FINDING 2023-004
Subject: Water and Waste Disposal Systems for Rural Communities -
Equipment and Real Property Management
Federal Agency: Department of Agriculture
Federal Program: Water and Waste Disposal Systems for Rural Communities
Assistance Listings Number: 10.760
Federal Award Number and Year (or Other Identifying Number): FY 2023
Compliance Requirement: Equipment and Real Property Management
Audit Findings: Material Weakness, Modified Opinion
Condition and Context
The Town had not properly designed or implemented a system of internal controls, which would
include appropriate segregation of duties, that would likely be effective in preventing, or detecting and
correcting, noncompliance. A property record or capital asset listing, which would include the information
listed below, is to be maintained for assets purchased that exceed the Town's capitalization threshold. In
addition, a physical inventory of all capital assets should be completed at least every two years.
Capital Asset Listing Information
A description of the property.
A serial number or other identification number.
The source of funding for the property (including the federal award identification number
(FAIN)).
Who holds title.
The acquisition date.
Cost of the property.
Percentage of federal participation in the project costs for the federal award under which
the property was acquired.
The location.
Use and condition of the property.
The Town purchased one asset, totaling $477,750, which exceeded the Town's capitalization
threshold. The asset was determined not to have been recorded in property records, nor was the asset on
the inventory listing. Additionally, the Town did not complete a capital asset inventory every two years as
required.
The lack of internal controls and noncompliance were systemic issues throughout the audit period.
INDIANA STATE BOARD OF ACCOUNTS
22
TOWN OF FRANKTON
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). . . ."
2 CFR 200.313(d) states in part:
"Management requirements. Procedures for managing equipment (including replacement
equipment), whether acquired in whole or in part under a Federal award, until disposition takes
place will, as a minimum, meet the following requirements:
(1) Property records must be maintained that include a description of the property, a serial
number or other identification number, the source of funding for the property (including
the FAIN), who holds title, the acquisition date, and cost of the property, percentage of
Federal participation in the project costs for the Federal award under which the
property was acquired, the location, use and condition of the property, and any ultimate
disposition data including the date of disposal and sale price of the property.
(2) A physical inventory of the property must be taken and the results reconciled with the
property records at least once every two years.
(3) A control system must be developed to ensure adequate safeguards to prevent loss,
damage, or theft of the property. Any loss, damage, or theft must be investigated.
. . ."
Cause
A proper system of internal controls was not designed by the management of the Town. Embedded
within a properly designed and implemented internal control system should be internal controls consisting
of policies and procedures. Policies reflect the Town's management statements of what should be done to
effect internal controls, and procedures should consist of actions that would implement these policies. The
Clerk-Treasurer was new to the position as of January 1, 2024. The former Clerk-Treasurer was not
knowledgeable on the compliance requirements of the federal award. The Town contracted with outside
engineers to manage the compliance requirement, and there was no documentation that an inventory of
capital assets had been completed. Additionally, the provided capital asset listing did not include the asset
in question. Lastly, the capital asset listing included items that were under the capital asset threshold in
the Town's Capital Asset Policy.
INDIANA STATE BOARD OF ACCOUNTS
23
TOWN OF FRANKTON
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
(Continued)
Effect
Without the proper implementation of an effectively designed system of internal controls, including
policies and procedures that provide segregation of duties and additional oversight as needed, the internal
control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance.
As such, a capital asset purchased with federal funds was not properly recorded in a capital asset
ledger, and a physical inventory was not performed.
Noncompliance with the provisions of federal regulations, and the terms and conditions of the
federal award could result in the loss of future federal funding to the Town.
Questioned Costs
There were no questioned costs identified.
Recommendation
We recommended that management of the Town design and implement a proper system of internal
controls, including policies and procedures that would provide segregation of duties to ensure capital assets
purchased with federal funds are included on a capital asset ledger and that a physical inventory is
performed every two years.
Views of Responsible Officials
For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.