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Module 11: Financial Management
 

Module 11: Financial Management

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  • The objective of this module is to provide grant administrators with sufficient information regarding CDBG requirements for financial management. As we discuss these requirements, it should become apparent that documentation, documentation, documentation is the key to successful financial management. Track CDBG expenditure as a separate cost account . Use a record tracking system such as a ledger to track all funds, which includes CDBG, local, and other state/federal funds. Financial management memory to take back with you is: account for spending the money correctly or pay it back.
  • Emphasize that the local governments must comply with the state standards/requirements and it is up to the state to establish them.
  • These requirements relate to the standards established by the state and not to standards that each jurisdiction must create. The local jurisdiction must know what the state requirements are and make sure they comply with them.
  • There are 3 options , which the state may use, for establishing the local government financial management requirements. The state may apply its own requirements, the state may establish new requirements, or the state may adopt Part 85 of CFR 24. The state adopted…insert state financial management method adopted. Note that if they do adopt Part 85, they can pick and choose which sections to follow—they do not have to adopt the entire regulation.
  • Now let us look at what it takes from the viewpoint of the unit of local government’s financial management system with regard to financial management requirements. What are the standards the grantee is held to by the state? Stewardship is a key. It’s important to take a responsible approach to the management of all the project funds. The purpose of these requirements is to ensure that the local government recipient has a financial system sufficient to: Provide effective control and accountability for all funds, property, and other assets. Oversee the expenditures in relationship to budgeted amounts to keep the project on track with the costs. Many entities use a “funds” approach—with a separate fund, not just a separate bank account.
  • Identify the source of funds, and maintain all invoices and bills and documents that demonstrate where when and how payment was made, cost reasonableness, allowability, and allocability of costs and verify that funds not used in violation of any restrictions or prohibitions for Federal assistance. Meet reporting requirements that are accurate, complete, and timely in the disclosure of financial results. Minimize the time elapsing between the transfer of funds and disbursement by the local recipient thereby contributing to the timeliness of expenditures.
  • A sound financial management structure is determined by its system of internal controls. The internal controls consist of listing the links of responsibility of persons doing the approval or recording of financial transactions and knowing the key persons’ duties. A recorded system for management authorization to ensure supervisory approval of transactions and the documentation of transactions for accounting purposes. This may include a written policy manual and a procedural manual regarding the appropriate documentation of financial transactions for accounting purposes. The adequate separation or segregation of duties, so no one person has the authority over financial transactions is the most difficult goal to accomplish. This is a particular issue with a small staff when it is necessary to insure separation of duties, etc. The duties for authorization, recording, and custody of assets for a transaction should be separate duties of individuals. Only authorized persons responsible for record-keeping should have access to those financial transactions records. A comparison of the financial records against actual money accounts is necessary to maintain accurate financial management.
  • Local grant administrators must ensure that costs charged to the CDBG grant are allowable. The standards for determining allowable costs apply equally to such items as salaries and administrative services contracts, as well as to real property and equipment purchases or leases, travel, and other administrative expenditures. Authorization is normally done through the budget approval process of the governing body. It is essential to insure that the cost is not prohibited by the CDBG Program, and other Federal, state or local laws and regulations and that the entire cost can be allocated to the CDBG project and directly related to the grant Direct costs are those that can be specifically identified with a particular final cost objective. Such as paying employees for time spent on the project, materials, equipment and capital expenditures, and travel. Indirect costs are those for the common purpose benefiting more than one objective or cannot be readily assigned to the objective. Such as the costs incurred by other departments in an organization…commonly overhead expenses .
  • The cost is only allowed to be charged one time against not more than one grant or activity. If the cost charged is at a discount, the local recipient cannot charge the non discount cost to CDBG and make a profit. Grant administrators must be in close communication with others involved in financial management for the jurisdiction. Need examples
  • The cost must be treated consistently for CDBG as it would be for a non-Federally assisted activity.
  • It is the local recipient’s responsibility to ensure that costs are allowable.
  • These are additional factors in determining whether costs are allowable. The local administrator and community officials carried out financial responsibilities according to the rules and procedures. The increase in project activity costs is a result of major changes in how the community does business because federal rules mean doing more. Purchases are made on sound business practices. The local procurement process evaluates project costs and determines if the price is okay.
  • The 43 items are listed on the next slide. But first let us discuss… Sections 1 through 43 provide principles to be applied in establishing the allowability or unallowability of certain items of cost. These principles apply whether a cost is treated as direct or indirect. Failure to mention a particular item of cost in these sections is not intended to imply that it is either allowable or unallowable; rather, determination of allowability in each case should be based on the treatment or standards provided for similar or related items of cost. Remember direct costs are costs charged against the project… Direct costs are those that can be specifically identified with a particular final cost objective. Such as paying employees for time spent on the project, materials, equipment and capital expenditures, and travel. Indirect costs are included in a cost allocation plan… Indirect costs are those for the common purpose benefiting more than one objective or cannot be readily assigned to the objective. Such as the costs incurred by other departments in an organization…commonly overhead expenses.
