Finding Text
FINDING 2023-003
Subject: Child Nutrition Cluster - Activities Allowed or Unallowed, Allowable Costs/Cost Principles
Federal Agency: Department of Agriculture
Federal Programs: School Breakfast Program, National School Lunch Program, COVID-19 - National
School Lunch Program, Summer Food Service Program for Children,
Fresh Fruit and Vegetable Program
Assistance Listings Numbers: 10.553, 10.555, 10.559, 10.582
Federal Award Numbers and Years (or Other Identifying Numbers): 2021-2022, 2022-2023
Pass-Through Entity: Indiana Department of Education
Compliance Requirements: Activities Allowed or Unallowed, Allowable Costs/Cost Principles
Audit Findings: Material Weakness, Modified Opinion
Condition and Context
The School Corporation entered into a cost reimbursement contract with a food service
management company (FSMC). The FSMC incurred costs on behalf of the School Corporation and
invoiced the School Corporation for reimbursement of those costs.
INDIANA STATE BOARD OF ACCOUNTS 19
LAKE RIDGE SCHOOLS
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
(Continued)
The School Corporation had not designed or implemented a system of internal controls to ensure
that program costs incurred by the FSMC were supported by proper documentation and were allowable
prior to payment.
Due to the lack of internal controls, the following errors were noted:
In a test of 44 transactions, 22 transactions (50%) totaling $6,641 did not have proper
documentation to support that the expenses were for the benefit of the food service program
and in conformance with the cost principles.
1. Of the 5 transactions totaling $764, were for food and supply purchases paid for by the
FSMC and then invoiced to the School Corporation for reimbursement. The vendor
invoices supporting these purchases could not be provided for audit.
2. Of the 15 transactions totaling $5,532, were for FSMC employee payroll, fringe benefits,
stipends, and other miscellaneous expenses. Proper supporting documentation could not
be provided for audit for these transactions.
3. Of the 2 transactions, were determined to be unallowable expenses, as noted below:
a. An Amazon purchase of $27 was for decorations that were shipped to a home
residence. The FSMC stated the decorations were for a ceremony for the opening of the
School Corporation's weight room.
b. The FSMC purchased Visa gift cards totaling $318 that were gifted to FSMC staff.
The items noted above were all considered questioned costs.
The lack of internal controls and noncompliance were systemic issues 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). . . ."
7 CFR 210.21(f)(1) states in part:
". . . (ii)
(A) The contractor must separately identify for each cost submitted for payment to the
school food authority the amount of that cost that is allowable (can be paid from the
nonprofit school food service account) and the amount that is unallowable (cannot be
paid from the nonprofit school food service account); or
INDIANA STATE BOARD OF ACCOUNTS 20
LAKE RIDGE SCHOOLS
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
(Continued)
(B) The contractor must exclude all unallowable costs from its billing documents and
certify that only allowable costs are submitted for payment and records have been
established that maintain the visibility of unallowable costs, including directly
associated costs in manner suitable for contract cost determination and verification.
(iii) The contractor's determination of its allowable costs must be made in compliance with
the applicable Departmental and Program regulations and Office of Management and
Budget cost circulars; . . .
(vi) The contractor must maintain documentation of costs and discounts, rebates and other
applicable credits, and must furnish such documentation upon request to the school
food authority, the State agency, or the Department."
7 CFR 225.15(a)(1) states: "Sponsors shall operate the food service in accordance with: the
provisions of this part; any instructions and handbooks issued by FNS under this part; and any instructions
and handbooks issued by the State agency which are not inconsistent with the provisions of this part."
2 CFR 200.403 states in part:
"Except where otherwise authorized by statute, costs must meet the following general criteria
in order to be allowable under Federal awards:
(a) Be necessary and reasonable for the performance of the Federal award and be
allocable thereto under these principles.
(b) Conform to any limitations or exclusions set forth in these principles or in the Federal
award as to types or amount of cost items. . . .
(g) Be adequately documented. . . ."
2 CFR 200.445(a) states: "Costs of goods or services for personal use of the non-Federal entity's
employees are unallowable regardless of whether the cost is reported as taxable income to the employees."
2 CFR 200.467 states: "Costs of selling and marketing any products or services of the non-Federal
entity (unless allowed under § 200.421) are unallowable, except as direct costs, with prior approval by the
Federal awarding agency when necessary for the performance of the Federal award."
Cause
A proper system of internal controls was not implemented by management of the School
Corporation, which would include segregation of key functions. Embedded within a properly designed and
implemented internal control system should be internal controls consisting of policies and procedures.
Policies reflect the School Corporation'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 design or implementation of the components of a 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. As a result, required supporting documentation could be provided to verify costs paid to
the FSMC were allowable and in conformance with the cost principles. In addition, unallowable costs were
paid.
INDIANA STATE BOARD OF ACCOUNTS 21
LAKE RIDGE SCHOOLS
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
(Continued)
Noncompliance with the grant agreement and the compliance requirement could result in the loss
of future federal funds to the School Corporation.
Questioned Costs
Known questioned costs of $6,641 were identified as explained in the Condition and Context.
Recommendation
We recommended that management of the School Corporation establish a proper system of
internal controls and develop policies and procedures to ensure all costs are adequately documented and
for the benefit of the food service program.
Views of Responsible Officials
For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.