Finding 1236146 (2025-016)

Federal Agency: Department of Housing and Urban Development (HUD) Federal Program: 14.228 COVID-19 - Community Development Block Grants/State's Program and Non-Entitlement Grants in Hawaii 2020 - B-20-DW-29-0001 14.228 Community Development Block Grants/State's Program and Non-Entitlement Grants in Hawaii 2017 - B-17-DC-29-0001 2018 - B-18-DC-29-0001, B-18-DP-29-0001, and B-18-DP-29-0002 2019 - B-19-DC-29-0001 and B-19-DP-29-0001 2020 - B-20-DC-29-0001 2021 - B-21-DC-29-0001 2022 - B-22-DC-29-0001 State Agency: Department of Economic Development (DED) Type of Finding: Internal Control (Significant Deficiency) and Nonmaterial Noncompliance Compliance Requirement: Reporting DED controls and procedures are not sufficient to fully comply with Federal Funding Accountability and Transparency Act (FFATA) reporting requirements for the Community Development Block Grant (CDBG) program. During state fiscal year 2025, the DED did not fully comply with FFATA reporting requirements for 18 of 27 subawards reviewed. During state fiscal year 2025, the DED disbursed approximately $56.2 million in first-tier subawards to 178 subrecipients of the CDBG program. First-tier subaward payments accounted for approximately 97% of the program's expenditures. The FFATA requires comprehensive reporting for certain federal awards to promote transparency and accountability over the use of the federal funds. Regulation 2 CFR Part 170, Appendix A, requires the DED to report first-tier subawards of $30,000 or more no later than the end of the month following the month in which the subaward was made. The regulation provides "[t]he recipient must also report a subaward if a modification increases the Federal funding to an amount that equals or exceeds $30,000. All reported subawards should reflect the total amount of the subaward." Information is reported to System for Award Management (SAM.gov) (the FFATA Subaward Reporting System [FSRS.gov] prior to March 2025) and is publicly available at USAspending.gov. The DED issues CDBG program subawards to local governments, such as counties and cities, for multiple-year periods. Due to the nature of the subawards and because the DED can spend federal awards over a several-year period (typically 8 federal fiscal years), the DED continuously modifies and updates subaward amounts and sources as subaward terms and conditions change, and as federal awards are reallocated to the subawards. Modifications to subawards impact FFATA reporting, and uncorrected reporting errors can carry forward for many years. To test compliance with FFATA reporting requirements, we reviewed a random sample of 27 CDBG subawards, totaling $18,598,846, that were active during the year ended June 30, 2025. For each subaward tested, we reviewed the original issuance and any applicable modifications, including issuances/modifications that occurred before the year ended June 30, 2025 (our review for timeliness of reporting was limited to the year ended June 30, 2025). Of the 27 subawards, 18 (67%) had instances of noncompliance (11 of which had at least 1 instance during the year ended June 30, 2025), as shown in the following table: In addition to the errors noted in the table, FFATA reports for 11 of 27 (41%) subawards did not report the correct federal award identification number (FAIN), or correct combination of FAINs. As a result, some or all of the subaward amounts were reported under incorrect federal award year(s). The following example explains 1 subaward that had multiple types of errors as of auditors' testing through February 2026: When the subaward totaling $957,409 was issued in April 2021, the DED timely and correctly completed FFATA reporting for $957,409, but reported the incorrect FAIN (federal award year 2019 instead of 2018). When the subaward was modified in August 2024, increasing the amount by $121,179, to $1,078,588, the DED correctly reported the increase amount and the FAIN, but completed FFATA reporting 1 month late. When the subaward was again modified in April 2025, decreasing the amount by $15,000, to $1,063,588, the DED did not complete any FFATA reporting. As a result, the subaward was overstated by $15,000 on USAspending.gov, and approximately 90% of the total amount was reported under an incorrect federal award year. Many FFATA reporting errors noted were associated with subaward modifications. Each of the 27 sampled subawards remained above $30,000 following each modification. DED personnel disagreed with some of the errors associated with modifications because they believe FFATA reporting is only required for subaward increases of $30,000 or more, regardless of the resulting subaward amount. They further stated they believe FFATA reporting is not required for any decreases of subaward amounts. However, the FFATA clearly states reporting is required if the modification results in a subaward amount that equals or exceeds $30,000 and that the total subaward amount should be reflected. Without adequate internal control over FFATA reporting, there is less assurance the information included in the FFATA reporting is complete, accurate, and submitted timely. In addition to noncompliance with federal requirements, FFATA inaccuracies increase the risk that those using the reports could rely on incomplete information. Regulation 2 CFR Section 200.303(a) requires recipients 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." Recommendation The DED strengthen internal controls to ensure information is timely and accurately reported for the CDBG program and complete FFATA reporting in accordance with the applicable requirements. Auditee's Response We partially agree with the auditor's finding. Our Corrective Action Plan includes an explanation and specific reasons for our disagreement and any planned actions to address the finding. Auditor's Comment The DED Corrective Action Plan (CAP) states the DED partially agrees with the recommendation, and provides the following 4 arguments: (1) The DED disagrees with the inclusion of errors in the audit report that were related to subawards executed prior to the audit period (year ended June 30, 2025), and believes the correct audit population should only include new subawards and amendments executed during the audit period, rather than all active subawards. However, as noted in the finding, due to the nature of the subawards (including DED's continuous modifications over a several year period), and the risk that uncorrected reporting errors can carry forward for many years, we reviewed a sample of subawards that were active during the year ended June 30, 2025. It was necessary to review the subaward, including original issuance and any applicable modifications, in entirety to determine the accuracy of FFATA reporting. Ignoring some activity could have led to inaccurate conclusions. (2) The DED believes the finding is inconsistent with the regulatory intent regarding systemic noncompliance because the DED corrected certain FFATA reporting discrepancies prior to and during the audit period. However, as reported in the finding, these corrections did not fully address all FFATA discrepancies. In addition, this argument disregards the auditor's responsibility to follow criteria outlined in 2 CFR 200.516 (Uniform Guidance) for reporting audit findings. The DED's insufficient internal controls and noncompliance with FFATA reporting requirements are systemic in nature; and therefore, the finding is classified as a significant deficiency in internal control, which is required to be reported. (3) Under the DED's literal interpretation of 2 CFR Part 170, Appendix A, DED personnel believe the DED does not have to report any deobligations (decreases of subaward amounts) and it only has to report subaward increases of $30,000 or more, regardless of the resulting subaward amount. (4) The DED disagrees subawards were reported in the incorrect federal award year (FAIN) because DED personnel do not believe they have to report modifications to FAIN information that occur after the initial award. Arguments (3) and (4) directly conflict with the FFATA's stated goal, which is "[t]o require full disclosure of all entities and organizations receiving federal funds." Further, the OMB Compliance Supplement defines "amount of subaward" as "[t]he net dollar amount of federal funds awarded to the subawardee including modifications." In addition to noncompliance, not reporting (a) deobligations, (b) all modifications that result in a subaward amount that equals or exceeds $30,000, and (c) FAIN modifications, prevents users from accessing complete and accurate information. The following example further illustrates the impact of inaccurate FFATA reporting by the DED. In our review of some subawards associated with FAIN B-19-DC-29-0001 (one of the DED's federal awards during the 2019 federal award year), we observed the USASpending.gov website showed the DED received $22.6 million in federal award funding, but awarded $95.9 million in subawards of these federal funds, over 4 times the federal award amount. Incomplete and inaccurate FFATA reporting leads to limited accuracy and transparency to the public. Until the errors are corrected, the DED's FFATA reporting will remain erroneous in future years.