Audit 318219

The City lacked adequate internal controls to ensuring compliance with federal suspension and debarment requirements. Assistance Listing Number and Title: 59.059 – Congressional Grants Federal Grantor Name: Small Business Administration Federal Award/Contract Number: SBAHQ23I0019 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 During the fiscal year 2023, the City spent $1,000,000 of federal funding from the congressional grant. The City received the congressional grant for the expansion of the Lacey MakerSpace, which is a public workshop that provides space and tools for residents to attend classes or create projects. The grant allowed the City to expand the workshop’s size to provide more workspace opportunities for residents. Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Federal regulations prohibit recipients from contracting with or making subawards to parties suspended or debarred from doing business with the federal government. Whenever the City enters into contracts or purchases goods or services that it expects to equal or exceed $25,000, and for all subawards regardless of award amount, paid all or in part with federal funds, it must verify the contractor or subrecipient were not suspended, debarred or otherwise excluded. The City may verify this by checking for exclusion records in the U.S. General Services System for Award Management at SAM.gov, obtaining a written certification from the contractor or subrecipient or adding a clause or condition into the contract that states the contractor or subrecipient is not suspended or debarred. The City must verify this before entering into the contract or making the subaward, and it must keep documentation demonstrating compliance with this federal requirement. Description of Condition The City did not have controls in place to verify and maintain documentation demonstrating that a subrecipient was not suspended or debarred before entering into an agreement with them. Specifically, the City paid one subrecipient $1 million and did not verify the subrecipient was not suspended or debarred before making the subaward. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. Cause of Condition The City was unaware that the suspension and debarment requirement was applicable to subrecipients. The City also relies on including an attestation clause in contracts that it did not use for the subrecipient contract. Effect of Condition Without adequate internal controls, the City increases its risk of awarding federal funds to subrecipients that are excluded from participating in federal programs. Any payments the City made to an ineligible party would be unallowable, and the federal agency could potentially recover them. Dring the audit, the City subsequently verified the subrecipient was not suspended or debarred. Therefore, we are not questioning costs. Recommendation We recommend the City develop internal controls to ensure subrecipients it pays all or in part with federal funds, are not suspended or debarred before making the subaward. The City should also maintain documentation demonstrating compliance with this federal requirement. City’s Response The City of Lacey acknowledges the auditor's finding regarding the need for enhanced internal controls to verify that subrecipients are not suspended or debarred before entering into agreements involving federal funds. The City has overall strong internal controls surrounding the utilization of grant dollars. Specific to the Congressional funds, the City had a number of mitigating controls in place to ensure the appropriate use of the funds. The City, Saint Martin’s University, and Thurston EDC are strong partners in making sure the Lacey MakerSpace reaches its full potential and continues to enhance the community. City leadership and the stated partners were thrilled to receive $1 million dollars to go towards the much-needed expansion of the Lacey MakerSpace. After receiving the award, it became clear that moving to a subrecipient model with Saint Martin’s University was the appropriate course of action. The City received approval from the Small Business Administration (granting authority) to proceed with this action. The City then drafted and executed an interlocal agreement with Saint Martin’s University. The interlocal agreement clearly stated that, as a subrecipient, Saint Martin’s University would adhere to all federal requirements. The City also completed a subrecipient risk assessment with Saint Martin’s University prior to finalizing the subrecipient model and were deemed to be a low risk subrecipient. Saint Martin’s completed a suspension and debarment check on the project’s contractor who ultimately received the funds. The City will address its controls and oversight over grant contracts with subrecipient agreements to ensure proper adherence to suspension and debarment requirements. This will be accomplished by including a contract clause that explicitly requires all subrecipients to certify that they are not suspended, debarred, or otherwise excluded from federal programs. This clause will be applied to all relevant agreements and contracts moving forward. The City has also initiated communication with relevant City staff to ensure that they are fully aware of federal requirements regarding suspension and debarment. The City will implement a periodic review process to ensure continued compliance with federal requirements. This includes regular audits of contracts and subawards to confirm that all necessary documentation is in place and that the City’s internal controls are functioning effectively. The City of Lacey is committed to full compliance with all federal regulations and takes the auditor’s finding seriously. We believe that the steps we have taken and the controls we have put in place for future use will effectively address the issue and prevent further occurrences. We appreciate the auditor’s recommendations and will continue to monitor and enhance our internal controls to ensure the integrity of our operations and the proper use of federal funds. Auditor’s Remarks We appreciate the steps the City is taking to resolve this issue. We will review the corrective action taken during our next 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 on Agencies on Governmentwide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689.

