Audit 401413

2025-001: Material Weakness in Internal Control over Compliance – Financial Management Federal Program: Community Development Block Grant (CDBG) Cluster – CFDA No. 14.218 Federal Agency: U.S. Department of Housing and Urban Development (HUD) Assistance Listing Number: 14.218 Compliance Requirement: Financial Management Type of Finding: Material Weakness in Internal Control over Compliance Criteria: In accordance with 2 CFR §200.302, non-federal entities must maintain financial management systems that provide accurate, current, and complete disclosure of financial results and include effective control over and accountability for all funds, including cash and grant-related balances. Condition: The Organization did not perform timely reconciliations of grant revenue, receivable, and cash accounts, resulting in material discrepancies at year-end. Audit procedures identified material adjustments to grant-related accounts across multiple federal programs, as well as several large adjustments to cash balances due to duplicate and erroneous entries that were not identified through the Organization’s internal control processes. These adjustments were subsequently identified and recorded with the assistance of an external CPA firm after year-end; however, the corrections were not made in a timely manner and were not part of the Organization’s established internal control procedures, contributing to delays in the completion of the audit. Although the CDBG program did not have current-year activity, this control deficiency is entity-wide and affects the Organization’s ability to accurately account for federal awards, including the CDBG program. Cause: The condition appears to be due to insufficient internal controls over financial reporting, including lack of timely reconciliations, inadequate review of transactions, and insufficient oversight of cash activity. A contributing factor to these control deficiencies was significant staffing changes during the year, including the loss of key personnel and the death of the Organization’s founder, which impacted the Organization’s ability to maintain consistent financial management processes over federal awards. Effect: A material weakness in internal control over compliance existed, as there is a reasonable possibility that material noncompliance with federal financial management requirements would not be prevented or detected and corrected on a timely basis. Questioned Costs: None identified. Context: Material discrepancies were identified in grant-related accounts across multiple federal programs and in cash accounts, requiring audit adjustments to properly state balances. Recommendation: We recommend implementation of formal reconciliation procedures for all significant accounts, including monthly reconciliations of cash and grant-related accounts, assignment of responsibility, and documented supervisory review. Management should also implement controls to identify and prevent duplicate or erroneous entries. Views of Responsible Officials: Management has acknowledged the condition and has taken corrective actions, including engaging an external CPA firm, hiring new key accounting personnel, and implementing enhanced reconciliation and review procedures to strengthen internal controls.