2022-001 The District did not have adequate internal controls for ensuring compliance with wage rate requirements. Assistance Listing Number and Title: 84.425, COVID-19 Education Stabilization Fund Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: N/A Pass-through Entity Name: Office of Superintendent of Public Instruction Pass-through Award/Contract Number: COVID-19, 84.425U-0137092 COVID-19, 84.425U-0138052 COVID-19, 84.425D-0120358 COVID-19, 84.425U-0712105 Known Questioned Cost Amount: $0 Background The objectives of the Education Stabilization Fund (ESF) program are to prevent, prepare for, and respond to the COVID-19 pandemic. In fiscal year 2022, the District spent $1,851,921 of its ESF awards. This included $619,509 in the Elementary and Secondary School Relief Funds (ESSER II) subprogram (84.425D) and $1,232,412 in the American Rescue Plan Elementary and Secondary School Emergency Relief (ARP ESSER/ESSER III) subprogram (84.425U). Federal regulations require award recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Under federal wage rate requirements, also known as the Davis-Bacon Act, contractors and subcontractors that work on projects financed with more than $2,000 of federal money must pay laborers and mechanics wage rates that the U.S. Department of Labor considers being similar to what local workers have been paid for similar projects. For construction contracts subject to these wage rate requirements, the District must include a provision that the contractor and its subcontractors comply with those requirements and the Department of Labor?s regulations. This includes a requirement for the contractor and its subcontractors to submit to the District weekly, for each week in which any contract work is performed, certified payroll reports. These reports must include a copy of the payroll and a signed statement of compliance. Description of Condition During the 2021?22 school year, the District spent $1,534,314 from its ESSER II and ESSER III awards to pay a contractor and its subcontractors for the purchase and installation of new heating, ventilation and air conditioning systems. This project was part of the District?s school facility capital improvement efforts to prevent the spread of COVID-19 and enable school operations by facilitating greater air flow and filtration. Our audit found the District did not have adequate internal controls for ensuring compliance with federal prevailing wage rate requirements. Specifically, the District did not: ? Include the required prevailing wage rate clause in the contract with the contractor ? Collect weekly certified payroll reports from the subcontractors to confirm they paid laborers proper prevailing wages We consider these deficiencies in internal controls to be a material weakness, which led to material noncompliance. The issue was not reported as a finding in the prior audit. Cause of Condition District management did not know the federal prevailing wage rate clauses were required to be included in the contract. Additionally, the District relied on the subcontractors to submit weekly certified payrolls to the website for the Washington State Department of Labor and Industries (L&I). Although staff said they checked that weekly certified payrolls were uploaded to the L&I system before the District paid the contractor, the District did not document this process. Further, staff did not know the District needed to obtain all certified payroll reports each week from the subcontractors. Effect of Condition Without adequate internal controls that ensure it includes the required prevailing wage rate clauses in its contracts and collects all weekly certified payroll reports, the District cannot demonstrate it complied with federal wage rate requirements. The District could also be liable for paying any additional wages if the subcontractors did not pay prevailing wage rates to laborers working on the contract. Recommendation We recommend the District develop internal controls that ensure compliance with federal wage rate requirements. This should include inserting the prevailing wage rate clauses into contracts, as well as implementing effective monitoring processes to collect and review all weekly certified payroll reports timely from contractors and subcontractors. District?s Response The District concurs with the finding. Corrective action will include inserting a prevailing wage rate clause into all federally funded contracts, as well as collecting and reviewing all weekly certified payroll reports in a timely manner from all contractors and subcontractors to verify that prevailing wage was paid. Auditor?s Remarks We thank the District for its cooperation throughout the audit and the steps it is taking to address these concerns. We will review the status of the District?s corrective action 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 29 CFR, Section 3.3 ? Weekly statement with respect to payment of wages, and Section 3.4 ? Submission of weekly statements and the preservation and inspection of weekly payroll records, establish requirements for contractor or subcontractor submission of weekly certified payroll reports. Title 29 CFR, Section 5.5 ? Contract provisions and related matters establishes the requirements for the contracting officer to insert in full in any contract in excess of $2,000 which is entered into for the actual construction, alteration and/or repair, including painting and decorating, of a public building or public work, or building or work financed in whole or in part with federal funds the clauses listed, which includes but is not limited to the minimum wages to be paid and payrolls and basic records to be maintained (submission of weekly certified payrolls).