March 31, 2015

Federal Grant and Contract News for Nonprofits - March 2015

5 min

The implementation of the Super Circular retained an important access-to-records requirement that gives the various federal agency Inspectors General (IG) access to "documents, papers, or other records of the non-federal entity which are pertinent to the federal award, in order to make audits, examinations, excerpts, and transcripts." 2 C.F.R. § 200.336(a). Under the record retention standards, all "[f]inancial records, supporting documents, statistical records, and all other non-federal entity records pertinent to a federal award must be retained for a period of three years from the date of submission of the final expenditure report or, for federal awards that are renewed quarterly or annually, from the date of the submission of the quarterly or annual financial report, respectively, as reported to the federal awarding agency or pass-through entity in the case of a subrecipient." Id. § 200.333.

The IG generally uses this right to review whether a particular grant program was compliant with both federal law and the terms of the grant agreement, as well as whether a particular expenditure created a risk of fraud, waste, and abuse. The IG then makes recommendations to the agency in the form of a public report about whether to allow or disallow certain costs. In recent years, the IG offices have expanded their budgets and increased their activity—an action that mirrors the recent uptick in enforcement actions under the Obama administration. With the implementation of the Super Circular standards, some of which remain ambiguous, nonprofits should expect grant funds to come under greater IG scrutiny for years to come. Accordingly, nonprofits should be mindful of the following when handling current or future IG inquiries.

Understand the role of each player.

The IG is not the programmatic personnel for the federal agency. In fact, the IG is reviewing both the nonprofit's and the agency's conduct for a given grant or program. The function of the IG is to act as a check on the entire agency discretionary spending process. Two important facts result from these divergent responsibilities:

  • The IG may have a different interpretation of the regulatory requirements than the agency. Because the IG operates independently, it is common for IGs and agencies to take differing views of contract and regulatory requirements, and the importance of those requirements. For this reason, it is important for nonprofit grantees to document their interaction with the agency and to obtain written confirmation from the agency of its interpretation of ambiguous provisions.
  • Nonprofits should understand that the agency will have the ultimate decision-making authority as to whether a particular cost is allowable. While the IG makes recommendations to the agency, the agency itself will ultimately determine what to do with those recommendations. As such, working closely with the agency throughout the life of your grant (obtaining continual documented approval practices or provisions requiring interpretation), as well as during any audit, can be of critical importance.
  • While the ultimate decision is that of the agency, because IGs submit semi-annual reports to Congress, agencies (to varying degrees) feel a certain amount of pressure to ensure they are exercising their discretion appropriately. Conversely, because IGs submit these semi-annual reports to Congress, they are incentivized to identify and defend their findings vigorously in order to present the most robust report possible to Congress.

Maintain robust, contemporary subgrant and contract files.

IGs will generally ask to review each of the subgrant and contract files for an award. This file should include all relevant procurement documentation, contract administration documentation (such as required reports), and notable programmatic correspondence. Having these files in one location and ready for the IG to review will not only demonstrate a nonprofit's compliance with the terms of the grant, but also will help establish that the nonprofit has the proper internal controls to administer the grant funds. In addition, nonprofits should consider implementing a policy whereby they seek and receive all subgrant and subcontract documents at the conclusion of those agreements. While the access-to-records provision stipulates only a three-year retention period, the clock does not start running for the grantee until the agency closes out the grant or all audit/litigation has concluded. By that time, the grantee's subgrantees and subcontractors may have disposed of their records many years ago, thereby potentially subjecting the grantee to disallowances because of inadequate documentation.

Follow internal policies and procedures.

Many IGs treat a grantee's internal policies and procedures as part of the grant, and will issue findings against a nonprofit if it fails to follow those internal policies and procedures, even where the nonprofit remains compliant with federal law. Nonprofits need to ensure that their policies are up-to-date and that their procedures reflect their actual operations. To the extent the nonprofit must deviate from a procedure, the nonprofit should document for the grant file the reason such deviation is necessary and why the deviation remains compliant with federal standards.

Assert your case at each step in the process.

As an IG audit progresses, nonprofits will have several opportunities to plead their case. For example, when the IG asks for documents supporting or narratives explaining a certain practice, grantees should not pass up this opportunity to include information and argument (which the IG may not have requested) that supports and justifies the practice at issue. The federal regulations provide a nonprofit with a good degree of latitude in how it operates, so grantees should take advantage of this latitude and use the regulations to protect their organization.

Cooperation is of the utmost importance.

While no one enjoys an IG audit, and it may come many years after the fact, it is critical that nonprofits cooperate with the IG. Often initial requests for documents and information are broad and perhaps vague, but nonprofits should work with the IG in narrowing the request to a manageable subset that satisfies the IG's needs without overly taxing the nonprofit's resources. This also permits the nonprofit to better understand the focus of the IG's audit. Be certain to listen closely, as many important facts and details are revealed in these discussions, which may better enable to resolve the inquiry. Further, discuss a timeline with the IG in providing requested documentation. If the IG feels that the nonprofit is stalling, dragging its feet, or worse, withholding documents, it may take the more formal step of requesting the same documents through an administrative subpoena. In next month's newsletter, we will discuss administrative subpoenas, the authority behind them, one's ability to challenge them formally, and practical tips for dealing with them.