The City lacked adequate internal controls to ensuring compliance with federal suspension and debarment requirements. Assistance Listing Number and Title: 59.059 – Congressional Grants Federal Grantor Name: Small Business Administration Federal Award/Contract Number: SBAHQ23I0019 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 During the fiscal year 2023, the City spent $1,000,000 of federal funding from the congressional grant. The City received the congressional grant for the expansion of the Lacey MakerSpace, which is a public workshop that provides space and tools for residents to attend classes or create projects. The grant allowed the City to expand the workshop’s size to provide more workspace opportunities for residents. Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Federal regulations prohibit recipients from contracting with or making subawards to parties suspended or debarred from doing business with the federal government. Whenever the City enters into contracts or purchases goods or services that it expects to equal or exceed $25,000, and for all subawards regardless of award amount, paid all or in part with federal funds, it must verify the contractor or subrecipient were not suspended, debarred or otherwise excluded. The City may verify this by checking for exclusion records in the U.S. General Services System for Award Management at SAM.gov, obtaining a written certification from the contractor or subrecipient or adding a clause or condition into the contract that states the contractor or subrecipient is not suspended or debarred. The City must verify this before entering into the contract or making the subaward, and it must keep documentation demonstrating compliance with this federal requirement. Description of Condition The City did not have controls in place to verify and maintain documentation demonstrating that a subrecipient was not suspended or debarred before entering into an agreement with them. Specifically, the City paid one subrecipient $1 million and did not verify the subrecipient was not suspended or debarred before making the subaward. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. Cause of Condition The City was unaware that the suspension and debarment requirement was applicable to subrecipients. The City also relies on including an attestation clause in contracts that it did not use for the subrecipient contract. Effect of Condition Without adequate internal controls, the City increases its risk of awarding federal funds to subrecipients that are excluded from participating in federal programs. Any payments the City made to an ineligible party would be unallowable, and the federal agency could potentially recover them. Dring the audit, the City subsequently verified the subrecipient was not suspended or debarred. Therefore, we are not questioning costs. Recommendation We recommend the City develop internal controls to ensure subrecipients it pays all or in part with federal funds, are not suspended or debarred before making the subaward. The City should also maintain documentation demonstrating compliance with this federal requirement. City’s Response The City of Lacey acknowledges the auditor's finding regarding the need for enhanced internal controls to verify that subrecipients are not suspended or debarred before entering into agreements involving federal funds. The City has overall strong internal controls surrounding the utilization of grant dollars. Specific to the Congressional funds, the City had a number of mitigating controls in place to ensure the appropriate use of the funds. The City, Saint Martin’s University, and Thurston EDC are strong partners in making sure the Lacey MakerSpace reaches its full potential and continues to enhance the community. City leadership and the stated partners were thrilled to receive $1 million dollars to go towards the much-needed expansion of the Lacey MakerSpace. After receiving the award, it became clear that moving to a subrecipient model with Saint Martin’s University was the appropriate course of action. The City received approval from the Small Business Administration (granting authority) to proceed with this action. The City then drafted and executed an interlocal agreement with Saint Martin’s University. The interlocal agreement clearly stated that, as a subrecipient, Saint Martin’s University would adhere to all federal requirements. The City also completed a subrecipient risk assessment with Saint Martin’s University prior to finalizing the subrecipient model and were deemed to be a low risk subrecipient. Saint Martin’s completed a suspension and debarment check on the project’s contractor who ultimately received the funds. The City will address its controls and oversight over grant contracts with subrecipient agreements to ensure proper adherence to suspension and debarment requirements. This will be accomplished by including a contract clause that explicitly requires all subrecipients to certify that they are not suspended, debarred, or otherwise excluded from federal programs. This clause will be applied to all relevant agreements and contracts moving forward. The City has also initiated communication with relevant City staff to ensure that they are fully aware of federal requirements regarding suspension and debarment. The City will implement a periodic review process to ensure continued compliance with federal requirements. This includes regular audits of contracts and subawards to confirm that all necessary documentation is in place and that the City’s internal controls are functioning effectively. The City of Lacey is committed to full compliance with all federal regulations and takes the auditor’s finding seriously. We believe that the steps we have taken and the controls we have put in place for future use will effectively address the issue and prevent further occurrences. We appreciate the auditor’s recommendations and will continue to monitor and enhance our internal controls to ensure the integrity of our operations and the proper use of federal funds. Auditor’s Remarks We appreciate the steps the City is taking to resolve this issue. We will review the corrective action taken during our next 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 on Agencies on Governmentwide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689.