Criteria: Effective internal control over financial reporting requires that management maintain complete and accurate accounting records and prepare financial statements, including all required disclosures, in accordance with the applicable financial reporting framework, and retain sufficient documentation to support governance activities. This includes maintaining complete Board meeting minutes and retaining documentation supporting the basis for compensation, including bonuses. Condition: The Organization does not maintain a complete general ledger or trial balance and does not track balance sheet accounts within its accounting system. The system used is limited to recording income and expense transactions and does not support the preparation of full financial statements. As a result, management does not prepare complete financial statements or related disclosures. Financial statements are prepared annually by a third-party accountant in connection with Form 990 preparation, with limited documented evidence of management review. In addition, the Organization does not consistently retain documentation supporting key governance and financial reporting activities. Specifically, complete Board meeting minutes were not available for all meetings held during the year, and documentation supporting the basis for employee compensation decisions, including performance evaluations and bonus determinations, is not maintained. Cause: This condition appears to result from reliance on an accounting system that is not designed to support full financial reporting, combined with insufficient expertise and lack of formal policies and procedures governing financial reporting, documentation retention, and review controls. Effect: The absence of complete accounting records and a formal financial reporting process significantly increases the risk that financial statements and related disclosures may be incomplete, inaccurate, or not in conformity with the applicable reporting framework. Errors or omissions may not be identified or corrected in a timely manner, resulting in a reasonable possibility of material misstatement. Additionally, the lack of complete Board meeting minutes reduces transparency over governance activities and limits the ability to demonstrate appropriate oversight of financial reporting matters. The absence of documentation supporting compensation decisions increases the risk that recorded expenses may not be adequately supported or consistently applied. Collectively, these deficiencies weaken the overall control environment. Recommendation: We recommend that the Organization implement a financial reporting process that includes maintaining a complete general ledger and trial balance, recording all balance sheet accounts, and preparing complete financial statements and disclosures on a periodic basis. Management should establish review procedures to ensure the accuracy and completeness of financial reporting, whether performed internally or with the assistance of external accountants. In addition, the Organization should implement formal policies and procedures requiring the preparation, approval, and retention of complete Board meeting minutes for all meetings, as well as the retention of supporting documentation for significant estimates and transactions, including compensation decisions and bonus determinations, to ensure that all amounts recorded in the financial statements are adequately supported. Management’s Response: Management agrees with the finding and acknowledges the limitations of its current financial reporting and documentation practices. Management indicates it will evaluate options to improve its accounting system and financial reporting capabilities, strengthen review procedures over financial statements prepared by external accountants, and implement policies to ensure that Board meeting minutes and supporting documentation for compensation decisions are properly maintained going forward.
Criteria: Effective internal control over financial reporting requires that key financial responsibilities, including authorization of transactions, recordkeeping, and custody of assets, be appropriately segregated among different individuals to reduce the risk of errors or fraud occurring and not being detected in a timely manner. Condition: The Executive Director is responsible for both the final approval and authorization of disbursements and the recording of transactions into the accounting system. These responsibilities represent incompatible duties that are not adequately segregated. Cause: This condition appears to result from limited staffing and a lack of formal controls to ensure appropriate segregation of duties within the financial reporting process. Effect: The concentration of authorization and recordkeeping responsibilities in a single individual increases the risk that errors, omissions, or unauthorized transactions could occur and not be detected in a timely manner. While the Board of Directors provides some level of oversight, such review is not sufficiently formalized or comprehensive to fully mitigate the control risk. Recommendation: We recommend that the Organization implement compensating controls to address the lack of segregation of duties, such as enhanced and documented review of disbursements and financial activity by an independent member of the Board of Directors, including periodic review of detailed financial reports, bank reconciliations, and supporting documentation. Management’s Response: Management agrees with the finding and indicates that, due to limited staffing, complete segregation of duties is not feasible; however, it will strengthen compensating controls by increasing the level of Board oversight and implementing more formalized review and approval procedures over financial activity.
Criteria: Uniform Guidance (2 CFR 200.302(b)(7) and 2 CFR 200.430) requires entities to establish and maintain effective internal control over federal awards, including ensuring that expenditures are properly authorized and supported by adequate documentation. Condition: During testing, the Organization was unable to provide documented evidence of disbursement approvals, as approvals are frequently communicated verbally or via text message and are not retained. In addition, the Organization was unable to provide employment agreements or other documentation supporting employee pay rates for individuals whose compensation was charged to the federal program. Cause: The condition appears to result from inadequate policies and procedures over documenting and retaining evidence of approval for expenditures, including both disbursement authorization and employee compensation arrangements, as well as a lack of formal controls requiring retention of such documentation. Effect: As a result, there is an increased risk that expenditures charged to federal programs may be unauthorized, improperly approved, unsupported, or not allowable under Uniform Guidance. The lack of documentation also limits the effectiveness of audit procedures and increases the likelihood that noncompliance could occur and not be detected. No questioned costs were identified as a result of this finding. Recommendation: We recommend that the Organization establish formal procedures requiring documented authorization for all disbursements and ensure that such approvals are retained in an organized and accessible manner. Additionally, the Organization should implement procedures requiring formal documentation of employee compensation arrangements, including established pay rates, and ensure that this documentation is consistently maintained and readily available for audit and compliance purposes. Management’s Response: Management agrees with the finding and indicates that it will implement formal approval procedures requiring documented authorization for all disbursements and will retain such documentation within its accounting records. Management also plans to implement standardized employment agreements and compensation authorization documentation for all employees and strengthen document retention practices to ensure compliance with federal requirements.
