SUGGESTIONS ON IMPROVING FINANCIAL MANAGEMENT

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How to Contract for Audit Services
Special Conditions for High Risk Grantees
A Site Tool for Monitoring Organizational Performance
Management of Accounts Receivable

Audit Procurement

Efficiently procuring cost-effective audit services is a key board and management responsibility.  To provide assistance in fulfilling the responsibility, the National Intergovernmental Audit Forum (NIAF) developed the following pamphlet, "How to Avoid a Substandard Audit:  Suggestions for Procuring and Audit." The information lays out a systematic approach to audit procurement which can help ensure engaging a qualified auditor and receive a quality audit.  The steps include the following:

1. Planning what needs to be done
2. Fostering competition through soliciting proposals
3. Evaluation proposals and qualification
4. Preparing a written agreement between the agency and the auditor
5. Monitoring the auditor's performance

An additional resource on this subject the agency may wish to consider reviewing is:

"What a Difference Preparation Makes: A guide to the Nonprofit Audit," by the Accountants for the Public Interest.  Call (202) 347-1668 for ordering information.

High Risk Agencies

Every county, and even many vendors, subgrant DHSS funding to other agencies. On occasion, a granting agency may encounter a situation where a prospective subgrantee has particular characteristics which create a higher than usual risk of having problems in administering the subgrant. The subgrantee, for instance, may have a history of unsatisfactory performance, being financially unstable, and/or not having a reliable financial reporting system. Even when these problems exist, however, it is not always feasible to award the subgrant to a different agency.

In these situations, the granting agency may wish to consider imposing special conditions or using other techniques to protect the funding. The federal Common Rule, or the federal "Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments," lays out some criteria for identifying "high risk" agencies and some possible actions to take when contracting with these agencies. The Common Rule in its entirety is referenced in the Financial Management Manual, but the portions relevant to high risk agencies are included on the following page.

Counties may find the federal guidelines useful in developing criteria to use in identifying subgrantees which are experiencing particularly difficult problems, and in identifying possible options for taking action. The attached information also may point to the types of information a granting agency may wish to routinely collect from all subgrantees as part of a larger information collection and tracking system to be used in flagging "high risk" subgrantees. The excerpted information also can serve to remind a granting agency that authority does exist for that agency to take more rigorous action, when necessary, to devise more stringent controls and tighter contract language in order to adequately monitor the use of federal and state funds.

FEDERAL "COMMON RULE" GUIDANCE ON "HIGH RISK" SUBGRANTEES

"'____.12 Special grant or subgrant conditions for "high-risk" grantees.

"(a) A grantee or subgrantee may be considered "high risk" if an awarding agency determines that a grantee or subgrantee:

1. Has a history of unsatisfactory performance, or
2. Is not financially stable, or
3. Has a management system which does not meet the management standards set forth in this part (see note below), or
4. Has not conformed to terms and conditions of previous awards, or
5. Is otherwise not responsible, and if the awarding agency determines that an award will be made, special conditions and/or restrictions shall correspond to the high risk condition and shall be included in the award.

"(b) Special conditions or restrictions may include:

1. Payment on a reimbursement basis;
2. Withholding authority to proceed to the next phase until receipt of evidence of acceptable performance within a given funding period;
3. Requiring additional, more detailed financial reports;
4. Additional project monitoring;
5. Requiring the grantee or subgrantee to obtain technical or management assistance; or
6. Establishing additional prior approvals.

"(c) If an awarding agency decides to impose such conditions, the awarding official will notify the grantee or subgrantee as early as possible, in writing, of:

1. The nature of the special conditions/restrictions;
2. The reason(s) for imposing them;
3. The corrective actions which must be taken before they will be removed and the time allowed for completing the corrective actions; and
4. The method of requesting reconsideration of the conditions/restrictions imposed."

NOTE:  See the "Common Rule" for a discussion of the management standards. DHSS has adopted a majority of these standards and they are reflected throughout this manual.

A Site Tool for Monitoring Organizational Performance

Whenever one organization contracts with another organization to provide program services, the organization providing the funding assumes some responsibility for assuring that the funds are being managed efficiently and effectively to accomplish the objectives for which funds were provided.

