Finding number: 2025-003 (Material Weakness in Internal Control over Compliance and Instance of Noncompliance) AL number: 21.027 AL title: Coronavirus State and Local Fiscal Recovery Funds (SLFRF) Federal award identification number and year: California Department of Housing and Community Development 21-HK-17231, 21-HK-17171, 21-HK-17192, 23-HK-18055, 23-HK-18064, 23-HK-18079, 23- HK-18085, 23-HK-18090, County of Los Angeles ARPA funds awarded in 2022. Name of federal agency: U.S. Department of the Treasury Name of pass-through entity: California Department of Housing and Community Development, and County of Los Angeles Repeat finding: Yes Criteria: Under 2 CFR §200.318-326, non-federal entities must adhere to procurement standards for purchases made with federal funds. Key requirements include: - Full and Open Competition: Procurement transactions must be conducted to ensure open competition and prevent practices that may unduly restrict competition (2 CFR §200.319(a)). - Documentation of Procurement History: Entities must maintain records that detail the procurement history, including the rationale for the method of procurement, selection of contract type, contractor selection or rejection, and the basis for the contract price (2 CFR §200.318(i)). -Use of Non-Competitive Procurement: Non-competitive procurement is only allowed under limited circumstances, such as when the item is available from a single source, there is a public emergency, or after solicitation of multiple sources, competition is deemed inadequate (2 CFR §200.320(c)). Condition: During 2025, the organization incurred expenditures of approximately $8.90 million for the renovation of motels into permanent housing using federal funds under the SLFRF program. However: - While estimate documentation was available to support certain contracts and management obtained three bids for most of its new contracts under these awards, documentation demonstrating compliance with other federal procurement standards, including the contractor solicitation process, selection method, or the basis for the contract price, was largely unavailable. - The Mission did not document its suspension and debarment consideration for each new contractor. SECTION III - SUMMARY OF FEDERAL AWARD FINDINGS AND QUESTIONED COSTS (continued) Cause: The organization did not establish or follow sufficient internal controls to ensure compliance with federal procurement requirements, including maintaining the required documentation for procurement activities. Possible effect: The lack of procurement documentation creates a significant risk that noncompliant practices occurred, such as non-competitive procurement or payments exceeding fair market value. Questioned cost: None Recommendation: Implement comprehensive procurement policies and procedures that comply with federal regulations under 2 CFR §200.318-326. Ensure all procurement transactions are documented, including evidence of competitive bidding or justification for non-competitive procurement under 2 CFR §200.320(c). Procurement documentation is required to include information on the solicitation process, considerations used by management in evaluating proposals, and the reasoning for management's final determinations. Each procurement process should be set up as a separate file, and include the suspension and debarment search results. Conduct staff training on procurement standards for federal awards, focusing on documentation, competition, and conflict of interest requirements. Incorporate review of the procurement process by the accounting team in advance of setting up new vendors. Perform periodic internal reviews to confirm compliance with procurement policies. SECTION III - SUMMARY OF FEDERAL AWARD FINDINGS AND QUESTIONED COSTS (continued) Views of responsible officials: Management concurs with the recommendation and recognizes that procurement compliance requires both appropriate competition and sufficient contemporaneous documentation demonstrating how the procurement decision was made. The Mission will strengthen its procurement framework to ensure applicable procurement requirements are identified before purchases are initiated and that the procurement file demonstrates the method used, competition obtained, selection rationale, required approvals, conflicts review, price or cost considerations where applicable, and justification for exceptions. Management adopted a procurement policy July 2026 and plans to implement supporting procedures designed to comply with applicable federal, state, local, and award-specific requirements. By December 31, 2026, the Mission plans to issue detailed procedures and standardized procurement-file templates covering procurement method selection, applicable thresholds, independent cost or price analysis, full and open competition, solicitation and bid documentation, conflictof- interest disclosures, contractor selection or rejection, contract type, price basis, required approvals, and permitted noncompetitive procurement justifications. Vendor onboarding will require documented suspension and debarment verification for each applicable vendor and contractor before commitment of funds, with evidence retained in the procurement file. Staff with purchasing, program, grant, and accounts-payable responsibilities will complete role-based training, and completion records will be retained. Management plans to consult with California HCD regarding contractor-selection expectations for the Homekey program and incorporate applicable requirements into the policy, procedures, and contract summaries. The Chief Financial Officer or designee will conduct and document periodic sample-based compliance reviews, track exceptions to resolution, and report material or recurring issues to executive management. Management plans to complete an operating-effectiveness review of procurement transactions and address identified deficiencies before year-end.
