Audit 334146

Criteria: 2 CFR Part 200 (Uniform Guidance) and the Compliance Supplement indicate accurate and complete records must be maintained with respect to the receipt, distribution/use, and inventory of USDA Foods, including end products processed from USDA Foods in TEFAP. Failure to maintain records required by 7 CFR section 250.19 is considered prima facie evidence of improper distribution or loss of USDA Foods, and the agency processor or entity is liable for the value of the food or replacement of the food in kind (7 CFR sections 250.16 and 250.19(a)). 7 CFR Part 250.14(b) indicates recipient agencies in household programs must store donated foods in a manner that permits them to be distinguished from other foods in storage and must maintain a separate inventory record of donated foods. Such recipient agencies' system of inventory management must ensure that donated foods are distributed to recipients in a timely manner that permits use of such foods while still in optimal condition. Such recipient agencies must notify the distributing agency of donated food losses and take further actions with respect to such food losses, as directed by the distributing agency. State distributing agencies must conduct an annual physical inventory of all storage facilities used by the distributing agency or by a sub-distributing agency. Such inventory must be reconciled annually with the storage facility’s inventory records and maintained on file by the agency which contracted with or maintained the storage facility. Corrective action must be taken immediately on all deficiencies and inventory discrepancies and the results of the corrective action forwarded to the distributing agency (7 CFR section 250.12(b)). In CSFP, a physical inventory also must be conducted annually at all storage and distribution sites where USDA Foods are stored (7 CFR section 247.28). The South Carolina TEFAP State Operations Manual also requires food banks to keep a signed receipt on file listing the commodities and quantities provided to Eligible Recipient Agencies (“ERAs”). Condition/Context: As part of our testing of controls and compliance over the accountability for USDA-donated foods, we noted the following: 1) Inventory distribution documentation discrepancies: In the last quarter of fiscal year 2021, the Organization reported to the South Carolina Department of Agriculture (“SCDA”) that the Organization had experienced inventory documentation discrepancies related to The Emergency Food Assistance Program (“TEFAP”) inventory account. The Organization reported to the SCDA that over the three preceding fiscal years (2019, 2020, and 2021), these discrepancies totaled $342,857. In the first quarter of fiscal year 2022, the Organization made additional reports to the SCDA regarding smaller inventory documentation discrepancies related to the TEFAP and Commodity Supplemental Food Program (CSFP) inventory accounts and regarding USDA program food that had been damaged by the failure of a refrigerator and by transit. Beginning on December 15, 2021, and ending on March 9, 2022, the SCDA issued a series of letters to the Organization reflecting determinations made by the SCDA that the Organization had caused or experienced food loss for which restitution to the SCDA was appropriate. The SCDA initially determined that the Organization owed a total of $497,645 in restitution for food loss to the SCDA. On March 31, 2022, the Organization submitted a request to the SCDA seeking reconsideration of its food loss and restitution determinations. The Organization’s request for reconsideration was pending without a decision for over two years. In a letter dated June 17, 2024, the SCDA provided the Organization notice of the final agency decision that the Organization owed SCDA $441,469 in restitution for food loss. These claims were reported as follows: a. Claim 1 related to reported inventory discrepancies extending back three years prior to fiscal year 2022 totaling $342,857. Harvest Hope believes this inventory discrepancy represented normal inventory shrinkage and should not be treated as a loss. b. Claim 2 totaling $73,448 related to inventory discrepancies found in CSFP commodities based on reporting errors in FNS reports due to incorrect inventory practices such as order fillers making substitutions without notifying management and undistributed boxes that were adjusted back into inventory without the contents being verified. c. Claim 3 totaling $11,575 related to inventory discrepancies for missing TEFAP commodities found during later monthly inventory counts. d. Claims 4 and 5 totaling $7,624 related to mechanical failure in the Harvest Hope warehouse and improper securing of inventory during transport leading to commodities being crushed in transit. 2) Documentation for distribution of USDA foods to recipient agencies: The Organization requires ERAs to sign receipts of USDA foods distributed to their agencies. While the Organization was able to provide support for certain transactions during the fiscal year to demonstrate its process, management was unable to provide signed documentation of receipt for specific items selected during our testing of distributions. We selected 40 distributions for testing, 25 of which were made to recipient agencies. Of these 25 distributions to recipient agencies, management was unable to provide signed documentation of receipt for 25 of these items due to document retention issues. Cause: 1) Inventory distribution documentation discrepancies: a. Claims 1 through 3: Management indicated these inventory discrepancies were identified during a review of inventory and reporting processes throughout the Organization, and by October 2021, this effort had uncovered a concern as to tracking of the distribution of USDA TEFAP program food. Management asserts that under the inventory procedures followed at the time, TEFAP items that could not be accounted for were being treated as having been distributed through Harvest Hope’s Emergency Food Pantry (“EFP”). This amount represented approximately 1% of