Finding Text
Finding 2025-004 – Unallowable Costs: Statement of Condition During our audit of the allowable costs testing for the major programs selected, we noted that rent was paid to a related entity and charged as expenses to the programs which are not allowable costs under the grants. Criteria Under 2 CFR Part 200, rental payments of any property owned by entities affiliated with the recipient are unallowable costs and cannot be charged or reimbursed using federal grant funds. Cause Due to accounting and program staff turnover in the Organization, the expenses were incorrectly charged to the program. Effect The unallowable related party rent expenses totaled $59,137 for the year ended June 30, 2025. Recommendation We recommend the Organization put policies and procedures in place to ensure unallowed expenses are not charged to the grants and to review what are the allowable expenses. The unallowable expenses totaling $59,137 should be repaid to the funding agency Views of Responsible Officials and Planned Corrective Actions Management concurs with the above unallowable expenses finding. The Organization has discussed this finding with the California Governor’s Office of Emergency Services (Cal OES) Auditor and has agreed upon the corrective action necessary to address the identified unallowable costs. The Organization will remove the related-party rent expenses from the affected grant awards through the abatement process approved by Cal OES. Upon completion of the abatement process, any required adjustments or reimbursements will be made in accordance with Cal OES guidance to ensure that only allowable costs are charged to the federal awards. As part of its corrective action, the Organization is strengthening its grant management and financial review processes. The Controller has been designated as the primary reviewer and approver of all grant cost allocations and will ensure grant budgets are reviewed for allowability before they are established within the accounting system. Finance staff will perform documented reviews of grant expenditures to verify compliance with Uniform Guidance (2 CFR Part 200), including the identification of related-party transactions and other potentially unallowable costs prior to charging expenses to federal awards. In addition, the Vice President of Finance will perform a secondary review of grant expenditures involving higher-risk transactions to provide additional oversight. The Organization will also implement formal written policies and procedures governing allowable costs under 2 CFR Part 200, including specific guidance for identifying, reviewing, and documenting related-party transactions. Annual training on federal grant compliance and allowable costs will be provided to both finance and program staff to reinforce these requirements and promote consistent application across the Organization. In collaboration with Cal OES and legal counsel, the Organization will evaluate and implement an appropriate long-term governance and leasing structure that complies with federal cost principles and addresses related-party considerations. This evaluation will ensure future lease arrangements and related-party transactions are structured and documented in accordance with applicable federal requirements. These enhanced controls will be implemented within 30 days. Together with centralized grant accounting procedures and strengthened financial oversight, these corrective actions are intended to ensure that only allowable costs are charged to federal awards and to prevent recurrence of this finding.