Preparing for a Federal Compliance Audit: A Guide for Life Sciences Organizations

Federal grant funding can transform a life sciences organization, accelerating research, advancing therapies, and opening doors that private capital cannot. But with that funding comes a compliance framework that catches many recipients off guard.

Organizations that treat compliance as an afterthought often face audit findings, repayment demands, or damaged relationships with federal agencies like the National Institutes of Health (NIH) and Department of Energy (DOE). A strong starting point is maintaining records on an accrual basis and following Generally Accepted Accounting Principles (GAAP), both of which keep your organization audit-ready from day one.

This guide walks you through what to do when an audit is required and what may be required, where organizations most commonly stumble, and how to build the infrastructure to stay ahead of it all.

Does Your Organization Need a Federal Compliance Audit?  

Depending on the granting agency and the specific grant program, organization may be subject to a compliance audits.  For example, the NIH references using the requirements under the Uniform Guidance for for-profit companies. A Uniform Guidance audit is required for any non-federal entity that spends $1,000,000 or more in reimbursable expenses under federal awards during a fiscal year beginning on or after October 1, 2024. For earlier fiscal years, the threshold was $750,000. Audit reports are due nine months after the fiscal year ends, typically by September 30.    Other agencies, including the DOE have their own specific audit requirements that focus more closely on the compliance of the grants and not on the entity-wide financial statements.  It is important to review the guidance to determine what type of audit a organization may be subject to complete.

Key points in determining if a compliance audit threshold has been exceeded: 

• Your organization’s expenses are reimbursed by grants awarded directly from federal agencies (e.g., NIH, DOE) or indirectly through pass-through entities (universities, state/local government, or prime contractors).  
• Acting as a pass-through entity does not exempt you; sub-awards should be included. 
• The determining factor is funds expended, not merely received.  
• Expenses should include any indirect costs charged to the grants. 
• Total expenditures should be determined based on the organization's fiscal year. 

If your organization exceeds the threshold, continue reading for guidance on the steps required to comply with audit requirements.  

Choosing the Right Audit Type

There are two types of audits based on the nature of the federal awards received by an organization: 

What Happens After the Audit

The deadline to submit the final audit report to the applicable grant agency is nine months after the end of the audit period, typically September 30 following a December 31 year-end.  

We can help provide you with any submission information and details needed. We can also offer recommendations for any findings of non-compliance during the audit to avoid future findings and adhere to best practices going forward. 

Avoiding the Most Common Findings

Knowing which audit applies to your organization is the first step. The next is understanding what auditors look for if they arrive. The following are the most common compliance gaps we see across life sciences organizations, and what you can do to close them.

If a reportable finding does occur, management must submit a corrective action plan explaining the cause of the issue and the steps they will take to remediate it. The government agency will review the appropriateness of the corrective action plan and may follow up to confirm that the plan has been implemented. For more severe findings, especially those with questioned costs, the organization may be required to return the federal funds.

Verify Your Vendors Before You Contract

Federal requirements prohibit grant recipients from contracting with vendors who have been suspended or debarred from doing business with the federal government. Recipients are required to verify that vendors used for government-funded grants have not been suspended or debarred by searching the System for Award Management (SAM.gov), which maintains the Excluded Parties List, before entering a contract with a vendor.

Failure to perform this step is one of the most common findings we encounter, as many companies are unaware of the requirement. We recommend establishing a process for the review of vendor suspension or debarment prior to entering vendor contracts and retaining documentation of review as proof that the process has been completed.

Keep Your Paper Trail Airtight

Financial records, supporting documents, statistical records, and any other materials pertinent to a federal award must be retained for a minimum of three years from the date the final expenditure report is submitted. Recipients should retain invoices or agreements supporting a direct expenditure, along with documentation showing that the appropriate individual reviewed and approved the expense for allowability and proper allocation to the grant. Proper retention of documentation does more than satisfy regulatory requirements; it demonstrates that internal controls over authorization and approval of grant expenditures are both present and functioning as intended.

We frequently observe that startups lack documented policies and procedures for documenting and retaining invoice approvals. 

 

Bill Indirect Costs Correctly

To comply with the compliance requirements, fringe benefits and indirect costs must be fairly assigned to federal awards and other activities. This means that these costs should reflect the benefits received by employees whose salaries are charged to these federal awards and activities. They should be classified as direct or indirect costs based on the accounting practices used by the non-federal entity.

In practice, we often see companies rely solely on the provisional indirect rates stated in the Notice of Award instead of calculating their actual indirect rates based on incurred costs. When a company’s actual rate is lower than the approved rate, it can result in the grant being overbilled.

 

Don’t Draw More Than You’ve Earned

Recipients requesting reimbursement under a cost-reimbursement award should include costs that have been paid and/or costs that will be paid within 30 days of submitting the reimbursement request. This requirement checks that federal agencies are not advancing funds beyond what is necessary, and that recipients are not unintentionally holding excess federal cash.

