Uniform guidance in focus: Updating written policies

Properly written policies and procedures are one of the best ways to improve an organization’s internal controls and reduce the likelihood of funds being misused. It shouldn’t be surprising then that the Office of Management and Budget’s (OMB) uniform guidance — which aims to reduce the risk of fraud, waste, and abuse of federal funds — places a heavy emphasis on written policies and procedures.

The OMB’s uniform guidance requires nonfederal entities to have certain written policies and procedures surrounding the management of their award funds. More formally known as the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, the uniform guidance is codified under Title 2, Subtitle A, Chapter two of the Code of Federal Regulations (2 CFR 200). Many nonfederal entities already have policies and procedures but may need to make updates as they implement the uniform guidance. Some will require updates and revisions, while others may be able to remain as written. In some cases, new policies and procedures may need to be created as well.

Best practices for updates

To start, two CFR 200.303 requires nonfederal entities to maintain effective internal controls over federal awards. The focus of these policies and procedures should be to ensure that those in the organization who carry out the objectives of the award understand:

• The federal statutes, regulations, and terms and conditions of the award
• How to evaluate and properly monitor compliance
• The steps to take if noncompliance is identified

Under two CFR 200.303, the uniform guidance also recommends these internal controls follow guidance in Standards for Internal Control in the Federal Government (the Green Book), issued by the Comptroller General of the United States, or the Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The structure of the policies and procedures necessary to accomplish an effective internal control structure will differ for each organization based on the number of employees, types of activities, and control risks.

As part of reviewing your entity’s internal control environment, consider performing the following assessment: First, identify the policies and procedures OMB has indicated are required in written form. Second, examine existing organizational policies and procedures to determine where updates and changes are necessary. Third, consider whether new policies and procedures need to be drafted and put in place, as appropriate.

Note that awards made prior to Dec. 26, 2014, may remain subject to the cost principles and administrative requirements contained in legacy guidance; therefore, it may not be appropriate to completely omit references to them just yet. However, your policies and procedures should be updated to refer to the uniform guidance for new federal awards you administer that are made on or after Dec. 26, 2014, so that users are aware of the new requirements.

Specific areas to examine

Although not an exhaustive list of the uniform guidance’s requirements for written documentation, the following four written policies are particularly important.

Advance payments and reimbursements

Your written procedures should address the requirements of two CFR 200.305, which essentially outlines procedures for collecting payments of federal funds. The section also compares your responsibilities regarding advance payments versus reimbursements.

Your policy should also discuss how the organization minimizes time between draws and actual disbursements. You can find the requirement that this process be governed by a written policy in two CFR 200.302(b)(6).

Allowable costs

The uniform guidance also requires written procedures for determining whether a cost is allowable in accordance with Subpart E. The standards assume you have policies and procedures over disbursements; what it’s really getting at is whether your organization has written procedures documenting how it ensures compliance.

Subpart E discusses a number of factors that should always be considered when evaluating allowable costs. Consider inserting the language of applicable sections in Subpart E verbatim into your policy, or at the very least making reference to specific sections so that those approving and monitoring costs are fully aware of their responsibilities. Note that there are subsections within Subpart E that relate to particular industries, such as Tribal governments or institutions of higher education, so be careful that only areas applicable to your organization are included.

Subpart E summarizes some key points when evaluating allowable costs. Although they may be intuitive, they’re basic concepts best included in a policy — especially for those individuals who might not be as familiar with federal awards. The following criteria are highlighted in two CFR 200.403 as necessary for costs to be considered allowable. The costs must:

• Be necessary and reasonable for the performance of the federal award (and be allocated to that use)
• Conform to limitations or exclusions regarding type or cost
• Be consistent with the policies and procedures the organization would apply to nonfederally financed work
• Be treated consistently with other comparable costs — for example, a cost may not be treated as a direct cost if a cost incurred for the same purpose in similar circumstances was allocated as an indirect cost
• Be determined in accordance with U.S. generally accepted accounting principles except as otherwise provided in two CFR 200 (for state and local governments and Indian Tribes only)
• Not be used to meet cost-sharing or matching requirements of any other federally financed program (see also two CFR 200.306(b))
• Be adequately documented (see also two CFR 200.300 through 200.309)

The guidance stating this is required to be a written policy can be found in two CFR 200.302(b)(7).

Conflicts of interest

Your written policies surrounding conflicts of interest should contain two parts: one covering employees and one covering potential conflicts of interest at the entity-wide level. It must also discuss the disciplinary actions applied for violations of the conflict of interest policy.

Under two CFR 200.318, recipient organizations are required to address conflicts of interest through written policies that govern the actions employees who select, award, and administer contracts. It states: “No employee, officer, or agent may participate in the selection, award, or administration of a contract supported by a Federal award if he or she has a real or apparent conflict of interest.” This policy is applicable to everyone and anyone involved in the procurement process.

Note that a potential conflict of interest extends beyond the individual concerned, including also that person’s immediate family members, partner, and other employers (including the employer of a family member or partner). In short, any individual or entity with a financial interest or tangible personal benefit riding on the contract would be considered to have a conflict of interest.

Further, individuals involved in the process can’t solicit or accept gratuities, favors, or anything of monetary value from contractors or parties to subcontracts. It’s acceptable, however, for entities to have a gift acceptance policy that addresses situations in which the financial interest isn’t substantial or the gift is unsolicited and of nominal value. The standards of conduct should outline disciplinary actions for violations of these standards.

If a recipient organization has a parent, affiliate, or subsidiary organization, it must also maintain written standards of conduct covering organizational conflicts of interest. An organizational conflict of interest would be one that — because of its relationships with these organizations — puts the recipient organization in a position where it’s unable (or appears unable) to be impartial. Parents, affiliates, and subsidiaries that are a state government, local government, or Indian Tribe are exempt.

Procurement

One more policy requirement for organizations receiving federal awards is compliance with the new procurement requirements, which we covered in greater detail in a May 2016 Insight article (“Uniform guidance in focus: Procurement”).

As a reminder, the uniform guidance sets specific requirements for each of five types of procurement: micropurchases, small purchases, sealed bids, competitive proposals, and sole-source items. Those are summarized in the following “procurement claw”:

Entities administering federal awards have the option to defer implementing these procurement standards for the two-year grace period allowed by OMB. However, for the grace period, an organization must document which procurement standard it complies with:  a previous version of applicable procurement standards or the new standard contained in the uniform guidance. It must also meet that documented standard during the grace period (covered in two CFR 200.110 and the Council on Financial Assistance Reform’s frequently asked questions document).