2022-001 The City did not have adequate internal controls for ensuring compliance with federal suspension and debarment requirements.
Assistance Listing Number and Title: 21.027, COVID-19 – Coronavirus State and Local Fiscal Recovery Funds
Federal Grantor Name: U.S. Department of the Treasury
Federal Award/Contract Number: N/A
Pass-through Entity Name: N/A
Pass-through Award/Contract Number: N/A
Known Questioned Cost Amount: $0
Prior Year Audit Finding: N/A
Background
The purpose of the Coronavirus State and Local Fiscal Recovery Funds is to respond to the COVID-19 pandemic’s negative effects on public health and the economy, provide premium pay to essential workers during the pandemic, provide government services to the extent COVID-19 caused a reduction in revenues collected, and make necessary investments in water, sewer, or broadband infrastructure. In 2022, the City spent $1,622,029 in program funds for the provision of government services.
Federal regulations require recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls.
Federal requirements prohibit recipients from contracting with or purchasing from parties suspended or debarred from doing business with the federal government. Whenever the City enters into contracts or purchases for goods or services that it expects to equal or exceed $25,000, paid all or in part with federal funds, it must verify the contractors have not been suspended, debarred or otherwise excluded. The City may verify a contractor’s status by obtaining a written certification from the contractor, adding a clause or condition into the contract that states the contractor is not suspended or debarred, or checking for exclusion records in the U.S General Services Administration’s System for Award Management at SAM.gov. The City must perform this verification before entering into the contract or charging all or part of the costs of the contract to a federal award, and keep documentation demonstrating compliance with this federal requirement.
Description of Condition
Our audit found the City’s internal controls were inadequate for ensuring staff verified the suspension and debarment status of contractors paid $25,000 or more before charging these costs to the program. Specifically, in 2022, the City did not verify two contractors we tested were not suspended or debarred from participating in federal programs before entering into contracts or charging costs to the program.
We consider this deficiency in internal controls to be a material weakness, which led to material noncompliance.
Cause of Condition
The City did not initially intend to use federal funds to pay these two contractors. When City officials decided to use federal funds instead of local funds to pay these contractors, staff misunderstood the requirement and thought they did not need to verify the contractors’ suspension and debarment status because the City spent the funds for the provision of government services.
Effect of Condition
The City did not obtain a written certification, insert a clause into the contract, or check SAM.gov to verify the contractors were not suspended or debarred. Without this verification, the City increases its risk of awarding federal funds to contractors that are excluded from participating in federal programs. Additionally, any payments the City made to an eligible party would be unallowable, and the awarding agency could potentially recover them.
We subsequently verified the contractors were not suspended or debarred, so we are not questioning costs.
Recommendation
We recommend the City strengthen internal controls to ensure all contractors it expects to pay $25,000 or more, all or in part with federal funds, are not suspended or debarred from participating in federal programs, and maintain documentation demonstrating compliance with this requirement.
City’s Response
The City looks forward to the annual audit and appreciates the relationship with the local audit team and the Washington State Auditor’s Office. We regularly reach out to seek guidance and are quick to implement any recommendations from the office. However, we disagree with both the basis of the finding and the statement that “The City does not have adequate controls for ensuring compliance with federal suspension and debarment requirements.”
As a Non-Entitlement Unit, the City was eligible for and elected to use the “Revenue Loss” category as an eligible use of the funding. Throughout all the materials released by the federal government related to eligible uses and compliance, there were references to the revenue loss eligibility category “providing recipients with broad latitude to use funds for the provision of government services to the extent of reduction in revenue due to the pandemic.” Furthermore, the SLFRF Compliance and Reporting Guidance explicitly states, “For recipients electing the “Standard Allowance,” Treasury will presume that up to $10 million, not to exceed the award allocation, in revenue has been lost due to the public health emergency. Recipients are permitted to use that amount to fund “government services.” This use option and guidance was in direct contrast to all other use options that required more cumbersome compliance requirements typically associated with federal grants. The revenue loss option was clearly recognizing the impact that the cumbersome compliance requirements would have on smaller entities and stated that it was to “ease the administrative burden”. As stated above, if you elected the standard allowance, Treasury will PRESUME that up to $10m, not to exceed the award allocation, in revenue has been lost due to the public health emergency and recipients are permitted to use that amount to fund “governmental services”. Why have an eligible use category of revenue loss with the presumption and understanding that it’s for governmental services yet have compliance requirements that completely undermine the category? At the time the city incurred the expenditures in question they were for the procurement of governmental service and it was not known which of these services would be categorized as federal under the revenue loss eligible use option. In fact, one of the expenses in question was a contracted payment that was entered into in a prior year for governmental services, specifically public safety. It is important to note that neither of the vendors who were paid were suspended nor debarred.
The city also strongly disagrees with the statement that “The City did not have adequate controls for ensuring compliance with federal suspension and debarment requirements.” The city has excellent internal controls as it was able to demonstrate during the auditor review of other federally funded programs.
The guidance that was issued with the funding was painstakingly read and reviewed and funding was spent per the guidance. We believe the interpretation and application of the guidance by the State Auditor’s Office for Non-Entitlement Units as it relates to the revenue loss option is incomplete and incorrect.
Despite this disagreement, the city will continue to comply with federal funding requirements related to suspension and debarment.
Auditor’s Remarks
We appreciate the City’s commitment to resolving the issue noted above and thank
the City for its cooperation and assistance during the audit.
We reaffirm our finding and will review the corrective action taken during our next regular audit.
Applicable Laws and Regulations
Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings.
Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements.
The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
Title 2 CFR Part 180, OMB Guidelines to Agencies on Governmentwide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689.
