FINDING 2022-005 Subject: CDBG - Entitlement Grants Cluster - Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Program Income 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-19-MC-18-0015, B-20-MC-20-0015, B-20-MW-18-0015, B-21-MC-18-0015, B-22-MC-18-0015 Compliance Requirements: Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Program Income Audit Findings: Material Weakness, Modified Opinion Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2021-003. Condition and Context Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Program Income - Use Payroll The City charged employee salaries for Community Development Block Grants/Entitlement Grants (grant) activities to the grant based on fixed percentages. Adequate time and effort records were not maintained to support the percentages charged to the federal award. Two employees were paid from the grant funds during the audit period: ? The first employee's salary and benefits were being paid 50 percent from federal grant funds. However, documentation to support the distribution of the employee's pay (i.e., time and effort logs) did not begin until November 19, 2022. The amount paid from the beginning of the audit period until November 19, 2022, was $48,677. As this amount was not adequately supported, it is considered questioned costs. ? The second employee was paid 100 percent from the federal grant. The City made a payroll correction to remove the employee's pay for the months of July through December. After the payroll adjustment, there was a remaining amount of payroll and benefits of $5,611 for the period of July through December charged to the grant which lacked supporting documentation that the costs were appropriate for the grant. This amount, $5,611, is considered questioned costs. Vendor Late fees and taxes were paid from the federal grant funds. A total of $51 was paid in late fees and sales tax during the audit period. This amount was determined to be a questioned cost. Program Income - Determining or Assessing and Recording Program income is gross income earned by a non-federal entity that is directly generated by a supported activity or earned as a result of the federal award during the period of performance. Program income is to be recorded in the unit's financial system along with the Housing and Urban Development (HUD) nationwide database, the Integrated Disbursement and Information System (IDIS). The City recorded program income in the accounting ledger for the sale of a Neighborhood Stabilization Property. After determining an approval process would be necessary to consider this program income, a request was sent to the HUD. Prior to receiving permission to include the sale as program income to the federal grant, an adjustment was made to transfer this program income to another fund. It was later recorded in the IDIS as program income but was never adjusted back into the unit's federal grant fund designated for this grant. The internal controls in place were not effective to ensure the amounts recorded in the accounting ledger and the amounts recorded in the IDIS agree and are accurate. 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). . . ." 2 CFR 200.430(i)(1) states in part: "Charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must: (i) Be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated; (ii) Be incorporated into the official records of the non-Federal entity; (iii) Reasonably reflect the total activity for which the employee is compensated by the non-Federal entity, not exceeding 100% of compensated activities . . . (vii) Support the distribution of the employee's salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity. . . ." 24 CFR 570.504(a) states: "Recording program income. The receipt and expenditure of program income as defined in ? 570.500(a) shall be recorded as part of the financial transactions of the grant program." 24 CFR 570.504(b)(2) states in part: "If the recipient chooses to retain program income, that program income shall be disposed of as follows: . . . (ii) Substantially all other program income shall be disbursed for eligible activities before additional cash withdrawals are made from the U.S. Treasury. . . ." Cause A proper system of internal controls was not designed by management of the City. 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, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. As a result, payments were made that resulted in questioned costs. 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 known questioned costs of $54,288. Recommendation We recommended that management of the City 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 over payroll, benefits, and vendor payments, as well as the proper recording of program income for the grant. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.