2025-002 The City did not have adequate internal controls and did not comply with federal suspension and debarment requirements. Assistance Listing Number and Title: 20.205 Highway Planning and Construction Federal Grantor Name: Federal Highway Administration, U.S. Department of Transportation Federal Award/Contract Number: N/A Pass-through Entity Name: WA State Department of Transportation (WSDOT) Pass-through Award/Contract Number: LA-10904, LA-10638, LA-9656, LA-11154, LA-9655, LA-10304, LA-9661, LA-10754, LA-10475, LA-10476 Known Questioned Cost Amount: $0 Prior Year Audit Finding: N/A Background During fiscal year 2025, the City spent $3,721,662 in Highway Planning and Construction program funds. The program’s objective is to provide funds for the planning, design, construction, and rehabilitation of highways and bridge transportation systems. 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. Federal requirements prohibit recipients from contracting with or purchasing from parties suspended or debarred from doing business with the federal government. Whenever the City 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 City 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 City must verify this before entering the contract, and must maintain documentation demonstrating compliance with this federal requirement. Description of Condition Although the City has a process to verify the suspension and debarment status for contractors it pays $25,000 or more, our audit found the City did not follow this process and did not verify one of four contractors 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. Cause of Condition City staff were aware of the federal suspension and debarment verification requirements and normally verify this during the procurement process. However, when the City entered into the contract, it did not intend to pay for it with federal funds, so staff did not verify the contractor’s status. Effect of Condition The City did not obtain a written certification, insert a clause into the contract or check for exclusion records at SAM.gov to verify the contractor it paid $202,470 using federal funds was not suspended or debarred before contracting with them. Without adequate internal controls, the City increases its risk of awarding funds to contractors that are excluded from participating in federal programs. Any payments the City made to an ineligible party would be unallowable, and the awarding agency could potentially recover them. We subsequently verified the contractor was not suspended or debarred. Therefore, we are not questioning costs. Recommendation We recommend the City 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. City’s Response The City thanks the State Auditor’s Office for the opportunity to respond to the audit finding regarding the City’s inadequate internal controls over federal suspension and debarment requirements. Although the City’s Contract and Procurement Officer has significantly improved policies and procedures over the last year, the City still relies on a decentralized model for procurement and grant management which continues to create challenges with meeting federal compliance requirements. This particular issue arose due to unusual funding circumstances. When the contract was initially signed, it was the City’s intention to use non-federal funds for the project. The decision was later made to use federal funds after the contract was already signed. Due to this uncommon circumstance, staff did not check for suspension and debarment since the contact was already signed and the City did not originally intend to use federal funds. In addition, the contract is with the largest private energy utility company in the State and risk of suspension or debarment are low. The City commits to continuing training for staff with procurement and grant management duties. Finance will continue to highlight federal compliance requirements for staff. The Contracts and Procurement Officer will also create a new guidance and checklist document to help staff meet federal compliance requirements. Additionally, the City will update our contract templates to include language for contractors to certify they are not suspended or debarred from participation in federal programs. The City takes its responsibility to comply with federal requirements regarding use of federal funds seriously and is committed to improving internal controls. Auditor’s Remarks We thank the City for its cooperation and assistance during the audit and acknowledge its commitment to resolve this finding. We will review the City’s corrective action taken 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.