Donor audits are an area of concern for many charities receiving grant funding. In this article Steve Harper considers how to avoid some of the most common pitfalls.
A wide range of charities rely on grants to fund significant parts of their ongoing activities, with many more able to obtain grant funding for specific projects. Grant funding can enable charities to raise significant funds from a single source, however, they often require the recipient to comply in full with conditions which are onerous. Non-compliance can have significant consequences including clawbacks and funders withholding payments.
Some funders require that external certification is obtained from an auditor, and in some instances this will be commissioned directly by the donor. Whilst many donor audits proceed smoothly, there are a number of common pitfalls which in some instances can be easily avoided with appropriate preventative action.
A core issue underlying many common pitfalls is that the recipient does not fully understand the conditions the donor has imposed or this understanding is not sufficiently widespread within the organisation. It is important to recognise that donor conditions will vary significantly from donor to donor, and also that different tranches of funding from the same funder may also have different terms and conditions. Donor conditions should be considered at the application stage, ensuring either that the conditions can be complied with currently or that the charity is clear as to the actions it would need to take to ensure that compliance can be achieved.
The need for an audit, or other certification, can itself be a pitfall. Certain grant funders are very clear as to when external certification is required and the form this should take. In this instance the need for certification is considered by the funder on a grant-by-grant basis. Certain funders take different approaches; for example, USAID require an audit of their funds where the total of USAID funding received by a non-US recipient in a financial year exceeds a specific threshold, currently $300,000. Some funders include within their standard terms a need for “audit” or “assurance”, but do not specify the wording required from the auditor.
Where this is the case, early consultation with both your auditor and the donor can help ensure that the eventual reporting from your auditor will meet the needs of the donor. In some cases you may need to discuss with your auditors at the proposal stage to ensure that you factor the estimated fee in the budget accompanying the proposal. Conversely where there is a specific form of words required by the donor, it is prudent to review this with your auditor at an early stage to ensure that your auditor can agree to provide this wording.
It is important that at the outset of a grant the recipient is clear on the records and systems it will need to maintain for reporting to the funder and for audit. This is especially the case where the records required will go over and above the normal record keeping in place at the charity. Certain donors require detailed timekeeping records to evidence the time individuals spend on specific projects where their work spans multiple projects. In this instance, it will often be insufficient to estimate that an individual works on the project for a certain percentage of their time: the actual time spent should be supported, usually by timesheets.
One of the areas which can cause difficulties if the appropriate procedures are not in place is procurement. Some grant funders expect a greater level of competitive tendering than is common amongst UK based charities, and so it is important that these requirements are understood early so that the necessary procedures can be implemented and followed from the outset. It is important that a charity documents not only the tender outcome, but also the process which was followed and why the decisions were reached. Competitive tendering is an area which can cause particular difficulties for charities operating internationally as it can be difficult to identify an appropriate range of suppliers from which to obtain tender documents. Knowing the requirements can assist a charity in identifying issues such as this early, and in taking the appropriate mitigating actions.
Many charities, especially those operating internationally, will deliver grant funded work through or alongside other organisations. Such organisations may be independent partners, local affiliates of the recipient charity or even subsidiaries of the charity. Particular care must be taken when delivering grant funded activities through other organisations. Where a partner organisation is a named recipient on the grant agreement, this is usually a more straightforward area as the funder is expecting them to be involved in the delivery of the project. Where partner organisation are not named on the grant agreement, it is important to assess whether procurement rules need to be followed to determine partner selection and sub-granting. As with other forms of procurement, the decision making processes needs to be evidenced to show why particular partners have been used.
Once appropriate partners are selected, it is important to ensure that the record keeping will be appropriate to enable reporting to the donor and audit of the figures. The grant terms and conditions imposed by the donor will also be applicable to any sub-grantees, and so it is important that partner organisations are aware of all of the conditions and that compliance with these conditions can be enforced. Passing on terms and conditions through sub-grant agreements is a common way to do this. The recipient charity should ensure that any local record keeping is sufficient and, particularly for new partners, it is may be helpful to complete an internal review of the records and evidence available at, or before, the first claim. Core to this is an effective due diligence assessment at the outset which considers whether potential partners will be able to meet the necessary standards and, if any concerns are identified, a plan is in place to address them. Discovering that inadequate records have been kept locally at the point of a donor audit is usually too late to fully address the issues, therefore appropriate measures should be put in place to review this at an early stage.
Another common issue occurs where claims do not reconcile to the accounting system maintained by the charity. A very common test auditors will perform is to ensure that the two reconcile. This is one way in which inappropriate claims can be identified; for example, where an organisation has claimed the same item of expenditure against multiple grants.
More benignly this can happen where two sets of records are maintained: one by the finance team for statutory accounting purposes and one by the programme team for the purposes of the purposes of reporting to the funder. The simplest way of addressing this issue is to ensure that claims are reconciled to the general ledger and that this reconciliation is maintained so that it can be provided to auditors if needed.
An effective donor audit process is best achieved through early identification of the key terms and conditions such that they can be fully implemented from the start of the grant. The relevant policies and procedures used by the organisation should be regularly reviewed to ensure that they enable compliance with funding terms. Some organisations which are significantly grant funded take the view that their policies should reflect the most onerous conditions set by a donor such that they are always in compliance and policies and procedures are reviewed against new funding in order to ensure this always remains the case. Such an approach is unlikely to be effective for those organisations which receive only a handful of grants, but the approach of comparing policies and procedures to funder requirements, identifying gaps and then putting in place mitigating actions is a sound one.
Stever Harper is a senior audit manager at haysmacintyre.
