Finding Text
The City did not have adequate internal controls for ensuring compliance with federal suspension and debarment requirements.
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: N/A
Pass-through Entity Name: N/A
Pass-through Award/Contract Number: N/A
Known Questioned Cost Amount: $0
Prior Year Audit Finding: N/A
Background
The purpose of the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) is to respond to the COVID-19 pandemic’s negative effects on public health and the economy, provide premium pay to essential workers during the pandemic, provide government services to the extent COVID-19 caused a reduction in revenues collected, and make necessary investments in water, sewer or broadband infrastructure. In fiscal year 2023, the City spent $2,290,160 to administer the program.
Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls.
Federal requirements prohibit recipients from contracting with or purchasing from parties suspended or debarred from doing business with the federal government. Whenever the City enters into contracts or purchases goods and services that it expects to equal or exceed $25,000, paid all or in part with federal funds, it must verify that the contractors are not suspended, debarred or otherwise excluded from participating in federal programs. The City may verify this by obtaining a written certification from the contractor, adding a clause or condition into the contract that states the contractor is not suspended or debarred, or checking for exclusion records in the U.S. General Services Administration’s System for Award Management at SAM.gov. The District must verify this before entering into the contract, and must maintain documentation demonstrating compliance with this federal requirement.
Description of Condition
Our audit found the City did not have adequate controls in place to verify one of three contractors it paid more than $25,000 in federal funds was not suspended or debarred from participating in federal programs before entering the contract or paying them.
We consider this deficiency in internal controls to be a material weakness that led to material noncompliance.
Cause of Condition
City’s finance staff responsible for checking federal suspension and debarment status are aware of such requirements and typically check suspension and debarment for contracts procured using federal awards. In this case, the project was not originally identified as a federally funded project and therefore, did not go through the finance department’s review of verifying the contractor was not suspended or debarred.
Effect of Condition
The City did not obtain a written certification from the contractor, insert a clause into the agreement or check for exclusion records at SAM.gov to verify one contractor it paid $49,396 was not suspended or debarred. Without this verification, the City increases its risk of awarding federal funds to contractors that are excluded from participating in federal programs. Any program funds the City used to pay contractors that were suspended or debarred would be unallowable, and the federal grantor could potentially recover them.
We subsequently verified the contractor was not suspended or debarred, so we are not questioning the costs.
Recommendation
We recommend the City strengthen its internal controls to ensure all contractors it pays $25,000 or more, all or in part with federal funds, are not suspended or debarred from participating in federal programs before contracting with or purchasing from them.
City’s Response
The City of Lynnwood has a standard practice in place that requires departments to identify if federal funding will be used prior to soliciting quotes and/or bids for projects. For federally funded projects, the status of the contractor is confirmed on SAM.gov and saved in vendor files before any payments are made to ensure the contractor is not suspended or disbarred from working on federally funded projects.
In this unique occurrence, the Parks Recreation and Cultural Arts Department identified the project as non-federally funded before quotes were obtained, but then subsequently asked the City Council to allocate federal funds for the project after the low bid was already accepted.
The Finance Department will continue to ensure that departments follow the existing process of confirming suspension/disbarment status for any federally funded projects. Departments have been advised that if they subsequently obtain City Council approval to utilize federal funds for projects that have already been bid/quoted as non-federal funded, then they must re-bid/re-quote the project as federally funded and save proof that the contractor is in good standing before any payments are made.
Auditor’s Remarks
We appreciate the City’s commitment to resolve this finding and thank the City for its cooperation and assistance during the audit. We will review the corrective action taken 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 180, OMB Guidelines to Agencies on Governmentwide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689.
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.