whether you’re properly managing hundreds of thousands (or even millions) of dollars in federal funds.

Organizations that receive federal funding can’t afford to treat single audits as just another compliance checkbox. The consequences of single audit findings can extend far beyond just a poor audit report. Significant findings can lead to repayment of federal funds, increased oversight or even suspension of future funding.

Through our experience conducting single audits across multiple sectors, we’ve observed common themes where organizations typically face compliance challenges. More importantly, we’ve developed strategies to help our clients proactively avoid these pitfalls.

Lacking Infrastructure & Documentation

The difference between a smooth audit and a challenging one often comes down to one factor: how well prepared an organization is for the audit.

Disorganized financial records and internal controls make it difficult to provide auditors with the necessary information. This could result in penalties, funding delays or even loss of grant eligibility. The most common organizational failures include:

• Non-centralized documentation: Organizations frequently struggle to maintain centralized records of grant agreements, contracts and notices of award. This dispersed documentation not only complicates the audit process but often leads to missed compliance requirements and potential findings.

• Inadequate expenditure tracking: Many nonprofits fail to properly segregate grant expenditures in their chart of accounts. Without clear tracking methods, proving compliance with grant requirements becomes nearly impossible. Consistent categorization, education of your accounting staff and regular reconciliations are key to ensuring you remain in compliance.

• SEFA preparation problems: The Schedule of Expenditures of Federal Awards (SEFA) serves as the foundation of your single audit, yet many organizations treat it as an afterthought. A proper SEFA should include:

• • Accurate program names
  • Current Assistance Listing numbers
  • Complete expenditure records for the fiscal year
  • Detailed subrecipient information, if applicable

When these elements are missing or incorrect, it often results in additional audit time and increased costs. It’s crucial that your SEFA reconciles with your organization’s financial statements. Proactively preparing your SEFA and aligning it with your financial statements makes for a smoother audit process.

Comprehensive preparation for the single audit process makes the experience much more seamless for your organization. Take the time to gather all your grant agreements, document your internal controls, prepare your SEFA and review your previous single audit (if your organization has one).

Failing to Understand Obligations Under Grant Agreements

Here’s a common scenario. An organization has managed the same federal grant for five years and has continued to operate with the procedures that were established when it first received the award. The problem? Grant requirements change, sometimes substantially — and that original understanding may now be outdated or incorrect.

This misunderstanding of grant obligations manifests in several ways. Common oversights include:

• Failure to account for matching requirements: Some organizations overlook matching requirements spelled out in their grant agreements. For instance, perhaps a grant includes a 25% matching requirement (a portion of the costs the grantee must contribute to the project, distinct from the grant funding). It’s vital to diligently read the grant agreements and identify the obligations your organization has as the grantee to ensure you remain in compliance.

• Fiscal year vs. grant period alignment problems: When your fiscal year doesn’t align with your grant period, careful tracking becomes crucial. Organizations may incorrectly allocate expenses across periods, leading to audit findings and potential fund recovery demands. This issue becomes particularly complex when managing multiple grants with different period ends.

• Changed requirements: Federal agencies regularly update their grant requirements. But many nonprofits continue to manage their grant under the guidelines specified in the original agreement instead of the most recent version. That can be a big mistake; what was allowable under your grant three years ago might not be permissible today.

Read More: The Importance of Understanding Grant Policies

Inadequate Internal Controls for Grant Compliance

Internal controls play a crucial part in the governance of any nonprofit. But if your organization is expensing federal funds, it’s especially important to have effective internal controls in place. Simply having internal controls isn’t enough; they must specifically align with the internal controls standards spelled out in your grant agreement. Inadequate internal controls typically manifest in several ways:

• Procedures vs. practice disconnect: Written procedures mean nothing if they’re not followed consistently. Many nonprofits have well-documented controls that their staff either doesn’t understand or doesn’t implement properly. This gap between documented procedures and actual practices almost always leads to audit findings. But these are preventable if organizations conduct routine internal audits of their control processes.

• Missing compliance-specific controls: Each federal program has unique compliance requirements, yet many organizations try to use one-size-fits-all controls. Department of Education grants, for instance, often require specific testing provisions that standard internal controls don’t address.

Cost Allocation Errors That Trigger Audit Findings

Improper cost allocation is another issue that can lead to findings in a single audit, especially for nonprofit organizations managing multiple federal grants. Organizations must have a documented cost allocation plan that specifies exactly how indirect costs such as payroll should be allocated across different grants.

This plan should outline the methodologies by which the organization allocates shared, indirect costs across different funding programs. It should include clear categorization of costs, the allocation basis used (e.g. employee hours spent on a particular program) and procedures for reviewing and updating the allocation methods.

A written cost allocation plan isn’t just a good practice — it’s a requirement. Having a cost allocation plan is important, but ensuring it’s followed is just as crucial. Errors frequently occur when employees disregard their organization’s plan, instead using inconsistent cost allocation methods on a month-to-month basis or applying outdated methodologies. Issues can also arise when employees do not maintain sufficient documentation supporting their allocation determinations.

Don’t Let These Mistakes Cost Your Organization

Single audit findings can be costly. You have the immediate costs of addressing audit findings with a corrective action plan. But in more serious or ongoing challenges, organizations may be required to repay federal funds, subjected to increased oversight requirements and face risks to future funding opportunities. That said, there’s good news: Most of these issues are preventable with proper planning and expertise.

Evaluate your current grant management practices against the common errors we’ve outlined here. If you’ve identified potential gaps, don’t wait for your auditor to find them first — address them now.

At James Moore, we believe in preventing audit issues rather than just finding them. Our team of experienced nonprofit assurance professionals can help you review and strengthen your internal controls, develop robust cost allocation methodologies, navigate program-specific requirements and more.

Whether you’re considering applying for new federal funding or managing existing grants, we’re here to help ensure your organization stays compliant and audit ready. Don’t wait for an audit finding to address these issues. Contact us today to discuss how we can help strengthen your federal grant management processes.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.