Audit 354800

Criteria: According to Generally Accepted Accounting Principles (GAAP), liabilities should be recorded accurately and in the correct accounting period. Internal control procedures should ensure the accuracy, completeness, and proper cutoff of accounts payable. An effective reconciliation and review process should be implemented to detect and correct errors in a timely manner. Condition: During our audit of the Organization we noted that the Accounts Payable subsidiary ledger was in agreement with the general ledger control account. However, the underlying balances within the subsidiary ledger included errors such as duplicate vendor invoices, incorrect amounts recorded, and transactions recorded in the wrong period. Cause: The discrepancies were primarily due to inadequate review and reconciliation procedures over the Accounts Payable detail. The organization lacked sufficient review procedures and monitoring controls over the A/P recording process. Vendor invoices were not adequately reviewed for duplication or accuracy, and there was no formal process for cut-off testing during month-end or year-end close. Management did not identify or correct entries and recording errors. Effect: The financial statements contained misstatements related to accounts payable, which required adjustment to fairly present the liability balance as of year-end. This also impacted the current and prior year expense recognition. Recommendation: We recommend management strengthen the review and reconciliation controls over the Accounts Payable ledger, including periodic review for duplicate entries, vendor invoice validation, and cut-off. Internal controls can be enhanced over the accounts payable process by: • Implementing detailed, documented reviews of vendor invoices for accuracy and duplication. • Establishing formal cutoff procedures and ensuring that all obligations are recorded during the financial close. • Performing monthly reconciliations that extend beyond matching the A/P ledger to the G/L and instead validate individual vendor balances.

Criteria: Under Accounting Standards Update (ASU) 2016-14, not-for-profit entities are required to present expenses by both natural and functional classification, and to disclose the methods used to allocate costs among program services and supporting activities. Management must exercise judgment in selecting reasonable, consistent, and supportable allocation methodologies. In addition, the organization should maintain written policies and controls over the application of allocation methods to ensure reliable financial reporting. Condition: The Organization did not allocate joint or shared costs (e.g., occupancy, personnel, administrative services) among program and supporting activities in accordance with an implemented allocation plan. In addition, a newly established program did not include costs associated with general oversight and management, despite shared staffing functions. No documented allocation methodology or policy was in place at the time of audit. Context: Costs that are shared across functional categories, such as salaries, rent, or general office expenses, were recorded directly to a single function or not allocated at all. This resulted in financial statement presentations that may not accurately reflect the costs of services provided across the Organization’s activities. The Organization currently has a written prototype of a cost allocation plan; however, it has not been customized to the entity, nor does the Organization perform time studies or use analyses to support allocation decisions. Effect: The financial statements are not fully presented in conformity with U.S. Generally Accepted Accounting Principles and the guidance provided in ASU 2016-14. This may impair the ability of management and those charged with governance to understand the Organization’s full cost structure and program efficiency and could lead to misinterpretation by users of the financial statements. Cause: Management has not fully implemented financial reporting policies and internal controls to ensure the application of a reasonable, documented, and consistently applied allocation methodology for shared or joint costs. Recommendation: We recommend that the Organization adopt a formal cost allocation policy in compliance with ASU 2016-14. This policy should outline methodologies for allocating personnel, occupancy, and other shared costs across functions, based on time studies, usage metrics, or other reasonable bases. We also recommend management ensure staff are trained on expense allocation principles and incorporate periodic reviews to assess consistency and compliance with the policy. These improvements will support accurate functional expense reporting and better align the Organization’s financial reporting practices with U.S. GAAP.

