Finding 2024-003 Subject: Water and Waste Disposal Systems for Rural Communities - Procurement and Suspension and Debarment 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): 15-048-349178652 Compliance Requirement: Procurement and Suspension and Debarment Audit Findings: Material Weakness, Other Matters Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2023-003. Condition and Context An effective internal control system was not in place at the Town in order to ensure compliance with requirements related to the grant agreement and the following compliance requirement: Procurement and Suspension and Debarment Procurement - Policy The Town did not have an approved procurement policy that reflected applicable state laws and regulations including procedures to avoid acquisition of unnecessary or duplicative items and procedures to ensure that all solicitations incorporate a clear and accurate description of the technical requirements for the material, product, or service to be procured. The Town is required to have and use documented procurement procedures, which are consistent with state, local, and tribal laws and regulations and the standards of this section, for the acquisition of property or services required under a federal award or subaward. Suspension and Debarment Prior to entering into subawards and covered transactions with the Water and Waste Disposal Systems for Rural Communities award funds, recipients are required to verify that such contracts and subrecipients are not suspended, debarred, or otherwise excluded. "Covered transactions" include, but are not limited to, contracts for goods and services awarded under procurement and nonprocurement transactions (i.e., grant agreement) that are expected to equal or exceed $25,000. The verification is to be done by checking SAM exclusions, collecting a certification from that person, or adding a clause or condition to the covered transaction with that person. Upon the inquiry of the Town to determine its policies and procedures related to suspension and debarment requirements, the Town stated that a suspension and debarment clause is included in contracts. Contracts are reviewed by the President of the Town Council. Three covered transactions, totaling $4,902,201, were identified and tested. The Town could not provide documentation that procedures were performed to verify that one of the three vendors paid from the Water and Waste Disposal Systems for Rural Communities award funds with contracts over $25,000 were not excluded or disqualified from participation in federal programs. Additionally, the Town had two agreements subject to the Buy America Build America (BABA) provisions. The Town could not provide documentation for one of the two vendors that procedures were performed to ensure the Buy America domestic preference provisions were included in either agreement or a BABA waiver was obtained. 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 200.318(a) states: "The non-Federal entity must have and use documented procurement procedures, consistent with State, local, and tribal laws and regulations and the standards of this section, for the acquisition of property or services required under a Federal award or subaward. The non- Federal entity's documented procurement procedures must conform to the procurement standards identified in §§ 200.317 through 200.327." 2 CFR 180.300 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 SAM Exclusions; or (b) Collecting a certification from that person; or (c) Adding a clause or condition to the covered transaction with that person." 2 CFR 184.4 states in part: "(a) Applicability of Buy America Preference to infrastructure projects. The Buy America Preference applies to Federal awards where funds are appropriated or otherwise made available for infrastructure projects in the United States, regardless of whether infrastructure is the primary purpose of the Federal award. (b) Including the Buy America Preference in Federal awards. All Federal awards with infrastructure projects must include the Buy America Preference in the terms and conditions. The Buy America Preference must be included in all subawards, contracts, and purchase orders for the work performed, or products supplied under the Federal award. . . ." 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 Town had a newly elected official as of January 1, 2024, who was not familiar with the requirements. The Town contracted with outside engineers to manage the compliance requirement, and there was no documentation that BABA provisions or a waiver were obtained for the contracts nor that they included a suspension or debarment clause. 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 a result, there was no procurement policy and vendors to whom payments equal to or in excess of $25,000 were not verified to be not suspended, debarred, or otherwise excluded. In addition, the BABA provisions were not appropriately included in infrastructure projects. Any program funds the Town used to pay vendors that have been suspended or debarred could be unallowable, and the funding agency could potentially recover them. Additionally, 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 Town. Questioned Costs There were no questioned costs identified. Recommendation We recommended the Town establish documented procurement procedures consistent with state and local laws for the acquisition of property or services required under a federal award or subaward as outlined in the code of federal regulations. In addition, we recommended that the Town strengthen its system of internal controls to ensure that all vendors 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 any covered transactions. We recommended that the Town ensure all applicable contracts contain the required BABA provisions. We also recommended that the current official gain a thorough understanding of the grant requirement to ensure compliance. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.