Your guide to audits of federal awards to for-profit entities.
For-profit entities that are awarded federal research and development (R&D) grants or other federal funding must recognize the importance of internal controls and compliance measures. These grants come with a host of regulations, and failure to comply can result in penalties, including the possibility of having to remit funds received or jeopardizing future funding.
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Understanding the compliance landscape
Upon receiving a federal grant, a for-profit entity is subject to regulations. In addition, an entity that has expended more than $750,000 in federal awards during the year will be subject to an independent audit of the award. This threshold is increasing to $1 million beginning with fiscal year-ends of Sept. 30, 2025, and after.
Different departments of the federal government might have different independent audit requirements. If the audit requirements are not clear in the award contract, it’s important to reach out to the contracting officer to confirm.
Establishing internal controls
While independent audit requirements might vary, any audit will consider internal controls – processes put in place to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. For entities with federal grants, internal controls should address the areas of segregation of duties, proper recordkeeping, cost tracking, and training and awareness. These controls should be implemented specifically to prevent, or detect and correct, noncompliance with grant requirements.
Staying compliant with federal regulations
Compliance is an ongoing process. For-profit entities must stay current with changes in federal regulations and grant-specific requirements. This includes:
- Adhering to procurement standards as outlined by the federal government
- Ensuring that all costs charged to the grant are allowable, allocable, reasonable, and incurred within the grant period
- Following the specific terms and conditions of the grant agreement, including any other relevant requirements such as eligibility, cash management, matching, and subrecipient monitoring
- Reporting progress and financial status to the granting agency, as required
Preparing for an independent audit
To prepare for an independent audit, entities should:
- Maintain clear and organized documentation of all grant-related activities
- Ensure that all financial statements and records are accurate and up to date
- Review compliance with the grant’s terms and conditions regularly
Being awarded a federal grant is a significant achievement for any for-profit entity, but it comes with responsibility. Establishing and maintaining internal controls and staying vigilant about compliance are critical to managing an independent audit. Completing an independent audit allows entities to not only meet the obligations of current federal awards but also position themselves for future federal grant opportunities.
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