2023-001 The City did not have adequate internal controls for ensuring compliance with federal procurement requirements.
Assistance Listing Number and Title: 20.205 Highway Planning and Construction
Federal Grantor Name: Federal Highway Administration, US Department of Transportation
Federal Award/Contract Number: N/A
Pass-through Entity Name: Washington State Department of Transportation
Pass-through Award/Contract Number: LA-10390
Known Questioned Cost Amount: $0
Prior Year Audit Finding: N/A
Background
During fiscal year 2023, the City spent $2,783,693 in federal Highway Planning and Construction program funds awarded from the Federal Highway Administration and passed through the Washington State Department of Transportation. During 2023, the City used program funds for the Thornton, Vista to Malloy project.
Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls.
Federal regulations require recipients to follow their own documented procurement procedures, which must conform to the Uniform Guidance procurement standards found in 2 CFR 200.318-327. The procedures must reflect the most restrictive of federal, state or local procurement thresholds and methods when using federal funds. Additionally, federal regulations require recipients to maintain written standards of conduct that cover conflicts of interest and govern the actions of employees involved in selecting, awarding or administrating contracts procured with federal funds.
Description of Condition
Our audit found the City’s internal controls were ineffective for ensuring compliance with federal procurement requirements. Specifically, the City did not have procurement policies or procedures to ensure compliance with federal requirements. Further, the City did not have standards of conduct policies or procedures covering conflicts of interest for officers or agents who award contracts, as federal regulations require.
We consider this deficiency in internal controls to be a significant deficiency.
Cause of Condition
This is the City’s first federal single audit since 2016. Since the City did not regularly manage federal funds since then, staff were unaware of the requirement to have written policies and procedures over procurement and standards of conduct covering conflicts of interest for officers and agents.
Effect of Condition
Without written policies and procedures, the City is at an increased risk of not complying with following the most restrictive of federal, state or local procurement methods and standards of conduct requirements when using federal funds to procure contractors.
Although the City did not have policies in place, it followed the procurement requirements in the Washington State Department of Transportation’s Local Agency Guidelines Manual and complied with federal requirements for soliciting and awarding the public works contracts we tested.
Recommendation
We recommend the City develop written procurement and standards of conduct policies and procedures that conform to federal procurement standards in Uniform Guidance (2 CFR 200.318-327).
City’s Response
The City is currently in the process of adopting a comprehensive purchasing and procurement policy, with the goal of implementing the major components of these policies by the end of April 2025. Although the City has consistently followed established purchasing procedures, including redundant reviews and purchasing limits, these practices have occasionally varied across departments and have not been formally codified.
The City acknowledges that formal adoption of purchasing policies not only ensures consistency in procurement practices across the organization but also serves as a valuable resource for employee training, particularly when making purchasing decisions that are uncommon for the jurisdiction. In recent years, the City has reexamined its broad range of financial responsibilities, including procurement, and has considered delaying the adoption of new policies until the landscape of these changes stabilizes. However, in its ongoing commitment to continuous improvement, the City has determined that adopting purchasing and procurement policies that address the majority of the City’s procurement decisions is the most effective course of action. These policies will be subject to ongoing refinement and updates over time.
The City remains receptive to insights and recommendations, such as those provided by the SAO, which contribute to the enhancement of its processes.
Auditor’s Remarks
We appreciate the City's commitment to resolve this finding and thank the City for its cooperation and assistance during the audit. We will review the corrective action taken during our next regular audit.
Applicable Laws and Regulations
Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings.
Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements.
The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
Title 2 CFR Part 200, Uniform Guidance, section 318, General procurement standards, establishes requirements for written procedures