  • The listing of 43 selected items of cost in Attachment B of OMB Circular A-87, which applies to states and local units of government, are only a topic or term statement. The circular contains additional guidance on determination of allowable costs. The items in red are unallowable selected cost items.
  • This is a precise, clear and definite statement of unallowable costs.
  • Source documentation is a key for the financial management system at both the state and local level. This factor plays an important role in the performance compliance monitoring conducted by HUD, State, auditors, and the local government. CDBG costs must be incurred not before and not after the grantee contract period unless exceptions are provided by the state. The local government official must approve fund expenditures. The basis of costs incurred must be documented with respect to payrolls if an employee’s time is charged against CDBG, the space and utilities costs, and any supplies charged to CDBG funds. A best practice is to have employee time sheet allocate time by the cost activity. Documentation is needed in the form of invoices, purchase orders, requisitions, bills, canceled checks, reasonable measurements, deposits, payroll for salaries/benefits, timesheets, contracts encumbrance, and other sources.
  • Budget control procedures are a management tool put in place to monitor obligations and expenditures against the approved budget for CDBG funded activities. The budget represents the best estimate of resources necessary for program operations and to meet project activity costs. When line items, project activities, display a pattern or exceed the budget, a careful re-assessment and action may be required to operate and complete project activities with resources allocated. It may not be possible to increase the budget to account for cost overruns. The comparisons need to be made on an ongoing basis, and not after a majority of funds have been committed and expended. It is of little benefit to stay within the budget if the activity or operation lags behind in terms of service or completion. Watch the project progress and spending rate so the expenditures do not exceed the authorized budget. It is extremely important to not spend all your money before the project is finished.
  • Procedures are required to be in place for both the State and local CDBG recipient to minimize the time elapsed between receipt of funds and the actual disbursement of funds. This requirement is intended to reduce unnecessary disbursement of CDBG funds from the US Treasury and minimize the cost of financing the CDBG Program by the Federal government.
  • There are two methods available to transfer CDBG grant funds. These are the reimbursement method and the cash advance method. The reimbursement method is a transfer of grant funds based on actual expenditures before the request for funds. The cash advance method involves the transfer of CDBG funds obligated by source documentation before the actual cash disbursements have been made by the grantee. Don’t ask for money until you have the invoice.
  • The State and local unit of government grantee must be in compliance with fund transfer requirements under cash management. This includes the submission of accurate disbursement requests, which require knowing how much cash is on hand and immediate cash needs. When CDBG funds are received by the grantee, disbursement needs to take place within 3 business days if drawn based on the cash advance method. This is a standard that HUD uses to determine if a subgrantee is in compliance with the cash management requirements. If the grantee transfer results in more funds being drawn than what was required, the grantee must return the excess balance in a timely manner. Reference to Treasury Circular 1075 31 CFR part 205 You should not ask for more money than you need, because you can’t hold on to excess cash .
  • We also need to talk about financial reporting. Financial reports prepared must be accurate, timely, current and represent a complete disclosure of the financial activity and status in each Federal grant program under which assistance is received. The state may have specific reporting requirements
  • These costs may be reimbursed whether or not the state has adopted Part 85 and thus uses OMB Circular A-87 The state is not required to permit reimbursement of pre-agreement costs.
  • *Fiscal year of the local government or non-profit (if there is a subrecipient) Both follow A-133 Changed to $500,000 for fiscal years ending after December 31, 2003 (prior to that it was $300,000) Audits must be in accordance with Generally Accepted Government Auditing Standards (GAGAS) and OMB A-133
  • Same for government and non-profits Recently the HUD Inspector General issued a report indicating that too often local governments are not in compliance with the Single Audit Act.
  • Has to be an Original
  • Notify State of audit findings, send corrective action plan to State and notify when corrective actions are complete
  • Check references of accountant – were Audits done on time, do they have experience With CDBG/HOME Can NOT appoint someone or just hire them, must be procured Can use CDBG funds for the audit proportionately with other federal funds
  • That concludes an overview, which included financial management details. Remember…manage correctly and avoid disallowed costs, which can result in paying back funds to HUD or the State.
  • This is a potentially risky area with great potential for ending up in the newspaper headlines if it is not handled properly.

Module 11: Financial Management Module 11: Financial Management Presentation Transcript

  • CDBG Financial Management Requirements For Grant Administrators
  • Financial Management - Objective
    • The objective of this module is to provide local grant administrators with a basic understanding of the financial management requirements related to the CDBG program.
