2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. 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 Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. 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. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. 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 expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance 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. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. 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: SLFRP0002 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 Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. 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 Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. 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 expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable 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.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. 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: SLFRP0002 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 Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. 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. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. 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 expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 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 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. 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. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. 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 Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. 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. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. 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 expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance 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. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. 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: SLFRP0002 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 Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. 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 Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. 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 expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable 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.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. 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: SLFRP0002 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 Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. 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. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. 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 expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 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 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. 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. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. 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 Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. 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. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. 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 expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance 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. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-051 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers paid with Temporary Assistance for Needy Families funds were allowable and property supported. Assistance Listing Number and Title: 93.558 Temporary Assistance for Needy Families Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2201WATANF; 2301WATANF Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $107,338,725 Prior Year Audit Finding: Yes, Finding 2022-035 Background The Department of Social and Health Service (DSHS), Community Services Office, administers the Temporary Assistance for Needy Families (TANF) grant that provides temporary cash assistance for families in need. To receive TANF benefits, participants must be engaged in activities listed in the Individual Responsibility Plan through the WorkFirst program, unless the TANF benefits are received only on behalf of a child. TANF grant funds are also used to pay clients’ child care costs to meet one of the program’s primary purposes of helping clients obtain employment. Washington has established the Working Connections Child Care (WCCC) program to help eligible working families pay for child care. Both the Department of Children, Youth, and Families (Department) and DSHS administer the program. The Department is responsible for establishing policies and procedures for licensing child care providers and paying them for allowable child care services. DSHS determines TANF client eligibility and reimburses the Department for child care payments under an agreement between the two agencies. In fiscal year 2023, DSHS paid $107,338,725 related to child care services. The Department uses its Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple Child Care Development Fund (CCDF) federal grant awards, and state funding. The Department uploads the payment data into the state’s accounting system at a summary level based on the various funding sources. DSHS worked with the Department to setup coding in the Payment Allocating Model system that looks at the client-level information and then assigns the correct TANF source of funds. Once the source of funds is identified, that information is then sent to SSPS for allocation assignment. The Department prepares electronic reports for funds allocated to TANF funding sources and sends DSHS a monthly bill. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. Some payments the Department makes for child care are funded by both the CCDF and TANF grants. While the two federal programs are separate, the requirements and policies in Washington for child care payments are consolidated under the WCCC program. Federal regulations require grant fund expenditures to be adequately supported to show that they have been used in accordance with program requirements. Federal regulations require recipients to establish and follow internal controls that 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 Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers paid with TANF funds were allowable and properly supported. The prior finding numbers were 2022-035 and 2021-028. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers paid with TANF funds were allowable and properly supported. To identify TANF-funded payments the Department made to child care providers, we requested a population of payments charged to TANF sources from SSPS. However, in fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent TANF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions from SSPS that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. Officials from the U.S. Department of Health and Human Services informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition and Questioned Costs By not complying with federal law regarding maintaining adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. Because the Department did not comply with federal requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $107,338,725 in federal program costs for child care payments that DSHS paid during the audit period. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Update service level agreements with DSHS to ensure payments are sufficient and properly supported • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the Working Connections Child Care (WCCC) program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the TANF grant. The Department allocated the TANF grant to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds for the CCDF or TANF grants. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF and TANF source of funds with the same eligibility requirements, the Department is confident TANF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-051 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers paid with Temporary Assistance for Needy Families funds were allowable and property supported. Assistance Listing Number and Title: 93.558 Temporary Assistance for Needy Families Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2201WATANF; 2301WATANF Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $107,338,725 Prior Year Audit Finding: Yes, Finding 2022-035 Background The Department of Social and Health Service (DSHS), Community Services Office, administers the Temporary Assistance for Needy Families (TANF) grant that provides temporary cash assistance for families in need. To receive TANF benefits, participants must be engaged in activities listed in the Individual Responsibility Plan through the WorkFirst program, unless the TANF benefits are received only on behalf of a child. TANF grant funds are also used to pay clients’ child care costs to meet one of the program’s primary purposes of helping clients obtain employment. Washington has established the Working Connections Child Care (WCCC) program to help eligible working families pay for child care. Both the Department of Children, Youth, and Families (Department) and DSHS administer the program. The Department is responsible for establishing policies and procedures for licensing child care providers and paying them for allowable child care services. DSHS determines TANF client eligibility and reimburses the Department for child care payments under an agreement between the two agencies. In fiscal year 2023, DSHS paid $107,338,725 related to child care services. The Department uses its Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple Child Care Development Fund (CCDF) federal grant awards, and state funding. The Department uploads the payment data into the state’s accounting system at a summary level based on the various funding sources. DSHS worked with the Department to setup coding in the Payment Allocating Model system that looks at the client-level information and then assigns the correct TANF source of funds. Once the source of funds is identified, that information is then sent to SSPS for allocation assignment. The Department prepares electronic reports for funds allocated to TANF funding sources and sends DSHS a monthly bill. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. Some payments the Department makes for child care are funded by both the CCDF and TANF grants. While the two federal programs are separate, the requirements and policies in Washington for child care payments are consolidated under the WCCC program. Federal regulations require grant fund expenditures to be adequately supported to show that they have been used in accordance with program requirements. Federal regulations require recipients to establish and follow internal controls that 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 Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers paid with TANF funds were allowable and properly supported. The prior finding numbers were 2022-035 and 2021-028. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers paid with TANF funds were allowable and properly supported. To identify TANF-funded payments the Department made to child care providers, we requested a population of payments charged to TANF sources from SSPS. However, in fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent TANF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions from SSPS that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. Officials from the U.S. Department of Health and Human Services informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition and Questioned Costs By not complying with federal law regarding maintaining adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. Because the Department did not comply with federal requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $107,338,725 in federal program costs for child care payments that DSHS paid during the audit period. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Update service level agreements with DSHS to ensure payments are sufficient and properly supported • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the Working Connections Child Care (WCCC) program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the TANF grant. The Department allocated the TANF grant to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds for the CCDF or TANF grants. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF and TANF source of funds with the same eligibility requirements, the Department is confident TANF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-034 The Office of Superintendent of Public Instruction did not have adequate internal controls over and did not comply with requirements to ensure it met the earmarking requirements for the Special Education program. Assistance Listing Number and Title: 84.027 Special Education Grants to States (IDEA, Part B) 84.027 COVID-19 Special Education Grants to States (IDEA, Part B) 84.173 Special Education–Preschool Grants (IDEA Preschool) 84.173 COVID-19 Special Education–Preschool Grants (IDEA Preschool) Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: H027A200074-20A; H027A210074-21A; H027A220074–21A; H027X210074; H173A200074; H173A210074; H173A220074; H173X210074 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Earmarking Known Questioned Cost Amount: $378,206 Prior Year Audit Finding: Yes, Finding 2022-025 Background The Individuals with Disabilities Education Act’s (IDEA) Special Education Grants to States program (IDEA, Part B) provides grants to states, and through them to local educational agencies (LEAs), to help provide special education and related services to eligible children with disabilities. IDEA’s Special Education Preschool Grants program (IDEA Preschool), also known as the “619 program,” provides grants to states, and through them to LEAs, to assist with providing special education and related services to children with disabilities ages 3 through 5 and, at a state’s discretion, to 2-year-old children with disabilities who will turn 3 during the school year. The Office of Superintendent of Public Instruction administers the Special Education program in Washington, which serves about 143,000 eligible students. The program provides specially designed instruction that addresses students’ unique needs. The Office offers the program at no cost to parents, and it includes the related services students need to access their educational program. The Office spent about $282 million in federal IDEA grant funds during fiscal year 2023, and passed about $278 million of that funding through to LEAs and educational service districts. IDEA, Part B identifies the amount of funds the Office must distribute to its LEAs on a formula basis, as well as the amount it can set aside for administration and other state-level activities. The Office was awarded $8,433,118 for the fiscal year 2021 IDEA Preschool Grant. From this award, $2,222,340 was earmarked to be spent on state-level activities. This is split between administrative costs of up to $444,468 and other state-level activities for the remaining amount. 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 it met the earmarking requirements for the program. The prior finding number was 2022-025. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure it met the earmarking requirements for the program. During the audit period, the Office did not accurately track expenditures for administration and other state-level activities. For the life of the grant, the Office spent $2,600,340 on other state-level activities, which exceeded the maximum by $378,206. As a result, we are questioning the $378,206 as unallowable state-level costs. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Although management were aware of the required earmarks, the Office did not address identified variances in the spending plan for them. This was due in part to staff changes within the program that led to inconsistencies in tracking expenditures of the earmarked funds. Effect of Condition and Questioned Costs Without adequate internal controls, the Office cannot ensure that it meets the grant’s earmarking requirements. By not complying with the grant’s earmarking requirements, the Office improperly spent $378,206 on activities that exceeded the allowable earmarked amount. 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 expenditures. Recommendations We recommend the Office: • Improve internal controls to ensure it does not exceed the maximum allowable amounts that are earmarked for administration and other state-level activities • Consult with the federal grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office of Superintendent of Public Instruction (OSPI) concurs with this finding. When special education fiscal leadership transitioned in 2021, the incoming director identified necessary changes in agency procedures for closing out the fiscal year for special education. Since that time, the following internal controls have been fully implemented to ensure spending plans do not exceed the maximum allowable amounts earmarked for administration and other state-level activities: 1. At the beginning of the fiscal year, the Director of Operations/Budget Analysis meet to review the criteria for spending plans. 2. Copies of GAN and Grants to States Summary Table and Preschool Grants to States Summary Table are shared with the Budget Analysis. 3. Director of Operations/Budget Analysis meet to review the GAN and Grants to States Summary Table and Preschool Grants to States Summary Table. 4. Director of Operations/Budget Analysis meet to review spending plan and update the maximum allowable amounts earmarked for administration and other state-level activities in the spending plan. 5. Maximum allowable amounts earmarked for administration and other state-level activities are reviewed throughout the fiscal year. 6. Director of Operations/Budget Analysis meet weekly to review spending plan. 7. Spending Plan updated as requests are received. 8. Monthly expenditure reports are produced and during weekly meetings, Director of Operations/Budget Analysis review expenditures. These internal controls have contributed to increased communication and partnership between the Director of Operations/Budget Analysis. With implementing these consistent controls, we can ensure that maximum allowable amounts that are earmarked for administration and other state-level activities will meet compliance. Auditor’s Remarks We thank the Office for its cooperation and assistance throughout the audit. We will review the status of the Office's corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 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 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 34 CFR Part 300, Assistance to States for the Education of Children with Disabilities, states in part: Section 300.812 Reservation for State activities, states: a. Each State may reserve not more than the amount described in paragraph (b) of this section for administration and other State-level activities in accordance with §§ 300.813 and 300.814. b. For each fiscal year, the Secretary determined and reports to the SEA an amount that is 25% of the amount the State received under section 619 of the Act for fiscal year 1997 cumulatively adjusted by the secretary for each succeeding fiscal year by the lesser of – 1. The percentage increase, if any, from the preceding fiscal year in the State’s allocation under section 619 of the Act; or 2. The rate of inflation, as measured by the percentage increase, if any, from the preceding fiscal year in the Consumer Price Index for All Urban Consumers, published by the Bureau of Labor Statistics to the Department of Labor. Section 300.813 State administration, states: a. For the purpose of administering section 619 of the Act (including the coordination of activities under Part B with the Act with, and providing technical assistance to, other programs that provide services to children with disabilities), a State may use not more than 20 percent of the maximum amount the State may reserve under § 300.812 for any fiscal year. b. Funds described in paragraph (a) of this section may also be used for the administration of Part C of the Act. Section 300.814 Other State-level activities. Each State must use any funds the State reserves under § 300.812 and does not use for administration under § 300.813 – a. For support services (including establishing and implementing the mediation process required by section 615€ of the Act), which may benefit children with disabilities younger than three or older than five as long as those services also benefit children with disabilities aged three through five; b. For direct services for children eligible for services under section 619 of the Act; c. For activities at the State and local levels to meet the performance goals established by the State under section 612(a)(15) of the Act; d. To supplement other funds used to develop and implement a statewide coordinated services system designed to improve results for children and families, including children with disabilities and their families, but not more than one percent of the amount received under section 619 of the Act for a fiscal year; e. To provide early intervention services (which must include an educational component that promotes school readiness and incorporates preliteracy, language, and numeracy skills) in accordance with Part C of the Act to children with disabilities who are eligible for services under section 619 of the Act and who previously received services under Part C of the Act until such children enter, or are eligible under State law to enter, kindergarten; or f. At the State's discretion, to continue service coordination or case management for families who receive services under Part C of the Act, consistent with § 300.814(e) 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.
