Audit 370140

Criteria The Uniform Guidance (2 CFR §200.303) requires non-federal entities to establish internal controls to ensure compliance with federal statutes, regulations, and the terms and conditions of federal awards. In addition, federal guidelines require the Organization to supervise the conduct of its volunteers, business partners, contractors and others aiding in administering its federal programs. Condition Internal controls over the SBRL program do not adequately regulate outcomes to grant recipients or provide sufficient disclosure of the Small Business Resiliency Loan program costs, benefits and requirements for participants. • The structure and terms of the grant program are confusing and there is no evidence the loan terms, associated costs and grant benefits were consistently communicated to borrowers. • Loan applications, underwriting materials and borrower training about program features, costs and benefits are decentralized across multiple Small Business Resource Networks (SBRNs), resulting in inconsistent loan and grant application submissions. • Borrowers with equal loan amounts received varying repayment terms, with some receiving longer terms and additional grant income without clear disclosure or equitable access. • Grant recipients were not clearly or consistently informed of the federal income tax consequences resulting from distributions out of the Collateral Account, which was established by the Benefit Distribution Agreement, when such distributions were used to cover missed loan payments and the end-of-loan term distributions. •There is no evidence these disparities were sufficiently explained to borrowers, leading to potential unequal treatment and potential financial harm. Cause The entity lacks standardized procedures for loan term disclosures, centralized underwriting protocols, and consistent communication of borrower grant benefits and federal income tax implications. There is insufficient oversight to ensure equitable treatment and transparency across SBRNs. Effect • Grant recipients may have been misled or disadvantaged due to unclear or unequal loan terms. • Grant funds may have been inequitably distributed, raising concerns about questioned costs and compliance with federal award conditions. Questioned Costs Estimated questioned costs include: • Loan disbursements with varying repayment terms: $4,755,500. Recommendation • Implement standardized loan application and cash flow analysis used to make underwritingdecisions and disclosures across all SBRNs. • Centralize or harmonize program training for SBRN and program administrators to ensureconsistent borrower treatment. • Clearly communicate eligibility for extended repayment terms and grant income Views of Responsible Officials Based on feedback and information available to the GoWest Foundation, the Foundation believes that the structure and terms of the grant program were less confusing to participants who spent time discussing it with the SBRN organizations than to an outside observer without the benefit of such contact. SBRN organizations were provided with uniform training materials and resources and each borrower completed the same application. The program had two primary objectives: 1) provide financial assistance to businesses treated as suffering disproportionate impacts from the pandemic (based on criteria established by the SLFRF program); and 2) help those businesses build or enhance their creditworthiness and their ability to navigate relationships with commercial lenders. The Foundation’s contact with borrowers and feedback from SBRN organizations reveals that a number of participants had a background of avoiding use of credit and suspicion of the financial services industry. Many of those participants self-limited their participation accordingly. In addition, different businesses experienced differing impacts from the pandemic and differing needs for assistance. GoWest worked diligently with the SBRN organizations to be sure that applicants received benefits consistent with their need and with the program terms. It may be that processes and procedures may not have been documented sufficiently to provide assurance to auditors. Similarly, individual case files may not have adequately reflected all of the supporting information that explained differences in levels of participation. However, the Foundation does not believe that these deficiencies had a material impact on equitable distribution of funds or on achievement of the desired results.

Criteria Under the American Rescue Plan Act of 2021, as implemented by the U.S. Department of the Treasury through 31 CFR Part 35 and the 2022 Final Rule, SLFRF recipients must establish and maintain effective internal controls to ensure that funds are used for eligible purposes and that eligibility determinations are based on substantiated, risk-mitigated criteria. The 2024 SLFRF Compliance Supplement designates the program as “higher risk,” requiring enhanced scrutiny of eligibility and fraud prevention measures. Condition The program relied extensively on self-attestation by applicants as the standard method of verifying eligibility, without requiring supporting documentation or conducting verification procedures. These practices were applied broadly and not limited to exceptional cases. Cause Program administrators adopted simplified eligibility procedures including approved use of geographic indicators such as zip codes to expedite benefit delivery. However, they did not implement compensating controls or verification mechanisms to mitigate the increased risk of fraud and ineligible payments associated with self-attestation and geographic proxies. Effect The use of self-attestation as primary eligibility tools may result in: • Ineligible recipients receiving benefits. • Disparate treatment of similarly situated individuals outside designated ZIP codes. • Increased fraud risk, particularly in a program already designated as high-risk. • Noncompliance with federal eligibility and internal control requirements under Uniform Guidance (2 CFR §200.303 and §200.518). Questioned Costs Estimated questioned costs include: • One Hundred Twenty-Six loan disbursements and grant awards using self-attestation eligibility criteria: $1,983,326. Recommendation The entity should: 1. Reassess eligibility criteria to ensure they are substantiated, equitable, and compliant with federal requirements. 2. Limit self-attestation to exceptional cases and implement verification procedures for all standard applications. 3. Strengthen internal controls to detect and prevent fraud, including random audits, third-party verification, and data cross-checks. 4. Document eligibility determinations and maintain records to support compliance with SLFRF rules and audit standards. Views of Responsible Officials The Foundation recognizes that self-attestation regarding impact of the Covid pandemic carries some fraud risk. The self-attestation process was developed as directed by the Washington Department of Commerce (the state recipient that contracted with the Foundation) to permit businesses not located in a geographic area that was presumptively disproportionately affected by the pandemic to participate in the program. Participants were required to explain the pandemic impact that they suffered in sufficient detail as to allow verification. The process attempted to balance fraud prevention against the desire to streamline qualification and reduce barriers to participation. The Foundation recognizes that documentation of the evidence of pandemic related impacts for self-attestation borrowers could be better.