FINDING 2023-007 Subject: Title I Grants to Local Educational Agencies - Special Tests and Provisions - Annual Report Card, High School Graduation Rate Federal Agency: Department of Education Federal Program: Title I Grants to Local Educational Agencies Assistance Listings Number: 84.010 Federal Award Numbers and Years (or Other Identifying Numbers): S010A190014, S010A200014, S010A210014, S010A220014 Pass-Through Entity: Indiana Department of Education Compliance Requirement: Special Tests and Provisions - Annual Report Card, High School Graduation Rate Audit Findings: Material Weakness, Other Matters Condition and Context The School Corporation had not properly designed or implemented a system of internal controls, which would include appropriate segregation of duties, that would likely be effective in preventing, or detecting and correcting, noncompliance related to the Special Tests and Provisions - Annual Report Card, High School Graduation Rate compliance requirement. The School Corporation did not have effective internal controls in place to ensure that documentation regarding the reason for a student being removed from the high school graduation cohort for mobility reasons was prepared, reviewed, and retained. INDIANA STATE BOARD OF ACCOUNTS 25 CROTHERSVILLE COMMUNITY SCHOOLS SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) The Special Tests and Provisions - Annual Report Card, High School Graduation Rate compliance requirement necessitated that for students removed from the high school graduation cohort for mobility reasons there be proper written documentation to support the identified mobility code. There were 11 students selected for testing. Of the 11 students tested, 1 student did not have the required supporting documentation to substantiate removal from the cohort for mobility reasons, and 9 students did not have any supporting documentation. The lack of internal controls, noncompliance, and failure to maintain adequate supporting documentation were systemic issues 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). . . ." 20 USC 7801(23)(B) states: "To remove a student from a cohort, a school or local educational agency shall require documentation, or obtain documentation from the State educational agency, to confirm that the student has transferred out, emigrated to another country, or transferred to a prison or juvenile facility, or is deceased." 2 CFR 200.334 states in part: "Financial records, supporting documents, statistical records, and all other non-Federal entity records pertinent to a Federal award must be retained for a period of three years from the date of submission of the final expenditure report or, for Federal awards that are renewed quarterly or annually, from the date of the submission of the quarterly or annual financial report, respectively, as reported to the Federal awarding agency or pass-through entity in the case of a subrecipient. . . ." Cause A proper system of internal controls was not designed by management of the School Corporation, which would include segregation of key functions. Embedded within a properly designed and implemented internal control system should be internal controls consisting of policies and procedures. Policies reflect the School Corporation's management statements of what should be done to effect internal controls, and procedures should consist of actions that would implement these policies. INDIANA STATE BOARD OF ACCOUNTS 26 CROTHERSVILLE COMMUNITY SCHOOLS SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Effect Without the proper design or implementation of the components of a system of internal controls, including policies and procedures that provide segregation of duties and additional oversight as needed, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. As a result, proper documentation to support students' mobility was not collected, retained or provided for audit. 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 School Corporation. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the School Corporation establish a proper system of internal controls and develop policies and procedures to ensure mobility documentation is collected and retained for audit. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.
Material Weakness Condition: Our audit revealed a control deficiency concerning missing documentation related to expenditures incurred under the federal grant for the Authority’s payroll transactions. During our test of allowable activities and allowed costs, we found 12 instances where essential documentation, such as employee time sheets were absent for transactions involving federal funds in fiscal year 2023. Questioned Costs: Related to the lack of supporting documentation noted above, we identified $21,052 of known question costs in relation to the federal program noted above. Criteria: Per 2 CFR Part 200 Subpart D Section 200.334, Financial records, supporting documents, statistical records, and all other non-Federal entity records pertinent to a Federal award must be retained for a period of three years from the date of submission of the final expenditure report or, for Federal awards that are renewed quarterly or annually, from the date of the submission of the quarterly or annual financial report, respectively, as reported to the Federal awarding agency or pass-through entity in the case of a subrecipient. Cause: The authority did not have proper procedures in place to maintain documentation for financial transactions. Potential Effect: Failure to maintain underlying documentation and support of financial transactions can increase the risk of fraud, result in financial statement misstatements, and expenditures that are not for an allowable activity as described in 2 CFR Part 200 Appendix XI Section 5307. Recommendation: We recommend the Authority maintain all timesheets and documentation of work provided for all financial transactions and records be maintained in an orderly manner to support all transactions.
2023-004 U.S. Department of Housing and Urban Development Federal Financial Assistance Listing # 14.157 Supportive Housing for the Elderly (Section 202) Project Rental Assistance Contract Number: ND99S091001 Project Number: 094-EE008-NP-WAH Activities Allowed/Unallowed and Allowable Costs/Cost Principles/Eligibility/Special Tests and Provisions Material Weakness in Internal Control over Compliance Criteria – CFR Section 200.334 indicates that financial records, supporting documentation, and all other entity records pertinent to federal awards must be retained for a period of three years. Condition – The Organization does not have an internal control system designed to provide for the appropriate retention of documentation supporting the transactions of the Organization and eligibility determinations of tenants at the project. As a result, through the transition of management, supporting documentation for expense transactions and tenant eligibility were destroyed and not able to be recreated. Cause – Due to a lack of control policies and proper enforcement, documents were inadvertently destroyed. Effect – Inadequate controls over document retention for the Organization could result in inaccurate transactions being recorded within the Organization’s financial statements or ineligible tenants occupying the units, which could result in non-compliance. Questioned Costs – None Reported. Context/Sampling – Not Applicable. Repeat Finding from Prior Year(s) – Yes, prior year finding 2022-004 Recommendation – It is the responsibility of management and those charged with governance to develop and enforce proper controls and monitoring over document retention policies. Views of Responsible Officials – Management agrees with the finding.
2023-004 U.S. Department of Housing and Urban Development Federal Financial Assistance Listing # 14.157 Supportive Housing for the Elderly (Section 202) Project Rental Assistance Contract Number: ND99S091001 Project Number: 094-EE008-NP-WAH Activities Allowed/Unallowed and Allowable Costs/Cost Principles/Eligibility/Special Tests and Provisions Material Weakness in Internal Control over Compliance Criteria – CFR Section 200.334 indicates that financial records, supporting documentation, and all other entity records pertinent to federal awards must be retained for a period of three years. Condition – The Organization does not have an internal control system designed to provide for the appropriate retention of documentation supporting the transactions of the Organization and eligibility determinations of tenants at the project. As a result, through the transition of management, supporting documentation for expense transactions and tenant eligibility were destroyed and not able to be recreated. Cause – Due to a lack of control policies and proper enforcement, documents were inadvertently destroyed. Effect – Inadequate controls over document retention for the Organization could result in inaccurate transactions being recorded within the Organization’s financial statements or ineligible tenants occupying the units, which could result in non-compliance. Questioned Costs – None Reported. Context/Sampling – Not Applicable. Repeat Finding from Prior Year(s) – Yes, prior year finding 2022-004 Recommendation – It is the responsibility of management and those charged with governance to develop and enforce proper controls and monitoring over document retention policies. Views of Responsible Officials – Management agrees with the finding.
2023-003 – Reporting FALN: 93.600 Name of Program or Cluster: Head Start Cluster – Head Start Federal Agency: Department of Health and Human Services Pass-through Entity: New York City (“NYC”) Department of Education Compliance Requirement: Reporting Condition The required annual report on real property, the SF-429 – Real Property Status Report, was not filed. Criteria Reporting – The organization should retain all financial records, reports, supporting documents, statistical records, and all other records pertinent to the award for a period of three years from the date of submission of expenditure/claim under 2 CFR 200.334. Cause The Settlement did not have adequate controls and procedures in place to identify reporting requirements and ensure reports were filed in a timely manner. Effect Reports not filed, reviewed, or signed may cause inaccurate information at the award agency and could cause delays in payments or impact future funding. Questioned Costs None Recommendation We recommend that the Settlement revise its documentation storage and retention procedures to ensure maintenance of required documentation. In addition, management should implement policies and procedures to ensure required reports are completed and filed by their respective due dates as required by the grant agreement and the Uniform Guidance Views of Responsible Officials See Corrective Action Plan in Appendix 2.
2023-003 – Reporting FALN: 93.600 Name of Program or Cluster: Head Start Cluster – Head Start Federal Agency: Department of Health and Human Services Pass-through Entity: New York City (“NYC”) Department of Education Compliance Requirement: Reporting Condition The required annual report on real property, the SF-429 – Real Property Status Report, was not filed. Criteria Reporting – The organization should retain all financial records, reports, supporting documents, statistical records, and all other records pertinent to the award for a period of three years from the date of submission of expenditure/claim under 2 CFR 200.334. Cause The Settlement did not have adequate controls and procedures in place to identify reporting requirements and ensure reports were filed in a timely manner. Effect Reports not filed, reviewed, or signed may cause inaccurate information at the award agency and could cause delays in payments or impact future funding. Questioned Costs None Recommendation We recommend that the Settlement revise its documentation storage and retention procedures to ensure maintenance of required documentation. In addition, management should implement policies and procedures to ensure required reports are completed and filed by their respective due dates as required by the grant agreement and the Uniform Guidance Views of Responsible Officials See Corrective Action Plan in Appendix 2.
2023-003 – Reporting FALN: 93.600 Name of Program or Cluster: Head Start Cluster – Head Start Federal Agency: Department of Health and Human Services Pass-through Entity: New York City (“NYC”) Department of Education Compliance Requirement: Reporting Condition The required annual report on real property, the SF-429 – Real Property Status Report, was not filed. Criteria Reporting – The organization should retain all financial records, reports, supporting documents, statistical records, and all other records pertinent to the award for a period of three years from the date of submission of expenditure/claim under 2 CFR 200.334. Cause The Settlement did not have adequate controls and procedures in place to identify reporting requirements and ensure reports were filed in a timely manner. Effect Reports not filed, reviewed, or signed may cause inaccurate information at the award agency and could cause delays in payments or impact future funding. Questioned Costs None Recommendation We recommend that the Settlement revise its documentation storage and retention procedures to ensure maintenance of required documentation. In addition, management should implement policies and procedures to ensure required reports are completed and filed by their respective due dates as required by the grant agreement and the Uniform Guidance Views of Responsible Officials See Corrective Action Plan in Appendix 2.
2023-003 – Reporting FALN: 93.600 Name of Program or Cluster: Head Start Cluster – Head Start Federal Agency: Department of Health and Human Services Pass-through Entity: New York City (“NYC”) Department of Education Compliance Requirement: Reporting Condition The required annual report on real property, the SF-429 – Real Property Status Report, was not filed. Criteria Reporting – The organization should retain all financial records, reports, supporting documents, statistical records, and all other records pertinent to the award for a period of three years from the date of submission of expenditure/claim under 2 CFR 200.334. Cause The Settlement did not have adequate controls and procedures in place to identify reporting requirements and ensure reports were filed in a timely manner. Effect Reports not filed, reviewed, or signed may cause inaccurate information at the award agency and could cause delays in payments or impact future funding. Questioned Costs None Recommendation We recommend that the Settlement revise its documentation storage and retention procedures to ensure maintenance of required documentation. In addition, management should implement policies and procedures to ensure required reports are completed and filed by their respective due dates as required by the grant agreement and the Uniform Guidance Views of Responsible Officials See Corrective Action Plan in Appendix 2.
2023-003 – Reporting FALN: 93.600 Name of Program or Cluster: Head Start Cluster – Head Start Federal Agency: Department of Health and Human Services Pass-through Entity: New York City (“NYC”) Department of Education Compliance Requirement: Reporting Condition The required annual report on real property, the SF-429 – Real Property Status Report, was not filed. Criteria Reporting – The organization should retain all financial records, reports, supporting documents, statistical records, and all other records pertinent to the award for a period of three years from the date of submission of expenditure/claim under 2 CFR 200.334. Cause The Settlement did not have adequate controls and procedures in place to identify reporting requirements and ensure reports were filed in a timely manner. Effect Reports not filed, reviewed, or signed may cause inaccurate information at the award agency and could cause delays in payments or impact future funding. Questioned Costs None Recommendation We recommend that the Settlement revise its documentation storage and retention procedures to ensure maintenance of required documentation. In addition, management should implement policies and procedures to ensure required reports are completed and filed by their respective due dates as required by the grant agreement and the Uniform Guidance Views of Responsible Officials See Corrective Action Plan in Appendix 2.
