6 Common Issues in Single Audits, From an Auditor’s Perspective

by: Jonathan Haynes
Verified by: CPA

June 14, 2024

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Nonprofits receive funding through many different sources: various grant programs, each with unique stipulations, individual donations, pass-through funding from other organizations, and more. This can complicate financial management, especially if sophisticated controls aren’t in place to accommodate differing compliance standards.

If nonprofits expend over $750,000 of federal funds in a fiscal year, they’re required to obtain a single audit: a specialized audit that assesses the organization’s financial statements and determines whether it has fulfilled the compliance requirements associated with their federal funding. 

In this article, we’ll explore six of the most common issues our auditors encounter when conducting single audits. We’ll also explore measures that organizations can put in place to proactively mitigate these issues and move toward a better system of managing federal funding.  

This article is the fifth in our five-part series on Single Audits. Learn more about the process by reading our other articles: 

Issue 1: SEFA Misalignment with Chart of Accounts

The Schedule of Expenditures of Federal Awards (SEFA) is a report that documents how an organization spends federal grant money, detailing which expenses during the reporting period were covered by grants or contracts. It’s critical that the SEFA reconciles with the organization’s financial statements. 

At the outset of the single audit process, an organization’s SEFA report is compared to its chart of accounts. If the two are misaligned. For example, if the organization’s financial statements show $5 million in grant revenue while the SEFA only reports $2 million in expenses, this raises concerns about the accuracy of the organization’s financial reporting. 

This can happen for a few reasons: 

  • Recording structure differences: Differences in the format and categorization between the SEFA and the chart of accounts can make it difficult to align them and lead to errors.
  • Incomplete or misaligned data: Data may not be fully recorded or reconciled, resulting in missing funds from the SEFA. 
  • Misunderstandings about which funds need reporting, Leading to incomplete or misleading data. 

Best Practice: Stay Aligned with Clear Communication and Documentation

Organizations can get ahead of this problem by proactively aligning SEFA with the chart of accounts: 

  • Establish consistent categorization: Standardize how funds are categorized across all financial records and SEFA, with clear codes and labels to minimize confusion.
  • Educate stakeholders: Ensure everyone understands the importance of accurate SEFA reporting, how to use codes and categorization and which funds should be included.
  • Regularly reconcile: Establish an internal reconciliation cadence to identify and address discrepancies proactively.
  • Document everything: Keep detailed documentation about all fund sources, programs, reporting criteria, and fund allocation decisions to support future audits.

Issue 2: Failing to Record Funding Received in the Correct Accounting Periods

Some nonprofits adopt accounting processes that lead to them incorrectly assigning grant funding to the wrong accounting period, ignoring the grant conditions or when the grant funding was spent. This practice can cause problems such as: 

  • Misaligned Financial Reporting: Discrepancies between reported revenue and the expenditures reported in SEFA.
  • Noncompliance with Grant Terms: Many grants are conditional, for example, associated with specific milestones or activities. Reporting all funding as revenue upfront, when the funding has not technically been earned, can cause nonprofits to become non-compliant and risk future funding.
  • Potential Audit Findings: Discrepancies in financial reporting could result in corrective action and potentially risk future grant eligibility.

Best Practice: Align SEFA with GAAP Financial Reporting

Nonprofits can avoid this issue by aligning their SEFA and GAAP financial reporting. 

To do this, align revenue recognition with spending and criteria fulfillment for more accurate reporting of financial activities. If grant funding has yet to be spent, defer it until the accounting period when it is used. This can help ensure grant term compliance and avoid single audit findings. 

To further clarify financial reporting, explain relevant conditions or deferment in footnotes or management discussions, and include this documentation in your financial statements for transparency.

Issue 3: Allocating Payroll

Many nonprofits encounter problems with payroll allocation for grant-related activities. This may be triggered in a few different ways. 

For example, organizations may not have sufficient documentation–in other words, proof the employee was working on something related to that grant. 

Or there may be discrepancies between allocation estimates and actual timesheets. 

Finally, double-dipping can occur if the same activities are allocated to numerous grant sources. 

Best Practice: Establish Internal Controls to Validate Payroll Allocation

Avoid payroll allocation issues by establishing internal controls to validate all allocation decisions, including: 

  • Robust documentation establishing the allocation methodology and its alignment with grant requirements
  • Segregation of duties to prevent conflicts of interest and ensure transparency
  • Approval processes to validate and sign off on all allocation decisions
  • Education for staff on allocation and documentation processes and the dangers of double dipping.

With a consistent approval process and standardized documentation, nonprofits can ensure accurate allocation and avoid confusion.

Issue 4: Errors and Discrepancies in Procurement Processes

Procurement is the process of acquiring goods and services from vendors. Specifically, it refers to a process that goes beyond purchasing and includes a contract. 