2023-035 The Office of Superintendent of Public Instruction improperly charged $42,265 to the Special Education Cluster. Assistance Listing Number and Title: 84.027 Special Education Grants to States (IDEA, Part B) 84.027 COVID-19 Special Education Grants to States (IDEA, Part B) 84.173 Special Education–Preschool Grants (IDEA Preschool) 84.173 COVID-19 Special Education–Preschool Grants (IDEA Preschool) Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: H027A200074-20A; H027A210074-21A; H027A220074–21A; H027X210074; H173A200074; H173A210074; H173A220074; H173X210074 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: $42,265 Prior Year Audit Finding: No Background The Individuals with Disabilities Education Act’s (IDEA) Special Education Grants to States program (IDEA, Part B) provides grants to states, and through them to local educational agencies (LEAs), to help provide special education and related services to eligible children with disabilities. IDEA’s Special Education Preschool Grants program (IDEA Preschool), also known as the “619 program,” provides grants to states, and through them to LEAs, to assist with providing special education and related services to children with disabilities ages 3 through 5 and, at a state’s discretion, to 2-year-old children with disabilities who will turn 3 during the school year. The Office of Superintendent of Public Instruction administers the Special Education program in Washington, which serves about 143,000 eligible students. The program provides specially designed instruction that addresses students’ unique needs. The Office offers the program at no cost to parents, and it includes the related services students need to access their educational program. The Office spent about $282 million in federal IDEA grant funds during fiscal year 2023, and passed about $278 million of that funding through to LEAs and educational service districts. IDEA, Part B identified that obligations charged to the fiscal year 2021 Special Education grants must be liquidated within 120 days after the budget period ended on September 30, 2022. Description of Condition The Office improperly charged $42,265 to the Special Education Cluster. We found the Office had adequate internal controls to ensure it materially complied with period of performance requirements. However, we examined two charges that were coded to the fiscal year 2021 Special Education grants after the liquidation period ended. We reviewed the supporting documentation for each expenditure to ensure it was allowable and took place during the period of performance. We found that both charges were recorded after the liquidation period for services and purchases that occurred during the period of performance. Federal regulations require the auditor to issue a finding when the known or estimated questioned costs identified in a single audit exceed $25,000. We are issuing this finding because, as stated in the Effect of Condition and Questioned Costs section of this finding, the estimated questioned costs exceed that threshold. This issue was not reported as a finding in the prior audit. Cause of Condition Office staff made accounting adjustments to the fiscal year 2021 IDEA, Part B grants after the liquidation period ended, and did not request a late liquidation from the U.S Department of Education. Effect of Condition and Questioned Costs We identified $42,265 in questioned costs that were paid outside the program’s period of performance. 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 expenditures. Recommendation We recommend the Office consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid. Office’s Response OSPI has established internal controls to address allowable periods for journal vouchers (corrections). The correction cycle will be aligned with federally established liquidation periods. OSPI will communicate the corrective action plan with internal stakeholders to ensure compliance with updated process/procedures. Internal Control Details: • Monitor expenditures (through monthly reports) to ensure the agency stays within the allowable set-aside threshold and grant maximum • Complete expenditure corrections within the grant liquidation period • Liquidation is done on the last business day of January (or 120 days after the budget period ends) • Submit late liquidation requests to the appropriate federal point of contact, as needed Auditor’s Remarks We thank the Office for its cooperation and assistance throughout the audit. We will review the status of the Office’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Fiscal Year 2021 Special Education Grant Award, Grant Award Notification, establishes the federal funding period for award numbers H173A200074 and H027A200074 as July 1, 2018, through September 30, 2021. Title 20 United States Code 1225(b), Section 421(b), General Education Provisions Act, establishes that any funds that are not obligated at the end of the federal funding period shall remain available for obligation for an additional period of 12 months
2023-034 The Office of Superintendent of Public Instruction did not have adequate internal controls over and did not comply with requirements to ensure it met the earmarking requirements for the Special Education program. Assistance Listing Number and Title: 84.027 Special Education Grants to States (IDEA, Part B) 84.027 COVID-19 Special Education Grants to States (IDEA, Part B) 84.173 Special Education–Preschool Grants (IDEA Preschool) 84.173 COVID-19 Special Education–Preschool Grants (IDEA Preschool) Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: H027A200074-20A; H027A210074-21A; H027A220074–21A; H027X210074; H173A200074; H173A210074; H173A220074; H173X210074 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Earmarking Known Questioned Cost Amount: $378,206 Prior Year Audit Finding: Yes, Finding 2022-025 Background The Individuals with Disabilities Education Act’s (IDEA) Special Education Grants to States program (IDEA, Part B) provides grants to states, and through them to local educational agencies (LEAs), to help provide special education and related services to eligible children with disabilities. IDEA’s Special Education Preschool Grants program (IDEA Preschool), also known as the “619 program,” provides grants to states, and through them to LEAs, to assist with providing special education and related services to children with disabilities ages 3 through 5 and, at a state’s discretion, to 2-year-old children with disabilities who will turn 3 during the school year. The Office of Superintendent of Public Instruction administers the Special Education program in Washington, which serves about 143,000 eligible students. The program provides specially designed instruction that addresses students’ unique needs. The Office offers the program at no cost to parents, and it includes the related services students need to access their educational program. The Office spent about $282 million in federal IDEA grant funds during fiscal year 2023, and passed about $278 million of that funding through to LEAs and educational service districts. IDEA, Part B identifies the amount of funds the Office must distribute to its LEAs on a formula basis, as well as the amount it can set aside for administration and other state-level activities. The Office was awarded $8,433,118 for the fiscal year 2021 IDEA Preschool Grant. From this award, $2,222,340 was earmarked to be spent on state-level activities. This is split between administrative costs of up to $444,468 and other state-level activities for the remaining amount. 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 it met the earmarking requirements for the program. The prior finding number was 2022-025. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure it met the earmarking requirements for the program. During the audit period, the Office did not accurately track expenditures for administration and other state-level activities. For the life of the grant, the Office spent $2,600,340 on other state-level activities, which exceeded the maximum by $378,206. As a result, we are questioning the $378,206 as unallowable state-level costs. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Although management were aware of the required earmarks, the Office did not address identified variances in the spending plan for them. This was due in part to staff changes within the program that led to inconsistencies in tracking expenditures of the earmarked funds. Effect of Condition and Questioned Costs Without adequate internal controls, the Office cannot ensure that it meets the grant’s earmarking requirements. By not complying with the grant’s earmarking requirements, the Office improperly spent $378,206 on activities that exceeded the allowable earmarked amount. 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 expenditures. Recommendations We recommend the Office: • Improve internal controls to ensure it does not exceed the maximum allowable amounts that are earmarked for administration and other state-level activities • Consult with the federal grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office of Superintendent of Public Instruction (OSPI) concurs with this finding. When special education fiscal leadership transitioned in 2021, the incoming director identified necessary changes in agency procedures for closing out the fiscal year for special education. Since that time, the following internal controls have been fully implemented to ensure spending plans do not exceed the maximum allowable amounts earmarked for administration and other state-level activities: 1. At the beginning of the fiscal year, the Director of Operations/Budget Analysis meet to review the criteria for spending plans. 2. Copies of GAN and Grants to States Summary Table and Preschool Grants to States Summary Table are shared with the Budget Analysis. 3. Director of Operations/Budget Analysis meet to review the GAN and Grants to States Summary Table and Preschool Grants to States Summary Table. 4. Director of Operations/Budget Analysis meet to review spending plan and update the maximum allowable amounts earmarked for administration and other state-level activities in the spending plan. 5. Maximum allowable amounts earmarked for administration and other state-level activities are reviewed throughout the fiscal year. 6. Director of Operations/Budget Analysis meet weekly to review spending plan. 7. Spending Plan updated as requests are received. 8. Monthly expenditure reports are produced and during weekly meetings, Director of Operations/Budget Analysis review expenditures. These internal controls have contributed to increased communication and partnership between the Director of Operations/Budget Analysis. With implementing these consistent controls, we can ensure that maximum allowable amounts that are earmarked for administration and other state-level activities will meet compliance. Auditor’s Remarks We thank the Office for its cooperation and assistance throughout the audit. We will review the status of the Office's corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 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 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 34 CFR Part 300, Assistance to States for the Education of Children with Disabilities, states in part: Section 300.812 Reservation for State activities, states: a. Each State may reserve not more than the amount described in paragraph (b) of this section for administration and other State-level activities in accordance with §§ 300.813 and 300.814. b. For each fiscal year, the Secretary determined and reports to the SEA an amount that is 25% of the amount the State received under section 619 of the Act for fiscal year 1997 cumulatively adjusted by the secretary for each succeeding fiscal year by the lesser of – 1. The percentage increase, if any, from the preceding fiscal year in the State’s allocation under section 619 of the Act; or 2. The rate of inflation, as measured by the percentage increase, if any, from the preceding fiscal year in the Consumer Price Index for All Urban Consumers, published by the Bureau of Labor Statistics to the Department of Labor. Section 300.813 State administration, states: a. For the purpose of administering section 619 of the Act (including the coordination of activities under Part B with the Act with, and providing technical assistance to, other programs that provide services to children with disabilities), a State may use not more than 20 percent of the maximum amount the State may reserve under § 300.812 for any fiscal year. b. Funds described in paragraph (a) of this section may also be used for the administration of Part C of the Act. Section 300.814 Other State-level activities. Each State must use any funds the State reserves under § 300.812 and does not use for administration under § 300.813 – a. For support services (including establishing and implementing the mediation process required by section 615€ of the Act), which may benefit children with disabilities younger than three or older than five as long as those services also benefit children with disabilities aged three through five; b. For direct services for children eligible for services under section 619 of the Act; c. For activities at the State and local levels to meet the performance goals established by the State under section 612(a)(15) of the Act; d. To supplement other funds used to develop and implement a statewide coordinated services system designed to improve results for children and families, including children with disabilities and their families, but not more than one percent of the amount received under section 619 of the Act for a fiscal year; e. To provide early intervention services (which must include an educational component that promotes school readiness and incorporates preliteracy, language, and numeracy skills) in accordance with Part C of the Act to children with disabilities who are eligible for services under section 619 of the Act and who previously received services under Part C of the Act until such children enter, or are eligible under State law to enter, kindergarten; or f. At the State's discretion, to continue service coordination or case management for families who receive services under Part C of the Act, consistent with § 300.814(e) 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.
2023-035 The Office of Superintendent of Public Instruction improperly charged $42,265 to the Special Education Cluster. Assistance Listing Number and Title: 84.027 Special Education Grants to States (IDEA, Part B) 84.027 COVID-19 Special Education Grants to States (IDEA, Part B) 84.173 Special Education–Preschool Grants (IDEA Preschool) 84.173 COVID-19 Special Education–Preschool Grants (IDEA Preschool) Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: H027A200074-20A; H027A210074-21A; H027A220074–21A; H027X210074; H173A200074; H173A210074; H173A220074; H173X210074 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: $42,265 Prior Year Audit Finding: No Background The Individuals with Disabilities Education Act’s (IDEA) Special Education Grants to States program (IDEA, Part B) provides grants to states, and through them to local educational agencies (LEAs), to help provide special education and related services to eligible children with disabilities. IDEA’s Special Education Preschool Grants program (IDEA Preschool), also known as the “619 program,” provides grants to states, and through them to LEAs, to assist with providing special education and related services to children with disabilities ages 3 through 5 and, at a state’s discretion, to 2-year-old children with disabilities who will turn 3 during the school year. The Office of Superintendent of Public Instruction administers the Special Education program in Washington, which serves about 143,000 eligible students. The program provides specially designed instruction that addresses students’ unique needs. The Office offers the program at no cost to parents, and it includes the related services students need to access their educational program. The Office spent about $282 million in federal IDEA grant funds during fiscal year 2023, and passed about $278 million of that funding through to LEAs and educational service districts. IDEA, Part B identified that obligations charged to the fiscal year 2021 Special Education grants must be liquidated within 120 days after the budget period ended on September 30, 2022. Description of Condition The Office improperly charged $42,265 to the Special Education Cluster. We found the Office had adequate internal controls to ensure it materially complied with period of performance requirements. However, we examined two charges that were coded to the fiscal year 2021 Special Education grants after the liquidation period ended. We reviewed the supporting documentation for each expenditure to ensure it was allowable and took place during the period of performance. We found that both charges were recorded after the liquidation period for services and purchases that occurred during the period of performance. Federal regulations require the auditor to issue a finding when the known or estimated questioned costs identified in a single audit exceed $25,000. We are issuing this finding because, as stated in the Effect of Condition and Questioned Costs section of this finding, the estimated questioned costs exceed that threshold. This issue was not reported as a finding in the prior audit. Cause of Condition Office staff made accounting adjustments to the fiscal year 2021 IDEA, Part B grants after the liquidation period ended, and did not request a late liquidation from the U.S Department of Education. Effect of Condition and Questioned Costs We identified $42,265 in questioned costs that were paid outside the program’s period of performance. 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 expenditures. Recommendation We recommend the Office consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid. Office’s Response OSPI has established internal controls to address allowable periods for journal vouchers (corrections). The correction cycle will be aligned with federally established liquidation periods. OSPI will communicate the corrective action plan with internal stakeholders to ensure compliance with updated process/procedures. Internal Control Details: • Monitor expenditures (through monthly reports) to ensure the agency stays within the allowable set-aside threshold and grant maximum • Complete expenditure corrections within the grant liquidation period • Liquidation is done on the last business day of January (or 120 days after the budget period ends) • Submit late liquidation requests to the appropriate federal point of contact, as needed Auditor’s Remarks We thank the Office for its cooperation and assistance throughout the audit. We will review the status of the Office’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Fiscal Year 2021 Special Education Grant Award, Grant Award Notification, establishes the federal funding period for award numbers H173A200074 and H027A200074 as July 1, 2018, through September 30, 2021. Title 20 United States Code 1225(b), Section 421(b), General Education Provisions Act, establishes that any funds that are not obligated at the end of the federal funding period shall remain available for obligation for an additional period of 12 months
2023-034 The Office of Superintendent of Public Instruction did not have adequate internal controls over and did not comply with requirements to ensure it met the earmarking requirements for the Special Education program. Assistance Listing Number and Title: 84.027 Special Education Grants to States (IDEA, Part B) 84.027 COVID-19 Special Education Grants to States (IDEA, Part B) 84.173 Special Education–Preschool Grants (IDEA Preschool) 84.173 COVID-19 Special Education–Preschool Grants (IDEA Preschool) Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: H027A200074-20A; H027A210074-21A; H027A220074–21A; H027X210074; H173A200074; H173A210074; H173A220074; H173X210074 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Earmarking Known Questioned Cost Amount: $378,206 Prior Year Audit Finding: Yes, Finding 2022-025 Background The Individuals with Disabilities Education Act’s (IDEA) Special Education Grants to States program (IDEA, Part B) provides grants to states, and through them to local educational agencies (LEAs), to help provide special education and related services to eligible children with disabilities. IDEA’s Special Education Preschool Grants program (IDEA Preschool), also known as the “619 program,” provides grants to states, and through them to LEAs, to assist with providing special education and related services to children with disabilities ages 3 through 5 and, at a state’s discretion, to 2-year-old children with disabilities who will turn 3 during the school year. The Office of Superintendent of Public Instruction administers the Special Education program in Washington, which serves about 143,000 eligible students. The program provides specially designed instruction that addresses students’ unique needs. The Office offers the program at no cost to parents, and it includes the related services students need to access their educational program. The Office spent about $282 million in federal IDEA grant funds during fiscal year 2023, and passed about $278 million of that funding through to LEAs and educational service districts. IDEA, Part B identifies the amount of funds the Office must distribute to its LEAs on a formula basis, as well as the amount it can set aside for administration and other state-level activities. The Office was awarded $8,433,118 for the fiscal year 2021 IDEA Preschool Grant. From this award, $2,222,340 was earmarked to be spent on state-level activities. This is split between administrative costs of up to $444,468 and other state-level activities for the remaining amount. 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 it met the earmarking requirements for the program. The prior finding number was 2022-025. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure it met the earmarking requirements for the program. During the audit period, the Office did not accurately track expenditures for administration and other state-level activities. For the life of the grant, the Office spent $2,600,340 on other state-level activities, which exceeded the maximum by $378,206. As a result, we are questioning the $378,206 as unallowable state-level costs. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Although management were aware of the required earmarks, the Office did not address identified variances in the spending plan for them. This was due in part to staff changes within the program that led to inconsistencies in tracking expenditures of the earmarked funds. Effect of Condition and Questioned Costs Without adequate internal controls, the Office cannot ensure that it meets the grant’s earmarking requirements. By not complying with the grant’s earmarking requirements, the Office improperly spent $378,206 on activities that exceeded the allowable earmarked amount. 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 expenditures. Recommendations We recommend the Office: • Improve internal controls to ensure it does not exceed the maximum allowable amounts that are earmarked for administration and other state-level activities • Consult with the federal grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office of Superintendent of Public Instruction (OSPI) concurs with this finding. When special education fiscal leadership transitioned in 2021, the incoming director identified necessary changes in agency procedures for closing out the fiscal year for special education. Since that time, the following internal controls have been fully implemented to ensure spending plans do not exceed the maximum allowable amounts earmarked for administration and other state-level activities: 1. At the beginning of the fiscal year, the Director of Operations/Budget Analysis meet to review the criteria for spending plans. 2. Copies of GAN and Grants to States Summary Table and Preschool Grants to States Summary Table are shared with the Budget Analysis. 3. Director of Operations/Budget Analysis meet to review the GAN and Grants to States Summary Table and Preschool Grants to States Summary Table. 4. Director of Operations/Budget Analysis meet to review spending plan and update the maximum allowable amounts earmarked for administration and other state-level activities in the spending plan. 5. Maximum allowable amounts earmarked for administration and other state-level activities are reviewed throughout the fiscal year. 6. Director of Operations/Budget Analysis meet weekly to review spending plan. 7. Spending Plan updated as requests are received. 8. Monthly expenditure reports are produced and during weekly meetings, Director of Operations/Budget Analysis review expenditures. These internal controls have contributed to increased communication and partnership between the Director of Operations/Budget Analysis. With implementing these consistent controls, we can ensure that maximum allowable amounts that are earmarked for administration and other state-level activities will meet compliance. Auditor’s Remarks We thank the Office for its cooperation and assistance throughout the audit. We will review the status of the Office's corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 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 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 34 CFR Part 300, Assistance to States for the Education of Children with Disabilities, states in part: Section 300.812 Reservation for State activities, states: a. Each State may reserve not more than the amount described in paragraph (b) of this section for administration and other State-level activities in accordance with §§ 300.813 and 300.814. b. For each fiscal year, the Secretary determined and reports to the SEA an amount that is 25% of the amount the State received under section 619 of the Act for fiscal year 1997 cumulatively adjusted by the secretary for each succeeding fiscal year by the lesser of – 1. The percentage increase, if any, from the preceding fiscal year in the State’s allocation under section 619 of the Act; or 2. The rate of inflation, as measured by the percentage increase, if any, from the preceding fiscal year in the Consumer Price Index for All Urban Consumers, published by the Bureau of Labor Statistics to the Department of Labor. Section 300.813 State administration, states: a. For the purpose of administering section 619 of the Act (including the coordination of activities under Part B with the Act with, and providing technical assistance to, other programs that provide services to children with disabilities), a State may use not more than 20 percent of the maximum amount the State may reserve under § 300.812 for any fiscal year. b. Funds described in paragraph (a) of this section may also be used for the administration of Part C of the Act. Section 300.814 Other State-level activities. Each State must use any funds the State reserves under § 300.812 and does not use for administration under § 300.813 – a. For support services (including establishing and implementing the mediation process required by section 615€ of the Act), which may benefit children with disabilities younger than three or older than five as long as those services also benefit children with disabilities aged three through five; b. For direct services for children eligible for services under section 619 of the Act; c. For activities at the State and local levels to meet the performance goals established by the State under section 612(a)(15) of the Act; d. To supplement other funds used to develop and implement a statewide coordinated services system designed to improve results for children and families, including children with disabilities and their families, but not more than one percent of the amount received under section 619 of the Act for a fiscal year; e. To provide early intervention services (which must include an educational component that promotes school readiness and incorporates preliteracy, language, and numeracy skills) in accordance with Part C of the Act to children with disabilities who are eligible for services under section 619 of the Act and who previously received services under Part C of the Act until such children enter, or are eligible under State law to enter, kindergarten; or f. At the State's discretion, to continue service coordination or case management for families who receive services under Part C of the Act, consistent with § 300.814(e) 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.
