Finding 555942 (2024-001)

Finding 2024-001: Inaccurate reporting of incurred costs for grant reimbursement Criteria: Under the accrual basis of accounting, costs are incurred when an entity becomes liable in exchange for a purchase or service. Revenue recognition standards require conditional grant revenue to be recognized when a certain condition is met, such as the revenue for reimbursement-type grants is recognized when allowable costs are incurred. Furthermore, cost principles for federal funds require that incurred expenses under the accrual basis of accounting drive the grant revenue to be recognized. Condition: Upon examining cost reimbursement reports for the Head Start program grant, we found reporting of expenses totaling $75,825 related to repairs of a playground to be reimbursed by the grantor, which was recognized as revenue in the year ended June 30, 2024. We examined the supporting documentation for the charged expense, and found an initial check for a $37,912 deposit had been written with a June 20, 2024 date to a vendor based on a proposed amount for the future services to be performed. Although the check had been written and signed before the year ended June 30, 2024 date, Dayspring held onto the check until the following fiscal year. Further inquiry also revealed that the repairs to the playground were not started until after the fiscal year ended June 30, 2024 and were not completed by the contractor until October 7, 2024. Therefore, costs for the repairs were not actually incurred during the reporting period for the reimbursement grant to be recognized as revenue in June 2024. Cause: Amounts were budgeted for repairs to the playground used for the Head Start program during the year ended June 30, 2024, and a contractor was found to perform the needed repair. The contractor requested a deposit for the work to be performed, Dayspring processed and signed a check, and the full amount of the repair was submitted as cost incurred in the Monthly Expenditures Report Form. Effect: In this instance, Dayspring capitalized the $75,825 of the playground repair costs as part of its property and equipment asset as of June 30, 2024 and recognized grant revenue and corresponding grant receivable of the same amount in year ended June 30, 2024. This resulted in an overstatement of the change in net assets for the year ended June 30, 2024 by $75,825. We have proposed a journal entry, which is reflected in the financial statement, to remove the assets and revenue during the year ended June 30, 2024. Since the request for grant reimbursement included these repair costs, Dayspring received reimbursement of $75,825 without incurring the costs during the year ended June 30, 2024. Internal controls over the preparation and review of the Monthly Expenditures Report Form did not identify the misstatement, and Dayspring was noncompliant under the reporting compliance requirement for the assistance listing number 93.600, Head Start Cluster. Recommendation: We recommend that Dayspring apply the accrual basis of accounting for all transactions recorded and perform a more comprehensive review of the expenditure reports for the grant reimbursement. Views of Responsible Officials and Planned Corrective Actions: We are aware of the cost reimbursement issue and agree with the finding. We believe the following circumstances contributed to the issue regarding the timing of the playground repair costs and the challenges that led to the delays in project completion: 1) Dayspring Programs, Inc. experienced delays in receiving reimbursements from the city for other program expenses, which affected our ability to issue timely payments for the playground resurfacing project. This financial constraint contributed to our decision to hold the initial check for the deposit until the following fiscal year, as we had to ensure funds were available to cover other essential operational costs. 2) The playground resurfacing project was further delayed due to supply chain disruptions at the vendor's end. While the contract was initiated prior to June 30, 2024, and the deposit was written, the vendor faced difficulties in obtaining necessary materials, which postponed the start of work until after the close of the fiscal year. These delays were beyond our control and resulted in the project's completion being pushed to October 7, 2024. We recognize the importance of ensuring that expenses are incurred within the correct reporting period for grant compliance. To address this issue and prevent future occurrences, we are implementing the following corrective actions: - Adjustment of Financial Reporting: We will work with the grantor agency to secure the appropriate federal approvals for any projects that may extend past the end of our fiscal year if necessary. - Enhanced Internal Controls: Our finance team will implement stricter monitoring of expense recognition, ensuring that only incurred costs are included in grant reimbursement requests. - Vendor Coordination: Going forward, we will attempt to implement a more rigorous project timeline review process with contractors to anticipate and address potential supply chain delays before committing grant funds. We remain committed to fully complying with grant guidelines and to strengthening our financial management processes.