Noncompliance and Material Weakness in Internal Control Systems Over Allowable Costs and Cash Management Resulting in a Modified (Adverse) Opinion Federal Agency: U.S. Department of Health and Human Services (HHS) Federal Program: Developmental Disabilities Basic Support and Advocacy Grant (PADD) Assistance Listing Number: 93.630 Award Number/Year: 2501NVPADD-01/October 1, 2024 to September 30, 2026 Pass-Through Entity: N/A (Direct Award) Questioned Costs: • $32,328.38 Program Income + • $ 3,559.20 Prepaid Rent • = $35,887.58 (Total Known Questioned Costs) Criteria: Program Income: In accordance with 45 CFR 75.303 and 2 CFR 200.403(c), factors affecting allowability of costs require that expenditures be net of all applicable credits, to include program income earned. These applicable credits serve to offset or reduce the allowable expense items allocable to the federal award as direct or indirect costs. Prepaid Rent: Per 45 CFR 75.305(b)(1): The non-federal entity must be paid in advance, provided it maintains or demonstrates the willingness to maintain both written procedures that minimize the time elapsing between the transfer of funds and disbursement by the non-federal entity, and financial management systems that meet the standards for fund control and accountability as established in this part. Advance payments to a non-federal entity must be limited to the minimum amounts needed and be timed with actual, immediate cash requirements of the non-federal entity in carrying out the purpose of the approved program or project. The timing and amount of advance payments must be as close as is administratively feasible to the actual disbursements by the non-federal entity for direct program or project costs and the proportionate share of any allowable indirect costs. The non-federal entity must make timely payments to contractors in accordance with the contract provisions. Payroll Expense: In accordance with 45 CFR 75.403, an allowable cost must be allocable (assignable) to a specific federal award in accordance with the relative benefits received. Furthermore, per 45 CFR75.430(i), charges to federal awards for salaries and wages must be based on records that accurately reflect the work performed and must be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated. Advance Funds: In accordance with 45 CFR 75.305(b)(1) [refer to “Prepaid Rent” above]. Condition: Program Income: During our testing of allowable costs, we noted that the Organization requested and received federal reimbursement for expenditures that had already been offset and funded by program income generated by the PADD federal award program. Specifically, the Organization failed to apply approximately $16,164.19 of program income as an applicable credit against gross expenditures prior to submitting its monthly request for reimbursement. Further, the Organization duplicated this improper reimbursement submission as the series of journal entries made in the general ledger system by the now-former accounting personnel were misinterpreted by current management resulting in this duplication of error. As a result of this series of transactions, the Organization was reimbursed three times for the same operating costs – once via program income and twice via the federal grant draws – resulting in unallowable expenditures being charges to the federal award. Prepaid Rent: During our testing of allowable costs, and per our review of the minutes of the board of directors, we discovered that federal funds requested and received were used to prepay rent during the year. In the March 2025 board minutes, 2 months of prepaid rent had been disbursed through June 2025. In the May 2025 board minutes, discussion occurred related to being over budget due to prepaid rent. As of September 30, 2025, a total of 14 months of rent payments were recognized in the general ledger and had been drawn from the PADD program. Total questioned costs related to these prepaid transactions, prepaid at year end, totaled $3,559.20. Payroll Expense: During our testing of allowable costs, 2 of the 20 time sheets selected did not contain approval signatures. Advance Funds: In accordance with 45 CFR 75.305(b)(1) [refer to “Prepaid Rent” above]. Of the 24 cash advances received, one advance was held for six working days, which is in excess of “immediate cash needs” as outlined in the Uniform Guidance and the policy historically observed by the Organization of 72 working hours. Cause: Program Income: The deficiency was caused by turnover in the finance department during the fiscal year. Accounting personnel were not sufficiently trained on HHS regulations regarding applicable credits (45 CFR 75.403) and the required deduction method for reporting program income. Further, the Organization lacks an established policy and internal control procedure to track program income separately within the general ledger and reconcile it against monthly federal drawdowns. Consequently, accounting staff processed reimbursement requests based on gross general ledger expenditures without adjusting for the applicable credits generated by program income. Prepaid Rent: The deficiency was caused by turnover in the financial department during the year, as well as accounting personnel not sufficiently trained on HHS regulations regarding allowable costs. Payroll Expense: The deficiency was caused by a lapse in the system of internal controls over this process due to key personnel being out of the office on vacation. Advance Funds: The deficiency was caused by turnover in the financial department during the year, as well as accounting personnel not