Program-Specific Audit Guide for Challenge Grants (45.130)

Program-Specific Audit Guide for Recipients of a NEH Challenge Grant

In accordance with OMB Circular No. A-133, "Audits for States, Local Governments, and Non-Profit Organizations"

The information in this guide is based on NEH's Challenge Grants booklet (OMB No. 3136-0134, Expires 06/30/09) and the Administration of NEH Challenge Grants booklet. The auditor can obtain copies of these documents from NEH's Web site at http://www.neh.gov/manage/index.html or by calling or writing the Public Information Office, Room 402, National Endowment for the Humanities, 1100 Pennsylvania Ave. N.W., Washington, DC 20506, 202/606-8400 or 800/NEH-1121, or info@neh.gov.

National Endowment for the Humanities

NEH is an independent grant-making agency created by Congress in 1965 to support research, education, and public programs in the humanities. Program grants are made through the Federal-State Partnership, four divisions (Preservation and Access, Public Programs, Research, and Education), and the Office of Challenge Grants.

Challenge Grants

NEH's Office of Challenge Grants helps institutions and organizations engaged in humanities activities to secure long-term support for, and improvements in, their programs and resources. Grant funds must be expended in accordance with the approved challenge grant proposal and budget or any written amendments.

With the exception of elementary and secondary schools, any U.S. nonprofit institution (public agency or private nonprofit organization) working wholly or in part within the humanities is eligible to apply.

The recipient of a first challenge grant must raise, from nonfederal donors, three times the amount of federal funds offered. Recipients of subsequent challenge grant awards are required to raise four times the amount offered. Other matching ratios are possible under special circumstances, and the auditor should confirm the amount of gifts to be raised by referring to the offer letter and amendments.

Eligible Uses of Grant Funds

In general, grant funds, federal and nonfederal combined, may be used to support the study of the humanities where that support is long-term. Funds may be invested in an endowment that produces income to support such diverse humanities programs as faculty development, cataloguing collections, fellowships, lecture series, visiting scholars, publishing subventions, hiring consultants, maintenance, endowment positions, acquisitions, and preservation/conservation programs.

Outright expenditure is therefore allowable when the item purchased has innate longevity such as materials which enhance or develop library or museum collections, orientation exhibits, construction or renovation of buildings, equipment, fund-raising costs (no more than 10 percent of total grant funds), and retirement of debt. Grant funds may also be used for bridging support, where the plan provides for endowment support at a future date. For example, if a college needs an instructor in Arabic language and literature, the challenge grant budget could allow for that salary to be paid out of grant funds for the first three years while the endowment fund is building to a level that ensures permanent support for the new faculty position.

Ineligible Uses of Grant Funds

Expenditures not eligible for funding are

direct subsidies for general operations,
funds for awards or stipends to students below the graduate level (Note: this use of funds is eligible in We the People Challenge Grants, which are designated by a CZ number prefix), and
support for short-term projects eligible for grants from other NEH programs.

Eligibility Criteria for Gifts Certified to NEH

A. General Criteria

The basic criterion for gift eligibility is that gifts must be in response to or in anticipation of the challenge grant and therefore "new."

All donors of restricted gifts must be aware that their gifts are to be used to match an NEH challenge grant. Unrestricted gifts (allowed only for challenge grants awarded after May 2005) may be certified for match only up to a total amount equivalent to the federal portion of the challenge grant.
All gifts must be used to support the purposes outlined in the approved challenge grant application.
All matching gifts, restricted and unrestricted, must be given or pledged, and pledges paid during the challenge grant period.
Gifts may not derive from the grantee institution itself, i.e.:
- the sale of land or assets already owned by an organization would not be eligible unless the land or asset was donated within the grant period as an unrestricted gift;
- income from endowed funds is not eligible; and
- grantees may not include as part of their match any interest earned on gifts made for challenge grant purposes.
Normally challenge grant funds, both federal and nonfederal portions, are received, held, and managed by the grantee institution. Any other arrangement (for example, with university foundations, friends groups, community foundations, parallel foundations, donor-advised funds) requires advance approval from NEH.

B. Kinds of Eligible Gifts

Grant recipients have the responsibility of accounting for the eligibility of all matching funds, and their records are subject to audit. To be eligible as a restricted gift the gift must represent a specific and documented response to the NEH challenge. The following are the principal kinds of gifts that may be eligible as matching donations:

Cash.
Nonfederal grants.
Special legislated nonfederal appropriations from state, county, or municipal governments. This appropriation must represent a level of support above the normal appropriation for the grantee institution.
Net proceeds from special fund-raising events or benefits held specifically to raise matching funds for an NEH challenge grant. (Publicity materials and other relevant receipts must be maintained to support gifts certified.) Only the net proceeds are eligible; the intrinsic value of items donated for auction or sale is not eligible.
Membership contributions, "friends" or alumni giving, or similar campaigns. The value of any tangible items received by donors, such as magazines, newsletters, or gift "premiums", must be deducted from a membership contribution to assess the actual gift value. Membership forms or solicitation material should indicate that contributions will be used for challenge grant matching purposes.
Earned income, such as income from publication or gift shop sales. Only the net income is eligible. To qualify as a restricted gift, such sales must be clearly identified as responses to the challenge grant. (The grantee has been advised to retain publicity materials and other relevant receipts and financial records.) Note: The total amount of earned income allowed may not exceed the federal portion of the challenge grant.
Marketable securities, valued as of the date of transfer from donor to grant recipient.
Real estate under the following circumstances:
- if converted into cash by means of sale before the end of the grant period (the value of the gift is then equivalent to the net sale value); or
- if income-producing and such income is restricted by the donor to the purposes of the grant (the value of the gift is equivalent to the value of the income received during the grant period).
In-kind gifts or donated services are eligible only if the material or service provided is included in the approved challenge grant budget. Gifts of tangible property not included in the approved challenge grant budget must be converted to cash to be eligible for match. Note: The total amount of in-kind gifts allowed may not exceed the federal portion of the challenge grant.