There are several mechanisms that can be used for monitoring performance. Some of these mechanisms include: (a) reviewing and approving program planning documents, (b) reviewing and approving operating budgets for the programs, (c) reviewing and approving expenditure reports for the program, (d) reviewing any reports of program accomplishments or other indicator data on the programs, (e) requiring, reviewing, and resolving audits of the program, and (f) performing on-site visits.

From time to time, in fulfilling its management monitoring responsibilities for subrecipient organizations funded through this department, DHSS staff have conducted on-site visits for the purpose of obtaining a brief assessment of the management capabilities of organizations it funds.

Numerous on-site review tools and performance checklists have been developed for the purpose of assisting staff responsible for monitoring the performance of subrecipients. Recently, however, Office of Program Review and Audit staff have developed a checklist of questions covering the areas of board oversight, financial management, and program management that we have found helpful in developing a broad assessment of organizational performance. This "site tool" is provided as a source of guidance for those whose responsibilities include the monitoring of the organizations to which they provide funds, and who do not already have a tool developed or are interested in reviewing their existing site monitoring tool.

SITE VISIT TOOL FOR MONITORING SUBGRANTEE PERFORMANCE

This tool was developed for brief (ideally one day) site visits to provider organizations to enable one to get a feel for how well the organization is functioning. The three broad areas covered are board activities, financial management, and program management.

Depending on the many varied circumstances surrounding the program(s) and provider organization being monitored, the users of the tool need to decide which of the enclosed questions are applicable, whether other subject areas need to be included in the review, and the criteria the reviewer(s) will use to determine whether the answers offered by the provider organization are acceptable. For example, if a recently completed comprehensive financial audit of an organization identified no accounting problems, the reviewer(s) may not need to ask every question pertaining to financial management. On the other hand, knowledge of past program performance concerns may prompt the reviewer(s) to concentrate on obtaining full and complete answers to all program management questions.

Board Activities

1. Are there Board approved by-laws? Obtain copies and review for relevant materials.
2. Are there Board approved personnel policies and procedures? Review these for any items that may be relevant to program operations or to the costs charged to grant programs.
3. Is there a Board approved financial policy and procedures manual? Is it updated on a periodic basis?
4. Determine the Board's role in establishing program directions, including development of a mission statement for the organization.
5. What kind of financial and program performance reports typically go to the Board, if any?
6. How active a role does the Board take in financial matters? In reviewing budget priorities? In reviewing financial performance?
7. Has the Board established performance goals for the Executive Director and periodically evaluated performance of the Executive Director?

Financial Management

1. Does the agency charge indirect costs to grants? If so, do they have a written indirect cost plan? Is the pool of indirect costs to be recovered through the rate segregated from costs charged directly? Are indirect costs budgeted for and approved in grant contracts? Do the costs charged meet any limitations prescribed for indirect costs?
2.  Does the agency allocate costs? If so, is there a written cost allocation plan? Is it reasonable? Is it followed?
3. Are the agency's bank statements reconciled in a timely manner? Check for signatures and for the age and amount of outstanding checks.
4. Are the agency's expenditure reports, which are submitted to the granting agency, supported by the agency's accounting records? Consider the rate of expenditure of granting funds. (The subgrantee may not be adequately controlling funds if year-to-date expenditures, when annualized, far exceed budgeted amounts. On the other hand, expenditure rates well below budgeted levels may indicate the subgrantee is not meeting targeted service levels.)
5. Is there adequate supporting documentation in the accounting records to support transactions that appear in the accounting system? Records of original entry, journal entries, correction transfers. (For a quick review, ask to see where these are kept and select a few samples of each of these and review with the business office staff how these are prepared and see what types of support are attached to the copies that appear in the files.)
6. What kinds of records make up the agency's accounting system? Detailed, summary, management. (For a quick review, select a few entries that appear on a recent expenditure report that has been filed with the department and ask the business office staff to trace back through the worksheets used to prepare the report and the associated accounting records from which the numbers on the worksheet were taken. This process is not overly time-consuming and can provide one with a quick comfort reading on the agency's record keeping system.)
7. Has the subgrantee developed and followed through in implementing a corrective action plan designed to fix all accounting deficiencies noted in the subgrantee's last annual audit?
8. How are the agency's individual grants accounted for in the accounting system? What records are kept of grant activity?
9. Is the subgrantee experiencing difficulties paying bills in a timely manner, as would be evidenced by a substantial amount of outstanding payables? If so, how old are the unpaid bills?
10. Are any program services offered through subcontractors? If so, review the subcontractor contracts and the status of payments to the subcontractors.
11. Does the organization keep records of equipment purchased with grant funds which show the date and amount of purchase, a description of the equipment which would enable one to identify and locate the particular items listed, and the grant sources which contributed to the purchase along with the amounts contributed by each?
12.  Review any major leases for space and equipment to ensure that the amount ultimately charged to grants for such items are reasonable and to identify any related party transactions that might result in unreasonable charges to grants for these items.

