PHOENIX HOUSES OF TEXAS, INC.

Finding #2025-002 – Significant Deficiency and Other Noncompliance – Reporting. Applicable federal program: U. S. Department of Health and Human Services, Assistance Listing #93.959, Passed through Texas Health and Human Services Commission, All contracts, Contract years: 09/01/23 – 08/31/24 and 09/01/24 – 08/31/25. Criteria: Management is responsible for establishing internal controls for contract compliance for reporting in accordance with the Uniform Guidance and requirements in the pass-thru agency grant contract. Condition and context: In our testing of a sample of monthly billings and quarterly reports from throughout the fiscal year, we noted that reports were not being submitted within the required timelines for several reporting periods. Management communicated their delays to Texas Health and Human Services Commission (THHS), and their plan to rectify the delays. Phoenix Houses of Texas were able to file all delayed quarterly reports and monthly billings prior to June 30, 2025. THHS has approved all the delayed monthly billings and quarterly reports. Cause and effect: Phoenix Houses was awarded a new 5-year grant agreement in July 2024 with an effective date of September 1, 2024 from the Texas Health and Human Services Commission to support prevention programming in Dallas, Austin, and Houston. The discontinuation of residential treatment services and exclusive focus on new prevention service grants necessitated organizational restructuring and related changes in personnel. The accounting system also required updates to enable proper budgeting, accounting and reporting for the new grants. Late reporting may result in delayed management decision-making, potential non-compliance with THHS reporting timelines and impacts on grant reimbursement collections. Recommendation: Re-emphasize internal procedures for timely grant billing and reporting to comply with grant contracts. Views of responsible officials and planned corrective actions: Management agrees with the finding. See Corrective Action Plan.

Finding #2023-001 – Significant Deficiency. Applicable federal program: U. S. Department of Health and Human Services, Assistance Listing #93.959, Passed through Texas Department of Health and Human Services, Contract #’s: HHS000663700275, HHS000663700276, HHS000663700277, HHS000663700278, HHS000779800001, HHS000779800004, Contract years: 09/21 – 08/22; 09/22 – 08/23. Applicable state program: Texas Department of Health and Human Services, Contract #’s: HHS000779800001, Contract year: 09/21 – 08/22. Criteria: Allowable Costs – The Uniform Guidance §200.430 and the Texas Grant Management Standards require that charges to awards for salaries and wages must be based on records that accurately reflect the work performed. These records must 1) be supported by a system of internal control which provides reasonable assurance the charges are accurate, allowable and properly allocated; 2) reasonably reflect the total activity for which the employee is compensated; 3) comply with the established accounting policies and practices of the agency; and 4) support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one activity. Additionally, the Uniform Guidance requires costs to be necessary and reasonable for the performance of the federal award.. Condition and context: During our testing of 40 payroll transactions, we noted instances where the shift differential was not properly calculated and allocated to the grant departments. Cause: The errors in the payroll allocations to the grant occurred during the correction by the Agency for a single payroll period for individuals receiving shift differentials. Failure to follow established review policies and procedures resulted in these employees being overpaid for shift differential only. Effect: Failure to follow established internal control policies and procedures which requires reviews of payroll, could result in unallowable costs being charged to the grant cost center used for reporting costs under fee for service contracts. Recommendation: Emphasize adherence to established policies and procedures to ensure payroll, including allocations methodology, are properly followed and reviewed. Views of responsible officials and planned corrective actions: Management agrees with the finding. See Corrective Action Plan.

Finding #2023-002 – Material Weakness and Other Noncompliance. Applicable federal program: U. S. Department of Health and Human Services, Assistance Listing #93.959, Passed through Texas Department of Health and Human Services, Contract #’s: HHS000663700277 and HHS000663700278, Contract years: 09/21 – 08/22; 09/22 – 08/23. Applicable state program: Texas Department of Health and Human Services, Contract #’s: HHS000663700277 and HHS000663700278, Contract year: 09/21 – 08/22. Criteria: Eligibility – Texas Administrative Code (TAC) requirements, as referenced in the Substance Use Disorder (SUD) Utilization Management (UM) Guidelines requires that Federal Block Grant-funded SUD treatment services will be provided to all eligible Texas residents. Client eligibility for Texas residency, financial eligibility, and clinical eligibility must be performed prior to billing HHSC for SUD treatment services. Further, providers are to conduct and document in CMBHS the financial eligibility determination. If the client is unable to provide proof of financial status, the individual can attest by signing an attestation statement. Condition and context: During our testing of 40 clients for proper eligibility, three clients had documented income verification that did not meet the income guidelines specified under the grant. Despite this, services were provided to these clients, and the costs were billed to the grant. Furthermore, one client out of the 40 tested did not have proper documentation to support the financial eligibility determination, and there was no attestation statement from the client explaining the inability to provide the necessary information. Cause: The finding occurred as a result of Phoenix House not following its internal control procedures requiring review of documentation to ensure the client files are complete with eligibility documentation and that only eligible clients are being billed to the grant. Effect: Failure to follow internal control procedures resulted in incomplete client files and ineligible persons served. Questioned costs: The grant was billed $282.54 for the four clients in the billing months selected in our testing. Recommendation: Provide additional staff training to ensure internal control procedures over client eligibility and required documentation are followed. Views of responsible officials and planned corrective action: Management agrees with the finding. See Corrective Action Plan.

