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When it comes to Federal Single Audits, nonprofits often make costly mistakes that lead to compliance issues, financial weaknesses, and material deficiencies. We frequently see organizations transitioning to us from other providers struggling with these common pitfalls – needing our help to overcome them. Below, we break down the top audit findings and what nonprofits need to know to stay compliant. If you’re still unsure whether your organization needs an audit at all, start with Why You May Need an Audit – and What You Should Get Instead.
1. Failure to Identify All Federal Grants
Many nonprofits fail to realize that some state grants originate from federal sources and mistakenly exclude these grants from their SEFA (Schedule of Expenditures of Federal Awards). This oversight is considered a material weakness in the financial statement component of the single audit because it results in an incomplete SEFA before the audit fieldwork begins. To ensure you’re covering all your bases, use our audit readiness checklist before audit season begins.
2. Failure to Submit Performance or Compliance Reports on Time
Every federal funder has strict deadlines for periodic performance and compliance reports. If a nonprofit misses these deadlines, it can be classified as a significant deficiency in the single audit. Timely submission is critical to maintaining compliance and ensuring continued funding.
3. Poor Documentation of Eligibility Requirements
Many federal grants are designed to support only eligible participants. For example, the USDA’s CACFP program funds meals only for individuals below a certain income threshold. Nonprofits must:
- Review eligibility before providing services
- Document eligibility verification for each participant
Even if a nonprofit follows the correct eligibility process, failure to retain documentation can result in a significant deficiency or even a material weakness in the single audit. Every federal grant has unique eligibility requirements, so nonprofits should make every effort to fully understand them. If your grant team is involved in the eligibility process, don’t miss these grant writing do’s and don’ts to stay on the right track from application through reporting.
Pro Tip: If an auditor cannot use your files to recreate a test of eligibility, you will get an audit finding. Make sure your documentation is complete.
4. Inconsistent Payroll Allocations
Uniform Grant Guidance (2 CFR Part 200.430) doesn’t require timesheets, but nonprofits must have a documented, consistent process for payroll allocations across federal funding sources.
Common mistakes include:
- No standardized process for tracking employee time
- Missing required signatures on timesheets
- Inconsistent payroll allocations
If an organization uses timesheets, they must be signed by both the employee and supervisor and reflect accurate allocations. If using estimates, the methodology must be clearly documented on a monthly, quarterly, or annual basis.
5. Weak Expense Approval Policies
Nonprofits must have clear policies on how bills are reviewed and approved before payment. Some organizations set a policy that only requires approvals for expenses over a certain amount—this is acceptable under Uniform Grant Guidance, but it must be followed consistently.
Proper evidence of approvals includes:
- Physical signatures
- Email correspondence
- Digital approval (e.g., Bill.com)
Failure to provide consistent documentation can result in compliance issues during an audit.
6. Lack of a Procurement Policy
Uniform Grant Guidance (2 CFR 200.318) requires nonprofits receiving federal grants to adopt and consistently follow a procurement policy.
This includes:
- A competitive bidding process for contracts over a set threshold
- Detailed documentation of vendor selection and compliance
- Proof of adherence to procurement policies
Having a policy isn’t enough—organizations must consistently follow and document compliance with it. If an auditor finds that a vendor contract above the policy threshold was approved without evidence of a competitive bidding process, the organization will receive a significant deficiency in its audit. We provide a sample procurement policy to our clients—reach out to us for details.
7. Poor Subrecipient Monitoring
Some nonprofits receive federal grants and sub-award a portion of the funds to another entity. In these cases, Uniform Grant Guidance requires organizations to:
- Develop and follow a structured monitoring process
- Ensure subrecipients comply with all federal regulations
- Review subrecipient documentation for valid costs and eligibility
Some organizations monitor subrecipients monthly as part of their grant disbursement process, while others conduct periodic audits. Either approach is valid, but it must be consistent and well-documented to avoid significant deficiencies or material weaknesses in the single audit.
Final Thoughts: Stay Ahead of Compliance Issues
Federal grant compliance can be complex, but nonprofits that address these common audit findings proactively can avoid financial weaknesses and compliance risks. At The Charity CFO, we specialize in nonprofit accounting and compliance—so you can focus on your mission.
You may have noticed a theme here – you must have a process and you must follow it consistently. Many times, we think auditors will have a specific “right or wrong” approach. The reality is, auditing tends to be more “verifying there is a process and did the organization follow their process consistently”. As you can see from our observations, the process can vary but the failure to follow your own process consistently is where organizations get tripped up.
Ready to take the next step?
If you’re looking to put these strategies into practice, our team of nonprofit experts is here to help. Contact us and let’s talk about how a fractional CFO can move your mission forward—starting with your finances.
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