2023-035 The Office of Superintendent of Public Instruction improperly charged $42,265 to the Special Education Cluster. Assistance Listing Number and Title: 84.027 Special Education Grants to States (IDEA, Part B) 84.027 COVID-19 Special Education Grants to States (IDEA, Part B) 84.173 Special Education–Preschool Grants (IDEA Preschool) 84.173 COVID-19 Special Education–Preschool Grants (IDEA Preschool) Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: H027A200074-20A; H027A210074-21A; H027A220074–21A; H027X210074; H173A200074; H173A210074; H173A220074; H173X210074 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: $42,265 Prior Year Audit Finding: No Background The Individuals with Disabilities Education Act’s (IDEA) Special Education Grants to States program (IDEA, Part B) provides grants to states, and through them to local educational agencies (LEAs), to help provide special education and related services to eligible children with disabilities. IDEA’s Special Education Preschool Grants program (IDEA Preschool), also known as the “619 program,” provides grants to states, and through them to LEAs, to assist with providing special education and related services to children with disabilities ages 3 through 5 and, at a state’s discretion, to 2-year-old children with disabilities who will turn 3 during the school year. The Office of Superintendent of Public Instruction administers the Special Education program in Washington, which serves about 143,000 eligible students. The program provides specially designed instruction that addresses students’ unique needs. The Office offers the program at no cost to parents, and it includes the related services students need to access their educational program. The Office spent about $282 million in federal IDEA grant funds during fiscal year 2023, and passed about $278 million of that funding through to LEAs and educational service districts. IDEA, Part B identified that obligations charged to the fiscal year 2021 Special Education grants must be liquidated within 120 days after the budget period ended on September 30, 2022. Description of Condition The Office improperly charged $42,265 to the Special Education Cluster. We found the Office had adequate internal controls to ensure it materially complied with period of performance requirements. However, we examined two charges that were coded to the fiscal year 2021 Special Education grants after the liquidation period ended. We reviewed the supporting documentation for each expenditure to ensure it was allowable and took place during the period of performance. We found that both charges were recorded after the liquidation period for services and purchases that occurred during the period of performance. Federal regulations require the auditor to issue a finding when the known or estimated questioned costs identified in a single audit exceed $25,000. We are issuing this finding because, as stated in the Effect of Condition and Questioned Costs section of this finding, the estimated questioned costs exceed that threshold. This issue was not reported as a finding in the prior audit. Cause of Condition Office staff made accounting adjustments to the fiscal year 2021 IDEA, Part B grants after the liquidation period ended, and did not request a late liquidation from the U.S Department of Education. Effect of Condition and Questioned Costs We identified $42,265 in questioned costs that were paid outside the program’s period of performance. 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 expenditures. Recommendation We recommend the Office consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid. Office’s Response OSPI has established internal controls to address allowable periods for journal vouchers (corrections). The correction cycle will be aligned with federally established liquidation periods. OSPI will communicate the corrective action plan with internal stakeholders to ensure compliance with updated process/procedures. Internal Control Details: • Monitor expenditures (through monthly reports) to ensure the agency stays within the allowable set-aside threshold and grant maximum • Complete expenditure corrections within the grant liquidation period • Liquidation is done on the last business day of January (or 120 days after the budget period ends) • Submit late liquidation requests to the appropriate federal point of contact, as needed Auditor’s Remarks We thank the Office for its cooperation and assistance throughout the audit. We will review the status of the Office’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Fiscal Year 2021 Special Education Grant Award, Grant Award Notification, establishes the federal funding period for award numbers H173A200074 and H027A200074 as July 1, 2018, through September 30, 2021. Title 20 United States Code 1225(b), Section 421(b), General Education Provisions Act, establishes that any funds that are not obligated at the end of the federal funding period shall remain available for obligation for an additional period of 12 months
2023-034 The Office of Superintendent of Public Instruction did not have adequate internal controls over and did not comply with requirements to ensure it met the earmarking requirements for the Special Education program. Assistance Listing Number and Title: 84.027 Special Education Grants to States (IDEA, Part B) 84.027 COVID-19 Special Education Grants to States (IDEA, Part B) 84.173 Special Education–Preschool Grants (IDEA Preschool) 84.173 COVID-19 Special Education–Preschool Grants (IDEA Preschool) Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: H027A200074-20A; H027A210074-21A; H027A220074–21A; H027X210074; H173A200074; H173A210074; H173A220074; H173X210074 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Earmarking Known Questioned Cost Amount: $378,206 Prior Year Audit Finding: Yes, Finding 2022-025 Background The Individuals with Disabilities Education Act’s (IDEA) Special Education Grants to States program (IDEA, Part B) provides grants to states, and through them to local educational agencies (LEAs), to help provide special education and related services to eligible children with disabilities. IDEA’s Special Education Preschool Grants program (IDEA Preschool), also known as the “619 program,” provides grants to states, and through them to LEAs, to assist with providing special education and related services to children with disabilities ages 3 through 5 and, at a state’s discretion, to 2-year-old children with disabilities who will turn 3 during the school year. The Office of Superintendent of Public Instruction administers the Special Education program in Washington, which serves about 143,000 eligible students. The program provides specially designed instruction that addresses students’ unique needs. The Office offers the program at no cost to parents, and it includes the related services students need to access their educational program. The Office spent about $282 million in federal IDEA grant funds during fiscal year 2023, and passed about $278 million of that funding through to LEAs and educational service districts. IDEA, Part B identifies the amount of funds the Office must distribute to its LEAs on a formula basis, as well as the amount it can set aside for administration and other state-level activities. The Office was awarded $8,433,118 for the fiscal year 2021 IDEA Preschool Grant. From this award, $2,222,340 was earmarked to be spent on state-level activities. This is split between administrative costs of up to $444,468 and other state-level activities for the remaining amount. 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 it met the earmarking requirements for the program. The prior finding number was 2022-025. Description of Condition The Office did not have adequate internal controls over and did not comply with requirements to ensure it met the earmarking requirements for the program. During the audit period, the Office did not accurately track expenditures for administration and other state-level activities. For the life of the grant, the Office spent $2,600,340 on other state-level activities, which exceeded the maximum by $378,206. As a result, we are questioning the $378,206 as unallowable state-level costs. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition Although management were aware of the required earmarks, the Office did not address identified variances in the spending plan for them. This was due in part to staff changes within the program that led to inconsistencies in tracking expenditures of the earmarked funds. Effect of Condition and Questioned Costs Without adequate internal controls, the Office cannot ensure that it meets the grant’s earmarking requirements. By not complying with the grant’s earmarking requirements, the Office improperly spent $378,206 on activities that exceeded the allowable earmarked amount. 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 expenditures. Recommendations We recommend the Office: • Improve internal controls to ensure it does not exceed the maximum allowable amounts that are earmarked for administration and other state-level activities • Consult with the federal grantor to discuss whether the questioned costs identified in the audit should be repaid Office’s Response The Office of Superintendent of Public Instruction (OSPI) concurs with this finding. When special education fiscal leadership transitioned in 2021, the incoming director identified necessary changes in agency procedures for closing out the fiscal year for special education. Since that time, the following internal controls have been fully implemented to ensure spending plans do not exceed the maximum allowable amounts earmarked for administration and other state-level activities: 1. At the beginning of the fiscal year, the Director of Operations/Budget Analysis meet to review the criteria for spending plans. 2. Copies of GAN and Grants to States Summary Table and Preschool Grants to States Summary Table are shared with the Budget Analysis. 3. Director of Operations/Budget Analysis meet to review the GAN and Grants to States Summary Table and Preschool Grants to States Summary Table. 4. Director of Operations/Budget Analysis meet to review spending plan and update the maximum allowable amounts earmarked for administration and other state-level activities in the spending plan. 5. Maximum allowable amounts earmarked for administration and other state-level activities are reviewed throughout the fiscal year. 6. Director of Operations/Budget Analysis meet weekly to review spending plan. 7. Spending Plan updated as requests are received. 8. Monthly expenditure reports are produced and during weekly meetings, Director of Operations/Budget Analysis review expenditures. These internal controls have contributed to increased communication and partnership between the Director of Operations/Budget Analysis. With implementing these consistent controls, we can ensure that maximum allowable amounts that are earmarked for administration and other state-level activities will meet compliance. Auditor’s Remarks We thank the Office for its cooperation and assistance throughout the audit. We will review the status of the Office's corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 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 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 34 CFR Part 300, Assistance to States for the Education of Children with Disabilities, states in part: Section 300.812 Reservation for State activities, states: a. Each State may reserve not more than the amount described in paragraph (b) of this section for administration and other State-level activities in accordance with §§ 300.813 and 300.814. b. For each fiscal year, the Secretary determined and reports to the SEA an amount that is 25% of the amount the State received under section 619 of the Act for fiscal year 1997 cumulatively adjusted by the secretary for each succeeding fiscal year by the lesser of – 1. The percentage increase, if any, from the preceding fiscal year in the State’s allocation under section 619 of the Act; or 2. The rate of inflation, as measured by the percentage increase, if any, from the preceding fiscal year in the Consumer Price Index for All Urban Consumers, published by the Bureau of Labor Statistics to the Department of Labor. Section 300.813 State administration, states: a. For the purpose of administering section 619 of the Act (including the coordination of activities under Part B with the Act with, and providing technical assistance to, other programs that provide services to children with disabilities), a State may use not more than 20 percent of the maximum amount the State may reserve under § 300.812 for any fiscal year. b. Funds described in paragraph (a) of this section may also be used for the administration of Part C of the Act. Section 300.814 Other State-level activities. Each State must use any funds the State reserves under § 300.812 and does not use for administration under § 300.813 – a. For support services (including establishing and implementing the mediation process required by section 615€ of the Act), which may benefit children with disabilities younger than three or older than five as long as those services also benefit children with disabilities aged three through five; b. For direct services for children eligible for services under section 619 of the Act; c. For activities at the State and local levels to meet the performance goals established by the State under section 612(a)(15) of the Act; d. To supplement other funds used to develop and implement a statewide coordinated services system designed to improve results for children and families, including children with disabilities and their families, but not more than one percent of the amount received under section 619 of the Act for a fiscal year; e. To provide early intervention services (which must include an educational component that promotes school readiness and incorporates preliteracy, language, and numeracy skills) in accordance with Part C of the Act to children with disabilities who are eligible for services under section 619 of the Act and who previously received services under Part C of the Act until such children enter, or are eligible under State law to enter, kindergarten; or f. At the State's discretion, to continue service coordination or case management for families who receive services under Part C of the Act, consistent with § 300.814(e) 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.