USDA program food being distributed by Harvest Hope. Moving these items to EFP helped balance inventory and account for expected product/inventory shrink. However, it could not be confirmed whether those items moved to EFP were properly distributed or not. The legacy accounting system (Macola) and former accounting practices had no method to report natural and expected de minimis product inventory discrepancies except as “losses” even when there was no reason to believe anything had been lost. The main causes of these issues were unstructured End of Month inventory reconciliation procedures and difficulties with the business software systems utilized in recording inventory, including an obsolete aging inventory system requiring extensive time and effort to use, poor interface and lack of interoperability of the inventory and accounting systems. b. Claims 4 and 5 were related to mechanical failure in the refrigeration system and leaking juice from grapes causing the pallets holding the grapes to weaken and be crushed during transport. 2) Documentation for distribution of USDA foods to recipient agencies: Although management required agencies to sign an invoice or bill of lading indicating receipt of foods, these records were maintained in paper form but were not organized in a consistent manner and could not be provided for the specific items noted in our distribution testing to recipient agencies. Effect: 1) Inventory distribution documentation discrepancies: Incorrect handling or accounting for USDA foods potentially leads to discrepancies that may be deemed to be food losses by the SCDA and required to be reimbursed to the federal program or replaced with similar items. Evidence of supporting documentation for the distribution of USDA donated foods was not available to determine whether the commodities had been distributed, resulting in potentially recording incorrect USDA food distribution amounts reported in the consolidated financial statements and on the SEFA. 2) Documentation for distribution of USDA foods to recipient agencies: Because signed receipts for distribution of USDA foods to ERAs were not available for all selections, there is potential for (a) distribution of USDA commodities to ineligible ERAs and (2) inaccurate record keeping of USDA food distributions. Questioned Costs: $92,648 related to Claims 2 through 5 which occurred during fiscal year 2022 within the inventory distribution documentation discrepancies discussed above. Auditor’s recommendation: A new inventory accounting system should be implemented to improve accuracy in tracking of USDA food inventory and distribution and enhance integration with the overall accounting system. Additionally, management should implement updated inventory accounting practices and provide training to ensure all USDA food commodities are received, handled, and transported in accordance with program requirements. Signed documentation for each distribution of USDA commodities to eligible recipient agencies should be systematically filed to ensure proper retention of records supporting each distribution. Auditee’s response: Harvest Hope is disputing the food loss and restitution claims. This has been assigned to an Administrative Law Judge and is currently pending. New Inventory Accounting System (NetSuite) implemented for reporting of the 2023 Fiscal Year. Includes: • NetSuite will greatly reduce opportunities for human error and give clear line of sight to all inventory. The move of inventory and accounting to cloud-based NetSuite platform helped remove errors associated with server-based accounting and inventory software currently used. • Added additional checkpoints in NetSuite to better track inventory with reporting and approvals for sales orders to ensure accuracy before orders are fulfilled. Personnel • Created Harvest Hope “Inventory Advisory Board,” comprised of warehouse leadership, branch executive directors, financial team, and President/CEO, to address and create inventory processes. • Hired three (3) new management-level positions, one at each Harvest Hope branch, focused on fulfillments. • Assigned new key leaders responsible for inventory matters. • Created a new fulfillment department to help inventory controls and processes. • Individualized one on one meetings at each Harvest Hope branch. • Created internal training manual for receiving, handling, and transporting of USDA program items • Talked through controls and inventory requirements needed for each facility. Internal Controls • All USDA to be verified and approved before finalizing invoice which then will be released to fulfillment to pack. • Moved inventory tagging/invoicing to warehouse management to ensure multiple touchpoints have accountability and oversight. • Implemented notated invoice for accuracy. • Established “Quality Control” check point in the CSFP packing line to ensure correct items are in boxes. • Created dual touch processing of all USDA inventory through both paper trail invoicing and systems invoicing. • Use “pick phase” for orders that are completed by fulfillment as a checkpoint before moving out of facility with verification by warehouse staff. • Implemented weekly USDA cycle counts and bimonthly total inventory counts. • Immediately stopped transferring unaccounted for items or inventory shrink to the EFP. Best Practices • Maintain standing engagement with accounting/business consultants to review practices, resolve unique challenges, and obtain best practice updates. • Individually wrap TEFAP orders in Harvest Hope Florence facility per agency guidance. • Reached out to other state and regional food banks to learn inventory “best practices.” • Moved all USDA packing to Harvest Hope Greenville facility. • Centralized and created CSFP process expertise in one facility. • Engaged accounting and other professionals to help understand issues. Documentation of distribution of USDA foods to recipient agencies: • We have moved to a cloud-based system that allows real time tracking of agencies to maintain contractual records with our policy.