Program Management

1. Are there current, specific position descriptions for staff and supervisors?
2. Are there provisions for employee evaluations, and is there evidence that employees are evaluated regularly?
3. To what extent do Program Directors manage their programs? That is, to what extent are program directors: (a) seeking out additional support for new programs related to their existing programs; (b) developing program plans; (c) monitoring operating budgets; (d) setting program priorities; and (e) preparing any reports of program accomplishments?
4. What financial reports do program managers routinely use?
5. Do program managers have a clear idea of their program objectives?
6. Have program managers developed measures of success which indicate the degree to which program objectives are being met? Is this information presented to the board? Is the information used by the organization to improve program services?
7. Check contracts for performance goals and determine the extent to which these are being measured and met.
8. How often do monitoring staff review the programs operated by the organization? What programs are reviewed? Are there any reports on the results of monitoring visits? What do the reports have to say about the programs? 

Management of Accounts Receivable

The management of accounts receivable is an essential component of financial management and good business practice. Generally accepted accounting principles and internal control standards establish the framework for an agency's accounts receivable system. Accounts receivable are often a significant part of an agency's financial statements and will be audited in its annual audit.

Each agency should establish an accounts receivable system to assure that all charges are billed promptly and recorded accurately and that adequate collection efforts are made. Agencies may find the attached list of general criteria for effective management of accounts receivable useful when they are assessing their accounts receivable policy and procedures.

MANAGEMENT OF ACCOUNTS RECEIVABLE

1. Accuracy of Information

   Each agency (a) should have an accurate count of who owes the agency what amount of funds and (b) the subsidiary ledger of accounts receivable should be updated on a timely basis.

2. Policies and Procedures

   Each agency should have written collections policies and procedures which (a) comply with applicable federal and state requirements, (b) are clear and understandable to all relevant parties, and (c) are likely to promote efficient and effective collections.

3. Compliance to Policies and Procedures

   Each agency should document that (a) policies and procedures are routinely followed and (b) departures from established policies and procedures are infrequent and can be adequately explained according to unanticipated, unique circumstances.

4. Collections Priorities

   Each agency should demonstrate that it has reasonable collections priorities. In the event that resource limitations prevent exhaustive pursuit of every account, the agency should establish and consistently follow reasonable collection priorities.

5. Timely Actions

   Each agency should have timeliness standards for action at each step of the collections process which are reasonable and which are followed.

6. Defining and Measuring Success

   Each agency should have established "benchmarks for success," or critical measures that the agency carefully tracks to monitor its success in accurately establishing and collecting accounts receivables. (e.g., percent of accounts meeting timeliness standards; trends in amounts collected as a percent of total outstanding; average time taken to fully collect from accounts; amount collected per dollars spent by the agency to collect from accounts; etc.)

7. Self-Improvement

   Each agency should demonstrate that it routinely reviews these measures (and other relevant information, such as information on collection activities in use or being experimented with by other agencies) to identify areas where improvements could be made.

8. Prevention

   Each agency should review patterns in the number, type, and causes of receivables as a means of identifying areas where the agency might pursue initiatives to prevent over-payments to begin with.

9. Contract Monitoring

   If the agency contracts for collections services, it should (a) clearly articulate enforceable standards of performance the contractor is expected to achieve, (b) monitor whether contractor performance is satisfactory, and (c) act appropriately according to the results of its monitoring efforts.

10. Writing Off Receivables

    Each agency should write off receivables only after fully documenting that: (a) rigorous collection efforts were pursued, (b) all activities were consistent with established policies and procedures, and (c) it is unlikely that the benefits to be gained from continued pursuit of the account will meet or exceed the costs of additional collections efforts.

11. Accounts Receivable Reports

    The agency should demonstrate that it maintains effective and timely reports and communications with all parties that the agency needs to work with in order to achieve its objectives.

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Last Revised:  July 12, 2010