Finding 1236144 (2025-011)

Federal Agency: United States Department of Agriculture (USDA) Federal Program: 10.558 Child and Adult Care Food Program (CACFP) 2024 and 2025 CACFP 2024 and 2025 CACFP-CIL 2024 and 2025 CACFP-SPON State Agency: Department of Health and Senior Services (DHSS) - Bureau of Community Food and Nutrition Assistance (BCFNA) Type of Finding: Internal Control (Material Weakness) and Material Noncompliance Questioned Costs: Unknown Compliance Requirement: Subrecipient Monitoring As noted in our two previous audits, during the year ended June 30, 2025, BCFNA subrecipient monitoring procedures were not in compliance with subrecipient monitoring requirements and were not sufficient to ensure CACFP subrecipient compliance with program requirements. As noted at finding 2025-010, audit sample results show the subrecipient payment error rate continued to increase. The BCFNA has implemented only a few changes to address our prior-year audit findings and strengthen monitoring procedures. During the year ended June 30, 2025, the BCFNA disbursed approximately $69.9 million to over 730 CACFP subrecipients, which consist of child and adult care centers and sponsors of centers. Disbursements to subrecipients represented approximately 98% of the program's expenditures. As part of its pass-through responsibilities, 7 CFR Section 226.6(a)(5), the BCFNA is required to ensure subrecipients effectively operate the program. Regulation 2 CFR Section 200.332(c) requires pass-through entities to evaluate each subrecipient's fraud risk and risk of noncompliance with a subaward to determine the appropriate subrecipient monitoring. Regulation 2 CFR Section 200.332(e) requires pass-through entities to monitor the activities of the subrecipient as necessary to ensure the subrecipient complies with federal statutes, regulations, and the terms and conditions of the subaward, and achieves goals and objectives. The BCFNA's subrecipient monitoring process, outlined in the Internal Nutritionist Manual, provides the requirements for monitoring the CACFP facilities/sponsors. The manual provides the planned frequency and type of monitoring activities, monitoring methods, and corrective action requirements. The manual requires the preparation of a risk assessment at the end of each monitoring review that assigns points to the facility/sponsor based on the number and severity of deficiencies and findings, with more deficiencies leading to a higher score. The score determines the required timing of future monitoring reviews of the facility/sponsor. Facilities/sponsors with a score of 0 to 10 points will be next monitored in 3 years, a score of 11 to 25 points within 2 years, a score of 26 to 35 points in 1 year; and facilities/sponsors with a score of 36 or more points are considered "seriously deficient" and are required to submit a Corrective Action Plan (CAP). If the CAP is deemed sufficient, seriously deficient facilities/sponsors will have a CAP verification review in 6 months. A score is not assigned for 6-month CAP verification reviews. During FY25, the BCFNA began performing technical assistance reviews for all new facilities/sponsors. In May 2024, when the BCFNA changed the risk assessment and scoring system, the BCFNA ceased assigning a grade of A, B, B-, or C to each review and widened the score ranges and associated review requirements. DHSS officials indicated the scores assessed by the new system are frequently higher than those assessed under the previous manual system. The impact of these changes on the frequency and effectiveness of the monitoring reviews is unclear. During each monitoring review, BCFNA personnel review documentation supporting a sample of claims during a test month. Any identified errors and associated overclaims/underclaims exceeding established thresholds are recouped/reimbursed in the facility's/sponsor's future claims. When reviews identify noncompliance, facilities/sponsors are required to prepare and submit a CAP to the BCFNA. In addition, as noted at finding number 2025-010, the BCFNA relies on these subrecipient monitoring procedures to prevent and detect meal reimbursement claim errors. Monitoring reviews have identified significant issues and claim errors, including some potentially fraudulent activity, and led to over 15 contract terminations in recent years. To test compliance with subrecipient monitoring requirements, and to evaluate the effectiveness of BCFNA monitoring procedures, we reviewed and analyzed a randomly-selected sample of 60 BCFNA monitoring reviews conducted for 60 CACFP facilities/sponsors during the year ended June 30, 2025. While our review found the sample monitoring reviews were performed in accordance with the policies and procedures outlined in the Internal Nutritionist Manual, we identified areas where these policies and procedures could be strengthened and improved to ensure facilities/sponsors comply with program requirements and submit proper claims. Our review and analysis