THIS FINDING CONTAINS BOTH A MATERIAL WEAKNESS AND A SIGNIFICANT DEFICIENCY - DUE TO LIMITATIONS in SF-SAC Section 3 this is only listed as a material weakness in that form. 2022-002 The District did not have adequate internal controls for ensuring compliance with federal procurement and suspension and debarment requirements, and it did not comply with federal suspension and debarment requirements. Assistance Listing Number and Title: 21.027 COVID-19 – Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: N/A Pass-through Entity Name: Washington State Department of Commerce Pass-through Award/Contract Number: 22-96720-205 Known Questioned Cost Amount: $0 Prior Year Audit Finding: N/A Background The purpose of the Coronavirus State and Local Fiscal Recovery Funds is to respond to the COVID-19 pandemic’s negative effect on public health and the economy, provide government services to the extent COVID-19 caused a reduction in revenues collected, make necessary investments in water, sewer or broadband infrastructure, provide emergency relief from natural disasters or their negative economic impacts, fund projects eligible under certain programs administered by the U.S. Department of Transportation through three pathways and fund projects eligible under the programs stablished in Title I of the Housing and Community Development Act of 1974. In 2022, the District spent $947,806 on program funds for water/sewer broadband infrastructure. Federal regulations require recipients to establish, document and maintain effective internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Suspension and debarment Federal requirements prohibit recipients from contracting with or purchasing from parties suspended or debarred from doing business with the federal government. Whenever the District enters into contracts or purchases goods and services that it expects to equal or exceed $25,000, paid all or in part with federal funds, it must verify the contractors are not suspended, debarred or otherwise excluded from participating in federal programs. The District may verify this by obtaining a written certification from the contractor, adding a clause or condition into the contract that states the contractor is not suspended or debarred, or checking for exclusion records in the U.S. General Services Administration’s System for Award Management at SAM.gov. The District must verify this before entering into the contract, and must maintain documentation demonstrating compliance with this federal requirement. Procurement Federal regulations require recipients to follow their own documented procurement procedures, which must conform to the Uniform Guidance procurement standards found in 2 CFR § 200.318-327. The procedures must reflect the most restrictive of federal, state or local procurement thresholds and methods. Federal regulations also require recipients to maintain written standards of conduct that cover conflicts of interest and govern the actions of employees involved in selecting, awarding or administrating contracts procured with federal funds. Description of Condition Suspension and debarment Although the District has a process to verify the suspension and debarment for contractors it pays more than $25,000, our audit found the District did not follow this process and did not document its verification that the contractor we tested was not suspended or debarred before purchasing from them. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. Procurement In addition, our audit found the District did not have internal controls for ensuring compliance with federal procurement requirements. Specifically, the District does not have written procurement procedures as federal regulations require and does not have a standards of conduct policy covering conflicts of interest for employees or agents who award contracts, as federal regulations require. We consider this deficiency in internal controls to be a significant deficiency. Cause of Condition Suspension and debarment Although District staff said they were aware of the requirements, they could not locate documentation to show they verified the contractor suspension and debarment status. Procurement Because the District does not regularly manage federal programs, staff were unaware of federal procurement requirements and did not know they needed written procurement procedures and standards of conduct. Effect of Condition Suspension and debarment The District did not obtain written certifications, insert clauses into the contracts, or check SAM.gov to verify the contractor it paid $871,320 with federal funds was not suspended or debarred before contracting. Without adequate internal controls, the District increases its risk of awarding federal funds to contractors that are excluded from participating in federal programs. Any payments the District made to an ineligible party would be unallowable, and the awarding agency could potentially recover them. We subsequently verified the contractor was not suspended and debarred. Therefore, we are not questioning costs. Procurement Without written policies and procedures that conform to federal procurement standards, the District is at an increased risk of not complying with the most restrictive of federal, state or local procurement methods and standards of conduct requirements when using federal funds. Although the District did not have written policies or procedures for procurement in place, it received guidance from the federal grantor and complied with procurement requirements for the competitive solicitation and selection of the public works contract we tested. Recommendation Suspension and debarment We recommend the District strengthen its internal controls to verify all contractors it pays $25,000 or more, all or in part with federal funds, are not suspended or debarred from participating in federal programs and maintain documentation demonstrating compliance with this requirement. Procurement We also recommend the District establish internal controls to comply with federal procurement requirements, including establishing written procurement and standards of conduct procedures that conform to federal procurement standards in Uniform Guidance (2 CFR § 200.318-327). District’s Response The District plans to follow the Washinton State Auditors Office recommendation to formally adopt a procurement and debarment polices by July 2026. The District recognizes it is in the best interests of the public to have documented policies and procedures, and those policies shall be adhered to. The District is grateful that $947,806 in grant assistance was provided, as passthrough funds that assisted an affordable housing development, and wants to ensure the public that processes and procedures were in place that minimized the risk of disbursing funds to a debarred contractor. The District’s bid documents, signed contracts, signed certifications, filings with WA State L&I, and outsourced bidder qualification review ensured qualifying bidder requirements were met prior to this projects commencement. These actions, which the SAO acknowledges did occur, address the concerns the SAO has identified. Still, the District agrees improvements can occur, and this will be addressed in a timely manner. Policies will be adopted that strengthen controls, which includes increased documentation that meets recommended State and Federal guidelines. Auditor’s Remarks We appreciate the steps the District is taking to resolve this issue. We will review the condition during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. Title 2 CFR Part 180, OMB Guidelines to Agencies on Governmentwide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689. Title 2 CFR Part 200, Uniform Guidance, section 318, General procurement standards, establishes requirements for written procedures.