Receiving a contract or grant through a U.S. Small Business Administration program is a milestone, but you can’t just take the money and do whatever you want. If you don’t meet your contractual obligations, you won’t pass an audit. Not passing an audit can mean losing your funding or having to pay it back.
The audits you’re subject to depend on the type of funding you receive. If you want to pass an audit in the Small Business Innovation Research or Small Business Technology Transfer (SBIR/STTR) program, here’s what you need to do.
For contracts: understand the different types of audit
For instance, a pre-award audit looks at your price proposals, forward pricing, and indirect rates. If it’s your first time having a cost-reimbursement contract, you’ll be subject to a pre-award accounting system survey.
Post-award, the most common audit is the incurred cost audit. This audit is required for all cost-reimbursable contracts where you’re supposed to report year-end costs to the government. Other post-award audits include truth-in-negotiations compliance, cost-accounting compliance, audits for contract changes, and even labor floor check audits.
A PDF file from the SBIR website explains several possible audits in detail.
For grants: prepare for a Uniform Guidance Audit
All SBIR/STTR grant recipients who expend more than $750,000 within a year are subject to a Uniform Guidance Audit (UGA). This audit is designed to verify that you are spending your grant money as proposed and that you have adequate internal controls in place. The audit will scrutinize your accounting system, how it works, and how you account for expenses.
An article published by Jameson & Company explains in detail what happens during a Uniform Guidance Audit and what an auditor looks for, including:
- How much money you’ve already spent
- How you’re tracking project costs
- An accounting system compliant with the Federal Acquisition Regulation (FAR)
- A profit & loss statement by job showing totals for each project category
- Accuracy of direct costs including labor, consulting, subcontractors, travel, and equipment
An auditor will also want to see how your costs relate to your award, who authorized each purchase and payment, how you coded each expense into your accounting records, and more.
It’s also normal for an auditor to ask questions related to fraud. You’re not being accused of fraud. It’s part of their job to use your answers to determine whether or not there is a potential for fraud.
Be prepared to hire your own UGA auditor; the government won’t cover it.
Get a FAR-compliant accounting system firmly in place
A short course on accounting and finance on the SBIT/STTR website will take you through the requirements of an FAR-approved accounting system. Since the SBIR and STTR awards contain multiple phases, each phase granting significantly more money, you’ll be held to higher standards as you progress. For example, in Phase II, you need an in-depth, detailed accounting system that keeps track of all costs and distinguishes those costs per project.
Avoid basic mistakes
SBIR accounting isn’t easy, and you can’t get away with half-hearted systems no matter how long you’ve been using those systems in your business. Here are a few words of advice.
- Don’t rely on spreadsheets. You might be addicted to using Excel spreadsheets, but they’re extremely limited in terms of manipulating data. For instance, you can’t use a spreadsheet to generate internal financial information for your tax returns. Your accountant will have to spend even more time configuring your raw data. Excel just doesn’t meet the government’s requirements.
- Use a proper accounting system, even when you have a fixed contract. Just because your contract is fixed doesn’t mean future work will be at fixed prices. If anything changes, you’ll regret not having a proper accounting system.
- Use a payroll service. It’s difficult, if not impossible, to have a proper accounting system without a payroll service. A payroll service makes sure employee tax withholdings are deposited on time, employment taxes are paid, paychecks are classified correctly, and W2s are filed on time.
- Make sure employees sign off on timesheet changes. Any time a change needs to be made to an employee’s timesheet, the employee needs to make the changes, initial it, and provide an explanation. Only the employee is allowed to do this. Adequate timekeeping is a best practice in SBIR accounting.
You won’t fear an audit when you’re prepared
It’s too easy to make mistakes without realizing it. However, when you plan ahead, there’s no reason to fear an audit. Connecting with a professional to help you establish your accounting system is the best step you can take.
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