Finding 498406 (2023-013)

2023-013 CACFP Subrecipient Monitoring BCFNA subrecipient risk assessment and monitoring procedures are not sufficient to ensure CACFP subrecipient compliance with program requirements. During the year ended June 30, 2023, the BCFNA disbursed approximately $75 million to over 750 CACFP subrecipients, which consist of child and adult care centers and sponsors of centers. Disbursements to subrecipients represented approximately 98 percent of the program's expenditures. As part of its pass-through responsibilities, 7 CFR Section 226.6(a)(5), the BCFNA is required to ensure subrecipients effectively operate the program. Regulation 2 CFR Section 200.332(b) requires pass-through entities to evaluate each subrecipient's risk of noncompliance with federal statutes, regulations, and the terms and conditions of the subaward for purposes of determining the appropriate subrecipient monitoring. Regulation 2 CFR Section 200.332(d) requires pass-through entities to monitor the activities of the subrecipient as necessary to ensure the subaward is used for authorized purposes, complies with the terms and conditions of the subaward, and achieves performance goals. The BCFNA's subrecipient monitoring process, outlined in the Internal Nutritionist Manual, provides the requirements for monitoring the CACFP facilities/sponsors. The manual provides the planned frequency and type of monitoring activities, monitoring methods, and corrective action requirements. The manual requires the preparation of a risk assessment at the end of each monitoring review that assigns a grade of A, B, B-, or C to the facility/sponsor based on the number and severity of deficiencies and findings. Facilities/sponsors that receive a C grade are determined to be "Seriously Deficient." The assigned grade determines the required timing of future monitoring reviews of the facility/sponsor. Facilities/sponsors with an A grade will be next monitored in 3 years, a B grade within 2 years, a B- grade within 6 months to 1 year, and a C grade within 90 days. During each monitoring review, BCFNA personnel review documentation supporting a sample of claims during a test month. Any identified errors and associated overclaims/underclaims exceeding established thresholds are recouped/reimbursed in the facility's/sponsor's future claims. When reviews identify noncompliance, facilities/sponsors are required to prepare and submit a Corrective Action Plan (CAP) to the BCFNA. In addition, as noted at finding number 2023-012, the BCFNA relies on these subrecipient monitoring procedures to prevent and detect meal reimbursement claim errors. Monitoring reviews have identified significant issues and claim errors, including some potentially fraudulent activity, and led to over 15 contract terminations in recent years. To test compliance with subrecipient monitoring requirements, and to evaluate the effectiveness of BCFNA monitoring procedures, we reviewed and analyzed a randomly-selected sample of 60 BCFNA monitoring reviews conducted for 58 CACFP facilities/sponsors during the year ended June 30, 2023. While our review found the sample monitoring reviews were performed in accordance with the policies and procedures outlined in the Internal Nutritionist Manual, we identified areas where these policies and procedures could be strengthened and improved to ensure facilities/sponsors comply with program requirements and submit proper claims. Our review and analysis of the 60 sampled monitoring reviews noted the monitoring reviews identified significant errors, noncompliance, disallowances, and overclaims. Our comparison of the sampled reviews to prior reviews noted deficient facilities/sponsors generally had continued deficiencies and little improvement from prior reviews, as shown below: • 30 facilities/sponsors received an A grade, while 28 received grades of B, B-, or C • Of the 26 facilities/sponsors that received grades of B, B-, or C, and had a prior review, 19 (73 percent) received the same or lower grade than the prior review • Of the 5 facilities/sponsors that received a C grade and had a prior review, 2 (40 percent) received the same grade as the prior review, and 3 (60 percent) received a lower grade than the prior review • 2 of the 5 facilities/sponsors that received a C grade were terminated as a result of the review or a subsequent 90-day follow-up review • For 41 of 58 (71 percent) monitoring reviews for which the BCFNA tested claims (with claims totaling $482,654 during the test months), the BCFNA identified net overclaims totaling $50,674, or at least 11 percent of the reimbursements tested. A. Risk Assessments The BCFNA prepares and uses risk assessments to determine the extent of monitoring necessary for each facility/sponsor. However, these risk assessments consider only the previous monitoring review grade (conducted up to 3 years previously), and do not consider other pertinent risk factors outlined in federal regulations. Regulation 2 CFR Section 200.332(b) suggests risk assessments should consider the subrecipient's prior experience with the same or similar subawards, the results of previous audits, whether the subrecipient has new personnel or new or substantially-changed systems, and the extent and results of federal awarding agency monitoring. Upon our inquiries about these risk factors, BCFNA officials indicated they are not required to consider these other factors in the risk assessments. While federal regulations provide the BCFNA discretion in selecting risk factors to consider, limiting risk assessments to only one risk factor and ignoring other relevant factors hinders the BCFNA 's ability to identify red flags and fraud risk