Audit 410535

MW-2024-010 Lack of Proper Controls Over Compliance for Purchases and Approvals Federal Program Information Federal Agency: U.S. Department of Education Award Name: COVID-19 – Education Stabilization Fund Assistance Listing Number: 84.425D, 84.425U Award Year: 2021 Compliance Requirement: Activities Allowed or Unallowed, Allowable Costs/Cost Principles Type of Finding Compliance Internal Control Over Compliance – Material Weakness Criteria or Specific Requirement Per 2 CFR 200.403, costs charged to federal awards must be necessary, reasonable, allocable, and adequately documented. Additionally, financial management systems are required to provide effective internal controls over federal awards, which requires the City to establish and maintain internal controls that provide reasonable assurance of compliance. Sound internal control practices require proper review and approval of expenditures and purchase orders, and adequate segregation of duties (SOD) to prevent and detect errors or misuse of funds. The City’s internal policies require the Business Administrator to approve purchase orders. Condition and Context During testing of 33 vendor transactions, the City was unable to provide approved purchase orders for 16 transactions. In addition, 4 purchase orders were approved by an individual different from the Business Administrator. The City was also unable to provide approved invoices for 7 transactions. Further, 9 invoices were approved by the same individual responsible for the purchase order, indicating a lack of segregation of duties. These issues indicate that key controls over authorization and segregation of duties were not operating effectively. Cause The City did not maintain or enforce adequate internal controls to ensure allowability of costs. Specifically, established approval controls were not consistently performed or documented, segregation of duties was not appropriately designed or implemented, and oversight procedures were insufficient to ensure compliance with internal policies. Effect or Potential Effect Without proper documentation and adherence to the review and approval process, there is an increased risk of unauthorized or inappropriate expenditures. This could lead to financial mismanagement and non-compliance with funding agency requirements, potentially resulting in funding disallowances. Questioned Costs Although the control deficiencies were significant, no questioned costs are reported, as we were able to obtain sufficient supporting documentation to conclude that the tested expenditures were allowable, reasonable, and allocable. Identification as a Repeat Finding This is a repeat of finding MW-2023-03 as it relates to purchase order approvals. Recommendation We recommend that the City reinforces the importance of following established internal control procedures for reviewing and approving all expenditures. This can be achieved through regular training for staff involved in the procurement process and periodic audits to ensure compliance. Additionally, implementing a centralized document retention system for purchase orders, invoices and related documents will help in maintaining proper records and facilitating easier retrieval during audits. Views of Responsible Official Management’s views and corrective action plan is included at the end of this report.