Criteria: 2 CFR Part 200 (Uniform Guidance) and the Compliance Supplement indicate USDA Foods may only be distributed to individual program participants who meet income eligibility requirements. Determinations are generally made by recipient agencies in accordance with the criteria and procedures established by the state agencies. A recipient agency must be either a public agency or a private entity possessing tax-exempt status under the Internal Revenue Code and must enter into a written agreement with the state agency, or with another recipient agency where permitted, binding it to perform the duties of a recipient agency (7 CFR sections 247.4, 247.7(a), 251.3(d), and 251.5(a)). Condition/Context: The Organization provided a list of 184 ERAs receiving distributions from the Organization during the year. We selected a sample of 19 agencies from this list and found the Organization had signed agreements meeting the requirements for all of the agencies in our sample selected from this list. However, in our testing of 40 USDA food distributions made to 5 recipient groups during the year (this included ERAs and individuals), we noted a distribution made to an agency that was not included on the eligible ERA list provided to us by the Organization. The Organization did not have a signed agreement with this agency. Cause: Management indicated the agency discussed above was not one of the usual contractual agencies to which the Organization typically distributed USDA foods; as such, there was no formal signed agreement with the recipient. Management noted when the Organization has a surplus of commodities that needs to be distributed prior to the foods’ expiration, the Organization may occasionally distribute these foods to agencies that are not on their pre-approved USDA agency list. The Organization does not have a process in place to obtain a signed agreement from these entities. Management indicated the usual process followed includes ensuring the recipient agency is properly registered as a nonprofit organization by utilizing a website such as the Secretary of State site, however, the documentation for this process is not retained. Effect: As documentation is not maintained to support the eligibility of recipient agencies that are not on the pre-approved USDA agency list and who may occasionally receive surplus commodities, the Organization is not able to substantiate there are controls in place to meet the requirement that accurate and complete records must be maintained with respect to the receipt, distribution/use, and inventory of USDA Foods. Lack of compliance with requirements may result in reduced future funding for the program.   Auditor’s recommendation: We recommend controls be strengthened to ensure proper documentation is maintained verifying a subrecipient is eligible to receive TEFAP products when new subrecipients are added during the year that are not on the pre-approved USDA listing. In order for a subrecipient to be eligible to receive TEFAP products, the subrecipient must be tagged as such in the inventory system. At the beginning of each fiscal year, a report should be reviewed of all agencies and their qualifiers. This should be checked against the agencies’ files to ensure 1) the removal of any qualifiers for which documentation has not been received, and 2) follow-up of agencies to obtain the necessary documents. This will ensure completeness, timeliness, and consistency among all agencies and all documents. Auditee’s response: The Organization has created a process to move all documents to cloud based storage, including recipient agency contracts for USDA and proof of tax-exempt status under Internal

Criteria: 2 CFR Part 200 (Uniform Guidance) and the Compliance Supplement indicate accurate and complete records must be maintained with respect to the receipt, distribution/use, and inventory of USDA Foods, including end products processed from USDA Foods in TEFAP. Failure to maintain records required by 7 CFR section 250.19 is considered prima facie evidence of improper distribution or loss of USDA Foods, and the agency processor or entity is liable for the value of the food or replacement of the food in kind (7 CFR sections 250.16 and 250.19(a)). 7 CFR Part 250.14(b) indicates recipient agencies in household programs must store donated foods in a manner that permits them to be distinguished from other foods in storage and must maintain a separate inventory record of donated foods. Such recipient agencies' system of inventory management must ensure that donated foods are distributed to recipients in a timely manner that permits use of such foods while still in optimal condition. Such recipient agencies must notify the distributing agency of donated food losses and take further actions with respect to such food losses, as directed by the distributing agency. State distributing agencies must conduct an annual physical inventory of all storage facilities used by the distributing agency or by a sub-distributing agency. Such inventory must be reconciled annually with the storage facility’s inventory records and maintained on file by the agency which contracted with or maintained the storage facility. Corrective action must be taken immediately on all deficiencies and inventory discrepancies and the results of the corrective action forwarded to the distributing agency (7 CFR section 250.12(b)). In CSFP, a physical inventory also must be conducted annually at all storage and distribution sites where USDA Foods are stored (7 CFR section 247.28). The South Carolina TEFAP State Operations Manual also requires food banks to keep a signed receipt on file listing the commodities and quantities provided to Eligible Recipient Agencies (“ERAs”). Condition/Context: As part of our testing of controls and compliance over the accountability for USDA-donated foods, we noted the following: 1) Inventory distribution documentation discrepancies: In the last quarter of fiscal year 2021, the Organization reported to the South Carolina Department of Agriculture (“SCDA”) that the Organization had experienced inventory documentation discrepancies related to The Emergency Food Assistance Program (“TEFAP”) inventory account. The Organization reported to the SCDA that over the three preceding fiscal years (2019, 2020, and 2021), these discrepancies totaled $342,857. In the first quarter of fiscal year 2022, the Organization made additional reports to the SCDA regarding smaller inventory documentation discrepancies related to the TEFAP and Commodity Supplemental Food Program (CSFP) inventory accounts and regarding USDA program food that had been damaged by the failure of a refrigerator and by transit. Beginning on December 15, 2021, and ending on March 9, 2022, the SCDA issued a series of letters to the Organization reflecting determinations made by the SCDA that the Organization had caused or experienced food loss for which restitution to the SCDA was appropriate. The SCDA initially determined that the Organization owed a total of $497,645 in restitution for food loss to the SCDA. On March 31, 2022, the Organization submitted a request to the SCDA seeking reconsideration of its food loss and restitution determinations. The Organization’s request for reconsideration was pending without a decision for over two years. In a letter dated June 17, 2024, the SCDA provided the Organization notice of the final agency decision that the Organization owed SCDA $441,469 in restitution for food loss. These claims were reported as follows: a. Claim 1 related to reported inventory discrepancies extending back three years prior to fiscal year 2022 totaling $342,857. Harvest Hope believes this inventory discrepancy represented normal inventory shrinkage and should not be treated as a loss. b. Claim 2 totaling $73,448 related to inventory discrepancies found in CSFP commodities based on reporting errors in FNS reports due to incorrect inventory practices such as order fillers making substitutions without notifying management and undistributed boxes that were adjusted back into inventory without the contents being verified. c. Claim 3 totaling $11,575 related to inventory discrepancies for missing TEFAP commodities found during later monthly inventory counts. d. Claims 4 and 5 totaling $7,624 related to mechanical failure in the Harvest Hope warehouse and improper securing of inventory during transport leading to commodities being crushed in transit. 