What You Need to Know About Your First OMB Audit

In the past 15 years, the federal government has intervened twice — during the Great Recession and the COVID-19 pandemic — in a significant and meaningful way to avoid a financial and economic meltdown, and thus another Great Depression. In both instances, the federal government used monetary and fiscal policy to ensure liquidity in the financial markets and to avoid an economic depression on Main Street.

The biggest difference between the two interventions is that the COVID intervention injected a more significant amount of cash into the economy in an attempt to see everyone through to the other side of the pandemic. That was done through direct fiscal spending to businesses, nonprofits, and individuals.

Much, but not all, of this direct funding is subject to the OMB Single Audit requirement if the recipient expends more than $750,000 in federal funding in a single fiscal year. Some of the most robust federal funding, like the Paycheck Protection Program (PPP), is not subject to the Single Audit requirement, while other funding, like the Shuttered Venue Operator Grant program, is subject to the audit.

If you are running a business or nonprofit organization that received more than $750,000 in federal funding (not including the PPP) and is likely to expend at least $750,000 of that funding in a single fiscal year, you should be asking yourself if your organization could be subject to the OMB Single Audit requirement.

If the answer is yes, then you should know what is involved with an OMB Single Audit and what you need to do to prepare yourself. Although this article is designed to help you prepare, it is by no means a comprehensive checklist; rather, the advice that follows should help you avoid the pitfalls that many business or nonprofit leaders experience with their first OMB audit.

Here are a few things you should review and consider upon receiving your federal award:

• Read the grant agreement in detail: As you read, you should note whether the grant is subject to the Single Audit requirement. Most grants that are subject specify that in the agreement. If it is not specified, you should still reach out to your grant officer at the federal agency to verify — do not just assume it is not subject. You should also review the grant period and budget to make sure you know when the grant funds must be spent by and what they can be spent on. You should also note possible additional reporting requirements you will need to comply with.
• Compliance happens in real time, not just when preparing for the audit: Many first-time awardees erroneously think preparing for a Single Audit is something that can be done after the fiscal year ends, in conjunction with preparing for the financial statement audit. This notion is incorrect as compliance with grant requirements must happen in real time throughout the fiscal year, and trying to comply after the fact is not permitted in most circumstances.
• It’s not just compliance, it’s internal control over compliance: Not only do you need to demonstrate that you complied with the terms of the federal Uniform Guidance and grant agreement as part of the Single Audit, but you also need to demonstrate that you had sufficient internal controls in place to ensure compliance. Those controls must be documented in your policy and procedures manual, and you have to demonstrate that you exercised those controls during the fiscal year.
• Timing of expenditures: The timing of when you spend the award triggers the Single Audit, and you largely control that timing within the grant period(s). Most federal grants cross at least one fiscal year, even if the grant period is only for one year (unless the grant period lines up exactly with your fiscal year). This affords the opportunity to spread the grant expenditures over multiple fiscal years and potentially have no fiscal year that exceeds $750,000 in federal expenditures, therefore avoiding the Single Audit. That said, please note federal expenditures are based on the accrual basis of accounting, and not on the cash basis, so you cannot defer federal expenditures into the next fiscal year by simply deferring payment of incurred expenses. A final tip for spreading federal expenditures across fiscal years is to ask for a “no-cost extension” to extend the period of the grant. Please note that these extensions are not automatic, so if the grant officer does not approve, then you must complete expenditures during the original grant period(s) or return the unspent funding.
• Tracking federal expenditures: All federal expenditures need to be tracked separately within your accounting system, preferably at the individual grant level. Be prepared to create new account sequencing, or possibly just new accounts, to track and report your federal grant activity. You will use this grant reporting from the accounting system to prepare a summary Schedule of Expenditures of Federal Awards for your auditor to include in their reporting.

I have mentioned compliance requirements quite a bit — but what exactly are the compliance requirements that must be followed? That depends on whether the compliance requirements included in the Uniform Guidance are applicable to the activities included in the grant and the terms of the grant agreement (see the grant agreement above). Most grants typically all have the following compliance requirements (which are fairly intuitive):

• Allowable costs and period of performance: Are you spending the grant funds as allowed by the law and per the agreed-upon grant budget, and are you only spending grant funds within the grant period?
• Cash management: If permitted, are you asking for cash advances to fund only near-term federal expenditures? When requesting reimbursement, are all reimbursement requests substantiated with previously incurred expenses?
• Matching and level of effort: If the grant calls for a matching contribution, have you satisfied it or are you on track to satisfy it by the end of the grant period? Have you achieved the required level of effort or the specific outcomes or objectives specified in the grant, or are you on track to satisfy those outcomes or objectives by the end of the grant period?
• Procurement and suspension and debarment: Is your procurement policy in accordance with the minimum requirements as specified in the Uniform Guidance? Have you made all procurements with federal funds in accordance with that policy, and properly documented the process? Did you verify that the vendor or contractor is not suspended or debarred from doing business with the federal government?
• Reporting: Have you submitted all the financial and performance reporting on time, as called for in the grant agreement?

If you have determined that a single audit is required, here are a few helpful tips as you prepare.

• Documentation: Document your compliance with all requirements, including internal controls over compliance. If you do not, your auditor will have to conclude that you are out of compliance (if you did not document that you did it, then your auditor must conclude that you did not, even if you did).
• Awareness and good communication: Make sure everyone involved with grant expenditures and reporting is aware of and understands the compliance requirements and the need to document. Ensure frequent communication and reporting with those involved to avoid misunderstandings that could lead to noncompliance. Conducting trainings specific to OMB compliance is essential to achieving that awareness and understanding.
• Review and supervision: Proper review and supervision is critical to ensure that all compliance requirements are followed and that reporting deadlines are met. This includes cross review and supervision with those carrying out the grant’s activities, and with the finance team that is capturing and reporting on all federal expenditures within the accounting system.

If you follow this general advice, you will be well on your way to a successful first OMB Single Audit. There are many more detailed aspects of compliance that could not be addressed in this article, but by consulting a knowledgeable auditor or consultant, and by educating yourself with research and trainings, you should be able to address the detailed compliance requirements that are specific to your federal awards.