C. Pledges

Pledges may count toward the release of federal funds when made during the challenge grant period, but all pledges must be paid and expended before the end of the grant period. Such pledges must be in writing and constitute a legally binding promise to pay. Similarly, a nonfederal grant (gift, category 2, above) may count toward matching when awarded during the challenge grant, but the award must be paid and expended before the end of the grant period. Legislated appropriations (gift category 3, above) may count toward matching when passed by the appropriate legislative body during the grant period, but the appropriation must be paid and expended before the end of the grant period. However, a contract for the sale of real estate (gift category 8, above) may not count toward the matching requirement prior to the final completed sale.

D. Ineligible Gifts

The following are examples of ineligible gifts:

Gifts deferred beyond the end of the grant period.
Bequests and other forms of planned giving.
Discounts on goods or services provided through contracts.

Audit Objective/Audit Program

This document is a supplement to Office of Management and Budget Circular No. A-133, "Audits of States, Local Governments, and Non-profit Organizations."

The auditor should be aware of the following:

In a particular year, the grantee may receive donations and certify them and not receive federal funds during the grantee's fiscal year. Although funds are not received, the auditor is required to perform the audit on the gifts certified. Because of the possibility of double-counting (i.e. pledge and cash), the auditor is advised to review cumulative workpapers supporting the certification form submitted to NEH.

The objectives and related audit steps for the auditor are:

To determine that the gifts certified are eligible. The basic criteria for gift eligibility are that restricted gifts must be in response to or in anticipation of the challenge grant, and that all gifts were given within the grant period. All donors of resticted gifts must be aware that their gifts are to be used to match an NEH challenge grant. Restricted gifts of $1,000 or more, must be supported by letters from the donor.
- Reconcile the grantee's "Certification of Matching Gifts for NEH Challenge Grant" with the general ledger(s)--cash and pledges. Report any discrepancies.
- On a test basis, select gifts certified to NEH of $1,000 or more. Each restricted gift must be supported by a letter from the donor that specifically mentions that the contribution was made in response to the NEH challenge grant. Each gift letter must be dated within the grant period.
- For restricted gifts under $1,000, determine that the grantee has a policy to determine that the gifts certified are eligible (see Eligibility Criteria for Gifts Certified to NEH) and that the policy is consistently followed. For restricted gifts, the grantee must be able to prove donor awareness of the challenge grant by retaining evidence such as brochures, posters, recordings, newsletters, and other publicity materials that specifically mention the NEH challenge grant.
To determine that pledges are eligible. Pledges certified to NEH must be pledged during the grant period and be paid to the grantee during the grant period.
- Review pledges of restricted gifts to determine that they are in response to the challenge grant. Review all pledges to determine that they were made during the grant period. All pledges must be in writing.
- Trace certified pledges to the cash receipts journal of the grant period. Ensure that the grantee did not certify both the pledges and cash (double-counted).
To determine that required documentation was submitted to NEH when the certification contains non-cash gifts (gifts of real estate; in-kind gifts of service, material or other types of tangible donations). All noncash gifts require documentation to be submitted to the NEH Office of Grant Management.
- Prepare or obtain a schedule of noncash gifts and determine that required supporting documentation was submitted to the NEH Office of Grant Management.
- Review reconciled certifications to cash receipts to assure accuracy (See Audit Step 1).
- Determine that NEH provided the grantee with a letter approving the amounts certified as noncash gifts.
- If the noncash gifts have not been properly reported to NEH, report the deficiency.
To determine that expenditures were made in accordance with the terms of the approved budget and any amendments.
- Review grantee's accounting records for expenditures to assure that funds were spent in accordance with the budget and properly reported in interim and final narrative report(s).
- Special audit procedures for the challenge grants supporting construction of a free-standing structure, for building renovations, or for additions to buildings of any age.
  1. Determine that the grantee consulted with their state historic preservation officer to determine if a property or site is listed, or is eligible for listing, in the National Register of Historic Places, and whether the proposed construction or renovation would have an adverse effect on the historic nature of the property.
  2. Determine that the grantee provided NEH with a copy of the opinion of the preservation officer.
  3. Determine that the grantee has a system in place for monitoring its contractors and subcontractors with respect to payment of prevailing wages under the Davis-Bacon Act.
  4. Determine that the grantee provided the required assurances to the Secretary of Labor that all laborers and mechanics employed by contractors or subcontractors on NEH-supported construction projects were paid wages at rates that are not less than those prevailing on similar construction in the locality, as determined by the Secretary of Labor in accordance with the Davis-Bacon Act, as amended, 40 U.S.C. 276a-276a-5.
    Note: Acceptance of federal funds in support of a renovation or construction project that is subject to the Davis-Bacon Act will subject the entire project to the prevailing wage rate requirements of the act regardless of the proportion of federal funds to total project costs. Additional information is available by contacting the U.S. Department of Labor, Wage and hour Division, Division of Contract Standards and Operations, 200 Constitution Avenue, N.W., Washington, DC 20210.