2) Documentation for distribution of USDA foods to recipient agencies: The Organization requires ERAs to sign receipts of USDA foods distributed to their agencies. While the Organization was able to provide support for certain transactions during the fiscal year to demonstrate its process, management was unable to provide signed documentation of receipt for specific items selected during our testing of distributions. We selected 40 distributions for testing, 25 of which were made to recipient agencies. Of these 25 distributions to recipient agencies, management was unable to provide signed documentation of receipt for 25 of these items due to document retention issues. Cause: 1) Inventory distribution documentation discrepancies: a. Claims 1 through 3: Management indicated these inventory discrepancies were identified during a review of inventory and reporting processes throughout the Organization, and by October 2021, this effort had uncovered a concern as to tracking of the distribution of USDA TEFAP program food. Management asserts that under the inventory procedures followed at the time, TEFAP items that could not be accounted for were being treated as having been distributed through Harvest Hope’s Emergency Food Pantry (“EFP”). This amount represented approximately 1% of USDA program food being distributed by Harvest Hope. Moving these items to EFP helped balance inventory and account for expected product/inventory shrink. However, it could not be confirmed whether those items moved to EFP were properly distributed or not. The legacy accounting system (Macola) and former accounting practices had no method to report natural and expected de minimis product inventory discrepancies except as “losses” even when there was no reason to believe anything had been lost. The main causes of these issues were unstructured End of Month inventory reconciliation procedures and difficulties with the business software systems utilized in recording inventory, including an obsolete aging inventory system requiring extensive time and effort to use, poor interface and lack of interoperability of the inventory and accounting systems. b. Claims 4 and 5 were related to mechanical failure in the refrigeration system and leaking juice from grapes causing the pallets holding the grapes to weaken and be crushed during transport. 2) Documentation for distribution of USDA foods to recipient agencies: Although management required agencies to sign an invoice or bill of lading indicating receipt of foods, these records were maintained in paper form but were not organized in a consistent manner and could not be provided for the specific items noted in our distribution testing to recipient agencies. Effect: 1) Inventory distribution documentation discrepancies: Incorrect handling or accounting for USDA foods potentially leads to discrepancies that may be deemed to be food losses by the SCDA and required to be reimbursed to the federal program or replaced with similar items. Evidence of supporting documentation for the distribution of USDA donated foods was not available to determine whether the commodities had been distributed, resulting in potentially recording incorrect USDA food distribution amounts reported in the consolidated financial statements and on the SEFA. 2) Documentation for distribution of USDA foods to recipient agencies: Because signed receipts for distribution of USDA foods to ERAs were not available for all selections, there is potential for (a) distribution of USDA commodities to ineligible ERAs and (2) inaccurate record keeping of USDA food distributions. Questioned Costs: $92,648 related to Claims 2 through 5 which occurred during fiscal year 2022 within the inventory distribution documentation discrepancies discussed above. Auditor’s recommendation: A new inventory accounting system should be implemented to improve accuracy in tracking of USDA food inventory and distribution and enhance integration with the overall accounting system. Additionally, management should implement updated inventory accounting practices and provide training to ensure all USDA food commodities are received, handled, and transported in accordance with program requirements. Signed documentation for each distribution of USDA commodities to eligible recipient agencies should be systematically filed to ensure proper retention of records supporting each distribution. Auditee’s response: Harvest Hope is disputing the food loss and restitution claims. This has been assigned to an Administrative Law Judge and is currently pending. New Inventory Accounting System (NetSuite) implemented for reporting of the 2023 Fiscal Year. Includes: • NetSuite will greatly reduce opportunities for human error and give clear line of sight to all inventory. The move of inventory and accounting to cloud-based NetSuite platform helped remove errors associated with server-based accounting and inventory software currently used. • Added additional checkpoints in NetSuite to better track inventory with reporting and approvals for sales orders to ensure accuracy before orders are fulfilled. Personnel • Created Harvest Hope “Inventory Advisory Board,” comprised of warehouse leadership, branch executive directors, financial team, and President/CEO, to address and create inventory processes. • Hired three (3) new management-level positions, one at each Harvest Hope branch, focused on fulfillments. • Assigned new key leaders responsible for inventory matters. • Created a new fulfillment department to help inventory controls and processes. • Individualized one on one meetings at each Harvest Hope branch. • Created internal training manual for receiving, handling, and transporting of USDA program items • Talked through controls and inventory requirements needed for each facility. Internal Controls • All USDA to be verified and approved before finalizing invoice which then will be released to fulfillment to pack. • Moved inventory tagging/invoicing to warehouse management to ensure multiple touchpoints have accountability and oversight. • Implemented notated invoice for accuracy. • Established “Quality Control” check point in the CSFP packing line to ensure correct items are in boxes. • Created dual touch processing of all USDA inventory through both paper trail invoicing and systems invoicing. • Use “pick phase” for orders that are completed by fulfillment as a checkpoint before moving out of facility with verification by warehouse staff. • Implemented weekly USDA cycle counts and bimonthly total inventory counts. • Immediately stopped transferring unaccounted for items or inventory shrink to the EFP. Best Practices • Maintain standing engagement with accounting/business consultants to review practices, resolve unique challenges, and obtain best practice updates. • Individually wrap TEFAP orders in Harvest Hope Florence facility per agency guidance. • Reached out to other state and regional food banks to learn inventory “best practices.” • Moved all USDA packing to Harvest Hope Greenville facility. • Centralized and created CSFP process expertise in one facility. • Engaged accounting and other professionals to help understand issues. Documentation of distribution of USDA foods to recipient agencies: • We have moved to a cloud-based system that allows real time tracking of agencies to maintain contractual records with our policy.

