2022-002 The District did not have adequate internal controls for ensuring compliance with federal reporting and level of expenditure requirements Assistance Listing Number and Title: 84.041 Impact Aid Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: S041B 20215394 Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A Known Questioned Cost Amount: $128,585 Prior Year Audit Finding: N/A Description of Condition The Impact Aid Program provides financial assistance to local educational agencies whose local revenues or enrollments are adversely affected by federal activities. These activities primarily involve ?federally connected? children who reside on tax-exempt federal property, such as military bases or Native American lands, or those residing with a parent who is employed on tax-exempt federal property within a school district?s boundaries. School districts receive program funds based on the number of federally connected children they report on an annual application, with additional funds provided for certain federally connected children with disabilities. In addition, the amount of expenditures a school district incurs for providing special education and related services to federally connected children with disabilities must be at least equal to the amount of funds it has received or credited for that fiscal year. During the 2021-2022 school year, the District received $459,901 in Impact Aid funds. Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Our audit found the District?s internal controls were ineffective for ensuring it properly reported the number of students eligible for funding on its application in fiscal year 2022. Specifically, the District included students who lived outside its boundaries in the number of eligible children it reported on its application. We consider these deficiencies in internal controls to be a material weakness. Cause of Condition District staff responsible for preparing the Impact Aid application did not know that students outside the District?s boundaries could not be reported and claimed. Effect of Condition and Questioned Costs The District reported 61 students on the Impact Aid application who did not reside in or attend a school in its boundaries. The District subsequently remitted the related funding to those students? home districts. This resulted in an overpayment of $127,601, and we are questioning these costs. In addition, the District reported one federally connected student with disabilities from outside its boundaries in the application. By incorrectly reporting the number of federally connected students with disabilities, the District is at risk of not meeting the required level of expenditure for these children. This resulted in an overpayment of $984, and we are also questioning these costs. Federal regulations require the State Auditor?s Office to report known questioned costs that are greater than $25,000 for each type of compliance requirement. We question costs when we find the District has not complied with grant regulations and/or when it does not have adequate documentation to support expenditures. The District also received an audit from the U.S. Department of Education regarding this issue, and paid these funds back to the agency. Recommendation We recommend the District establish internal controls to ensure all students reported on its Impact Aid application are eligible and reside within its boundaries. District?s Response The District recognizes and acknowledges deficiencies and errors by the District and its financial management contractor in collecting and reporting data pursuant to its Impact Aid application to the Federal Department of Education. While it has not been possible to identify how these originated, they appear to have been in place for a number of years, perhaps more than a decade, related to Washington State?s broad school choice policies and, not identified in previous audits by either Federal or State agencies. Regardless, the District has satisfactorily resolved outstanding data collection and reporting issues with the Department and has put in place administrative controls via training and oversight to comply with requirements. In the past ten months since the deficiencies were identified, the District has taken the following steps to address those and to come into compliance. The District Superintendent, District Secretary and Chair of the School Board were tasked with communicating and negotiating with Department officials. In a series of Zoom meetings, trainings and phone calls, the District team was made aware of the deficiencies, provided with guidance of strategies to correct those and with guidance on addressing the effects of Washington State?s school choice policies on Impact Aid. As a result of that guidance, the District corrected its data collection and validation methodology, proposed and negotiated tuition agreements with three adjoining Districts, proposed and negotiated repayment agreements with those Districts and the Department. Future data collection and validation will be reviewed by the District?s financial management contractor, Education Service District 101. District administration and Board will send representatives to attend the annual conference of the National Association of Federally Impacted Schools in Washington, DC, and to meet with Department staff to review the application and its data. The District will take part in any relevant training opportunities offered by the Department or by the Office of the Superintendent of Public Instruction. 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 34 CFR Part 222, Impact Aid Programs, Subpart C ? Payments for Federally Connected Children Under Section 8003(b) of the Act