Many for-profit organizations receive federal funding through grants, contracts, loans, or other funding arrangements. Depending on the contract, the organization may be required to undergo a compliance audit; a comprehensive audit governed by federal, state, or other regulations. Understanding when a compliance audit is required and how to prepare for it is critical to protect the organization and to demonstrate accountability.
What Is a For-Profit Compliance Audit?
A compliance audit evaluates whether an organization is following specific rules, regulations, or contractual terms that apply to a particular program or activity. Unlike a financial statement audit, which focuses on whether financial statements are fairly presented, a compliance audit focuses on adherence to requirements imposed by external parties.
Common Types of Compliance Audits for For-Profit Entities
For-profit organizations often encounter federal compliance requirements through programs such as:
- Research and development grants
- Department of Energy (DOE) awards
- HUD and Housing Program Audits
- Small Business Administration (SBA) programs
- Infrastructure and construction funding
- Healthcare-related federal programs
Each program has its own compliance requirements, which the auditor will test as part of the engagement.
What Does the Federal Compliance Audit Cover?
While each compliance audit is tailored to specific requirements, auditors typically focus on:
- Internal control testing over financial reporting and compliance
- Compliance testing, including allowable costs and activities, and eligibility, if applicable
- Accurate reporting and documentation
Preparing for a Compliance Audit
Proper preparation can significantly reduce audit risk. Organizations should:
- Maintain accurate and well-organized financial records
- Track federal expenditures separately from non-federal funds
- Document internal controls and compliance procedures
- Review award agreements and compliance requirements
Engaging auditors early and conducting internal readiness assessments can also help identify potential issues for resolution before the start of an engagement.
Final Takeaways
The world of federal compliance can be complex and overwhelming. This is especially true for organizations that have never been through the process before. However, with proper planning, the right resources and a clear understanding of federal requirements, organizations can navigate the process efficiently and successfully. It is important to partner with an experienced audit firm to help you understand requirements and avoid common pitfalls.
If your organization is subject to compliance requirements—or expects to be—please do not hesitate to reach out. We are here to help you navigate requirements, answer any questions, and develop a plan that supports both compliance and long-term success.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
