Finding 2025-003 - Internal Control Deficiencies Over Financial Reporting and Audit Readiness (Significant Deficiency) Information on Federal Programs – U.S. Department of Health and Human Services — Health Resources and Services Administration (HRSA), FALN 93.224 Health Center Program (and other HRSA programs, as applicable) Compliance Requirement Financial Management / Reporting (2 CFR 200.302; 2 CFR 200.303) Criteria – 1. Under 2 CFR 200.302 (Financial Management), non-Federal entities must maintain financial records that: • Accurately reflect financial transactions, and • Are supported by source documentation sufficient for audit purposes. 2. Under 2 CFR 200.303 (Internal Controls), non-Federal entities must establish and maintain effective internal controls to provide reasonable assurance that: • Financial reporting is reliable, and • Federal awards are managed in compliance with applicable requirements. Federal awarding agencies, including HRSA, and auditing standards further expect timely preparation of financial statements and adequate documentation supporting material account balances. Condition – During the audit of the financial statements and the Single Audit for the year ended June 30, 2025, we identified deficiencies in the Organization’s internal controls related to financial reporting timeliness, documentation, and audit readiness. Specifically: • The year-end financial close process was significantly delayed, with the fiscal year ended June 30, 2025 not substantially completed until May 2026. • Turnover in key accounting and finance personnel during the audit period adversely affected continuity in financial reporting and audit preparation. • The Organization experienced difficulty reconciling and substantiating beginning balances carried forward from the predecessor auditor, including limited supporting documentation. • The Organization was unable to timely provide sufficient supporting documentation for: - Property and equipment balances, including historical cost, additions, and accumulated depreciation, and - Lease accounting balances, including lease amortization schedules and related calculations. • As a result, audit completion required multiple follow-up requests and alternative audit procedures to obtain sufficient audit evidence. Cause – The deficiencies appear to be the result of a combination of factors, including: • Turnover in key accounting personnel, resulting in loss of institutional knowledge. • Inadequate transition documentation during the change in audit firms, leading to insufficient support for opening balances. • Lack of fully documented policies and procedures governing: - Fixed asset accounting and reconciliation, - Lease accounting and amortization tracking, and - Period-end financial close processes. • Insufficient supervisory review controls to ensure timely reconciliation and documentation of significant balances. Effect – These deficiencies increase the risk that: • Financial information used to support federal awards may be incomplete, inaccurate, or unsupported. • Audit completion timelines may be significantly delayed, increasing administrative burden and audit costs. • Management’s ability to rely on timely financial information for compliance and decision-making may be impaired. Auditor’s Perspective – From the auditor’s perspective, these deficiencies affected audit efficiency and timeliness, but did not prevent the auditor from ultimately obtaining sufficient and appropriate audit evidence to support the financial statements and the Schedule of Expenditures of Federal and State Grant Awards. No material misstatements were identified in the financial statements or in federal award amounts reported, and no questioned costs were noted. Accordingly, the deficiencies relate primarily to audit readiness, documentation, and governance processes, rather than a systemic failure of controls over financial reporting or federal compliance. Based on the nature of the deficiencies and the audit evidence obtained, the finding is appropriately classified as a significant deficiency and does not rise to the level of a material weakness. Questioned Costs – None. Auditor’s Recommendations – From an internal control and audit-readiness perspective, we recommend that management strengthen controls over financial reporting and documentation by implementing the following actions: • Formal Financial Close Process - Implement a documented monthly and year-end financial close process that includes defined timelines, assigned responsibilities, and required supervisory review and approval. • Fixed Asset and Lease Accounting Support - Establish and maintain complete supporting schedules for material asset-related balances, including: - A fixed asset subsidiary ledger reconciled to the general ledger, and - Lease accounting and amortization schedules prepared and reviewed in accordance with applicable accounting standards. • Balance-Sheet Reconciliations - Perform and document timely reconciliations of all significant balance-sheet accounts, including explicit reconciliation of beginning balances following changes in auditors or accounting personnel. • Documentation Retention Practices - Enhance documentation retention procedures to ensure that all material balances are supported by verifiable source records that are readily available for audit and management review. • Personnel and Auditor Transition Procedures - Develop and implement formal transition procedures for changes in key accounting personnel or external auditors to promote continuity of financial records and institutional knowledge. • Supervisory Review Controls - Strengthen supervisory review controls by requiring documented evidence of review and approval of account reconciliations and key supporting schedules. • Training and Technical Expertise Provide targeted internal training and/or obtain external technical support, as needed, to ensure adequate expertise in complex accounting areas such as fixed assets and leases. Implementation of these actions is expected to improve the timeliness and reliability of financial reporting, reduce audit delays, and strengthen compliance with Uniform Guidance and HRSA financial-management expectations. Views of Responsible Officials – Management concurs with the finding. OIC experienced turnover in key finance positions, delayed year-end close activities, and documentation challenges during the auditor transition; management will strengthen close, documentation, and audit readiness controls.