Criteria: 2 CFR Part 200 (Uniform Guidance) and the Compliance Supplement indicate accurate and complete records must be maintained with respect to the receipt, distribution/use, and inventory of USDA Foods, including end products processed from USDA Foods in TEFAP. Failure to maintain records required by 7 CFR section 250.19 is considered prima facie evidence of improper distribution or loss of USDA Foods, and the agency processor or entity is liable for the value of the food or replacement of the food in kind (7 CFR sections 250.16 and 250.19(a)). 7 CFR Part 250.14(b) indicates recipient agencies in household programs must store donated foods in a manner that permits them to be distinguished from other foods in storage and must maintain a separate inventory record of donated foods. Such recipient agencies' system of inventory management must ensure that donated foods are distributed to recipients in a timely manner that permits use of such foods while still in optimal condition. Such recipient agencies must notify the distributing agency of donated food losses and take further actions with respect to such food losses, as directed by the distributing agency. State distributing agencies must conduct an annual physical inventory of all storage facilities used by the distributing agency or by a sub-distributing agency. Such inventory must be reconciled annually with the storage facility’s inventory records and maintained on file by the agency which contracted with or maintained the storage facility. Corrective action must be taken immediately on all deficiencies and inventory discrepancies and the results of the corrective action forwarded to the distributing agency (7 CFR section 250.12(b)). In CSFP, a physical inventory also must be conducted annually at all storage and distribution sites where USDA Foods are stored (7 CFR section 247.28). The South Carolina TEFAP State Operations Manual also requires food banks to keep a signed receipt on file listing the commodities and quantities provided to Eligible Recipient Agencies (“ERAs”). Condition/Context: As part of our testing of controls and compliance over the accountability for USDA-donated foods, we noted the following: 1) Inventory distribution documentation discrepancies: In the last quarter of fiscal year 2021, the Organization reported to the South Carolina Department of Agriculture (“SCDA”) that the Organization had experienced inventory documentation discrepancies related to The Emergency Food Assistance Program (“TEFAP”) inventory account. The Organization reported to the SCDA that over the three preceding fiscal years (2019, 2020, and 2021), these discrepancies totaled $342,857. In the first quarter of fiscal year 2022, the Organization made additional reports to the SCDA regarding smaller inventory documentation discrepancies related to the TEFAP and Commodity Supplemental Food Program (CSFP) inventory accounts and regarding USDA program food that had been damaged by the failure of a refrigerator and by transit. Beginning on December 15, 2021, and ending on March 9, 2022, the SCDA issued a series of letters to the Organization reflecting determinations made by the SCDA that the Organization had caused or experienced food loss for which restitution to the SCDA was appropriate. The SCDA initially determined that the Organization owed a total of $497,645 in restitution for food loss to the SCDA. On March 31, 2022, the Organization submitted a request to the SCDA seeking reconsideration of its food loss and restitution determinations. The Organization’s request for reconsideration was pending without a decision for over two years. In a letter dated June 17, 2024, the SCDA provided the Organization notice of the final agency decision that the Organization owed SCDA $441,469 in restitution for food loss. These claims were reported as follows: a. Claim 1 related to reported inventory discrepancies extending back three years prior to fiscal year 2022 totaling $342,857. Harvest Hope believes this inventory discrepancy represented normal inventory shrinkage and should not be treated as a loss. b. Claim 2 totaling $73,448 related to inventory discrepancies found in CSFP commodities based on reporting errors in FNS reports due to incorrect inventory practices such as order fillers making substitutions without notifying management and undistributed boxes that were adjusted back into inventory without the contents being verified. c. Claim 3 totaling $11,575 related to inventory discrepancies for missing TEFAP commodities found during later monthly inventory counts. d. Claims 4 and 5 totaling $7,624 related to mechanical failure in the Harvest Hope warehouse and improper securing of inventory during transport leading to commodities being crushed in transit. 2) Documentation for distribution of USDA foods to recipient agencies: The Organization requires ERAs to sign receipts of USDA foods distributed to their agencies. While the Organization was able to provide support for certain transactions during the fiscal year to demonstrate its process, management was unable to provide signed documentation of receipt for specific items selected during our testing of distributions. We selected 40 distributions for testing, 25 of which were made to recipient agencies. Of these 25 distributions to recipient agencies, management was unable to provide signed documentation of receipt for 25 of these items due to document retention issues. Cause: 1) Inventory distribution documentation discrepancies: a. Claims 1 through 3: Management indicated these inventory discrepancies were identified during a review of inventory and reporting processes throughout the Organization, and by October 2021, this effort had uncovered a concern as to tracking of the distribution of USDA TEFAP program food. Management asserts that under the inventory procedures followed at the time, TEFAP items that could not be accounted for were being treated as having been distributed through Harvest Hope’s Emergency Food Pantry (“EFP”). This amount represented approximately 1% of USDA