FINDING 2024-006 Subject: Title I Grants to Local Educational Agencies Federal Agency: Department of Education Federal Program: Title I Grants to Local Educational Agencies Assistance Listings Number: 84.010 Federal Award Numbers and Years (or Other Identifying Numbers): S010A210014, S010A220014, S010A230014 Pass-Through Entity: Indiana Department of Education Compliance Requirements: Activities Allowed or Unallowed; Allowable Costs/Cost Principles; Cash Management; Matching, Level of Effort, Earmarking; Reporting; Special Tests and Provisions - Participation of Private School Children; Special Tests and Provisions - Annual Report Card, High School Graduation Rate; Special Tests and Provisions - Assessment Testing Audit Findings: Material Weakness, Modified Opinion INDIANA STATE BOARD OF ACCOUNTS 39 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Repeat Finding This is a repeat finding from the immediately prior audit report for control activities - activities allowed or unallowed; allowable costs/cost principles; cash management; reporting; matching, level of effort, earmarking; and special tests and provisions - participation in private school children. The prior audit finding numbers were 2022-005, 2022-006, 2022-008, and 2022-009. Condition and Context Internal control is generally defined as a process affected by an entity's oversight body, management, and other personnel that provides reasonable assurance that the entity will achieve its objectives. For federal awards, nonfederal entities, such as the School Corporation, are required to establish and maintain internal control over federal awards to provide reasonable assurance that the entity will comply with applicable federal statutes, regulations, and the terms and conditions of its awards. Internal control is not a single event but an ongoing process that operates through five integrated components: Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring. Each component must function effectively, and the components must operate together in an integrated manner, for an internal control system to be effective. Deficiencies in the internal control system were identified across the five components and are described below. Control Environment - Activities Allowed or Unallowed; Allowable Costs/Cost Principles; Cash Management; Matching, Level of Effort, Earmarking; Reporting; Special Tests and Provisions - Participation of Private School Children; Special Tests and Provisions - Annual Report Card, High School Graduation Rate; Special Tests and Provisions - Assessment Testing The School Corporation had not established a strong foundation for an effective internal control system. There was no demonstrated emphasis on the importance of internal controls or on compliance with federal program requirements. Risk Assessment - Activities Allowed or Unallowed; Allowable Costs/Cost Principles; Cash Management; Matching, Level of Effort, Earmarking; Reporting; Special Tests and Provisions - Participation of Private School Children; Special Tests and Provisions - Annual Report Card, High School Graduation Rate; Special Tests and Provisions - Assessment Testing The School Corporation had not defined objectives necessary to identify risks or determine risk tolerances. Management did not identify, analyze, or respond to risks that could affect the achievement of objectives, including risks arising from significant changes to operations or the potential for fraud. Control Activities The School Corporation did not maintain sufficient financial records for its Title I programs. Although separate funds were established, expenditures were not accurately recorded, preventing the auditors from properly testing compliance with the federal requirements for the Activities Allowed or Unallowed; Allowable Costs/Cost Principles; Cash Management; Matching, Level of Effort, Earmarking; Reporting; Special Tests and Provisions - Participation of Private School Children compliance requirements. Notable errors included payroll mapping errors, as well as unsupported reimbursement requests. INDIANA STATE BOARD OF ACCOUNTS 40 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Expenditures as reported on the Schedule of Expenditures of Federal Awards are based on reimbursements received during the audit period. To determine the specific expenditures associated with each reimbursement request the corresponding ledger activity or other applicable supporting documentation was requested. Based on the documentation provided, or lack thereof, it was determined that reimbursement requests were not prepared using expenditures recorded in the Title I funds. Instead, other undocumented or inconsistently retained records were used, and the amounts in those records did not align with the reimbursement requests submitted or the related fund activity. Of the 13 reimbursement claims submitted: There were 5 reimbursement requests totaling $854,889 filed in fiscal year 2022-2023 that had no supporting documentation, and the amounts requested did not agree with the disbursement activity recorded in the grant program funds. There were 8 reimbursement requests totaling $496,155 and received in 2023-2024 that had supporting documentation; however, the documentation agreed with reimbursement request amount in only 4 instances. For the other 4 reimbursement requests where documentation was provided, discrepancies totaling $15,982 were identified between the documentation and the amounts requested. Additionally, the documentation used to support 2023-2024 reimbursement requests did not correspond to the ledger activity recorded in the Title I program funds; instead, the School Corporation relied on separate individual payroll reports that were not tied to the program's financial records. Due to the lack of adequate documentation, we were unable to determine the validity of expenditures claimed for reimbursement, and, therefore, could not determine a population of expenditures to verify for compliance testing. This resulted in questioned costs totaling $1,351,044. Additional issues included: The former Chief Financial Officer did not direct the payroll clerk to allocate salaries and benefits for Title I personnel to the appropriate funds. As a result, salary and benefit costs were charged to the Title I funds for employees who did not work on the program, while costs for employees who did work on the program were charged to non-Title I funds. Receipt activity recorded in the Title I program funds did not always reflect actual Title I grant receipts. For example, receipts totaling $63,901 for the Supportive Effective Instruction State Grants program (formerly Improving Teacher Quality State Grants), Assistance Listings Number 84.367, were incorrectly recorded in the Title I fund. A separate fund was not created for the 2022-2023 grant project year as required by the pass-through entity; instead, an existing project year fund was used. Transfers totaling $993,763 in 2022-2023 and $73,107 in 2023-2024 were made into the Title I program funds from other funds