Criteria Pursuant to 2 CFR §200.303, the Academy is required to establish and maintain effective internal controls over Federal awards that provide reasonable assurance that Federal awards are managed in compliance with Federal statutes, regulations, and the terms and conditions of the awards. Additionally, pursuant to 2 CFR Part 200, Subpart E, costs charged to Federal awards must be adequately documented, properly supported, accurately recorded, and allowable under applicable Federal program requirements. Management is responsible for monitoring grant activities and ensuring that third-party service providers and grant administrators perform their duties in accordance with applicable requirements. Condition During testing of 26 transactions charged to the FEMA Public Assistance Program, we identified the following exceptions: 1. The Academy transferred $30,000 from its FEMA Public Assistance bank account to its operating account as reimbursement of 2023 Single Audit costs. Although management indicated that the expenditure appears to be allowable under FEMA requirements, the Academy could not provide documentation demonstrating that the reimbursement request had been adequately supported, processed, or otherwise substantiated as of the date of our testing. 2. The Academy transferred $30,144 from its FEMA Public Assistance bank account to its operating account as an expense reimbursement. The Academy could not provide sufficient supporting documentation for the expenditure or documentation supporting the related reimbursement request. Accordingly, the amount was considered a questioned cost. 3. The Academy charged a payment of $72,756 to the FEMA Public Assistance Program and recorded the transaction as a withholding for services rendered remitted to the Puerto Rico Department of the Treasury. However, supporting documentation indicated that the amount represented construction retainage. Although the cost was allowable, the transaction was improperly classified. Management subsequently corrected the error by returning the funds to the FEMA Public Assistance account after year-end. 4. The Academy recorded two transactions totaling $130,620 as assets rather than Federal expenditures. 5. The Academy recorded duplicate entries in the accounting records for two transactions totaling $107,812 related to FEMA expenditures. However, no duplicate disbursements resulted from these duplicate entries. Context The exceptions noted represent 5 of the 26 transactions selected for testing. The deficiencies identified involved reimbursement processing, documentation retention, expenditure classification, and oversight of grant administration activities. Collectively, these exceptions indicate that management's controls over FEMA grant compliance were not operating effectively to ensure that expenditures were adequately supported, properly classified, reviewed, and recorded in accordance with applicable Federal requirements before Federal funds were drawn down or utilized. Effect The lack of effective controls over FEMA grant administration increased the risk that: • Federal expenditures may be charged to the program without adequate supporting documentation. • Reimbursements may be requested or recorded without adequate review and support. • Expenditures may be improperly classified in the accounting records. • Noncompliance with FEMA and Uniform Guidance requirements may not be detected and corrected in a timely manner. • Management may not have reliable information for monitoring and reporting Federal program activity. Cause The Academy outsourced significant FEMA grant administration activities and relied on third-party personnel to prepare reimbursement requests and manage grant compliance activities. However, management did not establish sufficient monitoring procedures to review reimbursement requests, verify supporting documentation, evaluate reimbursement activity, and ensure the proper recording of FEMA-related transactions. Additionally, personnel responsible for reviewing Federal grant transactions had limited training in FEMA grant administration and Uniform Guidance requirements. As a result, deficiencies related to documentation, reimbursement processing, and accounting classifications were not prevented or detected on a timely basis. Questioned costs Unsupported FEMA reimbursement totaling $30,144. The $30,000 reimbursement related to Single Audit costs was not reported as questioned costs because management provided documentation indicating that the underlying cost appears allowable and may be eligible for reimbursement upon proper submission and approval under FEMA requirements. Recommendation We recommend that the Academy strengthen its internal controls over FEMA grant administration by: 1. Establishing procedures to ensure that reimbursement requests are adequately supported, reviewed, approved, and submitted in accordance with FEMA requirements. 2. Maintaining complete documentation supporting all expenditures and reimbursement requests charged to Federal awards. 3. Requiring periodic reconciliation of reimbursement requests, supporting documentation, amounts received, and amounts recorded in the accounting records. 4. Implementing supervisory reviews of Federal grant expenditures and related accounting entries before transactions are processed and recorded. 5. Assigning qualified personnel to monitor and evaluate activities performed by third-party grant administrators and other service providers involved in FEMA grant administration. 6. Providing periodic training regarding FEMA Public Assistance requirements, Uniform Guidance requirements, and Federal grant management responsibilities to personnel responsible for Federal grant administration. Views of responsible officials and corrective actions Management response is reported in the “Corrective Action Plan” at the end of this report.