FINDING 2022-003 Subject: Water and Waste Disposal Systems for Rural Communities - Reporting Federal Agency: Department of Agriculture Federal Program: Water and Waste Disposal Systems for Rural Communities Assistance Listings Number: 10.760 Federal Award Number and Year (or Other Identifying Number): CY 2020 Compliance Requirement: Reporting Audit Findings: Material Weakness, Modified Opinion Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2021-004. Condition and Context The Town had not designed or implemented adequate internal controls and procedures to ensure that reports were prepared, accurate, and submitted in accordance with the applicable compliance requirements for the federal grant. The United States Department of Agriculture (USDA) requires the following two financial reports be submitted annually: 1. Statement of Budget, Income and Equity, (Form RD 442-2) 2. Balance Sheet (Form RD 442-3) The Form RD 442-2 covers financial operations relating to the borrower's water or waste disposal project. The Form RD 442-3 presents the financial status of the borrower's water or waste disposal project. In both instances, a borrower may submit the financial data on other forms, provided the forms are in a similar format and signed and dated by the organization's official to certify the correctness of the information. Alternatively, an annual audit may be submitted in lieu of the forms. The Town was required to file each report, as noted above, during the audit period. Both reports were selected for testing. Per inquiry with the Town and review of its records, the Town attempted to prepare Form RD 442-2; however, the report was never completed, nor was it filed with the appropriate authorities. Additionally, the Town did not file or even attempt to prepare Form RD 442-3. Neither alternative reports nor a financial statement were submitted to the USDA in lieu of the forms. The lack of internal controls and noncompliance were systemic issues, which occurred throughout the audit period. Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in 'Standards for Internal Control in the Federal Government' issued by the Comptroller General of the United States or the 'Internal Control Integrated Framework', issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). . . ." 2 CFR 200.302(b) states in part: "The financial management system of each non-Federal entity must provide for the following . . . (2) Accurate, current, and complete disclosure of the financial results of each Federal award or program in accordance with the reporting requirements set forth in ?? 200.328 and 200.329. . . ." 7 CFR 1780.47 states in part: "Borrower accounting methods, management reporting and audits. . . . (e) Borrowers exempt from audits. All borrowers who are exempt from audits, will, within 60 days following the end of each fiscal year, furnish the RUS with annual financial statements, consisting of a verification of the organization's balance sheet and statement of income and expense by an appropriate official of the organization. Forms RD 442-2, 'Statement of Budget, Income and Equity,' and 442-3 may be used. (f) Management reports. These reports will furnish management with a means of evaluating prior decisions and serve as a basis for planning future operations and financial strategies. In those cases where revenues from multiple sources are pledged as security for an RUS loan, two reports will be required; one for the project being financed by RUS and one combining the entire operation of the borrower. In those cases where RUS loans are secured by general obligation bonds or assessments and the borrower combines revenues from all sources, one management report combining all such revenues is acceptable. The following management data will be submitted by the borrower to the processing office. These reports at a minimum will include a balance sheet and income and expense statement. . . . (2) Annual management reports. Prior to the beginning of each fiscal year the following will be submitted to the processing office. (If Form RD 442-2 is used as the annual management report, enter data in column three only of Schedule 1, and complete all of Schedule 2.) (i) Two copies of the management reports and proposed 'Annual Budget.' (ii) Financial information may be reported on Form RD 442-2 which includes Schedule 1, 'Statement of Budget, Income and Equity' and Schedule 2, 'Projected Cash Flow' or information in similar format. (iii) A copy of the rate schedule in effect at the time of submission. (g) Substitute for management reports. When RUS loans are secured by the general obligation of the public body or tax assessments which total 100 percent of the debt service requirements, the State program official may authorize an annual audit to substitute for other management reports if the audit is received within nine months after the end of the audit period." Cause A proper system of internal controls was not designed by management of the Town. Embedded within a properly designed and implemented internal control system should be internal controls consisting of policies and procedures. Policies reflect the Town's management statements of what should be done to effect internal controls, and procedures should consist of actions that would implement these policies. Effect Without the proper implementation of an effectively designed system of internal controls, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. As a result, required reports were not filed with the USDA. Noncompliance with the provisions of federal statutes, regulations, and the terms and conditions of the federal award could result in the loss of future federal funding to the Town. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the Town establish a proper system of internal controls and develop policies and procedures to ensure required reports, or allowable alternatives are completed and filed with the USDA. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.