    • Local grant administrators must be aware that, as a recipient of CDBG funds, their jurisdiction must be in compliance with these requirements in addition to any local or other state requirements.
  • Financial Management - Overview
    • State CDBG Programs are required to have financial management standards or fiscal and administrative requirements as described in the CDBG program regulations at 24 CFR 570.489(d).
    • Local CDBG recipients must comply with the standards established by the state.
  • State Standards
    • The fiscal and administrative requirements
    • established by each state CDBG program
    • must:
    • Show that uses of funds comply with all applicable statutory and regulatory requirements;
    • Document that all funds received have been spent only for reasonable and necessary costs of program operation; and
    • Demonstrate that program funds have not been used for general expenses of State or local government.
  • State Standards
    • Insert state specific information related to whether or not the state has chosen to use Part 85.
  • Financial Management Using Part 85
    • Fiscal control and accounting procedures of local recipients must be sufficient to:
      • Permit preparation of reports required by statute and regulation
      • Permit tracing of funds to establish that they have not been used in violation of any statutory or regulatory restrictions
  • Financial Management Using Part 85 - continued
    • Financial management systems must meet the following standards:
      • Accurate, current and complete financial reporting
      • Accounting records that identify the source and application of funds
      • Effective internal controls and accountability for all assets
      • Budget controls with actual expenditures compared with budgeted amounts
  • Financial Management Using Part 85 - continued
      • Use of OMB cost principles (Circular A-87) in determining the reasonableness, allowability and allocability of costs
      • Complete source documentation for all accounting records
      • Effective cash management to maximize timeliness of spending
  • Financial Management Using Part 85 - continued
    • Internal control and accountability must be maintained for all cash, real/personal property, and other assets.
  • Internal Control
    • Basic elements of internal control
      • organizational chart
      • written definition of duties
      • formal system of authorization and supervision
      • separation of duties
      • control over access to assets, blank forms, and confidential documents
      • comparison of actual assets and liabilities to financial records
  • Determining Allowable Costs
    • Local grant recipients must ensure that costs charged to the CDBG grant are allowable
    • Recipients should use OMB Circular A-87 to guide their determination of allowable costs
    • Standards for determining allowability apply equally to all cost items and apply whether a cost is direct or indirect
  • Determining Allowable Costs - continued
    • Allowable costs under CDBG, must:
      • Be necessary and reasonable
      • Be allocable according to the CDBG contract
      • Be authorized or not prohibited under state/local laws and regulations
      • Conform to limitations or exclusions (laws, terms, conditions of award, etc.)
      • Be consistent with policies, regulations and procedures
  • Determining Allowable Costs – continued
      • Allowable costs must (continued):
      • Be in accordance with Generally Accepted Government Auditing Standards (GAGAS)
      • Be adequately documented
      • Be treated consistently (with non-CDBG costs)
  • Determining Allowable Costs - continued
    • In order to be allowable, costs must be necessary and reasonable to carry out the objectives of the grant
    • Reasonable costs must be:
      • Generally recognized as ordinary and necessary
      • Related to requirements imposed by sound business practices
      • Related to Federal and state laws and regulations
      • Related to the terms and conditions of the award
  • Determining Allowable Costs - continued
    • The individuals involved in implementing the activity must have carried out their responsibilities appropriately
    • The award may have caused significant deviations from the established practices of the local recipient, which resulted in increased costs
    • The local recipient must be able to document that they have paid market prices for goods and services
  • Determining Allowable Costs - continued
    • OMB Circular A-87 includes a Listing of Selected Items of Cost (Attachment B)
    • The specific cost items are described as “allowable” “generally allowable” or “unallowable”.
  • Allowable Costs OMB A-87 Attachment B: Listing of selected Items of Cost (unallowable costs red lettering)
    • Advertising and public relations costs
    • Advisory councils
    • Alcoholic beverages
    • Audit costs and related services
    • Bad debts
    • Bonding costs
    • Communication costs
    • Compensation for personal services
    • Contingency provisions
    • Defense and prosecution of criminal and civil proceedings, and claims
    • Depreciation and use allowances
    • Donations and contributions
    • Employee morale, health, and welfare costs
    • Entertainment costs
    • Equipment and other capital expenditures
    • Fines and penalties
    • Fund raising and investment management costs
    • Gains and losses on disposition of depreciable property and other capital assets and substantial relocation of Federal programs
    • General government expenses
    • Goods or services for personal use
    • Idle facilities and idle capacity
    • Insurance and indemnification
    • Interest
    • Lobbying
    • Maintenance, operations, and repairs
    • Materials and supplies costs
    • Meetings and conferences
    • Memberships, subscriptions, and professional activity costs
    • Patent costs
    • Plant and homeland security costs
    • Pre-award costs
    • Professional service costs
    • Proposal costs
    • Publication and printing costs
    • Rearrangement and alteration costs
    • Reconversion costs
    • Rental costs of building and equipment
    • Royalties and other costs for the use of patents
    • Selling and marketing
    • Taxes
    • Termination costs applicable to sponsored agreements
    • Training costs
    • Travel costs
  • Unallowable Costs
    • Unallowable Costs (per A-87, Attachment B)
      • Alcoholic Beverages
      • Bad Debts
      • Contingencies
      • Contributions & Donations
      • Defense and prosecution of criminal and civil proceedings and claims
      • Entertainment
      • Fines and Penalties
      • Fund raising and investment management costs
      • General government expenses
      • Idle facilities and idle capacity
      • Lobbying
  • Documentation
    • All accounting records must be supported by source documentation… KEY!!!
