Finding 1073381 (2023-001)

FINDING 2023-001 Subject: COVID-19: Coronavirus State and Local Fiscal Recovery Funds - Suspension and Debarment Federal Agency: Department of the Treasury Federal Program: COVID-19: Coronavirus State and Local Fiscal Recovery Funds Assistance Listings Number: 21.027 Federal Award Number and Year (or Other Identifying Number): 2021 Compliance Requirement: Procurement and Suspension and Debarment Audit Findings: Material Weakness, Modified Opinion INDIANA STATE BOARD OF ACCOUNTS 13 CITY OF MICHIGAN CITY SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2022-001. Condition and Context The City elected to receive the standard revenue loss allowance, allowing the City to claim $10,000,000 of its total State and Local Fiscal Recovery Funds (SLFRF) allocation of $16,549,045 as revenue loss to use for government services. All SLFRF program funds expended in 2023 were under the revenue loss eligible use category. The U.S. Department of the Treasury (Treasury) determined that there are no subawards under this eligible use category, and that recipients' use of revenue loss funds would not give rise to subrecipient relationships given that there is no federal program or purpose to carry out in the case of the revenue loss portion of the award. Prior to entering into subawards and covered transactions with SLFRF award funds, recipients are required to verify that such contractors and subrecipients are not suspended, debarred, or otherwise excluded. "Covered transactions" include, but are not limited to, contracts for goods and services awarded under a nonprocurement transaction (i.e., grant agreement) that are expected to equal or exceed $25,000. The verification is to be done by checking the Excluded Parties List System (EPLS), collecting a certification from that person, or adding a clause or condition to the covered transaction with that person. Due to the Treasury's determination that the revenue loss eligible use category does not give rise to subawards, the City was only required to comply with suspension and debarment requirements related to contracts. The City's policies related to SLFRF suspension and debarment requirements included the Board of Public Works completing a review of each bid packet to ensure the bidder submitted a statement indicating if they were not suspended or debarred. Of the 14 transactions that equaled or exceeded $25,000 that were paid from SLFRF funds during the audit period, 3 were selected for testing to verify the City followed its procedures related to suspension and debarment. There was 1 transaction in the amount of $226,050 that was made for the purchase of a municipal tractor sweeper for the Street Department. Although bids were obtained for the street sweeper, the vendor's suspension and debarment status was not verified prior to payment. The 2nd second transaction selected for testing in the amount of $55,355 was made for the purchase of a Ford F250 truck for the Park Department. The purchase was made without verifying the vendor's suspension and debarment status. The 3rd transaction selected for testing in the amount of $128,800 was made for the maintenance of a fence in Patriot Park for the Park Department. The purchase was made without verifying the vendor's suspension and debarment status. The lack of internal controls and noncompliance were systemic issues throughout the audit period. INDIANA STATE BOARD OF ACCOUNTS 14 CITY OF MICHIGAN CITY SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in 'Standards for Internal Control in the Federal Government' issued by the Comptroller General of the United States or the 'Internal Control Integrated Framework', issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). . . ." 31 CFR 19.300 states: "When you enter into a covered transaction with another person at the next lower tier, you must verify that the person with whom you intend to do business is not excluded or disqualified. You do this by: (a) Checking the EPLS; or (b) Collecting a certification from that person if allowed by this rule; or (c) Adding a clause or condition to the covered transaction with that person." Cause The system of internal controls as established by management of the City was not properly implemented to ensure that the policies and procedures in place related to suspension and debarment were appropriately followed. Effect Without the proper implementation of an effectively designed system of internal controls, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. As such, the City cannot ensure the contractors paid with federal funds are eligible to participate in federal programs. Any program funds the City used to pay contractors that have been suspended or debarred would be unallowable, and the funding agency could potentially recover them. Furthermore, noncompliance with the provisions of federal statutes, regulations, and the terms and conditions of the federal award could result in the loss of future federal funding to the City. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the City establish a proper system of internal controls, including strengthening its policies and procedures, to ensure that all contractors that are paid $25,000 or more, all or in part with federal funds, are not suspended or debarred from participating in federal programs before entering into contracts. INDIANA STATE BOARD OF ACCOUNTS 15 CITY OF MICHIGAN CITY SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.