factors and properly assess facility/sponsor risk of noncompliance. Sufficient risk assessments are necessary to ensure monitoring reviews are conducted with adequate frequency to help ensure subrecipient compliance with program requirements. Finding classification This finding is classified as a significant deficiency in internal control and nonmaterial noncompliance with the federal subrecipient monitoring requirements regarding risk assessments. As noted in the finding, BCFNA risk assessments do not meet the spirit of the federal regulation which suggests the extent and level of monitoring for each subrecipient be based on various risk factors. As a result, there is a risk that monitoring reviews will not be performed as frequently and thoroughly as needed to identify and address subrecipient noncompliance. Because the BCFNA does perform risk assessments for each subrecipient and does monitor the subrecipients with lower grades with more frequency, the finding did not rise to a level of material noncompliance, and was therefore considered nonmaterial noncompliance. Our decisions regarding the classification of the internal control deficiencies were made in accordance with AU-C Section 935, Compliance Audits and the AICPA Audit Guide: Government Auditing Standards and Single Audits (Audit Guide). In addition to the definitions outlined in part B of this finding, the Audit Guide states "[a] significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance." Our evaluation of the deficiencies for the possibility and magnitude of potential noncompliance determined the deficiencies are considered a significant deficiency. B. Subrecipient Monitoring Procedures Our review of BCFNA subrecipient monitoring procedures noted areas that should be strengthened and improved. Corrective action plans BCFNA CAP review procedures are not adequate to ensure facilities/sponsors have made or planned sufficient corrective actions to address noncompliance, as required by federal regulations. The Internal Nutritionist Manual requires nutritionists to review subrecipient CAPs outlining corrective actions taken or planned for completeness and to ensure the required action items are adequately addressed. However, this review is generally performed without verifying the accuracy of the CAP information through review of supporting documentation, testing, or other methods. The BCFNA does not require submission of supporting documentation of corrective actions taken or planned. BCFNA officials indicated they may request supporting documentation on occasion depending on the complexity of the finding; and indicated they verify the CAP during 90-day follow-up reviews of Seriously Deficient facilities/sponsors. Of the 60 monitoring reviews in our sample, 51 required a CAP. The monitoring review documentation indicated the CAP was verified during the five 90-day follow-up reviews and one technical assistance review, but there was no documentation that the nutritionist verified the CAP information for any of the remaining 45 reviews (88 percent of the 51 reviews that required a CAP). Furthermore, our review of monitoring review documentation noted numerous instances where the prior year CAP indicated a specific deficiency was addressed, but the same deficiency was again noted in the subsequent review. Regulation 2 CFR Section 200.332(d) provides that monitoring must include following up and ensuring the subrecipient takes timely and appropriate action on all deficiencies identified. The USDA CACFP handbook, Monitoring Handbook for State Agencies (USDA Monitoring Handbook), provides that follow-up reviews (on-site or desk reviews of paperwork) may be conducted any time corrective action is required to ensure the facility/sponsor has completely corrected the review findings, according to their approved corrective action response. Example CAP forms included in the USDA Monitoring Handbook require facilities/sponsors to submit supporting documentation along with the CAP to verify corrections were made or will be implemented. The USDA CACFP handbook, Serious Deficiency, Suspension, & Appeals for State Agencies & Sponsoring Organizations, provides that facilities/sponsors deemed Seriously Deficient must submit additional supporting documentation with the CAP to document that corrective actions have occurred; this might include copies of income eligibility forms, enrollment rosters, staff training documentation, site monitoring reports, menus, child nutrition labels or manufacturers’ product analysis sheets or recipes, attendance records, meal count forms, and itemized food receipts. BCFNA officials stated they believe their practices comply with federal regulations. They also stated they believe federal regulations do not require physical verification or review of supporting documentation to verify the CAPs immediately at the time of submission, and following up during the next scheduled review is allowed. Without verifying information in CAPs submitted, the BCFNA cannot demonstrate compliance with federal regulations and lacks assurance the facilities/sponsors took timely and appropriate action on all deficiencies identified during monitoring reviews. In addition, there is increased risk that deficiencies will not be corrected and will continue without detection. Claims testing The Internal Nutritionist Manual and monitoring practices provide for testing of a sample of claims within only 1 test month during each monitoring review, and do not provide for expanded testing when significant errors are identified. BCFNA personnel indicated monitoring reviews are limited to only 1 test month since the USDA Monitoring Handbook does not require expanded testing