On March 31, the National Science Foundation (NSF) Office of Inspector General (IG) issued an audit report in which it questioned approximately $1.8 million in costs charged by the University of California at Berkeley to NSF grants totaling $379 million from 2010 to 2012. The NSF IG's report is one of several recent reminders that Federal nonprofit grantees need to prepare for audits of their grants, and that those audits often can entail a lengthy process, particularly where large dollar amounts are involved. This month's newsletter continues our focus on various compliance issues with a discussion of how to prepare for, engage in, and appeal multi-year audits. While long-term audits can be an arduous and frustrating process, nonprofit grantees should consider taking the following actions before, during, and after IG audits to minimize the IG's recommended disallowance and recover improperly disallowed funds.
Prepare for the Audit Before It Begins
The most important work in reducing the aggravation of an audit occurs well before an auditor starts opening up books—during the performance of the grant award.
- Create an Audit Trail for Decisions Made During Performance. Grant conditions and regulations (such as 2 C.F.R. § 200.400(d)'s requirement to provide adequate documentation of the reasonableness and necessity of all costs incurred under the grant) set forth a nonprofit's responsibilities when it comes to the creation and maintenance of records that give contemporaneous explanation for the nonprofit's decisions throughout performance. Such documentary evidence includes various iterations of required policies and procedures that can demonstrate to an auditor that the nonprofit worked diligently throughout the life of the grant to safeguard and expend grant funds in accordance with all applicable requirements. Having clear, contemporaneous documentation of the circumstances prevailing at the time the decision was made can help to mitigate the effects of an auditor's after-the-fact second-guessing of grantee actions.
- Establish Filing Systems and Document Retention Policies That Ensure Adequate Documentation Is Readily Available. As required by 2 C.F.R. § 200.333, nonprofit grantees should establish consistent, comprehensive filing systems and document retention policies that set the ground rules for grant administrative personnel on what are relevant documents that should be saved, where and how these documents will be stored, and how long they will be retained. These policies also should include guidelines for ensuring that final versions of decisionally important documents are created and dated by the appropriate personnel with knowledge of the decision. Additionally, storing these documents in non-editable file formats will help demonstrate to subsequent auditors that they are an accurate representation of the contemporaneous thought process of the organization, and will preserve institutional knowledge if the decision-making personnel eventually leave the organization.
Assemble the Right Team and Maintain Communication During the Audit
Audits do not simply involve opening up grantee records and waiting for the audit report. It is critical that nonprofits assemble an appropriate team that is able to communicate effectively with the auditors.
- Assemble the Right Team. First, a nonprofit should designate a single point of contact within the organization to be the face for the organization during the audit. Ideally, that person should have a good understanding of the grant programs being audited, from both programmatic and cost perspectives. Generally speaking, the liaison probably should not be the organization's general counsel, but should report to the general counsel to preserve attorney-client privilege, where appropriate. Second, the nonprofit should involve outside counsel early in the process. Outside counsel will be able to direct a high-level strategy while the organization focuses on the immediate tasks at hand, and is likely to have broad experience and contacts with auditors from several agencies. Furthermore, in the event a grantee needs to take a strong stand, outside counsel can provide the legal basis, as well as play the role of "bad cop" to help reduce the possibility that the organization's standing in the eyes of the agency might suffer.
- Document the Audit Process. Grantees should seek clarification in writing of audit requests and questions, where necessary, to ensure they have a complete understanding of what is being asked before responding. Keep a running list of these auditor requests and questions, as well as responses to them, saving each version of that request, so that the IG cannot credibly question a grantee's responsiveness to a given question. Additionally, nonprofit grantees should create written records of audit meetings to memorialize the discussions and should seek to clarify any resultant requests in writing.
A Nonprofit's Rights after the Audit
- Provide Written Responses Prior to an Agency Decision. After the IG issues a report—which may include recommendations to disallow certain costs—the agency must ultimately decide if it will accept or reject the IG's recommendation. It is critical that nonprofit grantees provide their written response to the IG's report prior to the agency's ultimate determination, pointing out any auditor misconceptions, factual errors, and/or mistaken application of the law.
- Know Your Appeal Options. The agency will then agree or disagree with the auditors' findings and propose any corrective action that the agency believes is needed to address the findings. To the extent that the agency makes adverse findings against the grantee, there often is an agency appeals process. If the agency appeals process produces an unfavorable outcome, nonprofits can seek judicial review under the Administrative Procedure Act, 5 U.S.C. §§ 500-596.
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A long-term audit can be a frustrating, resource-intensive process. Having a plan before, during, and after an audit will lower that aggravation and can reduce the amounts the auditors otherwise might have questioned.