Grant Compliance vs. Financial Audits: Understanding the Differences

No, this is not a silly question—grant compliance and financial audits are not the same thing (though they are often conflated with one another).

There’s a lot of overlap between the two, but they shouldn’t be used interchangeably.

In this article, we’ll go over the nuanced differences between grant compliance vs. financial audits, sharing an overview of each and explaining the roles they play in your organization’s success.

Let’s get started!

Grant Compliance: An Overview

In the simplest terms, grant compliance is the process of following the requirements outlined within a grant agreement.

These requirements vary from grant to grant, and often include rules and regulations regarding how you should:

• Allocate funding
• Operate in specific geographic areas
• Track financial information
• Report data
• Share success metrics

Ultimately, these are the terms and conditions that you agree to when you accept the grant, and it’s up to you and your organization to ensure that you meet them.

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Why Grant Compliance Is Important

At times, grant compliance may seem like it’s just useless paperwork and something you need to check a box to say you did. However, it’s actually a critical component to your organization’s success.

Here’s why:

1. It promotes accountability and transparency: It proves you can do what you say you’ll do. You are a trustworthy organization that follows through with its commitments.
2. It strengthens your reputation and credibility: It shows both the funder and your community that you’re invested in making a real difference with the funds given to you.
3. It opens up opportunities for future funding: It helps you maintain a strong working relationship with your funders and encourages future support.

However, failing to maintain grant compliance can have some serious consequences, including:

• Losing the funding
• Missing out on future funding opportunities
• Harming your relationships with funders
• Damaging your overall credibility within the community

This may sound intimidating, but it doesn’t have to be. Funders understand that you might run into unforeseen issues. Things happen—but when they do, it’s critical that you communicate the challenges in meeting a specific line item in the grant agreement immediately.

Listen to this wise advice from Mary Gladstone-Highland from Spark Group Consulting:
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“Often, nonprofits encounter challenges where their initial plans don't align perfectly with the reality of executing a project…In such situations, it's common for nonprofit leaders to feel concerned about maintaining the trust of the funder…[However], most funders understand and are willing to collaborate on adjusting the project plan to something more feasible. Remember, you and the funder share the common goal of effecting positive change, and transparency is critical in maintaining a solid relationship.”

Your funders want to see you succeed, so they can help you troubleshoot or simply give you grace if you need it.

What’s Involved in Grant Compliance

Grant compliance requirements are unique to each grant, so you’ll want to carefully review the grant agreement to ensure you know what’s expected of you.

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As you do, consider the following grant compliance checklist steps to help guide you through the process.

1. Understand the requirements. Identify what restrictions and limitations are in place, as well as the overall expectations of the grant. Note if there are specific requirements you need to pay special attention to, including any deadlines.
2. Develop a compliance plan to help you stay informed and organized concerning your grant requirements. This can include milestones, deliverables, deadlines, approval steps, and more.
3. Assign roles and responsibilities across the team to ensure you can meet the requirements in a timely manner. This will be especially helpful when it comes to cross-functional reporting needs.
4. Regularly monitor your progress to ensure you’re on track throughout the year. This will also allow you the space to make adjustments as needed.

You can also find a more detailed look into this process in our article on How to Manage Grants in 2024.

Tips To Remain Compliant

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As you get more familiar with the process, grant compliance will become a breeze. Here are some tips to help you remain compliant:

• Offer a clear division of responsibility. Meet with your teams so they understand expectations and you can answer questions before they become barriers to execution.
• Use a grant calendar—like the one available in Instrumentl!—to help you track all your important dates. You can assign tasks, track awards, and more within the platform, which will help you stay on top of your requirements and finances to ensure compliance.
• Conduct routine audits. Financial audits are an important part of grant compliance. They make sure you are spending in line with the requirements. (More on financial audits below!)

The good news is if you have a clear understanding of what is expected of you, grant compliance can be easy!

Financial Audits: Explained

As mentioned above, there are a lot of similarities when it comes to grant compliance vs. financial audits.

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So, what is a financial audit?
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A financial audit is the process of reviewing your nonprofit’s financial statements to ensure the financial records accurately represent how you are spending your money, as well as ensuring your spending is in line with 501(c)3 regulations.

You can conduct a financial audit of your nonprofit’s overall finances, which is a comprehensive look at your entire revenue and spending. You can also conduct more targeted financial audits, especially when it comes to individual grants.

Financial audits for grants can be completed in a few different ways:

• Internal audits are often unofficial audits that are completed by your team to ensure you are following policies and procedures to meet grant compliance.
• Third-party audits can be conducted by a CPA, accounting firm, or other qualified party. These are often required by government funders and can be costly.
• Funder audits are done by the funder to ensure that you are meeting their regulations.

