Finding Text
Finding 2023-003 Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Special Tests and Provisions
Identification of the federal program:
Federal Grantor: United States Department of Homeland Security
Pass-Through Grantors:
State of Missouri, State Emergency Management Agency
Arkansas Division of Emergency Management
Assistance Listing No.: 97.036, COVID-19 Disaster Grants – Public Assistance (Presidentially Declared Disasters) (FEMA)
Pass-Through Award Numbers and Award Periods:
Project# 185883 P/W# 529 01/20/2020–09/14/2020
Project# 699963 P/W# 624 01/01/2022–07/01/2022
Project# 699667 P/W# 233 01/01/2022–07/01/2022
Project# 699670 P/W# 211 01/01/2022–07/01/2022
Criteria or Specific Requirement (Including Statutory, Regulatory, or Other Citation):
2 CFR Section 200.303 of the Uniform Guidance states the following regarding internal control:
“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).”
As described in Title 2 Code of Federal Regulations (C.F.R.) § 200.333, financial records, supporting documents, statistical records and all other non-Federal entity records pertinent to a Federal award must be retained for a period of three (3) years from the date of submission of the final expenditure report or, for Federal awards that are renewed quarterly or annually, from the date of the submission of the quarterly or annual financial report, respectively, as reported to the Federal awarding agency or pass-through entity in the case of a subrecipient.
In addition, 2 CFR Section 200.403 of the Uniform Guidance states the following regarding the factors affecting the allowability of costs:
“Except where otherwise authorized by statue, costs must meet the following general criteria in order to be allowable under Federal awards:
(g) Be adequately documented.”
Condition:
Adequate documentation was not retained to support the average unit cost applied to COVID-19 personal protective equipment (PPE) inventory usage charged to the FEMA program as Force Account Material (FAM) costs.
In addition, for 12 of 40 non-FAM costs (including purchased equipment, purchased supplies, and rental equipment) charged to the program, we noted adequate documentation was not retained to evidence review and approval of the expenditure for allowability.
Cause:
Management did not have sufficiently designed internal controls in place over the review and approval of average unit costs applied to FAM usage charged to the FEMA program.
In addition, for 11 non-FAM (purchased equipment) transactions from fiscal year 2020 charged to the FEMA program, expenditure approvals were maintained in a legacy general ledger system and upon migration to the current general ledger system, the approval trail was not retained. For one other non-FAM (purchased equipment) transaction from fiscal year 2022 charged to the FEMA program, the required level of approvals of the purchase-card transaction was not retained.
Effect or potential effect:
For FAM costs, Mercy Health is not in compliance with the general criteria of maintaining adequate documentation that supports the average unit costs used in the calculation and determination of the costs charged to the federal program.
For non-FAM costs, Mercy Health may not be compliant with the allowability of costs requirements of the FEMA program.
Questioned costs:
$45 – Assistance Listing No. 97.036 (COVID-19).
Context:
We sampled 40 FAM costs (totaling $2,826 in federal expenditures) and agreed the PPE inventory item’s usage to supporting requisition documentation. In addition, we obtained the external vendor invoice for the purchase of the PPE inventory item immediately prior to the usage of the PPE inventory item. However, for all 40 sampled FAM costs, we could not verify the average unit cost that is used in determining the amount charged to the FEMA program. The net overstatement of the costs based on the average unit cost for these 40 sampled FAM costs in comparison to the external vendor invoices was $45.
In addition, we sampled 40 non-FAM costs (totaling $218,110 in federal expenditures) and noted that 12 purchased equipment transactions (totaling $182,048 in federal expenditures) did not have support retained to evidence review and approval of the expenditure for allowability.
FAM costs and non-FAM costs represent 71% and 29%, respectively, of total federal expenditures for the FEMA program of $3,383,897 for the year ended June 30, 2023.
Identification as a repeat finding, if applicable:
The finding is not a repeat finding from the prior year.
Recommendation:
Management should design and implement effective internal controls over the review and approval of all costs charged to the FEMA program.
Views of Responsible Officials:
Mercy Health has a system to calculate average cost of inventory items. We rely on this system, but it was not tested as part of compliance.
In addition, Mercy Health has a robust capital approval process (for all equipment) and financial approval thresholds. All COVID purchases were logged in the capital system (VFA) and approvals were documented. During this time, we changed approval systems from VFA to Strata. We will ensure all capital is reviewed and approved in Strata going forward.