Common Single Audit Findings and Remediation Series: Program Income

January 24, 2020
Single Audit Government Building

Program income appears to be a simple compliance requirement. However, the apparent simplicity can often be misleading as it is sometimes one of the hardest grant requirements to properly identify or calculate. Once program income is identified, the next step of the battle is determining the type of program income and the method of application or impact to the grant program. Each grant program can apply program income differently, but the methods of application will generally fall into three separate methods: addition, deduction, and cost sharing.

Identification and Calculation
The first common deficiency in program income is, unfortunately, the identification or calculation of program income. The Uniform Guidance defines program income as “gross income earned by the non-federal entity that is directly generated by a supported activity or earned as a result of the federal award during the period of performance.” Typical examples of program income are fees for services performed, rental income from property acquired with federal awards, license fees, and interest earned on federal loans. The standard examples make sense and are clear; however, there are many times where a relationship between the grant and program income can be vague. As an example, for many of the health-related awards, providers may charge a low-cost fee for a specific healthcare related service at a clinic. If a grant is received to support the payroll, vaccines, or other operational costs of the clinic, is all, some, or none of the income generated by the clinic, subject to federal requirements? Some awards may allow a grantee to use funding to construct a building that then generates some sort of operating income. Is any of the subsequent operating income program income? This example can have different answers depending on the period of performance and underlying requirements of the federal award.

Given how vague the definition is and the multitude of different scenarios that can be applied, the first step to avoiding misidentification of program income is to read the grant award carefully to see if it provides clarification. If there is still confusion, the next step is to reach out to the federal liaison for the grant to seek clarification. The goal is to ensure reporting is accurate, not only in the individual grant, but also on the Schedule of Expenditures of Federal Awards and ensure compliance with program income requirements.

The addition method is applied, with prior approval from the federal agency, to use the income on top of the amounts already received for the federal award. As the method name implies, this is additive in an effort to grow the program to something larger than what the federal dollars provide. The common pitfall around the addition method is a lack of internal controls in ensuring the income is not diverted elsewhere. When this method is used, the income must be spent for allowable costs and in support of the program. A strong internal control would be to provide for the segregation of duties between the receipting and recording of the income as well as a separate control for the authorization in the use of the income. If the internal controls are weak surrounding the recording and restricted-use of the income, it is possible that the income will be unknowingly diverted, and a finding may result. Review your procedures and controls to ensure that program income is restricted for use in the program and that the chart of accounts easily indicate as such to help prevent this finding.

The most common application method of program income is the deduction method. This method essentially decreases the amount of the upcoming draw request. Prior to drawing funds, grantees must to the extent available, use existing resources (i.e. program income) first. In practice, this is met by reducing the cash draw by the remaining unspent program income. What is the common finding here? Weak internal controls in identifying, classifying, and recording the program income. Since program income under the deduction method is a reduction of the cash draw, it is imperative that it is timely and accurately reported as an off-set to grant expenses. Therefore, segregation of duties over receipting and recording the income is necessary. However, in addition to this, there should be a review process in place over the reimbursement cycle to ensure that program income is appropriately applied to the cash request. Weak internal controls here will lead to over-drawing federal funds and lead to a finding with potential questioned costs. Review your procedures and controls to ensure these review processes are in place. Similar to the addition method, the chart of accounts should be set up to make the reconciliation process easy.

Cost Sharing
With prior approval from the federal agency, program income may be used as a source for your local match or cost sharing. However, the use of these funds is still restricted to being spent on allowable costs in support of the grant. Due to this, the pitfalls, findings, and remediation are almost identical to the addition method discussed above. The cost sharing funds need to be separately identified and spent appropriately in the support of the program. Reviewing your procedures to avoid diversion and the separate identification within the chart is accounts is the key to avoiding a finding.

Program income may appear simple, but due to the myriad of possible scenarios, can be vague and confusing. A proper line of communication with the federal liaison, an appropriate chart of accounts, and sound internal controls for receipting and recording the income are all key factors to avoiding noncompliance. Should you have any questions regarding these matters, please reach out to your local Eide Bailly professional.

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