Auditing Consortia and Sub-Grants: Lead Partner Responsibility and Partner Checks

When a project is delivered not by one organisation but by a consortium, the financial structure becomes more complex: the donor signs an agreement with a single organisation while several of them spend the money. For the lead partner this means responsibility for funds it did not spend directly and for documents it does not see every day.

Below we look at how liability is allocated, what a sub-grant agreement must contain, how to build partner monitoring and what exactly an auditor checks in such a project.

Who answers to whom

Most grant agreements follow a simple rule: the signatory of the agreement answers to the donor. If an audit finds a partner’s cost ineligible, it is the lead partner that repays the donor, and only then recovers the amount from the partner under the sub-grant agreement.

The practical conclusion follows: a sub-grant agreement is not a formality but the lead partner’s main protection. It must pass on to the partner the same rules the donor imposed on the lead partner, and give the right to verify compliance.

What a sub-grant agreement must contain

• the partner’s budget using the same lines as the project budget;
• an eligibility period that does not extend beyond the period of the main agreement;
• the donor’s procurement rules, passed on without softening and with the same thresholds;
• documentation requirements and the record retention period;
• the format and frequency of reporting from which the lead partner builds the consolidated report;
• the right of the lead partner and the donor to audit and to access source documents;
• the procedure for repaying amounts found ineligible;
• requirements on donor visibility, conflict of interest, data protection and any policies the agreement demands.

A mistake visible in audits regularly: the partner receives only a budget and deadlines, without the procurement rules. The partner then spends according to its own rules, and the cost becomes ineligible for the whole project.

Monitoring instead of a check at the end

A lead partner cannot simply accept reports in spreadsheet form. A workable scheme looks like this.

Frequency	What the lead partner does
Monthly or quarterly	Receives the partner’s report with a cost register, reconciles it to the budget, queries variances
Once per period	Requests scanned source documents for the largest costs on a sample basis
Once per project or per year	Carries out a monitoring visit: document review, inspection of equipment, meetings with the team
Before the final report	Performs or commissions a verification of partner expenditure

A monitoring visit is documented in a report listing the documents reviewed, the issues found and the deadlines for resolving them. This is the first document an auditor will ask for: it shows that the consortium’s control system works in practice rather than only on paper.

What the auditor checks

An audit of a consortium project works on two levels. At the lead partner level the auditor examines the organisation’s own costs and its sub-grant management system: agreements, monitoring, reconciliation of reports, documentation of decisions. At partner level, depending on the donor’s terms of reference, the auditor either tests their costs directly or assesses the quality of the lead partner’s controls.

Typical procedures: reconciling the sub-grant amounts in the donor report to actual transfers and partner reports; sample testing of partners’ source documents; checking that partners respected procurement thresholds; analysing whether the same cost is funded by two partners at once.

The report format is set by the donor and may be ISA 805, ISRS 4400 or the donor’s template; the differences are covered in our article on ISA 800, ISA 805 and ISAE 3000.

Typical consortium problems

• a partner spent funds on lines absent from its own budget;
• a partner has no separate analytics and project costs are mixed with other activities;
• partner procurement carried out without a competitive procedure;
• partner reports arrive in different formats and cannot be consolidated without manual adjustments;
• funds transferred to a partner late in the project, leaving no time to spend them;
• one cost, for example a joint event, reported by two partners;
• a partner does not retain source documents, arguing that it already reported to the lead partner.

What the lead partner should do at the start

Before the first transfer it is worth doing three things: assessing the partner’s capacity, agreeing a single reporting format, and holding an induction meeting that explains the donor’s rules to the partner’s accountant, not only to its director. Assessing a partner’s capacity is the same procedure a donor applies to you, described in our article on the donor capacity assessment of an organisation.

One more practical step is an interim verification of partner costs at the mid-point of the project. It costs less than repaying the donor after the final audit, and it leaves time to correct issues.

MK Audit has audited consortium projects and sub-grant schemes since 2000, is listed in the Ukrainian register of auditors (No. 4624) and is a member of DFK International. We issue reports in Ukrainian and English and, where required, in the donor’s template. If you are a lead partner and want partner costs checked before the final report, send us a request: commercial proposal after reviewing the assignment, response within 1 day.