Prevent Misuse of Grant Funds
We like to believe it is rare that a grantee intentionally misuses funds. However, without proper planning and documentation, an organization places itself at risk for misuse of funds.
How is misuse defined?
By definition, misuse of funds is simply using funds for purposes outside of those dictated by the grantor. This can happen both intentionally, such as in the case of grant fraud, or unintentionally, through misuse of grant funds.
Because a grant is essentially a contract with the federal agency, the grantor makes a binding agreement to provide a specific amount of funding, while the grantee makes a binding agreement to administer those funds according to the grantor’s specific terms and conditions.
How do you avoid misuse of funds?
Education and preparation are both key elements in order for an organization to reduce risk of misusing funds and remain in compliance with the grant.
Who should we educate about the proper use of grant funds?
Both those directly responsible for administering the grant within the organization and all other employees working with grant funds should be trained as to the terms for how funding is to be used.
In addition, it is often advisable for organizations to educate their clients and other members of the public (i.e. donors, volunteers) as to the terms of the grant.
What can we do to prevent misuse of grant funds?
Step 1: Start with a realistic budget
Prevention of misuse of grant funds starts at the beginning of the grant application and writing process. Organizations must carefully construct, as well as review, the budget delivered to the grantor, making certain that the budget is both adequate and realistic in terms of meeting grant requirements. Key personnel such as department heads and accounting should be consulted.
Step 2: Have strong compliance plans in place
Key elements of good compliance plans include three main mechanisms for reporting:
• How funding is received
• How funding is accounted for
• How funding is spent
In order to accurately report on how funds are used, organizations must properly maintain strong best practice methods within accounting, documentation, and record keeping.
For example, with regard to program income and cost share, the organization must have an intimate understanding of how the funding agency requires program income and cost share to be treated. Additionally, it is essential to follow the reporting schedule required by the grantor.
Step 3: Identify weaknesses within your existing compliance plans
Reducing the risk for unintentional misuse of funds is profoundly important as misspent funds are most always expected to be recovered from the grantee. Early detection is of the utmost importance to prevent big expensive problems down the road.
When planning or reviewing current compliance plans, ask the following questions to assist in identifying weaknesses within the current plan:
• Does the plan include procedures for documenting purchases using receipts and invoices? Does the organization have a formal procurement process?
• If the grantee is required to perform specific services, does the plan address documentation in order to prove conditions of the grant are being met?
• If program income is generated via activities described in the grant, does the organization understand how the agency requires this income to be treated and have procedures in place to ensure compliance?
• If cost share is a condition of your grant, does the organization understand how and when cost share funds must be received and reported?
• Has the organization conferred with an expert regarding using indirect versus direct cost rates? This is a complex issue and can result in unintentional misuse of funds.
• Does the organization have appropriate procedures to document time and effort requirements specified in the grant (i.e. time sheets)?
Addressing these questions will go a long way towards preventing misuse of funds. Which of these does your organization have in place?
Lucy Morgan CPA, MBA