How to Approve Grant Spending Before It Becomes an Audit Finding

Grant spending findings are one of the most common categories in single audit results. They are also among the most preventable. Almost every spending finding traces to the same structural failure: the approval happened after the expenditure, or did not happen at all, or happened but was never documented.

The fix is not complicated. It requires building a pre-approval step into every expenditure that touches grant funds - and documenting that step at the transaction level, not in a separate folder.

Why Grant Spending Findings Happen

The most common mental model for grant compliance is that findings happen when organizations spend money on the wrong things. Grant funds spent on non-allowable costs. Staff time charged to a grant they did not actually work on. Equipment purchased outside the approved budget.

Those findings exist. But the more frequent finding is structural: an allowable cost was incurred without the required pre-approval. The expenditure was legitimate. The problem was the sequence.

2 CFR 200.407 lists specific cost categories that require prior written approval from the awarding agency before they can be charged to a federal award. Among them: equipment purchases above the threshold, subcontracting arrangements not proposed at the time of application, changes in scope, and budget modifications that exceed allowable rebudgeting thresholds. An organization can spend money on a perfectly allowable purpose and still receive a finding if it did not obtain the required approval before spending.

At the internal controls level, the same logic applies to your own spending authorization framework. If your internal controls specify that the finance director must approve expenditures over a certain amount, and a purchase was made without that approval, an auditor may flag the absence of the required internal authorization as a control deficiency - even if the cost was otherwise allowable.

What a Pre-Approval Workflow Requires

A grant spending pre-approval workflow has four components.

A written authorization matrix. The matrix documents who can authorize what. It specifies approval levels by dollar amount, by cost category, and by grant type. It identifies who is required to approve any item that triggers funder prior approval requirements. This document should be reviewed with staff during onboarding and updated any time personnel in approval roles change.

A purchase request process. Before any grant-funded expenditure, the person initiating the purchase submits a request that documents the grant being charged, the budget category, the amount, the specific purpose, and whether the purchase triggers any funder prior approval requirement. The request routes to the appropriate approver based on the authorization matrix.

A documentation standard. The approval record needs to include the requester, the approver, the date of approval, the grant and budget category, the amount, and the specific purpose. It should be attached to the transaction record, not maintained in a separate binder or folder. When an auditor pulls an expenditure from your general ledger, the authorization trail should be visible without a scavenger hunt.

A prior-approval check step. For federal awards, add an explicit step to the purchase request process: “Does this purchase require prior written approval from the awarding agency?” If yes, the internal approval is not sufficient - funder approval must be obtained before proceeding.

Segregation of Duties

The pre-approval workflow also serves your segregation of duties requirements. 2 CFR 200.303 requires non-federal entities to maintain effective internal controls, including segregation of duties. For grant spending, the minimum segregation is: the person who initiates a purchase should not also be the person who authorizes it.

In small organizations, full segregation is sometimes impractical. When the same person must both initiate and approve a purchase, document the compensating control - for example, a second review by the executive director for all purchases over a threshold, even if the finance director both requested and initially approved them.

Auditors understand resource constraints. They do not accept undocumented departures from segregation as a matter of organizational size.

Handling Urgency Without Skipping Controls

Emergency purchases are the most common reason pre-approval processes fail. A program event requires supplies today. An equipment failure demands immediate repair. The approval process would take longer than the situation allows.

Build an expedited path before you need it.

The expedited path should include: verbal authorization from the approving authority (captured in a text or email confirming “I approve this purchase”), with the formal request and approval documentation completed the same business day. The verbal authorization is the control; the documentation is the record.

What you cannot do is skip the authorization and document it later. “Later” is the most expensive word in grant compliance. Documentation assembled after the fact is subject to scrutiny, often incomplete, and sometimes impossible to make credible. An auditor who finds a pattern of post-hoc documentation is not reassured by the documentation - they start asking what else was documented after the fact.

The Budget Modification Problem

Budget modifications create a specific pre-approval trap. Organizations frequently discover that they need to move funds between budget categories after the grant period is underway. Personnel costs are higher than budgeted; travel costs are lower. A reallocation makes operational sense.

Many organizations make the reallocation and then request funder approval, assuming it will be granted retroactively. Sometimes it is. But when the funder denies the retroactive modification, the reallocated expenditures in the receiving category become unallowed, and the organization has a finding.

The correct sequence: identify the need for a budget modification, submit the prior approval request before moving any funds, receive written approval, and then make the modification. Budget modifications that require funder approval are not an exception to the pre-approval requirement - they are one of its most important applications.

What Auditors Want to See

When auditors review grant expenditures, they are tracing a specific path: from the transaction in the general ledger, to the source document (invoice, receipt, payroll record), to the authorization that preceded the expenditure, to the budget category in the approved grant budget.

They are looking for the authorization to precede the transaction. If the authorization date is after the purchase date, or if there is no authorization record at all, the transaction is at risk of being flagged. If the transaction required funder prior approval that was not obtained, the finding is likely regardless of how appropriate the expenditure was.

Building the documentation trail at the time of each transaction - rather than assembling it for audit - is the single most effective compliance investment available to organizations managing federal grants.

Download the Grant File Audit Checklist to see the complete documentation structure auditors expect for each award, organized by grant phase.

DEFINITION

Prior approval

Written consent by the federal awarding agency or pass-through entity before a non-federal entity takes an action or incurs a cost that would otherwise require authorization. Required for specific cost categories under 2 CFR 200.407.

DEFINITION

Allowable cost

A cost that meets the criteria in 2 CFR 200.405: reasonable, allocable, consistent with applicable cost principles, and adequately documented.

DEFINITION

Allocable cost

A cost allocable to a federal award if the goods or services involved are chargeable or assignable to the award in accordance with the relative benefits received.