Common Single Audit Findings and Remediation Series: Matching, Level of Effort, and Earmarking

January 17, 2019

Typically referred to as requirement “G,” this requirement is made up of three separate and distinct individual requirements that attempt to accomplish similar goals. Many grantees may be familiar with the matching component of “G” but may not be aware of the other two requirements. Matching, level of effort, and earmarking all try to ensure that the grantee is financially committed to the grant purpose. There are nuances involved with each, which can lead to misunderstanding and to noncompliance.

Matching requires grantees to spend a specified dollar amount, calculated as a percentage of total federal expenditures for the grant. Matching is common in entitlement grants, where the grantees can claim reimbursements as long as they have eligible costs. To keep grantees financially committed, they are required to match grant funds locally. There are generally two examples of how a match is met: matching each transaction or matching with separate transactions. The match may be required to be proportionately met throughout the grant period or, alternatively, the match requirement may only be required to be met by the grant end date.

One way to ensure compliance is to match every transaction with nonfederal funds. For example, each transaction is split and coded in the chart of accounts to the federal and local ledger accounts respectively (using the appropriate matching percentages). This ensures that the grantee only claims the federal percentage and that the match expenditure is an allowable expenditure, since it is the same expenditure as the federal expenditure. This is a great way to ensure compliance, but it can require additional administrative work to allocate each individual transaction. Another way to meet a required match is to code all the transactions to a federal grant cost center. When the reimbursement request is prepared, the match is applied to the total of the cost center. Under this method, the grantee must pay close attention to any changes in the matching rate during the period.

Some grantees, to avoid the transactional burden, will code some transactions to the federal ledger account to be funded entirely with the grant and will consider other separate transactions to be matching expenditures with nonfederal sources. A separate “match” ledger account is maintained and monitored with allowable costs being coded to the match ledger account. This method may not be as burdensome from an individual transaction standpoint, but it does require additional monitoring. Grantees that utilize this approach must have internal controls in place to monitor the required match percentage, ensure the match is met, and ensure the match is met with allowable costs.

Grantees must examine their situation carefully and decide which method works best for their processes. Once the decision is made, internal controls can be designed and implemented and staff trained to ensure the requirements are met.

Level of Effort
Level of effort has two separate components: supplement not supplant and maintenance of effort. At their core, both components try to ensure the grantee keeps its local resources in the program. Supplement not supplant signifies that the federal expenditures are to be used to supplement a program and not replace local resources. For example, if a grantee always paid for 15 FTEs for a program, the addition of the federal dollars should enable the grantee to pay for 20 FTEs and not just pay for the same 15 FTEs, effectively diverting local resources elsewhere. 

Maintenance of effort usually involves a calculation where an average of prior local expenditures must be met, or partially met, in the future. For example, a grantee may be required to maintain expenditures at 90 percent of the prior two-year average or require a certain percentage of time be spent on the program by designated grant personnel.

Where do the findings originate within level of effort? Generally, it involves a lack of internal controls in the budget process and a lack of monitoring the results. In the above examples, if the grantee doesn’t budget to spend at least 90 percent of the prior two-year average from local sources or budget to include additional FTEs due to the additional federal funding, noncompliance is almost certain.

If internal controls are in place over the budgeting process, the next step is to ensure the budget is monitored and met. Many times, coming in under budget is great. However, if the budget was designed to ensure compliance, monitoring must also be in place to ensure the results do not negatively impact federal program requirements. Understanding how your organization meets level of effort requirements is key to avoiding findings.

Slightly different than the previous two requirements, earmarking instructs grantees on how to spend federal dollars. Earmarking requirements can vary and can include limits on administrative expenditures or minimum/maximum requirements on types of program expenditures. Usually the intent is to ensure the grantee is maximizing the federal dollar for the program (i.e., limiting administrative costs or spending enough federal expenditures on priority areas).

Findings over earmarking almost always come from a lack of internal controls over monitoring the expense thresholds. For example, if a grant limits administrative expenditures to 5 percent, the only way for a finding to occur is for the grantee to not monitor the relevant expenditures to ensure they are limited to 5 percent. The key to preventing findings over earmarking is to be aware of the specific earmarking thresholds for the types of expenditures and to ensure monitoring is ongoing.

These three requirements share commonalities, including the internal controls needed to ensure compliance. Grantees must read each grant award carefully, understand what local resources must be used or where and how the federal resources can be spent. Monitoring each of those components is paramount for compliance. 

Should you have any questions regarding these matters, please reach out to your local Eide Bailly professional

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