2022-001 The District’s internal controls were inadequate for ensuring compliance with federal requirements for procurement, and suspension and debarment requirements.
Assistance Listing Number and Title: 10.760- Water and Waste Disposal Systems for Rural Communities
Federal Grantor Name: U.S. Department of Agriculture, Rural Utilities Service
Federal Award/Contract Number: N/A
Pass-through Entity Name: Rural Utilities Service, Washington State Department of Agriculture
Pass-through Award/Contract Number: 91/01, 91/02, and 91/03
Known Questioned Cost Amount: $0
Prior Year Audit Finding: N/A
Description of Condition
The Water and Waste Disposal Systems for Rural Communities program awards direct loans, loan guarantees, and project grants for new and improved water and waste disposal systems serving rural areas where financing is not available from commercial sources at reasonable rates and terms. The program is authorized to provide loan and grant assistance to eligible applicants for water and waste disposal facilities in rural and incorporated areas up to 10,000 people. In 2022, the District spent $1,041,712 in federal funding to replace its water distribution system.
Federal regulations require recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls.
Procurement
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 applicable federal requirements, state laws or local policies. When using federal funds to procure goods and services, governments must apply the more restrictive requirements by obtaining quotes or following a competitive procurement process, depending on the estimated cost of the procurement activity.
Although the District has a written procurement policy, it does not reference Uniform Guidance procurement standards set out at 2 CFR 200.318-327 for procurement with federal funds, nor does it reflect most restrictive standard (federal, state, or local) applicable to the procurement method being used.
Suspension and Debarment
Federal regulations prohibit recipients from contracting with or purchasing from parties suspended or debarred from doing business with the federal government. Whenever the District enters into contracts or purchases goods or services that it expects to equal or exceed $25,000, paid all or in part with federal funds, it must verify contractors are not suspended, debarred or otherwise excluded from participating in federal programs. The District may accomplish this verification by obtaining a written certification from the contractor, adding a clause or condition into the contract that states the contractor is not suspended or debarred, or checking for exclusion records in the U.S. General Services Administration’s System for Award Management at SAM.gov. The District must perform this verification before entering into the contract, and it must maintain documentation demonstrating compliance with this federal requirement.
Our audit found the District’s internal controls were ineffective for ensuring it verified all contractors were not suspended or debarred.
We consider these deficiencies in internal controls to be material weaknesses that led to material noncompliance.
Cause of Condition
Procurement
The District was not aware of the requirement to update the procurement policy to conform to the procurement standards in Uniform Guidance.
Suspension and Debarment
The District does not typically receive significant federal grants and relied on guidance from its contracted consultant. The District incorrectly thought the contract included the required certification clause.
Effect of Condition
Procurement
Although the District did not update its written policies, it did comply with federal procurement requirements when it solicited and awarded the public works project. However, without updated written procedures, the District is at greater risk of noncompliance with following the most restrictive procurement methods when procuring contractors paid all or in part with federal funds.
Suspension and Debarment
Without verification, the District increases its risk of awarding federal funds to contractors that are excluded from participating in federal programs. Any program funds the District made to an ineligible party would be unallowable, and the federal grantor could potentially recover them.
The District did not verify the suspension and debarment status for one contractor that was paid $741,915 during the audit period. We subsequently verified the contractor was not suspended or debarred. Therefore, we are not questioning the related costs.
Recommendation
Procurement
We recommend the District update its written procurement policy and procedures that conform with Uniform Guidance standards (2 CFR 200.318-327) for all procurement activities.
Suspension and Debarment
We recommend the District improve its internal controls to ensure all contractors paid $25,000 or more, all or in part with federal funds, are not suspended or debarred before entering into contracts with them.
District’s Response
The District will amend its procurement policy to include references to federal standards 2 CFR 200.318-327 for procurement activities that utilize federal funds. Furthermore, the District will also include procedures to ensure that all contractors paid $25,000 with federal funds have not been suspended, debarred, or otherwise restricted from participating in federal programs.
Auditor’s Remarks
We appreciate the District’s commitment to resolve this finding and thank the District 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 180, OMB Guidelines to Agencies on Government wide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689.
Title 2 CFR Part 200, Uniform Guidance, sections 318 through 327, Procurement Standards, establishes requirements for written procedures.