2023-003 – Reporting FALN: 93.600 Name of Program or Cluster: Head Start Cluster – Head Start Federal Agency: Department of Health and Human Services Pass-through Entity: New York City (“NYC”) Department of Education Compliance Requirement: Reporting Condition The required annual report on real property, the SF-429 – Real Property Status Report, was not filed. Criteria Reporting – The organization should retain all financial records, reports, supporting documents, statistical records, and all other records pertinent to the award for a period of three years from the date of submission of expenditure/claim under 2 CFR 200.334. Cause The Settlement did not have adequate controls and procedures in place to identify reporting requirements and ensure reports were filed in a timely manner. Effect Reports not filed, reviewed, or signed may cause inaccurate information at the award agency and could cause delays in payments or impact future funding. Questioned Costs None Recommendation We recommend that the Settlement revise its documentation storage and retention procedures to ensure maintenance of required documentation. In addition, management should implement policies and procedures to ensure required reports are completed and filed by their respective due dates as required by the grant agreement and the Uniform Guidance Views of Responsible Officials See Corrective Action Plan in Appendix 2.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
2023-026 The Office of Financial Management did not have adequate internal controls over and did not comply with requirements to ensure Coronavirus State and Local Fiscal Recovery Funds were used for only allowable activities. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Known Questioned Cost Amount: $300,000,000 Prior Year Audit Finding: Yes, Finding 2022-018 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington has received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury (Department). Federal law stipulate that states may use SLFRF funds to: • Support public health expenditures, including COVID-19 prevention and mitigation efforts • Address negative economic impacts caused by the public health emergency • Replace lost public sector revenue • Provide premium pay for essential workers • Invest in water, sewer, and broadband infrastructure States may only use funds to cover costs incurred during the period of performance, which began on March 3, 2021, and ends on December 31, 2024. Under the Department’s final rule, SLFRF recipients could use funds to replace lost public sector revenue to provide government services. Recipients could elect a one-time standard allowance of $10 million to spend on the provision of government services during the grant’s period of performance. Alternatively, SLFRF recipients could calculate lost revenue based on a formula established by the Department to determine the amount of SLFRF funds that can be used for the provision of government services. Washington chose to calculate its lost revenue rather than use the standard allowance. The calculated amount of revenue loss determines the limit of SLFRF funds that recipients can use to provide government services. For reporting purposes on the Schedule of Expenditures of Federal Awards (SEFA), the aggregate expenditures for all eligible use categories must be reported, not the result of the revenue loss calculations or the standard allowance. Washington received $2.2 billion of its total $4.4 billion SLFRF allocation in May 2022. When received, the funds were accounted for in the state’s Coronavirus State Fiscal Recovery Fund (Fund 706). Washington State Substitute Senate Bill 5165, section 408, included distributions totaling $600 million from Fund 706 to various state transportation-related accounts. According to the Office of Financial Management, these distributions compensated for revenue loss in state fiscal years 2020 and 2021 relative to revenues collected in state fiscal year 2019, and they were to be used to maintain government services. The Office attributed $300 million of this as SLFRF expenditures for transportation-related accounts on the state’s fiscal year 2023 SEFA. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. The prior finding number was 2022-018. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure SLFRF funds were used for only allowable activities. While recipients are allowed to use SLFRF funds to replace lost public sector revenues, the state was required to identify actual expenditures that were provided for government services. At the time of audit, the state had not identified such expenditures. Rather, the state asserted that all expenditures in the transportation accounts receiving the SLFRF funds were appropriated for government services, so there was no doubt as to the allowability of the use of funds. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Office management does not agree that federal requirements and the Department’s final rule required the state to separately identify actual expenditures that equal the amount of SLFRF expenditures claimed. It is the Office’s position that all expenditures in the transportation-related accounts were for government services, so the state had sufficient expenditures to meet the grant requirement. During the last audit, the Office contacted the Department for guidance on the matter. The Department has maintained a FAQ document for the SLFRF program, and the answer to question 13.15, states in part, “recipients should not deviate from their established practices and policies regarding the incurrence of cost, and that they should expend and account for the funds in accordance with laws and procedures for expending and accounting for the recipient’s own funds.” A Department representative acknowledged this FAQ guidance, and said the Department does not have additional, specific requirements about how recipients should internally track their use of SLFRF funds for revenue replacement. At the time of this audit, the Office had not received the Department’s management decision regarding the prior audit finding. Effect of Condition and Questioned Costs Without a population of actual expenditures to audit, we could not design tests to verify that the costs the Office charged to the grant were only for allowable activities, met cost principles, and were incurred during the grant’s period of performance. In our judgment, without identifying the specific expenditures charged to the SLFRF program, the Office did not comply with federal requirements. Therefore, we are questioning the $300 million in costs that were not supported by specifically identified expenditures for government services. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its federal expenditures. Recommendations We recommend the Office: • Identify the actual government service expenditures that are the basis for the $300 million in SLFRF expenditures recorded on the state’s fiscal year 2023 SEFA • Review the supporting documentation for the expenditures to ensure they meet compliance requirements for the SLFRF program and are adequately documented, while also documenting the details of this review • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office does not concur with the audit finding. The state of Washington implemented internal controls and created Fund 706 to track the Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Following U.S. Department of Treasury guidance and instructions, the state of Washington determined there was approximately $3 billion in revenue loss. The state, through legislation, approved the transfer of $300 million from the SLFRF account to various state transportation accounts under the revenue loss provision. Each transportation account that received SLFRF funds was established in statute and is for a specific “government service” purpose. Therefore, all payments from those accounts would be considered an actual government service expenditure. The U.S. Treasury FAQ 3.2 states that “Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.” We reaffirm that all expenditures from the transportation accounts that received the SLFRF funds were used to maintain government services. The State Administrative and Accounting Manual requires all state agencies to establish internal controls over payments for goods and services, including ensuring payments are lawful and for proper purposes, reviewing payments to ensure they are supported, as well as documenting the review of all payments. State agencies continued to follow their established internal controls to ensure expenditures from the transportation accounts were proper and allowable. Additionally, the Office followed consistent policies and practices regarding the incurrence of costs in the transportation accounts for both non-SLFRF and SLFRF funds, which complied with federal guidance. The Office disagrees that the total amount of lost revenue transferred to the transportation accounts should be considered questioned costs because the auditors were unable to design tests for compliance. Questioned costs, if any, could have been identified through appropriate and relevant audit procedures. The Office continues to work with U.S. Treasury, through the Management Decision process, to ensure no questioned costs are required to be repaid. Auditor’s Remarks We believe that the federal requirement is that SLFRF recipients must separately identify actual expenditures that equal the amount of SLFRF expenditures stated on the Schedule of Expenditures of Federal Awards. This is consistent with the State’s practice for recording expenditures for all other federal programs. Because the Office did not identify specific expenditures for the SLFRF program in the accounting system, we were unable to test SLFRF expenditures from the State’s transportation accounts. The expenditures for the State coded to the Office’s SLFRF account (706) did not include the distributions mentioned by the Office in its response, above, and therefore there was no expenditure activity for our Office to test for compliance. We reaffirm our finding and will follow-up on the Office’s corrective action during the 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. Title 2 CFR Part 200, Uniform Guidance, section 302, Financial management, states in part: The financial management system of each non-Federal entity must provide for the following (see also 200.334, 200.335, 200.336, and 200.337) 1. Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. 2. Records that identify adequately the source of the application of funds for federally funded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation Title 2 CFR Part 200, Uniform Guidance, section 410, Collection of unallowable costs, establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200, Uniform Guidance, section 403, establishes the factors affecting the allowability of costs. 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.
Department of Health and Human Services Temporary Assistance for Needy Families (TANF), Federal Assistance Listing # 93.558 Pass Through Virginia Department of Social Services, Pass Through Entity Identifying Number BEN-21-054 Type of Finding: Significant Deficiency in Internal Control over Compliance with Federal Awards Criteria: The Organization should have effective internal controls in place over review of intake forms, per 2 CFR 200.303 and 2 CFR 200.334. Condition: During our audit, it was noted that there was not an effective review of intake forms. Context: During testing, 9 of the 60 intake forms did not contain appropriate signatures by individuals or management noting approval. The sample was not intended to be, and was not, a statistically valid sample. Cause/Effect: Internal control processes over intake forms were not operating effectively from July 2022 through June 2023. Questioned Costs: N/A Identification of Repeat Finding: Repeat Finding 2022-003 Recommendation: We recommend that Cornerstones implements a review process to ensure that intake forms are complete and accurate as possess all appropriate signatures. Views of Responsible Officials and Correction Action: Management’s response is reported in “Management’s Views and Corrective Action Plan” included at the end of this report.
Department of Health and Human Services Temporary Assistance for Needy Families (TANF), Federal Assistance Listing # 93.558 Pass Through Virginia Department of Social Services, Pass Through Entity Identifying Number BEN-21-054 Type of Finding: Material Weakness in Internal Control over Compliance with Federal Awards and Material Noncompliance Criteria: The Organization should have processes and procedures in place to keep and maintain client records, per 2 CFR 200.303 and 2 CFR 200.334. Condition: During our audit, we noted that the Organization was unable to find supporting records. Context: During testing, the Organization was unable to find supporting records for 15 out of the 60 samples that received services as part of a federal program. The sample was not intended to be, and was not, a statistically valid sample. Cause/Effect: Internal control processes over proper maintenance of clients’ records were not operating effectively, causing documentation to not be located. Questioned Costs: Unknown Identification of Repeat Finding: Repeat Finding 2022-004 Recommendation: We recommend procedures are implemented to ensure proper maintenance of client records. Views of Responsible Officials and Correction Action: Management’s response is reported in “Management’s Views and Corrective Action Plan” included at the end of this report.
Department of Health and Human Services Temporary Assistance for Needy Families (TANF), Federal Assistance Listing # 93.558 Pass Through Virginia Department of Social Services, Pass Through Entity Identifying Number BEN-21-054 Type of Finding: Significant Deficiency in Internal Control over Compliance with Federal Awards Criteria: The Organization should have effective internal controls in place over review of intake forms, per 2 CFR 200.303 and 2 CFR 200.334. Condition: During our audit, it was noted that there was not an effective review of intake forms. Context: During testing, 9 of the 60 intake forms did not contain appropriate signatures by individuals or management noting approval. The sample was not intended to be, and was not, a statistically valid sample. Cause/Effect: Internal control processes over intake forms were not operating effectively from July 2022 through June 2023. Questioned Costs: N/A Identification of Repeat Finding: Repeat Finding 2022-003 Recommendation: We recommend that Cornerstones implements a review process to ensure that intake forms are complete and accurate as possess all appropriate signatures. Views of Responsible Officials and Correction Action: Management’s response is reported in “Management’s Views and Corrective Action Plan” included at the end of this report.
Department of Health and Human Services Temporary Assistance for Needy Families (TANF), Federal Assistance Listing # 93.558 Pass Through Virginia Department of Social Services, Pass Through Entity Identifying Number BEN-21-054 Type of Finding: Material Weakness in Internal Control over Compliance with Federal Awards and Material Noncompliance Criteria: The Organization should have processes and procedures in place to keep and maintain client records, per 2 CFR 200.303 and 2 CFR 200.334. Condition: During our audit, we noted that the Organization was unable to find supporting records. Context: During testing, the Organization was unable to find supporting records for 15 out of the 60 samples that received services as part of a federal program. The sample was not intended to be, and was not, a statistically valid sample. Cause/Effect: Internal control processes over proper maintenance of clients’ records were not operating effectively, causing documentation to not be located. Questioned Costs: Unknown Identification of Repeat Finding: Repeat Finding 2022-004 Recommendation: We recommend procedures are implemented to ensure proper maintenance of client records. Views of Responsible Officials and Correction Action: Management’s response is reported in “Management’s Views and Corrective Action Plan” included at the end of this report.