of records beyond 1 month. While the BCFNA performs additional testing during 90-day follow-up reviews for facilities/sponsors deemed Seriously Deficient, additional testing is not performed in any other situation. For example, one facility had a 43% overpayment rate and received a B grade and another facility had a 29% overpayment rate and received a B- grade; however, additional testing was not performed for either facility and subsequent monitoring was not yet scheduled for 2 years and 1 year, respectively. The USDA Monitoring Handbook suggests testing activities during 1 test month, and also suggests the state agency may determine additional review is warranted and review records beyond the test month to determine the extent of the noncompliance. When significant errors are identified, additional testing would help BCFNA nutritionists determine the extent that instances of noncompliance are isolated versus pervasive. Such information would be valuable to the overall conclusions and grade assigned to the review, and in decisions regarding subsequent monitoring. Overclaim recoupment BCFNA subrecipient monitoring procedures do not provide for identification and pursuit of recoupment of all overpayments associated with errors identified during monitoring reviews. When overclaims due to noncompliance with eligibility requirements are identified during monitoring reviews, the BCFNA only identifies and seeks recoupment for the overclaims made during the test month. Overclaims associated with eligibility errors begin at the time the eligibility determination was made and continue until the error is discovered. Although the BCFNA is aware noncompliance occurred during the month(s) before the test month, the BCFNA does not attempt to identify those overclaims. In addition, when a facility/sponsor is terminated, the BCFNA does not always identify or seek recoupment of overclaim amounts. In our sample of 60 monitoring reviews, contracts for 2 sponsors were terminated as a result of a 90-day follow-up review. For these 2 sponsors, in the reviews prior to the 90-day follow-up reviews, the BCFNA identified and recouped significant overclaims ($21,998, or 99 percent of total claims tested for one sponsor; and $3,501, or 64 percent, for the other sponsor). In the subsequent 90-day follow-up reviews for these 2 sponsors, significant claim errors were identified in the test month claims, which totaled $12,445; however, the test month claims were not fully tested, and overclaims were not identified or recouped. Any overclaims not identified and recouped from these 2 terminated sponsors would be considered questioned costs; however, those questioned costs are unknown. BCFNA officials indicated they do not pursue recoupment of overclaims beyond the test month because this practice is allowed by the USDA. They indicated they pursue recoupment of overclaims for facilities/sponsors with terminated contracts on a case-by-case basis, considering various factors. However, 7 CFR Section 226.14 provides that state agencies shall disallow and recover any portion of a claim for reimbursement not properly payable, including claims not made in accordance with recordkeeping requirements. Pursuing full recoupment would hold facilities/sponsors accountable for all overclaims and would serve as a deterrent to future errors, noncompliance, and overclaims. Furthermore, without procedures to identify and recoup all overclaims, there is a risk that significant overclaims will go undetected and unrecouped, and questioned costs could be significant. Conclusions In addition to complying with federal requirements, strong subrecipient monitoring procedures are necessary to ensure facilities/sponsors comply with program requirements, submit proper claims, and address deficiencies identified. Without strong internal controls, there is increased risk of noncompliance, errors, fraud, waste, and abuse of federal funds. Strong monitoring procedures would ensure facilities/sponsors are held accountable for and correct errors and noncompliance identified. The BCFNA should enhance procedures to provide for verification of CAPs and identification and recoupment of overclaims associated with all errors identified during monitoring reviews, as required by federal regulations; and expand testing when significant errors are identified. Regulation 2 CFR Section 200.332(g) requires pass-through entities to consider whether the results of the subrecipient's audits, on-site reviews, or other monitoring indicate conditions that necessitate adjustments to the pass-through entity's own records. Furthermore, 2 CFR Section 200.303(a) requires the non-federal entity to "[e]stablish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-federal entity is managing that 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." Finding classification This finding is classified as a material weakness in internal control and material noncompliance with the federal subrecipient monitoring requirements. Our audit of the BCFNA's compliance with federal subrecipient monitoring requirements concluded the BCFNA did not materially comply with federal requirements to ensure subrecipients effectively operate the CACFP and to monitor the activities of the subrecipient as necessary to ensure the subaward is used for authorized purposes, complies with the terms and conditions of the subaward, and achieves performance goals. This conclusion is based on the facts, deficiencies, and noncompliance stated in the finding, including the following: 1) Disbursements to subrecipients represented approximately 98 percent of the CACFP expenditures. 