Reference Number 2024-007: Reimbursable Expenditures Assistance Listing Number/Program: 20.205 Highway Planning and Construction Agency / Pass-Through: U.S. Department of Transportation, passed through the California Department of Transportation Compliance Requirement: Allowable Costs and Activities Evaluation of Finding: Material Weakness in Internal Control over Compliance and Questioned Cost Repeat Finding: No Condition During our audit of the Highway Planning and Construction program, Assistance Listing Number 20.205, we selected reimbursable grant expenditures for testing. One expenditure charged to the program in the amount of $29,789 was not supported by adequate documentation, such as invoices, receipts, contracts, payroll records, or other records demonstrating that the cost was allowable, allocable, and incurred for the federal program. Because the Council was unable to provide documentation supporting the expenditure, the amount is considered a questioned cost. Criteria Federal awards may be charged only for costs that are necessary, reasonable, allocable, and adequately documented in accordance with 2 CFR 200.403 and 2 CFR 200.405. In addition, 2 CFR 200.302 requires nonfederal entities to maintain financial management systems and records that identify the source and application of federal funds and support the allowability of costs charged to federal awards. Management is responsible for maintaining internal controls over compliance sufficient to ensure expenditures claimed for reimbursement are properly supported and comply with applicable grant requirements. Cause The Council did not maintain adequate grant expenditure documentation or perform a sufficiently detailed review to ensure that costs submitted for reimbursement were supported by records demonstrating allowability, allocability, and compliance with federal program requirements before reimbursement was requested or the expenditure was reported. Effect or Potential Effect Unsupported expenditures increase the risk that costs charged to the federal program may not be allowable or properly allocable to the award. The unsupported reimbursable expenditure of $29,789 is considered a questioned cost. Recommendation We recommend that the Council strengthen its grant expenditure review process to require complete supporting documentation before costs are charged to federal awards or submitted for reimbursement. Documentation should be retained in a manner that clearly supports the nature, amount, timing, allowability, and allocability of each expenditure. The Council should also review the questioned cost and consult with the grantor, as appropriate, regarding resolution. SECTION III - FEDERAL AWARD FINDINGS AND QUESTIONED COSTS (CONTINUED) Management Response and Corrective Action: Management concurs with the finding and acknowledges that improvements are necessary to strengthen StanCOG's internal controls over grant expenditure documentation, review, and reimbursement processes. The condition identified resulted from deficiencies in historical grant expenditure documentation and review procedures. During the period under audit, StanCOG did not have sufficiently documented processes in place to ensure that all costs charged to federal awards were supported by adequate documentation demonstrating the nature, amount, timing, allowability, and allocability of the expenditure prior to reimbursement submission. The unsupported expenditure identified during testing relates to a reimbursement claimed under the Highway Planning and Construction program. Management recognizes the importance of maintaining complete supporting documentation for all federal award expenditures and will work with the appropriate parties, including the grantor as necessary, to evaluate and resolve the questioned cost in accordance with applicable federal requirements. Since the period under audit, StanCOG has undergone significant changes within its Finance Department and has recently hired new management focused on strengthening financial controls, improving grant compliance practices, and rebuilding sustainable financial processes. Management is currently reviewing existing grant accounting and reimbursement procedures and is implementing enhanced controls to ensure federal expenditures are properly supported and reviewed prior to reimbursement requests. Management is implementing, or plans to implement, the following corrective actions: • Establish standardized grant expenditure review procedures requiring supporting documentation before costs are charged to federal awards or submitted for reimbursement. • Develop documentation requirements for grant-related expenditures, including invoices, contracts, payroll documentation, time records, and other supporting records necessary to demonstrate allowability and allocability. • Implement documented supervisory review procedures to verify that expenditures charged to federal programs are appropriate, supported, and comply with applicable federal requirements. • Improve coordination between Finance and program/project staff to ensure required supporting documentation is collected and retained timely. • Establish consistent grant file organization and retention procedures to ensure documentation supporting federal expenditures is readily available for monitoring and audit purposes. • Provide guidance and training to staff involved in grant administration, project management, and expenditure processing regarding federal cost principles and documentation requirements. • Review the questioned cost identified in the audit and coordinate with the appropriate grantor representatives regarding resolution, as necessary. Management recognizes the importance of strong grant management practices and maintaining adequate documentation to support the use of federal funds. StanCOG is committed to strengthening its internal control environment, improving grant expenditure review procedures, and ensuring that future reimbursement requests are supported by complete and appropriate documentation in accordance with federal requirements.