Make sure you check your grant agreement to ensure you know which—if any—type of financial audit you must complete.

When Are Financial Audits Required

Regular financial audits should be a part of your overall operating procedures to monitor the health of your organization.

There are other instances where comprehensive financial audits are required for tax purposes or to meet specific grant requirements.

According to the National Council of Nonprofits, organizations will need to undergo financial audits by a third-party CPA or accounting firm if:

• They receive more than $750,000 in federal awards in a single fiscal year.
• They are providing services within the community and state and/or local governments require it.
• It is required as part of the grant application process, usually for private foundations.
• It is a requirement for a loan application with a bank.

Third-party audits are expensive. According to GrowthForce, they range from $5,000 to $20,000, depending on the nonprofit’s size, complexity, time constraints of the audit, and more.

How To Prepare for a Financial Audit

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Instrumentl offers a comprehensive document library where you can house all your grant-related documentation all in one location.

So, how can you prepare for an audit?

1. Create an audit timeline. Make sure you have a clear understanding of when you need to provide documentation by, when they will be conducting the audit, and when it should be completed. You can even include an estimation on when items should be actioned on. This could be part of your overall grant agreement, so make sure the deadlines align.
2. Develop an organizational system. Instrumentl has a document library that can help, but ultimately you want to make sure that everything grant-related—including your finances—are in a single location to maintain clear and accurate records.
3. Locate all your documentation. This includes your balance sheets, grant agreements, records, reports, transactions, and more. You need to make sure that you have proof of how you are spending your funds related to your grants, reflecting everything from the rent you pay to maintain a space to the supplies you purchase to maintain the program. Also, be sure to ask the auditor for specific documents they are looking for to help guide the process.
4. Make sure your accounting records are up-to-date and accurate. If you’re missing something, now is the time to track it down to help the audit go as smoothly as possible. Do you need to add salary information or address unexpected expenses? You have specific requirements, so you can be proactive in ensuring you are meeting them.

If you maintain clear and accurate records throughout the year, preparing for an audit will be easy.

Now that you know a little bit about each, let’s take a moment to compare grant compliance vs. financial audits:

• They both play an important role in ensuring that you are being a good steward of funds, allocating them as required and expected within a set of previously agreed upon criteria.
• Financial audits can identify failings within grant compliance, allowing your nonprofit the time to pivot to address the issues before they become a challenge.
• When your nonprofit is in full compliance of the grant requirements, it should sail through its financial audit.

Keep in mind that grant compliance can include a financial audit to help promote transparency, accountability, and responsible financial management in the use of grant funds.

Both grant compliance and financial audits work hand in hand throughout the entire nonprofit grant management process, so make sure that your grant and accounting teams are in regular contact to drive synergies in the workflow.

Grant and Accounting Team Relationship Management

The relationship between your grants team and the accounting team should be prioritized throughout the entire grant management lifecycle. However, it’s especially important during post-award grant management.

Why?

• Accounting teams prepare many of the reports needed for the grant. When you collaborate to set schedules and deadlines, it can ensure timely and accurate delivery of information.
• Outside partnerships can help spot compliance gaps that could become a problem down the road.
• Unique perspectives can be highlighted through data and analytics, providing opportunities for enhanced decision making, financial planning, and forecasting to inform your overall grant strategy.

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It’s important to remember that compliance is everyone’s responsibility, and you can learn more about all things grant compliance here.

Matt Hugg, President and Founder of Nonprofit Courses, does a great job of explaining the importance of these partnerships:
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“Your accounting office will need time to produce the reports necessary to show the proper use of funds. Create a schedule for them so that you get what you need in time to meet your funder's requirements, and raise any questions they may have about how the money was spent. Make the coordination between you as the grant proposal writer, the program officer carrying out the funded program, and them as the accountants a top priority.”

These relationships should be built on two-way communication to help you achieve the same goals.

Wrapping Up

It’s easy to get the two confused when you’re looking at grant compliance vs. financial audits because of their similarities.

• Grant compliance is more about making sure that a nonprofit is meeting the requirements set out in a specific grant.
• Financial audits are concerned with the nonprofit’s financials as a whole. Grants are an important part of this, but they are not the only component that is considered.

There are different types of financial audits, and the type of funding you receive will determine what type of audit, if any, you need to conduct.

You can stay on top of all your grant compliance and audit needs by staying organized and having a centralized repository for all your documentation.

Instrumentl can help, offering a document library to house all your important information, as well as a calendar, tasking, award tracking features, and more. It’s a full service grant management solution that can help you throughout the entire grant life cycle.

‍Sign up for your free, 14-day trial today and see all that Instrumentl can offer you!