FINDING 2022-003 Subject: Water and Waste Disposal Systems for Rural Communities - Internal Controls Federal Agency: Department of Agriculture Federal Program: Water and Waste Disposal Systems for Rural Communities Assistance Listings Number: 10.760 Federal Award Numbers and Years (or Other Identifying Numbers): RD Grant 06, RD Loan 05, RD Loan 07 Compliance Requirements: Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Procurement and Suspension and Debarment Audit Finding: Material Weakness Condition and Context The City had not properly designed or implemented a system of internal controls, which would include appropriate segregation of duties that would likely be effective in preventing, or detecting and correcting, material noncompliance related to expenditures made from the Water and Waste Disposal Systems for Rural Communities grant funds. Activities Allowed or Unallowed and Allowable Costs/Cost Principles Under the Water and Waste Disposal Systems for Rural Communities program, the United States Department of Agriculture's (USDA) Rural Utilities Service (RUS) 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. Loan and grant funds may be expended on eligible project costs, as approved by the RUS. These expenditures include items such as land acquisition, water rights, legal fees, engineering fees, construction costs, and the purchase of equipment. The City relied solely on the contracted engineer and the USDA to ensure that program disbursements were for allowable activities and allowable costs. The City did not have an oversight or approval process in place to ensure the compliance prior to payment. Procurement and Suspension and Debarment Federal regulations allow for informal procurement methods when the value of the procurement for property or services does not exceed the simplified acquisition threshold, which is set at $250,000. However, Indiana Code 5-22-8 has a more restrictive threshold of $150,000 or less for when small purchase procedures may be used. This informal process allows for methods other than the formal bid process. The informal process is divided between two methods based on thresholds. Micro-purchases, typically for those purchases $10,000 or under, and small purchase procedures for those purchases above the micro-purchase threshold, but below the simplified acquisition threshold. Micro-purchases may be awarded without soliciting competitive price rate quotations. If small purchase procedures are used, then price or rate quotations must be obtained from an adequate number of qualified sources. The City relied solely on the contracted engineer and the USDA to ensure that program disbursements were properly procured and that applicable vendors were not suspended or debarred prior to entering into a covered transaction. The City did not have oversight or approval process in place to ensure the compliance prior to payment. The lack of internal controls was a systemic issue, which occurred throughout the audit period. Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (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). . . ." Cause A proper system of internal controls was not designed by management of the City. Embedded within a properly designed and implemented internal control system should be internal controls consisting of policies and procedures. Policies reflect the City's management statements of what should be done to effect internal controls, and procedures should consist of actions that would implement these policies. Effect Without the proper implementation of an effectively designed system of internal controls, including policies and procedures that provide segregation of duties and additional oversight as needed, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. 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 City. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the City, design and implement a proper system of internal controls that would provide segregation of duties for the review all payments to ensure its an allowable activity, allowable cost, properly procured, and the vendor is not suspended or debarred. Additionally, policies and procedures should be implemented to ensure appropriate reviews, approvals, and oversight are taking place. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.