Finding 366885 (2022-001)

Finding 2022-01 – Material Weakness in Internal Control over Compliance with Allowable Costs and Reporting - Child Care and Development Block Grant- Assistance Listing #93.575, Child Care Mandatory and Matching Funds of the Child Care Development Fund - Assistance Listing #93.596 Criteria or Specified Requirement Accounting staff submit periodic reimbursement requests to the California Department of Social Services for expenses reimbursable under the Council's federal Child Care Development Fund contract. Costs are recognized as the liability is incurred consistent with Generally Accepted Accounting Principles. Management uses two pool funds to allocate central office costs to its various funds, activities and projects. Payroll and related expenses are allocated based on direct hours, and facilities expenses are allocated based on square footage. Condition Found In review of the allocation from the two pool funds, it was noted that allocation ratios had not been updated from the prior year amounts despite the program mix changing. As such, the other funds, activities and projects are charged more than their share of those costs. A review of the year end accounts for accrued payroll and payroll taxes showed stale balances that had not been reconciled to actual accrued costs. Cause Management indicated that the loss of the Executive Director during the year placed too much pressure on the finance department to give them the time to undertake a new indirect calculation and to adequately review and tie out balance sheet accounts. Effect Some grant funds or projects receive excess pool allocations and costs that cannot be traced to actual expenses. Questioned Costs Monthly allocations are made within the accounting software but the hour and square footage totals and year end balance sheet accruals are not documented; consequently, there is no way to recompute the allocation to include all funds, activities and projects used by the Organization. Since audit procedures were performed to vouch cutoff, accruals, reclassifications, and allowable costs eligible for reimbursement as of June 30, 2022, there are no questioned costs. Recommendation We recommend that the indirect cost allocation be updated at least annually to include all funds, activities and projects so that each shares in the pool cost. After consultation regarding possible remedies to the condition, the Council engaged an outside accounting firm to provide financial oversight. We recommend that the Council continue that relationship, or a similar relationship until such time as they can develop sufficient capability among staff to meet the requirements for oversight.