The COVID-19 pandemic brought forth a wave of new federal programs as well as a significant increase in federal funds distributed to both existing and new recipient entities. Government and non-profit recipients of federal funds are subject to the requirements of 2 Code of Federal Regulations (CFR) 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, also known as the Uniform Guidance.
For-profit entities that crossed the single audit threshold ( ears following after October 1, 2024 or $750,000 for fiscal years beginning before October 1, 2024) face specific compliance requirements. Here’s what you need to know to stay compliant and audit-ready.
What’s Required?
The audit requirements for for-profit entities differ from those requirements for governments or non-profit recipients. For-profit entities typically follow 2 CFR 200.507, Program-specific Audits, unless there are specific compliance requirements specified in the federal agency’s Code of Federal Regulations. For example, the Department of Energy has its own requirements under 2 CFR 910.
When determining audit requirements, your auditor will look at the Appendix for Program-Specific Audit Guides in the applicable OMB Compliance Supplement. If a program-specific audit guide is available, the auditor must follow Generally Accepted Government Auditing Standards (GAGAS) and the audit guide when performing a program-specific audit. When a program-specific audit guide is not available, the auditee and auditor must have basically the same responsibilities for the Federal program as they would have for an audit of a major program in a single audit. The specific requirements are detailed in 2 CFR 200.507(b).
Any for-profit entity that receives federal funds is also subject to the terms and conditions of the grant agreement. The terms and conditions spell out specific requirements such as allowable costs, procurement, any matching requirements, and reporting (list is not all-inclusive). The agreements may also spell out specific audit requirements, including the type of audit and deadline for submission to the federal awarding agency (also called the cognizant agency). If the grant agreement is unclear regarding specific compliance requirements, award recipients should contact their cognizant agency to clarify any questions and expectations.
Many for-profit entities only receive federal funding from one federal agency. If funding is received from multiple agencies, the for-profit entity should confirm specific terms and conditions with each awarding agency. The awarding agency and/or the grant agreements should also specify the deadline for completion of the audits and submission of the audit reports.
Setting Up for Success
Once you’ve reviewed the grant agreements, the for-profit entity will need to establish internal controls to ensure compliance with applicable terms and conditions. Some common compliance requirements include:
- Procurement and conflict-of-interest policies
- Documented processes for determining allowable costs and/or how eligibility is determined
- Processes and controls around equipment purchased with federal funds
- Processes and controls around timely and accurate reporting
From our experience, the procurement and conflict-of-interest policies often trip up first-time recipients. It’s worth investing time upfront to avoid compliance issues later.
The most widely recognized source of guidance on internal control is the Committee of Sponsoring Organizations (COSO), which originally released guidance in 1992 and updated its Internal Control-Integrated Framework in 2013. Entities should review this framework and perform a risk assessment to help provide a framework for compliance. In addition, please see or a recent article on Uniform Guidance changes and internal controls.
Getting Audit-Ready
You’ve read your agreements, confirmed expectations, and built your internal controls. Now let’s talk about practical steps to make your audit as smooth as possible:
Keep federal funds separate in your books – don’t mix them with other revenue. Make sure to segregate out all activity related to federal awards and not commingle accounts and funds within the accounting system.
Talk with your accounting team early and often about federal requirements – they’re different from what you’re used to. Compliance requirements for federal awards can be quite rigorous and differ significantly from typical financial statement compliance requirements.
Prepare your schedule of expenditures of federal awards (SEFA).
Keep clean and organized records that are available for audit. We recommend keeping all records electronically or, at minimum, maintaining the ability to provide them in electronic form to auditors.
To promote a smooth audit, it is important to be timely, accurate, and proactive in keeping financial records. Do not wait until year-end or audit time to track federal awards records and policies. If you do not implement it by year-end, you risk having significant audit findings since you cannot fix policies and processes retroactively.
Taking Ownership of Your Compliance Journey
We know federal compliance can feel overwhelming, especially for companies new to government funding. The good news? With the right preparation and guidance, you can build a compliance framework that works for your business.
Moving Forward with Confidence
Federal awards have opened new opportunities for for-profit companies to contribute to national priorities while growing their businesses. Yes, the compliance requirements are significant, but they’re absolutely manageable with proper planning and support.
At Rea, our advisors work alongside for-profit companies navigating federal awards for the first time. We help you build practical compliance systems that fit your business while meeting federal requirements. Let’s talk about your specific situation and how our federal awards advisors can help you make the most of your federal funding opportunities.
Danny Sklenicka is a senior advisor at Rea who helps companies and organizations navigate federal compliance requirements. Have questions about your specific situation? Reach out today.
