Federal Agency: U.S. Department of Health and Human Services AL Program: 93.959 Block Grants for Prevention and Treatment of Substance Abuse Federal Award No.: 1B08TI084652-01; 6B08TI084652-01M001; 6B08TI084652-01M002; 1B08TI083457-01; 6B08TI083457-01M001; 6B08TI083457-01M002; 6B08TI083457-01M003; and 6B08TI083457-01M004 Area: Subrecipient Monitoring Questioned Costs: $639,897 Criteria: In accordance with 45 CFR § 75.352, pass-through entity (PTE) must: a. Ensure that every subaward is clearly identified to the subrecipient as a subaward and includes the following information at the time of the subaward and if any of these data elements change, include the changes in subsequent subaward modification. When some of this information is not available, the pass-through entity must provide the best information available to describe the Federal award and subaward. Required information includes: (1) Federal Award Identification; (2) All requirements imposed by the pass-through entity on the subrecipient so that the Federal award is used in accordance with Federal statutes, regulations and the terms and conditions of the Federal award; (3) Any additional requirements that the pass-through entity imposes on the subrecipient in order for the pass-through entity to meet its own responsibility to the U.S. Department of Health and Human Services (HHS) awarding agency including identification of any required financial and performance reports; (4) An approved federally recognized indirect cost rate negotiated between the subrecipient and the Federal Government or, if no such rate exists, either a rate negotiated between the pass-through entity and the subrecipient (in compliance with this part), or a de minimis indirect cost rate as defined in § 75.414(f); (5) A requirement that the subrecipient permit the pass-through entity and auditors to have access to the subrecipient's records and financial statements as necessary for the pass-through entity to meet the requirements of this part; and (6) Appropriate terms and conditions concerning closeout of the subaward. b. 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 described in paragraphs (d) and (e) of this section, which may include consideration of such factors as: (1) The subrecipient's prior experience with the same or similar subawards; (2) The results of previous audits including whether or not the subrecipient receives a Single Audit in accordance with subpart F, and the extent to which the same or similar subaward has been audited as a major program; (3) Whether the subrecipient has new personnel or new or substantially changed systems; and (4) The extent and results of HHS awarding agency monitoring (e.g., if the subrecipient also receives Federal awards directly from a HHS awarding agency). c. Consider imposing specific subaward conditions upon a subrecipient if appropriate as described in § 75.207. d. Monitor the activities of the subrecipient as necessary to ensure that the subaward is used for authorized purposes, in compliance with Federal statutes, regulations, and the terms and conditions of the subaward; and that subaward performance goals are achieved. Pass-through entity monitoring of the subrecipient must include: (1) Reviewing financial and performance reports required by the pass-through entity. (2) Following-up and ensuring that the subrecipient takes timely and appropriate action on all deficiencies pertaining to the Federal award provided to the subrecipient from the pass-through entity detected through audits, on-site reviews, and other means. (3) Issuing a management decision for audit findings pertaining to the Federal award provided to the subrecipient from the pass-through entity as required by § 75.521. e. Depending upon the pass-through entity's assessment of risk posed by the subrecipient (as described in paragraph (b) of this section), the following monitoring tools may be useful for the pass-through entity to ensure proper accountability and compliance with program requirements and achievement of performance goals: (1) Providing subrecipients with training and technical assistance on program-related matters; and (2) Performing on-site reviews of the subrecipient's program operations; (3) Arranging for agreed-upon-procedures engagements as described in § 75.425. f. Verify that every subrecipient is audited as required by subpart F of this part when it is expected that the subrecipient's Federal awards expended during the respective fiscal year equaled or exceeded the threshold set forth in § 75.501. g. 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. h. Consider taking enforcement action against noncompliant subrecipients as described in § 75.371 and in program regulations. Condition: 1. Of four subrecipients tested, aggregating $639,897 of a total population of $639,897, the following were noted for the four (or 100%) subawards that were made during FY2023: a. Risk assessments were not performed to evaluate each subrecipient's risk of noncompliance with Federal statutes, regulations, and the terms and conditions of the subaward; b. Subrecipient agreements were not provided to substantiate that every subaward is clearly identified to the subrecipient as a subaward and includes the required information at the time of the subaward; c. Monitoring activities were not performed to ensure that the subaward is used for authorized purposes, in compliance with Federal statutes, regulations, and the terms and conditions of the subaward; and that subaward performance goals are achieved; and d. Verification that subrecipient required to be audited is audited as required by Subpart F were not performed. Total FY2023 subrecipient expenditures for all four subrecipients amounted to $639,897, for which the amount is questioned. 2. Of twelve (100%) subrecipient expenditures tested, aggregating $125,061 of a total population of $639,897, no evidence was provided to substantiate that payments, made by subrecipients to vendors, were done prior to the date FSM National Government made reimbursements to the subrecipient. In addition, reimbursement payments made to the subrecipients were not provided.. No questioned costs are presented as amounts are questioned at Condition 1. Cause: The FSM National Government does not have approved/adopted written subrecipient monitoring policies and procedures. In addition, the FSM National Government failed to enforce compliance with subrecipient monitoring requirements and lacks monitoring controls over the following: 1. Risk assessments and monitoring activities of a subrecipient to evaluate each subrecipient’s risk of noncompliance and to ensure that each subrecipient complies with Federal statutes, regulations, and the terms and conditions of the subaward; and 2. Adequate documentation and systematic filing of relevant documentation supporting program costs. Effect: The FSM National Government is in noncompliance with applicable subrecipient monitoring requirements and questioned costs of $639,897 result for Condition 1. Recommendation: We recommend the FSM National Government establish an approved/adopted written subrecipient monitoring policies and procedures. In addition, the FSM National Government should implement monitoring internal control procedures over the following: 1. 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 described in paragraphs (d) and (e) of 45 CFR § 75.352; 2. Monitoring activities of a subrecipient to ensure that the subrecipient complies with Federal statutes, regulations, and the terms and conditions of the subaward; 3. Verification that subrecipients are audited as required by subpart F; and 4. Adequate documentation and systematic filing of relevant documentation to support program costs. Views of Responsible Officials: Management disagrees with the finding. Refer to FSM NG’s Views of Responsible Officials for their detailed response. Auditor Response: The audit conducted is at the FSM National Government level and not at the subrecipients level. Accordingly, as the pass-though entity, the FSM National Government must maintain adequate documentation of the required monitoring activities of its subrecipient. Further, in accordance with 2 CFR 200.1, questioned cost means an amount, expended or received from a Federal award, that in the auditor's judgment: (i) is noncompliant or suspected noncompliant with Federal statutes, regulations, or the terms and conditions of the Federal award; (ii) at the time of the audit, lacked adequate documentation to support compliance; or (iii) appeared unreasonable and did not reflect the actions a prudent person would take in the circumstances. Accordingly, as the FSM National Government was in noncompliance with the applicable subrecipient monitoring requirements and lacked adequate documentation to support compliance, questioned costs are retained.