FINDING 2025-003 Subject: Child Nutrition Cluster - Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Special Tests and Provisions - Non-Profit School Food Service Accounts Federal Agency: Department of Agriculture Federal Programs: School Breakfast Program, National School Lunch Program, Summer Food Service Program for Children Assistance Listings Numbers: 10.553, 10.555, 10.559 Federal Award Number and Year (or Other Identifying Number): FY2023-24 Pass-Through Entity: Indiana Department of Education Compliance Requirements: Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Special Tests and Provisions - Non-Profit School Food Service Accounts Audit Findings: Significant Deficiency, Modified Opinion Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2023-003. Condition and Context Food Service - Expenditures The School Corporation had not properly designed or implemented a system of internal controls, which would include appropriate segregation of duties, that would likely be effective in preventing, or detecting and correcting, noncompliance related to transfers of the grant. A transfer totaling $148,955 was made from the School Lunch fund to the Payroll Clearing fund on July 1, 2023, as a part of the conversion to the new financial system. Documentation to support that this was to fund an allowable activity or cost of the grant was not provided for audit. Food Service - Revenues The School Corporation had not properly designed or implemented a system of internal controls, which would include appropriate segregation of duties, that would likely be effective in preventing, or detecting and correcting, noncompliance related to food service revenues being accounted for in the School Food Account. A School Food Authority (SFA) is required to account for all revenues and expenditures of its nonprofit school food service in accordance with state and federal requirements. A SFA must operate its food services on a nonprofit basis; all revenue generated by the school food service must be used to operate and improve its food services. In the prior audit, the School Corporation's process was to receipt the School Lunch reimbursement received into a Food Service Federal Reimbursement fund and then transfer that reimbursement to the School Lunch fund the following month. The April 2022 and April 2023 reimbursements of $158,679 and $91,108, respectively, were receipted into the Food Service Federal Reimbursement fund on July 7, 2022, and June 2, 2023. The reimbursements, totaling $249,787, had not been transferred to the School Lunch fund, which is the designated school food service fund, as of June 30, 2023. INDIANA STATE BOARD OF ACCOUNTS 23 GRIFFITH PUBLIC SCHOOLS SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) In July 2023, the School Corporation converted to a new financial system. The $250,995 balance in the Food Service Federal Reimbursement fund was not converted into the new financial system, and, therefore, was not transferred to the School Lunch fund. Audit adjustments were proposed, accepted by the School Corporation, and made to the financial statement and the Combining Schedule of Receipts, Disbursements, Other Financing Sources (Uses), and Cash and Investment Balances - Regulatory Basis presented as Other Information in the Financial Statement Audit Report of the School Corporation. The lack of internal controls and noncompliance was isolated to the 2023-2024 school year. Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the 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 (COSO). . . ." 7 CFR 220.7(e) states in part: ". . . the School Food Authority shall, with respect to participating schools under its jurisdiction: (1) (i) Maintain a nonprofit school food service; (ii) . . . use all revenues received by such food service only for the operation or improvement of that food service . . ." 7 CFR 210.14(a) states in part: "Nonprofit school food service. School food authorities shall maintain a nonprofit school food service. Revenues received by the nonprofit school food service are to be used only for the operation or improvement of such food service, except that, such revenues shall not be used to purchase land or buildings, unless otherwise approved by FNS, or to construct buildings. . . ." 7 CFR 220.2 states in part: ". . . Nonprofit school food service account means the restricted account in which all of the revenue from all food service operations conducted by the school food authority principally for the benefit of school children is retained and used only for the operation or improvement of the nonprofit school food service. . . ." INDIANA STATE BOARD OF ACCOUNTS 24 GRIFFITH PUBLIC SCHOOLS SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) 7 CFR 210.2 states in part: ". . . Nonprofit school food service account means the restricted account in which all of the revenue from all food service operations conducted by the school food authority principally for the benefit of school children is retained and used only for the operation or improvement of the nonprofit school food service. . . ." 7 CFR 225.15(a)(1) states: "Sponsors shall operate the food service in accordance with: the provisions of this part; any instructions and handbooks issued by FNS under this part; and any instructions and handbooks issued by the State agency which are not inconsistent with the provisions of this part." 2 CFR 200.403 states in part: "Except where otherwise authorized by statute, costs must meet the following general criteria in order to be allowable under Federal awards: (a) Be necessary and reasonable for the performance of the Federal award and be allocable thereto under these principles. (b) Conform to any limitations or exclusions set forth in these principles or in the Federal award as to types or amount of cost items. . . . (g) Be adequately documented. . . ." Cause The School Corporation's management did not have properly designed internal controls in place to ensure all funds in the prior financial system were properly converted into the new financial system. Effect Without the proper implementation of an effectively designed system of internal controls, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. As a result, unsupported costs were transferred out of the School Lunch fund and prior period errors were not corrected. Noncompliance with the grant agreement and the compliance requirements could result in the loss of future federal funds to the School Corporation. Questioned Costs Known questioned costs of $148,955 were identified as explained in the Condition and Context. Recommendation We recommended that management of the School Corporation design and implement a proper system of internal controls, including policies and procedures that would provide segregation of duties to ensure appropriate reviews, approvals, and oversight are taking place to ensure costs transferred out are adequately documented and that reimbursements errors are corrected. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.