sufficiently trained on HHS regulations regarding cash management. Effect: Program Income: The Organization is not in compliance with Uniform Guidance and HHS cost principles regarding applicable credits and program income. Requesting reimbursement for costs already recovered via program income results in over-clearing federal funds. Total identified questioned costs are $32,328.38, representing the federal reimbursements received for expenditures that should have been reduced by the program income credit and the erroneous request for reimbursement in the duplicated amount. Prepaid Rent: The Organization is not in compliance with Uniform Guidance and HHS cost principles outlined in 45 CFR 75.305. Requesting advance funds for prepaid rent resulted in questioned costs of $3,559.20. Payroll Expense: The Organization is not in compliance with Uniform Guidance and HHS cost principles outlined in 45 CFR 75.430. Failure to obtain supervisory approval on timesheets results in a lack of internal controls to verify that payroll costs charged to the grant reflect actual hours worked on the program. Advance Funds: The Organization is not in compliance with Uniform Guidance and HHS cash management principles outlined in 45 CFR 75.305. Context: Program Income: Our testing of allowable costs under the PADD grant identified two specific transactions where expenditures were fully reimbursed by federal funds despite being offset by program income and/or being erroneously drawn. Because these transactions relate to the same journal entry recognized in the general ledger, these are considered isolated instances. Prepaid Rent: Our testing of allowable costs under the PADD grant identified two specific instances where advanced funds were requested and used to prepay rent. Payroll Expense: Our testing of allowable costs under the PADD grant identified two instances where time sheets did not contain appropriate evidence of approval. Advance Funds: Our testing of cash management under the PAIMI grant identified one instance of 24 where cash advances received were disbursed outside the timeframe which would reasonably be considered “immediate”. Prior Year Finding: No Recommendation: Program Income: We recommend that management design and implement formal, written internal control procedures to identify, track, and account for all program income generated by PADD grant activities within the general ledger. Specifically, management should establish a mandatory pre-draw reconciliation process. Before any monthly or periodic reimbursement request is submitted via the Payment Management System (PMS), the finance department must calculate the total program income that should be applied as a reduction (applicable credit) to the gross expenditures. Only the remaining net allowable expenditures should be submitted for federal reimbursement. Prepaid Rent: We recommend that management design and implement formal, written internal control procedures to ensure compliance with cash management requirements. Specifically, management should implement a supervisory review of all general ledger disbursements against grant draws to ensure federal funds are limited to minimum amounts needed for immediate cash requirements. Payroll Expense: We recommend that management update its internal control policies to establish formal backup/interim approval authorities. When primary supervisors are out of the office on vacation or leave, a designated alternative official must be authorized to review and approve timesheets timely to ensure the continuity of internal controls. Advance Funds: We recommend that management design and implement formal, written internal control procedures to ensure compliance with cash management requirements. Specifically, management should implement a supervisory to ensure federal funds are limited to minimum amounts needed for immediate cash requirements as indicated in the Uniform Guidance. Views of Responsible Officials and Planned Corrective Actions: Program Income: We received confirmation from the federal partners that we should spend the $16,165 legal fees from 2023, in April 2026. Those funds were not drawn down during PPE April 30, 2026 and May 15, 2026. Prepaid Rent: We received permission and were encouraged by our federal funders to pre-pay rent. We will not be pre-paying rent going forward. The Executive Director meets weekly with both PADD and PAIMI program managers to review processes. Payroll Expense: Payroll packets are reviewed during and after the payroll process to ensure all timesheets are approved and signed off by both the Executive Director and Board of Directors when appropriate. Executive Director’s timesheets and authorizations are presented to the Board of Directors when signing checks for review and approval. Procedures have been updated to include a secondary review of the timesheets at the end of each payroll cycle. Advance Funds: Internal controls have been updated and there is an additional level for reviewing requests. The Executive Director is provided a list of all funds available after each draw down and the amounts drawn down are matched to the GL and GFR. This responsibility will be transferred to the Deputy Director once the new Fiscal Manager is in place. There is a schedule for the date the funds are allowed to be requested that fall within the 72-hour window posted in the Finance office and the Executive Director is notified before any requests are processed. The current Finance officer is meeting every two weeks for training with NDRN and policies, Uniform Guidance, MIP processes, and federal grants are reviewed in these meetings.