(The following was excerpted from an article in the Federal Grants Management Handbook). Nonprofit organizations receiving funds from pass-through entities should not simply rely on the pass-through entity to tell them whether or not they are receiving federal grant funds, according to two accounting experts who also urged nonprofits to understand their responsibilities for properly managing federal funds. Nonprofit subrecipients should proactively request the information.

When receiving funds that are not direct from a federal granting agency, a nonprofit must realize that the funds could have been passed down from the initial grant recipient through to a second tier of subrecipients. The funds may not necessarily be federal grant funds (i.e., they could originate from state or local coffers), so the subrecipient organization should take steps immediately to determine if the awarded funds had, in fact, originated as federal grant funds to ensure they are managed appropriately.

“The lack of knowledge that the funds were federal is not an excuse or a ‘free pass,’” Pete Ugo, a partner with Crowe Horwath LLP, recently told attendees at the American Institute of Certified Public Accountants’ Not-for-Profit Industry Conference. “The first thing you should do when you are aware of receiving federal dollars is look at the Office of Management and Budget Circular A-133 Compliance Supplement to understand what the rules and regulations are because as an auditor, if I find out that [the nonprofit] is just now figuring out it is receiving federal dollars, it makes me wonder how it has been complying with the rules though the entire grant period.”

Subrecipients could also request a copy of the original award documents from the prime recipient to determine if there are any special requirements from the federal granting agency. The subrecipient must comply with the same federal requirements as the prime recipient, whether the requirements are from OMB, the granting agency or both. An auditor would also expect to see the Catalog of Federal Domestic Assistance number associated with the federal source of funds. A subrecipient, therefore, would also want to ask its pass-through agency for the CFDA number, which is another good strategy for identifying the source of funds. Awards that would originate from state or local funding, for example, would have no CFDA number.