2023-035 The Office of Superintendent of Public Instruction improperly charged $42,265 to the Special Education Cluster. Assistance Listing Number and Title: 84.027 Special Education Grants to States (IDEA, Part B) 84.027 COVID-19 Special Education Grants to States (IDEA, Part B) 84.173 Special Education–Preschool Grants (IDEA Preschool) 84.173 COVID-19 Special Education–Preschool Grants (IDEA Preschool) Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: H027A200074-20A; H027A210074-21A; H027A220074–21A; H027X210074; H173A200074; H173A210074; H173A220074; H173X210074 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: $42,265 Prior Year Audit Finding: No Background The Individuals with Disabilities Education Act’s (IDEA) Special Education Grants to States program (IDEA, Part B) provides grants to states, and through them to local educational agencies (LEAs), to help provide special education and related services to eligible children with disabilities. IDEA’s Special Education Preschool Grants program (IDEA Preschool), also known as the “619 program,” provides grants to states, and through them to LEAs, to assist with providing special education and related services to children with disabilities ages 3 through 5 and, at a state’s discretion, to 2-year-old children with disabilities who will turn 3 during the school year. The Office of Superintendent of Public Instruction administers the Special Education program in Washington, which serves about 143,000 eligible students. The program provides specially designed instruction that addresses students’ unique needs. The Office offers the program at no cost to parents, and it includes the related services students need to access their educational program. The Office spent about $282 million in federal IDEA grant funds during fiscal year 2023, and passed about $278 million of that funding through to LEAs and educational service districts. IDEA, Part B identified that obligations charged to the fiscal year 2021 Special Education grants must be liquidated within 120 days after the budget period ended on September 30, 2022. Description of Condition The Office improperly charged $42,265 to the Special Education Cluster. We found the Office had adequate internal controls to ensure it materially complied with period of performance requirements. However, we examined two charges that were coded to the fiscal year 2021 Special Education grants after the liquidation period ended. We reviewed the supporting documentation for each expenditure to ensure it was allowable and took place during the period of performance. We found that both charges were recorded after the liquidation period for services and purchases that occurred during the period of performance. Federal regulations require the auditor to issue a finding when the known or estimated questioned costs identified in a single audit exceed $25,000. We are issuing this finding because, as stated in the Effect of Condition and Questioned Costs section of this finding, the estimated questioned costs exceed that threshold. This issue was not reported as a finding in the prior audit. Cause of Condition Office staff made accounting adjustments to the fiscal year 2021 IDEA, Part B grants after the liquidation period ended, and did not request a late liquidation from the U.S Department of Education. Effect of Condition and Questioned Costs We identified $42,265 in questioned costs that were paid outside the program’s period of performance. 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 expenditures. Recommendation We recommend the Office consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid. Office’s Response OSPI has established internal controls to address allowable periods for journal vouchers (corrections). The correction cycle will be aligned with federally established liquidation periods. OSPI will communicate the corrective action plan with internal stakeholders to ensure compliance with updated process/procedures. Internal Control Details: • Monitor expenditures (through monthly reports) to ensure the agency stays within the allowable set-aside threshold and grant maximum • Complete expenditure corrections within the grant liquidation period • Liquidation is done on the last business day of January (or 120 days after the budget period ends) • Submit late liquidation requests to the appropriate federal point of contact, as needed Auditor’s Remarks We thank the Office for its cooperation and assistance throughout the audit. We will review the status of the Office’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Fiscal Year 2021 Special Education Grant Award, Grant Award Notification, establishes the federal funding period for award numbers H173A200074 and H027A200074 as July 1, 2018, through September 30, 2021. Title 20 United States Code 1225(b), Section 421(b), General Education Provisions Act, establishes that any funds that are not obligated at the end of the federal funding period shall remain available for obligation for an additional period of 12 months
2023-058 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the Child Care and Development Fund Cluster programs were allowable and properly supported. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $356,042,172 Prior Year Audit Finding: Yes, Finding 2022-041 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is responsible for establishing policies to ensure payments to providers for child care services are allowable. In fiscal year 2023, the Department spent more than $356 million on monthly child care subsidy payments to child care providers. There are three child care provider types: licensed centers, licensed family homes, and licensed exempt providers referred to as Family, Friends and Neighbor providers. The Department uses the Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple CCDF federal grant awards, and state funding. The Department uploads the SSPS payment data into the state’s accounting system at a summary level based on the various funding sources. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. The Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers were allowable and properly supported. We have reported this condition since 2005. The most recent audit finding numbers were 2022-041, 2021-033, 2020-038, 2019-035, 2018–034, 2017-024, 2016-021, 2015-023, 2014-023, 2013-016, 12-28, 11-23, 10-31, 9-12 and 8–13. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the CCDF programs were allowable and properly supported. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in SSPS and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. The total amount of known child care payments with federal CCDF funds in the audit period was $356,042,172. The Department also partially funded these payments with an additional $48,941,302 in state dollars. Because the Department did not comply with HHS requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $356,042,172 in federal program costs the Department incurred during the audit period. The payments the Department partially paid with state funds are not included in the federal questioned costs. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 2, Definitions, includes the definition of improper payment. 45 CFR Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. 45 CFR Part 75, section 403, Factors Affecting Allowability of Costs. 45 CFR Part 75, section 410, Collection of Unallowable Costs 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-060 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Matching, Level of Effort, Earmarking Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-042 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Additionally, under the Temporary Assistance for Needy Families (TANF) program, the Department may transfer TANF funds to the CCDF, which are then treated as Discretionary Funds. The Department is instructed how to spend this federal money. For the Department to receive its allotted share of the Matching Fund, it must meet the Maintenance of Effort (MOE) requirement and match the federal Matching Fund claimed with state expenditures at the Federal Medical Assistance Percentage rate for the applicable fiscal year. The Department must also meet earmarking requirements for expenditures for administrative and quality activities. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. Department staff run monthly and quarterly expenditure reports from the accounting system to track requirements over matching, level of effort, and earmarking for each open grant award. 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 prior audits, we reported the Department did not have adequate internal controls over matching, level of effort, and earmarking requirements for the CCDF Cluster programs. The prior audit finding numbers were 2022-042, 2021-036, and 2020-040. Description of Condition The Department did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the CCDF programs. The Department’s accounting records should be used to verify it has met matching, level of effort, and earmarking requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in the payment system inaccurate and unreliable for testing. Without identifying which expenditures it transferred, the Department’s monitoring is insufficient for properly managing matching, level of effort, and earmarking requirements. Our Office could not rely on the data supporting the Department’s expenditures or verify that the accounting records were accurate. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with matching, level of effort, and earmarking requirements. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in the payment system, and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures the Department created a condition that made it impossible for our Office to determine if it had met matching, level of effort, and earmarking requirements. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop effective ongoing monitoring procedures Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-061 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with period of performance requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-043 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. Each federal grant specifies a performance period during which recipients must obligate and liquidate program costs. These periods typically align with the federal fiscal year of October 1 through September 30. Payments for costs charged before a grant’s beginning date or after the ending date are not allowed without the grantor’s prior approval. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Each of these funds has specific period of performance requirements established in federal regulation (45 CFR § 98.60(d)): • Discretionary Funds must be obligated by the end of the succeeding fiscal year after award and expended by the end of the third fiscal year after award. • Mandatory Funds must be obligated by the end of the fiscal year in which they are awarded if the state also requests Matching Funds. If no Matching Funds are requested for the fiscal year, then the Mandatory Funds are available until liquidated. • Matching Funds must be obligated by the end of the fiscal year in which they are awarded and liquidated by the end of the succeeding fiscal year after award. During the audit period, the Department also received supplemental funds under the Coronavirus Aid, Relief, and Economic Security (CARES) and the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Acts. These funds are treated as Discretionary Funds, however, they have their own specific obligation and liquidation timeframes. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over period of performance requirements for the CCDF program. The prior finding numbers were 2022-043, 2021-037, and 2020-041. Description of Condition The Department did not have adequate internal controls over and did not comply with period of performance requirements for the CCDF program. Our Office uses the Department’s accounting records to verify it has met the period of performance requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditures coded in the payment system inaccurate and unreliable for audit testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with period of performance requirements. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to determine if it materially met the period of performance requirements. Furthermore, without adequate internal controls in place, the Department is at a higher risk of making improper payments with grant funds. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop written policies and procedures over federal period of performance requirements Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.66 – Availability of funds, states in part: (d) The following obligation and liquidation provisions apply to States and Territories: (1) Discretionary Fund allotments shall be obligated in the fiscal year in which funds are awarded or in the succeeding fiscal year. Unliquidated obligations as of the end of the succeeding fiscal year shall be liquidated within one year. (2) (i) Mandatory Funds for States requesting Matching Funds per § 98.55 shall be obligated in the fiscal year in which the funds are granted and are available until expended. (ii) Mandatory Funds for States that do not request Matching Funds are available until expended. (3) Both the Federal and non-Federal share of the Matching Fund shall be obligated in the fiscal year in which the funds are granted and liquidated no later than the end of the succeeding fiscal year. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-062 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with financial reporting requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Service Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Reporting Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-044 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is required to submit a quarterly ACF-696 financial report for each open grant. These reports contain information on expenditures for three CCDF funding sources: the Mandatory Fund, the Matching Fund, and the Discretionary Fund. The Department uses CCDF expenditures recorded in the state’s accounting system to compile and support the ACF-696 report. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over financial reporting requirements for the CCDF program. The prior finding numbers were 2022-044 and 2021-038. Description of Condition The Department did not have adequate internal controls over and did not comply with financial reporting requirements for the CCDF program. The Department’s accounting records must provide and support the financial information reported on ACF-696 reports. During the audit period, the Department’s grant management practice was to process expenditure transfers at the fund level without identifying which expenditures it transferred. Therefore, we could not rely on the data supporting the Department’s reported ACF-696 expenditures and could not test whether the reports were accurate and complete. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes using federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported them. This affected all populations of childcare expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the CCDF program expenditures reported on the ACF-696 financial report. Recommendations We recommend the Department design and implement internal controls to ensure the ACF-696 report is supported with transaction-level data that is sufficient to comply with federal law and state rules. Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the number of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure childcare payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-058 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the Child Care and Development Fund Cluster programs were allowable and properly supported. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $356,042,172 Prior Year Audit Finding: Yes, Finding 2022-041 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is responsible for establishing policies to ensure payments to providers for child care services are allowable. In fiscal year 2023, the Department spent more than $356 million on monthly child care subsidy payments to child care providers. There are three child care provider types: licensed centers, licensed family homes, and licensed exempt providers referred to as Family, Friends and Neighbor providers. The Department uses the Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple CCDF federal grant awards, and state funding. The Department uploads the SSPS payment data into the state’s accounting system at a summary level based on the various funding sources. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. The Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers were allowable and properly supported. We have reported this condition since 2005. The most recent audit finding numbers were 2022-041, 2021-033, 2020-038, 2019-035, 2018–034, 2017-024, 2016-021, 2015-023, 2014-023, 2013-016, 12-28, 11-23, 10-31, 9-12 and 8–13. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the CCDF programs were allowable and properly supported. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in SSPS and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. The total amount of known child care payments with federal CCDF funds in the audit period was $356,042,172. The Department also partially funded these payments with an additional $48,941,302 in state dollars. Because the Department did not comply with HHS requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $356,042,172 in federal program costs the Department incurred during the audit period. The payments the Department partially paid with state funds are not included in the federal questioned costs. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 2, Definitions, includes the definition of improper payment. 45 CFR Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. 45 CFR Part 75, section 403, Factors Affecting Allowability of Costs. 45 CFR Part 75, section 410, Collection of Unallowable Costs 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-060 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Matching, Level of Effort, Earmarking Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-042 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Additionally, under the Temporary Assistance for Needy Families (TANF) program, the Department may transfer TANF funds to the CCDF, which are then treated as Discretionary Funds. The Department is instructed how to spend this federal money. For the Department to receive its allotted share of the Matching Fund, it must meet the Maintenance of Effort (MOE) requirement and match the federal Matching Fund claimed with state expenditures at the Federal Medical Assistance Percentage rate for the applicable fiscal year. The Department must also meet earmarking requirements for expenditures for administrative and quality activities. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. Department staff run monthly and quarterly expenditure reports from the accounting system to track requirements over matching, level of effort, and earmarking for each open grant award. 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 prior audits, we reported the Department did not have adequate internal controls over matching, level of effort, and earmarking requirements for the CCDF Cluster programs. The prior audit finding numbers were 2022-042, 2021-036, and 2020-040. Description of Condition The Department did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the CCDF programs. The Department’s accounting records should be used to verify it has met matching, level of effort, and earmarking requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in the payment system inaccurate and unreliable for testing. Without identifying which expenditures it transferred, the Department’s monitoring is insufficient for properly managing matching, level of effort, and earmarking requirements. Our Office could not rely on the data supporting the Department’s expenditures or verify that the accounting records were accurate. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with matching, level of effort, and earmarking requirements. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in the payment system, and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures the Department created a condition that made it impossible for our Office to determine if it had met matching, level of effort, and earmarking requirements. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop effective ongoing monitoring procedures Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-061 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with period of performance requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-043 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. Each federal grant specifies a performance period during which recipients must obligate and liquidate program costs. These periods typically align with the federal fiscal year of October 1 through September 30. Payments for costs charged before a grant’s beginning date or after the ending date are not allowed without the grantor’s prior approval. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Each of these funds has specific period of performance requirements established in federal regulation (45 CFR § 98.60(d)): • Discretionary Funds must be obligated by the end of the succeeding fiscal year after award and expended by the end of the third fiscal year after award. • Mandatory Funds must be obligated by the end of the fiscal year in which they are awarded if the state also requests Matching Funds. If no Matching Funds are requested for the fiscal year, then the Mandatory Funds are available until liquidated. • Matching Funds must be obligated by the end of the fiscal year in which they are awarded and liquidated by the end of the succeeding fiscal year after award. During the audit period, the Department also received supplemental funds under the Coronavirus Aid, Relief, and Economic Security (CARES) and the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Acts. These funds are treated as Discretionary Funds, however, they have their own specific obligation and liquidation timeframes. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over period of performance requirements for the CCDF program. The prior finding numbers were 2022-043, 2021-037, and 2020-041. Description of Condition The Department did not have adequate internal controls over and did not comply with period of performance requirements for the CCDF program. Our Office uses the Department’s accounting records to verify it has met the period of performance requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditures coded in the payment system inaccurate and unreliable for audit testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with period of performance requirements. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to determine if it materially met the period of performance requirements. Furthermore, without adequate internal controls in place, the Department is at a higher risk of making improper payments with grant funds. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop written policies and procedures over federal period of performance requirements Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.66 – Availability of funds, states in part: (d) The following obligation and liquidation provisions apply to States and Territories: (1) Discretionary Fund allotments shall be obligated in the fiscal year in which funds are awarded or in the succeeding fiscal year. Unliquidated obligations as of the end of the succeeding fiscal year shall be liquidated within one year. (2) (i) Mandatory Funds for States requesting Matching Funds per § 98.55 shall be obligated in the fiscal year in which the funds are granted and are available until expended. (ii) Mandatory Funds for States that do not request Matching Funds are available until expended. (3) Both the Federal and non-Federal share of the Matching Fund shall be obligated in the fiscal year in which the funds are granted and liquidated no later than the end of the succeeding fiscal year. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-062 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with financial reporting requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Service Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Reporting Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-044 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is required to submit a quarterly ACF-696 financial report for each open grant. These reports contain information on expenditures for three CCDF funding sources: the Mandatory Fund, the Matching Fund, and the Discretionary Fund. The Department uses CCDF expenditures recorded in the state’s accounting system to compile and support the ACF-696 report. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over financial reporting requirements for the CCDF program. The prior finding numbers were 2022-044 and 2021-038. Description of Condition The Department did not have adequate internal controls over and did not comply with financial reporting requirements for the CCDF program. The Department’s accounting records must provide and support the financial information reported on ACF-696 reports. During the audit period, the Department’s grant management practice was to process expenditure transfers at the fund level without identifying which expenditures it transferred. Therefore, we could not rely on the data supporting the Department’s reported ACF-696 expenditures and could not test whether the reports were accurate and complete. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes using federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported them. This affected all populations of childcare expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the CCDF program expenditures reported on the ACF-696 financial report. Recommendations We recommend the Department design and implement internal controls to ensure the ACF-696 report is supported with transaction-level data that is sufficient to comply with federal law and state rules. Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the number of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure childcare payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-058 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the Child Care and Development Fund Cluster programs were allowable and properly supported. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $356,042,172 Prior Year Audit Finding: Yes, Finding 2022-041 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is responsible for establishing policies to ensure payments to providers for child care services are allowable. In fiscal year 2023, the Department spent more than $356 million on monthly child care subsidy payments to child care providers. There are three child care provider types: licensed centers, licensed family homes, and licensed exempt providers referred to as Family, Friends and Neighbor providers. The Department uses the Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple CCDF federal grant awards, and state funding. The Department uploads the SSPS payment data into the state’s accounting system at a summary level based on the various funding sources. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. The Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers were allowable and properly supported. We have reported this condition since 2005. The most recent audit finding numbers were 2022-041, 2021-033, 2020-038, 2019-035, 2018–034, 2017-024, 2016-021, 2015-023, 2014-023, 2013-016, 12-28, 11-23, 10-31, 9-12 and 8–13. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the CCDF programs were allowable and properly supported. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in SSPS and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. The total amount of known child care payments with federal CCDF funds in the audit period was $356,042,172. The Department also partially funded these payments with an additional $48,941,302 in state dollars. Because the Department did not comply with HHS requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $356,042,172 in federal program costs the Department incurred during the audit period. The payments the Department partially paid with state funds are not included in the federal questioned costs. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 2, Definitions, includes the definition of improper payment. 45 CFR Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. 45 CFR Part 75, section 403, Factors Affecting Allowability of Costs. 45 CFR Part 75, section 410, Collection of Unallowable Costs 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-060 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Matching, Level of Effort, Earmarking Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-042 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Additionally, under the Temporary Assistance for Needy Families (TANF) program, the Department may transfer TANF funds to the CCDF, which are then treated as Discretionary Funds. The Department is instructed how to spend this federal money. For the Department to receive its allotted share of the Matching Fund, it must meet the Maintenance of Effort (MOE) requirement and match the federal Matching Fund claimed with state expenditures at the Federal Medical Assistance Percentage rate for the applicable fiscal year. The Department must also meet earmarking requirements for expenditures for administrative and quality activities. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. Department staff run monthly and quarterly expenditure reports from the accounting system to track requirements over matching, level of effort, and earmarking for each open grant award. 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 prior audits, we reported the Department did not have adequate internal controls over matching, level of effort, and earmarking requirements for the CCDF Cluster programs. The prior audit finding numbers were 2022-042, 2021-036, and 2020-040. Description of Condition The Department did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the CCDF programs. The Department’s accounting records should be used to verify it has met matching, level of effort, and earmarking requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in the payment system inaccurate and unreliable for testing. Without identifying which expenditures it transferred, the Department’s monitoring is insufficient for properly managing matching, level of effort, and earmarking requirements. Our Office could not rely on the data supporting the Department’s expenditures or verify that the accounting records were accurate. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with matching, level of effort, and earmarking requirements. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in the payment system, and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures the Department created a condition that made it impossible for our Office to determine if it had met matching, level of effort, and earmarking requirements. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop effective ongoing monitoring procedures Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-061 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with period of performance requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-043 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. Each federal grant specifies a performance period during which recipients must obligate and liquidate program costs. These periods typically align with the federal fiscal year of October 1 through September 30. Payments for costs charged before a grant’s beginning date or after the ending date are not allowed without the grantor’s prior approval. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Each of these funds has specific period of performance requirements established in federal regulation (45 CFR § 98.60(d)): • Discretionary Funds must be obligated by the end of the succeeding fiscal year after award and expended by the end of the third fiscal year after award. • Mandatory Funds must be obligated by the end of the fiscal year in which they are awarded if the state also requests Matching Funds. If no Matching Funds are requested for the fiscal year, then the Mandatory Funds are available until liquidated. • Matching Funds must be obligated by the end of the fiscal year in which they are awarded and liquidated by the end of the succeeding fiscal year after award. During the audit period, the Department also received supplemental funds under the Coronavirus Aid, Relief, and Economic Security (CARES) and the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Acts. These funds are treated as Discretionary Funds, however, they have their own specific obligation and liquidation timeframes. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over period of performance requirements for the CCDF program. The prior finding numbers were 2022-043, 2021-037, and 2020-041. Description of Condition The Department did not have adequate internal controls over and did not comply with period of performance requirements for the CCDF program. Our Office uses the Department’s accounting records to verify it has met the period of performance requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditures coded in the payment system inaccurate and unreliable for audit testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with period of performance requirements. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to determine if it materially met the period of performance requirements. Furthermore, without adequate internal controls in place, the Department is at a higher risk of making improper payments with grant funds. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop written policies and procedures over federal period of performance requirements Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.66 – Availability of funds, states in part: (d) The following obligation and liquidation provisions apply to States and Territories: (1) Discretionary Fund allotments shall be obligated in the fiscal year in which funds are awarded or in the succeeding fiscal year. Unliquidated obligations as of the end of the succeeding fiscal year shall be liquidated within one year. (2) (i) Mandatory Funds for States requesting Matching Funds per § 98.55 shall be obligated in the fiscal year in which the funds are granted and are available until expended. (ii) Mandatory Funds for States that do not request Matching Funds are available until expended. (3) Both the Federal and non-Federal share of the Matching Fund shall be obligated in the fiscal year in which the funds are granted and liquidated no later than the end of the succeeding fiscal year. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-062 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with financial reporting requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Service Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Reporting Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-044 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is required to submit a quarterly ACF-696 financial report for each open grant. These reports contain information on expenditures for three CCDF funding sources: the Mandatory Fund, the Matching Fund, and the Discretionary Fund. The Department uses CCDF expenditures recorded in the state’s accounting system to compile and support the ACF-696 report. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over financial reporting requirements for the CCDF program. The prior finding numbers were 2022-044 and 2021-038. Description of Condition The Department did not have adequate internal controls over and did not comply with financial reporting requirements for the CCDF program. The Department’s accounting records must provide and support the financial information reported on ACF-696 reports. During the audit period, the Department’s grant management practice was to process expenditure transfers at the fund level without identifying which expenditures it transferred. Therefore, we could not rely on the data supporting the Department’s reported ACF-696 expenditures and could not test whether the reports were accurate and complete. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes using federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported them. This affected all populations of childcare expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the CCDF program expenditures reported on the ACF-696 financial report. Recommendations We recommend the Department design and implement internal controls to ensure the ACF-696 report is supported with transaction-level data that is sufficient to comply with federal law and state rules. Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the number of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure childcare payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-058 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the Child Care and Development Fund Cluster programs were allowable and properly supported. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $356,042,172 Prior Year Audit Finding: Yes, Finding 2022-041 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is responsible for establishing policies to ensure payments to providers for child care services are allowable. In fiscal year 2023, the Department spent more than $356 million on monthly child care subsidy payments to child care providers. There are three child care provider types: licensed centers, licensed family homes, and licensed exempt providers referred to as Family, Friends and Neighbor providers. The Department uses the Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple CCDF federal grant awards, and state funding. The Department uploads the SSPS payment data into the state’s accounting system at a summary level based on the various funding sources. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. The Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers were allowable and properly supported. We have reported this condition since 2005. The most recent audit finding numbers were 2022-041, 2021-033, 2020-038, 2019-035, 2018–034, 2017-024, 2016-021, 2015-023, 2014-023, 2013-016, 12-28, 11-23, 10-31, 9-12 and 8–13. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the CCDF programs were allowable and properly supported. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in SSPS and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. The total amount of known child care payments with federal CCDF funds in the audit period was $356,042,172. The Department also partially funded these payments with an additional $48,941,302 in state dollars. Because the Department did not comply with HHS requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $356,042,172 in federal program costs the Department incurred during the audit period. The payments the Department partially paid with state funds are not included in the federal questioned costs. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 2, Definitions, includes the definition of improper payment. 45 CFR Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. 45 CFR Part 75, section 403, Factors Affecting Allowability of Costs. 45 CFR Part 75, section 410, Collection of Unallowable Costs 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-060 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Matching, Level of Effort, Earmarking Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-042 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Additionally, under the Temporary Assistance for Needy Families (TANF) program, the Department may transfer TANF funds to the CCDF, which are then treated as Discretionary Funds. The Department is instructed how to spend this federal money. For the Department to receive its allotted share of the Matching Fund, it must meet the Maintenance of Effort (MOE) requirement and match the federal Matching Fund claimed with state expenditures at the Federal Medical Assistance Percentage rate for the applicable fiscal year. The Department must also meet earmarking requirements for expenditures for administrative and quality activities. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. Department staff run monthly and quarterly expenditure reports from the accounting system to track requirements over matching, level of effort, and earmarking for each open grant award. 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 prior audits, we reported the Department did not have adequate internal controls over matching, level of effort, and earmarking requirements for the CCDF Cluster programs. The prior audit finding numbers were 2022-042, 2021-036, and 2020-040. Description of Condition The Department did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the CCDF programs. The Department’s accounting records should be used to verify it has met matching, level of effort, and earmarking requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in the payment system inaccurate and unreliable for testing. Without identifying which expenditures it transferred, the Department’s monitoring is insufficient for properly managing matching, level of effort, and earmarking requirements. Our Office could not rely on the data supporting the Department’s expenditures or verify that the accounting records were accurate. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with matching, level of effort, and earmarking requirements. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in the payment system, and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures the Department created a condition that made it impossible for our Office to determine if it had met matching, level of effort, and earmarking requirements. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop effective ongoing monitoring procedures Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-061 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with period of performance requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-043 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. Each federal grant specifies a performance period during which recipients must obligate and liquidate program costs. These periods typically align with the federal fiscal year of October 1 through September 30. Payments for costs charged before a grant’s beginning date or after the ending date are not allowed without the grantor’s prior approval. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Each of these funds has specific period of performance requirements established in federal regulation (45 CFR § 98.60(d)): • Discretionary Funds must be obligated by the end of the succeeding fiscal year after award and expended by the end of the third fiscal year after award. • Mandatory Funds must be obligated by the end of the fiscal year in which they are awarded if the state also requests Matching Funds. If no Matching Funds are requested for the fiscal year, then the Mandatory Funds are available until liquidated. • Matching Funds must be obligated by the end of the fiscal year in which they are awarded and liquidated by the end of the succeeding fiscal year after award. During the audit period, the Department also received supplemental funds under the Coronavirus Aid, Relief, and Economic Security (CARES) and the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Acts. These funds are treated as Discretionary Funds, however, they have their own specific obligation and liquidation timeframes. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over period of performance requirements for the CCDF program. The prior finding numbers were 2022-043, 2021-037, and 2020-041. Description of Condition The Department did not have adequate internal controls over and did not comply with period of performance requirements for the CCDF program. Our Office uses the Department’s accounting records to verify it has met the period of performance requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditures coded in the payment system inaccurate and unreliable for audit testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with period of performance requirements. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to determine if it materially met the period of performance requirements. Furthermore, without adequate internal controls in place, the Department is at a higher risk of making improper payments with grant funds. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop written policies and procedures over federal period of performance requirements Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.66 – Availability of funds, states in part: (d) The following obligation and liquidation provisions apply to States and Territories: (1) Discretionary Fund allotments shall be obligated in the fiscal year in which funds are awarded or in the succeeding fiscal year. Unliquidated obligations as of the end of the succeeding fiscal year shall be liquidated within one year. (2) (i) Mandatory Funds for States requesting Matching Funds per § 98.55 shall be obligated in the fiscal year in which the funds are granted and are available until expended. (ii) Mandatory Funds for States that do not request Matching Funds are available until expended. (3) Both the Federal and non-Federal share of the Matching Fund shall be obligated in the fiscal year in which the funds are granted and liquidated no later than the end of the succeeding fiscal year. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-062 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with financial reporting requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Service Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Reporting Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-044 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is required to submit a quarterly ACF-696 financial report for each open grant. These reports contain information on expenditures for three CCDF funding sources: the Mandatory Fund, the Matching Fund, and the Discretionary Fund. The Department uses CCDF expenditures recorded in the state’s accounting system to compile and support the ACF-696 report. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over financial reporting requirements for the CCDF program. The prior finding numbers were 2022-044 and 2021-038. Description of Condition The Department did not have adequate internal controls over and did not comply with financial reporting requirements for the CCDF program. The Department’s accounting records must provide and support the financial information reported on ACF-696 reports. During the audit period, the Department’s grant management practice was to process expenditure transfers at the fund level without identifying which expenditures it transferred. Therefore, we could not rely on the data supporting the Department’s reported ACF-696 expenditures and could not test whether the reports were accurate and complete. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes using federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported them. This affected all populations of childcare expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the CCDF program expenditures reported on the ACF-696 financial report. Recommendations We recommend the Department design and implement internal controls to ensure the ACF-696 report is supported with transaction-level data that is sufficient to comply with federal law and state rules. Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the number of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure childcare payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-058 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the Child Care and Development Fund Cluster programs were allowable and properly supported. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $356,042,172 Prior Year Audit Finding: Yes, Finding 2022-041 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is responsible for establishing policies to ensure payments to providers for child care services are allowable. In fiscal year 2023, the Department spent more than $356 million on monthly child care subsidy payments to child care providers. There are three child care provider types: licensed centers, licensed family homes, and licensed exempt providers referred to as Family, Friends and Neighbor providers. The Department uses the Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple CCDF federal grant awards, and state funding. The Department uploads the SSPS payment data into the state’s accounting system at a summary level based on the various funding sources. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. The Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers were allowable and properly supported. We have reported this condition since 2005. The most recent audit finding numbers were 2022-041, 2021-033, 2020-038, 2019-035, 2018–034, 2017-024, 2016-021, 2015-023, 2014-023, 2013-016, 12-28, 11-23, 10-31, 9-12 and 8–13. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the CCDF programs were allowable and properly supported. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in SSPS and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. The total amount of known child care payments with federal CCDF funds in the audit period was $356,042,172. The Department also partially funded these payments with an additional $48,941,302 in state dollars. Because the Department did not comply with HHS requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $356,042,172 in federal program costs the Department incurred during the audit period. The payments the Department partially paid with state funds are not included in the federal questioned costs. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 2, Definitions, includes the definition of improper payment. 45 CFR Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. 45 CFR Part 75, section 403, Factors Affecting Allowability of Costs. 45 CFR Part 75, section 410, Collection of Unallowable Costs 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-060 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Matching, Level of Effort, Earmarking Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-042 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Additionally, under the Temporary Assistance for Needy Families (TANF) program, the Department may transfer TANF funds to the CCDF, which are then treated as Discretionary Funds. The Department is instructed how to spend this federal money. For the Department to receive its allotted share of the Matching Fund, it must meet the Maintenance of Effort (MOE) requirement and match the federal Matching Fund claimed with state expenditures at the Federal Medical Assistance Percentage rate for the applicable fiscal year. The Department must also meet earmarking requirements for expenditures for administrative and quality activities. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. Department staff run monthly and quarterly expenditure reports from the accounting system to track requirements over matching, level of effort, and earmarking for each open grant award. 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 prior audits, we reported the Department did not have adequate internal controls over matching, level of effort, and earmarking requirements for the CCDF Cluster programs. The prior audit finding numbers were 2022-042, 2021-036, and 2020-040. Description of Condition The Department did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the CCDF programs. The Department’s accounting records should be used to verify it has met matching, level of effort, and earmarking requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in the payment system inaccurate and unreliable for testing. Without identifying which expenditures it transferred, the Department’s monitoring is insufficient for properly managing matching, level of effort, and earmarking requirements. Our Office could not rely on the data supporting the Department’s expenditures or verify that the accounting records were accurate. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with matching, level of effort, and earmarking requirements. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in the payment system, and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures the Department created a condition that made it impossible for our Office to determine if it had met matching, level of effort, and earmarking requirements. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop effective ongoing monitoring procedures Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-061 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with period of performance requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-043 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. Each federal grant specifies a performance period during which recipients must obligate and liquidate program costs. These periods typically align with the federal fiscal year of October 1 through September 30. Payments for costs charged before a grant’s beginning date or after the ending date are not allowed without the grantor’s prior approval. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Each of these funds has specific period of performance requirements established in federal regulation (45 CFR § 98.60(d)): • Discretionary Funds must be obligated by the end of the succeeding fiscal year after award and expended by the end of the third fiscal year after award. • Mandatory Funds must be obligated by the end of the fiscal year in which they are awarded if the state also requests Matching Funds. If no Matching Funds are requested for the fiscal year, then the Mandatory Funds are available until liquidated. • Matching Funds must be obligated by the end of the fiscal year in which they are awarded and liquidated by the end of the succeeding fiscal year after award. During the audit period, the Department also received supplemental funds under the Coronavirus Aid, Relief, and Economic Security (CARES) and the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Acts. These funds are treated as Discretionary Funds, however, they have their own specific obligation and liquidation timeframes. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over period of performance requirements for the CCDF program. The prior finding numbers were 2022-043, 2021-037, and 2020-041. Description of Condition The Department did not have adequate internal controls over and did not comply with period of performance requirements for the CCDF program. Our Office uses the Department’s accounting records to verify it has met the period of performance requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditures coded in the payment system inaccurate and unreliable for audit testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with period of performance requirements. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to determine if it materially met the period of performance requirements. Furthermore, without adequate internal controls in place, the Department is at a higher risk of making improper payments with grant funds. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop written policies and procedures over federal period of performance requirements Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.66 – Availability of funds, states in part: (d) The following obligation and liquidation provisions apply to States and Territories: (1) Discretionary Fund allotments shall be obligated in the fiscal year in which funds are awarded or in the succeeding fiscal year. Unliquidated obligations as of the end of the succeeding fiscal year shall be liquidated within one year. (2) (i) Mandatory Funds for States requesting Matching Funds per § 98.55 shall be obligated in the fiscal year in which the funds are granted and are available until expended. (ii) Mandatory Funds for States that do not request Matching Funds are available until expended. (3) Both the Federal and non-Federal share of the Matching Fund shall be obligated in the fiscal year in which the funds are granted and liquidated no later than the end of the succeeding fiscal year. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-062 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with financial reporting requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Service Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Reporting Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-044 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is required to submit a quarterly ACF-696 financial report for each open grant. These reports contain information on expenditures for three CCDF funding sources: the Mandatory Fund, the Matching Fund, and the Discretionary Fund. The Department uses CCDF expenditures recorded in the state’s accounting system to compile and support the ACF-696 report. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over financial reporting requirements for the CCDF program. The prior finding numbers were 2022-044 and 2021-038. Description of Condition The Department did not have adequate internal controls over and did not comply with financial reporting requirements for the CCDF program. The Department’s accounting records must provide and support the financial information reported on ACF-696 reports. During the audit period, the Department’s grant management practice was to process expenditure transfers at the fund level without identifying which expenditures it transferred. Therefore, we could not rely on the data supporting the Department’s reported ACF-696 expenditures and could not test whether the reports were accurate and complete. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes using federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported them. This affected all populations of childcare expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the CCDF program expenditures reported on the ACF-696 financial report. Recommendations We recommend the Department design and implement internal controls to ensure the ACF-696 report is supported with transaction-level data that is sufficient to comply with federal law and state rules. Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the number of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure childcare payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-058 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the Child Care and Development Fund Cluster programs were allowable and properly supported. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $356,042,172 Prior Year Audit Finding: Yes, Finding 2022-041 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is responsible for establishing policies to ensure payments to providers for child care services are allowable. In fiscal year 2023, the Department spent more than $356 million on monthly child care subsidy payments to child care providers. There are three child care provider types: licensed centers, licensed family homes, and licensed exempt providers referred to as Family, Friends and Neighbor providers. The Department uses the Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple CCDF federal grant awards, and state funding. The Department uploads the SSPS payment data into the state’s accounting system at a summary level based on the various funding sources. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. The Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers were allowable and properly supported. We have reported this condition since 2005. The most recent audit finding numbers were 2022-041, 2021-033, 2020-038, 2019-035, 2018–034, 2017-024, 2016-021, 2015-023, 2014-023, 2013-016, 12-28, 11-23, 10-31, 9-12 and 8–13. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the CCDF programs were allowable and properly supported. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in SSPS and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. The total amount of known child care payments with federal CCDF funds in the audit period was $356,042,172. The Department also partially funded these payments with an additional $48,941,302 in state dollars. Because the Department did not comply with HHS requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $356,042,172 in federal program costs the Department incurred during the audit period. The payments the Department partially paid with state funds are not included in the federal questioned costs. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 2, Definitions, includes the definition of improper payment. 45 CFR Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. 45 CFR Part 75, section 403, Factors Affecting Allowability of Costs. 45 CFR Part 75, section 410, Collection of Unallowable Costs 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-060 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Matching, Level of Effort, Earmarking Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-042 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Additionally, under the Temporary Assistance for Needy Families (TANF) program, the Department may transfer TANF funds to the CCDF, which are then treated as Discretionary Funds. The Department is instructed how to spend this federal money. For the Department to receive its allotted share of the Matching Fund, it must meet the Maintenance of Effort (MOE) requirement and match the federal Matching Fund claimed with state expenditures at the Federal Medical Assistance Percentage rate for the applicable fiscal year. The Department must also meet earmarking requirements for expenditures for administrative and quality activities. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. Department staff run monthly and quarterly expenditure reports from the accounting system to track requirements over matching, level of effort, and earmarking for each open grant award. 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 prior audits, we reported the Department did not have adequate internal controls over matching, level of effort, and earmarking requirements for the CCDF Cluster programs. The prior audit finding numbers were 2022-042, 2021-036, and 2020-040. Description of Condition The Department did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the CCDF programs. The Department’s accounting records should be used to verify it has met matching, level of effort, and earmarking requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in the payment system inaccurate and unreliable for testing. Without identifying which expenditures it transferred, the Department’s monitoring is insufficient for properly managing matching, level of effort, and earmarking requirements. Our Office could not rely on the data supporting the Department’s expenditures or verify that the accounting records were accurate. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with matching, level of effort, and earmarking requirements. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in the payment system, and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures the Department created a condition that made it impossible for our Office to determine if it had met matching, level of effort, and earmarking requirements. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop effective ongoing monitoring procedures Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-061 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with period of performance requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-043 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. Each federal grant specifies a performance period during which recipients must obligate and liquidate program costs. These periods typically align with the federal fiscal year of October 1 through September 30. Payments for costs charged before a grant’s beginning date or after the ending date are not allowed without the grantor’s prior approval. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Each of these funds has specific period of performance requirements established in federal regulation (45 CFR § 98.60(d)): • Discretionary Funds must be obligated by the end of the succeeding fiscal year after award and expended by the end of the third fiscal year after award. • Mandatory Funds must be obligated by the end of the fiscal year in which they are awarded if the state also requests Matching Funds. If no Matching Funds are requested for the fiscal year, then the Mandatory Funds are available until liquidated. • Matching Funds must be obligated by the end of the fiscal year in which they are awarded and liquidated by the end of the succeeding fiscal year after award. During the audit period, the Department also received supplemental funds under the Coronavirus Aid, Relief, and Economic Security (CARES) and the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Acts. These funds are treated as Discretionary Funds, however, they have their own specific obligation and liquidation timeframes. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over period of performance requirements for the CCDF program. The prior finding numbers were 2022-043, 2021-037, and 2020-041. Description of Condition The Department did not have adequate internal controls over and did not comply with period of performance requirements for the CCDF program. Our Office uses the Department’s accounting records to verify it has met the period of performance requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditures coded in the payment system inaccurate and unreliable for audit testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with period of performance requirements. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to determine if it materially met the period of performance requirements. Furthermore, without adequate internal controls in place, the Department is at a higher risk of making improper payments with grant funds. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop written policies and procedures over federal period of performance requirements Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.66 – Availability of funds, states in part: (d) The following obligation and liquidation provisions apply to States and Territories: (1) Discretionary Fund allotments shall be obligated in the fiscal year in which funds are awarded or in the succeeding fiscal year. Unliquidated obligations as of the end of the succeeding fiscal year shall be liquidated within one year. (2) (i) Mandatory Funds for States requesting Matching Funds per § 98.55 shall be obligated in the fiscal year in which the funds are granted and are available until expended. (ii) Mandatory Funds for States that do not request Matching Funds are available until expended. (3) Both the Federal and non-Federal share of the Matching Fund shall be obligated in the fiscal year in which the funds are granted and liquidated no later than the end of the succeeding fiscal year. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-062 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with financial reporting requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Service Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Reporting Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-044 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is required to submit a quarterly ACF-696 financial report for each open grant. These reports contain information on expenditures for three CCDF funding sources: the Mandatory Fund, the Matching Fund, and the Discretionary Fund. The Department uses CCDF expenditures recorded in the state’s accounting system to compile and support the ACF-696 report. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over financial reporting requirements for the CCDF program. The prior finding numbers were 2022-044 and 2021-038. Description of Condition The Department did not have adequate internal controls over and did not comply with financial reporting requirements for the CCDF program. The Department’s accounting records must provide and support the financial information reported on ACF-696 reports. During the audit period, the Department’s grant management practice was to process expenditure transfers at the fund level without identifying which expenditures it transferred. Therefore, we could not rely on the data supporting the Department’s reported ACF-696 expenditures and could not test whether the reports were accurate and complete. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes using federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported them. This affected all populations of childcare expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the CCDF program expenditures reported on the ACF-696 financial report. Recommendations We recommend the Department design and implement internal controls to ensure the ACF-696 report is supported with transaction-level data that is sufficient to comply with federal law and state rules. Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the number of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure childcare payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-058 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the Child Care and Development Fund Cluster programs were allowable and properly supported. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $356,042,172 Prior Year Audit Finding: Yes, Finding 2022-041 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is responsible for establishing policies to ensure payments to providers for child care services are allowable. In fiscal year 2023, the Department spent more than $356 million on monthly child care subsidy payments to child care providers. There are three child care provider types: licensed centers, licensed family homes, and licensed exempt providers referred to as Family, Friends and Neighbor providers. The Department uses the Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple CCDF federal grant awards, and state funding. The Department uploads the SSPS payment data into the state’s accounting system at a summary level based on the various funding sources. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. The Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers were allowable and properly supported. We have reported this condition since 2005. The most recent audit finding numbers were 2022-041, 2021-033, 2020-038, 2019-035, 2018–034, 2017-024, 2016-021, 2015-023, 2014-023, 2013-016, 12-28, 11-23, 10-31, 9-12 and 8–13. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the CCDF programs were allowable and properly supported. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in SSPS and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. The total amount of known child care payments with federal CCDF funds in the audit period was $356,042,172. The Department also partially funded these payments with an additional $48,941,302 in state dollars. Because the Department did not comply with HHS requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $356,042,172 in federal program costs the Department incurred during the audit period. The payments the Department partially paid with state funds are not included in the federal questioned costs. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 2, Definitions, includes the definition of improper payment. 45 CFR Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. 45 CFR Part 75, section 403, Factors Affecting Allowability of Costs. 45 CFR Part 75, section 410, Collection of Unallowable Costs 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-060 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Matching, Level of Effort, Earmarking Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-042 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Additionally, under the Temporary Assistance for Needy Families (TANF) program, the Department may transfer TANF funds to the CCDF, which are then treated as Discretionary Funds. The Department is instructed how to spend this federal money. For the Department to receive its allotted share of the Matching Fund, it must meet the Maintenance of Effort (MOE) requirement and match the federal Matching Fund claimed with state expenditures at the Federal Medical Assistance Percentage rate for the applicable fiscal year. The Department must also meet earmarking requirements for expenditures for administrative and quality activities. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. Department staff run monthly and quarterly expenditure reports from the accounting system to track requirements over matching, level of effort, and earmarking for each open grant award. 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 prior audits, we reported the Department did not have adequate internal controls over matching, level of effort, and earmarking requirements for the CCDF Cluster programs. The prior audit finding numbers were 2022-042, 2021-036, and 2020-040. Description of Condition The Department did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the CCDF programs. The Department’s accounting records should be used to verify it has met matching, level of effort, and earmarking requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in the payment system inaccurate and unreliable for testing. Without identifying which expenditures it transferred, the Department’s monitoring is insufficient for properly managing matching, level of effort, and earmarking requirements. Our Office could not rely on the data supporting the Department’s expenditures or verify that the accounting records were accurate. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with matching, level of effort, and earmarking requirements. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in the payment system, and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures the Department created a condition that made it impossible for our Office to determine if it had met matching, level of effort, and earmarking requirements. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop effective ongoing monitoring procedures Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-061 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with period of performance requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-043 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. Each federal grant specifies a performance period during which recipients must obligate and liquidate program costs. These periods typically align with the federal fiscal year of October 1 through September 30. Payments for costs charged before a grant’s beginning date or after the ending date are not allowed without the grantor’s prior approval. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Each of these funds has specific period of performance requirements established in federal regulation (45 CFR § 98.60(d)): • Discretionary Funds must be obligated by the end of the succeeding fiscal year after award and expended by the end of the third fiscal year after award. • Mandatory Funds must be obligated by the end of the fiscal year in which they are awarded if the state also requests Matching Funds. If no Matching Funds are requested for the fiscal year, then the Mandatory Funds are available until liquidated. • Matching Funds must be obligated by the end of the fiscal year in which they are awarded and liquidated by the end of the succeeding fiscal year after award. During the audit period, the Department also received supplemental funds under the Coronavirus Aid, Relief, and Economic Security (CARES) and the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Acts. These funds are treated as Discretionary Funds, however, they have their own specific obligation and liquidation timeframes. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over period of performance requirements for the CCDF program. The prior finding numbers were 2022-043, 2021-037, and 2020-041. Description of Condition The Department did not have adequate internal controls over and did not comply with period of performance requirements for the CCDF program. Our Office uses the Department’s accounting records to verify it has met the period of performance requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditures coded in the payment system inaccurate and unreliable for audit testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with period of performance requirements. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to determine if it materially met the period of performance requirements. Furthermore, without adequate internal controls in place, the Department is at a higher risk of making improper payments with grant funds. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop written policies and procedures over federal period of performance requirements Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.66 – Availability of funds, states in part: (d) The following obligation and liquidation provisions apply to States and Territories: (1) Discretionary Fund allotments shall be obligated in the fiscal year in which funds are awarded or in the succeeding fiscal year. Unliquidated obligations as of the end of the succeeding fiscal year shall be liquidated within one year. (2) (i) Mandatory Funds for States requesting Matching Funds per § 98.55 shall be obligated in the fiscal year in which the funds are granted and are available until expended. (ii) Mandatory Funds for States that do not request Matching Funds are available until expended. (3) Both the Federal and non-Federal share of the Matching Fund shall be obligated in the fiscal year in which the funds are granted and liquidated no later than the end of the succeeding fiscal year. