FINDING 2024-002 Subject: Economic Development Cluster - Reporting Federal Agency: Department of Commerce Federal Program: Economic Adjustment Assistance Assistance Listings Number: 11.307 Federal Award Number and Year (or Other Identifying Number): 06-79-06420 Compliance Requirement: Reporting Audit Findings: Material Weakness, Other Matters Condition and Context An effective system of internal controls was not in place at the City in order to ensure compliance with the grant agreement and the reporting compliance requirement. The grant agreement for the City's construction project states that the City is to submit a Federal Financial Report (SF-425) on a semi-annual basis. The SF-425 report includes, among other line items: cash receipts, cash disbursements, cash on hand, total federal funds authorized, and total recipient share required. Both of the submitted SF-425 reports were tested. Additionally, the City was required to submit progress reports on a quarterly basis. Two of the quarterly reports were selected for testing. Both the SF-425 reports and the quarterly progress reports were prepared and submitted by one employee of the City. Evidence of an established internal control over the reports tested was not available for audit. The data submitted in the SF-425 report submitted by the City for the reporting period ending on September 30, 2024, contained the following errors: Cash receipts were understated by $1,037,155. INDIANA STATE BOARD OF ACCOUNTS 19 CITY OF KOKOMO SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Cash disbursements were understated by $1,037,155. The lack of internal controls and noncompliance was isolated to the award 06-79-06420, EDA-Davis Road construction project. Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in 'Standards for Internal Control in the Federal Government' issued by the Comptroller General of the United States or the 'Internal Control Integrated Framework', issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). . . ." 2 CFR 200.302(b) states in part: "The financial management system of each non-Federal entity must provide for the following (see §§ 200.334, 200.335, 200.336, and 200.337): (1) Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, Federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. (2) Accurate, current, and complete disclosure of the financial results of each Federal award or program in accordance with the reporting requirements set forth in §§ 200.328 and 200.329. If a Federal awarding agency requires reporting on an accrual basis from a recipient that maintains its records on other than an accrual basis, the recipient must not be required to establish an accrual accounting system. This recipient may develop accrual data for its reports on the basis of an analysis of the documentation on hand. . . . (3) Records that identify adequately the source and application of funds for federallyfunded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation. . . ." Cause Embedded within a properly designed and implemented internal control system should be internal controls consisting of policies and procedures. Policies reflect the City's management statements of what should be done to effect internal controls, and procedures should consist of actions that would implement these policies. The errors were due to federal reimbursements not being included as cash receipts and cash disbursements in the SF-425 reports. INDIANA STATE BOARD OF ACCOUNTS 20 CITY OF KOKOMO SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Effect Without the proper implementation of an effectively designed system of internal controls over reporting, the City could not ensure that the reports submitted were accurate. In addition, not meeting the Economic Development Cluster reporting requirements increases the likelihood that the public will not have access to transparent and accurate information regarding expenditures of federal awards. Noncompliance with the provisions of federal statutes, regulations, and the terms and conditions of the federal award could result in the loss of future federal funding to the City. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the City design and implement a proper system of internal controls, including policies and procedures, to ensure that the City provides the Department of Commerce with complete and accurate information for the SF-425 and quarterly reports. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.