FINDING 2023-003
Subject: Child Nutrition Cluster - Activities Allowed or Unallowed, Allowable Costs/Cost Principles,
Special Tests and Provisions - Non-Profit School Food Service Accounts
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): FY 2021-2022, FY 2022-2023
Pass-Through Entity: Indiana Department of Education
Compliance Requirements: Activities Allowed or Unallowed, Allowable Costs/Cost Principles, Special
Tests and Provisions - Non-Profit School Food Service Accounts
Audit Findings: Material Weakness, Modified Opinion
Repeat Finding
This is a repeat finding from the prior audit report. The prior audit finding number was 2021-005.
Condition and Context
The School Corporation had not designed or implemented a system of internal controls to ensure
that program costs were supported by proper documentation, were allowable, and only for the operation of
the food service program.
The School Corporation entered into two cost reimbursement contracts with two food service
management companies (FSMC) during the audit period. Four invoices for payment to the FSMC, which
totaled $746,491, were selected for testing. Supporting documentation was presented for only $319,679
of the costs invoiced. Due to the lack of supporting documentation, we were unable to determine if the
remaining costs paid, $426,812, were allowable expenditures. The costs that were not properly
documented were considered questioned costs.
In the supporting documentation presented for audit, sales tax was erroneously paid totaling $861.
These unallowable costs were 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). . . ."
INDIANA STATE BOARD OF ACCOUNTS 23
SCHOOL CITY OF EAST CHICAGO
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
(Continued)
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
(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 220.7(e) states in part:
". . . the School Food Authority shall, with respect to participating schools under its jurisdiction:
. . .
(1)
(i) Maintain a nonprofit school food service;
(ii) . . . use all revenues received by such food service only for the operation or
improvement of that food service . . ."
7 CFR 210.14(a) states in part:
"(a) Nonprofit school food service. School food authorities shall maintain a nonprofit school
food service. Revenues received by the nonprofit school food service are to be used only for
the operation or improvement of such food service, except that, such revenues shall not be
used to purchase land or buildings, unless otherwise approved by FNS, or to construct
buildings. . . ."
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.
INDIANA STATE BOARD OF ACCOUNTS
24
SCHOOL CITY OF EAST CHICAGO
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
(Continued)
(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. . . ."
Cause
A proper system of internal controls was not designed 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 implementation of an effectively designed system of internal controls, 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 only for the operation of the school food program. In addition, unallowable
costs, sales tax, were paid.
Noncompliance with the grant agreement and the Activities Allowed or Unallowed, the Allowable
Costs/Cost Principles, and the Special Tests and Provisions - School Food Service Accounts compliance
requirements could result in the loss of future federal funds to the School Corporation.
Questioned Costs
Known questioned costs of $427,673 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
only allowable costs are paid from the school food accounts.
Views of Responsible Officials
For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.