Finding number: 2025-004 (Material Weakness in Internal Control over Compliance and Instance of Noncompliance) AL number: 21.027 AL title: Coronavirus State and Local Fiscal Recovery Funds (SLFRF) Federal award identification number and year: California Department of Housing and Community Development 21-HK-17231, 21-HK-17171, 21-HK-17192, 23-HK-18055, 23-HK-18064, 23-HK-18079, 23- HK-18085, 23-HK-18090, County of Los Angeles ARPA funds awarded in 2022. Name of federal agency: U.S. Department of the Treasury Name of pass-through entity: California Department of Housing and Community Development, and County of Los Angeles Repeat finding: Yes Criteria: Per 2 CFR §200.510(b), the SEFA must include: - A list of individual federal programs by agency, including the Assistance Listing number. - The total federal awards expended for each program, including capital projects funded by federal grants. - Amounts passed through to subrecipients. - Outstanding balances for loan or loan guarantee programs. - Significant accounting policies used in preparing the SEFA. Condition: During our audit of the Schedule of Expenditures of Federal Awards (SEFA), we identified that the schedule prepared by management included the full amount of expenditures related to certain awards that included a mixture of Federal and state funds. This resulted in an overstatement of the Federal awards in the SEFA prepared by management, also resulting in a need for a restatement of the 2024 SEFA. The 2025 SEFA has been corrected and the corrected amounts are included in the accompanying schedule. Cause: Management did not sufficiently review the terms of the award documents nor identify the need to obtain additional information from its funders. Possible effect: An inaccurate SEFA could result in noncompliance with the Uniform Guidance and an incomplete Single Audit. Questioned cost: N/A SECTION III - SUMMARY OF FEDERAL AWARD FINDINGS AND QUESTIONED COSTS (continued) Recommendation: We recommend that management: - Implement a reconciliation process to ensure that all federal expenditures are accurately captured in the SEFA. - Provide additional training for accounting personnel on federal reporting requirements. - Review all local government awards to determine whether Federal funds are a component of the contracts. - Review SEFA data for completeness and accuracy before submission. This should include crossreferencing to individual awards documents. Views of responsible officials: Management concurs with the recommendation. The Mission recognizes that accurate SEFA preparation begins with identification of federal funding when an award is received and cannot depend solely on a year-end exercise performed after transactions have already been recorded. Management will establish a federal award identification and reconciliation process connecting contract administration, accounting records, federal award information, and the final SEFA. Management plans to formalize an enhanced SEFA preparation and review process by December 31, 2026. Finance/Accounting will maintain a centralized award inventory identifying the awarding agency and pass-through entity, Assistance Listing number, period of performance, federal and nonfederal funding components, amounts passed through to subrecipients, outstanding loan or loan-guarantee balances when applicable, and the accounting policies used to prepare the SEFA. At least quarterly, Accounting will reconcile the inventory and cumulative federal expenditures to the general ledger, grant billing records, award agreements, and supporting schedules; differences will be investigated, resolved, and documented. Management also plans to complete a preliminary year-to-date SEFA review before year-end. As part of the immediate FY 2025 remediation, management will document the bridge from the prior SEFA to the final revised schedule; retain support for the funding classification of County Operating and Measure H amounts; reconcile the final SEFA to the general ledger and project schedules; and ensure related amounts and disclosures in the audit report are updated consistently. The additional implementation activities are described below: * Reviewing all new grant agreements and contracts to identify funding sources and determine the appropriate federal participation percentage. * Providing targeted training to accounting personnel regarding federal reporting requirements and awards with blended funding sources. * Establishing a secondary management review of the SEFA, including reconciliation of expenditures to underlying award agreements and supporting schedules.