Finding Text
The Marshall County Fiscal Court failed to implement adequate controls over the Disaster Grants – Public Assistance (Presidentially Declared Disaster) (FEMA) program to ensure all compliance requirements are being met. Disbursements for the FEMA program were not handled in the manner prescribed by the county’s administrative code, or the manner prescribed by the Department For Local Government as required by KRS 68.210. The auditor selected a sample size of forty federal expenditures related to the FEMA program. Of the forty expenditures tested, thirty-four expenditures, totaling $5,049,474, did not have purchase orders as required.
Furthermore, the fiscal court did not have any internal control procedures in place to verify that FEMA expenditure requests, and record keeping were being done correctly. This resulted in the county’s Schedule of Federal Awards and Expenditures (SEFA) being materially misstated, and several schedules and reports being incomplete or inaccurate.
The fiscal court relied heavily on a third-party administrator for all FEMA project activity and relied on the third-party’s controls to satisfy compliance requirement. Also, according to county personnel, at that time the fiscal court decided not to require purchase orders for contracted services and disaster related expenditures.
By relying on a third-party administrator’s controls, without enacting any internal controls, the county increased the risk of misappropriation of funds, and noncompliance with federal grant guidelines. This could have potentially led to questioned costs that would have to be repaid, and less federal funding in the future.
By not requiring purchase orders, there is an increased risk of misappropriation of funds and overspending budget line items. Furthermore, the fiscal court is not in compliance with the Department of Local Government’s policies or their own Administrative Code.
Strong internal controls dictate that the fiscal court should review all federal expenditure documentation and reports to ensure compliance requirements are being met, and activities are being completed accurately. Strong internal controls also require purchase orders be approved and issued prior to items being ordered and expenses being incurred, to ensure available line-item appropriation exists.
The Marshall County Administrative Code Section 4.6 states, “All claims for payment from the County shall be filed in writing with the County Judge. Each claim shall be recorded by date, receipt and purchase order number and presented to the Fiscal Court at its next meeting.”
2 CFR Part 200, Appendix XI, the Compliance Supplement for program 4-97.036, states, “Cost must be: Consistent with applicant’s internal policies, regulations, and procedures that apply uniformly to both federal awards and other activities of applicant.”
KRS 68.210 gives the State Local Finance Officer the authority to prescribe a system of uniform accounts. The Department of Local Government (DLG) requires counties to implement a purchase order system which includes issuing purchase orders for all claims expended from the county’s budget. Good internal controls require the use of established procurement policies to ensure that federal disbursements are handled in the manner consistent with the treatment of non-federal disbursements.
In addition, according to a memorandum from the Department for Local Government (DLG) dated August 4, 2016, “[t]he main purpose of this system is to ensure that purchases can be made if there are sufficient appropriations available within the amount of line items in the county’s budget. Because of this, it is a requirement by the State Local Finance Officer that all counties have a purchase order system and follow the guidelines prescribed on Page 54 of the County Budget Preparation and State Local Finance Officer Policy Manual.” Furthermore, DLG highly recommends that counties accept the practice of issuing purchase orders for payroll and utility claims.
Auditor recommends that the Marshall County Fiscal Court strengthen internal controls over the federal expenditure process by ensuring all activity related to federal expenditures is reviewed for accuracy and compliance. Auditor further recommends that purchase orders are issued for all expenditures prior to the purchase being made.