Accessing Funds: Section 6.2 Establishing a Financial Management SystemOverview
The fundamental purpose of financial management is to ensure the appropriate, effective, timely and honest use of funds.
Specifically, grantees must ensure that:
- Internal controls are in place and adequate;
- Documentation is available to support accounting record entries;
- Financial reports and statements are complete, current, reviewed periodically; and
- Audits are conducted in a timely manner and in accordance with applicable standards.
In establishing a financial management system, grantees are to follow both 24 CFR Part 570 and 2 CFR Part 200 which govern CDBG grantee financial management systems. In addition, the use and accounting for CDBG funds are governed by HUD Notice CPD-04-11 and 31 CFR Part 205. CDFA also imposes additional requirements that can be found throughout this chapter. Failure to account for and manage CDBG funds accordingly may result in sanctions imposed by CDFA and/or HUD.
A grantee’s financial management system must provide for the following:
- Accurate, current, and complete disclosure of financial results;
- Records that identify adequately the source and application of grant funds;
- Comparison of actual outlays with amounts budgeted for the grant;
- Procedures to minimize the amount of time elapsed between the transfer of funds from the US Treasury and the disbursements by the grantee;
- Procedures for determining reasonableness and allowable costs;
- Accounting records that are supported by appropriate source documentation; and
- A systematic method to assure timely and appropriate resolution of audit findings and recommendations.
The three basic functions, which must be served by the financial management system, are:
1. The financial management system must have an identified procedure for recording all financial transactions.
2. All expenditures should be related to allowable activities in the grant agreement approved by CDFA.
3. All expenditures of CDBG funds must be in compliance with applicable laws, rules, and regulations.
Tip: Use the Sample Financial Management Checklist as a tool to help your organization set up and maintain your financial management system.
2 CFR Part 200 also requires that grantees take reasonable measures to safeguard personally identifiable information (e.g., social security or bank account numbers) and other information designated to be sensitive by HUD or the state, consistent with applicable federal, state, and local laws regarding privacy and obligations of confidentiality.
Internal controls refer to the combination of policies, procedures, defined job responsibilities, personnel, and records that allow a grantee (or sub-recipient) to maintain adequate oversight and control of its cash, property, and other assets.
The soundness of any grantee’s financial management structure is determined by its system of internal controls. Specifically, the main goals of internal controls are to:
- Ensure resources are protected against waste, mismanagement or loss.;
- Ensure that accounting information is accurate and reliable; and
- Ensure resources are used for authorized purposes and in a manner consistent with applicable laws, regulations, and policies.
As part of an effective internal control system, one person will be designated (per the financial management responsibilities checklist) as the primary person at the grantee organization responsible for the overall financial management of a CDBG project. This person should be familiar with their organization’s present accounting system. Refer to 2CFR 200.303 for more information.
Each grantee should determine the accounting procedures that will assist in providing accurate and complete financial information. Grantees are required to maintain accounting records that sufficiently identify the source and use of the CDBG funds provided to them. All records must be supported by source documentation.
The grantee may have CDBG accounting records fully integrated into an existing accounting system. Grantees may also have partially integrated records into an existing system; however, ledgers should be developed to provide the required accounting information for the CDBG grant. Separate records eliminate potential conflicts with the grantee’s usual record keeping systems.
At a minimum, a grantee’s accounting system, must:
- Clearly identify all receipt and expenditure transactions of the grant; and
- Provide for budgetary control by tracking expenditures and accrued obligations by approved activity.
- CFDA staff and the grantee’s auditors should be able to readily trace all transactions through the accounting system at any time during the grant period of performance or after grant close-out.
The grantee must be able to report expenditures for each approved activity. A record of the account balances must be maintained for each approved activity that accounts for expenses accrued as well as obligations that have been incurred but not yet been paid out.
Accounting records must be supported by source documentation. Source documentation includes items such as cancelled checks, paid bills, payrolls, time and attendance records, contract documents and other paperwork.
Tip: It is important that a grantee establishes a system in which all source documents pertaining to the project are clearly marked by an identifier on each source document. This will help assure that transactions are properly classified and segregated in the accounting records.
Source documentation should tell the story of the basis of the costs incurred and the actual dates of the expenditure. For example, source documentation on payments to contractors would include a request for payment, proof of inspection to verify work and materials, and, perhaps, cancelled checks. CFDA encourages the use of purchase orders or payment vouchers when preparing expenditures for payment of any cost associated with the project. These documents are prepared in accordance with local policies and procedures as well as those required by federal regulations.
Any cost incurred must be allowed as per 2 CFR 200.402 – 202.475. It is a grantee’s responsibility to ensure that CDBG funds are spent only on those costs which are approved in Exhibit B in the Grant Agreement.
The grantee must establish policies and procedures for determining cost reasonableness, allowability, and allocability of costs. CPD Notice 13-07
There are two types of administrative costs. General administrative costs (GACs) are the costs associated with implementation of the grant. These costs may include salaries for personnel who devote full or part time to the grant, supplies used for grant activities, and the cost of administrative services provided by other agencies. Program activity costs (PACs) are those costs directly related to the implementation of grant requirements. Attachment 6-2: Cost Categories for GACs and PACs
In charging administrative costs, grantees should keep in mind:
- All administrative costs charged to the project must be documented through timesheets, purchase orders, and invoices.
- For those projects directly administered by the grantee, employees paid in whole or in part from CDBG funds should prepare timesheets indicating the hours worked for each pay period.
- Timesheets must show the exact hours each individual worked on the project, the hours worked on non-CDBG projects, the date on which the work was performed and a description of the work performed.
- The employee and the employee’s supervisor must sign the timesheet.
Grant records should account for all matching funds committed to the project. The receipt and expenditure of the matching funds should be carefully documented. If matching funds are derived from a source outside the local government, project records should identify the source and amount.
Grantees who maintain real or personal property paid in whole or in part with CDBG funds are required to properly manage these assets and to ensure that the assets continue to be used for their intended purposes in accordance with the CDBG regulations and 2 CFR 200.310-.316. 24 CFR 570.489(j) and (k)
Grantees must maintain appropriate records of their assets, whether in their possession or in the possession of a sub-recipient organization. Specifically:
- In the case of real property, meaning land and any improvements to structures on the land, grantees must maintain a current real property inventory, updated at least biannually. In cases where the grantee is maintaining land, grantees should also describe the intended reuse of the land and the timeframe for improving the land so that it meets a CDBG national objective.
- For personal property, grantees should maintain a fixed assets ledger that includes the following: a description of the property; any identifying information such as a serial number; the funding source (grant number); the acquisition date and cost; the federal share of the cost; and the location, use, and condition of the property; and disposition data. Grantees are required to conduct a physical inventory of personal property biannually to ensure that the property is being maintained in good condition and that there are procedures in place to prevent loss, damage, or theft of the property.
Grantees must maintain records that properly document the disposition of any CDBG-funded property. It should be noted that real property purchased or improved with CDBG funds in excess of $25,000 must continue to meet the CDBG national objective approved for the project for at least five years after close-out of the grant that funded the property purchase or improvement. Should the recipient choose to change the use of property they must contact CFDA to ensure that proper procedures are followed. Failure to do so can result in payback of the grant award. More information on Change of Use can be found in Chapter 12: Monitoring and Closeout.