The Metcalfe County Fiscal Court Failed To Implement Adequate Controls Over Federal Expenditures Federal Program: Assistance Listing Number #14.228 COVID-19 - Community Development Block Grants/State’s Program and Non-Entitlement Grants in Hawaii Award Number and Year: 20C-202, 2020 Name of Federal Agency and Pass-Through Agency: US Department of Housing and Urban Development, Passed Through Kentucky Department for Local Government Compliance Requirements: Activities Allowed & Allowable Costs, Special Tests and Provisions Type of Finding: Material Weakness COVID Related: Yes Amount of Questioned Costs: None noted Identification of Questioned Costs and How Computed: None noted Repeat Finding: Not repeat finding Condition and Context The Metcalfe County Fiscal Court failed to implement adequate internal controls over the Community Development Block Grants/State’s Program and Non-Entitlement Grants in Hawaii – COVID-19 (CDBG-CV) program to ensure all compliance requirements were being met and that record keeping was being done correctly. The fiscal court contracted with a third party that oversaw the planning, design, inspection services, environmental services, and construction administration for the project without any oversight by the fiscal court. The fiscal court did not receive copies of invoices or certified payroll records from the contractor or third-party administrator to review before disbursements were made to the contractor. During testing of the federal program compliance, auditors obtained invoices and certified payroll records from the third-party administrator and concluded that the fiscal court was in compliance with federal requirements. Cause The fiscal court relied on a third-party administrator for the recording of all CDBG-CV project activity. The fiscal court also relied on the third-party to satisfy compliance requirements and failed to establish any review process or independent internal controls that verified that activities performed and amounts charged to the program were allowable under all applicable compliance requirements. Effect By relying on a third-party administrator’s controls, and without enacting any internal controls, the county increased the risk of misappropriation of funds and noncompliance with federal grant guidelines. This deficiency could have potentially led to the repayment of questioned costs and less federal funding in the future. Criteria 2 CFR § 200.303, titled Internal Controls, states the non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the recipient or subrecipient is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should align with the guidance in “Standards for Internal Control in the Federal Government,” issued by the Comptroller General of the United States (Green Book) or the “Internal Control Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Recommendations We recommend the Metcalfe County Fiscal Court establish internal controls over the federal expenditure process and ensure all activity related to federal expenditures is reviewed for accuracy and compliance.