of the 60 sampled monitoring reviews noted the monitoring reviews identified significant errors, noncompliance, disallowances, and overclaims. Our comparison of the sampled reviews to prior reviews noted deficient facilities/sponsors generally had continued deficiencies and little improvement from prior reviews, as follows: • Of the 58 sampled monitoring reviews assigned a score, 26 (45%) facilities/sponsors had a score of 10 or less, while 32 (55%) had a score of 11 or more. • Of the 29 facilities/sponsors that had a score of 11 or more and had a prior review, 27 (93%) had the same or higher score than the prior review indicating a lack of significant improvement or decline in compliance since the prior review. • Of the 2 facilities/sponsors that had a score of 36 or more and had a prior review, both had higher scores than the prior review. • For 50 of 58 monitoring reviews (86%) for which the BCFNA tested claims and quantified errors (with claims totaling $568,271 during the test months), the BCFNA identified overclaims totaling $72,561 and underclaims totaling $4,275, netting to $68,286, or at least 12% of the reimbursements tested. As noted at finding 2025-010, audit sample results show the subrecipient payment error rate increased from prior years. Our review of BCFNA subrecipient monitoring procedures during the year ended June 30, 2025, noted areas that should be strengthened and improved. Claims testing The Internal Nutritionist Manual and monitoring practices provide for testing of a sample of claims within only 1 test month during each monitoring review, and do not provide for expanded testing when significant errors are identified. For example, 2 facilities had 100% overpayment rates and were assigned scores of 34 and 13; however, additional testing was not performed for either facility. Neither facility was deemed "seriously deficient;" and the facilities were scheduled to be next reviewed in 1 year and 2 years, respectively. BCFNA personnel indicated monitoring reviews are limited to only 1 test month since the USDA Monitoring Handbook does not require expanded testing of records beyond 1 month. However, the USDA Monitoring Handbook suggests testing activities during 1 test month, and also suggests the state agency may determine additional review is warranted and review records beyond the test month to determine the extent of the noncompliance. When significant errors are identified, additional testing would help BCFNA nutritionists determine the extent that instances of noncompliance are isolated versus pervasive. Such information would be valuable to the overall conclusions and points assigned to the review, and in decisions regarding subsequent monitoring. Overclaim recoupment BCFNA subrecipient monitoring procedures do not provide for identification and pursuit of recoupment of all overpayments associated with errors identified during monitoring reviews. When overclaims due to noncompliance with eligibility requirements are identified during monitoring reviews, the BCFNA only identifies and seeks recoupment for the overclaims made during the test month. Overclaims associated with eligibility errors begin at the time the eligibility determination was made and continue until the error is discovered. Although the BCFNA is aware noncompliance occurred during the month(s) before the test month, the BCFNA does not attempt to identify those overclaims. In addition, when a facility/sponsor is terminated, the BCFNA does not always identify or seek recoupment of overclaim amounts. In our sample of 60 monitoring reviews, the contract for 1 sponsor was terminated as a result of a 6-month CAP verification review. For this sponsor, in the review prior to the 6-month CAP verification review, the BCFNA identified and recouped overclaims of $2,879, or 100% of total claims tested. In the subsequent 6-month CAP verification review, significant claim errors were identified in the test month claims paid, which totaled $4,091, and the sponsor was terminated. However, the test month claims were not fully tested, and overclaims were not identified or recouped. Any overclaims not identified and recouped from this sponsor would be considered questioned costs; however, those questioned costs are unknown. BCFNA officials indicated they do not pursue recoupment of overclaims beyond the test month because this practice is allowed by the USDA. They indicated they pursue recoupment of overclaims for facilities/sponsors with terminated contracts on a case-by-case basis, considering various factors. However, 7 CFR Section 226.14 provides that state agencies shall disallow and recover any portion of a claim for reimbursement not properly payable, including claims not made in accordance with recordkeeping requirements. Pursuing full recoupment would hold facilities/sponsors accountable for all overclaims and would serve as a deterrent to future errors, noncompliance, and overclaims. Further, without procedures to identify and recoup all