Grant Reporting Requirements and Misuse of Funds – Part II
Last month, we wrote about the importance of reporting how grant funds are spent and the consequences of misusing funds. Most grant applications require submitting a budget that then must be followed for the duration of the grant. If there are changes to the budget after a grant has been awarded, an organization needs to give official notification and receive approval before funds are spent. Material misuse of funds occurs when there is no approval. This can lead to fines and the need to repay funds, whether as a deduction from future grants or direct repayment, and possibly even a ban on future grant funds to your organization.
The best way to avoid misuse of funds or other violations of grant requirements is to thoroughly read, understand, and plan for the guidelines accompanying each awarded grant.
Use grant books
To avoid the legal trouble, fees, and problems following misuse of funds, it is important to create a framework for reporting how funds were used. The first thing to do is to create a grant book for each grant you are awarded. A grant book should include a copy of the grant application, reports generated for the grant, and time cards for grant-funded staff. The reports should include both financial and programmatic reports that detail which funds were applied to which programs. Time cards need to be current and include information about any matching gifts that were received.
After creating the grant book, use it! Too often, policies and procedures that were put into place at the beginning of the project fall by the wayside. For grants, this can lead to troubles with the auditor and disallowed costs. Faithful use of the grant book will keep your nonprofit organized and on track for reporting success.
Set up systems properly
When choosing software programs to track expenses and produce reports, be sure the reports generated match what is officially needed. Specifically, accounting software must be set up with an accrual method of accounting. Use a software that allows you to set up each grant as a class. When recording expenses and revenues, code them as the proper grant. When you go to pull reports, it will be easier to decipher what expenses and revenues go along with each grant.
Ensure separation of duties
Not only do all the processes and reports related to the grant need to be executed, but they also need to be executed by the correct person. This may include board and CEO involvement or an authorized grant official, and there should be cross-checks to ensure that no one person has the ability to misuse funds.
“Not only do all the processes and reports related to the grant need to be executed, but they also need to be executed by the correct person.”
The CEO (or executive director or whoever is named in the grant) takes on the responsibilities of signing time cards, reviewing expenses and comparing them to the budget, and checking the grant budget monthly to ensure there are no expenses allocated to the grant that should not be. The board needs to review all reports and financial statements, approve them, and maintain proper board minutes and records. In the event of an audit, the auditor will be checking to see that the board maintained proper oversight.
Finally, the board treasurer will review and reconcile bank statements, have access to all online bank accounts and online payment accounts, and review all grant draws. This creates a system of cross-checks for all grant spending.
Follow best practices to avoid an audit
Through the years, Nonprofit Solutions Law has helped many nonprofit organizations untangle the legal mess that comes from misuse of funds or other issues with grants. In that time, we’ve worked with many different auditors and learned some of the recommended best practices to avoid an audit.
● Be consistent in the method used to allocate funds and document all allocations.
● Review claim forms and invoices prior to payment.
● Use an accounting system in which you can easily compare budget versus actual award expenses.
● Consistently review monthly and quarterly expenses and document the board’s approval of those expenses.
● Develop and implement policies and procedures for things like property and asset management, contract award and management, payroll, succinct time allocation documentation, and contract procurement and payment.
Following these key best practices and auditor recommendations is the best way to ensure proper handling of grant funds and avoid misuse of funds and disallowed costs.
