Finding Text
2025-001 Misappropriation of Funds Material Weakness in Internal Control Condition: Subsequent to the close of the fiscal year, the Authority was notified by its banking institution of potentially fraudulent activity involving disbursements made to a company owned by an employee of the Authority. Upon investigation, management determined that the employee, who had access to the Authority’s check issuance process, directed $155,706 in payments to an entity they owned and controlled. These payments were not for legitimate goods or services. The disbursements were charged across multiple accounts, including both federal and non-federal program expenditures. The federal program expenditures were charged to the Public and Indian Housing program. Context: The fraudulent activity was identified by the Authority’s bank through transaction monitoring and reported to management. The employee was subsequently terminated, criminally charged, and has pled guilty. The Authority is seeking restitution; however, specific repayment terms have not yet been finalized as of the date of this report. Criteria: Under 2 CFR 200.303, the Authority must establish and maintain effective internal controls over federal awards that provide reasonable assurance of compliance with federal statutes, regulations, and the terms and conditions of the awards. 2 CFR 200.403 requires that costs charged to federal awards be necessary, reasonable, and allocable. Additionally, 24 CFR 990.108 limits Public Housing Operating Fund expenditures to eligible operating expenses necessary for the operation of public housing. Payments made to a company owned by an employee for which no goods or services were received do not meet these allowability requirements. Cause: The Authority did not maintain adequate segregation of duties or sufficient monitoring controls over the vendor setup, invoice processing, and check issuance functions. Specifically, one individual had authority to create vendors, approve invoices, and issue checks without independent review or secondary approval. At the time the fraud occurred, disbursement activity was not subject to an independent secondary review of the overall check run, including the listing of payees and amounts, which could have identified payments issued to an unauthorized or fictitious vendor. Effect: Unauthorized payments totaling $155,706 were made over the nineteen-month period, resulting in a misstatement of both federal and non-federal expenditures. As a result, certain federal program costs were unallowable under 2 CFR 200.403 and 24 CFR 990.108. These expenditures include $115,850 of questioned costs charged to the Public and Indian Housing program during the fiscal year. Auditor’s Recommendations: The Authority should strengthen internal controls over the accounts payable and disbursement process by segregating duties between vendor setup, invoice approval, and check issuance; implementing a dual-approval process for new vendors and all check disbursements; conduct independent reviews of payment reports; and review all expenditures charged to federal programs to identify and reimburse any unallowable costs. Management Response: See Corrective Action Plan.