Audit 411080

Criteria: Uniform Guidance (2 CFR §200.510(b)) requires the Schedule of Expenditures of Federal Awards (SEFA) to include, for each federal program, the amount provided to subrecipients from federal awards when the auditee passes federal funds through to another entity. 2 CFR 200.331 establishes the criteria for distinguishing subrecipients from contractors. Condition: The SEFA as originally prepared and presented to the auditors did not separately disclose amounts passed through to subrecipients for the major program. During audit procedures, the auditors made inquiry of management regarding the classification of certain disbursements. Upon that inquiry, management determined that a group of entities (representing 55% of the total major program expenditures) previously coded as vendors were subrecipients under 2 CFR 200.331. The SEFA was subsequently revised to separately identify these amounts on the face of the schedule. Total SEFA expenditures were unchanged by the revision. The same system classification failure caused an immaterial incorrect presentation in ALN 93.243 as well. (See also Finding 2025-002 regarding subrecipient monitoring deficiencies arising from the same misclassification.) Cause: Management did not have adequate procedures or controls in place to evaluate and document whether entities receiving federal funds met the Uniform Guidance definition of a subrecipient versus a contractor (vendor). As a result, certain entities were incorrectly classified as vendors, and the related pass-through expenditures were not identified as amounts provided to subrecipients for purposes of SEFA reporting. The condition was not detected by management or those charged with governance prior to auditor inquiry. Effect: Amounts provided to subrecipients were omitted from the SEFA for the major program above as well as ALN 93.243, resulting in incomplete reporting required under Uniform Guidance. The misclassification of subrecipients as vendors caused the SEFA to not accurately disclose pass-through activity and could impair the ability of federal agencies, pass-through entities, and other users of the SEFA to assess the extent of subrecipient relationships and related monitoring responsibilities. The SEFA was revised prior to issuance to correctly reflect amounts provided to subrecipients; accordingly, no misstatement remains in the schedule as issued. Recommendation: Management should establish and document procedures for evaluating each recipient of federal award funds to determine whether the relationship meets the Uniform Guidance criteria for a subrecipient or contractor prior to first payment is processed. In addition, management should implement formal review, with evidence of review retained, of the SEFA to ensure all subrecipient payments are properly identified, accumulated, and disclosed as amounts provided to subrecipients prior to issuance. Management’s Response and Corrective Action Plan is found on page 29-31.

Criteria: 2 CFR 200.332 requires a pass-through entity to identify required subaward information, evaluate each subrecipient’s fraud risk and risk of noncompliance, monitor subrecipient activities, verify required audits under Subpart F, and consider audit or monitoring results for corrective action, adjustments, or enforcement. Condition: The entity did not have formal policies and procedures for subrecipient monitoring, incorrectly classified the subrecipients as vendors, did not perform or document formal subrecipient risk assessments, did not obtain or request subrecipient audit reports, and approved subrecipient agreements that included incorrect Assistance Listing Numbers (ALN). The entity did review and approve sampled reimbursement requests for allowability and performed monitoring of programmatic performance and progress; however, those procedures did not address all required subrecipient monitoring elements under 2 CFR 200.332. (See also Finding 2025-001 regarding the SEFA reporting deficiency arising from the same misclassification.) Cause: The entity had not established formal subrecipient monitoring policies and procedures sufficient to ensure required monitoring activities were consistently performed and documented. Effect: The entity may not identify subrecipient noncompliance, audit findings, corrective action needs, or incorrect federal award information on a timely basis. Incorrect ALNs in subrecipient agreements increase the risk that subrecipients report the award under the wrong federal program. Recommendation: The entity should develop, document, and implement internal control procedures over federal award agreements and subrecipient monitoring to ensure compliance with 2 CFR 200.331 and 2 CFR 200.332. The procedures should require, at a minimum, documented subrecipient-versus-contractor determinations at the onset of each agreement, documented subrecipient risk assessments, accurate identification of required subaward information including the ALN, review of financial and performance reports, verification of required Subpart F audits, review and follow-up of audit findings or other significant developments, and documentation of monitoring procedures performed. Management should also establish a documented review control over subrecipient agreements to ensure required federal award information is accurate before execution and retain evidence of review, approval, monitoring conclusions, and any required corrective action. Management’s Response and Corrective Action Plan is found on page 29-31.