Finding 1156829 (2024-009)

Federal Agency: United States Department of Agriculture (USDA) Federal Program: 10.558 Child and Adult Care Food Program (CACFP) 2022, 2023, 2024 - CACFP 2022, 2023, 2024 - CACFP-CIL 2023 and 2024 - CACFP-SPON State Agency: Department of Health and Senior Services (DHSS) - Bureau of Community Food and Nutrition Assistance (BCFNA) Type of Finding: A - Internal Control (Significant Deficiency) and Nonmaterial Noncompliance B - Internal Control (Material Weakness) and Material Noncompliance Questioned Costs: Unknown Compliance Requirement: Subrecipient Monitoring As noted in our previous audit, during the year ended June 30, 2024, BCFNA subrecipient risk assessment and monitoring procedures were not in compliance with subrecipient monitoring requirements and were not sufficient to ensure CACFP subrecipient compliance with program requirements. During the year ended June 30, 2024, the BCFNA disbursed approximately $67.6 million to over 780 CACFP subrecipients, which consist of child and adult care centers and sponsors of centers. Disbursements to subrecipients represented approximately 98 percent of the program's expenditures. As part of its pass-through responsibilities, 7 CFR Section 226.6(a)(5), the BCFNA is required to ensure subrecipients effectively operate the program. Regulation 2 CFR Section 200.332(b) requires pass-through entities to evaluate each subrecipient's risk of noncompliance with federal statutes, regulations, and the terms and conditions of the subaward for purposes of determining the appropriate subrecipient monitoring. Regulation 2 CFR Section 200.332(d) requires pass-through entities to monitor the activities of the subrecipient as necessary to ensure the subaward is used for authorized purposes, complies with the terms and conditions of the subaward, and achieves performance goals. The BCFNA's subrecipient monitoring process, outlined in the Internal Nutritionist Manual, provides the requirements for monitoring the CACFP facilities/sponsors. The manual provides the planned frequency and type of monitoring activities, monitoring methods, and corrective action requirements. The manual requires the preparation of a risk assessment at the end of each monitoring review that assigns a grade of A, B, B-, or C to the facility/sponsor based on the number and severity of deficiencies and findings. Facilities/sponsors that receive a C grade are determined to be "seriously deficient." The assigned grade determines the required timing of future monitoring reviews of the facility/sponsor. Facilities/sponsors with an A grade will be next monitored in 3 years, a B grade within 2 years, a B- grade within 6 months to 1 year, and a C grade within 90 days. During each monitoring review, BCFNA personnel review documentation supporting a sample of claims during a test month. Any identified errors and associated overclaims/underclaims exceeding established thresholds are recouped/reimbursed in the facility's/sponsor's future claims. When reviews identify noncompliance, facilities/sponsors are required to prepare and submit a Corrective Action Plan (CAP) to the BCFNA. In addition, as noted at finding number 2024-008, the BCFNA relies on these subrecipient monitoring procedures to prevent and detect meal reimbursement claim errors. Monitoring reviews have identified significant issues and claim errors, including some potentially fraudulent activity, and led to over 15 contract terminations in recent years. To test compliance with subrecipient monitoring requirements, and to evaluate the effectiveness of BCFNA monitoring procedures, we reviewed and analyzed a randomly-selected sample of 60 BCFNA monitoring reviews conducted for 60 CACFP facilities/sponsors during the year ended June 30, 2024. While our review found the sample monitoring reviews were performed in accordance with the policies and procedures outlined in the Internal Nutritionist Manual, we identified areas in which these policies and procedures could be strengthened and improved to ensure facilities/sponsors comply with program requirements and submit proper claims. Our review and analysis of the 60 sampled monitoring reviews noted the monitoring reviews identified significant errors, noncompliance, disallowances, and overclaims. Our comparison of the sampled reviews to prior reviews noted deficient facilities/sponsors generally had continued deficiencies and little improvement from prior reviews, as follows: • Of the 60 sampled, 32 facilities/sponsors received an A grade, while 28 received grades of B, B-, or C. • Of the 24 facilities/sponsors that received grades of B, B-, or C, and had a prior review, 21 (88 percent) received the same or lower grade than the prior review. • Of the 4 facilities/sponsors that received a C grade and had a prior review, 2 (50 percent) received the same grade as the prior review, and 2 (50 percent) received a lower grade. • Of the 7 facilities/sponsors that received a C grade, 4 were terminated as a result of the review or as a result of a subsequent 90-day follow-up review. • For 43 of 59 (73 percent) monitoring reviews for which the BCFNA tested claims (with claims totaling $537,466 during the test months), the BCFNA identified overclaims totaling $48,508 and underclaims totaling $10,144, netting to $38,364, or at least 7 percent of the reimbursements tested. A. Risk Assessments The BCFNA prepares and uses risk assessments to determine the extent of monitoring necessary for each facility/sponsor. However, the risk assessments prepared during the year ended June 30, 2024, considered only the