FINDING 2024-009 Subject: COVID-19 - Education Stabilization Fund Federal Agency: Department of Education Federal Programs: COVID-19 - Education Stabilization Fund Assistance Listings Numbers: 84.425D, 84.425U Federal Award Numbers and Years (or Other Identifying Numbers): S425D210013, S425U210013 Pass-Through Entity: Indiana Department of Education Compliance Requirements: Activities Allowed or Unallowed; Allowable Costs/Cost Principles; Cash Management; Equipment and Real Property Management; Matching, Level of Effort, Earmarking; Reporting; Special Tests and Provisions - Wage Rate Requirements; Special Tests and Provisions - Participation of Private School Children Audit Findings: Material Weakness, Modified Opinion Repeat Finding This is a repeat finding from the immediately prior audit report for activities allowed or unallowed, allowable costs/cost principles, cash management, equipment and real property management, and reporting. The prior audit finding numbers were 2022-013, 2022-014, 2022-015, and 2022-016. 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 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. INDIANA STATE BOARD OF ACCOUNTS 52 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Control Activities The School Corporation did not maintain sufficient financial records for its COVID-19 - Education Stabilization Fund program. Although separate funds were established, expenditures were not accurately recorded, preventing the auditors from properly testing compliance with the federal requirements for Activities Allowed or Unallowed; Allowable Costs/Cost Principles; Cash Management; Equipment and Real Property Management; Matching, Level of Effort, Earmarking; Reporting; Special Tests and Provisions - Wage Rate Requirements; and Special Tests and Provision - Participation of Private School Children compliance requirements. Notable errors included expenditures recorded to the grant funds in the amount of $1,623,704 more than the grant amount awarded, as well as unsupported reimbursement requests. The School Corporation attempted to identify expenditures that they no longer wanted to be considered costs under the grant program to correct the overspending. However, instead of reclassifying the expenditures to the proper funds, monies were transferred into the grant funds from other School Corporation funds. The documentation to support the expenditures to be reallocated was not complete as $296,202 of the transfer amount could not be associated with specific expenditure transactions. Additionally, $839,096 in transactions identified to be reclassified were associated with the prior fiscal year 2021-2022 financial activity. After considering transactions recorded in the fund during 2022-2023 and 2023-2024 that were reallocated to other funds the remaining expenditures in the grant program funds were $138,134 less than the total grant funds claimed for reimbursement during the audit period. Due to insufficient documentation, expenditures claimed for reimbursement could not be verified, resulting in questioned costs totaling $1,654,481. 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: INDIANA STATE BOARD OF ACCOUNTS 53 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) (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. . . . (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, expenditures were not properly reviewed to determine if costs were properly recorded to grant funds. 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. INDIANA STATE BOARD OF ACCOUNTS 54 SCOTT COUNTY SCHOOL DISTRICT 2 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) 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, 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 $1,654,481 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 review expenditures and financial ledger reports to ensure activity is recorded to the correct fund. 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. 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.