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Part II: Pre-Award Requirements
Chapter 3: Standards for Financial Management Systems


  • Accounting System
  • Total Cost Budgeting and Accounting
  • Commingling of Funds
  • Recipient and Subrecipient Accounting Responsibilities
  • Cash Depositories
  • Supplanting

All recipients are required to establish and maintain accounting systems and financial records to accurately account for funds awarded to them. These records shall include both Federal funds and all matching funds of State, local, and private organizations, when applicable.

State recipients shall expend and account for grant funds in accordance with State laws and procedures for expending and accounting for their own funds. Subrecipients of States shall follow the financial management requirements imposed on them by States. (State and local procedures must ensure that subrecipients comply with the financial management standards found at 28 CFR Parts 66 and 70.)


The recipient is responsible for establishing and maintaining an adequate system of accounting and internal controls for itself, and for ensuring that an adequate system exists for each of its subrecipients. An acceptable and adequate accounting system:

  1. Presents and classifies projected historical cost of the grant as required for budgetary and evaluation purposes;
  2. Provides cost and property control to ensure optimal use of funds;
  3. Controls funds and other resources to assure that the expenditure of funds and use of property conform to any general or special conditions that apply to the recipient;
  4. Meets the prescribed requirements for periodic financial reporting of operations; and
  5. Provides financial data for planning, control, measurement, and evaluation of direct and indirect costs.

Funds may be awarded as formula/block or discretionary awards. The various financial requirements and formulas of the awarding agency's programs, as well as the need for recipients to separately account for individual awards, require a special program account structure extending beyond normal classification by type of receipts, expenditures, assets, and liabilities.

  1. Block and Formula Awards. To properly account for block and formula awards, the State should establish and maintain program accounts which will enable separate identification and accounting for:

    1. Formula and block grant funds expended through programs of local government; and
    2. Formula funds utilized to develop a State plan and to pay that portion of expenditures necessary for administration.
  2. Discretionary Awards. To properly account for discretionary awards, all recipients should establish and maintain program accounts which will enable, on an individual basis, separate identification and accounting for:

    1. Receipt and disposition of all funds (including project income);
    2. Funds applied to each budget category included within the approved award;
    3. Expenditures governed by any special and general provisions; and
    4. Non-Federal matching contribution, if required.


Accounting for all funds awarded by the Federal agency shall be structured and executed on a "total program cost" basis. That is, total program costs, including Federal funds, State and local matching shares, and any other fund sources included in the approved project budget or received as program income shall be the foundation for fiscal administration, accounting, and audit. Unless otherwise prohibited by statute, applications for funding and financial reports require budget and cost estimates on the basis of total costs.


Federal agencies shall not require physical segregation of cash deposits or the establishment of any eligibility requirements for funds which are provided to a recipient. However, the accounting systems of all recipients and subrecipients must ensure that agency funds are not commingled with funds from other Federal agencies. Each award must be accounted for separately. Recipients and subrecipients are prohibited from commingling funds on either a program-by-program or project-by-project basis.

Funds specifically budgeted and/or received for one project may not be used to support another. Where a recipient's or subrecipient's accounting system cannot comply with this requirement, the recipient or subrecipient shall establish a system to provide adequate fund accountability for each project it has been awarded.


  1. Reviewing Financial Operations. Direct recipients should be familiar with, and periodically monitor, their subrecipients' financial operations, records, system, and procedures. Particular attention should be directed to the maintenance of current financial data.
  2. Recording Financial Activities. The subrecipient's award or contract obligation, as well as cash advances and other financial activities, should be recorded in the books of the recipient in summary form. Subrecipient expenditures should be recorded on the books of the recipient or evidenced by report forms duly filed by the subrecipient. Non-Federal contributions applied to programs or projects by subrecipients should likewise be recorded, as should any program income resulting from program operations.
  3. Budgeting and Budget Review. The recipient should ensure that each subrecipient prepares an adequate budget on which its award commitment will be based. The detail of each project budget should be maintained on file by the recipient.
  4. Accounting for Non-Federal Contributions. Recipients will ensure that the requirements, limitations, and regulations pertinent to non-Federal contributions are applied.
  5. Audit Requirements. Recipients must ensure that subrecipients have met the necessary audit requirements contained in this Guide (see Part III, Chapter 19: Audit Requirements).
  6. Reporting Irregularities. Recipients and their subrecipients are responsible for promptly notifying the awarding agency and the Federal cognizant audit agency of any illegal acts or irregularities and of proposed and actual actions, if any. Please notify the Office of the Comptroller Customer Service Center at 1-(800)-458-0786 if any irregularities occur. Illegal acts and irregularities include conflicts of interest, falsification of records or reports, and misappropriation of funds or other assets.
  7. Debarred and Suspended Organizations. Recipients and subrecipients must not award or permit any award at any level to any party which is debarred or suspended from participation in Federal assistance programs. For details regarding debarment procedures, see 28 CFR Part 67, Government-wide Debarment and Suspension (Nonprocurement) and 28 CFR Part 83 Government-wide Requirements for Drug-free Workplace (Grants).
  8. Bonding. The awarding agency may require adequate fidelity bond coverage where recipient lacks sufficient coverage to protect the Federal government interest (see OMB Circular A-110, Attachment, Subpart C, paragraph 21(c)).

Where the conduct of a program or one of its components is delegated to a subrecipient, the direct recipient is responsible for all aspects of the program including proper accounting and financial recordkeeping by the subrecipient. Responsibilities include the accounting of receipts and expenditures, cash management, the maintaining of adequate financial records, and the refunding of expenditures disallowed by audits.


In accordance with the administrative requirements for government and non-governmental entities, recipients are encouraged to use minority banks (banks which are owned at least 50 percent by minority group members). A list of minority-owned banks may be obtained from the Minority Business Development Agency, Department of Commerce, Washington, DC 20230.


Federal funds must be used to supplement existing funds for program activities and must not replace those funds that have been appropriated for the same purpose. Supplanting will be the subject of application review, as well as pre-award review, post-award monitoring, and audit. If there is a potential presence of supplanting, the applicant or grantee will be required to supply documentation demonstrating that the reduction in non-Federal resources occurred for reasons other than the receipt or expected receipt of Federal funds. For certain programs, a written certification may be requested by the awarding agency or recipient agency stating that Federal funds will not be used to supplant State or local funds.

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