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The Hidden Costs of Grant Noncompliance for Governments
If your organization has ever dealt with federal or state grants, you certainly know that staying current with all of the various compliance requirements can be a full-time job. The consequences of noncompliance can be significant. They can vary from a simple letter from a grantor agency to disallowed costs that must be repaid. But there are also more subtle costs measured in the loss of credibility, diminished future grant opportunities, or the lost time that must be devoted to restoring confidence in the professionalism of your organization. The costs of noncompliance are high, especially when you consider how relatively inexpensive it is to implement internal controls.
When noncompliance is uncovered, the public reaction can sometimes be extreme. For instance, a noncompliance finding for the late filing of report to a grantor agency can become the headline article in tomorrow's paper: "Director With Six-Figure Salary Doesn't Report Federal Expenses." The effects of negative publicity can ripple through an entire organization, from the elected officials to the lowest ranking staff members. This redirects attention and resources away from serious issues facing government or the community.
- Low employee morale and stressed staff
- Time spent responding to governance, public records request, or media inquires
- Attention and efforts of management being redirected away from the mission
Future grant opportunities
Grantor agencies have a vested interest in ensuring their funds are given to organizations with sound policies and a reputation of performance and compliance. That “minor” noncompliance this year may translate into grantor concern and skepticism next year. This is especially important if a government’s grant funding is concentrated with one federal department or grantor agency.
- Lost opportunities of not receiving a grant
- Receiving a smaller allocation
- Delays in funding in the case of multiple rounds of funding
Additional requests from grantors, regulators, and auditors
When a government is subject to a single audit, noncompliance can result in a high risk designation from the auditor. This translates into more testing for the auditors and, as a result, more time spent fulfilling the additional requests for information. Almost all instances of noncompliance involve personnel resources at the highest levels of an organization’s hierarchy, which means that, until the noncompliance issue is resolved, there will be less time to deal with the important challenges of the organization.
- Higher audit costs due to higher risk designation
- Employee time meeting additional audit requests
- Lost productivity while developing and following corrective action plans
Criminal and civil penalties
Noncompliance can also result in criminal and civil penalties. Grants involving services to individuals are especially sensitive. A data breach related to social security numbers, employee health information, or financial information can open the door to significant criminal or civil charges. Misappropriated assets can also result in penalties.
- Litigation expenses (criminal and civil)
- Remediation costs to resolve grant noncompliance
- Increased insurance premiums and overall cost of business services (audit, legal, and information technology)
The risk of noncompliance should never deter an organization seeking new grant opportunities. Rather, reflecting on the hidden costs of noncompliance should encourage an organization to strengthen its compliance stance and its internal controls.
Excellence in grant compliance should be owned and celebrated by an entire organization, not just the finance department. Leaders of governmental organizations should communicate the cost of noncompliance to both financial and operational staff at all levels. Sharing these insights can create an environment of grant compliance awareness and accountability so that an organization never has the need to calculate the exact costs of noncompliance.
How we can help
CLA professionals can help you assess, streamline, and simplify grant compliance. We can also help you understand how to strengthen your internal controls. Avoiding the costs associated with the noncompliance demands a concerted effort, but an organization that fosters a culture of grant compliance is far more positive and sustainable than one that exposes itself to the consequences of noncompliance.