2024-001 The City did not have adequate internal controls and did not comply 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 Treasury Federal Award/Contract Number: WA0110 Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A Known Questioned Cost Amount: $0.00 Prior Year Audit Finding: Yes, Finding 2023-002 Background The purpose of the Coronavirus State and Local Fiscal Recovery funds 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 2024, the City spent $8,286,347 in program funds for these activities. 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 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 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 City 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 internal controls to verify all 11 contractors it paid more than $25,000 in federal funds were not suspended or debarred from participating in federal programs. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. Cause of Condition The City experienced key staff turnover in the finance department, which is ultimately responsible for ensuring compliance with procurement and suspension and debarment requirements. Current staff were unable to produce documentation to demonstrate compliance with suspension and debarment requirements. Effect of Condition and Questioned Costs The City did not obtain a written certification from the contractors, insert a clause into the contracts, or check for exclusion records at SAM.gov to verify contractors it paid $2,164,338 using federal funds were not suspended or debarred before contracting. Without adequate internal controls, the City increases its risk of awarding federal funds to contractors that are excluded from participating in federal programs. Any payments the City made to an ineligible party would be unallowable, and the awarding agency could potentially recover them. We subsequently verified the contractors were not suspended or debarred. Therefore, we are not questioning costs. Recommendation We recommend the City 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. City’s Response The City thanks the State Auditor’s Office for the opportunity to respond to the audit finding regarding the non-compliance with federal suspension and debarment requirements of Coronavirus State and Local Fiscal Recovery Fund (SLFRF) expenditures. Since the beginning of the COVID-19 pandemic, the City has focused on providing assistance to our residents as quickly as possible to mitigate the associated health, social, and economic impacts. Emergency declarations by the U.S. Secretary of Health and Human Services and the governor of Washington in 2020 only served to reinforce the urgent need to quickly provide assistance to the residents of Bothell. The City’s decentralized model for procurement and grant management has created challenges to meet federal compliance requirements. The City is committed to safeguarding public funds while meeting the needs of residents. A full-time analyst has already been hired to oversee SLFRF funds and assist staff with meeting compliance requirements. A full-time Contracts and Procurement Officer has also been hired to train staff and update the City’s procurement policies and procedures. Improving federal compliance will be a primary function of this role. Additional training is being created to educate City staff on federal compliance requirements. The City is currently working with our legal team on options to include suspension and debarment language in contracts, reducing administrative burden on City staff while ensuring compliance. The City appreciates the efforts of the State Auditor’s Office in providing a thorough and detailed explanation of the appropriate compliance requirements. The City acknowledges it did not retain sufficient documentation to show suspension and debarment compliance requirements were met. The City takes its responsibility to safeguard public funds seriously, and is committed to improving internal controls over grant management that affect the City’s ability to comply with federal regulations. Auditor’s Remarks We thank the City for its cooperation and assistance during the audit and acknowledge its commitment to resolve this finding. We will review the City’s 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. 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 to Agencies on Governmentwide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689.