program food being distributed by Harvest Hope. Moving these items to EFP helped balance inventory and account for expected product/inventory shrink. However, it could not be confirmed whether those items moved to EFP were properly distributed or not. The legacy accounting system (Macola) and former accounting practices had no method to report natural and expected de minimis product inventory discrepancies except as “losses” even when there was no reason to believe anything had been lost. The main causes of these issues were unstructured End of Month inventory reconciliation procedures and difficulties with the business software systems utilized in recording inventory, including an obsolete aging inventory system requiring extensive time and effort to use, poor interface and lack of interoperability of the inventory and accounting systems. b. Claims 4 and 5 were related to mechanical failure in the refrigeration system and leaking juice from grapes causing the pallets holding the grapes to weaken and be crushed during transport. 2) Documentation for distribution of USDA foods to recipient agencies: Although management required agencies to sign an invoice or bill of lading indicating receipt of foods, these records were maintained in paper form but were not organized in a consistent manner and could not be provided for the specific items noted in our distribution testing to recipient agencies. Effect: 1) Inventory distribution documentation discrepancies: Incorrect handling or accounting for USDA foods potentially leads to discrepancies that may be deemed to be food losses by the SCDA and required to be reimbursed to the federal program or replaced with similar items. Evidence of supporting documentation for the distribution of USDA donated foods was not available to determine whether the commodities had been distributed, resulting in potentially recording incorrect USDA food distribution amounts reported in the consolidated financial statements and on the SEFA. 2) Documentation for distribution of USDA foods to recipient agencies: Because signed receipts for distribution of USDA foods to ERAs were not available for all selections, there is potential for (a) distribution of USDA commodities to ineligible ERAs and (2) inaccurate record keeping of USDA food distributions. Questioned Costs: $92,648 related to Claims 2 through 5 which occurred during fiscal year 2022 within the inventory distribution documentation discrepancies discussed above. Auditor’s recommendation: A new inventory accounting system should be implemented to improve accuracy in tracking of USDA food inventory and distribution and enhance integration with the overall accounting system. Additionally, management should implement updated inventory accounting practices and provide training to ensure all USDA food commodities are received, handled, and transported in accordance with program requirements. Signed documentation for each distribution of USDA commodities to eligible recipient agencies should be systematically filed to ensure proper retention of records supporting each distribution. Auditee’s response: Harvest Hope is disputing the food loss and restitution claims. This has been assigned to an Administrative Law Judge and is currently pending. New Inventory Accounting System (NetSuite) implemented for reporting of the 2023 Fiscal Year. Includes: • NetSuite will greatly reduce opportunities for human error and give clear line of sight to all inventory. The move of inventory and accounting to cloud-based NetSuite platform helped remove errors associated with server-based accounting and inventory software currently used. • Added additional checkpoints in NetSuite to better track inventory with reporting and approvals for sales orders to ensure accuracy before orders are fulfilled. Personnel • Created Harvest Hope “Inventory Advisory Board,” comprised of warehouse leadership, branch executive directors, financial team, and President/CEO, to address and create inventory processes. • Hired three (3) new management-level positions, one at each Harvest Hope branch, focused on fulfillments. • Assigned new key leaders responsible for inventory matters. • Created a new fulfillment department to help inventory controls and processes. • Individualized one on one meetings at each Harvest Hope branch. • Created internal training manual for receiving, handling, and transporting of USDA program items • Talked through controls and inventory requirements needed for each facility. Internal Controls • All USDA to be verified and approved before finalizing invoice which then will be released to fulfillment to pack. • Moved inventory tagging/invoicing to warehouse management to ensure multiple touchpoints have accountability and oversight. • Implemented notated invoice for accuracy. • Established “Quality Control” check point in the CSFP packing line to ensure correct items are in boxes. • Created dual touch processing of all USDA inventory through both paper trail invoicing and systems invoicing. • Use “pick phase” for orders that are completed by fulfillment as a checkpoint before moving out of facility with verification by warehouse staff. • Implemented weekly USDA cycle counts and bimonthly total inventory counts. • Immediately stopped transferring unaccounted for items or inventory shrink to the EFP. Best Practices • Maintain standing engagement with accounting/business consultants to review practices, resolve unique challenges, and obtain best practice updates. • Individually wrap TEFAP orders in Harvest Hope Florence facility per agency guidance. • Reached out to other state and regional food banks to learn inventory “best practices.” • Moved all USDA packing to Harvest Hope Greenville facility. • Centralized and created CSFP process expertise in one facility. • Engaged accounting and other professionals to help understand issues. Documentation of distribution of USDA foods to recipient agencies: • We have moved to a cloud-based system that allows real time tracking of agencies to maintain contractual records with our policy.

