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FINDING 2022-002 Subject: Highway Planning and Construction Cluster - Internal Controls Federal Agency: Department of Transportation Federal Program: Highway Planning and Construction Assistance Listings Number: 20.205 Federal Award Numbers and Years (or Other Identifying Numbers): DES NO 1700724, DES NO 1801597, DES NO 1700725 Pass-Through Entity: Indiana Department of Transportation Compliance Requirements: Activities Allowed or Unallowed and Allowable Costs/Cost Principles Audit Finding: Material Weakness Condition and Context The Town had not properly designed or implemented a system of internal controls, which would include appropriate segregation of duties, that would likely be effective in preventing, or detecting and correcting, material noncompliance related to expenditures made from the Highway Planning and Construction funds. The Indiana Department of Transportation (INDOT) administers the Highway Planning and construction program in the State of Indiana. The INDOT passes federal funds through to the Local Public Agencies (LPA) for qualifying projects to construct, preserve, and improve transportation on the nation's roads. When a project is awarded, the contract outlines specific requirements with which the LPA is required to comply. When the LPA signs the contract, they accept their responsibility for ensuring each local federal-aid project complies with all federal laws and regulations. The LPA is also required to appoint at least one full-time employee as the Employee in Responsible Charge (ERC) to manage the award. In order to receive reimbursement, the LPA is required to submit an LPA Invoice Voucher with supporting documentation. Invoices are to be reviewed for accuracy, and approved by the ERC, before payment by the LPA. Proof of the ERC review must be provided when requesting reimbursement on the LPA Invoice Voucher. Given INDOTs thorough review process for ensuring expenses are allowable, our objective was to verify invoices were not charged to any other federal programs and that invoices sent to the INDOT were not fraudulent. The Capital Projects Manager/ERC prepared and submitted the LPA Invoice Vouchers without a review or oversight process in place to ensure that the expenses were not charged to any other federal programs and were not fraudulent. The lack of internal controls was a systematic issue throughout the audit period. Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with 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). . . ." Cause A proper system of internal controls over the Highway Planning and Construction expenditures was not designed by management of the Town, which would include segregation of key functions to ensure Highway Planning and Construction funds were not fraudulent or charged to other federal programs. Embedded within a properly designed and implemented internal control system should be internal controls consisting of policies and procedures. Policies reflect the Town's management perspective of what should be done to effect internal controls, and procedures should consist of actions that would implement these policies. Effect Without the proper implementation of an effectively designed system of internal controls, including policies and procedures that provide segregation of duties and additional oversight as needed, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. Noncompliance with the provisions of federal statutes, regulations, and the terms and conditions of the federal award could result in the loss of future federal funding to the County. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the Town design and implement a proper system of internal controls that would provide segregation of duties for the preparation of the LPA Invoice Voucher and the review of the LPA Invoice Voucher prior to submission to the INDOT. Additionally, policies and procedures should be implemented to ensure appropriate reviews, approvals, and oversight are taking place. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.