    • CDBG costs charged must be incurred during grant period
    • Funds must be expended on allowable items
    • Expenditures must be approved by responsible grantee official
    • Documentation must explain the basis of costs incurred
  • Budget Control
    • Budget control as a management tool
      • control expenditures and compare to approved operational budget
    • Control and compare expenditures to approved budget by:
      • maintaining record of the amounts budgeted
      • recording unexpended and unobligated balances
      • comparing actual against projected funds
  • Cash Management
    • Disbursements/payments
      • Standard: the time elapsed for the transfer of funds and disbursement by the state and unit of local government grantee shall be minimal for payment methods and procedures used
  • Cash Management - continued
      • Disbursement/payment methods
        • Reimbursements: payments made as a reimbursement for costs already paid by grantee
        • Cash advance: disbursements made to pay for expenses/costs invoiced or billed to grantee. These must be only for source documented costs
  • Cash Management - continued
    • Cash management: fund transfers must be in compliance, which includes:
      • Accurate information in the disbursement request
      • Compliance with the general standard---CDBG funds are disbursed to pay for CDBG program costs within 3 business days of the receipt of funds
      • Erroneously drawn funds must be returned in a timely manner
  • Financial Reporting
    • Financial reporting must be accurate and current and include complete disclosure of the financial results of funded activities in accordance with financial reporting requirements of the state
    • At a minimum the reporting must include:
      • amount budgeted
      • disbursements to date
      • program income and other
      • actual expenditures/disbursements
  • Pre-agreement Costs
    • State CDBG program regulations at 24 CFR 570.489 (b) allow for reimbursement of costs incurred by a local CDBG recipient before the establishment of a formal grant relationship between the state and the unit of general local government
    • State must have established procedures (which may include environmental requirements)
    • Costs must be incurred for eligible activities
  • Annual Audit Requirements
    • Single Audit
      • OMB Circular A-133 requires entities that expend $500,000 or more during a fiscal year* in federal awards (from all sources) have a Single Audit conducted for that fiscal year.
    • Audits must be in accordance with Generally Accepted Government Auditing Standards (GAGAS) and OMB A-133
  • Annual Audit Requirements continued
    • The State may determine when the audit is due
    • Instructions
      • Include date of entity’s fiscal year end
      • List sources of all federal expenditures
  • Annual Audits Knowing the Rules
    • Local Governments and Non-Profit Organizations receiving Federal Funds:
      • Single Audit Act and OMB Circular A-133
      • www.whitehouse.gov/omb/grants/grants
        • circulars.html
  • Annual Audit Requirements
    • Upon completion, the Grantee must:
      • Submit a copy of the Audit to the State
      • If there are no Audit Findings or questioned costs, the grantee may provide written notification to the state that an audit was conducted in accordance with A-133
      • Submit copies of Collection Form (SF-SAC) and/or Reporting Package to Federal Clearinghouse, and each federal awarding agency as appropriate
  • Annual Audit Requirements
    • The Grantee is responsible for follow-up and corrective action on all audit findings.
    • Prepare a corrective action plan to address each audit finding including:
      • name of person responsible
      • corrective action planned
      • anticipated completion date.
  • Auditor Selection
    • Must procure
    • Request for Proposal most appropriate
    • Should be CPA or licensed public accountant
    • Must be experienced with Single Audits, CDBG programs, and local government
    • Verify completion and timeliness of previous audits
    • CDBG funds can pay for grant’s share of Audit
    • Charge to General Administration
  • Financial Management Conclusion
    • Local governments that receive CDBG funds must:
      • Comply with applicable Federal, state and local laws, regulations, standards, and procedures
      • Conduct financial management methods and procedures in accordance with Generally Accepted Government Auditing Standards (GAGAS)
    • All financial management practices will be:
      • Monitored by the state CDBG program
      • Examined closely by auditors
  • Conclusion - continued
    • Local officials and grant administrators must be aware that all financial management practices will be:
      • Monitored by the state CDBG program
      • Examined closely by independent auditors
      • Make sure that your financial
      • management practices are sound!