overclaims, there is a risk that significant overclaims will go undetected and unrecouped, and questioned costs could be significant. Conclusions In addition to complying with federal requirements, strong subrecipient monitoring procedures are necessary to ensure facilities/sponsors comply with program requirements, submit proper claims, and address deficiencies identified. Subrecipient monitoring procedures should be designed to prevent future deficiencies and noncompliance. Without strong internal controls, there is increased risk of noncompliance, errors, fraud, waste, and abuse of federal funds. Strong monitoring procedures would ensure facilities/sponsors are held accountable for and correct errors and noncompliance identified. Regulation 2 CFR Section 200.332(h) requires pass-through entities to consider whether the results of a subrecipient's audit, site visits, or other monitoring necessitate adjustments to the pass-through entity's records. Further, 2 CFR Section 200.303(a) requires the recipient to "[e]stablish, document, and maintain effective internal control over the Federal award that provides reasonable assurance that the recipient or subrecipient is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should align with the 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)." Finding classification This finding is classified as a material weakness in internal control and material noncompliance with the federal subrecipient monitoring requirements. Our audit of the BCFNA's compliance with federal subrecipient monitoring requirements concluded the BCFNA did not materially comply with federal requirements to ensure subrecipients effectively operate the CACFP and to monitor the activities of the subrecipient as necessary to ensure the subrecipient complies with federal statutes, regulations, and the terms and conditions of the subaward, and achieves goals and objectives. This conclusion is based on the facts, deficiencies, and noncompliance stated in the finding, including the following: 1) Disbursements to subrecipients represented approximately 98% of the CACFP expenditures. 2) BCFNA subrecipient monitoring reviews identified significant errors, noncompliance, disallowances, and overclaims; and deficiencies identified often continued for years with little improvement from review to review. The 12% subrecipient payment error rate identified by the BCFNA, which exceeds our audit materiality threshold of 4%, along with the high rate of continued noncompliance, serve as indicators of the ineffectiveness of the BCFNA monitoring process. 3) The BCFNA did not comply with federal subrecipient monitoring requirements regarding disallowing and recovering improper payments. 4) Multiple deficiencies in monitoring procedures were identified. In conducting a Single Audit in accordance with 2 CFR Part 200 (Uniform Guidance), auditors are required by 2 CFR Section 200.514(d)(1)(2), to determine whether the auditee has complied with federal statutes, regulations, and the terms and conditions of federal awards that may have a direct and material effect on each of its major programs, as outlined in the OMB Compliance Supplement. While compliance with the USDA CACFP handbooks was considered in our audit, our conclusion on compliance is based on the BCFNA's compliance with the federal statutes and regulations, as required. Our decisions regarding the classification of the internal control deficiencies were made in accordance with AU-C Section 935, Compliance Audits, and the AICPA Audit Guide: Government Auditing Standards and Single Audits (Audit Guide). The Audit Guide provides the following definitions regarding internal control deficiencies: A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. "[A] reasonable possibility exists when the likelihood of the event is either reasonably possible or probable…" Reasonably possible is when "[t]he chance of the future event or events occurring is more than remote but less than likely." Probable means "[t]he future event or events are likely to occur." The failure to design and implement adequate controls and procedures over subrecipient monitoring led to material noncompliance with the subrecipient monitoring requirements. The BCFNA's controls failed to develop an effective subrecipient monitoring process that ensures subrecipients comply with federal statutes, regulations, and the terms and conditions of subawards, and achieve goals and objectives. Because the internal control deficiencies have not been corrected, it is probable that the material noncompliance will continue. For these reasons, the deficiencies are considered a material weakness. Recommendation The DHSS through the BCFNA continue to review, strengthen, and enforce subrecipient monitoring procedures to ensure CACFP facilities/sponsors comply with program requirements, submit proper claims, and address deficiencies identified. The BCFNA should enhance procedures to provide for identification and recoupment of overclaims associated