In recent years, the federal government has increased funding to for-profit life sciences companies to help research and development projects on all levels of societal advancement. If your company has received any federal awards, you may be subject to a Yellow Book or program-specific audit. When performing this type of review, auditors look for several key elements that small companies often overlook when maintaining compliance with an award. There are several things you can do to prepare for the audit to ensure you will have a perfect report, which are outlined below.
Audit Threshold and Tracking Costs
First, you must determine if you need an audit. This is defined by the total amount of federal funds spent during the fiscal year. Current guidance require an audit if the recipient of the federal award has spent over $750,000 of federal funds in a fiscal year (this amount was increased from $500,000 for fiscal years beginning on or after December 26, 2014). Common mistakes in determining if an audit is required stem from misunderstanding the difference between federal revenues and federal expenses. A company must have spent the designated funds during the fiscal year—even if they didn’t receive the cash during that same fiscal year. For example, if a company receives a million dollar award but only spent $200,000 during the fiscal year, then an audit is not required—even if the million dollars was advanced on day one of the fiscal year.
Additionally, the threshold applies to all federal awards spent in total for a fiscal year, not just a single award. Many companies involved in research and development will try to obtain as many awards as they can to fund their research. If your company receives more than one federal award you must add the expenditures together to determine if the spending threshold has been met and an audit is required.
A common practice is to implement an accounting system that tracks the costs of each grant project separately, from normal operations. If your company’s internal accounting software cannot handle separate tracking, then the accounting department has to implement a manual process or invest in software that will meet your needs. By tracking your costs separately you can easily identify whether your company has met the audit threshold.
Policies and Procedures
During an audit, one of the first things an auditor will review, is a company’s policies and procedures manual to determine if they meet federal compliance requirements. All awards require the company to follow certain compliance requirements, which fall under 12 categories (previously 14) addressed in the OMB Compliance Supplement (www.whitehouse.gov/omb/circulars). Not all awards require compliance with all categories, as this depends on the type of award and the federal awarding agency. Your company should be aware of which compliance categories it is required to comply with for each award. You can find compliance requirements by reading through your award terms and conditions and researching the referenced codes. Common audit findings come from companies simply not having any internal control procedures in place that address the compliance requirements. A best practice is to add policies and procedures to your manual to ensure the activities of the company meets those requirements.
All awards require reporting to their federal awarding agency on a routine basis with regard to project status, milestone progress, and financial reporting. Companies often forget that there are several reporting forms and conditions that need to be submitted monthly, quarterly, annually, or within five days after a special event occurs. Specific reporting requirements are enclosed with your grant documentation as a supplemental schedule or as part of the terms and conditions. While forgetting to send a report may not disqualify you from receiving funding, communicating with your federal awarding agency representative and submitting reports is required.
This last key element seems like a given - don’t spend federal money on anything outside of the award project. Auditors will perform testing on expenditures applied to the award and, more often than not, they find and identify unusual expenditures. The indirect costs applied to awards are limited to facilities and administration, and are often negotiated rates with your Federal awarding agency. Auditors determine if these negotiated rates are correctly applied to the award, along with reviewing for allowability of costs and assessing that costs are consistently charged as either indirect or direct, and are not double charged. By tracking your company’s expenses separately from other operations, as mentioned above, you can identify errors in the accounting system before reporting to the federal awarding agency or starting your audit. This will help prevent audit findings and ensure you stay in compliance with the award requirements.
As part of the condition for receiving a grant, your company has agreed to comply with a variety of requirements. Making sure you are in compliance is the primary objective of the Yellow Book and program-specific audit. While staying in compliance with all requirements should be your main goal, considering these key elements will help your audit go smoothly.
You should look to your accounting personnel or grant manager to help identify if your company is in compliance with all requirements. In anticipation of an audit, if you feel you don’t have these key elements covered or are uncertain if they are adequate, BPM offers a variety of services including pre-audit consultation meetings, assistance with compliance identification, cost tracking and segregation, and overhead indirect calculations.
BPM for Life Sciences
BPM is one of the largest California-based accounting and consulting firms, ranking in the top 50 in the country. It has served the San Francisco Bay Area's emerging and mid-cap businesses, as well as high-net-worth individuals, since 1986. Our Life Sciences industry group represents over 200 companies from early stage research ventures to public healthcare companies in fields ranging from biopharmaceuticals and medical devices to health diagnostics. Our goal in partnering with our clients is to provide financial clarity and guidance to help with their strategic planning, preparing for capital raises/liquidity events and regulatory compliance. For more information or to learn how we can provide innovative solutions to your needs, contact Scott Taylor at STaylor@bpmcpa.com or (650) 855-6882 or Melissa Kinter at MKinter@bpmcpa.com or (408) 961-6357.