2022-001 The City did not have adequate internal controls for ensuring compliance with federal suspension and debarment requirements.
Assistance Listing Number and Title: 21.027, COVID-19 – Coronavirus State and Local Fiscal Recovery Funds
Federal Grantor Name: U.S. Department of the Treasury
Federal Award/Contract Number: N/A
Pass-through Entity Name: N/A
Pass-through Award/Contract Number: N/A
Known Questioned Cost Amount: $0
Prior Year Audit Finding: N/A
Background
The purpose of the Coronavirus State and Local Fiscal Recovery Funds is to respond to the COVID-19 pandemic’s negative effects on public health and the economy, provide premium pay to essential workers during the pandemic, provide government services to the extent COVID-19 caused a reduction in revenues collected, and make necessary investments in water, sewer, or broadband infrastructure. In 2022, the City spent $1,622,029 in program funds for the provision of government services.
Federal regulations require recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls.
Federal requirements prohibit recipients from contracting with or purchasing from parties suspended or debarred from doing business with the federal government. Whenever the City enters into contracts or purchases for goods or services that it expects to equal or exceed $25,000, paid all or in part with federal funds, it must verify the contractors have not been suspended, debarred or otherwise excluded. The City may verify a contractor’s status by obtaining a written certification from the contractor, adding a clause or condition into the contract that states the contractor is not suspended or debarred, or checking for exclusion records in the U.S General Services Administration’s System for Award Management at SAM.gov. The City must perform this verification before entering into the contract or charging all or part of the costs of the contract to a federal award, and keep documentation demonstrating compliance with this federal requirement.
Description of Condition
Our audit found the City’s internal controls were inadequate for ensuring staff verified the suspension and debarment status of contractors paid $25,000 or more before charging these costs to the program. Specifically, in 2022, the City did not verify two contractors we tested were not suspended or debarred from participating in federal programs before entering into contracts or charging costs to the program.
We consider this deficiency in internal controls to be a material weakness, which led to material noncompliance.
Cause of Condition
The City did not initially intend to use federal funds to pay these two contractors. When City officials decided to use federal funds instead of local funds to pay these contractors, staff misunderstood the requirement and thought they did not need to verify the contractors’ suspension and debarment status because the City spent the funds for the provision of government services.
Effect of Condition
The City did not obtain a written certification, insert a clause into the contract, or check SAM.gov to verify the contractors were not suspended or debarred. Without this verification, the City increases its risk of awarding federal funds to contractors that are excluded from participating in federal programs. Additionally, any payments the City made to an eligible party would be unallowable, and the awarding agency could potentially recover them.
We subsequently verified the contractors were not suspended or debarred, so we are not questioning costs.
Recommendation
We recommend the City strengthen internal controls to ensure all contractors it expects to pay $25,000 or more, all or in part with federal funds, are not suspended or debarred from participating in federal programs, and maintain documentation demonstrating compliance with this requirement.
City’s Response
The City looks forward to the annual audit and appreciates the relationship with the local audit team and the Washington State Auditor’s Office. We regularly reach out to seek guidance and are quick to implement any recommendations from the office. However, we disagree with both the basis of the finding and the statement that “The City does not have adequate controls for ensuring compliance with federal suspension and debarment requirements.”
As a Non-Entitlement Unit, the City was eligible for and elected to use the “Revenue Loss” category as an eligible use of the funding. Throughout all the materials released by the federal government related to eligible uses and compliance, there were references to the revenue loss eligibility category “providing recipients with broad latitude to use funds for the provision of government services to the extent of reduction in revenue due to the pandemic.” Furthermore, the SLFRF Compliance and Reporting Guidance explicitly states, “For recipients electing the “Standard Allowance,” Treasury will presume that up to $10 million, not to exceed the award allocation, in revenue has been lost due to the public health emergency. Recipients are permitted to use that amount to fund “government services.” This use option and guidance was in direct contrast to all other use options that required more cumbersome compliance requirements typically associated with federal grants. The revenue loss option was clearly recognizing the impact that the cumbersome compliance requirements would have on smaller entities and stated that it was to “ease the administrative burden”. As stated above, if you elected the standard allowance, Treasury will PRESUME that up to $10m, not to exceed the award allocation, in revenue has been lost due to the public health emergency and recipients are permitted to use that amount to fund “governmental services”. Why have an eligible use category of revenue loss with the presumption and understanding that it’s for governmental services yet have compliance requirements that completely undermine the category? At the time the city incurred the expenditures in question they were for the procurement of governmental service and it was not known which of these services would be categorized as federal under the revenue loss eligible use option. In fact, one of the expenses in question was a contracted payment that was entered into in a prior year for governmental services, specifically public safety. It is important to note that neither of the vendors who were paid were suspended nor debarred.
The city also strongly disagrees with the statement that “The City did not have adequate controls for ensuring compliance with federal suspension and debarment requirements.” The city has excellent internal controls as it was able to demonstrate during the auditor review of other federally funded programs.
The guidance that was issued with the funding was painstakingly read and reviewed and funding was spent per the guidance. We believe the interpretation and application of the guidance by the State Auditor’s Office for Non-Entitlement Units as it relates to the revenue loss option is incomplete and incorrect.
Despite this disagreement, the city will continue to comply with federal funding requirements related to suspension and debarment.
Auditor’s Remarks
We appreciate the City’s commitment to resolving the issue noted above and thank
the City for its cooperation and assistance during the audit.
We reaffirm our finding and will review the corrective action taken during our next regular audit.
Applicable Laws and Regulations
Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings.
Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements.
The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
Title 2 CFR Part 180, OMB Guidelines to Agencies on Governmentwide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689.