2024-001 The Authority did not have adequate internal controls and did not comply with the federal suspension and debarment requirements and overcharged costs to the Formula Grants for Rural Areas and Tribal Transit Program. Assistance Listing Number and Title: 20.509 – Formula Grants for Rural Areas and Tribal Transit Program Federal Grantor Name: Federal Transit Administration Federal Award/Contract Number: N/A Pass-through Entity Name: Washington State Department of Transportation Pass-through Award/Contract Number: PTD0649 Known Questioned Cost Amount: $39,683 Prior Year Audit Finding: N/A Background During fiscal year 2024, the Authority spent $810,260 in federal funds from the Formula Grants for Rural Areas and Tribal Transit program. The program’s purpose is to initiate, improve or continue public transportation service in rural areas by providing financial assistance for operating, planning and administrative expenses, and the acquisition, construction and improvement of facilities and equipment. The Authority used these funds to support its operations and maintenance of its vehicles and bus fleet. Suspension & Debarment Federal regulations require recipients to establish, document and maintain effective 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 Authority 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 the contractors are not suspended, debarred or otherwise excluded from participating in federal programs. The Authority 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 Authority must verify this before entering into the contract, and must maintain documentation demonstrating compliance with this federal requirement. Allowable Costs and Cost Principles Federal regulations establish principles and standards for determining allowable direct and indirect costs for federal awards. All costs that recipients charge to the program must comply with program requirements and recipients must support this compliance with proper documentation that demonstrates costs are allowable. Description of Condition Suspension & Debarment Our audit found the Authority did not have internal controls to verify the contractor it paid more than $25,000 in federal funds was not suspended or debarred from participating in federal programs. We consider this deficiency in internal controls to be material weaknesses that led to material noncompliance. Allowable Costs and Cost Principles The Authority utilized an indirect cost allocation plan submitted to the Washington State Department of Transportation for their calculation of eligible indirect costs for this grant. The indirect cost allocation plan calculates a percentage of eligible direct payroll expenditures that can be charged to the grant. Although the Authority’s internal controls were adequate for ensuring it materially complied with the program’s allowable cost requirements, in the Authority’s indirect cost allocation plan, one of the budgeted numbers factored into the calculation was incorrectly entered, leading to the wrong allocation percentage being charged. In addition, the Authority included payroll cashouts in their calculation of indirect costs, which were not eligible direct payroll expenditures. Cause of Condition Suspension & Debarment Authority staff were unaware that the federal requirements for suspension and debarment were applicable to purchase orders above $25,000. Allowable Costs and Cost Principles During the preparation of the indirect cost plan, the Authority did not adequately verify the budgeted numbers were correctly entered. Additionally, while the Authority knew payroll cashouts were not eligible costs, its review did not detect they had been included in the calculation. Effect of Condition and Questioned Costs Suspension & Debarment The Authority did not obtain a written certification from the contractor, insert a clause into the contract or check for exclusion records at SAM.gov to verify the contractor it paid $53,130 using federal funds was not suspended or debarred before contracting. Without adequate internal controls, the Authority increases its risk of awarding federal funds to contractors that are excluded from participating in federal programs. Any payments the Authority made to an ineligible party would be unallowable, and the awarding agency could potentially recover them. We subsequently verified the contractor was not suspended or debarred. Therefore, we are not questioning costs. Allowable Costs and Cost Principles In the Authority’s calculation of their indirect cost allocation percentage, the Authority incorrectly entered “$866,876” instead of “$86,876” for FICA benefits in their calculation. Due to this, the Authority incorrectly calculated their indirect rate as 31%. Our recalculation determined this should have been 24%. The Authority included $78,054 in ineligible direct payroll expenditures in their calculation of indirect costs that could be charged. This grant had a matching requirement, where reimbursement would only be made on 5.92% of eligible direct and indirect expenditures. As a result, $4,621 in payroll cashouts was incorrectly multiplied by the indirect rate to be included as indirect costs. These errors in combination led to the Authority overcharging this grant by $39,683 in indirect expenditures. Federal regulations require the State Auditor’s Office to report known questioned costs that are more than $25,000 for each type of compliance requirement. We question costs when we find the Authority has not complied with grant regulations and/or when it does not have adequate documentation to support expenditures. Recommendation Suspension & Debarment We recommend the Authority strengthen its internal controls to verify 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 and maintain documentation demonstrating compliance with this requirement. Allowable Costs and Cost Principles We recommend the Authority ensure all costs it charges to federal programs comply with cost principles. We also recommend the Authority improve its calculation process to ensure it properly calculates its indirect cost rate and only applies this rate to eligible direct expenditures. Authority’s Response Changes in staffing, including hiring several new employees, contributed to knowledge gaps in federal procurement requirements and compliance practices. To provide adequate internal controls in complying with federal suspension and debarment requirements, Grays Harbor Transit will train all employees involved in procurement on federal procurement procedures. Our procurement department will review and monitor this control. A secondary reviewer will review and approve all costs charged to federal programs to ensure compliance with federal cost principles. Auditor’s Remarks We thank the Authority for its cooperation throughout the audit and the steps it is taking to address these concerns. We will review the status of the Authority’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. 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. Title 2 CFR Part 180, OMB Guidelines on Agencies on Governmentwide Department and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the cost principles for how direct and indirect costs should be charged to federal programs.