2) BCFNA subrecipient monitoring reviews identified significant errors, noncompliance, disallowances, and overclaims; and deficiencies identified often continued for years with little improvement from review to review. The 11 percent subrecipient payment error rate identified by the BCFNA, which exceeds our audit materiality threshold of 4 percent, along with the high rate of continued noncompliance, serve as indicators of the effectiveness or ineffectiveness of the BCFNA monitoring process. 3) The BCFNA did not comply with specific components of federal subrecipient monitoring requirements, including properly following up and ensuring subrecipients take timely and appropriate action on all deficiencies identified and disallowing and recovering improper payments. 4) Multiple deficiencies in monitoring procedures were identified, including the previously-listed deficiencies and inadequate payment testing. In conducting a single audit in accordance with 2 CFR Part 200 (Uniform Guidance), auditors are required by 2 CFR Section 200.514(d)(1)(2), to determine whether the auditee has complied with federal statutes, regulations, and the terms and conditions of federal awards that may have a direct and material effect on each of its major programs, as outlined in the OMB Compliance Supplement. While compliance with the USDA CACFP handbooks was considered in the our audit, our conclusion on compliance is based on the BCFNA's compliance with the federal statutes and regulations, as required. Our decisions regarding the classification of the internal control deficiencies were made in accordance with AU-C Section 935, Compliance Audits and the Audit Guide. The Audit Guide provides the following definitions regarding internal control deficiencies: "A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis." "A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis." "A reasonable possibility exists when the likelihood of the event is either reasonably possible or probable…" Reasonably possible is "[t]he chance of the future event or events occurring is more than remote but less than likely." Probable means "[t]he future event or events are likely to occur." The failure to design and implement adequate controls and procedures over subrecipient monitoring led to material noncompliance with the subrecipient monitoring requirements. The BCFNA's controls failed to develop an effective subrecipient monitoring process that ensures subrecipients use subawards for authorized purposes, comply with the terms and conditions of the subawards, and achieve performance goals. Because the internal control deficiencies have not been corrected, it is probable that the material noncompliance will continue. For these reasons, the deficiencies are considered a material weakness. Recommendations The DHSS through the BCFNA: A. Implement a CACFP subrecipient risk assessment process that is consistent with federal regulations. B. Review, strengthen, and enforce subrecipient monitoring procedures to ensure CACFP facilities/sponsors comply with program requirements, submit proper claims, and address deficiencies identified. The BCFNA should enhance procedures to provide for verification of CAP information and identification and recoupment of overclaims associated with all errors identified during monitoring reviews, as required by federal regulations; and expand testing when significant errors are identified. The DHSS should identify and recoup the overclaims for the 2 terminated sponsors noted in this finding. Auditee's Response A. We disagree with the auditor's finding. Our Corrective Action Plan includes an explanation and specific reasons for our disagreement. B. We disagree with the auditor's finding. Our Corrective Action Plan includes an explanation and specific reasons for our disagreement. Auditor's Comment Finding A. The DHSS Corrective Action Plan (CAP) states the DHSS disagrees with the State Auditor's Office (SAO) recommendation because they believe the BCFNA risk assessment process considers relevant information and complies with the substance and spirit of the federal regulations. During the audit, BCFNA officials stated their risk assessments consider only one risk factor because they are not required to consider all suggested risk factors outlined in 2 CFR Section 200.332(b). However, in their CAP, the DHSS claims the BCFNA formal risk assessment process considers all suggested risk factors. During our audit, the documented risk assessments completed by DHSS for the 58 sampled subrecipients showed the BCFNA only considered one risk factor, and did not consider other pertinent risk factors outlined in 2 CFR Section 200.332(b) which contradicts the DHSS position presented in their CAP. Additionally, the CAP indicates considerations for new personnel or systems are made during onsite monitoring visits; however, 2 CFR Section 200.332(b) requires these considerations to be evaluated prior to the monitoring visit as part of the risk assessment process. Finding B. The DHSS CAP states the DHSS disagrees with the SAO's recommendation that monitoring procedures should be strengthened. The CAP states the DHSS believes the BCFNA has a strong system of internal controls over subrecipient monitoring documented in the Internal Nutritionist Manual and believes these controls are in compliance with federal regulations. However, in making these statements, the DHSS has failed to recognize and acknowledge existing subrecipient monitoring procedures have allowed serious and material subrecipient noncompliance. As part of its pass-through responsibilities outlined in the federal regulations, the BCFNA is required to ensure subrecipients comply with federal regulations and terms and conditions of the subaward, and effectively