Questioned Costs: $44,046 - The overbilled amount has been reclassified to a liability to the funder but has not been repaid or settled. Criteria: In accordance with 2 CFR § 200.403 and 2 CFR § 200.405, costs charged to federal awards must be allowable, allocable, and necessary to the performance of the federal award. Under the terms of a cost-reimbursement federal contract, as governed by 2 CFR § 200.403, § 200.404, and § 200.405, all costs charged to a federal award must be: • Actually incurred, • Allocable to the program, • Allowable under federal cost principles, and • Supported by adequate documentation. Under 2 CFR § 200.414 indirect costs may only be charged based on an approved rate (e.g., NICRA or de minimis), applied to the proper base and only if such costs are actually incurred during the performance period. Billing the full invoice amount of shared costs without allocating based on an approved indirect cost rate is not compliant with Uniform Guidance. Condition: The Organization billed indirect costs totaling $45,096 to a federal cost-reimbursement contract, despite not having incurred qualifying indirect costs during the contract period. The Organization charged entire invoice amounts for shared indirect costs. The billed amounts were based solely on the approved indirect cost rate applied to direct cost invoices, however, there is a maximum of $1,050 in actual indirect expenses for administrative support, or other shared costs incurred or allocated. Cause: The Organization misinterpreted the cost allocation rules and did not have an adequate process for applying the approved indirect cost rate. Billing practices defaulted to charging the entire invoice amount to federal awards when costs benefitted multiple programs. The Organization lacked adequate controls over indirect cost invoicing and did not perform timely reconciliations between budgeted and actual costs incurred. The outside accountant relied on budgeted percentages rather than actual expenses, and there was no final adjustment process in place to reconcile at year-end. Effect: The Organization received $44,046 in federal funds that were not supported by actual indirect costs incurred. These funds represent unallowable costs and are considered questioned costs under the Uniform Guidance. Identification of Repeat Finding ☐ Yes  ☑ No Recommendation: We recommend that the Organization: • Implement policies and procedures to reconcile indirect costs billed to actual costs incurred. • Implement a post-invoicing reconciliation process to compare actual indirect costs with amounts billed. • Ensure that all invoicing for federal awards complies with the approved indirect cost rate agreement. • Return the $44,046 of unexpended indirect cost reimbursements to the granting agency. • Provide additional training to accounting and grants management staff on the treatment of indirect costs under 2 CFR Part 200.

Questioned Costs: $88,135 Criteria: In accordance with 2 CFR § 200.403–.405, costs charged to federal awards must be allowable, allocable, and supported by valid documentation. Additionally, under 2 CFR § 200.318–.320, all contracts must be awarded with clear terms and timeframes and must be executed prior to the provision of goods or services. For subawards, 2 CFR § 200.331 requires that subrecipient agreements be in writing and include all legally required terms and conditions. Payments made outside the terms of a written, active contract — particularly beyond expiration dates — may be deemed unallowable due to lack of legal obligation and documentation. Condition: Of the ten contracts selected for testing, seven were expired at the time payments were made. In total, the Organization paid $88,135 for services rendered beyond the contract end dates, including payments to one subrecipient and multiple consultants or contractors. The Organization indicated that all payments were budgeted within the approved federal grant agreements; however, these payments were not supported by amendments, extensions, or new agreements authorizing continued work or compensation. Additionally, in four additional instances, one selected for testing, contracts specified hourly or deliverable rates and defined service periods but contained inaccurate or inconsistent total compensation amounts. One of four contracts made payments under these agreements that exceeded the stated contract total. Overall, the discrepancies created ambiguity about the authorized funding limit and raise concerns about enforceability and allowability of the costs under federal award terms. Cause: The Organization did not have sufficient procedures in place to monitor contract expiration dates or to ensure that updated agreements were executed before authorizing payments. In these cases, services continued based on verbal agreements or historical practice rather than a valid, enforceable contract. Effect: As a result, $88,135 in costs were incurred and charged to the federal grant without a valid contractual basis. Even though the costs were budgeted, the lack of a valid, active contract invalidates the legal obligation required for allowability under 2 CFR § 200.403 and § 200.405. Therefore, the costs are questioned pending resolution with the federal awarding agency. Furthermore, the absence of executed agreements represents a significant internal control deficiency and increases the risk of unauthorized or disputed expenditures. The inconsistencies in contractual rates expose the Organization to the risk of paying amounts not clearly authorized by written agreements and may result in questioned or disallowed costs, especially if contract limits are exceeded. Weaknesses in contract drafting and review also constitute a significant deficiency in internal control over compliance. Identification of Repeat Finding: ☐ Yes  ☑ No Recommendation: We recommend that the Organization: • Develop and implement a contract tracking system to monitor start and end dates. • Require that all contracts, extensions, and amendments be executed before services are rendered or payments are issued. • Provide training to program and procurement staff on federal procurement standards and contract management. • Review existing contracts to ensure compliance and take corrective action for any others that may have expired. • Work with the awarding agency to determine whether any portion of the $88,135 must be refunded.

