Finding 519875 (2023-004)

FINDING 2023-004 Subject: Water and Waste Disposal System for Rual Communities - Reporting Federal Agency: Department of Agriculture Federal Program: Water and Waste Disposal System for Rural Communities Assistance Listings Number: 10.760 Federal Award Number and Year (or Other Identifying Number): CY 2023 Compliance Requirement: Reporting Audit Findings: Material Weakness, Modified Opinion Condition and Context The Town had not designed or implemented adequate internal controls and procedures to ensure that reports were prepared, accurate, and submitted in accordance with the applicable compliance requirements for the federal grant. The United States Department of Agriculture (USDA) requires the following reports be submitted annually:  Statement of Budget, Income, and Equity (Form RD 442-2)  Balance Sheet (Form RD 442-3) The Form RD 442-2 covers financial operations relating to the Town's water main replacement project and the Form RD 442-3 presents the financial status of the project. In both instances, a borrower may submit the financial data on other forms, provided the forms are in a similar format and signed and dated by the organization's official to certify the correctness of the information. Alternatively, an annual audit may be submitted in lieu of the forms. The Town was required to file each report, as noted above, during the audit period; however, the reports were not filed. 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: INDIANA STATE BOARD OF ACCOUNTS 19 TOWN OF LAFONTAINE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) (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 200.302(b) states in part: "The financial management system of each non-Federal entity must provide for the following . . . (2) Accurate, current, and complete disclosure of the financial results of each Federal award or program in accordance with the reporting requirements set forth in §§ 200.328 and 200.329. . . ." 7 CFR 1780.47 states in part: "Borrower accounting methods, management reporting and audits. . . . (e) Borrowers exempt from audits. All borrowers who are exempt from audits, will, within 60 days following the end of each fiscal year, furnish the RUS with annual financial statements, consisting of a verification of the organization's balance sheet and statement of income and expense by an appropriate official of the organization. Forms RD 442-2, 'Statement of Budget, Income and Equity,' and 442-3 may be used. (f) Management reports. These reports will furnish management with a means of evaluating prior decisions and serve as a basis for planning future operations and financial strategies. In those cases where revenues from multiple sources are pledged as security for an RUS loan, two reports will be required; one for the project being financed by RUS and one combining the entire operation of the borrower. In those cases where RUS loans are secured by general obligation bonds or assessments and the borrower combines revenues from all sources, one management report combining all such revenues is acceptable. The following management data will be submitted by the borrower to the processing office. These reports at a minimum will include a balance sheet and income and expense statement. . . . (2) Annual management reports. Prior to the beginning of each fiscal year the following will be submitted to the processing office. (If Form RD 442-2 is used as the annual management report, enter data in column three only of Schedule 1, and complete all of Schedule 2.) (i) Two copies of the management reports and proposed 'Annual Budget'. (ii) Financial information may be reported on Form RD 442-2 which includes Schedule 1, 'Statement of Budget, Income and Equity' and Schedule 2, 'Projected Cash Flow' or information in similar format. (iii) A copy of the rate schedule in effect at the time of submission. INDIANA STATE BOARD OF ACCOUNTS 20 TOWN OF LAFONTAINE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) (g) Substitute for management reports. When RUS loans are secured by the general obligation of the public body or tax assessments which total 100 percent of the debt service requirements, the State program official may authorize an annual audit to substitute for other management reports if the audit is received within nine months after the end of the audit period." Cause The Town incorrectly assumed that the reports were filed by the engineering firm coordinating the grant. Effect Without the proper implementation of an effectively designed system of internal controls, the Town cannot ensure the required reports are filed with the awarding agency. As such, the USDA does not have accurate and current information to discern the financial status of the Town's project. Furthermore, 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 Town. Questioned Costs There were no questioned costs identified. Recommendation We recommended that the Town's management design and implement a system of internal controls to ensure that all required reports are filed. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.