operate the program. Given the level of material subrecipient noncompliance that has occurred and continues to occur, BCFNA subrecipient monitoring procedures are clearly not sufficient to prevent future noncompliance. The BCFNA has focused on individual components of its systems, but has not holistically evaluated whether the procedures, collectively and in their entirety, comply with the federal subrecipient monitoring requirements. The BCFNA continues to strictly follow existing procedures without making adequate adjustments to address and mitigate the serious subrecipient problems. Recognizing problems and reacting to those problems are critical components of an effective internal control system designed to ensure compliance with the federal requirements. The finding addresses three specific aspects of the BCFNA subrecipient monitoring program that could be strengthened to help bring the BCFNA into overall compliance with federal subrecipient monitoring requirements. Some individual processes are not in compliance with federal regulations and some could be improved by doing more than what is minimally required. The DHSS CAP argues they are in full compliance with each of these aspects and no improvements are needed. Corrective action plans The DHSS CAP claims the BCFNA process to verify subrecipient CAPs during the next scheduled review is in compliance with federal regulations which require the BCFNA to ensure subrecipients take timely and appropriate action. While verifications performed during 90-day follow up reviews would be considered timely, for verifications conducted 6 months to 3 years after receipt of the subrecipient CAP, it is impossible for the BCFNA to ensure corrective action was taken within timeframes indicated in the subrecipient CAP or to demonstrate compliance with this monitoring requirement. The DHSS CAP claims this process is in accordance with USDA regulations; however, as noted in the finding, USDA guidance suggests the BCFNA perform follow up reviews to ensure the subrecipient has completely corrected the review findings. When follow up reviews are not performed timely, the BCFNA has no assurance that subrecipients are in compliance with their CAPs. Claims testing The DHSS CAP claims BCFNA procedures are adequate since they comply with the minimum USDA guidance for testing claims. The CAP further claims the Internal Nutritionist Manual allows for, and the BCFNA conducts, expanded testing beyond the test month when warranted. However, the manual does not mention testing beyond the test month, and no expanded testing was performed for any of the 60 sampled monitoring reviews. The finding notes instances where subrecipients had significant overpayment rates (43% and 29%), yet no additional testing was performed and subsequent monitoring was not scheduled for 1 or 2 years. This indicates the DHSS claims testing could be improved to ensure compliance with subrecipient monitoring responsibilities. Overclaim recoupment The DHSS CAP claims the BCFNA practice to pursue recoupment of overclaims for only the test month is adequate since this minimum practice is allowed by the USDA. This practice could be viewed as an incentive for subrecipients to intentionally overclaim meals, knowing that only 1 month of overclaims (out of a period up to 3 years since the last monitoring review) would be subject to repayment. The CAP also claims recoupment of overclaims is pursued for subrecipients with terminated contracts on a case-by-case basis; however, such recoupment was not pursued for the 2 applicable sampled reviews with significant claims errors identified in the test month. Without pursuing recoupment of overclaims, the BCFNA is not in compliance with 7 CFR Section 226.14 and lacks strong policies for deterring future noncompliance and overclaims. The DHSS CAP argues the 11 percent error rate, based on the sample of monitoring reviews performed during the year ended June 30, 2023, is inflated because the reviews are proportionally more likely to include a higher number of claims with discrepancies. However, this error rate is just one indicator of the serious ongoing subrecipient problems. The DHSS CAP includes various misrepresentations of the contents of the finding. These statements, which attempt to negate or reduce the significance of the noncompliance noted in the finding, are listed below (in quotes): 1) "The SAO has not noted any specific noncompliance with federal requirements regarding subrecipient monitoring." This statement is incorrect. The finding states the BCFNA did not comply with overall subrecipient monitoring requirements as well as specific components of those requirements, including properly following up and ensuring subrecipients take timely and appropriate action on all deficiencies identified and disallowing and recovering improper payments. 2) "Out of the SAO's test sample of 60 monitoring reviews, only 9 of the overclaims were over the $600 threshold of acceptable risk set by the USDA." This statement is incorrect. Of the 36 sampled monitoring reviews with overclaims totaling $50,954, 13 reviews with overclaims totaling $46,724, were in excess of $600. As noted in the finding, if the remaining 23 overpayments of $600 or less, totaling $4,230 are excluded, the error rate is at least 9 percent. Subrecipient data clearly shows significant subrecipient noncompliance is occurring within the CACFP program. These problems cannot be denied and should not be ignored. Until the DHSS recognizes these problems, acknowledges there are weaknesses in its existing procedures, and takes action to strengthen its procedures, significant subrecipient noncompliance will likely continue.