Finding Text
Finding 2024-043 - Use of Federal Funds to Satisfy Required Local Match Without Prior Approval Summary: The City of Batesville substituted federal Delta Regional Authority (ORA) and Appalachian Regional Commission (ARC) funds for required local match obligations under two federal grants-ARC (ALN 23.002) and CDBG (ALN 14.228)-without obtaining prior written approval from the awarding agencies. Although CDBG was not selected for audit testing, the questioned costs originally exceeded the $10,000 threshold and are reported in accordance with 2 CFR §200.516(a): Total questioned costs of $800,406 were initially allocated proportionally between the two programs; These costs have since been resolved through formal amendments to both grant agreements. Federal Programs 23.002 _; Appalachian Area Development (ARC) 14.228 - Community Development Block Grants/State's Program and Non-Entitlement Grants in Hawaii· (CDBG) Note: ALN 14.228 was not selected for audit testing under the Uniform Guidance compliance requirements. However, a finding is presented in accordance with 2 CFR §200.516(a) due to the materiality of the issue and its connection to ARC grant MS-20699. Award Numbers ARC: MS-20699 CDBG Subgrant: 1137 ~21-111-PF-01 Federal Agencies U.S. Department of the Treasury (via Appalachian Regional Commission) U.S. Department of Housing and Urban Development Compliance Requirements Matching - 2 CFR §200.306 Allowable Costs/Cost Principles - 2 CFR §200.403 Internal Controls -2 CFR §200.303 Audit Finding Threshold - 2 CFR §200.516(a) Type of Finding Internal Control over Compliance - Material Weakness Compliance - Noncompliance Questioned Costs Based on actual net expenditures and proportional match requirements: (TABLE) These questioned costs have been eliminated following receipt of amended contracts from ARC and CDBG approving the use of ORA and CDBG funds as match. Criteria The following federal regulations and grant conditions establish the requirements violated in this finding: 1. Matching Requirements - 2 CFR §200.306 Federal funds may not be used to meet a required cost share or match unless expressly authorized by the awarding agency. Matching contributions must: Be verifiable from the recipient's records Not be included as contributions for any other federal award Be necessary and reasonable for accomplishing program objectives Be allowable under the cost principles Not be paid by. the federal government under another award, unless authorized 2. Allowable Costs ... 2 CFR §200.403 Costs must be necessary, reasonable, allocable, and conform to limitations in the award terms. Costs must be adequately documented and consistent with policies that apply uniformly to both federally financed and other activities. 3. Internal Controls - 2 CFR §200.303 Recipients must establish and maintain effective internal controls to ensure compliance with feqeral statutes, regulations, and award terms. Controls should provide reasonable assurance that the organization is managing the award in compliance with applicable requirements. 4. Audit Finding Threshold-2 CFR §200.516(a) Auditors must report known questioned costs that exceed $10,000 for a federal program, even if the program was not selected for audit testing. Condition During the audit of ARC grant MS-20699 (ALN 23.002), we noted that the City of Batesville substituted $569,600 in federal ORA funds for the originally budgeted local match of $341,784. Additionally, for COBG grant ALN 14.228, the City substituted $569,600 in ORA funds and $553,000 in ARC grant funds for the originally budgeted local match of $901,784. These substitutions were made without prior written approval or executed amendments from the awarding agencies, as required under 2 CFR §200.306 and the respective grant agreements. Resolution Following the audit fieldwork, the City obtained formal amendments to both grant agreements: On October 24, 2025, ARC approved the substitution of ORA and COBG funds as match under ALN 23.002. On November 7, 2025, COBG approved the substitution of ORA and ARC funds as match under ALN 14.228. These approvals eliminate the previously identified questioned costs totaling $800,406. However, the lack of contemporaneous documentation and prior approval reflects a breakdown in internal controls and remains a material compliance issue. Cause The City lacked adequate internal controls to ensure changes to match sources were formally reviewed and approved by the awarding agencies prior to implementation. The substitution of federal funds for required local match was not documented or authorized at the time of expenditure. Effect Although questioned costs have been resolved, the City was in noncompliance with federal matching requirements and allowable cost principles at the time of expenditure. This reflects a broader control deficiency in the City's grant management process and increases the risk of future noncompliance. Recommendation We recommend the City strengthen its internal controls over grant compliance, including: Formal review and documentation of match sources prior to drawdown Written approval from awarding agencies before substituting federal funds for required match Staff training on federal match requirements and Uniform Guidance compliance Views of Responsible Officials Management concurs with the finding. The City acknowledges that federal ORA and ARC funds were applied toward required match obligations without prior approval or amendment to the respective grant agreements. ARC and CDBG representatives have since approved the substitutions through formal amendments. The City will implement procedures requiring written authorization for any future match substitutions and establish a formal review process to verify match sources prior to drawdown.