Criteria: According to Generally Accepted Accounting Principles (GAAP), liabilities should be recorded accurately and in the correct accounting period. Internal control procedures should ensure the accuracy, completeness, and proper cutoff of accounts payable. An effective reconciliation and review process should be implemented to detect and correct errors in a timely manner. Condition: During our audit of the Organization we noted that the Accounts Payable subsidiary ledger was in agreement with the general ledger control account. However, the underlying balances within the subsidiary ledger included errors such as duplicate vendor invoices, incorrect amounts recorded, and transactions recorded in the wrong period. Cause: The discrepancies were primarily due to inadequate review and reconciliation procedures over the Accounts Payable detail. The organization lacked sufficient review procedures and monitoring controls over the A/P recording process. Vendor invoices were not adequately reviewed for duplication or accuracy, and there was no formal process for cut-off testing during month-end or year-end close. Management did not identify or correct entries and recording errors. Effect: The financial statements contained misstatements related to accounts payable, which required adjustment to fairly present the liability balance as of year-end. This also impacted the current and prior year expense recognition. Recommendation: We recommend management strengthen the review and reconciliation controls over the Accounts Payable ledger, including periodic review for duplicate entries, vendor invoice validation, and cut-off. Internal controls can be enhanced over the accounts payable process by: • Implementing detailed, documented reviews of vendor invoices for accuracy and duplication. • Establishing formal cutoff procedures and ensuring that all obligations are recorded during the financial close. • Performing monthly reconciliations that extend beyond matching the A/P ledger to the G/L and instead validate individual vendor balances.

Criteria: Under Accounting Standards Update (ASU) 2016-14, not-for-profit entities are required to present expenses by both natural and functional classification, and to disclose the methods used to allocate costs among program services and supporting activities. Management must exercise judgment in selecting reasonable, consistent, and supportable allocation methodologies. In addition, the organization should maintain written policies and controls over the application of allocation methods to ensure reliable financial reporting. Condition: The Organization did not allocate joint or shared costs (e.g., occupancy, personnel, administrative services) among program and supporting activities in accordance with an implemented allocation plan. In addition, a newly established program did not include costs associated with general oversight and management, despite shared staffing functions. No documented allocation methodology or policy was in place at the time of audit. Context: Costs that are shared across functional categories, such as salaries, rent, or general office expenses, were recorded directly to a single function or not allocated at all. This resulted in financial statement presentations that may not accurately reflect the costs of services provided across the Organization’s activities. The Organization currently has a written prototype of a cost allocation plan; however, it has not been customized to the entity, nor does the Organization perform time studies or use analyses to support allocation decisions. Effect: The financial statements are not fully presented in conformity with U.S. Generally Accepted Accounting Principles and the guidance provided in ASU 2016-14. This may impair the ability of management and those charged with governance to understand the Organization’s full cost structure and program efficiency and could lead to misinterpretation by users of the financial statements. Cause: Management has not fully implemented financial reporting policies and internal controls to ensure the application of a reasonable, documented, and consistently applied allocation methodology for shared or joint costs. Recommendation: We recommend that the Organization adopt a formal cost allocation policy in compliance with ASU 2016-14. This policy should outline methodologies for allocating personnel, occupancy, and other shared costs across functions, based on time studies, usage metrics, or other reasonable bases. We also recommend management ensure staff are trained on expense allocation principles and incorporate periodic reviews to assess consistency and compliance with the policy. These improvements will support accurate functional expense reporting and better align the Organization’s financial reporting practices with U.S. GAAP.

