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COVID-19 Federal Assistance e311

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Compliance & Reporting, Due Diligence & Fraud Protection

What are good practices for documenting and accounting for programs using federal funds?

As municipalities continue to spend aid and apply for additional grants and funding, they will find it helpful to regularly assess internal controls to ensure they have established measures sufficient to prevent mistakes or misconduct that might result in the misuse of federal funds. Ideally, municipalities can avoid clawbacks by preventing mistakes and deterring misconduct. Municipalities should consider safeguards that will make it more likely that they will be able to detect misappropriations or breaches of the rules governing the receipt and distribution of money. These safeguards will allow the municipality to take corrective action and avoid clawbacks in the future.     

Assessing internal controls is not only a best practice in grant management, but also something that the Federal Government expects municipalities to do. Specifically, CFR 200.303,[1] “Internal Controls,” states that “[t]he non-federal entity must…[e]stablish and maintain effective internal control over the federal award that provides reasonable assurance that the non-federal entity is managing the federal award in compliance with federal statutes, regulations, and the terms and conditions of the federal award.”  

With the passage of numerous COVID-19 relief packages, municipalities have received millions of dollars from multiple funding sources that are then often passed on to subrecipients. In managing any grant program, the initial stage is the most important. Municipalities will find it difficult to adequately implement or monitor the grant program if their plan to manage, monitor, and oversee a funding program is not well-developed from the outset.[2]

Below are some examples of suggested steps that municipalities can consider in order to strengthen the management of grant programs, including disbursements of funds to subrecipients. These steps may help prevent the misuse of funds and avoid potential clawbacks by federal auditors.

  1. Leadership: Hire or contract out a grant administrator with relevant grant administration experience and familiarity with the Code of Federal Regulation.
  2. Transparency: Improve transparency with a data management system which serves as a central repository of information that: (i) accounts for the receipt and distribution of all grant funds; (ii) tracks the source and beneficiary of the funds; and (iii) justifies the proposed use of funds. A central repository can help manage your relief programs and identify mistakes early on in the process before they become larger or more systemic issues.
  3. Risk Assessment: Analyze the terms and conditions of the subaward and conduct risk assessments of subrecipients to evaluate noncompliance risk. These assessments can also be employed to help determine the appropriate levels of oversight.[3] The following are examples of due diligence measures to be considered for inclusion in the risk assessments:
  • Require subrecipients to complete a pre-award risk assessment questionnaire that will help determine the level of risk. The U.S. Department of Justice (“DOJ”) has provided a sample risk assessment questionnaire to help formulate and tailor specific assessment questionnaires - DOJ Sample Risk Assessment Questionnaire.
  • Perform basic due diligence checks including (i) a SAM database search[4] to determine if a person or entity is on the federal government excluded parties list and (ii) searches for recent liens, judgements, bankruptcy filings, etc. Municipalities can consider leveraging locally-based resources for due diligence expertise including banking and financial institutions, law enforcement, and regulatory agencies.
  • As part of the self-certification process, require the potential recipient to disclose all previously received grant funds as well as pending grant applications. Municipalities can consider accessing federal and local agency data sources and databases to randomly test the accuracy of these disclosures.
  1. Subrecipient Agreement: Execute a subrecipient agreement or contract with the awarded entity. The following information can be considered for inclusion in the subrecipient agreement:
  • Right-to-audit clause to provide future access to books and records maintained by subrecipients;
  • Cooperation clause that obligates the subrecipient to cooperate with any future government review, audit, or investigation;
  • Acknowledgement by subrecipients of having read and understood the federal grant requirements laid out in 2 CFR 200;[5]
  • Language detailing the mechanism for the recovery of misspent grant money;
  • Language describing the service to be provided and how it fits into the permissible uses of the grant program;
  • Language requiring subrecipients to perform their own due diligence of employees, subcontractors, and vendors; and
  • A certification that the information contained in the grant application and the subrecipient agreement is true and accurate; any false statements made as part of the certification or application can be prosecuted.
  1. Oversight and Monitoring: A DOJ National Procurement Fraud Task Force (“NPFTF”) report titled “Best Practices for Combatting Grant Fraud” noted that grant awarding agencies are often focused on awarding the grant money and do not devote sufficient resources to the oversight of how those funds are spent.[6] The report noted that awarding agencies often fail to: (i) sufficiently audit and review supporting documentation for grant expenditures; (ii) establish performance goals for programs; (iii) ensure that grantees submit performance data to demonstrate that grant monies are being used effectively and as intended; and (iv) properly close grants in a timely manner. In order to detect and address program vulnerabilities before they potentially become systemic, municipalities can consider proactively performing oversight, auditing, and monitoring of their grant programs, including funds expended by subrecipients. These steps can help to make sure proper documentation, tracking, and accountability are in place. In order to help accomplish this, municipalities can consider the following steps:
  • Create internal policies that clearly communicate expectations regarding documenting and tracking expenditures and what procedures you expect to be followed in order to ensure accountability of the money spent. These policies should not only be distributed to your municipal team, but also to subrecipients. Subrecipients should acknowledge in writing that they have reviewed the policies and will adhere to the requirements.
  • As part of the assessment process, make sure your municipality has sufficient resources in place to conduct assessments and provide oversight. If additional assistance is needed, you might consider hiring a private contractor or consultant to help supplement your auditing and compliance staff. The various relief funds provide the ability to use a portion of the federal funds to assist with the management of grant funding and aid. Refer to your funding source guidance for more specific details.
  • Clawbacks will most likely come as the result of an audit. As a result, prepare your project documents as if you are already under audit by creating an audit trail you will be able to rely on in the future. The audits trail should include, but not be limited to: general ledgers that account for the receipt and disbursement of funds, budget records for 2019 and 2020, payroll records to support payroll expenses related to COVID-19, contracts and subcontracts, and, where applicable, photographs supporting expenditures. 
  • Consider starting your own municipal internal program audits as soon as possible. Regular proactive internal audits might help identify and correct issues that, if gone unnoticed, could result in future clawbacks.
  1. Information Sharing Within and Among Agencies: The NPFTF report also noted that coordination and communication will help: (i) identify crosscutting management sectors; (ii) spot problem grantees that accept awards from more than one agency; (iii) identifying common fraud schemes; and (iv) provide opportunities for coordination and cooperation in outreach and training.[7] Municipalities may consider finding opportunities to maintain regular contact with local, State and Federal agencies in order to exchange lessons learned and to share best practices.

Date Revised: June 4, 2021

 

[2] U.S. Department of Justice, Improving the Grant Management Process (2009) at 3, https://www.oig.dot.gov/sites/default/files/files/Improving%20the%20Grant%20Management%20Process_DOJ%20OIG.pdf.

[6] U.S. Department of Justice, A Guide to Grant Oversight and Best Practices for Combating Grant Fraud (2009) at 13,  https://www.oig.dot.gov/sites/default/files/files/Grant_Fraud.pdf.

[7] Id. at 12.