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FINDING 2022-002 Subject: CDBG - Entitlement Grants Cluster - Reporting Federal Agency: Department of Housing and Urban Development Federal Programs: Community Development Block Grants/Entitlement Grants, COVID-19 - Community Development Block Grants/Entitlement Grants Assistance Listings Number: 14.218 Federal Award Numbers and Years (or Other Identifying Numbers): B-18-MC-18-0012, B-19-MC-18-0012, B-20-MC-18-0012, B-20-MW-18-0012, B-21-MC-18-0012 Compliance Requirement: Reporting Audit Finding: Material Weakness Condition and Context The City 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. Recipients are required to submit performance reports annually or quarterly depending on the specific CDBG Entitlement Grant received. Performance reports required to be submitted include the Consolidated Annual Performance and Evaluation Report (CAPER), the IDIS Section 3 Report, and the Quarterly Performance Report (QPR) for the Neighborhood Stabilization Program (NSP) grant. As the City did not receive a NSP grant, its required performance reports were the CAPER and the IDIS Section 3 Report. The City submitted one CAPER and one IDIS Section 3 Report during the audit period; however, a single employee prepared and submitted the reports without a documented oversight, review, or approval process. The lack of internal controls was a systemic 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 was not implemented by management of the City, 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 City'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, 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 City. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the City design and implement a proper system of internal controls that would provide segregation of duties for the preparation and review of federal reports to ensure appropriate reviews, approvals, and oversights 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.