Procurement is subject to several thresholds that define which processes must be used: 

  • Micro-Purchase Threshold: The maximum value purchase organizations can make without a competitive bidding process, generally up to $50,000 annually, but dependent on certain criteria.
  • Small Purchases: For procurements between the micro-purchase threshold used by the organization and $250,000, organizations may use simplified procedures, such as requesting vendor quotes instead of a formalized bidding process. 
  • Simplified Acquisition Threshold: For anything above $250,000, an organization must follow a formal competitive bidding process, including RFPs, bid selection and negotiation. Some specialized services may have only one vendor with the capabilities or ability to fulfill the needs of the procurement. Selection of this type of sole source procurement must be documented.

As these thresholds are updated, it’s critical that nonprofits update their procurement policies in line with these updates. If the nonprofit misunderstands these thresholds or fails to update their internal policies, they may commit errors that result in single audit findings. 

Other common causes of procurement errors include lack of clear documentation and discrepancies in the vendor selection process. 

Best Practice: Establish and Uphold Formalized Procurement Procedures

A formalized procurement procedure can help nonprofits avoid procurement-related findings. 

First, establish consistent procurement policies that define roles, responsibilities, thresholds and required documentation. While you can align these with the most up-to-date federal thresholds, some organizations develop more conservative internal thresholds.

These procurement policies should include: 

  • A formal agreement with all vendors
  • Vendor selection guidelines and best practices
  • Required documentation regarding grant requirements, vendor selection and justifications
  • Regular training for staff on threshold levels, acquisition processes, documentation and other internal best practices

Formalizing this process will make the procurement process more consistent, help to manage risk and avoid future findings.

Issue 5: Ineffective Subrecipient Monitoring

Many organizations pass grant funding through to other organizations (known as subrecipients) to conduct specific grant-related activities on their behalf. 

This is distinct from contracted services: 

  • A contractor provides goods or services for the organization’s own use and is paid through procurement contracts. Contractors can be used to carry out grant-related activities, but the compliance requirements under the grant remain solely with the organization.
  • A subrecipient carries out grant-related activities and is paid via the grant in question where certain compliance requirements under the grant are passed through as well.

When organizations fail to monitor subrecipients or do so inconsistently, funds may be misused, the organization may fall into non-compliance, and audit findings may occur. 

Each of these consequences may threaten the lead recipient’s future eligibility for grant funding.

Best Practice: Formalize the Subrecipient Agreement Process

Manage the risk associated with passing through grant funding by formalizing the agreement process. 

Start with risk assessments, considering potential subrecipients’ single audit findings, financial stability and past performance. Then, enter into a formal agreement. 

By establishing formal, documented agreements between lead agencies and subrecipients, organizations can clearly define roles, compliance obligations, and monitoring and documentation processes, making it easier to avoid errors. 

Finally, document everything, including your risk assessment process, negotiations, meeting minutes and follow-up conversations for easier auditing down the line. 

Issue 6: Misunderstanding Generally Accepted Government Auditing Standards (GAGAS)

Nonprofits must understand precisely which standards they’re being measured against to stay ahead of single audit requirements and avoid findings. One of the most common misunderstandings has to do with material audit adjustments. 

If the nonprofit misunderstands which standards apply, it could theoretically be compliant but still receive single audit findings.

For example, an organization’s financial statements contain material audit adjustments. Because these adjustments are unrelated to their grants, they don’t include them in their single audit documentation. Because Generally Accepted Government Auditing Standards (GAGAS) stipulate that all material weaknesses and deficiencies must be disclosed, regardless of their relationships to grant funding, this results in a finding.

In this case, the example nonprofit took all the steps they believed they needed to stay compliant. And because they didn’t understand GAGAS, it was still insufficient. 

Best Practice: Take Proactive Steps to Stay Compliant

To avoid these understandings, maintain a thorough fluency with all relevant audit standards and where they differ. Then, build these standards into internal controls, with clearly established roles and responsibilities, documentation, and regular checks. 

Maintain in-depth documentation about all financial records, including transactions, allocation, procurement, other activities, and rationale for each decision. This helps to provide a clear audit trail in the future. 

Finally, provide staff with regular, up-to-date training on compliance requirements and the consequences of noncompliance. 

Smith + Howard: Experienced Single Audit Professionals

By proactively learning about the single audit process–the timeline, required documentation, standards and potential challenges–you can establish stronger internal controls to help your organization stay compliant and avoid findings. 

The keys to success are education, robust documentation, organization, and consistency across all areas of financial management. 

At Smith + Howard, our experienced single audit professionals can guide you through this process as seamlessly as possible. The team’s deep understanding of the audit process and the nonprofit landscape enables them to provide targeted guidance and strategic recommendations to help your nonprofit continue its mission.

To learn more about how Smith + Howard can help you through the single audit process, contact an advisor today.

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If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.