with all errors identified during monitoring reviews, as required by federal regulations; and expand testing when significant errors are identified. The DHSS should identify and recoup the overclaims for the terminated sponsor noted in this finding. Auditee's Response We disagree with the auditor's finding. Our Corrective Action Plan includes an explanation and specific reasons for our disagreement. Auditor's Comment The DHSS Corrective Action Plan (CAP) states the DHSS, for the third year in a row, disagrees with the finding and believes no corrective action is required because (1) they believe subrecipient monitoring, claim recoupment, and risk assessment procedures comply with USDA requirements; and (2) the similar FY23 finding (finding number 2023-013) was closed by the USDA after reviewing the DHSS corrective action plan. The DHSS CAP further states they believe the SAO is holding the DHSS to higher standards than required by federal guidance and regulations and that implementing the SAO's recommendations would cause undue burden on the participants and providers of the program which the USDA warns against. However, in making these statements, the DHSS ignored the noncompliance with specific USDA and Uniform Guidance requirements identified in the finding, and failed to recognize and acknowledge that existing subrecipient reimbursement and monitoring procedures have allowed serious and material subrecipient noncompliance year after year. Furthermore, federal agency closure of a prior year finding does not protect the DHSS from future findings. As of August 2026, the DHSS had received no communication from the USDA regarding the fiscal year 2024 finding. Regarding the finding statement that policies and procedures should be strengthened and improved, the DHSS CAP states the SAO has applied performance audit standards instead of single audit standards. This statement is incorrect. While not required, we have included a finding classification section that outlines the auditor's responsibilities under the single audit, as well as audit guidance followed in making decisions regarding the BCFNA's internal controls and compliance with the federal statutes and regulations. Regarding the finding section pertaining to recoupment of overclaims, the DHSS CAP claims the "BCFNA pursues recoupment of overclaims of only the test month per USDA requirements, although when warranted, additional reviews are conducted beyond the test month. In addition, BCFNA officials pursue recoupment of overclaims for facilities/sponsors with terminated contracts on a case-by-case basis, taking into consideration various factors." While the DHSS makes this claim, in our sample of 60 monitoring reviews, the DHSS did not expand testing beyond the test month for any reviews, and did not seek recoupment of overclaims for the facility/sponsor terminated as a result of the monitoring reviews. As part of its pass-through responsibilities outlined in the federal regulations, the BCFNA is required to ensure subrecipients comply with federal regulations and terms and conditions of the subaward, and effectively operate the program. Given the extent of material subrecipient noncompliance that continues to occur, BCFNA procedures are clearly not sufficient to deter and prevent future noncompliance. The BCFNA has focused on individual components of its systems, but has not holistically evaluated whether the procedures, collectively and in their entirety, comply with the federal requirements intended to ensure subrecipient reimbursements are allowable and supported. The BCFNA continues to strictly follow existing procedures without making adequate adjustments to address and mitigate the serious subrecipient reimbursement problems. Recognizing problems and responding to them are critical components of an effective internal control system designed to ensure compliance with the federal requirements. For three years, the SAO has recommended the BCFNA enhance procedures related to identification and recoupment of overclaims, as required by federal regulations; and expand testing when significant errors are identified. The BCFNA has ignored these recommendations; and as a result, lacks a sufficient method for deterring future noncompliance. While the DHSS argues these recommendations would cause undue burden on the participants of the program and the subrecipients, not implementing these recommendations could cause an undue burden on the DHSS and the subrecipients, since weak consequences or deterrents to noncompliance leads to continued noncompliance, which requires increased monitoring and follow-up efforts. Subrecipient data clearly shows significant subrecipient noncompliance is occurring within the CACFP. These problems cannot be denied and should not be ignored. Until the DHSS recognizes these problems, acknowledges there are weaknesses in its existing procedures, and takes action to strengthen them, significant improper payments to subrecipients will likely continue.