previous monitoring review grade (conducted up to 3 years previously), and did not consider other pertinent risk factors outlined in federal regulations. Regulation 2 CFR Section 200.332(b) suggests risk assessments should consider the subrecipient's prior experience with the same or similar subawards, the results of previous audits, whether the subrecipient has new personnel or new or substantially-changed systems, and the extent and results of federal awarding agency monitoring. While federal regulations provide the BCFNA discretion in selecting risk factors to consider, limiting risk assessments to only one risk factor and ignoring other relevant factors hinders the BCFNA's ability to identify red flags and fraud risk factors and properly assess facility/sponsor risk of noncompliance. Sufficient risk assessments are necessary to ensure monitoring reviews are conducted with adequate frequency to help ensure subrecipient compliance with program requirements. Finding classification This finding is classified as a significant deficiency in internal control and nonmaterial noncompliance with the federal subrecipient monitoring requirements regarding risk assessments. As noted in the finding, BCFNA risk assessments prepared during the year ended June 30, 2024, do not meet the spirit of the federal regulation, which suggests the extent and level of monitoring for each subrecipient be based on various risk factors. As a result, there is a risk that monitoring reviews will not be performed as frequently and thoroughly as needed to identify and address subrecipient noncompliance. Because the BCFNA does perform risk assessments for each subrecipient and does monitor the subrecipients with lower grades with more frequency, the finding did not rise to a level of material noncompliance, and was therefore considered nonmaterial noncompliance. Our decisions regarding the classification of the internal control deficiencies were made in accordance with AU-C Section 935, Compliance Audits and the AICPA Audit Guide: Government Auditing Standards and Single Audits (Audit Guide). In addition to the definitions outlined in part B of this finding, the Audit Guide states "[a] significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance." Our evaluation of the deficiencies for the possibility and magnitude of potential noncompliance determined the deficiencies are considered a significant deficiency. B. Subrecipient Monitoring Procedures Our review of BCFNA subrecipient monitoring procedures during the year ended June 30, 2024, noted areas that should be strengthened and improved. Corrective action plans BCFNA CAP review procedures were not adequate to ensure facilities/sponsors made and/or planned sufficient corrective actions to address noncompliance, as required by federal regulations. The Internal Nutritionist Manual requires nutritionists to review subrecipient CAPs outlining corrective actions taken or planned for completeness and to ensure the required action items are adequately addressed. However, during the year ended June 30, 2024, this review was generally performed without verifying the accuracy of the CAP information through review of supporting documentation, testing, or other methods. The BCFNA did not require submission of supporting documentation of corrective actions taken or planned. BCFNA officials indicated they may request supporting documentation on occasion depending on the complexity of the finding, and they verify the CAP during 90-day follow-up reviews of "seriously deficient" facilities/sponsors. Of the 60 monitoring reviews in our sample, 49 required a CAP. The monitoring review documentation indicated the CAP was verified during 7 of the 90-day follow-up reviews, but there was no documentation that the nutritionist verified the CAP information for any of the remaining 42 reviews (86 percent of the 49 reviews that required a CAP). Furthermore, our review of monitoring review documentation noted numerous instances in which the prior year CAP indicated a specific deficiency was addressed, but the same deficiency was again noted in the subsequent review. Regulation 2 CFR Section 200.332(d) provides that monitoring must include following up and ensuring the subrecipient takes timely and appropriate action on all deficiencies identified. The USDA CACFP handbook, Monitoring Handbook for State Agencies (USDA Monitoring Handbook), provides that follow-up reviews (on-site or desk reviews of paperwork) may be conducted any time corrective action is required to ensure the facility/sponsor has completely corrected the review findings, according to its approved corrective action response. Example CAP forms included in the USDA Handbook require facilities/sponsors to submit supporting documentation along with the CAP to verify corrections were made or will be implemented. The USDA CACFP handbook, Serious Deficiency, Suspension, & Appeals for State Agencies & Sponsoring Organizations, provides that facilities/sponsors deemed "seriously deficient," must submit additional supporting documentation with the CAP to document that corrective actions have occurred; this might include copies of income eligibility forms, enrollment rosters, staff training documentation, site monitoring reports, menus, child nutrition labels or manufacturers' product analysis sheets or recipes, attendance records, meal count forms, and itemized food receipts. Without verifying information in CAPs submitted, the BCFNA cannot demonstrate compliance with federal regulations and it lacks assurance the facilities/sponsors took timely and appropriate