Hi,
There is a particular kind of audit finding that finance officers dread more than any other, because the money is already gone. The expense was legitimate, the entity needed the purchase, the work was done well. And the cost gets disallowed anyway, because of how it was bought.
Under federal award rules, it is not enough that the expenditure was reasonable. The procurement process has to hold up: the right method for the dollar amount, real competition, documented rationale, required contract provisions, and a conflict of interest policy that actually exists in writing.
When any of that is missing, the cost can be questioned, and questioned costs get repaid out of local funds. Your taxpayers or your ratepayers cover it, for a purchase your board already approved.
The trap that catches the most entities is not a federal rule at all. It is their own policy. Auditors test against the most restrictive requirement that applies, which means federal rules, state law, and your own purchasing ordinance all stack. If your local policy requires three written quotes above five thousand dollars, and someone got one quote for a seven thousand dollar job, that is a finding, even though the federal threshold would have allowed it. The federal rule is a floor, not a ceiling, and most entities have never reconciled their own policy against it.
The recurring failures look mundane, which is exactly why they survive year after year:
- Quotes that were obtained but never kept. Somebody called three vendors. Nobody wrote it down, and the person who made the calls has since retired.
- Sole source justifications written afterwards, to explain a decision that was already made. “Only they can do it” is a conclusion, not a justification.
- Splitting a purchase into smaller pieces that each fall under a threshold, which is treated as avoidance whether or not it was intended that way.
- No suspension and debarment check before awarding. It takes a minute on SAM.gov, and almost nobody does it.
- Missing required contract clauses. Federally funded contracts carry mandatory provisions, and a signed agreement without them is deficient even if the work was perfect.
- A conflict of interest policy that exists nowhere. The board member whose brother-in-law paved the lot may have been the cheapest bid and it will still be the first thing an auditor asks about.
- Piggybacking off another entity’s contract without confirming that the original procurement met federal standards.
It plays out identically across very different organizations. A district buying curriculum software on a renewal nobody competed for. An authority awarding roof repairs to the contractor who did the last three roofs. A utility replacing pumps through the distributor it has always used. A town retaining the engineering firm that has served it for twenty years, on an agreement last competed in 2011.
The protection is documentation created at the time, not reconstructed later:
- Reconcile your written purchasing policy against federal and state requirements, and fix whichever is out of step
- Keep a procurement file for every award: method chosen and why, who was solicited, what they quoted, why the winner won
- Run and save the debarment check before the award, not at audit time
- Use a standard rider of required federal clauses so they cannot be left off
- Get the conflict of interest policy adopted, and have people actually sign disclosures
- Decide your method by the total cost of the whole project, not by invoice
This is work we take on directly:
- Procurement policy review and alignment with Uniform Guidance and state law
- Grant compliance, SEFA preparation and questioned cost resolution
- Single Audit and Yellow Book engagements, and audit finding remediation
- ACFR and AFR preparation, fund accounting bookkeeping, and board or council ready reporting
Reply to this email by Friday and we will set up a free 15-minute call with one of our senior government specialists. Send us your current purchasing policy and the dollar value of your largest federally funded purchase this year, and we will tell you on the call whether the two are compatible.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com