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-062 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with financial reporting requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Service Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Reporting Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-044 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is required to submit a quarterly ACF-696 financial report for each open grant. These reports contain information on expenditures for three CCDF funding sources: the Mandatory Fund, the Matching Fund, and the Discretionary Fund. The Department uses CCDF expenditures recorded in the state’s accounting system to compile and support the ACF-696 report. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over financial reporting requirements for the CCDF program. The prior finding numbers were 2022-044 and 2021-038. Description of Condition The Department did not have adequate internal controls over and did not comply with financial reporting requirements for the CCDF program. The Department’s accounting records must provide and support the financial information reported on ACF-696 reports. During the audit period, the Department’s grant management practice was to process expenditure transfers at the fund level without identifying which expenditures it transferred. Therefore, we could not rely on the data supporting the Department’s reported ACF-696 expenditures and could not test whether the reports were accurate and complete. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes using federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported them. This affected all populations of childcare expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the CCDF program expenditures reported on the ACF-696 financial report. Recommendations We recommend the Department design and implement internal controls to ensure the ACF-696 report is supported with transaction-level data that is sufficient to comply with federal law and state rules. Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the number of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure childcare payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-058 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the Child Care and Development Fund Cluster programs were allowable and properly supported. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Known Questioned Cost Amount: $356,042,172 Prior Year Audit Finding: Yes, Finding 2022-041 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is responsible for establishing policies to ensure payments to providers for child care services are allowable. In fiscal year 2023, the Department spent more than $356 million on monthly child care subsidy payments to child care providers. There are three child care provider types: licensed centers, licensed family homes, and licensed exempt providers referred to as Family, Friends and Neighbor providers. The Department uses the Social Service Payment System (SSPS) to process the payments it makes to child care providers. The system allocates payments to various funding sources, based on the eligibility of the client. These funding sources include multiple federal programs, multiple CCDF federal grant awards, and state funding. The Department uploads the SSPS payment data into the state’s accounting system at a summary level based on the various funding sources. There is always a need to transfer the funding sources for some payments throughout the year to manage federal and state funds properly. In prior audit periods up until fiscal year 2021, the Department prepared supporting documentation for transfers that included details of what payments it was transferring. The purpose of documenting this detail was to maintain proper support for federal expenditures. The Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers were allowable and properly supported. We have reported this condition since 2005. The most recent audit finding numbers were 2022-041, 2021-033, 2020-038, 2019-035, 2018–034, 2017-024, 2016-021, 2015-023, 2014-023, 2013-016, 12-28, 11-23, 10-31, 9-12 and 8–13. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments to child care providers for the CCDF programs were allowable and properly supported. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in SSPS inaccurate and unreliable for testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments to child care providers for compliance with activities allowed and cost principles. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in SSPS and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the federal dollars it used for payments to child care providers. Because we could not test transaction-level detail, we also could not determine whether the issues we identified in prior audits had improved or worsened, including the Department’s lack of adequate internal controls and significant rate of noncompliance for payments to child care providers. The total amount of known child care payments with federal CCDF funds in the audit period was $356,042,172. The Department also partially funded these payments with an additional $48,941,302 in state dollars. Because the Department did not comply with HHS requirements to allow for the tracing of grant expenditures to a payment level, we are questioning all $356,042,172 in federal program costs the Department incurred during the audit period. The payments the Department partially paid with state funds are not included in the federal questioned costs. 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 expenditures. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 2, Definitions, includes the definition of improper payment. 45 CFR Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. 45 CFR Part 75, section 403, Factors Affecting Allowability of Costs. 45 CFR Part 75, section 410, Collection of Unallowable Costs 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-060 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Matching, Level of Effort, Earmarking Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-042 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Additionally, under the Temporary Assistance for Needy Families (TANF) program, the Department may transfer TANF funds to the CCDF, which are then treated as Discretionary Funds. The Department is instructed how to spend this federal money. For the Department to receive its allotted share of the Matching Fund, it must meet the Maintenance of Effort (MOE) requirement and match the federal Matching Fund claimed with state expenditures at the Federal Medical Assistance Percentage rate for the applicable fiscal year. The Department must also meet earmarking requirements for expenditures for administrative and quality activities. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. Department staff run monthly and quarterly expenditure reports from the accounting system to track requirements over matching, level of effort, and earmarking for each open grant award. 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 prior audits, we reported the Department did not have adequate internal controls over matching, level of effort, and earmarking requirements for the CCDF Cluster programs. The prior audit finding numbers were 2022-042, 2021-036, and 2020-040. Description of Condition The Department did not have adequate internal controls over and did not comply with matching, level of effort, and earmarking requirements for the CCDF programs. The Department’s accounting records should be used to verify it has met matching, level of effort, and earmarking requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditure coding in the payment system inaccurate and unreliable for testing. Without identifying which expenditures it transferred, the Department’s monitoring is insufficient for properly managing matching, level of effort, and earmarking requirements. Our Office could not rely on the data supporting the Department’s expenditures or verify that the accounting records were accurate. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with matching, level of effort, and earmarking requirements. By processing these adjustments at the fund level, the Department invalidated the transaction-level documentation of the original child care expenditure in the payment system, and did not identify the new allocation at the payment level. Additionally, the Department transferred some of these child care expenditures more than once at the fund level, making the underlying data increasingly unreliable with each transfer. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures the Department created a condition that made it impossible for our Office to determine if it had met matching, level of effort, and earmarking requirements. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop effective ongoing monitoring procedures Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-061 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with period of performance requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Services Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Period of Performance Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-043 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. Each federal grant specifies a performance period during which recipients must obligate and liquidate program costs. These periods typically align with the federal fiscal year of October 1 through September 30. Payments for costs charged before a grant’s beginning date or after the ending date are not allowed without the grantor’s prior approval. The CCDF consists of three distinct funding sources: Discretionary Fund, Mandatory Fund, and Matching Fund. Each of these funds has specific period of performance requirements established in federal regulation (45 CFR § 98.60(d)): • Discretionary Funds must be obligated by the end of the succeeding fiscal year after award and expended by the end of the third fiscal year after award. • Mandatory Funds must be obligated by the end of the fiscal year in which they are awarded if the state also requests Matching Funds. If no Matching Funds are requested for the fiscal year, then the Mandatory Funds are available until liquidated. • Matching Funds must be obligated by the end of the fiscal year in which they are awarded and liquidated by the end of the succeeding fiscal year after award. During the audit period, the Department also received supplemental funds under the Coronavirus Aid, Relief, and Economic Security (CARES) and the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Acts. These funds are treated as Discretionary Funds, however, they have their own specific obligation and liquidation timeframes. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over period of performance requirements for the CCDF program. The prior finding numbers were 2022-043, 2021-037, and 2020-041. Description of Condition The Department did not have adequate internal controls over and did not comply with period of performance requirements for the CCDF program. Our Office uses the Department’s accounting records to verify it has met the period of performance requirements. In fiscal year 2021, management informed us that the Department changed its grant management practices to process expenditure transfers at the grant level. This new process made the original expenditures coded in the payment system inaccurate and unreliable for audit testing. As a result, we could not trace the federal funds to a level of expenditure adequate to establish whether the Department spent CCDF funds in accordance with federal and state regulations. Further, this meant we could not test the Department’s payments for compliance with period of performance requirements. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes with federal dollars. The Department’s accounting practices prevent it from meeting this requirement. The Department implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported the adjustments. This affected all populations of child care expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to determine if it materially met the period of performance requirements. Furthermore, without adequate internal controls in place, the Department is at a higher risk of making improper payments with grant funds. Recommendations We recommend the Department: • Design and implement internal controls to ensure transaction-level data is sufficient to comply with federal law and state rules • Develop written policies and procedures over federal period of performance requirements Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the amount of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure child care payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.66 – Availability of funds, states in part: (d) The following obligation and liquidation provisions apply to States and Territories: (1) Discretionary Fund allotments shall be obligated in the fiscal year in which funds are awarded or in the succeeding fiscal year. Unliquidated obligations as of the end of the succeeding fiscal year shall be liquidated within one year. (2) (i) Mandatory Funds for States requesting Matching Funds per § 98.55 shall be obligated in the fiscal year in which the funds are granted and are available until expended. (ii) Mandatory Funds for States that do not request Matching Funds are available until expended. (3) Both the Federal and non-Federal share of the Matching Fund shall be obligated in the fiscal year in which the funds are granted and liquidated no later than the end of the succeeding fiscal year. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-062 The Department of Children, Youth, and Families did not have adequate internal controls over and did not comply with financial reporting requirements for the Child Care and Development Fund Cluster. Assistance Listing Number and Title: 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Grantor Name: U.S. Department of Health and Human Service Federal Award/Contract Number: 2103WACCDF; 2103WACCDD; 2203WACCDF; 2203WACCDD; 2303WACCDF; 2303WACCDD; 2003WACCC3; 2103WACDC6; 2103WACSC6; 2103WACCC5 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Reporting Known Questioned Cost Amount: None Prior Year Audit Finding: Yes, Finding 2022-044 Background The Department of Children, Youth, and Families administers the federal Child Care and Development Fund (CCDF) grants to help eligible working families pay for child care and fund improvements to child care quality. In fiscal year 2023, the Department spent about $547.2 million in federal funding. The Department is required to submit a quarterly ACF-696 financial report for each open grant. These reports contain information on expenditures for three CCDF funding sources: the Mandatory Fund, the Matching Fund, and the Discretionary Fund. The Department uses CCDF expenditures recorded in the state’s accounting system to compile and support the ACF-696 report. The U.S. Department of Health and Human Services (HHS), which oversees the CCDF program at the federal level, requires recipients to have accounting procedures that are sufficient for tracing grants to a level of expenditure adequate to show that they have been used in accordance with program requirements. 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 prior audits, we reported the Department did not have adequate internal controls over financial reporting requirements for the CCDF program. The prior finding numbers were 2022-044 and 2021-038. Description of Condition The Department did not have adequate internal controls over and did not comply with financial reporting requirements for the CCDF program. The Department’s accounting records must provide and support the financial information reported on ACF-696 reports. During the audit period, the Department’s grant management practice was to process expenditure transfers at the fund level without identifying which expenditures it transferred. Therefore, we could not rely on the data supporting the Department’s reported ACF-696 expenditures and could not test whether the reports were accurate and complete. This condition is also referenced in audit finding 2023-058. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition The Department is required to maintain sufficient documentation for each payment it makes using federal dollars. The Department’s accounting practices prevent it from meeting this requirement. In fiscal year 2021, the Department informed our Office that it had implemented what management referred to as fund-level accounting. This consisted of making significant accounting adjustments between funding sources in its general ledger without identifying the underlying transactions in the payment system that supported them. This affected all populations of childcare expenditures for every month of the fiscal year. HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant. Effect of Condition By not complying with requirements in federal law to maintain adequate supporting documentation for expenditures, the Department created a condition that made it impossible for our Office to audit the CCDF program expenditures reported on the ACF-696 financial report. Recommendations We recommend the Department design and implement internal controls to ensure the ACF-696 report is supported with transaction-level data that is sufficient to comply with federal law and state rules. Department’s Response The Department has managed the CCDF program since 2019, prior to that it was managed by the Department of Social and Health Services and the Department of Early Learning. The Department implemented grant-level management of all federal funds, including the CCDF grant. The Department allocated the CCDF grants to eligible clients and allowable activities in compliance with 45 CFR 98.67. This process consists of making grant level adjustments between allowable grant sources to properly spend grant dollars within the allowable period of performance and ensure level of effort and matching requirements. The Department’s grant adjustments were processed based on eligible clients and allowable activities and did not include child-level data as required by SAO. The Department held an informal meeting on February 23, 2022, with HHS representative, the State Auditor’s Office and the Office of Financial Management. The intent was to obtain the grantor’s perspective in whether proper grant accounting required the use of child-level data. HHS stated they would not offer an opinion until they received the completed finding from the state. However, the Cause of Condition of finding 2021-033 stated, “HHS officials informed the Department that these accounting practices do not comply with federal law, but management said they believe they are compliant.” The Department does not agree with SAO’s interpretation of the meeting outcome. In the area of CCDF eligibility, for state fiscal year 2021, the SAO also issued finding 2021-035, with questioned cost of $32 and in state fiscal year 2022, finding 2022-008 (temporary number) with no questioned costs. There were no other findings or exit items in the area of eligibility determination or the cost allocation of funds. Given that eligibility or cost allocation is not an area of concern and transfers were processed between CCDF source of funds with the same eligibility requirements, the Department is confident CCDF funding was spent appropriately within federal regulations. The Department received a management decision letter dated October 3, 2023, from HHS for finding 2021-033 (2020-038) which states: “the ACF noted that the auditor raised concern about the Department’s accounting procedures and efforts made to trace expenditures at the transaction-level. As the basis for the finding, the auditor used CFRs (200.53, 200.303, 200.403, 200.410) that do not apply to CCDF. Federal regulations allow Lead Agencies to expend and account for CCDF funds in accordance with their own procedures.” In addition, ACF did not sustain the disallowance of questioned costs and stated: “Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” The management decision letter also conveyed the following determination by HHS for finding 2021-035, 2020-039 on eligibility compliance: “The ACF believes the corrective actions taken or planned, as stated above, should prevent recurrence of this finding in the future. In addition, we recognize the continuous progression of the State’s actions to fully resolve this finding as the number of error cases and the number of questioned costs have both significantly declined over the last 3 years. Therefore, the ACF will not pursue the questioned costs of $32 since the state has taken corrective actions that appear to have resulted in an amount of questioned costs that are immaterial.” The ACF recommended, “that the Department work with the auditors to determine an appropriate methodology that can be tested to ensure childcare payments comply with Federal regulations.” The Department met with ACF and SAO on November 8, 2023, to discuss the ACF decision at which time ACF upheld the above statements that the finding was not substantiated. The Department is committed to collaborating with SAO to determine an appropriate methodology that identifies a sampling unit that can be used to accurately test compliance. The SAO maintained that the program is not auditable without child-level data. The Department does not currently have the staff and resources to develop and maintain the business process redesign, as well as the information technology initiatives necessary to meet the level of assurance as identified by SAO. In response to the auditor’s recommendations, the Department has submitted a budget request for the 2024 supplemental budget. If the request is funded, it would allow adjustments to include child-level data. Auditor’s Remarks The level of documentation needed to support grant expenditures is not established by our Office, but in title 45 of the U.S. Code of Federal Regulations and the state’s grant award. During the February 2022 meeting with HHS that the Department referenced in its response, the grantor stated the specific federal law the Department’s accounting procedures were noncompliant with was 45 CFR 98.67. We agree with the HHS management decision that our references to 2 CFR 200.53, 200.303, 200.403 and 200.410 in the prior finding were not correct. However, HHS adopted these same requirements in 45 CFR 75.2, 75.303, 75.403 and 75.410, respectfully. These requirements were all in place during the audit period. The proper references are included in this finding. In its response, the Department references previous findings related to the eligibility compliance requirement as a basis for asserting federal funds were spent properly. The requirements to determine whether a client is eligible to receive subsidized child care are different than the requirements to ensure the payments for those services are allowable, fall within each award’s period of performance and adequately supported. Without adequate transactional level payment data, our Office is unable to perform tests to verify the Department met these requirements. In addition, we also are unable to verify whether the Department complied with matching, level of effort and earmarking requirements, or that required financial information reported to the federal government was accurate. These matters are referenced in separate findings in our report. We disagree with the Department’s description of the meeting held with HHS program staff on November 8, 2023. The Department states HHS “upheld the above statements that the finding was not substantiated.” This is not accurate. During this meeting, HHS representatives conveyed the same message that they did in the management decision issued October 3, 2023. The finding was partially substantiated because the questioned costs identified in the audit would not be disallowed. The management decision states: “The ACF partially sustains the finding and recommendation. The ACF agrees with the auditor that the Department should strengthen internal controls to ensure payments to child care providers are allowable and properly supported.” “The ACF does not sustain a disallowance for the questioned costs in the amount of $271,353,409 representing the entire amount of the CCDF grant award. Although the Department’s internal controls were lacking, the ACF has not identified any funds that were expended on ineligible activities.” We are not aware of what procedures ACF performed to conclude expenditures reported by the Department for fiscal year 2022 were spent only for allowable activities, were for allowable costs and met federal cost principles. We questioned all expenditures because, in our judgment, they were unauditable. Lastly, when the Washington State Legislature approved the Department’s 2023-25 biennial budget, it specified: “Funding in this subsection must be expended with internal controls that provide child-level detail for all transactions.” We reaffirm our finding and hope additional resources from the Legislature, to get down to child-level detail for all transactions, will resolve the auditing problems existing at the Department. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations 45 U.S. Code of Federal Regulations (CFR) Part 75, section 303, Internal Controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 45 CFR Part 75, section 516, Audit findings, establishes reporting requirements for audit findings. Title 45 CFR, Section 98.67 – Fiscal requirements, states: (a) Lead Agencies shall expend and account for CCDF funds in accordance with their own laws and procedures for expending and accounting for their own funds. (b) Unless otherwise specified in this part, contracts that entail the expenditure of CCDF funds shall comply with the laws and procedures generally applicable to expenditures by the contracting agency of its own funds. (c) Fiscal control and accounting procedures shall be sufficient to permit: (1) Preparation of reports required by the Secretary under this subpart and under subpart H; and (2) The tracking of funds to a level of expenditure adequate to establish that such funds have not been used in violation of the provisions of this part. 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.
