Blog: The Hidden Cost of Government Grants

By: Cristopher Sefransky, CPA, CFE, LSSGB

Government grants are a critical source of support revenue for nonprofit organizations.  Grant awards exist for a multitude of different types of organizations and allow the organizations to deliver various programs as well as give them the funding for projects for which they otherwise may not have the capacity.  In addition, grants may provide increased support for the general operations of organizations.

Despite the increased revenue source, it is important that an organization read the fine print of grant contracts and understand the related financial statement reporting requirements. The amount of the grant may trigger different types of financial statement audits, which come with different costs.  Based on the funding level, a financial statement audit, a financial statement audit in accordance with Government Auditing Standards (a” Yellow Book audit”), or an audit under the Single Audit Act of 1984 (a “Single Audit” or “Uniform Guidance audit”) may be required.

Financial Statement Audit

The objective of a financial statement audit is for an independent auditor to obtain reasonable assurance about whether the organization’s financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes an opinion related to that assurance.  The audit is typically performed in accordance with generally accepted auditing standards. The financial statement auditor opines on the basic financial statements and if those financial statements represent a fair presentation under relevant accounting standards.  This type of audit may be the minimum requirement for reporting under a grant contract.

Yellow Book Audit

A Yellow Book audit is a financial statement audit in accordance with generally accepted auditing standards and generally accepted government auditing standards.  In addition to an opinion on the financial statements, the independent auditor reports on internal control over financial reporting and on compliance and other matters based on the financial statement audit.  An opinion on internal controls and compliance is not the objective of a Yellow Book audit, however, an understanding of internal controls is obtained and tests of compliance with certain provisions of laws, regulations, contracts, and grant agreements are performed. In general, a Yellow Book audit is similar to a basic financial statement audit with the added component of an evaluation of compliance as noncompliance could have a direct and material effect on the financial statements.  In order to perform a Yellow Book audit, the independent auditor must take additional continuing professional education (“CPE”) courses related to Yellow Book audits and meet more stringent independence requirements.  Any type of entity in any industry could be subject to a Yellow Book audit if the grantor requires the audit within the grant contract or if local, state, or federal regulations require this type of audit based on the level of funding.

Uniform Guidance Audit

A Single Audit includes a financial statement audit in accordance with auditing standards generally accepted in the United States of America as well as the standards applicable to financial audits contained in Government Auditing Standards and an audit of the organization’s compliance for each major program with the types of compliance requirements described in the Office of Management and Budget (“OMB”) Compliance Supplement.  In addition to the basic financial statements, the Schedule of Expenditures of Federal Awards is required supplementary information.  The independent auditor is required to opine on the organization’s compliance with the various types of compliance requirements that could have a direct and material effect on each of its major federal programs as detailed in the OMB Compliance Supplement.  The Uniform Guidance applies when federal programs are the ultimate funding source for the grants received by the organization.  Currently, under the Uniform Guidance, as detailed in CFR, Chapter 2, Part 200, the threshold for a Single Audit is any organization that expends more than $750,000 in federal funds annually.   On April 22, 2024, the OMB issued a Final Rule revising several sections of the Uniform Guidance, including increasing the audit threshold from $750,000 to $1,000,000 in federal funds expended annually.   Funding agencies must implement the Final Rule by October 1, 2024.  For auditees, the threshold increase is effective for fiscal years beginning on or after October 1, 2024.

Each of these levels of service has an increased level of cost proportionate to the required procedures.  Note that under CFR, Chapter 2, Part 200, audit services (subject to certain detailed limitations) are allowable costs that are able to be charged back to the program grant.

While grant contracts may be detailed and daunting, organizations should familiarize themselves with the financial reporting requirements.  Management should consult with their accounting professionals about the financial statement reporting requirements of their grants.  At HFCO, we have a team of professionals specializing in audits of nonprofit organizations, Yellow Book Audits, and Single Audits that can help your organization understand and meet your financial statement reporting requirements.

Reach out to our nonprofit audit department contact, By: Cristopher Sefransky, CPA, CFE, LSSGB, Audit and Assurance Manager, with any questions.