Finding Text
The City did not have adequate internal controls in place to ensure compliance with federal procurement requirements. Assistance Listing Number and Title: 10.760 – Water and Waste Disposal Systems for Rural Communities Federal Grantor Name: U.S. Department of Agriculture, Rural Utilities Service Federal Award/Contract Number: 089123264 Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A Known Questioned Cost Amount: $0 Prior Year Audit Finding: N/A Background During fiscal year 2024, the City spent $1,000,515 in the Water and Waste Disposal System for Rural Communities program funds. The program’s objective is to provide funds to assist rural communities in obtaining safe drinking water and adequate waste disposal facilities. The City used this funding for a water main improvement project. 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 regulations also require recipients to follow their own documented procedures, which must conform to the Uniform Guidance procurement standards found in 2 CFR § 200.318-327. The procedures must reflect the most restrictive of applicable federal requirements, state laws or local policies. When using federal funds to procure goods and services, governments must apply the more restrictive requirements by obtaining quotes or following a competitive procurement process, depending on the estimated cost of the procurement activity. Description of Condition The District paid an engineer $155,805 in 2024 for a water main improvement project. Our audit found the City did not have adequate controls to ensure it complied with procurement requirements. Specifically, the City did not establish written procurement procedures and did not follow the most restrictive requirements when using federal funds to procure an engineering firm. We consider these deficiencies in internal controls to be material weaknesses that led to material noncompliance. Cause of Condition The City does not regularly receive federal grant audits. Staff were unaware they needed a written procurement procedure. Additionally, the City has experienced turnover in the public works department, including roles responsible for procuring architect and engineering services for the project. Additionally, staff said they worked closely with U.S. Department of Agriculture and submitted the contract for the engineer, which received approval; however, the documentation provided only indicated approval of the contract and not the procurement of the engineer. Effect of Condition Without written procurement procedures, the City is at greater risk of not complying with the most restrictive procurement methods when procuring contractors paid all or in part with federal funds. Additionally, the City cannot ensure it allowed for full and open competition and selected the most qualified contractor. Further, the City cannot ensure it complied with federal procurement requirements. Recommendation We recommend the City establish procurement procedures to conform with federal procurement requirements. Additionally, we recommend the City strengthen its internal controls over its procurement of architectural and engineering services to ensure compliance with federal requirements. City’s Response The City of Royal City is committed to meeting all federal grant requirements and thanks SAO for providing guidance regarding this matter. We will proceed with developing written procurement procedures for purchases, services and public works contracts. It is our goal to ensure all stipulations are met for solicitation and award of Architectural and Engineering Services and Public Works contracts as required by state and federal granting agencies. Auditor’s Remarks We thank the City for its cooperation and assistance during the audit and acknowledge its commitment to improving the condition described. We will review the status of this issue 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 200, Uniform Guidance, section 318, General procurement standards, establishes requirements for written procedures and requirements for maintaining records sufficient to detail the history of procurement. Title 2 CFR Part 200, Uniform Guidance, section 320, Methods of procurement to be followed, establishes requirements for procuring with Federal funds by non-federal entities.