2023-006 The Employment Security Department made improper payments to ineligible beneficiaries of the Unemployment Insurance program. Assistance Listing Number and Title: 17.225 Unemployment Insurance 17.225 COVID-19 Unemployment Insurance Federal Grantor Name: U.S. Department of Labor Federal Award/Contract Number: UI-34528-20-60-A-53; UI-34748-20-55-A-53; UI-35682-21-55-A-53; UI-35977-21-60-A-53; UI-37098-21-55-A-53; UI-37256-22-55-A-53; UI-37313-22-55-A-53; UI-38013-22-60-A-53; UI-38163-22-55-A-53; UI-38511-22-55-A-53; UI-38580-22-75-A-53; UI-39303-23-55-A-53; UI-39355-23-55-A-53; UI-34092-20-55-A-53 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed, Eligibility Known Questioned Cost Amount: $603 Prior Year Audit Finding: No Background The Unemployment Insurance (UI) program was created by the Social Security Act, and provides benefits under the Unemployment Compensation program to people for periods of involuntary unemployment. It provides a stabilizing effect on the economy by maintaining the spending power of eligible workers while they are between jobs. The Employment Security Department administers the state’s UI program. During fiscal year 2023, the Department paid more than $1.1 billion in unemployment insurance benefits to people in Washington. In 2020, the U.S. Department of Labor (DOL) established new unemployment compensation programs, including Pandemic Unemployment Assistance (PUA), to provide additional unemployment assistance benefits to eligible workers affected by the COVID-19 pandemic. These programs were extended and modified through the American Rescue Plan Act of 2021. Under the temporary programs, which expired on September 6, 2021, states must process and pay benefits to eligible people for all weeks of unemployment ending on or before the date of termination or eligibility expiration (whichever comes first). People eligible for PUA included those not eligible for regular unemployment compensation, such as people who have already exhausted their regular UI benefits, are self-employed, seeking part-time employment, or lack sufficient work history. The first week in which claimants were eligible to receive PUA benefits began on January 27, 2020. During the pandemic, people applying for PUA benefits were required to self-certify that they were unemployed, partially unemployed, or unable or unavailable to work due to COVID-19. However, in January 2021, DOL announced a change to federal law through Unemployment Insurance Program Letter (UIPL) 16-20, Change 4. This change required that people receiving PUA benefits on or after December 27, 2020, submit proof of documentation to the state substantiating their employment, self-employment, or planned start of employment or self-employment in order to receive their benefits, regardless of when their benefits are actually paid. This includes people requesting retroactive payments of PUA benefits that are not received until after December 27, 2020. Description of Condition The Department did not ensure that payments were made only to eligible beneficiaries of the UI program. We found the Department had adequate internal controls to ensure it paid UI benefits to eligible people, and it materially complied with the federal requirements. However, we identified questioned costs for benefits awarded to PUA claimants. We used a statistical sampling method to randomly select and examine 78 out of a total population of 20,447 claims for weekly PUA benefits. For these claims, the Department was required to determine the eligibility of each claimant to receive benefits, including verifying proof of employment, self-employment, or planned start of employment or self-employment. We found three instances (5.1 percent) where the Department paid weekly benefits without requesting and reviewing documentation from the claimant substantiating employment, self-employment, or planned start of employment or self-employment, as required by the federal grantor. These three claims resulted in $603 in known overpayments of PUA benefits by the Department, as each claim was paid after December 27, 2020, and during our audit period. Federal regulations require the auditor to issue a finding when the known or estimated questioned costs identified in a single audit exceed $25,000. We are issuing this finding because, as stated in the Effect of Condition and Questioned Costs section of this finding, the estimated questioned costs exceed that threshold. This issue was not reported as a finding in the prior audit. Cause of Condition Department officials did not correctly interpret the guidance outlined in the UIPL change to reflect that claimants were required to provide documentation substantiating proof of employment or self-employment in order to receive payments from the state after December 27, 2020. The Department did not request documentation from PUA claimants to substantiate employment prior to paying the claims. Effect of Condition and Questioned Costs We identified $603 in known federal questioned costs and $208,975 in likely federal questioned costs. We considered these questioned costs because the people receiving the benefit payments did not meet all the program’s eligibility requirements at the time of payment. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflects this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). 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 expenditures. Recommendations We recommend the Department: • Verify people applying for PUA benefits have met all eligibility requirements before issuing weekly benefit payments • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department does not concur with the finding. The State Auditor’s Office asserts the Department incorrectly interpreted guidance outlined in the UIPL regarding PUA benefit eligibility requirements. However, citing the UIPL below: UIPL 16-20 change 4 2. Requirement to submit documentation substantiating employment or self-employment (Section 241 of the Continued Assistance Act) (new). The first full paragraph of section C.2. of attachment I, UIPL 16-20 change 4 says that: “Anyone that receives a payment of PUA on or after December 27, 2020, (the enactment date of the Continued Assistance Act) will be required to submit documentation substantiating employment or self-employment, or the planned commencement of employment or self-employment.” [emphasis added] Under this guidance, the claimant had to first have been issued a payment after the Continued Assistant Act (CAA) became effective (regardless of the week or weeks the payment(s) were for) before the Department could set the issue to request the documentation. In the exceptions noted by SAO, the first claimant wasn’t paid at all until 2023. Once the payment was issued to the claimant, the PUA Documents Required (PDR) issue was properly set. In the second, the claimant received some payments before 12/27/20 and then had other payment stops on her claim that were not removed until 2023. The removal of those payment stops triggered a payment for the remaining weeks claimed. Because those payments were made after 12/27/20, the PDR issue was set. Under the same section, item c. limits the date the Department can start the denial for failing to comply with the PDR issue: c. Failure to Comply. Individuals who do not provide documentation substantiating employment/self-employment (or planned employment/self-employment) within the required timeframe, as described above, are not eligible for PUA. For DUA, if the individual fails to submit documentation substantiating employment or self-employment, the state must establish an overpayment for the entire DUA claim, per 20 C.F.R. 625.6(e)(2). However, as provided in Section 241(b)(2) of the Continued Assistance Act, for PUA, if the individual fails to submit such documentation, the state may only establish an overpayment for those weeks of unemployment ending on or after December 27, 2020 (the enactment date of the Continued Assistance Act). For example, an individual has a PUA claim effective on November 1, 2020, and files and is paid for weeks of unemployment ending November 7, 2020, through weeks ending January 9, 2021. Because the individual received a payment for PUA after December 27, 2020, the state must notify the individual on January 4, 2021, about the requirement to provide documentation substantiating employment/self-employment (or planned employment/self-employment) within 90 days (by April 4, 2021). If, in that timeframe, the individual fails to provide documentation or fails to show good cause to have the deadline extended, an overpayment must be established for all the weeks paid beginning with the week ending January 2, 2021. This is because the individual cannot be deemed ineligible for a week of unemployment ending before the date of enactment solely for failure to submit documentation (emphasis added). In the cases reviewed, the claimants did not respond to the issue or provide their documentation. Because the denial is limited to only claimed weeks following the enactment of the CAA (weeks ending 1/2/21 and later), any weeks from 2020 that were paid in 2023 had no potential for denial and therefore should not be considered to be incorrectly paid, similar to the example given above from the UIPL. If addition, if claimants never claimed a week ending after the CAA was effective, the PDR issue will set but never be adjudicated because they had never claimed a week that was potentially deniable. In discussions with SAO, the Office cited paragraph b(ii) of the UIPL, to indicate that any claims paid by the State on or after 12/27/2020 require the claimant to provide documentation substantiating employment or self-employment within 90 days of payment, or when directed to submit the documentation by the state workforce agency, whichever is later. This section of the UIPL solely lays out the requirements for establishing the respond-by dates for providing documentation for review. The deadline for responses is different depending on whether the PUA claim was filed before 1/26/21 or on/after that date. This paragraph does not establish the requirements for payment or non-payment of PUA weeks. Additionally, the Department received further guidance in a webinar with USDOL on Monday, January 11, 2021, which reinforced the methodology used by the Department in these cases. Auditor’s Remarks For the claimants in question, we did not receive any documentation from the Department demonstrating that a request was sent to the claimant to provide supporting documentation substantiating employment, nor was there evidence provided that the claims in-question were suspended due to missing documentation from the claimants. Federal guidance contained in Attachment I to UIPL 16-20, Change 4 – Pandemic Unemployment Assistance (PUA) Implementation and Operating Instructions stipulates the following: “Anyone that receives a payment of PUA on or after December 27, 2020, (the enactment date of the Continued Assistance Act) will be required to submit documentation substantiating employment or self-employment, or the planned commencement of employment or self-employment. This includes any individual who receives any payment of PUA on or after December 27, even if the payment is for a week of unemployment that occurred before December 27, 2020. The deadline for providing such documentation depends on when the individual filed the initial PUA claim. • Filing New Applications for PUA on or after January 31, 2021. Individuals filing a new PUA application on or after January 31, 2021 (regardless of whether the claim is backdated), are required to provide documentation within 21 days of application or the date the individual is directed to submit the documentation by the State Agency, whichever is later. The deadline may be extended if the individual has shown good cause under state UC law within 21 days. • Filing Continued Claims for PUA. Individuals who have an existing PUA claim as of December 27, 2020, (the enactment date of the Continued Assistance Act) or who file a new initial PUA claim before January 31, 2021, and who receive PUA on or after December 27, 2020, must provide documentation within 90 days of the application date or the date the individual is instructed to provide such documentation by the state agency (whichever date is later).” We questioned these payments due to the Department not receiving any supporting documentation substantiating employment or self-employment from these claimants during the audit period, and failing to establish overpayment notices to the claimants during the audit period. For all three payments in-question, the claimant filed for PUA prior to December 27, 2020, and therefore would have been required to submit supporting documentation substantiating employment to the Department within 90 days, or as directed by the Department. Because the Department did not receive supporting documentation from the claimants for these benefit weeks during the audit period, we could not determine that the payments were allowable and that the claimants met the PUA eligibility requirements for their benefit weeks paid. We reaffirm our finding and will follow-up on the Department’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 200.1, Uniform Guidance, establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Office of Management and Budget, 2 CFR Part 200, Appendix XI, Compliance Supplement, Unemployment Insurance, states in part: E. Eligibility 1. Eligibility for Individuals a. PUA – PUA provides benefits to covered individuals, who are those individuals not eligible for regular unemployment compensation (UC or extended benefits under state or federal law or PEUC, including those who have exhausted all rights to such benefits). Covered individuals also include self-employed, those seeking part-time employment, individuals lacking sufficient work history, and those who otherwise do not qualify for regular unemployment compensation or extended benefits under state or federal law or PEUC. PUA is payable to individuals who are ineligible for regular UC, EB, or PEUC and are unemployed, partially unemployed, or unable or unavailable to work due to one of the COVID-19 related reasons identified in Attachment I to UIPL No. 16-20, Change 6. Section 2102(a)(3)(A)(ii)(I) of the CARES Act included 10 specific COVID-19 related reasons. The Department, under the authority provided by Section 2102(a)(3)(A)(ii)(I)(kk) of the CARES Act, added additional COVID-19 related reasons three new COVID-19 related reasons with the publication of UIPL No. 16-20, Change 5 on February 25, 2021. All COVID-19 related reasons apply retroactively to the beginning of the PUA program. Additionally, individuals who are paid on or after December 27, 2020, must submit proof of documentation substantiating employment, self-employment, or the planned commencement of employment or self-employment (see Attachment I, Section C.2. of UIPL No. 16-20, Change 4). This includes individuals requesting retroactive payments that are not received until after December 27, 2020.