FINDING 2024-008 Subject: Special Education Cluster (IDEA) Federal Agency: Department of Education Federal Programs: Special Education Grants to States, COVID-19 - Special Education Grants to States, Special Education Preschool Grants, COVID-19 - Special Education Preschool Grants Assistance Listings Numbers: 84.027, 84.027X, 84.173, 84.173X Federal Award Numbers and Years (or Other Identifying Numbers): 22611-138-PN01, 23611-138-PN01, 24611-138-PN01, 22611-138-ARP, 22619-138-PN01, 23619-138-PN01, 24619-138-PN01, 22619-138-ARP Pass-Through Entity: Indiana Department of Education Compliance Requirements: Activities Allowed or Unallowed; Allowable Costs/Cost Principles; Cash Management; Matching, Level of Effort, Earmarking; Period of Performance; Reporting Audit Findings: Material Weakness, Modified Opinion Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding numbers were 2022-010, 2022-011, and 2022-012. 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. INDIANA STATE BOARD OF ACCOUNTS 47 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) 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 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 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 receives federal funding through the Special Education Cluster (IDEA), including the Special Education Grants to States and Special Education Preschool Grants programs, administered by the Indiana Department of Education. These funds are subject to federal requirements regarding activities allowed or unallowed; allowable costs/cost principles; cash management; matching, level of effort, earmarking; period of performance; reporting; and financial documentation. The School Corporation did not maintain sufficient financial records for its special education 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; Period of Performance; and Reporting compliance requirements. Notable errors included payroll and fund mapping errors, as well as unsupported reimbursement requests. Salaries and benefits for special education staff were incorrectly mapped, resulting in expenditures being charged to the wrong funds. Additionally, program reimbursement requests were not based upon ledger expenditures and relied on documentation that was either missing or inconsistent with the amounts claimed. Due to insufficient documentation, most expenditures claimed for reimbursement could not be verified, resulting in questioned costs totaling $1,694,906. Of the 23 claims for reimbursement filed: There were 11 reimbursements totaling $1,289,892 that lacked supporting documentation and the amount claimed did not agree with the ledger disbursement activity. There were 11 reimbursements totaling $404,904 that either agreed with the grant fund ledger activity or documentation was retained to support the amount claimed for reimbursement. INDIANA STATE BOARD OF ACCOUNTS 48 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) There was 1 reimbursement totaling $110 that differed from the amount claimed by $1,837, with the amount claimed being less than the supporting documentation. Additional issues included: Receipt activity within the funds was not always reflective of the program grant money received. Special education program receipts totaling $47,913 were receipted to nonspecial education grant funds. A separate fund was not created to identify and record financial activity for each grant project year as required by the pass-through entity. Specifically, separate funds were not created for the Special Education Preschool grant for project years 2022 and 2023. Transfers between funds were made to address deficit fund balances, either due to financial activity being misallocated or errors discovered in transaction recording. However, supporting documentation for these corrections was not kept. In fiscal year 2022-2023, a total of $222,602 was moved into program funds from other sources or between various special education grant project year funds, while $6,653 was transferred in during 2023-2024. Conversely, funds totaling $699,655 in 2022-2023 and $722,283 in 2023-2024 were transferred out of program grant funds to other accounts or between special education grant project year funds. Information and Communication 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 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). . . ." INDIANA STATE BOARD OF ACCOUNTS 49 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) 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. . . . (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 special education programs were not mapped to the proper funds in the accounting software. Finally, reimbursement requests were completed based on documentation, other than the ledger, that was not always retained or when retained did not agree with the amounts being requested. 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. INDIANA STATE BOARD OF ACCOUNTS 50 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) 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 special education grant program funds for employees who were not involved with the program and expenditures for those involved with the program were recorded to nonspecial education 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. Questioned Costs Questioned costs in the amount of $1,694,906 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.