2022-003 The City?s internal controls were inadequate for ensuring compliance with federal requirements for suspension and debarment. Assistance Listing Number and Title: 21.027 ? COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLT 9045 Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A N/A Questioned Cost Amount: $0 Prior Year Audit Finding: N/A Background The purpose of the Coronavirus State and Local Fiscal Recover Funds (SLFRF) program is to respond to the COVID-19 pandemic?s negative effects on public health and the economy, provide premium pay to essential workers during the pandemic, provide government services to the extent COVID-19 caused a reduction in revenues collected, and make necessary investments in water, sewer or broadband infrastructure. In 2022, the City spent $1,903,054 in program funds. Federal regulations require recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Federal requirements prohibit recipients from contracting with or purchasing from parties suspended or debarred from doing business with the federal government. Whenever the City contracts for goods or services that it expects to equal or exceed $25,000, paid all or in part with federal funds, it must verify the contractors have not been suspended, debarred, or otherwise excluded. The City may accomplish this verification by obtaining a written certification from the contractor, adding a clause or condition into the contract that states the contractor is not suspended or debarred, or checking for exclusion records in the U.S. General Services Administration?s System for Award Management at SAM.gov. The City must perform this verification before entering into the contract, and it must maintain documentation demonstrating compliance with this federal requirement. Description of Condition Our audit found the City?s internal controls were inadequate for ensuring it verified the suspension and debarment status of contractors for purchases exceeding $25,000, paid all or in part with federal funds. Specifically, the City did not verify that two contractors were not suspended or debarred from participating in federal programs before paying them $113,463 in fiscal year 2022. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. Cause of Condition City staff were aware of the federal suspension and debarment verification requirements. However, City staff were unable to provide documentation to support that they verified the contractors were not suspended or debarred. Effect of Condition The City did not obtain a signed certification, insert a clause into the contract, or check SAM.gov to verify two contractors were not suspended or debarred before entering into the contracts. Without this verification, the City increases its risk of awarding federal funds to parties that are excluded from participating in federal programs. Any payments the City made to an ineligible party would be unallowable, and the federal grantor could potentially recover them. The City subsequently verified the contractors were not suspended or debarred, so we are not questioning costs. Recommendation We recommend the City strengthen internal controls to ensure all contractors it expects to pay $25,000 or more, all or in part with federal funds, are not suspended or debarred from participating in federal programs before entering into contracts with them. City?s Response The City did not verify suspension and debarment for two of its contractors because the City relied on United States Treasury guidance that such practice was not required for cities that elected the standard $10 million revenue loss for funds received through ARPA (American Rescue Plan Act). Specifically, the SLRF Final Rule FAQ 2.21 states ??as part of the revenue loss eligible use category, which is the broadest eligible use category that is capped by either the $10 million standard allowance (up to a recipient?s award size) or a recipient?s calculated revenue loss, recipients may use SLFRF funds on government services. These government services include any service traditionally provided by a government unless Treasury has stated otherwise. Eligible government services that may be covered under the revenue loss eligible use category include maintenance, improvement, or new construction of public school facilities, including those that address over-crowding and capacity constraints, support energy efficiency, and respond to health and safety concerns, among other purposes.? The City disagrees with the State Auditor?s Office in regards to inadequate internal controls. The issue here is a matter of interpretation of revenue loss ? the City?s position is that the federal funds received as replacement revenue for funds lost due to the pandemic could be used for any legitimate government purpose and without verification of suspension and debarment. Moving forward, the City will comply with the State Auditor?s Office requirement regarding verification of suspension and debarment for contractors funded with federal ARPA funded replacement revenue. Auditor?s Remarks We appreciate the steps the City is taking to resolve this issue. We will review the condition during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303 Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. Title 2 CFR Part 180, OMB Guidelines to Agencies on Governmentwide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689.