Finding 2023-059: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCC5 Criteria: Federal regulation, 2 CFR 200.332(a)(1), lays out the fourteen required elements to be communicated to subrecipients to identify the federal award properly. Federal regulation, 2 CFR 200.332(b), requires non-federal entities to evaluate each subrecipient’s risk of noncompliance with federal statutes, regulations, and the terms and conditions of the subaward to determine the appropriate level of subrecipient monitoring. Federal regulation, 2 CFR 200.332(d), requires non-federal entities to monitor the subrecipient’s activities, including reviewing reports and resolving Single Audit findings related to the subaward. Federal regulation, 2 CFR 200.334, requires financial records, supporting documents, statistical records, and all other non-Federal entity records pertinent to a Federal award be retained for three years. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the Department of Public Health and Human Services (department), to describe in their state plan the effective internal controls in place to ensure program integrity and accountability. The department’s State Plan outlines the department’s processes for regularly evaluating internal control activities, including reviews of the Child Care Resource and Referral (CCR&R) agency audits to evaluate performance. The State Plan also indicates that prior to each contract year with the CCR&R agencies, the contract manager and fiscal analyst conduct a risk assessment on each agency, and that the risk assessment draws on the agency’s Single Audit (amongst other factors). Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: We noted the following instances where controls were ineffective in complying with federal regulations governing subrecipient monitoring, related to the CCR&R agencies. (1) The department’s internal controls were ineffective in ensuring that all of the federal award identification items required by 2 CFR 200.332(a)(1) were included in its subaward agreements with the CCR&R agencies in fiscal years 2022 and 23. The 2022 agreements do not include federal award identification number, award date, period of performance start and end date, budget period start and end date, identification of whether the award is research and development related, and the required information on indirect costs. The 2023 agreements contain all required elements other than the budget period start and end date. While the 2023 agreements include most of the required federal award identification information, the disclosed information is for the department’s most recent federal awards received. As part of our audit, we noted the department’s processes include moving expenditures between grant awards, to maximize grant funds as grants are nearing close-out. If similar practices to those we observed in the current audit period continue, it is possible the federal awards disclosed in the 2023 agreements will not be those to which the department ultimately attributes all the subaward expenditures. (2) The department's internal controls were ineffective in ensuring compliance with State Plan procedures related to program integrity and accountability. The department could not provide evidence risk assessments were completed because associated documentation was not retained for the CCR&R agencies for federal fiscal year 2022. Additionally, the department uses the risk assessments to document its review and consideration of audit reports, including Single Audit reports, so they could not demonstrate reviews occurred as part of the risk assessment process. Federal regulations require these risk assessments and audit report reviews. Questioned Costs: No questioned costs identified. Context: There are six CCR&R agencies, covering seven regions throughout the state. For risk assessment purposes, there are only six entities over which risk should be assessed. The department enters into separate agreements by region for contracting purposes, so there are seven contracts. As discussed in the condition above, we found issues in both years of the audit period. In total, the department paid the CCR&R agencies approximately $29.2 million during fiscal years 2022 and 2023, or 18 percent of the total program expenditures for the audit period. Effect: The department is not in compliance with federal subrecipient monitoring requirements and did not follow the procedures in the State Plan. The CCR&R agencies were not provided all the information required to identify their subawards. In addition, the CCR&R agencies may not have all of the information necessary to comply with the terms of the award and to meet all federal compliance requirements, which may limit the ability of subrecipients to comply. Subrecipients subject to Single Audits will also need this information for their audit. Additionally, the risk assessment process is an important element of internal controls over the compliance requirements carried out by the CCR&Rs. There is risk that the department may not appropriately monitor the activities of the subrecipients. Cause: The department’ standard contract template did not contain all required elements. In addressing prior audit findings 2021-051, 2021-052, and 2021-053 related to contract disclosures in other federal programs, the department centrally worked on an update to the contract templates. However, per department personnel, this update occurred too late for changes to be implemented for the 2022 contracts. Regarding the budget period information’s exclusion from the 2023 contracts, department personnel indicated the intent in the contract template is for the contract term to be the budget period, as communicated through the budget attachment. For these specific contracts, however, the budget attachment does not include the budget period. Regarding the risk assessments, program personnel indicated they believe the 2022 risk assessment were completed but saved over when the 2023 risk assessments were started. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over subrecipient monitoring for the Child Care Development Fund Cluster to ensure all award identification information is communicated to subrecipients, subrecipient risk assessments and associated audit report reviews are completed, and documentation is retained. B. Comply with federal subrecipient monitoring regulations and State Plan requirements by communicating all award identification information to subrecipients and by completing and retaining documentation of risk assessments and audit report reviews for subrecipients. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-060: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCCC5 Criteria: Federal regulation, 45 CFR 98.11(b)(4), states that in retaining overall responsibility for the administration of the program, lead agencies such as the Department of Public Health and Human Services (department) shall ensure the program complies with the approved state plan. Note that federal regulation 45 CFR 98.68(b) requires the state plan to (1) include a description of the processes in place to identify fraud and (2) recover fraudulent overpayments. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the department, to describe in their state plan the effective internal controls that are in place to ensure program integrity and accountability. Section 8.1.2 of the State Plan indicates that part of the department’s process to identify risk in the CCDF program include Child Care Resource and Referral (CCR&R) agency eligibility supervisors conducting a review of 10 percent of cases monthly, with the department reviewing the results. Section 8.1.5 of the State Plan further indicates the monthly CCR&R agency eligibility supervisor reviews, discussed above, are part of the department’s procedures to identify and prevent fraud or intentional program violations. The State Plan specifies these reviews: (1) aid in the identification and prevention of fraud and intentional program violations because they allow for a review of more eligibility cases where potential fraud can be identified; and (2) aid the state in identifying areas of concern that should be addressed in training, with the intent of helping CCR&R staff identify situations that could be instances of intentional program violations and fraud. Federal regulation, 2 CFR 200.334, requires the retention of financial records, supporting documents, statistical records, and all other non-federal records pertinent to a federal award for three years. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: As part of the audit, we noted the following monitoring tools that the department intended to have in place over the activities of the CCR&Rs were not consistently used during fiscal years 2022 and 2023: • The department intended to perform quarterly desk monitoring of the CCR&Rs for fiscal year 2023, using quarterly reports submitted by the CCR&Rs, instead of on-site monitoring at the start of the fiscal year. While the department intended to do these reviews, no desk reviews were fully completed and documented other than those for the year’s first quarter. • Monthly CCR&R agency supervisor reviews of eligibility determinations made by CCR&R staff did not occur for October 2021-August 2022, and December 2022-February 2023. Department staff indicated they use the desk monitoring and supervisor reviews to monitor the activities of the CCR&Rs, to mitigate risk, and to remain in a low error rate classification related to improper payments. As such, these monitoring tools are important controls over compliance requirements associated with eligibility for participation in the Best Beginnings Child Care Scholarship program (BBCCS) and monitoring the activities of the CCR&R agencies as subrecipients. Additionally, the State Plan describes the supervisor reviews as elements of the department’s internal controls to ensure program integrity and accountability. Questioned Costs: No questioned costs identified. Context: There are six CCR&R entities, covering seven regions throughout the state. The CCR&Rs perform various tasks to help the department administer the program, including determining eligibility for families to participate in the BBCCS. The department offers this program to qualified low-income families whose child or children receive care from approved providers. Payments issued to childcare providers for the BBCCS program, based in part on the eligibility determinations made by the CCR&R staff, totaled approximately $48 million in fiscal years 2022 and 2023 combined. Effect: Without effective internal controls, including those over retaining documentation, the department cannot demonstrate the steps they have taken to mitigate risk. There is also risk that absent this type of monitoring, program personnel will not timely become aware of challenges the CCR&Rs are facing related to implementing program requirements. Furthermore, the State Plan indicates the monthly CCR&R supervisor reviews are to be completed as part of the state’s procedures to ensure program integrity and accountability, including identifying risks within the program and identifying and preventing fraud or intentional program violations. However, the department has not complied with the State Plan regarding these reviews. These reviews are a State Plan certified tool to aid in identifying fraudulent overpayments, as mandated by federal regulations. Consequently, the department cannot fully demonstrate compliance with federal regulations regarding the identification and collection of fraudulent overpayments. Department personnel represented there were no fraudulent payments identified through other means in fiscal year 2022, and that one fraudulent payment was identified in fiscal year 2023. Based on our review, collection procedures were initiated on this payment in fiscal year 2024. Cause: Department personnel indicated there were staff capacity issues and turnover during the audit period, which impacted their ability to perform the CCR&R quarterly monitoring as initially intended. Additionally, the CCDF cluster received a significant influx in federal funding during the audit period, in response to the COVID-19 public health emergency. Administering these funds created more work for the department, and department personnel indicated this increased workload impacted their capacity to facilitate the monthly supervisor review process. Department personnel also asserted they undertook a project to re-work the supervisor review process with input from CCR&R supervisors, and that the new process was implemented in March of 2023. In September 2023, the department was facilitating the supervisor reviews for April 2023. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over monitoring the activities of the Child Care Resource and Referral agencies helping to carry out the objectives of the Child Care Development Fund Cluster, including following the monitoring procedures described in the State Plan. B. Comply with federal regulations regarding fraudulent payment detection. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-059: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCC5 Criteria: Federal regulation, 2 CFR 200.332(a)(1), lays out the fourteen required elements to be communicated to subrecipients to identify the federal award properly. Federal regulation, 2 CFR 200.332(b), requires non-federal entities to evaluate each subrecipient’s risk of noncompliance with federal statutes, regulations, and the terms and conditions of the subaward to determine the appropriate level of subrecipient monitoring. Federal regulation, 2 CFR 200.332(d), requires non-federal entities to monitor the subrecipient’s activities, including reviewing reports and resolving Single Audit findings related to the subaward. Federal regulation, 2 CFR 200.334, requires financial records, supporting documents, statistical records, and all other non-Federal entity records pertinent to a Federal award be retained for three years. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the Department of Public Health and Human Services (department), to describe in their state plan the effective internal controls in place to ensure program integrity and accountability. The department’s State Plan outlines the department’s processes for regularly evaluating internal control activities, including reviews of the Child Care Resource and Referral (CCR&R) agency audits to evaluate performance. The State Plan also indicates that prior to each contract year with the CCR&R agencies, the contract manager and fiscal analyst conduct a risk assessment on each agency, and that the risk assessment draws on the agency’s Single Audit (amongst other factors). Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: We noted the following instances where controls were ineffective in complying with federal regulations governing subrecipient monitoring, related to the CCR&R agencies. (1) The department’s internal controls were ineffective in ensuring that all of the federal award identification items required by 2 CFR 200.332(a)(1) were included in its subaward agreements with the CCR&R agencies in fiscal years 2022 and 23. The 2022 agreements do not include federal award identification number, award date, period of performance start and end date, budget period start and end date, identification of whether the award is research and development related, and the required information on indirect costs. The 2023 agreements contain all required elements other than the budget period start and end date. While the 2023 agreements include most of the required federal award identification information, the disclosed information is for the department’s most recent federal awards received. As part of our audit, we noted the department’s processes include moving expenditures between grant awards, to maximize grant funds as grants are nearing close-out. If similar practices to those we observed in the current audit period continue, it is possible the federal awards disclosed in the 2023 agreements will not be those to which the department ultimately attributes all the subaward expenditures. (2) The department's internal controls were ineffective in ensuring compliance with State Plan procedures related to program integrity and accountability. The department could not provide evidence risk assessments were completed because associated documentation was not retained for the CCR&R agencies for federal fiscal year 2022. Additionally, the department uses the risk assessments to document its review and consideration of audit reports, including Single Audit reports, so they could not demonstrate reviews occurred as part of the risk assessment process. Federal regulations require these risk assessments and audit report reviews. Questioned Costs: No questioned costs identified. Context: There are six CCR&R agencies, covering seven regions throughout the state. For risk assessment purposes, there are only six entities over which risk should be assessed. The department enters into separate agreements by region for contracting purposes, so there are seven contracts. As discussed in the condition above, we found issues in both years of the audit period. In total, the department paid the CCR&R agencies approximately $29.2 million during fiscal years 2022 and 2023, or 18 percent of the total program expenditures for the audit period. Effect: The department is not in compliance with federal subrecipient monitoring requirements and did not follow the procedures in the State Plan. The CCR&R agencies were not provided all the information required to identify their subawards. In addition, the CCR&R agencies may not have all of the information necessary to comply with the terms of the award and to meet all federal compliance requirements, which may limit the ability of subrecipients to comply. Subrecipients subject to Single Audits will also need this information for their audit. Additionally, the risk assessment process is an important element of internal controls over the compliance requirements carried out by the CCR&Rs. There is risk that the department may not appropriately monitor the activities of the subrecipients. Cause: The department’ standard contract template did not contain all required elements. In addressing prior audit findings 2021-051, 2021-052, and 2021-053 related to contract disclosures in other federal programs, the department centrally worked on an update to the contract templates. However, per department personnel, this update occurred too late for changes to be implemented for the 2022 contracts. Regarding the budget period information’s exclusion from the 2023 contracts, department personnel indicated the intent in the contract template is for the contract term to be the budget period, as communicated through the budget attachment. For these specific contracts, however, the budget attachment does not include the budget period. Regarding the risk assessments, program personnel indicated they believe the 2022 risk assessment were completed but saved over when the 2023 risk assessments were started. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over subrecipient monitoring for the Child Care Development Fund Cluster to ensure all award identification information is communicated to subrecipients, subrecipient risk assessments and associated audit report reviews are completed, and documentation is retained. B. Comply with federal subrecipient monitoring regulations and State Plan requirements by communicating all award identification information to subrecipients and by completing and retaining documentation of risk assessments and audit report reviews for subrecipients. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-060: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCCC5 Criteria: Federal regulation, 45 CFR 98.11(b)(4), states that in retaining overall responsibility for the administration of the program, lead agencies such as the Department of Public Health and Human Services (department) shall ensure the program complies with the approved state plan. Note that federal regulation 45 CFR 98.68(b) requires the state plan to (1) include a description of the processes in place to identify fraud and (2) recover fraudulent overpayments. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the department, to describe in their state plan the effective internal controls that are in place to ensure program integrity and accountability. Section 8.1.2 of the State Plan indicates that part of the department’s process to identify risk in the CCDF program include Child Care Resource and Referral (CCR&R) agency eligibility supervisors conducting a review of 10 percent of cases monthly, with the department reviewing the results. Section 8.1.5 of the State Plan further indicates the monthly CCR&R agency eligibility supervisor reviews, discussed above, are part of the department’s procedures to identify and prevent fraud or intentional program violations. The State Plan specifies these reviews: (1) aid in the identification and prevention of fraud and intentional program violations because they allow for a review of more eligibility cases where potential fraud can be identified; and (2) aid the state in identifying areas of concern that should be addressed in training, with the intent of helping CCR&R staff identify situations that could be instances of intentional program violations and fraud. Federal regulation, 2 CFR 200.334, requires the retention of financial records, supporting documents, statistical records, and all other non-federal records pertinent to a federal award for three years. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: As part of the audit, we noted the following monitoring tools that the department intended to have in place over the activities of the CCR&Rs were not consistently used during fiscal years 2022 and 2023: • The department intended to perform quarterly desk monitoring of the CCR&Rs for fiscal year 2023, using quarterly reports submitted by the CCR&Rs, instead of on-site monitoring at the start of the fiscal year. While the department intended to do these reviews, no desk reviews were fully completed and documented other than those for the year’s first quarter. • Monthly CCR&R agency supervisor reviews of eligibility determinations made by CCR&R staff did not occur for October 2021-August 2022, and December 2022-February 2023. Department staff indicated they use the desk monitoring and supervisor reviews to monitor the activities of the CCR&Rs, to mitigate risk, and to remain in a low error rate classification related to improper payments. As such, these monitoring tools are important controls over compliance requirements associated with eligibility for participation in the Best Beginnings Child Care Scholarship program (BBCCS) and monitoring the activities of the CCR&R agencies as subrecipients. Additionally, the State Plan describes the supervisor reviews as elements of the department’s internal controls to ensure program integrity and accountability. Questioned Costs: No questioned costs identified. Context: There are six CCR&R entities, covering seven regions throughout the state. The CCR&Rs perform various tasks to help the department administer the program, including determining eligibility for families to participate in the BBCCS. The department offers this program to qualified low-income families whose child or children receive care from approved providers. Payments issued to childcare providers for the BBCCS program, based in part on the eligibility determinations made by the CCR&R staff, totaled approximately $48 million in fiscal years 2022 and 2023 combined. Effect: Without effective internal controls, including those over retaining documentation, the department cannot demonstrate the steps they have taken to mitigate risk. There is also risk that absent this type of monitoring, program personnel will not timely become aware of challenges the CCR&Rs are facing related to implementing program requirements. Furthermore, the State Plan indicates the monthly CCR&R supervisor reviews are to be completed as part of the state’s procedures to ensure program integrity and accountability, including identifying risks within the program and identifying and preventing fraud or intentional program violations. However, the department has not complied with the State Plan regarding these reviews. These reviews are a State Plan certified tool to aid in identifying fraudulent overpayments, as mandated by federal regulations. Consequently, the department cannot fully demonstrate compliance with federal regulations regarding the identification and collection of fraudulent overpayments. Department personnel represented there were no fraudulent payments identified through other means in fiscal year 2022, and that one fraudulent payment was identified in fiscal year 2023. Based on our review, collection procedures were initiated on this payment in fiscal year 2024. Cause: Department personnel indicated there were staff capacity issues and turnover during the audit period, which impacted their ability to perform the CCR&R quarterly monitoring as initially intended. Additionally, the CCDF cluster received a significant influx in federal funding during the audit period, in response to the COVID-19 public health emergency. Administering these funds created more work for the department, and department personnel indicated this increased workload impacted their capacity to facilitate the monthly supervisor review process. Department personnel also asserted they undertook a project to re-work the supervisor review process with input from CCR&R supervisors, and that the new process was implemented in March of 2023. In September 2023, the department was facilitating the supervisor reviews for April 2023. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over monitoring the activities of the Child Care Resource and Referral agencies helping to carry out the objectives of the Child Care Development Fund Cluster, including following the monitoring procedures described in the State Plan. B. Comply with federal regulations regarding fraudulent payment detection. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-059: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCC5 Criteria: Federal regulation, 2 CFR 200.332(a)(1), lays out the fourteen required elements to be communicated to subrecipients to identify the federal award properly. Federal regulation, 2 CFR 200.332(b), requires non-federal entities to evaluate each subrecipient’s risk of noncompliance with federal statutes, regulations, and the terms and conditions of the subaward to determine the appropriate level of subrecipient monitoring. Federal regulation, 2 CFR 200.332(d), requires non-federal entities to monitor the subrecipient’s activities, including reviewing reports and resolving Single Audit findings related to the subaward. Federal regulation, 2 CFR 200.334, requires financial records, supporting documents, statistical records, and all other non-Federal entity records pertinent to a Federal award be retained for three years. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the Department of Public Health and Human Services (department), to describe in their state plan the effective internal controls in place to ensure program integrity and accountability. The department’s State Plan outlines the department’s processes for regularly evaluating internal control activities, including reviews of the Child Care Resource and Referral (CCR&R) agency audits to evaluate performance. The State Plan also indicates that prior to each contract year with the CCR&R agencies, the contract manager and fiscal analyst conduct a risk assessment on each agency, and that the risk assessment draws on the agency’s Single Audit (amongst other factors). Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: We noted the following instances where controls were ineffective in complying with federal regulations governing subrecipient monitoring, related to the CCR&R agencies. (1) The department’s internal controls were ineffective in ensuring that all of the federal award identification items required by 2 CFR 200.332(a)(1) were included in its subaward agreements with the CCR&R agencies in fiscal years 2022 and 23. The 2022 agreements do not include federal award identification number, award date, period of performance start and end date, budget period start and end date, identification of whether the award is research and development related, and the required information on indirect costs. The 2023 agreements contain all required elements other than the budget period start and end date. While the 2023 agreements include most of the required federal award identification information, the disclosed information is for the department’s most recent federal awards received. As part of our audit, we noted the department’s processes include moving expenditures between grant awards, to maximize grant funds as grants are nearing close-out. If similar practices to those we observed in the current audit period continue, it is possible the federal awards disclosed in the 2023 agreements will not be those to which the department ultimately attributes all the subaward expenditures. (2) The department's internal controls were ineffective in ensuring compliance with State Plan procedures related to program integrity and accountability. The department could not provide evidence risk assessments were completed because associated documentation was not retained for the CCR&R agencies for federal fiscal year 2022. Additionally, the department uses the risk assessments to document its review and consideration of audit reports, including Single Audit reports, so they could not demonstrate reviews occurred as part of the risk assessment process. Federal regulations require these risk assessments and audit report reviews. Questioned Costs: No questioned costs identified. Context: There are six CCR&R agencies, covering seven regions throughout the state. For risk assessment purposes, there are only six entities over which risk should be assessed. The department enters into separate agreements by region for contracting purposes, so there are seven contracts. As discussed in the condition above, we found issues in both years of the audit period. In total, the department paid the CCR&R agencies approximately $29.2 million during fiscal years 2022 and 2023, or 18 percent of the total program expenditures for the audit period. Effect: The department is not in compliance with federal subrecipient monitoring requirements and did not follow the procedures in the State Plan. The CCR&R agencies were not provided all the information required to identify their subawards. In addition, the CCR&R agencies may not have all of the information necessary to comply with the terms of the award and to meet all federal compliance requirements, which may limit the ability of subrecipients to comply. Subrecipients subject to Single Audits will also need this information for their audit. Additionally, the risk assessment process is an important element of internal controls over the compliance requirements carried out by the CCR&Rs. There is risk that the department may not appropriately monitor the activities of the subrecipients. Cause: The department’ standard contract template did not contain all required elements. In addressing prior audit findings 2021-051, 2021-052, and 2021-053 related to contract disclosures in other federal programs, the department centrally worked on an update to the contract templates. However, per department personnel, this update occurred too late for changes to be implemented for the 2022 contracts. Regarding the budget period information’s exclusion from the 2023 contracts, department personnel indicated the intent in the contract template is for the contract term to be the budget period, as communicated through the budget attachment. For these specific contracts, however, the budget attachment does not include the budget period. Regarding the risk assessments, program personnel indicated they believe the 2022 risk assessment were completed but saved over when the 2023 risk assessments were started. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over subrecipient monitoring for the Child Care Development Fund Cluster to ensure all award identification information is communicated to subrecipients, subrecipient risk assessments and associated audit report reviews are completed, and documentation is retained. B. Comply with federal subrecipient monitoring regulations and State Plan requirements by communicating all award identification information to subrecipients and by completing and retaining documentation of risk assessments and audit report reviews for subrecipients. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-060: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCCC5 Criteria: Federal regulation, 45 CFR 98.11(b)(4), states that in retaining overall responsibility for the administration of the program, lead agencies such as the Department of Public Health and Human Services (department) shall ensure the program complies with the approved state plan. Note that federal regulation 45 CFR 98.68(b) requires the state plan to (1) include a description of the processes in place to identify fraud and (2) recover fraudulent overpayments. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the department, to describe in their state plan the effective internal controls that are in place to ensure program integrity and accountability. Section 8.1.2 of the State Plan indicates that part of the department’s process to identify risk in the CCDF program include Child Care Resource and Referral (CCR&R) agency eligibility supervisors conducting a review of 10 percent of cases monthly, with the department reviewing the results. Section 8.1.5 of the State Plan further indicates the monthly CCR&R agency eligibility supervisor reviews, discussed above, are part of the department’s procedures to identify and prevent fraud or intentional program violations. The State Plan specifies these reviews: (1) aid in the identification and prevention of fraud and intentional program violations because they allow for a review of more eligibility cases where potential fraud can be identified; and (2) aid the state in identifying areas of concern that should be addressed in training, with the intent of helping CCR&R staff identify situations that could be instances of intentional program violations and fraud. Federal regulation, 2 CFR 200.334, requires the retention of financial records, supporting documents, statistical records, and all other non-federal records pertinent to a federal award for three years. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: As part of the audit, we noted the following monitoring tools that the department intended to have in place over the activities of the CCR&Rs were not consistently used during fiscal years 2022 and 2023: • The department intended to perform quarterly desk monitoring of the CCR&Rs for fiscal year 2023, using quarterly reports submitted by the CCR&Rs, instead of on-site monitoring at the start of the fiscal year. While the department intended to do these reviews, no desk reviews were fully completed and documented other than those for the year’s first quarter. • Monthly CCR&R agency supervisor reviews of eligibility determinations made by CCR&R staff did not occur for October 2021-August 2022, and December 2022-February 2023. Department staff indicated they use the desk monitoring and supervisor reviews to monitor the activities of the CCR&Rs, to mitigate risk, and to remain in a low error rate classification related to improper payments. As such, these monitoring tools are important controls over compliance requirements associated with eligibility for participation in the Best Beginnings Child Care Scholarship program (BBCCS) and monitoring the activities of the CCR&R agencies as subrecipients. Additionally, the State Plan describes the supervisor reviews as elements of the department’s internal controls to ensure program integrity and accountability. Questioned Costs: No questioned costs identified. Context: There are six CCR&R entities, covering seven regions throughout the state. The CCR&Rs perform various tasks to help the department administer the program, including determining eligibility for families to participate in the BBCCS. The department offers this program to qualified low-income families whose child or children receive care from approved providers. Payments issued to childcare providers for the BBCCS program, based in part on the eligibility determinations made by the CCR&R staff, totaled approximately $48 million in fiscal years 2022 and 2023 combined. Effect: Without effective internal controls, including those over retaining documentation, the department cannot demonstrate the steps they have taken to mitigate risk. There is also risk that absent this type of monitoring, program personnel will not timely become aware of challenges the CCR&Rs are facing related to implementing program requirements. Furthermore, the State Plan indicates the monthly CCR&R supervisor reviews are to be completed as part of the state’s procedures to ensure program integrity and accountability, including identifying risks within the program and identifying and preventing fraud or intentional program violations. However, the department has not complied with the State Plan regarding these reviews. These reviews are a State Plan certified tool to aid in identifying fraudulent overpayments, as mandated by federal regulations. Consequently, the department cannot fully demonstrate compliance with federal regulations regarding the identification and collection of fraudulent overpayments. Department personnel represented there were no fraudulent payments identified through other means in fiscal year 2022, and that one fraudulent payment was identified in fiscal year 2023. Based on our review, collection procedures were initiated on this payment in fiscal year 2024. Cause: Department personnel indicated there were staff capacity issues and turnover during the audit period, which impacted their ability to perform the CCR&R quarterly monitoring as initially intended. Additionally, the CCDF cluster received a significant influx in federal funding during the audit period, in response to the COVID-19 public health emergency. Administering these funds created more work for the department, and department personnel indicated this increased workload impacted their capacity to facilitate the monthly supervisor review process. Department personnel also asserted they undertook a project to re-work the supervisor review process with input from CCR&R supervisors, and that the new process was implemented in March of 2023. In September 2023, the department was facilitating the supervisor reviews for April 2023. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over monitoring the activities of the Child Care Resource and Referral agencies helping to carry out the objectives of the Child Care Development Fund Cluster, including following the monitoring procedures described in the State Plan. B. Comply with federal regulations regarding fraudulent payment detection. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-059: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCC5 Criteria: Federal regulation, 2 CFR 200.332(a)(1), lays out the fourteen required elements to be communicated to subrecipients to identify the federal award properly. Federal regulation, 2 CFR 200.332(b), requires non-federal entities to evaluate each subrecipient’s risk of noncompliance with federal statutes, regulations, and the terms and conditions of the subaward to determine the appropriate level of subrecipient monitoring. Federal regulation, 2 CFR 200.332(d), requires non-federal entities to monitor the subrecipient’s activities, including reviewing reports and resolving Single Audit findings related to the subaward. Federal regulation, 2 CFR 200.334, requires financial records, supporting documents, statistical records, and all other non-Federal entity records pertinent to a Federal award be retained for three years. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the Department of Public Health and Human Services (department), to describe in their state plan the effective internal controls in place to ensure program integrity and accountability. The department’s State Plan outlines the department’s processes for regularly evaluating internal control activities, including reviews of the Child Care Resource and Referral (CCR&R) agency audits to evaluate performance. The State Plan also indicates that prior to each contract year with the CCR&R agencies, the contract manager and fiscal analyst conduct a risk assessment on each agency, and that the risk assessment draws on the agency’s Single Audit (amongst other factors). Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: We noted the following instances where controls were ineffective in complying with federal regulations governing subrecipient monitoring, related to the CCR&R agencies. (1) The department’s internal controls were ineffective in ensuring that all of the federal award identification items required by 2 CFR 200.332(a)(1) were included in its subaward agreements with the CCR&R agencies in fiscal years 2022 and 23. The 2022 agreements do not include federal award identification number, award date, period of performance start and end date, budget period start and end date, identification of whether the award is research and development related, and the required information on indirect costs. The 2023 agreements contain all required elements other than the budget period start and end date. While the 2023 agreements include most of the required federal award identification information, the disclosed information is for the department’s most recent federal awards received. As part of our audit, we noted the department’s processes include moving expenditures between grant awards, to maximize grant funds as grants are nearing close-out. If similar practices to those we observed in the current audit period continue, it is possible the federal awards disclosed in the 2023 agreements will not be those to which the department ultimately attributes all the subaward expenditures. (2) The department's internal controls were ineffective in ensuring compliance with State Plan procedures related to program integrity and accountability. The department could not provide evidence risk assessments were completed because associated documentation was not retained for the CCR&R agencies for federal fiscal year 2022. Additionally, the department uses the risk assessments to document its review and consideration of audit reports, including Single Audit reports, so they could not demonstrate reviews occurred as part of the risk assessment process. Federal regulations require these risk assessments and audit report reviews. Questioned Costs: No questioned costs identified. Context: There are six CCR&R agencies, covering seven regions throughout the state. For risk assessment purposes, there are only six entities over which risk should be assessed. The department enters into separate agreements by region for contracting purposes, so there are seven contracts. As discussed in the condition above, we found issues in both years of the audit period. In total, the department paid the CCR&R agencies approximately $29.2 million during fiscal years 2022 and 2023, or 18 percent of the total program expenditures for the audit period. Effect: The department is not in compliance with federal subrecipient monitoring requirements and did not follow the procedures in the State Plan. The CCR&R agencies were not provided all the information required to identify their subawards. In addition, the CCR&R agencies may not have all of the information necessary to comply with the terms of the award and to meet all federal compliance requirements, which may limit the ability of subrecipients to comply. Subrecipients subject to Single Audits will also need this information for their audit. Additionally, the risk assessment process is an important element of internal controls over the compliance requirements carried out by the CCR&Rs. There is risk that the department may not appropriately monitor the activities of the subrecipients. Cause: The department’ standard contract template did not contain all required elements. In addressing prior audit findings 2021-051, 2021-052, and 2021-053 related to contract disclosures in other federal programs, the department centrally worked on an update to the contract templates. However, per department personnel, this update occurred too late for changes to be implemented for the 2022 contracts. Regarding the budget period information’s exclusion from the 2023 contracts, department personnel indicated the intent in the contract template is for the contract term to be the budget period, as communicated through the budget attachment. For these specific contracts, however, the budget attachment does not include the budget period. Regarding the risk assessments, program personnel indicated they believe the 2022 risk assessment were completed but saved over when the 2023 risk assessments were started. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over subrecipient monitoring for the Child Care Development Fund Cluster to ensure all award identification information is communicated to subrecipients, subrecipient risk assessments and associated audit report reviews are completed, and documentation is retained. B. Comply with federal subrecipient monitoring regulations and State Plan requirements by communicating all award identification information to subrecipients and by completing and retaining documentation of risk assessments and audit report reviews for subrecipients. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-060: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCCC5 Criteria: Federal regulation, 45 CFR 98.11(b)(4), states that in retaining overall responsibility for the administration of the program, lead agencies such as the Department of Public Health and Human Services (department) shall ensure the program complies with the approved state plan. Note that federal regulation 45 CFR 98.68(b) requires the state plan to (1) include a description of the processes in place to identify fraud and (2) recover fraudulent overpayments. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the department, to describe in their state plan the effective internal controls that are in place to ensure program integrity and accountability. Section 8.1.2 of the State Plan indicates that part of the department’s process to identify risk in the CCDF program include Child Care Resource and Referral (CCR&R) agency eligibility supervisors conducting a review of 10 percent of cases monthly, with the department reviewing the results. Section 8.1.5 of the State Plan further indicates the monthly CCR&R agency eligibility supervisor reviews, discussed above, are part of the department’s procedures to identify and prevent fraud or intentional program violations. The State Plan specifies these reviews: (1) aid in the identification and prevention of fraud and intentional program violations because they allow for a review of more eligibility cases where potential fraud can be identified; and (2) aid the state in identifying areas of concern that should be addressed in training, with the intent of helping CCR&R staff identify situations that could be instances of intentional program violations and fraud. Federal regulation, 2 CFR 200.334, requires the retention of financial records, supporting documents, statistical records, and all other non-federal records pertinent to a federal award for three years. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: As part of the audit, we noted the following monitoring tools that the department intended to have in place over the activities of the CCR&Rs were not consistently used during fiscal years 2022 and 2023: • The department intended to perform quarterly desk monitoring of the CCR&Rs for fiscal year 2023, using quarterly reports submitted by the CCR&Rs, instead of on-site monitoring at the start of the fiscal year. While the department intended to do these reviews, no desk reviews were fully completed and documented other than those for the year’s first quarter. • Monthly CCR&R agency supervisor reviews of eligibility determinations made by CCR&R staff did not occur for October 2021-August 2022, and December 2022-February 2023. Department staff indicated they use the desk monitoring and supervisor reviews to monitor the activities of the CCR&Rs, to mitigate risk, and to remain in a low error rate classification related to improper payments. As such, these monitoring tools are important controls over compliance requirements associated with eligibility for participation in the Best Beginnings Child Care Scholarship program (BBCCS) and monitoring the activities of the CCR&R agencies as subrecipients. Additionally, the State Plan describes the supervisor reviews as elements of the department’s internal controls to ensure program integrity and accountability. Questioned Costs: No questioned costs identified. Context: There are six CCR&R entities, covering seven regions throughout the state. The CCR&Rs perform various tasks to help the department administer the program, including determining eligibility for families to participate in the BBCCS. The department offers this program to qualified low-income families whose child or children receive care from approved providers. Payments issued to childcare providers for the BBCCS program, based in part on the eligibility determinations made by the CCR&R staff, totaled approximately $48 million in fiscal years 2022 and 2023 combined. Effect: Without effective internal controls, including those over retaining documentation, the department cannot demonstrate the steps they have taken to mitigate risk. There is also risk that absent this type of monitoring, program personnel will not timely become aware of challenges the CCR&Rs are facing related to implementing program requirements. Furthermore, the State Plan indicates the monthly CCR&R supervisor reviews are to be completed as part of the state’s procedures to ensure program integrity and accountability, including identifying risks within the program and identifying and preventing fraud or intentional program violations. However, the department has not complied with the State Plan regarding these reviews. These reviews are a State Plan certified tool to aid in identifying fraudulent overpayments, as mandated by federal regulations. Consequently, the department cannot fully demonstrate compliance with federal regulations regarding the identification and collection of fraudulent overpayments. Department personnel represented there were no fraudulent payments identified through other means in fiscal year 2022, and that one fraudulent payment was identified in fiscal year 2023. Based on our review, collection procedures were initiated on this payment in fiscal year 2024. Cause: Department personnel indicated there were staff capacity issues and turnover during the audit period, which impacted their ability to perform the CCR&R quarterly monitoring as initially intended. Additionally, the CCDF cluster received a significant influx in federal funding during the audit period, in response to the COVID-19 public health emergency. Administering these funds created more work for the department, and department personnel indicated this increased workload impacted their capacity to facilitate the monthly supervisor review process. Department personnel also asserted they undertook a project to re-work the supervisor review process with input from CCR&R supervisors, and that the new process was implemented in March of 2023. In September 2023, the department was facilitating the supervisor reviews for April 2023. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over monitoring the activities of the Child Care Resource and Referral agencies helping to carry out the objectives of the Child Care Development Fund Cluster, including following the monitoring procedures described in the State Plan. B. Comply with federal regulations regarding fraudulent payment detection. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-059: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCC5 Criteria: Federal regulation, 2 CFR 200.332(a)(1), lays out the fourteen required elements to be communicated to subrecipients to identify the federal award properly. Federal regulation, 2 CFR 200.332(b), requires non-federal entities to evaluate each subrecipient’s risk of noncompliance with federal statutes, regulations, and the terms and conditions of the subaward to determine the appropriate level of subrecipient monitoring. Federal regulation, 2 CFR 200.332(d), requires non-federal entities to monitor the subrecipient’s activities, including reviewing reports and resolving Single Audit findings related to the subaward. Federal regulation, 2 CFR 200.334, requires financial records, supporting documents, statistical records, and all other non-Federal entity records pertinent to a Federal award be retained for three years. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the Department of Public Health and Human Services (department), to describe in their state plan the effective internal controls in place to ensure program integrity and accountability. The department’s State Plan outlines the department’s processes for regularly evaluating internal control activities, including reviews of the Child Care Resource and Referral (CCR&R) agency audits to evaluate performance. The State Plan also indicates that prior to each contract year with the CCR&R agencies, the contract manager and fiscal analyst conduct a risk assessment on each agency, and that the risk assessment draws on the agency’s Single Audit (amongst other factors). Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: We noted the following instances where controls were ineffective in complying with federal regulations governing subrecipient monitoring, related to the CCR&R agencies. (1) The department’s internal controls were ineffective in ensuring that all of the federal award identification items required by 2 CFR 200.332(a)(1) were included in its subaward agreements with the CCR&R agencies in fiscal years 2022 and 23. The 2022 agreements do not include federal award identification number, award date, period of performance start and end date, budget period start and end date, identification of whether the award is research and development related, and the required information on indirect costs. The 2023 agreements contain all required elements other than the budget period start and end date. While the 2023 agreements include most of the required federal award identification information, the disclosed information is for the department’s most recent federal awards received. As part of our audit, we noted the department’s processes include moving expenditures between grant awards, to maximize grant funds as grants are nearing close-out. If similar practices to those we observed in the current audit period continue, it is possible the federal awards disclosed in the 2023 agreements will not be those to which the department ultimately attributes all the subaward expenditures. (2) The department's internal controls were ineffective in ensuring compliance with State Plan procedures related to program integrity and accountability. The department could not provide evidence risk assessments were completed because associated documentation was not retained for the CCR&R agencies for federal fiscal year 2022. Additionally, the department uses the risk assessments to document its review and consideration of audit reports, including Single Audit reports, so they could not demonstrate reviews occurred as part of the risk assessment process. Federal regulations require these risk assessments and audit report reviews. Questioned Costs: No questioned costs identified. Context: There are six CCR&R agencies, covering seven regions throughout the state. For risk assessment purposes, there are only six entities over which risk should be assessed. The department enters into separate agreements by region for contracting purposes, so there are seven contracts. As discussed in the condition above, we found issues in both years of the audit period. In total, the department paid the CCR&R agencies approximately $29.2 million during fiscal years 2022 and 2023, or 18 percent of the total program expenditures for the audit period. Effect: The department is not in compliance with federal subrecipient monitoring requirements and did not follow the procedures in the State Plan. The CCR&R agencies were not provided all the information required to identify their subawards. In addition, the CCR&R agencies may not have all of the information necessary to comply with the terms of the award and to meet all federal compliance requirements, which may limit the ability of subrecipients to comply. Subrecipients subject to Single Audits will also need this information for their audit. Additionally, the risk assessment process is an important element of internal controls over the compliance requirements carried out by the CCR&Rs. There is risk that the department may not appropriately monitor the activities of the subrecipients. Cause: The department’ standard contract template did not contain all required elements. In addressing prior audit findings 2021-051, 2021-052, and 2021-053 related to contract disclosures in other federal programs, the department centrally worked on an update to the contract templates. However, per department personnel, this update occurred too late for changes to be implemented for the 2022 contracts. Regarding the budget period information’s exclusion from the 2023 contracts, department personnel indicated the intent in the contract template is for the contract term to be the budget period, as communicated through the budget attachment. For these specific contracts, however, the budget attachment does not include the budget period. Regarding the risk assessments, program personnel indicated they believe the 2022 risk assessment were completed but saved over when the 2023 risk assessments were started. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over subrecipient monitoring for the Child Care Development Fund Cluster to ensure all award identification information is communicated to subrecipients, subrecipient risk assessments and associated audit report reviews are completed, and documentation is retained. B. Comply with federal subrecipient monitoring regulations and State Plan requirements by communicating all award identification information to subrecipients and by completing and retaining documentation of risk assessments and audit report reviews for subrecipients. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-060: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCCC5 Criteria: Federal regulation, 45 CFR 98.11(b)(4), states that in retaining overall responsibility for the administration of the program, lead agencies such as the Department of Public Health and Human Services (department) shall ensure the program complies with the approved state plan. Note that federal regulation 45 CFR 98.68(b) requires the state plan to (1) include a description of the processes in place to identify fraud and (2) recover fraudulent overpayments. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the department, to describe in their state plan the effective internal controls that are in place to ensure program integrity and accountability. Section 8.1.2 of the State Plan indicates that part of the department’s process to identify risk in the CCDF program include Child Care Resource and Referral (CCR&R) agency eligibility supervisors conducting a review of 10 percent of cases monthly, with the department reviewing the results. Section 8.1.5 of the State Plan further indicates the monthly CCR&R agency eligibility supervisor reviews, discussed above, are part of the department’s procedures to identify and prevent fraud or intentional program violations. The State Plan specifies these reviews: (1) aid in the identification and prevention of fraud and intentional program violations because they allow for a review of more eligibility cases where potential fraud can be identified; and (2) aid the state in identifying areas of concern that should be addressed in training, with the intent of helping CCR&R staff identify situations that could be instances of intentional program violations and fraud. Federal regulation, 2 CFR 200.334, requires the retention of financial records, supporting documents, statistical records, and all other non-federal records pertinent to a federal award for three years. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: As part of the audit, we noted the following monitoring tools that the department intended to have in place over the activities of the CCR&Rs were not consistently used during fiscal years 2022 and 2023: • The department intended to perform quarterly desk monitoring of the CCR&Rs for fiscal year 2023, using quarterly reports submitted by the CCR&Rs, instead of on-site monitoring at the start of the fiscal year. While the department intended to do these reviews, no desk reviews were fully completed and documented other than those for the year’s first quarter. • Monthly CCR&R agency supervisor reviews of eligibility determinations made by CCR&R staff did not occur for October 2021-August 2022, and December 2022-February 2023. Department staff indicated they use the desk monitoring and supervisor reviews to monitor the activities of the CCR&Rs, to mitigate risk, and to remain in a low error rate classification related to improper payments. As such, these monitoring tools are important controls over compliance requirements associated with eligibility for participation in the Best Beginnings Child Care Scholarship program (BBCCS) and monitoring the activities of the CCR&R agencies as subrecipients. Additionally, the State Plan describes the supervisor reviews as elements of the department’s internal controls to ensure program integrity and accountability. Questioned Costs: No questioned costs identified. Context: There are six CCR&R entities, covering seven regions throughout the state. The CCR&Rs perform various tasks to help the department administer the program, including determining eligibility for families to participate in the BBCCS. The department offers this program to qualified low-income families whose child or children receive care from approved providers. Payments issued to childcare providers for the BBCCS program, based in part on the eligibility determinations made by the CCR&R staff, totaled approximately $48 million in fiscal years 2022 and 2023 combined. Effect: Without effective internal controls, including those over retaining documentation, the department cannot demonstrate the steps they have taken to mitigate risk. There is also risk that absent this type of monitoring, program personnel will not timely become aware of challenges the CCR&Rs are facing related to implementing program requirements. Furthermore, the State Plan indicates the monthly CCR&R supervisor reviews are to be completed as part of the state’s procedures to ensure program integrity and accountability, including identifying risks within the program and identifying and preventing fraud or intentional program violations. However, the department has not complied with the State Plan regarding these reviews. These reviews are a State Plan certified tool to aid in identifying fraudulent overpayments, as mandated by federal regulations. Consequently, the department cannot fully demonstrate compliance with federal regulations regarding the identification and collection of fraudulent overpayments. Department personnel represented there were no fraudulent payments identified through other means in fiscal year 2022, and that one fraudulent payment was identified in fiscal year 2023. Based on our review, collection procedures were initiated on this payment in fiscal year 2024. Cause: Department personnel indicated there were staff capacity issues and turnover during the audit period, which impacted their ability to perform the CCR&R quarterly monitoring as initially intended. Additionally, the CCDF cluster received a significant influx in federal funding during the audit period, in response to the COVID-19 public health emergency. Administering these funds created more work for the department, and department personnel indicated this increased workload impacted their capacity to facilitate the monthly supervisor review process. Department personnel also asserted they undertook a project to re-work the supervisor review process with input from CCR&R supervisors, and that the new process was implemented in March of 2023. In September 2023, the department was facilitating the supervisor reviews for April 2023. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over monitoring the activities of the Child Care Resource and Referral agencies helping to carry out the objectives of the Child Care Development Fund Cluster, including following the monitoring procedures described in the State Plan. B. Comply with federal regulations regarding fraudulent payment detection. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-059: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCC5 Criteria: Federal regulation, 2 CFR 200.332(a)(1), lays out the fourteen required elements to be communicated to subrecipients to identify the federal award properly. Federal regulation, 2 CFR 200.332(b), requires non-federal entities to evaluate each subrecipient’s risk of noncompliance with federal statutes, regulations, and the terms and conditions of the subaward to determine the appropriate level of subrecipient monitoring. Federal regulation, 2 CFR 200.332(d), requires non-federal entities to monitor the subrecipient’s activities, including reviewing reports and resolving Single Audit findings related to the subaward. Federal regulation, 2 CFR 200.334, requires financial records, supporting documents, statistical records, and all other non-Federal entity records pertinent to a Federal award be retained for three years. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the Department of Public Health and Human Services (department), to describe in their state plan the effective internal controls in place to ensure program integrity and accountability. The department’s State Plan outlines the department’s processes for regularly evaluating internal control activities, including reviews of the Child Care Resource and Referral (CCR&R) agency audits to evaluate performance. The State Plan also indicates that prior to each contract year with the CCR&R agencies, the contract manager and fiscal analyst conduct a risk assessment on each agency, and that the risk assessment draws on the agency’s Single Audit (amongst other factors). Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: We noted the following instances where controls were ineffective in complying with federal regulations governing subrecipient monitoring, related to the CCR&R agencies. (1) The department’s internal controls were ineffective in ensuring that all of the federal award identification items required by 2 CFR 200.332(a)(1) were included in its subaward agreements with the CCR&R agencies in fiscal years 2022 and 23. The 2022 agreements do not include federal award identification number, award date, period of performance start and end date, budget period start and end date, identification of whether the award is research and development related, and the required information on indirect costs. The 2023 agreements contain all required elements other than the budget period start and end date. While the 2023 agreements include most of the required federal award identification information, the disclosed information is for the department’s most recent federal awards received. As part of our audit, we noted the department’s processes include moving expenditures between grant awards, to maximize grant funds as grants are nearing close-out. If similar practices to those we observed in the current audit period continue, it is possible the federal awards disclosed in the 2023 agreements will not be those to which the department ultimately attributes all the subaward expenditures. (2) The department's internal controls were ineffective in ensuring compliance with State Plan procedures related to program integrity and accountability. The department could not provide evidence risk assessments were completed because associated documentation was not retained for the CCR&R agencies for federal fiscal year 2022. Additionally, the department uses the risk assessments to document its review and consideration of audit reports, including Single Audit reports, so they could not demonstrate reviews occurred as part of the risk assessment process. Federal regulations require these risk assessments and audit report reviews. Questioned Costs: No questioned costs identified. Context: There are six CCR&R agencies, covering seven regions throughout the state. For risk assessment purposes, there are only six entities over which risk should be assessed. The department enters into separate agreements by region for contracting purposes, so there are seven contracts. As discussed in the condition above, we found issues in both years of the audit period. In total, the department paid the CCR&R agencies approximately $29.2 million during fiscal years 2022 and 2023, or 18 percent of the total program expenditures for the audit period. Effect: The department is not in compliance with federal subrecipient monitoring requirements and did not follow the procedures in the State Plan. The CCR&R agencies were not provided all the information required to identify their subawards. In addition, the CCR&R agencies may not have all of the information necessary to comply with the terms of the award and to meet all federal compliance requirements, which may limit the ability of subrecipients to comply. Subrecipients subject to Single Audits will also need this information for their audit. Additionally, the risk assessment process is an important element of internal controls over the compliance requirements carried out by the CCR&Rs. There is risk that the department may not appropriately monitor the activities of the subrecipients. Cause: The department’ standard contract template did not contain all required elements. In addressing prior audit findings 2021-051, 2021-052, and 2021-053 related to contract disclosures in other federal programs, the department centrally worked on an update to the contract templates. However, per department personnel, this update occurred too late for changes to be implemented for the 2022 contracts. Regarding the budget period information’s exclusion from the 2023 contracts, department personnel indicated the intent in the contract template is for the contract term to be the budget period, as communicated through the budget attachment. For these specific contracts, however, the budget attachment does not include the budget period. Regarding the risk assessments, program personnel indicated they believe the 2022 risk assessment were completed but saved over when the 2023 risk assessments were started. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over subrecipient monitoring for the Child Care Development Fund Cluster to ensure all award identification information is communicated to subrecipients, subrecipient risk assessments and associated audit report reviews are completed, and documentation is retained. B. Comply with federal subrecipient monitoring regulations and State Plan requirements by communicating all award identification information to subrecipients and by completing and retaining documentation of risk assessments and audit report reviews for subrecipients. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-060: U.S. Department of Health and Human Services ALN #93.575 and 93.596, Child Care Development Fund Cluster (CCDF) (COVID-19) Grant #2101MTCCDF, 2201MTCCDD, 2201MTCCDF, 2301MTCCDD, 2301MTCCDF, 2101MTCCC5 Criteria: Federal regulation, 45 CFR 98.11(b)(4), states that in retaining overall responsibility for the administration of the program, lead agencies such as the Department of Public Health and Human Services (department) shall ensure the program complies with the approved state plan. Note that federal regulation 45 CFR 98.68(b) requires the state plan to (1) include a description of the processes in place to identify fraud and (2) recover fraudulent overpayments. Federal regulation, 45 CFR 98.68(a), requires lead agencies, such as the department, to describe in their state plan the effective internal controls that are in place to ensure program integrity and accountability. Section 8.1.2 of the State Plan indicates that part of the department’s process to identify risk in the CCDF program include Child Care Resource and Referral (CCR&R) agency eligibility supervisors conducting a review of 10 percent of cases monthly, with the department reviewing the results. Section 8.1.5 of the State Plan further indicates the monthly CCR&R agency eligibility supervisor reviews, discussed above, are part of the department’s procedures to identify and prevent fraud or intentional program violations. The State Plan specifies these reviews: (1) aid in the identification and prevention of fraud and intentional program violations because they allow for a review of more eligibility cases where potential fraud can be identified; and (2) aid the state in identifying areas of concern that should be addressed in training, with the intent of helping CCR&R staff identify situations that could be instances of intentional program violations and fraud. Federal regulation, 2 CFR 200.334, requires the retention of financial records, supporting documents, statistical records, and all other non-federal records pertinent to a federal award for three years. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: As part of the audit, we noted the following monitoring tools that the department intended to have in place over the activities of the CCR&Rs were not consistently used during fiscal years 2022 and 2023: • The department intended to perform quarterly desk monitoring of the CCR&Rs for fiscal year 2023, using quarterly reports submitted by the CCR&Rs, instead of on-site monitoring at the start of the fiscal year. While the department intended to do these reviews, no desk reviews were fully completed and documented other than those for the year’s first quarter. • Monthly CCR&R agency supervisor reviews of eligibility determinations made by CCR&R staff did not occur for October 2021-August 2022, and December 2022-February 2023. Department staff indicated they use the desk monitoring and supervisor reviews to monitor the activities of the CCR&Rs, to mitigate risk, and to remain in a low error rate classification related to improper payments. As such, these monitoring tools are important controls over compliance requirements associated with eligibility for participation in the Best Beginnings Child Care Scholarship program (BBCCS) and monitoring the activities of the CCR&R agencies as subrecipients. Additionally, the State Plan describes the supervisor reviews as elements of the department’s internal controls to ensure program integrity and accountability. Questioned Costs: No questioned costs identified. Context: There are six CCR&R entities, covering seven regions throughout the state. The CCR&Rs perform various tasks to help the department administer the program, including determining eligibility for families to participate in the BBCCS. The department offers this program to qualified low-income families whose child or children receive care from approved providers. Payments issued to childcare providers for the BBCCS program, based in part on the eligibility determinations made by the CCR&R staff, totaled approximately $48 million in fiscal years 2022 and 2023 combined. Effect: Without effective internal controls, including those over retaining documentation, the department cannot demonstrate the steps they have taken to mitigate risk. There is also risk that absent this type of monitoring, program personnel will not timely become aware of challenges the CCR&Rs are facing related to implementing program requirements. Furthermore, the State Plan indicates the monthly CCR&R supervisor reviews are to be completed as part of the state’s procedures to ensure program integrity and accountability, including identifying risks within the program and identifying and preventing fraud or intentional program violations. However, the department has not complied with the State Plan regarding these reviews. These reviews are a State Plan certified tool to aid in identifying fraudulent overpayments, as mandated by federal regulations. Consequently, the department cannot fully demonstrate compliance with federal regulations regarding the identification and collection of fraudulent overpayments. Department personnel represented there were no fraudulent payments identified through other means in fiscal year 2022, and that one fraudulent payment was identified in fiscal year 2023. Based on our review, collection procedures were initiated on this payment in fiscal year 2024. Cause: Department personnel indicated there were staff capacity issues and turnover during the audit period, which impacted their ability to perform the CCR&R quarterly monitoring as initially intended. Additionally, the CCDF cluster received a significant influx in federal funding during the audit period, in response to the COVID-19 public health emergency. Administering these funds created more work for the department, and department personnel indicated this increased workload impacted their capacity to facilitate the monthly supervisor review process. Department personnel also asserted they undertook a project to re-work the supervisor review process with input from CCR&R supervisors, and that the new process was implemented in March of 2023. In September 2023, the department was facilitating the supervisor reviews for April 2023. Recommendation: We recommend the Department of Public Health and Human Services: A. Enhance internal controls over monitoring the activities of the Child Care Resource and Referral agencies helping to carry out the objectives of the Child Care Development Fund Cluster, including following the monitoring procedures described in the State Plan. B. Comply with federal regulations regarding fraudulent payment detection. Views of Responsible Officials: The department concurs with this recommendation. For additional information regarding the department’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-042: U.S. Department of Education ALN #84.371 Comprehensive Literacy Development Program Grant #S371C190012, S371C190012-19A, S371C190012-20, and S371C190012-21 Criteria: Federal regulation, 34 CFR 75.118, requires a recipient wanting to receive a continuation award to submit a performance report that provides the most current performance and financial expenditure information. Federal regulation, 34 CFR 75.720, requires these reports to be submitted annually unless the Secretary allows less frequent reporting. Federal regulation, 2 CFR 200.334, requires retaining supporting documents related to a federal award for three years from the date of the final expenditure report. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: The Office of Public Instruction (office) submitted a performance report to receive a Comprehensive Literacy State Development Program grant continuation award. The office’s internal controls were not adequate to ensure the amounts submitted were accurate and supported. We could not verify the accuracy of the “Other” line amounts in the third annual report (year three) Comprehensive Literacy Grant Annual Performance Report submitted during fiscal year 2023 because documentation was not retained. Questioned Costs: No questioned costs identified. Context: The year three report includes total expenditures of $8,715,409, of which $8,265,108 is not supported. The unsupported amount is related to expenditures reported on the “Other” line, primarily subrecipient allocations. Effect: Per federal regulations, if the office submits an inaccurate performance report, continued funding for the grant can be denied. The office did not submit a report that complied with federal regulations. Cause: Program staff indicated that the "Other" line amount mainly includes subrecipient information and should reflect actual expenditures plus subrecipient allocations. Due to staff turnover, supporting documentation was not retained. The state's accounting system reports actual expenditures, not allocations so it cannot be used to support the “Other” line item. Additionally, a new report cannot be generated from their grant system to support the report, as the allocations were point in time information that cannot be recreated. Recommendation: We recommend the Office of Public Instruction: A. Implement internal controls to ensure the report is supported before submission in accordance with federal regulations. B. Maintain support for amounts reported on the annual performance report as required by federal regulation in order to demonstrate accurate reporting. Views of Responsible Officials: The office concurs with the recommendation. For additional information regarding the office’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-042: U.S. Department of Education ALN #84.371 Comprehensive Literacy Development Program Grant #S371C190012, S371C190012-19A, S371C190012-20, and S371C190012-21 Criteria: Federal regulation, 34 CFR 75.118, requires a recipient wanting to receive a continuation award to submit a performance report that provides the most current performance and financial expenditure information. Federal regulation, 34 CFR 75.720, requires these reports to be submitted annually unless the Secretary allows less frequent reporting. Federal regulation, 2 CFR 200.334, requires retaining supporting documents related to a federal award for three years from the date of the final expenditure report. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: The Office of Public Instruction (office) submitted a performance report to receive a Comprehensive Literacy State Development Program grant continuation award. The office’s internal controls were not adequate to ensure the amounts submitted were accurate and supported. We could not verify the accuracy of the “Other” line amounts in the third annual report (year three) Comprehensive Literacy Grant Annual Performance Report submitted during fiscal year 2023 because documentation was not retained. Questioned Costs: No questioned costs identified. Context: The year three report includes total expenditures of $8,715,409, of which $8,265,108 is not supported. The unsupported amount is related to expenditures reported on the “Other” line, primarily subrecipient allocations. Effect: Per federal regulations, if the office submits an inaccurate performance report, continued funding for the grant can be denied. The office did not submit a report that complied with federal regulations. Cause: Program staff indicated that the "Other" line amount mainly includes subrecipient information and should reflect actual expenditures plus subrecipient allocations. Due to staff turnover, supporting documentation was not retained. The state's accounting system reports actual expenditures, not allocations so it cannot be used to support the “Other” line item. Additionally, a new report cannot be generated from their grant system to support the report, as the allocations were point in time information that cannot be recreated. Recommendation: We recommend the Office of Public Instruction: A. Implement internal controls to ensure the report is supported before submission in accordance with federal regulations. B. Maintain support for amounts reported on the annual performance report as required by federal regulation in order to demonstrate accurate reporting. Views of Responsible Officials: The office concurs with the recommendation. For additional information regarding the office’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-031: U.S. Department of Education ALN #84.425D and #84.425U, Education Stabilization Fund Grant #S425D200006, S010A200026-21A, S425U210006-21A Criteria: The Elementary and Secondary School Emergency Relief Fund (ESSER) is part of the Education Stabilization Fund. The ESSER reporting expectations for fiscal years 2022 and 2023 state that the annual reports provide the public with insight into how ESSER funds have been used, indicating it is important to report by expenditures category. In addition, in fiscal year 2023, the Office of Management & Budget Circular A-133 Compliance Supplement notes the following are ESSER annual report key line items: • Local Education Agency’s (LEA) expenditures by ESSER subgrant fund, expenditure category, and object code • Allocation of ESSER funds to schools and criteria used to allocate funds to schools, and • Full Time Equivalent (FTE) positions Federal regulation, 2 CFR 200.334, requires non-federal entities to retain records related to the federal awards. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: The Office of Public Instruction (office) did not accurately report all required elements of the ESSER annual reports submitted during fiscal years 2022 and 2023 contrary to federal requirements. In addition, although the office added some controls to the reporting process, like tying total expenditures reported to the state’s accounting system, they did not have sufficient controls in place to prevent, or detect and correct, material noncompliance related to ESSER annual reports submitted during fiscal years 2022 and 2023. Questioned Costs: No questioned costs identified. Context: The office submitted five spreadsheets each year for their ESSER annual reporting. We tested four spreadsheets each year, three focusing on ESSER I, ESSER II, and ESSER III. The fourth spreadsheet was called the Cross Act, which included total FTE employee information. All eight spreadsheets had inaccuracies as summarized below. • The office did not have the functionality to report ESSER I LEA's expenditures by category in their grants tracking system called E-Grants as required. Because the functionally was not available for ESSER I, all ESSER I expenditures were reported as "other items" for all reports submitted during the audit period. • The ESSER 2021 CARES report submitted to the federal government in July 2022 was not accurate when submitted, because the report did not include ESSER expenditures of $1.2 million spent by co-ops. The purpose of co-ops is for small to medium sized LEAs that pool resources in order to gain specialized services. The office is currently correcting these reports by adding the co-ops that were not included. • ESSER annual reporting requires expenditures to be reported by LEA, category, and type of expenditure. The reported information came from E-Grants, but the backup documentation was not retained to support the ESSER expenditures by category. This applies to ESSER I, II, and III reports provided to the federal government during the audit period. • We were not able to verify the accuracy of the key line items "allocation of ESSER funds to schools and the criteria used to allocate funds to schools" and "FTE". The LEAs reported this information and office personnel indicated there was no way to verify its accuracy. Office staff reported that LEA personnel do certify the data. These are key line items, indicating the federal government believes the items to be important. We also noted some FTEs that were likely inaccurate. For example, a youth correctional facility reported zero FTE. Repeat Finding: This is a repeat finding and was reported as Single Audit finding 2021-037 in the audit for the two fiscal years ended June 30, 2021. Effect: The office did not comply with federal reporting requirements for the ESSER program. As noted above, the federal government says the annual reports provide the public with insight into how ESSER funds have been used. This can’t be accomplished if the information in the report is unsupported. Cause: The office initially did not collect the level of expenditure detail needed to accurately complete the ESSER annual reports because guidance changed from the U. S. Department of Education after awarding ESSER I to the office. The office did not have the ability to amend the data collected in the E-Grants system, which resulted in reporting expenditure activities in the “other” categories. During the audit period, the office used E-Grants reports to compile expenditure data by category for ESSER II and III but did not retain documentation to support the reported data. Current staff members were unable to locate the supporting documents, because the person who ran and formatted the report was no longer with the office. The office can prevent this kind of knowledge loss by making sure multiple employees participate in the reporting process. Documenting internal controls related to the reporting process will also ensure compliance consistency, even when there is turnover. Recommendation: We recommend the Office of Public Instruction: A. Enhance internal controls to ensure annual reports are accurate and supported. B. Correct and resubmit previously submitted annual reports. C. Comply with federal regulations by reporting all required data elements in annual reports and retain support for the information reported. Views of Responsible Officials: The office concurs with this recommendation. For additional information regarding the office’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-031: U.S. Department of Education ALN #84.425D and #84.425U, Education Stabilization Fund Grant #S425D200006, S010A200026-21A, S425U210006-21A Criteria: The Elementary and Secondary School Emergency Relief Fund (ESSER) is part of the Education Stabilization Fund. The ESSER reporting expectations for fiscal years 2022 and 2023 state that the annual reports provide the public with insight into how ESSER funds have been used, indicating it is important to report by expenditures category. In addition, in fiscal year 2023, the Office of Management & Budget Circular A-133 Compliance Supplement notes the following are ESSER annual report key line items: • Local Education Agency’s (LEA) expenditures by ESSER subgrant fund, expenditure category, and object code • Allocation of ESSER funds to schools and criteria used to allocate funds to schools, and • Full Time Equivalent (FTE) positions Federal regulation, 2 CFR 200.334, requires non-federal entities to retain records related to the federal awards. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: The Office of Public Instruction (office) did not accurately report all required elements of the ESSER annual reports submitted during fiscal years 2022 and 2023 contrary to federal requirements. In addition, although the office added some controls to the reporting process, like tying total expenditures reported to the state’s accounting system, they did not have sufficient controls in place to prevent, or detect and correct, material noncompliance related to ESSER annual reports submitted during fiscal years 2022 and 2023. Questioned Costs: No questioned costs identified. Context: The office submitted five spreadsheets each year for their ESSER annual reporting. We tested four spreadsheets each year, three focusing on ESSER I, ESSER II, and ESSER III. The fourth spreadsheet was called the Cross Act, which included total FTE employee information. All eight spreadsheets had inaccuracies as summarized below. • The office did not have the functionality to report ESSER I LEA's expenditures by category in their grants tracking system called E-Grants as required. Because the functionally was not available for ESSER I, all ESSER I expenditures were reported as "other items" for all reports submitted during the audit period. • The ESSER 2021 CARES report submitted to the federal government in July 2022 was not accurate when submitted, because the report did not include ESSER expenditures of $1.2 million spent by co-ops. The purpose of co-ops is for small to medium sized LEAs that pool resources in order to gain specialized services. The office is currently correcting these reports by adding the co-ops that were not included. • ESSER annual reporting requires expenditures to be reported by LEA, category, and type of expenditure. The reported information came from E-Grants, but the backup documentation was not retained to support the ESSER expenditures by category. This applies to ESSER I, II, and III reports provided to the federal government during the audit period. • We were not able to verify the accuracy of the key line items "allocation of ESSER funds to schools and the criteria used to allocate funds to schools" and "FTE". The LEAs reported this information and office personnel indicated there was no way to verify its accuracy. Office staff reported that LEA personnel do certify the data. These are key line items, indicating the federal government believes the items to be important. We also noted some FTEs that were likely inaccurate. For example, a youth correctional facility reported zero FTE. Repeat Finding: This is a repeat finding and was reported as Single Audit finding 2021-037 in the audit for the two fiscal years ended June 30, 2021. Effect: The office did not comply with federal reporting requirements for the ESSER program. As noted above, the federal government says the annual reports provide the public with insight into how ESSER funds have been used. This can’t be accomplished if the information in the report is unsupported. Cause: The office initially did not collect the level of expenditure detail needed to accurately complete the ESSER annual reports because guidance changed from the U. S. Department of Education after awarding ESSER I to the office. The office did not have the ability to amend the data collected in the E-Grants system, which resulted in reporting expenditure activities in the “other” categories. During the audit period, the office used E-Grants reports to compile expenditure data by category for ESSER II and III but did not retain documentation to support the reported data. Current staff members were unable to locate the supporting documents, because the person who ran and formatted the report was no longer with the office. The office can prevent this kind of knowledge loss by making sure multiple employees participate in the reporting process. Documenting internal controls related to the reporting process will also ensure compliance consistency, even when there is turnover. Recommendation: We recommend the Office of Public Instruction: A. Enhance internal controls to ensure annual reports are accurate and supported. B. Correct and resubmit previously submitted annual reports. C. Comply with federal regulations by reporting all required data elements in annual reports and retain support for the information reported. Views of Responsible Officials: The office concurs with this recommendation. For additional information regarding the office’s planned corrective action see the Corrective Action Plan starting on page D-1.
Finding 2023-031: U.S. Department of Education ALN #84.425D and #84.425U, Education Stabilization Fund Grant #S425D200006, S010A200026-21A, S425U210006-21A Criteria: The Elementary and Secondary School Emergency Relief Fund (ESSER) is part of the Education Stabilization Fund. The ESSER reporting expectations for fiscal years 2022 and 2023 state that the annual reports provide the public with insight into how ESSER funds have been used, indicating it is important to report by expenditures category. In addition, in fiscal year 2023, the Office of Management & Budget Circular A-133 Compliance Supplement notes the following are ESSER annual report key line items: • Local Education Agency’s (LEA) expenditures by ESSER subgrant fund, expenditure category, and object code • Allocation of ESSER funds to schools and criteria used to allocate funds to schools, and • Full Time Equivalent (FTE) positions Federal regulation, 2 CFR 200.334, requires non-federal entities to retain records related to the federal awards. Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things, 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. Condition: The Office of Public Instruction (office) did not accurately report all required elements of the ESSER annual reports submitted during fiscal years 2022 and 2023 contrary to federal requirements. In addition, although the office added some controls to the reporting process, like tying total expenditures reported to the state’s accounting system, they did not have sufficient controls in place to prevent, or detect and correct, material noncompliance related to ESSER annual reports submitted during fiscal years 2022 and 2023. Questioned Costs: No questioned costs identified. Context: The office submitted five spreadsheets each year for their ESSER annual reporting. We tested four spreadsheets each year, three focusing on ESSER I, ESSER II, and ESSER III. The fourth spreadsheet was called the Cross Act, which included total FTE employee information. All eight spreadsheets had inaccuracies as summarized below. • The office did not have the functionality to report ESSER I LEA's expenditures by category in their grants tracking system called E-Grants as required. Because the functionally was not available for ESSER I, all ESSER I expenditures were reported as "other items" for all reports submitted during the audit period. • The ESSER 2021 CARES report submitted to the federal government in July 2022 was not accurate when submitted, because the report did not include ESSER expenditures of $1.2 million spent by co-ops. The purpose of co-ops is for small to medium sized LEAs that pool resources in order to gain specialized services. The office is currently correcting these reports by adding the co-ops that were not included. • ESSER annual reporting requires expenditures to be reported by LEA, category, and type of expenditure. The reported information came from E-Grants, but the backup documentation was not retained to support the ESSER expenditures by category. This applies to ESSER I, II, and III reports provided to the federal government during the audit period. • We were not able to verify the accuracy of the key line items "allocation of ESSER funds to schools and the criteria used to allocate funds to schools" and "FTE". The LEAs reported this information and office personnel indicated there was no way to verify its accuracy. Office staff reported that LEA personnel do certify the data. These are key line items, indicating the federal government believes the items to be important. We also noted some FTEs that were likely inaccurate. For example, a youth correctional facility reported zero FTE. Repeat Finding: This is a repeat finding and was reported as Single Audit finding 2021-037 in the audit for the two fiscal years ended June 30, 2021. Effect: The office did not comply with federal reporting requirements for the ESSER program. As noted above, the federal government says the annual reports provide the public with insight into how ESSER funds have been used. This can’t be accomplished if the information in the report is unsupported. Cause: The office initially did not collect the level of expenditure detail needed to accurately complete the ESSER annual reports because guidance changed from the U. S. Department of Education after awarding ESSER I to the office. The office did not have the ability to amend the data collected in the E-Grants system, which resulted in reporting expenditure activities in the “other” categories. During the audit period, the office used E-Grants reports to compile expenditure data by category for ESSER II and III but did not retain documentation to support the reported data. Current staff members were unable to locate the supporting documents, because the person who ran and formatted the report was no longer with the office. The office can prevent this kind of knowledge loss by making sure multiple employees participate in the reporting process. Documenting internal controls related to the reporting process will also ensure compliance consistency, even when there is turnover. Recommendation: We recommend the Office of Public Instruction: A. Enhance internal controls to ensure annual reports are accurate and supported. B. Correct and resubmit previously submitted annual reports. C. Comply with federal regulations by reporting all required data elements in annual reports and retain support for the information reported. Views of Responsible Officials: The office concurs with this recommendation. For additional information regarding the office’s planned corrective action see the Corrective Action Plan starting on page D-1.