Finding 1146123 (2024-004)

Finding Number: 2024-004 Finding Title: Internal Controls and Compliance Over Federally Funded Equipment Compliance Requirement(s): Equipment and Real Property Management Classification: Significant Deficiency Programs: Port Security Grant Program ALN #: 97.056 Pass-through entity: N/A – Direct Award Federal Agency: Department of Homeland Security Federal Award Numbers: EMW-2021-PU-00463-S01 Federal Award Year: 2021 Criteria or specific requirement (including statutory, regulatory, or other citation § 200.313 Equipment. See also § 200.439. (a) Title. Title to equipment acquired under the Federal award will vest upon acquisition in the recipient or subrecipient subject to the conditions of this section. This title must be a conditional title unless a Federal statute specifically authorizes the Federal agency to vest title in the recipient or subrecipient without further responsibility to the Federal Government (and the Federal agency elects to do so). A conditional title means a clear title is withheld by the Federal agency until conditions and requirements specified in the terms and conditions of a Federal award have been fulfilled. Title for equipment vested in a recipient or subrecipient is subject to the following conditions: (1) Use the equipment for the authorized purposes of the project during the period of performance or until the property is no longer needed for the purposes of the project. (2) While the equipment is being used for the originally authorized purpose, the recipient or subrecipient must not dispose of or encumber its title or other interests without the approval of the Federal agency or pass-through entity. (3) Use and dispose of the property in accordance with paragraphs (b), (c), and (e) of this section. (b) General. A State must use, manage and dispose of equipment acquired under a Federal award in accordance with State laws and procedures. Indian Tribes must use, manage, and dispose of equipment acquired under a Federal award in accordance with tribal laws and procedures. If such laws and procedures do not exist, Indian Tribes must follow the guidance in this section. Other recipients and subrecipients, including subrecipients of a State or Indian Tribe, must follow paragraphs (c) through (e) of this section. (c) Use. (1) The recipient or subrecipient must use equipment for the project or program for which it was acquired and for as long as needed, whether or not the project or program continues to be supported by the Federal award. The recipient or subrecipient must not encumber the equipment without prior approval of the Federal agency or pass-through entity. The Federal agency may require the submission of the applicable common forms for reporting on equipment. When no longer needed for the original project or program, the equipment may be used in other activities in the following order of priority: (i) Activities under other Federal awards from the Federal agency that funded the original program or project; then (ii) Activities under Federal awards from other Federal agencies. These activities include consolidated equipment for information technology systems. (2) During the time that equipment is used on the project or program for which it was acquired, the recipient or subrecipient must also make the equipment available for use on other programs or projects supported by the Federal Government, provided that such use will not interfere with the purpose for which it was originally acquired. First preference for other use of the equipment must be given to other programs or projects supported by the Federal agency that financed the equipment. Second preference must be given to programs or projects under Federal awards from other Federal agencies. Use for non-federally funded projects is also permissible, provided such use will not interfere with the purpose for which it was originally acquired. The recipient or subrecipient should consider charging user fees as appropriate. (3) Notwithstanding the encouragement in § 200.307 to earn program income, the recipient or subrecipient must not use equipment acquired with the Federal award to provide services for a fee that is less than a private company would charge for similar services unless specifically authorized by Federal statute. This restriction is effective as long as the Federal Government retains an interest in the equipment. (4) When acquiring replacement equipment, the recipient or subrecipient may either trade-in or sell the equipment and use the proceeds to offset the cost of the replacement equipment. (d) Management requirements. Regardless of whether equipment is acquired in part or its entirety under the Federal award, the recipient or subrecipient must manage equipment (including replacement equipment) utilizing procedures that meet the following requirements: (1) Property records must include a description of the property, a serial number or another identification number, the source of funding for the property (including the FAIN), the title holder, the acquisition date, the cost of the property, the percentage of the Federal agency contribution towards the original purchase, the location, use and condition of the property, and any disposition data including the date of disposal and sale price of the property. The recipient and subrecipient are responsible for maintaining and updating property records when there is a change in the status of the property. (2) A physical inventory of the property must be conducted, and the results must be reconciled with the property records at least once every two years. (3) A control system must be in place to ensure safeguards for preventing property loss, damage, or theft. Any loss, damage, or theft of equipment must be investigated. The recipient or subrecipient must notify the Federal agency or pass-through entity of any loss, damage, or theft of equipment that will have