Criteria: Uniform Guidance (2 CFR 200.403) requires that costs charged to federal awards be allowable and consistent with the terms and conditions of the award, including any prior approval requirements for capital expenditures or significant property improvements. Condition: Testing identified that the Organization charged $4,074 to the federal program for an HVAC replacement that was not approved by the granting agency per the grant and did not appear to meet allowability requirements. Cause: The condition appears to result from inadequate controls over reviewing expenditures for compliance with grant terms and federal allowability requirements prior to charging costs to the program. Effect: As a result, the Organization charged an unallowable cost to the federal program, resulting in noncompliance with Uniform Guidance and grant requirements. Recommendation: We recommend that the Organization implement procedures to review all non-routine or capital-related expenditures for allowability and compliance with grant terms prior to charging such costs to federal awards, including obtaining required approvals where applicable. Management’s Response: Management agrees with the finding and indicates that it will implement additional review procedures to ensure that all expenditures charged to federal programs are evaluated for allowability and properly approved prior to being incurred.
Criteria: Uniform Guidance requires that when a non-federal organization owns a building, allowable facility costs charged to a federal award are generally limited to depreciation, properly computed and allocated to the benefiting programs. Charges equivalent to rent or mortgage principal payments are not an allowable method of recovering facility costs for owned property. Interest on borrowed capital is generally unallowable, except in limited circumstances and only when specific conditions are met under Uniform Guidance and applicable award terms. Condition: During testing and expanded procedures, it was identified that the Organization charged occupancy costs totaling $17,166 to the federal program for buildings it owns. The Organization developed and applied a methodology to calculate a fair market value rental rate for its facilities and charged this rate to the program. In addition, the Organization occasionally charged actual mortgage payments directly to the grant. These practices are not consistent with Uniform Guidance requirements for allowable occupancy costs. Cause: This condition appears to result from a misunderstanding of federal cost principles and reliance on informal guidance from external parties. Management indicated that it was advised that mortgage costs could not be charged, and subsequently developed a fair market value rental methodology based on discussions with other nonprofit organizations. However, the Organization did not establish controls to ensure that its methodology complied with Uniform Guidance. Effect: As a result, the Organization utilized an unallowable methodology to charge occupancy costs to the federal program, leading to noncompliance with federal requirements. The issue is pervasive in nature and resulted in questioned costs totaling $17,165.51. Recommendation: The Organization should discontinue charging rent equivalents or mortgage payment amounts to federal programs for owned facilities. Going forward, management should charge allowable facility costs using depreciation, computed in accordance with Uniform Guidance and properly allocated to benefiting programs. Management should also ensure that any interest costs charged to federal awards, if any, are specifically allowable under Uniform Guidance and the terms of the award and are supported by appropriate documentation and approvals. Management’s Response: Management acknowledged the finding and stated that the occupancy charges were intended to recover facility costs incurred in operating the federal program. Management indicated that policies and procedures will be updated to ensure compliance with Uniform Guidance requirements for charging facility costs to federal awards.
Criteria: Uniform Guidance (2 CFR 200.403 and 2 CFR 200.430) requires that costs charged to federal awards be properly classified, allowable, and reflect the nature of the expenditure. Compensation for personal services must be accurately categorized and charged to appropriate cost objectives. Condition: During testing, it was identified that the Organization recorded $2,143 of employee compensation, paid through its payroll process as a bonus or stipend, to a travel and development line item rather than classifying the cost as payroll-related expense. Cause: This condition appears to result from inadequate controls over the classification and coding of expenditures, as well as a lack of review procedures to ensure payroll-related costs are recorded in the appropriate accounts. Effect: As a result, $2,143 compensation costs were misclassified in the accounting records and improperly charged to the federal program under an incorrect cost category. This increases the risk that financial reports submitted for federal awards may be inaccurate and that costs may not be evaluated appropriately for allowability. Recommendation: We recommend that the Organization implement procedures to ensure that all payroll-related costs, including bonuses and stipends, are properly classified within the accounting system. Management should also establish review controls over coding of expenditures to ensure consistency with Uniform Guidance and grant reporting requirements. Management’s Response: Management agrees with the finding and indicates that it will strengthen review procedures over expense classification and ensure that compensation costs are properly recorded within payroll-related accounts going forward.