FINDING 2022-003 Subject: Water and Waste Disposal Systems for Rural Communities - Reporting Federal Agency: Department of Agriculture Federal Program: Water and Waste Disposal Systems for Rural Communities Assistance Listings Number: 10.760 Federal Award Number and Year (or Other Identifying Number): CY 2020 Compliance Requirement: Reporting Audit Findings: Material Weakness, Modified Opinion Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2021-004. Condition and Context The Town had not designed or implemented adequate internal controls and procedures to ensure that reports were prepared, accurate, and submitted in accordance with the applicable compliance requirements for the federal grant. The United States Department of Agriculture (USDA) requires the following two financial reports be submitted annually: 1. Statement of Budget, Income and Equity, (Form RD 442-2) 2. Balance Sheet (Form RD 442-3) The Form RD 442-2 covers financial operations relating to the borrower's water or waste disposal project. The Form RD 442-3 presents the financial status of the borrower's water or waste disposal project. In both instances, a borrower may submit the financial data on other forms, provided the forms are in a similar format and signed and dated by the organization's official to certify the correctness of the information. Alternatively, an annual audit may be submitted in lieu of the forms. The Town was required to file each report, as noted above, during the audit period. Both reports were selected for testing. Per inquiry with the Town and review of its records, the Town attempted to prepare Form RD 442-2; however, the report was never completed, nor was it filed with the appropriate authorities. Additionally, the Town did not file or even attempt to prepare Form RD 442-3. Neither alternative reports nor a financial statement were submitted to the USDA in lieu of the forms. The lack of internal controls and noncompliance were systemic issues, which occurred throughout the audit period. Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in 'Standards for Internal Control in the Federal Government' issued by the Comptroller General of the United States or the 'Internal Control Integrated Framework', issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). . . ." 2 CFR 200.302(b) states in part: "The financial management system of each non-Federal entity must provide for the following . . . (2) Accurate, current, and complete disclosure of the financial results of each Federal award or program in accordance with the reporting requirements set forth in ?? 200.328 and 200.329. . . ." 7 CFR 1780.47 states in part: "Borrower accounting methods, management reporting and audits. . . . (e) Borrowers exempt from audits. All borrowers who are exempt from audits, will, within 60 days following the end of each fiscal year, furnish the RUS with annual financial statements, consisting of a verification of the organization's balance sheet and statement of income and expense by an appropriate official of the organization. Forms RD 442-2, 'Statement of Budget, Income and Equity,' and 442-3 may be used. (f) Management reports. These reports will furnish management with a means of evaluating prior decisions and serve as a basis for planning future operations and financial strategies. In those cases where revenues from multiple sources are pledged as security for an RUS loan, two reports will be required; one for the project being financed by RUS and one combining the entire operation of the borrower. In those cases where RUS loans are secured by general obligation bonds or assessments and the borrower combines revenues from all sources, one management report combining all such revenues is acceptable. The following management data will be submitted by the borrower to the processing office. These reports at a minimum will include a balance sheet and income and expense statement. . . . (2) Annual management reports. Prior to the beginning of each fiscal year the following will be submitted to the processing office. (If Form RD 442-2 is used as the annual management report, enter data in column three only of Schedule 1, and complete all of Schedule 2.) (i) Two copies of the management reports and proposed 'Annual Budget.' (ii) Financial information may be reported on Form RD 442-2 which includes Schedule 1, 'Statement of Budget, Income and Equity' and Schedule 2, 'Projected Cash Flow' or information in similar format. (iii) A copy of the rate schedule in effect at the time of submission. (g) Substitute for management reports. When RUS loans are secured by the general obligation of the public body or tax assessments which total 100 percent of the debt service requirements, the State program official may authorize an annual audit to substitute for other management reports if the audit is received within nine months after the end of the audit period." Cause A proper system of internal controls was not designed by management of the Town. Embedded within a properly designed and implemented internal control system should be internal controls consisting of policies and procedures. Policies reflect the Town's management statements of what should be done to effect internal controls, and procedures should consist of actions that would implement these policies. Effect Without the proper implementation of an effectively designed system of internal controls, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. As a result, required reports were not filed with the USDA. Noncompliance with the provisions of federal statutes, regulations, and the terms and conditions of the federal award could result in the loss of future federal funding to the Town. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the Town establish a proper system of internal controls and develop policies and procedures to ensure required reports, or allowable alternatives are completed and filed with the USDA. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.