In this episode of THE SAMPLE, Leita Hart-Fanta, CPA answers the question, “What are the Uniform Guidance Cost Principles?” Another way to phrase that question is, “Can I buy that with federal grant funds?”
Welcome to The Sample, a quick discussion of auditing concepts and terms that will help you do your work. Conducting an audit in accordance with auditing standards is no small feat and I want to support you. We’ll be referring to the GAO, IIA and AICPA literature to bolster our conversations. Let’s get started.
In this episode, we answer the question, “What are the Uniform Guidance Cost Principles?” Or maybe a more direct question would be, “Can I buy that with federal dollars?” The Uniform Guidance is a shortened term for this longer formal title, and notice that Cost Principles are part of this longer document. This document tells the grant community how to take care of federal funds and the Cost Principles tell us what we can and cannot spend federal dollars on.
So let’s say you’re auditing a not-for-profit and they are charging alcoholic beverages that they serve at these little soirees that they have every Friday to the federal grant. They’re also paying rent. Are these expenditures okay with federal dollars? Can we do that? Well, you have to run it through three filters before you can say yea or nay on these.
One filter is, is it allowable? So allowable can be determined partially, as I’ll show you a minute, just partially, from looking at the Cost Principles in the Uniform Guidance. Let me show you what that looks like. I’m in the Uniform Guidance on an ECFR. You can see the directive up here. Sub-Part E, Cost Principles, and if I scroll down, I’m going to see alcoholic beverage’s address. It’s all in alphabetical order, all kinds of things, Conferences, depreciation, entertainment costs, all these things are addressed in the Cost Principles. So I can say whether it’s in there or not.
The next thing I need to determine is whether it’s allocable. Allocable means that you have a robust enough accounting system to tell who is spending which dollars. And so if you are auditing this not-for-profit and they get funds from five different sources, maybe three federal grantors, the county, and donors, the federal government would like you to be able to tell who is paying for what expenditure, because they don’t like their money used for other programs. They want it just to go to the program they gave you money for, and they also hate it when you co-mingle funds, which means that you throw all of the money into one big lump and then just start spending. So you have to have a pretty good accounting system to be able to trace where the money comes from and what was it actually used for.
And then the last criteria is a little bit of a catchall, it’s reasonableness. Is it reasonable that they’re paying rent? Is it reasonable that they’re having a soiree every Friday? If they can’t be clear on one of these first two criteria, the last one the federal grantor will use is, “that’s just not even reasonable.”
Now, per the Cost Principles, alcoholic beverages are a no-no, and rent is okay. However, there are exceptions to this rule. How can that be? Well, it can be because there are three documents that rule allowability.
One is the Cost Principles that we just looked at. Those are generic, and they are like a blanket over all federal grant funds. But those can be overridden by the programmatic rules and by the actual contract that the grantee writes with the grantor. So the not-for-profit will sign a piece of paper with the grantor that says, “Here’s what this program is about and here’s whether you can spend money on these things or not.” So these last two documents can override the Cost Principles.
Where do you get the Programmatic Regulations? You get them out of the Compliance Supplement, which is re-published every year by the federal grant community, and you can find it just by looking for whatever year it is’ compliant supplement. And it will describe what the Grant’s about, what different rules apply to this grant, and whether various costs are allowable or not. So you’ve got to look at all three of these places to really determine if it’s allowable. Cost Principles is just one of the three places you need to look.
So there is a case that I know of where alcohol is actually allowable. So a friend of mine participated in this study. It was a pretty fun study that was funded with federal grant funds to see what the impact of drinking alcohol was on people’s driving. So she showed up at 10:00 a.m. in the morning and they gave her whiskey, shots of whiskey, and then they asked her to drive between cones. And that was paid for with federal dollars. That’s a case where the grant terms and conditions, the contract, the programmatic rules would override the Cost Principles.
Then there’s another case where rent is actually not allowable. And the Fed speaks specifically to this in the Cost Principles where not-for-profits will buy a building and then rent it back to the federal government at three times or more, just an exorbitant rental rate, so that they’re earning a profit off the federal grant. The feds have caught onto this and they put it in the Cost Principles, “No, you can’t do that.” So there are exceptions.
So when you run into a debate with the auditee about whether that cost is allowable or not, make sure that you run it through these three filters. Is it allowable, allocable, and reasonable? And to determine if it’s allowable, you need to look at these three documents, the Cost Principles, which are in the Uniform Guidance, the Programmatic Regulations, which are in the Compliance Supplement, and the grant contract itself.
That wraps it up for another episode of The Sample. True to the nature of a sample, we didn’t talk about everything, so you’ve probably got questions. Write to me firstname.lastname@example.org and I’ll do my best to fill in the blanks. Thanks for playing.
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