or between Title I project years without adequate supporting documentation explaining the composition of the transfer amounts. Transfers totaling $650,150 in 2022-2023 were made out of the Title I program funds to other funds or other Title I project years, without sufficient supporting documentation identifying the nature of the transferred amounts. INDIANA STATE BOARD OF ACCOUNTS 41 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Information and Communication - Activities Allowed or Unallowed; Allowable Costs/Cost Principles; Cash Management; Matching, Level of Effort, Earmarking; Reporting; Special Tests and Provisions - Participation of Private School Children; Special Tests and Provisions - Annual Report Card, High School Graduation Rate; Special Tests and Provisions - Assessment Testing The School Corporation had not established adequate communication methods or practices to ensure that reliable information was identified, captured, and communicated to the appropriate internal and external parties. Monitoring - Activities Allowed or Unallowed; Allowable Costs/Cost Principles; Cash Management; Matching, Level of Effort, Earmarking; Reporting; Special Tests and Provisions - Participation of Private School Children; Special Tests and Provisions - Annual Report Card, High School Graduation Rate; Special Tests and Provisions - Assessment Testing The School Corporation did not perform ongoing or periodic evaluations to determine whether internal controls were operating effectively or to identify needed improvement. In addition, the School Corporation did not have a process in place to track or to follow-up on corrective actions written in response to audit findings. Due to the number and severity of the issues identified with the program's financial records and supporting documentation, we were unable to perform the procedures necessary to test the program for compliance. 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). . . ." 2 CFR 200.302(b) states in part: "The financial management system of each non-Federal entity must provide for the following (see also §§ 200.334, 200.335, 200.336, and 200.337): (1) Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. . . . (2) Accurate, current, and complete disclosure of the financial results of each Federal award or program in accordance with the reporting requirements set forth in §§ 200.328 and 200.329. . . . INDIANA STATE BOARD OF ACCOUNTS 42 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) (3) Records that identify adequately the source and application of funds for federallyfunded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation. (4) Effective control over, and accountability for, all funds, property, and other assets. The non-Federal entity must adequately safeguard all assets and assure that they are used solely for authorized purposes. See § 200.303. . . ." 2 CFR 200.334 states in part: "Financial records, supporting documents, statistical records, and all other non-Federal entity records pertinent to a Federal award must be retained for a period of three years from the date of submission of the final expenditure report or, for the Federal awards that are renewed quarterly or annual, from the date of submission of the quarterly or annual financial report, respectively, as reported to the Federal awarding agency or pass-through entity in the case of a subrecipient. . . ." Cause The School Corporation had not implemented an effective system of internal controls. Changes in key financial personnel, along with insufficient employee training, contributed to processes and procedures not being properly developed or consistently followed. Additionally, employees' salaries and benefits associated with the Title I programs were not mapped to the proper funds in the accounting software. Finally, reimbursement requests were completed based upon documentation, other than the ledger, that was not always retained or when retained did not agree with the amounts requested. Transfers in and out of Title I program funds did not contain sufficient supporting documentation to determine the specific purposes of the transfers Effect Because the five components of internal control were not properly designed or implemented, the School Corporation's internal control system could not be effective. As a result, general and fraud-related risks, as well as risks arising from significant operational changes, could negatively impact the School Corporation. Existing internal control deficiencies may continue undetected, and additional weaknesses may exist without being identified. Additionally, because the School Corporation did not establish an effective system of internal controls to ensure that the required documentation was obtained and retained, we were unable to obtain sufficient appropriate audit evidence to determine whether the School Corporation complied with the applicable federal program compliance requirements. This lack of documentation created a scope limitation for the audit and increased the risk that noncompliance, if present, may not have been detected. The inability to demonstrate compliance with federal requirements may affect the School Corporation's ability to support current program expenditures and may place eligibility for future federal funding at risk. Finally, salary and benefit expenditures were recorded to the Title I grant program funds for employees who were not involved with the program and expenditures for those involved with the program were recorded to non-Title I funds. Reimbursement requests could not be reconciled to the detailed ledger of expenditures. As such, a complete and accurate population of expenditures, that reconciled to the Schedule of Expenditures of Federal Awards or the financial statement could not be determined. INDIANA STATE BOARD OF ACCOUNTS 43 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Questioned Costs Questioned costs in the amount of $1,351,044 were identified as detailed in the Condition and Context. Recommendation We recommended the School Corporation design and implement a system of internal controls, which would include policies and procedures related to the five components of internal control. Management should define clear objectives, identify and assess risks, and develop policies and procedures to address those risks. Regular monitoring should be conducted to ensure internal controls are operating effectively and deficiencies are addressed promptly. We also recommended that the School Corporation ensure employees' salaries and benefits are properly mapped within the accounting system. Additionally, we recommended that all documentation to support a reimbursement request be attached to the reimbursement request and reconciled to the ledger at the time of request. We also recommended that any necessary transfers contain sufficient supporting documentation. Finally, we recommended that the School Corporation maintain complete and accurate records for all grant funds and project years. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.