Information on the federal program: Subject: Head Start Cluster – Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Equipment and Real Property Federal Agency: Department of Health and Human Services Federal Program: Head Start Cluster Assistance Listing Number: 93.600 Federal Award Numbers and Years (or Other Identifying Numbers): 05HP000285 Compliance Requirement: Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Equipment and Real Property Audit Finding: Material Weakness, Other Matters Criteria: 45 CFR 75.308(c)(1) states in part: "For non-construction Federal awards, recipients must request prior approval from HHS awarding agencies for one or more of the following program or budget-related reasons: . . . (xi) The recipient wishes to dispose of, replace, or encumber title to real property, equipment, or intangible property that are acquired or improved with a Federal award. . . ." 45 CFR 75.323 states: "Real property, equipment, and intangible property, that are acquired or improved with a Federal award must be held in trust by the non-Federal entity as trustee for the beneficiaries of the project or program under which the property was acquired or improved. The HHS awarding agency may require the non-Federal entity to record liens or other appropriate notices of record to indicate that personal or real property has been acquired or improved with a Federal award and that use and disposition conditions apply to the property." 2 CFR 200.313(d) states in part: "Management requirements. Procedures for managing equipment (including replacement equipment), whether acquired in whole or in part under a Federal award, until disposition takes place will, as a minimum, meet the following requirements: (1) Property records must be maintained that include a description of the property, a serial number or other identification number, the source of funding for the property (including the FAIN), who holds title, the acquisition date, and cost of the property, percentage of Federal participation in the project costs for the Federal award under which the property was acquired, the location, use and condition of the property, and any ultimate disposition data including the date of disposal and sale price of the property. (2) A physical inventory of the property must be taken and the results reconciled with the property records at least once every two years. (3) A control system must be developed to ensure adequate safeguards to prevent loss, damage, or theft of the property. Any loss, damage, or theft must be investigated. (4) Adequate maintenance procedures must be developed to keep the property in good condition. Condition: An effective internal control system was not in place at the Unit to ensure compliance with requirements related to the grant agreement and the equipment compliance requirements related to prior approval, property records, and physical inventory. Cause: The Unit's management had not developed a system of internal controls to ensure compliance with the equipment requirements. Effect: The failure to establish an effective internal control system allowed noncompliance with the grant agreement and the compliance requirements. A lack of segregation of duties within an internal control system could have also allowed the misuse and mismanagement of federal funds and assets by not having proper oversight, reviews, and approvals over the activities of the programs. Questioned Costs: $160,847. Context: During testing, we noted the Unit spent $160,847 on flooring upgrades which exceeded the $5,000 federal equipment and real property threshold. However, the Unit did not perform any of the required federal compliance steps related to the flooring purchase (getting approval before making the purchase, adding the flooring purchase to the capital asset listing, and performing an inventory of the flooring). The Unit believed the flooring purchase did not require approval because it does not meet the criteria of a major renovation under Head Start guidelines. However, as noted in the criteria above, the flooring still qualifies as an equipment and real property purchase. Identification as a repeat finding, if applicable: No. Recommendation: We recommend that the Unit perform the required steps to maintain compliance with the federal equipment compliance requirements.