action on all deficiencies identified during monitoring reviews. In addition, there is increased risk that deficiencies will not be corrected and will continue without detection. In August 2024, the BCFNA implemented an electronic system for facilities/sponsors to upload documentation supporting their CAPs. In May 2025, the BCFNA updated the Internal Nutritionist Manual to provide for reviews of the supporting documentation to verify facilities/sponsors implemented corrective action. Claims testing The Internal Nutritionist Manual and monitoring practices provide for testing of a sample of claims within only 1 test month during each monitoring review, and do not provide for expanded testing when significant errors are identified. BCFNA personnel indicated monitoring reviews are limited to only 1 test month because the USDA Monitoring Handbook does not require expanded testing of records beyond 1 month. While the BCFNA performs additional testing during 90-day follow-up reviews for facilities/sponsors deemed "seriously deficient," additional testing is not performed in any other situation. For example, one facility had a 33 percent overpayment rate and received a B grade while another facility had a 100 percent overpayment rate and received a B- grade; however, additional testing was not performed for either facility. The USDA Monitoring Handbook suggests testing activities during 1 test month, and also suggests the state agency may determine additional review is warranted and review records beyond the test month to determine the extent of the noncompliance. When significant errors are identified, additional testing would help BCFNA nutritionists determine the extent that instances of noncompliance are isolated versus pervasive. Such information would be valuable to the overall conclusions and grade assigned to the review, and in decisions regarding subsequent monitoring. Overclaim recoupment BCFNA subrecipient monitoring procedures do not provide for identification and pursuit of recoupment of all overpayments associated with errors identified during monitoring reviews. When overclaims due to noncompliance with eligibility requirements are identified during monitoring reviews, the BCFNA only identifies and seeks recoupment for the overclaims made during the test month. Overclaims associated with eligibility errors begin at the time the eligibility determination was made and continue until the error is discovered. Although the BCFNA is aware noncompliance occurred during the month(s) before the test month, the BCFNA does not attempt to identify those overclaims. In addition, when a facility/sponsor is terminated, the BCFNA does not always identify or seek recoupment of overclaim amounts. In our sample of 60 monitoring reviews, the contract for 1 sponsor was terminated as a result of a 90-day follow-up review. For this sponsor, in the review prior to the 90-day follow-up review, the BCFNA identified and recouped overclaims totaling $2,278, or 100 percent of total claims tested. In the subsequent 90-day follow-up review significant claim errors were identified in the test month claims, which totaled $1,961; however, the test month claims were not fully tested, and overclaims were not identified or recouped. Any overclaims not identified and recouped from this terminated sponsor would be considered questioned costs; however, those questioned costs are unknown. BCFNA officials indicated they do not pursue recoupment of overclaims beyond the test month because this practice is allowed by the USDA. They indicated they pursue recoupment of overclaims for facilities/sponsors with terminated contracts on a case-by-case basis, considering various factors. However, 7 CFR Section 226.14 provides that state agencies shall disallow and recover any portion of a claim for reimbursement not properly payable, including claims not made in accordance with recordkeeping requirements. Pursuing full recoupment would hold facilities/sponsors accountable for all overclaims and would serve as a deterrent to future errors, noncompliance, and overclaims. Furthermore, without procedures to identify and recoup all overclaims, there is a risk that significant overclaims will go undetected and unrecouped, and questioned costs could be significant. Conclusions In addition to complying with federal requirements, strong subrecipient monitoring procedures are necessary to ensure facilities/sponsors comply with program requirements, submit proper claims, and address deficiencies identified. Without strong internal controls, there is increased risk of noncompliance, errors, fraud, waste, and abuse of federal funds. Strong monitoring procedures would ensure facilities/sponsors are held accountable for, and correct, errors and noncompliance identified. Regulation 2 CFR Section 200.332(g) requires pass-through entities to consider whether the results of the subrecipient's audits, on-site reviews, or other monitoring indicate conditions that necessitate adjustments to the pass-through entity's own records. Furthermore, 2 CFR Section 200.303(a) requires the non-federal entity to "[e]stablish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-federal entity is managing that 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." Finding classification This finding is classified as a material weakness in internal control and material noncompliance with the federal subrecipient monitoring requirements. Our audit of the BCFNA's compliance with federal subrecipient monitoring requirements concluded the BCFNA did not materially comply with federal requirements to