FINDING 2023-003
Subject: Child Nutrition Cluster - Activities Allowed or Unallowed, Allowable Costs/Cost Principles,
Special Tests and Provisions - Non-Profit School Food Service Accounts
Federal Agency: Department of Agriculture
Federal Programs: School Breakfast Program, National School Lunch Program, COVID-19 - National
School Lunch Program, Summer Food Service Program for Children
Assistance Listings Numbers: 10.553, 10.555, 10.559
Federal Award Numbers and Years (or Other Identifying Numbers): FY2021-2022, FY2022-2023
Pass-Through Entity: Indiana Department of Education
Compliance Requirements: Activities Allowed or Unallowed, Allowable Costs/Cost Principles,
Special Tests and Provisions - Non-Profit School Food Service Accounts
Audit Findings: Material Weakness, Modified Opinion
Repeat Finding
This is a repeat finding from the prior audit report for the Allowable Costs/Cost Principles. The prior
audit finding number was 2021-003.
Condition and Context
Food Service - Expenditures
The School Corporation 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, noncompliance related to the payroll and payroll
benefit costs charged to the grant.
The School Corporation's process was to charge food service payroll and related benefits to a
Foodservice Payroll fund, and then transfer funds from the Foodservice (School Lunch) fund
to reimburse the Foodservice Payroll fund the following month. The amounts transferred from
the School Lunch fund to the Foodservice Payroll fund did not always agree to the actual payroll
paid. Six of the eleven transfers made during the audit period did not agree to actual payroll
paid. This resulted in $144,679, in excess of actual payroll paid, being transferred from the
School Lunch fund to the Foodservice Payroll fund. The transfers that were not properly
supported were considered questioned costs.
Food Service - Revenues
The School Corporation 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, noncompliance related to food service revenues
being accounted for in the School Food Account.
A School Food Authority (SFA) is required to account for all revenues and expenditures of its
non-profit school food service in accordance with state and federal requirements. A SFA must
operate its food services on a non-profit basis; all revenue generated by the school food service
must be used to operate and improve its food services.
The School Corporation's process was to receipt the School Lunch reimbursement received
into a Federal Reimbursement fund and then transfer that reimbursement to the School Lunch
fund the following month. One individual receipted the monthly reimbursement into the School
Lunch fund, there was no documentation that an oversight or review process had been
established to ensure the receipt was posted accurately.
The April 2022 reimbursement of $158,679 was receipted into the Food Service Federal
Reimbursement fund on July 7, 2022. The reimbursement had not been transferred to the
School Lunch fund, which is the designated school food service fund, as of June 30, 2023.
The lack of internal controls and noncompliance were systemic issues 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). . . ."
7 CFR 220.7(e) states in part:
". . . the School Food Authority shall, with respect to participating schools under its jurisdiction:
. . .
(1)
(i) Maintain a nonprofit school food service;
(ii) . . . use all revenues received by such food service only for the operation or
improvement of that food service . . ."
7 CFR 210.14(a) states in part:
"(a) Nonprofit school food service. School food authorities shall maintain a nonprofit school
food service. Revenues received by the nonprofit school food service are to be used only for
the operation or improvement of such food service, except that, such revenues shall not be
used to purchase land or buildings, unless otherwise approved by FNS, or to construct
buildings. . . ."
7 CFR 220.2 states in part:
". . . Nonprofit school food service account means the restricted account in which all of the
revenue from all food service operations conducted by the school food authority principally for
the benefit of school children is retained and used only for the operation or improvement of the
nonprofit school food service. . . ."
7 CFR 210.2 states in part:
". . . Nonprofit school food service account means the restricted account in which all of the
revenue from all food service operations conducted by the sponsor principally for the benefit of
children is retained and used only for the operation or improvement of the nonprofit food
service. This account shall include, as appropriate, non-Federal funds used to support paid
lunches as provided in § 210.14(e), and proceeds from non-program foods . . ."
7 CFR 225.15(a)(1) states: "Sponsors shall operate the food service in accordance with: the
provisions of this part; any instructions and handbooks issued by FNS under this part; and any instructions
and handbooks issued by the State agency which are not inconsistent with the provisions of this part."
2 CFR 200.403 states in part:
"Except where otherwise authorized by statute, costs must meet the following general criteria
in order to be allowable under Federal awards:
(a) Be necessary and reasonable for the performance of the Federal award and be
allocable thereto under these principles.
(b) Conform to any limitations or exclusions set forth in these principles or in the Federal
award as to types or amount of cost items. . . .
(g) Be adequately documented. . . ."
Cause
A proper system of internal controls was not implemented by management of the School
Corporation, which would include segregation of key functions. Embedded within a properly designed and
implemented internal control system should be internal controls consisting of policies and procedures.
Policies reflect the School Corporation's management statements 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, the
internal control system cannot be capable of effectively preventing, or detecting and correcting, material
noncompliance. As a result, unsupported costs were transferred out of the Foodservice fund and
reimbursements were not timely receipted into the fund.
Noncompliance with the grant agreement and the compliance requirement could result in the loss
of future federal funds to the School Corporation.
Questioned Costs
Known questioned costs of $144,679 were identified as explained in the Condition and Context.
Recommendation
We recommended that management of the School Corporation design and implement a proper
system of internal controls, including policies and procedures that would provide segregation of duties to
ensure appropriate reviews, approvals, and oversight are taking place to ensure costs transferred out are
adequately documented and that reimbursements are timely receipted.
Views of Responsible Officials
For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.