Criteria: 2 CFR Part 200 (Uniform Guidance) and the Compliance Supplement indicate USDA Foods may only be distributed to individual program participants who meet income eligibility requirements. Determinations are generally made by recipient agencies in accordance with the criteria and procedures established by the state agencies. A recipient agency must be either a public agency or a private entity possessing tax-exempt status under the Internal Revenue Code and must enter into a written agreement with the state agency, or with another recipient agency where permitted, binding it to perform the duties of a recipient agency (7 CFR sections 247.4, 247.7(a), 251.3(d), and 251.5(a)). Condition/Context: The Organization provided a list of 184 ERAs receiving distributions from the Organization during the year. We selected a sample of 19 agencies from this list and found the Organization had signed agreements meeting the requirements for all of the agencies in our sample selected from this list. However, in our testing of 40 USDA food distributions made to 5 recipient groups during the year (this included ERAs and individuals), we noted a distribution made to an agency that was not included on the eligible ERA list provided to us by the Organization. The Organization did not have a signed agreement with this agency. Cause: Management indicated the agency discussed above was not one of the usual contractual agencies to which the Organization typically distributed USDA foods; as such, there was no formal signed agreement with the recipient. Management noted when the Organization has a surplus of commodities that needs to be distributed prior to the foods’ expiration, the Organization may occasionally distribute these foods to agencies that are not on their pre-approved USDA agency list. The Organization does not have a process in place to obtain a signed agreement from these entities. Management indicated the usual process followed includes ensuring the recipient agency is properly registered as a nonprofit organization by utilizing a website such as the Secretary of State site, however, the documentation for this process is not retained. Effect: As documentation is not maintained to support the eligibility of recipient agencies that are not on the pre-approved USDA agency list and who may occasionally receive surplus commodities, the Organization is not able to substantiate there are controls in place to meet the requirement that accurate and complete records must be maintained with respect to the receipt, distribution/use, and inventory of USDA Foods. Lack of compliance with requirements may result in reduced future funding for the program.   Auditor’s recommendation: We recommend controls be strengthened to ensure proper documentation is maintained verifying a subrecipient is eligible to receive TEFAP products when new subrecipients are added during the year that are not on the pre-approved USDA listing. In order for a subrecipient to be eligible to receive TEFAP products, the subrecipient must be tagged as such in the inventory system. At the beginning of each fiscal year, a report should be reviewed of all agencies and their qualifiers. This should be checked against the agencies’ files to ensure 1) the removal of any qualifiers for which documentation has not been received, and 2) follow-up of agencies to obtain the necessary documents. This will ensure completeness, timeliness, and consistency among all agencies and all documents. Auditee’s response: The Organization has created a process to move all documents to cloud based storage, including recipient agency contracts for USDA and proof of tax-exempt status under Internal

Criteria: 2 CFR Part 200 (Uniform Guidance) and the Compliance Supplement indicate accurate and complete records must be maintained with respect to the receipt, distribution/use, and inventory of USDA Foods, including end products processed from USDA Foods in TEFAP. Failure to maintain records required by 7 CFR section 250.19 is considered prima facie evidence of improper distribution or loss of USDA Foods, and the agency processor or entity is liable for the value of the food or replacement of the food in kind (7 CFR sections 250.16 and 250.19(a)). 7 CFR Part 250.14(b) indicates recipient agencies in household programs must store donated foods in a manner that permits them to be distinguished from other foods in storage and must maintain a separate inventory record of donated foods. Such recipient agencies' system of inventory management must ensure that donated foods are distributed to recipients in a timely manner that permits use of such foods while still in optimal condition. Such recipient agencies must notify the distributing agency of donated food losses and take further actions with respect to such food losses, as directed by the distributing agency. State distributing agencies must conduct an annual physical inventory of all storage facilities used by the distributing agency or by a sub-distributing agency. Such inventory must be reconciled annually with the storage facility’s inventory records and maintained on file by the agency which contracted with or maintained the storage facility. Corrective action must be taken immediately on all deficiencies and inventory discrepancies and the results of the corrective action forwarded to the distributing agency (7 CFR section 250.12(b)). In CSFP, a physical inventory also must be conducted annually at all storage and distribution sites where USDA Foods are stored (7 CFR section 247.28). The South Carolina TEFAP State Operations Manual also requires food banks to keep a signed receipt on file listing the commodities and quantities provided to Eligible Recipient Agencies (“ERAs”). Condition/Context: As part of our testing of controls and compliance over the accountability for USDA-donated foods, we noted the following: 1) Inventory distribution documentation discrepancies: In the last quarter of fiscal year 2021, the Organization reported to the South Carolina Department of Agriculture (“SCDA”) that the Organization had experienced inventory documentation discrepancies related to The Emergency Food Assistance Program (“TEFAP”) inventory account. The Organization reported to the SCDA that over the three preceding fiscal years (2019, 2020, and 2021), these discrepancies totaled $342,857. In the first quarter of fiscal year 2022, the Organization made additional reports to the SCDA regarding smaller inventory documentation discrepancies related to the TEFAP and Commodity Supplemental Food Program (CSFP) inventory accounts and regarding USDA program food that had been damaged by the failure of a refrigerator and by transit. Beginning on December 15, 2021, and ending on March 9, 2022, the SCDA issued a series of letters to the Organization reflecting determinations made by the SCDA that the Organization had caused or experienced food loss for which restitution to the SCDA was appropriate. The SCDA initially determined that the Organization owed a total of $497,645 in restitution for food loss to the SCDA. On March 31, 2022, the Organization submitted a request to the SCDA seeking reconsideration of its food loss and restitution determinations. The Organization’s request for reconsideration was pending without a decision for over two years. In a letter dated June 17, 2024, the SCDA provided the Organization notice of the final agency decision that the Organization owed SCDA $441,469 in restitution for food loss. These claims were reported as follows: a. Claim 1 related to reported inventory discrepancies extending back three years prior to fiscal year 2022 totaling $342,857. Harvest Hope believes this inventory discrepancy represented normal inventory shrinkage and should not be treated as a loss. b. Claim 2 totaling $73,448 related to inventory discrepancies found in CSFP commodities based on reporting errors in FNS reports due to incorrect inventory practices such as order fillers making substitutions without notifying management and undistributed boxes that were adjusted back into inventory without the contents being verified. c. Claim 3 totaling $11,575 related to inventory discrepancies for missing TEFAP commodities found during later monthly inventory counts. d. Claims 4 and 5 totaling $7,624 related to mechanical failure in the Harvest Hope warehouse and improper securing of inventory during transport leading to commodities being crushed in transit. 