We often see federal funds drawn based on monthly estimates rather than on actual incurred costs. Although using estimates may feel operationally efficient, it creates a compliance risk because it can lead to drawing more federal funds than the organization is entitled to at that point in time. This results in excess cash on hand, which is considered non‑compliant and may trigger repayment, increased monitoring, or additional audit scrutiny.

 

Invest in an Adequate Accounting System

Federal regulation states that grant recipients must maintain an acceptable accounting system that leads to accurate, timely, and compliant financial reporting. The system must segregate direct and indirect costs, accumulate costs by contract, and allocate indirect costs logically and consistently. It must also support reliable billing, reconcile subsidiary ledgers to the general ledger, and include internal controls such as timekeeping, labor distribution, and management reviews. Failure to meet these standards may result in system disapproval, payment withholdings, and audit findings.

After receiving a federal grant, we recommend checking that you are using a compliant accounting system. Accounting systems commonly used by startups, such as QuickBooks, are typically compliant but may require additional steps in tracking expenses, like designating an expense to a specific class or customer name for proper internal tracking.

Meet the September 30 Deadline

Another frequent finding is late submission of the audit report. This can be avoided by engaging an auditor early, so that the audit is performed and finalized nine months after fiscal year-end. 

For more detail on what the federal government expects from grant recipients, especially subrecipients, please see What to Do After Receiving Federal Funding – Subrecipients.

Knowing where organizations commonly fall short gives you a significant advantage. But awareness alone isn't enough. The following section moves from the pitfalls to the practical, walking through the systems, processes, and controls that keep your organization compliant and audit-ready year-round

Build Your Internal Controls Before the Auditor Arrives

A successful audit starts before your auditor arrives. Most findings aren’t the result of the misuse of funds; they stem from weak internal controls and poor documentation. Organizations with good intentions fall short because they don’t know the requirements, and issues go unnoticed until the next fiscal year.  

Strong internal controls help prevent this. They make sure funds are managed properly, records are accurate, and decisions rely on solid data. 

Fortunately, controls don’t require a large finance team. Simple steps such as segregation of duties, cash flow reviews, and clear approval processes go a long way. Documenting these practices in a manual builds consistency and simplifies onboarding as you grow.  

Set Up Your Accounting System for Compliance

After evaluating internal controls, integrate them into your accounting system and processes. This is one of the most critical steps for grant compliance. Your system isn’t just software. It’s a framework for tracking, analyzing, and reporting financial data. Think of it as your organization’s financial scientific method. It collects raw data, refines it, and produces accurate reports for informed decisions.  

The Code of Federal Regulations requires you to maintain a Federal Acquisition Regulations-compliant accounting software that supports accrual-based financial statements and has the ability to track awards separately. Beyond basic reporting, your system should include:  

• Grant tracking and segregation of funds: ability to segregate direct, indirect, and unallowable costs, as well as to track federal awards separately from other funding sources to prevent commingling 
• Document management: attach approved invoices, receipts, and supporting documentation directly to transactions for easy retrieval during audits  
• Budget-to-actual reporting: compare cumulative expenditures to approved budgets for each grant to monitor compliance  
• Indirect cost allocation: support for calculating and applying approved indirect cost rates  
• Time and effort reporting integration: capture payroll allocations for employees working on federal programs and the ability to track employee time by activity  
• Workflow approvals: safeguard proper authorization for purchases, reimbursements, and journal entries  

These capabilities not only help you meet compliance requirements but also improve efficiency and reduce risk. Investing in a scalable system sets your organization up for growth and smoother audits in the future. 

Test Your Processes Before They’re Tested for You

Once the basics are in place, test your processes. Conduct routine internal audits in key areas, such as:

• Cash disbursements
• Receipts
• Financial reporting
• Month-end closing

These reviews reveal whether controls work as intended or if gaps allow errors.  

Catching weaknesses early gives you the opportunity to fix them long before external auditors arrive. It’s far better to remediate internally than during an audit. Proactive testing is one of the most effective ways to gain compliance and maintain reliable records. 

Your Path to a Clean Audit

Preparing for an audit doesn’t have to be overwhelming. By establishing strong internal controls, implementing a compliant accounting system, and conducting regular self-assessments, your organization will be audit-ready.  

These proactive steps not only reduce the risk of findings but also strengthen financial transparency and compliance. If you need guidance or support, our team is here to help you build a solid foundation for success.

Compliance is manageable when you know what to expect. The organizations that fare best aren't necessarily the largest or most resourced; they're the ones that build the right foundations early and stay proactive.

EisnerAmper's audit team works with life sciences organizations at every stage, from first-time federal award recipients to established research institutions, helping you stay compliant, audit-ready, and focused on the work that matters.