FINDING 2025-003 Subject: COVID-19 - Coronavirus State and Local Fiscal Recovery Funds - Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Period of Performance Federal Agency: Department of the Treasury Federal Program: COVID-19 - Coronavirus State and Local Fiscal Recovery Funds Assistance Listings Number: 21.027 Federal Award Number and Year (or Other Identifying Number): FY2025 Compliance Requirements: Activities Allowed or Unallowed, Allowable Costs/ Cost Principles, Period of Performance Audit Finding: Material Weakness Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2024-003. Condition and Context The County had not properly designed or implemented a system of internal controls, which would include appropriate segregation of duties, that would likely be effective in preventing, or detecting and correcting, material noncompliance related to expenditures made from the COVID-19 - Coronavirus State and Local Fiscal Recovery Funds (SLFRF). Prior to receipt of SLFRF award funds, all eligible entities were required to execute a Financial Assistance Agreement (Agreement), which included the Award Terms and Conditions that recipients must comply with in carrying out the objectives of their award. Per the Agreement, the County was responsible for the effective administration of the federal award, as well as the application of sound management practices and administration of the federal funds in a manner consistent with the program objectives and the terms and conditions of the award. Recipients may use SLFRF funds for any eligible expenses subject to the restrictions set forth in sections 602 and 603 of the Social Security Act as added by section 9901 of the American Rescue Plan Act of 2021. The SLFRF program provides substantial flexibility for each recipient to meet local needs within four separate eligible use categories. Recipients may use SLFRF funds to: Respond to the COVID-19 public health emergency and its negative economic impacts; Respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers of eligible employers that have eligible workers who are performing essential work; Provide government services, to the extent COVID-19 caused a reduction in revenues collected in the most recent full fiscal year of the recipient; Make necessary investments in water, sewer, or broadband infrastructure; Provide emergency relief from natural disasters or the negative economic impacts of natural disasters; INDIANA STATE BOARD OF ACCOUNTS 18 SHELBY COUNTY SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Fund projects eligible under certain programs administered by the U.S. Department of Transportation; and Fund projects eligible under the programs established in Title I of the Housing and Community Development Act of 1974. Pursuant to the Agreement, the period of performance for the award began on the date the funds were disbursed to the County and ends on December 31, 2026. Recipients may only use funds to cover costs incurred during the period that began on March 3, 2021, and ends on December 31, 2024. Recipients must liquidate all obligations incurred by December 31, 2024, under the award no later than December 31, 2026, which is the end of the period of performance. Recipients may use payments from the SLFRF funds to replace lost public sector revenue to provide government services. Recipients may use this funding to provide government services to the extent of the reduction in revenue experienced due to the pandemic. The dollar amount of the revenue loss determines the limit for the amount of the SLFRF funds that can be used to "provide government services" (which is one of four eligible uses of the SLFRF funds). A single employee received all invoices for financial obligations made from the SLFRF award. The employee prepared and reviewed the claims to ensure all expenditures were for allowable activities, were within the period of performance, and were for allowable costs prior to issuing payment from the SLFRF fund. The SLFRF claims were then included with the regular claims docket for the Board of County Commissioner's review and subsequent approval. However, the docket did not include sufficient detail, nor was other documentation provided to the Board of County Commissioners, in order for them to complete an appropriate level of review to determine if the expenses related to the SLFRF award were for allowable activities, within the period of performance, or for allowable costs. The lack of internal controls was a systemic issue throughout the audit period. 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). . . ." Cause A proper system of internal controls over the SLFRF expenditures was not designed by management of the County, which would include segregation of key functions, to ensure the SLFRF funds were being used appropriately. Embedded within a properly designed and implemented internal control system should be internal controls consisting of policies and procedures. Policies reflect the County's management of what should be done to affect internal controls, and procedures should consist of actions that would implement these policies. INDIANA STATE BOARD OF ACCOUNTS 19 SHELBY COUNTY SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Effect Without the proper implementation of an effectively designed system of internal controls, including policies and procedures that provide segregation of duties and additional oversight as needed, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. Noncompliance with the provisions of federal statutes, regulations, and the terms and conditions of the federal award could result in the loss of future federal funding to the County. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the County design and implement a proper system of internal controls including policies and procedures that would provide segregation of duties to ensure appropriate reviews, approvals, and oversight are taking place prior to payment of funds from the SLFRF award. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.