2) Documentation for distribution of USDA foods to recipient agencies: The Organization requires ERAs to sign receipts of USDA foods distributed to their agencies. While the Organization was able to provide support for certain transactions during the fiscal year to demonstrate its process, management was unable to provide signed documentation of receipt for specific items selected during our testing of distributions. We selected 40 distributions for testing, 25 of which were made to recipient agencies. Of these 25 distributions to recipient agencies, management was unable to provide signed documentation of receipt for 25 of these items due to document retention issues. Cause: 1) Inventory distribution documentation discrepancies: a. Claims 1 through 3: Management indicated these inventory discrepancies were identified during a review of inventory and reporting processes throughout the Organization, and by October 2021, this effort had uncovered a concern as to tracking of the distribution of USDA TEFAP program food. Management asserts that under the inventory procedures followed at the time, TEFAP items that could not be accounted for were being treated as having been distributed through Harvest Hope’s Emergency Food Pantry (“EFP”). This amount represented approximately 1% of USDA program food being distributed by Harvest Hope. Moving these items to EFP helped balance inventory and account for expected product/inventory shrink. However, it could not be confirmed whether those items moved to EFP were properly distributed or not. The legacy accounting system (Macola) and former accounting practices had no method to report natural and expected de minimis product inventory discrepancies except as “losses” even when there was no reason to believe anything had been lost. The main causes of these issues were unstructured End of Month inventory reconciliation procedures and difficulties with the business software systems utilized in recording inventory, including an obsolete aging inventory system requiring extensive time and effort to use, poor interface and lack of interoperability of the inventory and accounting systems. b. Claims 4 and 5 were related to mechanical failure in the refrigeration system and leaking juice from grapes causing the pallets holding the grapes to weaken and be crushed during transport. 2) Documentation for distribution of USDA foods to recipient agencies: Although management required agencies to sign an invoice or bill of lading indicating receipt of foods, these records were maintained in paper form but were not organized in a consistent manner and could not be provided for the specific items noted in our distribution testing to recipient agencies. Effect: 1) Inventory distribution documentation discrepancies: Incorrect handling or accounting for USDA foods potentially leads to discrepancies that may be deemed to be food losses by the SCDA and required to be reimbursed to the federal program or replaced with similar items. Evidence of supporting documentation for the distribution of USDA donated foods was not available to determine whether the commodities had been distributed, resulting in potentially recording incorrect USDA food distribution amounts reported in the consolidated financial statements and on the SEFA. 2) Documentation for distribution of USDA foods to recipient agencies: Because signed receipts for distribution of USDA foods to ERAs were not available for all selections, there is potential for (a) distribution of USDA commodities to ineligible ERAs and (2) inaccurate record keeping of USDA food distributions. Questioned Costs: $92,648 related to Claims 2 through 5 which occurred during fiscal year 2022 within the inventory distribution documentation discrepancies discussed above. Auditor’s recommendation: A new inventory accounting system should be implemented to improve accuracy in tracking of USDA food inventory and distribution and enhance integration with the overall accounting system. Additionally, management should implement updated inventory accounting practices and provide training to ensure all USDA food commodities are received, handled, and transported in accordance with program requirements. Signed documentation for each distribution of USDA commodities to eligible recipient agencies should be systematically filed to ensure proper retention of records supporting each distribution. Auditee’s response: Harvest Hope is disputing the food loss and restitution claims. This has been assigned to an Administrative Law Judge and is currently pending. New Inventory Accounting System (NetSuite) implemented for reporting of the 2023 Fiscal Year. Includes: • NetSuite will greatly reduce opportunities for human error and give clear line of sight to all inventory. The move of inventory and accounting to cloud-based NetSuite platform helped remove errors associated with server-based accounting and inventory software currently used. • Added additional checkpoints in NetSuite to better track inventory with reporting and approvals for sales orders to ensure accuracy before orders are fulfilled. Personnel • Created Harvest Hope “Inventory Advisory Board,” comprised of warehouse leadership, branch executive directors, financial team, and President/CEO, to address and create inventory processes. • Hired three (3) new management-level positions, one at each Harvest Hope branch, focused on fulfillments. • Assigned new key leaders responsible for inventory matters. • Created a new fulfillment department to help inventory controls and processes. • Individualized one on one meetings at each Harvest Hope branch. • Created internal training manual for receiving, handling, and transporting of USDA program items • Talked through controls and inventory requirements needed for each facility. Internal Controls • All USDA to be verified and approved before finalizing invoice which then will be released to fulfillment to pack. • Moved inventory tagging/invoicing to warehouse management to ensure multiple touchpoints have accountability and oversight. • Implemented notated invoice for accuracy. • Established “Quality Control” check point in the CSFP packing line to ensure correct items are in boxes. • Created dual touch processing of all USDA inventory through both paper trail invoicing and systems invoicing. • Use “pick phase” for orders that are completed by fulfillment as a checkpoint before moving out of facility with verification by warehouse staff. • Implemented weekly USDA cycle counts and bimonthly total inventory counts. • Immediately stopped transferring unaccounted for items or inventory shrink to the EFP. Best Practices • Maintain standing engagement with accounting/business consultants to review practices, resolve unique challenges, and obtain best practice updates. • Individually wrap TEFAP orders in Harvest Hope Florence facility per agency guidance. • Reached out to other state and regional food banks to learn inventory “best practices.” • Moved all USDA packing to Harvest Hope Greenville facility. • Centralized and created CSFP process expertise in one facility. • Engaged accounting and other professionals to help understand issues. Documentation of distribution of USDA foods to recipient agencies: • We have moved to a cloud-based system that allows real time tracking of agencies to maintain contractual records with our policy.