an impact on the program. (4) Regular maintenance procedures must be in place to ensure the property is in proper working condition. (5) If the recipient or subrecipient is authorized or required to sell the property, proper sales procedures must be in place to ensure the highest possible return. (e) Disposition. When equipment acquired under a Federal award is no longer needed for the original project, program, or for other activities currently or previously supported by a Federal agency, the recipient or subrecipient must request disposition instructions from the Federal agency or pass-through entity if required by the terms and conditions of the Federal award. Disposition of the equipment will be made as follows, in accordance with Federal agency or pass-through entity disposition instructions: (1) Equipment with a current fair market value of $10,000 or less (per unit) may be retained, sold, or otherwise disposed of with no further responsibility to the Federal agency or pass-through entity. (2) Except as provided in § 200.312(b), or if the Federal agency or pass-through entity fails to provide requested disposition instructions within 120 days, items of equipment with a current fair market value in excess of $10,000 (per-unit) may be retained or sold by the recipient or subrecipient. However, the Federal agency is entitled to an amount calculated by multiplying the percentage of the Federal agency's contribution towards the original purchase by the current market value or proceeds from the sale. If the equipment is sold, the Federal agency or pass-through entity may permit the recipient or subrecipient to retain, from the Federal share, $1,000 of the proceeds to cover expenses associated with the selling and handling of the equipment. (3) The recipient or subrecipient may transfer title to the property to the Federal Government or to an eligible third party provided that the recipient or subrecipient must be entitled to compensation for its attributable percentage of the current fair market value of the property. (4) In cases where a recipient or subrecipient fails to take appropriate disposition actions, the Federal agency or pass-through entity may direct the recipient or subrecipient to take disposition actions. Condition As part of our audit procedures, we reviewed internal controls over inventory and asset management, including physical inspection and disposition tracking of equipment. For the Fire Department, we determined that no physical inventory of federally funded equipment had been conducted during the required biennial period, and no reconciliation of equipment records to actual assets had been performed. While informal tracking logs and asset purchase records existed, they were incomplete and lacked standardized documentation of asset tag numbers, inspection dates, asset condition, and verification signatures. Moreover, there was no evidence of centralized or departmental oversight to ensure routine physical inventory and compliance with Federal property standards. In addition, we identified the Harbor department failed to properly record the disposition of a federally funded asset. The asset was still marked as “in service” within the equipment listing provided to us during the audit; however the item had in fact been disposed of during the audit period. Cause The Fire Department’s grants team oversees the compliance with required federal equipment procedures, the grants team indicated capacity issues were the main contributor towards the lack of a reconciliation or inventorying of the equipment. The Harbor Departments property related to a vehicle which was disposed of after an accident. This occurred between the departments inventory processes leading to the listing not being updated by mistake. Effect or potential effect The Departments were out of compliance with federal requirements surrounding equipment management, maintenance, and disposal. Questioned costs None Context The Harbor Department special vehicle which had an estimated book value of $0 that was involved in a collision before being disposed of. There were $0 in proceeds received related to the disposal. Identification as a repeat finding if applicable N/A Recommendation We recommend the departments enhance internal controls to ensure its property records include all the requirements under the Uniform Guidance and properly identify all property and equipment purchased with federal funds. We recommend the Fire Department implement a plan to address staffing needs and formalize procedures regarding the reconciliation, tracking, and maintenance of federally funded equipment. We recommend the Harbor Department enhance their procedures on equipment disposals. Views of responsible officials and planned corrective actions The Fire Department will ensure that all grant funds are expended in compliance with grant guidelines, including the completion of a biennial Equipment Inventory and the submission of a certification letter verifying its accuracy to the grantor every other year. Effective June 16, 2025, the Fire Department will conduct an Equipment Inventory and submit a verification letter to the grantor confirming its completion on a biennial basis. The current Equipment Inventory will be completed by the Support Services Bureau by September 30, 2025. The Fire Department will ensure the accompanying verification letter is sent to the grantor along with the updated inventory list. This biennial requirement will be integrated into the Department’s annual calendar. Following the FY2025 inventory, the next cycle will occur in FY2027 and continue in every odd-numbered fiscal year thereafter. The Harbor Department will enhance its written procedures on equipment disposals and provide training to appropriate Finance, Security, and Maintenance Division staff in FY 2025 to ensure compliance and timeliness in following equipment disposal procedures.