Questioned Costs: $44,046 - The overbilled amount has been reclassified to a liability to the funder but has not been repaid or settled. Criteria: In accordance with 2 CFR § 200.403 and 2 CFR § 200.405, costs charged to federal awards must be allowable, allocable, and necessary to the performance of the federal award. Under the terms of a cost-reimbursement federal contract, as governed by 2 CFR § 200.403, § 200.404, and § 200.405, all costs charged to a federal award must be: • Actually incurred, • Allocable to the program, • Allowable under federal cost principles, and • Supported by adequate documentation. Under 2 CFR § 200.414 indirect costs may only be charged based on an approved rate (e.g., NICRA or de minimis), applied to the proper base and only if such costs are actually incurred during the performance period. Billing the full invoice amount of shared costs without allocating based on an approved indirect cost rate is not compliant with Uniform Guidance. Condition: The Organization billed indirect costs totaling $45,096 to a federal cost-reimbursement contract, despite not having incurred qualifying indirect costs during the contract period. The Organization charged entire invoice amounts for shared indirect costs. The billed amounts were based solely on the approved indirect cost rate applied to direct cost invoices, however, there is a maximum of $1,050 in actual indirect expenses for administrative support, or other shared costs incurred or allocated. Cause: The Organization misinterpreted the cost allocation rules and did not have an adequate process for applying the approved indirect cost rate. Billing practices defaulted to charging the entire invoice amount to federal awards when costs benefitted multiple programs. The Organization lacked adequate controls over indirect cost invoicing and did not perform timely reconciliations between budgeted and actual costs incurred. The outside accountant relied on budgeted percentages rather than actual expenses, and there was no final adjustment process in place to reconcile at year-end. Effect: The Organization received $44,046 in federal funds that were not supported by actual indirect costs incurred. These funds represent unallowable costs and are considered questioned costs under the Uniform Guidance. Identification of Repeat Finding ☐ Yes  ☑ No Recommendation: We recommend that the Organization: • Implement policies and procedures to reconcile indirect costs billed to actual costs incurred. • Implement a post-invoicing reconciliation process to compare actual indirect costs with amounts billed. • Ensure that all invoicing for federal awards complies with the approved indirect cost rate agreement. • Return the $44,046 of unexpended indirect cost reimbursements to the granting agency. • Provide additional training to accounting and grants management staff on the treatment of indirect costs under 2 CFR Part 200.

Questioned Costs: $88,135 Criteria: In accordance with 2 CFR § 200.403–.405, costs charged to federal awards must be allowable, allocable, and supported by valid documentation. Additionally, under 2 CFR § 200.318–.320, all contracts must be awarded with clear terms and timeframes and must be executed prior to the provision of goods or services. For subawards, 2 CFR § 200.331 requires that subrecipient agreements be in writing and include all legally required terms and conditions. Payments made outside the terms of a written, active contract — particularly beyond expiration dates — may be deemed unallowable due to lack of legal obligation and documentation. Condition: Of the ten contracts selected for testing, seven were expired at the time payments were made. In total, the Organization paid $88,135 for services rendered beyond the contract end dates, including payments to one subrecipient and multiple consultants or contractors. The Organization indicated that all payments were budgeted within the approved federal grant agreements; however, these payments were not supported by amendments, extensions, or new agreements authorizing continued work or compensation. Additionally, in four additional instances, one selected for testing, contracts specified hourly or deliverable rates and defined service periods but contained inaccurate or inconsistent total compensation amounts. One of four contracts made payments under these agreements that exceeded the stated contract total. Overall, the discrepancies created ambiguity about the authorized funding limit and raise concerns about enforceability and allowability of the costs under federal award terms. Cause: The Organization did not have sufficient procedures in place to monitor contract expiration dates or to ensure that updated agreements were executed before authorizing payments. In these cases, services continued based on verbal agreements or historical practice rather than a valid, enforceable contract. Effect: As a result, $88,135 in costs were incurred and charged to the federal grant without a valid contractual basis. Even though the costs were budgeted, the lack of a valid, active contract invalidates the legal obligation required for allowability under 2 CFR § 200.403 and § 200.405. Therefore, the costs are questioned pending resolution with the federal awarding agency. Furthermore, the absence of executed agreements represents a significant internal control deficiency and increases the risk of unauthorized or disputed expenditures. The inconsistencies in contractual rates expose the Organization to the risk of paying amounts not clearly authorized by written agreements and may result in questioned or disallowed costs, especially if contract limits are exceeded. Weaknesses in contract drafting and review also constitute a significant deficiency in internal control over compliance. Identification of Repeat Finding: ☐ Yes  ☑ No Recommendation: We recommend that the Organization: • Develop and implement a contract tracking system to monitor start and end dates. • Require that all contracts, extensions, and amendments be executed before services are rendered or payments are issued. • Provide training to program and procurement staff on federal procurement standards and contract management. • Review existing contracts to ensure compliance and take corrective action for any others that may have expired. • Work with the awarding agency to determine whether any portion of the $88,135 must be refunded.