ensure subrecipients effectively operate the CACFP and to monitor the activities of the subrecipient as necessary to ensure the subaward is used for authorized purposes, complies with the terms and conditions of the subaward, and achieves performance goals. This conclusion is based on the facts, deficiencies, and noncompliance stated in the finding, including the following: (1) Disbursements to subrecipients represented approximately 98 percent of the CACFP expenditures. (2) BCFNA subrecipient monitoring reviews identified significant errors, noncompliance, disallowances, and overclaims; and deficiencies identified often continued for years with little improvement from review to review. The 7 percent subrecipient payment error rate identified by the BCFNA, which exceeds our audit materiality threshold of 4 percent, along with the high rate of continued noncompliance, serve as indicators of the ineffectiveness of the BCFNA monitoring process. (3) The BCFNA did not comply with specific components of federal subrecipient monitoring requirements, including properly following up and ensuring subrecipients take timely and appropriate action on all deficiencies identified and disallowing and recovering improper payments. (4) Multiple deficiencies in monitoring procedures were identified, including the previously-listed deficiencies and inadequate payment testing. In conducting a single audit in accordance with 2 CFR Part 200 (Uniform Guidance), auditors are required by 2 CFR Section 200.514(d)(1)(2), to determine whether the auditee has complied with federal statutes, regulations, and the terms and conditions of federal awards that may have a direct and material effect on each of its major programs, as outlined in the OMB Compliance Supplement. While compliance with the USDA CACFP handbooks was considered in the our audit, our conclusion on compliance is based on the BCFNA's compliance with the federal statutes and regulations, as required. Our decisions regarding the classification of the internal control deficiencies were made in accordance with AU-C Section 935, Compliance Audits and the Audit Guide. The Audit Guide provides the following definitions regarding internal control deficiencies: A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. "A reasonable possibility exists when the likelihood of the event is either reasonably possible or probable…" Reasonably possible is "[t]he chance of the future event or events occurring is more than remote but less than likely." Probable means "[t]he future event or events are likely to occur." The failure to design and implement adequate controls and procedures over subrecipient monitoring led to material noncompliance with the subrecipient monitoring requirements. The BCFNA's controls failed to develop an effective subrecipient monitoring process that ensures subrecipients use subawards for authorized purposes, comply with the terms and conditions of the subawards, and achieve performance goals. Because the internal control deficiencies have not been corrected, it is probable that the material noncompliance will continue. For these reasons, the deficiencies are considered a material weakness. Recommendations The DHSS through the BCFNA: A. Implement a CACFP subrecipient risk assessment process that is consistent with federal regulations. B. Review, strengthen, and enforce subrecipient monitoring procedures to ensure CACFP facilities/sponsors comply with program requirements, submit proper claims, and address deficiencies identified. The BCFNA should enhance procedures to provide for identification and recoupment of overclaims associated with all errors identified during monitoring reviews, as required by federal regulations; expand testing when significant errors are identified; and continue to verify CAP information. The DHSS should identify and recoup the overclaims for the terminated sponsor noted in this finding. Auditee's Response A. We disagree with the auditor's finding. Our Corrective Action Plan includes an explanation and specific reasons for our disagreement. B. We disagree with the auditor's finding. Our Corrective Action Plan includes an explanation and specific reasons for our disagreement. Auditor's Comment The DHSS Corrective Action Plan (CAP) states the DHSS disagrees with the finding because, while the prior year finding (finding number 2023-013) was partially sustained by the USDA - Food and Nutrition Service (USDA-FNS), a corrective action plan was accepted and deemed adequate by the USDA-FNS. The CAP also states in April 2025, the USDA-FNS recommended final action to close the prior year finding. These statements are not accurate. April and June 2025 emails from USDA-FNS officials to the DHSS regarding the prior audit finding, provided to auditors by DHSS officials, indicate the finding was sustained; corrective action was required, taken, and validated by the USFA-FNS; and final action was approved by the USDA-FNS on June 10, 2025. It is unclear why the DHSS considers the prior year finding to be only partially sustained when the Summary Schedule of Prior Audit Findings, which was also prepared by the DHSS, states the finding was sustained. Except for the information mentioned in the audit finding regarding subrecipient corrective action plans, the DHSS did not provide the State Auditor's Office information regarding corrective action taken. Any new procedures would have been implemented after the audit period, and will be subject to subsequent audits. Because the DHSS took no corrective action prior to or during the audit period, this finding is valid.