So you got a federal grant.

And that means lots of internal controls requirements.

Are you wondering what that means – really?

A primary “must” for managing your organization’s federal awards is strong internal controls.

So, if you are feeling a little uncertain about what that means to you, here are the basics of internal controls in this short guide with examples from the world of grant management.

The 7 Basics of Internal Controls for Grant Management

There are seven basic controls that every grant manager can use to reduce the risk of both grant mismanagement and fraud.

Identifying all the necessary internal controls may feel a little overwhelming as each grant may have varied specifications and requirements.

However, understanding the basics of internal controls will set you on the right track.

Take a minute to review the list and ask the following questions about your organization:

Control #1: Formal Written Policies and Procedures

Start with formalizing written policies and procedures – a component of internal controls called “Control Activities.”

• Who can approve grant spending?
• How is labor recorded and charged?
• What are the procedures for procuring goods and services?
• Are there drug-free workplace requirements?
• Do we have a process to minimize the time between requesting grant funds and paying suppliers?

And besides the general internal control activities requirements, have you reviewed your grant terms and conditions for a list of additional policies that must be in writing?

Control #2: Adequate Monitoring

Sure, you have great written policies and procedures, but how do you know if anyone is actually following those great internal control activities?

Monitoring is another component of strong internal controls.

• How do you check to make sure the existing policies and procedures are understood and adhered to?
• How do you ensure that the charges to the federal grant are reasonable, allocable, and not limited or excluded by Federal Cost Principles regulations?
• How do you make sure that organizational policies are applied to your grants uniformly, whether they are federal grants or not?
• How do you confirm that spending is adequately documented?

Control #3: Reconciliations

Missing reconciliations are a common weakness in internal controls cited in Single Audit findings for federal awards.

• Are your general ledger account reconciliations current and updated in a timely manner?
• Do your property records for equipment purchased with grant funds match the accounting records?
• Have you taken a physical inventory of property purchased with federal funds recently and reconciled the results to the property records?

Control #4: Secured, Safeguarded Assets

Requirements for the financial management of federal grants include the internal control component of assessing risk to determine appropriate controls over all funds, property, and other assets.

The recipient and subrecipient must adequately safeguard all assets and ensure that they are used only for purposes authorized by the award.

How does your organization:

• Safeguard property from loss, damage, or theft?
• Prevent the misuse of credit cards and other assets?
• Provide periodic training to minimize the risk of non-compliance is held for employees on grant requirements?

Control #5: Segregation of Duties

Segregation of duties is a foundational principle of strong internal controls and involves the assigning the functions of recording transactions, authorizing transactions, and custody of assets to different people.

When one or two people have too much responsibility for two or more of these functions, the door is left open for waste, fraud, and abuse of federal funding.

• Do you require authorization for purchases before they are made by someone other than the requester?
• Are goods received by a central receiving function, or can people arrange for purchases to be delivered to their homes?
• Is access to inventory, equipment, check stock, and petty cash controlled and limited to people authorized to use the assets?

Control #6: Supervisory Review and Approval

When spending is reviewed prior to the transaction, this provides checks and balances for proper authorization.

When transactions are reviewed after the transaction takes place, a vital monitoring component of internal controls is performed.

Supervisors and managers are on the front lines of strong internal controls at your organization.

Consider:

• What is the process for having supervisors approve spending on the grant?
• What forms or regular reviews are done by supervisory personnel?
• How do you demonstrate the approval and reviews were done? (For example, are the documents signed and dated?)

Control #7: Adequate Documentation

Finally, producing and retaining sufficient documentation to demonstrate the proper use of federal funding can make the difference between an allowable cost and disallowed spending that must be repaid to the federal funding agency.

What are the requirements are your organization to support allowability:

• Are receipts required for reimbursement of spending?
• Do the receipts have enough detail to determine if the costs are allowable to charge the grant? (i.e., itemized receipts)
• Do time cards show what grants and other activities the employee spent their time on?

The Goal of Internal Controls in the Federal Grant Environment

As a general rule, the goal of internal controls is to provide reasonable assurance that grant requirements are complied with in a timely and cost-effective manner.

But what does “reasonable assurance” mean in the real world?

Recognize that it does not mean “perfect” assurance but a “reasonable” bet that the work will be done on your grant effectively and efficiently while staying in compliance with federal grant regulations.

Meeting this goal involves everyone working directly and indirectly on the federal grant to know the basics of well-developed internal control systems.

Ready to Deepen Your Understanding of Federal Funding?

Would you like to be a better grant writer or manager?

Deepen your understanding of procurement and the single audit for federal grants?

We have another grant training seminar coming soon.

Click here to get all the details!

Hope to see you there!

Rachel Werner, MPA, GPC, PMP

MyFedTrainer Principal, Compliance Champion