Finding #2021-003 ? Significant Deficiency Applicable federal program: U. S. Department of Health and Human Services Block Grants for Prevention and Treatment of Substance Abuse Assistance Listing #: 93.959 Passed through the Texas Department of State Health Services Contract #?s: HHS000539700098; HHS000539700107; HHS000539700050; HHS000539700057; HHS000539700088; HHS000539700150; HHS000077600059 Contract years: 09/01/19 ? 08/31/20; 09/01/20 ? 08/31/21 Criteria: The Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards 2 CFR Part 200, ?200.400 requires that internal controls be in place to ensure that costs charged to federal programs are allowable. Condition and context: During our testing of 36 major program disbursements, we noted that 6 transactions purchased via the organization?s debit card were not reviewed and approved by an independent person to ensure that they are authorized and allowable. Repeat of finding #2020-001. Cause: The organization?s debit card policy does not require independent review and approval of the associated transactions for allowability. Effect: A lack of effective internal control over the disbursements process could result in misappropriation of assets or errors that are not detected or corrected on a timely basis or unallowable costs charged to a federal program. Questioned costs: None Recommendation: Management should implement procedures to include independent review and approval by the debit cardholder?s supervisor of debit card transactions. Views of responsible officials and planned corrective actions: Management agrees with the finding. See Corrective Action Plan.

Finding #2020-003 ? Material Weakness and Other Noncompliance Applicable federal and state programs: U. S. Department of Health and Human Services Passed through the Texas Department of State Health Services and Texas Health and Human Services Commission Block Grants for Prevention and Treatment of Substance Abuse CFDA #: 93.959 Contract Numbers: HHS000539700098 Federal and State, 2016-048018-003 YPS Federal, HHS000539700107 Federal and State, 2016-048017-003 YPS Federal and State, HHS000539700050 Federal and State, 2016-048068-003 YPU Federal, HHS000539700057 Federal and State, 2016-048069-003 YPU Federal, HHS000539700150 Federal and State, 2016-047903-003 CCP Federal, HHS000077600059 Federal and State, 2016-048211-003 YPI Federal, HHS000539700088 Federal and State, 2016-048481-003 SA/TRA Federal and State, 2016-048488-003 SA/TRF Federal and State, 2016-048478-003 SA/TRY Federal, 2016-048474-003 SA/TRA Federal and State, 2016-048519-003 SA/TRY Federal and State, 2016-048491-003 SA/TRY Federal and State, 2016-048500-003 SA/TRF Federal and State, PH16-001-23 Federal, 2017-049941-002 SA/TRY-LBHA Federal and State Contract Years: 09/01/19-08/31/20, 09/01/18-08/31/19 Criteria: Allowable costs ? An effective internal control system includes a system that requires retention of documentation to evidence proper approval of transactions and to provide accurate reporting of transactions. Additionally, the internal control system should include review of transactions for verification of accuracy as to amount and period. Management is responsible for having an internal control system in place to ensure that only allowable costs in accordance with the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ?200.400 are recorded and allocated to federal awards. Condition and context: Same as Finding #2020-001. This is a repeat finding from fiscal year 2019, Finding #2019-005. Cause: Inadequate policies and procedures over the retention of documentary evidence of transactions and review and approvals. Effect: Failure to adequately establish and maintain effective internal controls over the approval, documentation and recording of non-payroll disbursements could result in unallowable costs being charged to a program. Questioned costs: Unknown Recommendation: Develop policies and procedures to ensure retention of documentary evidence of disbursements and review of transactions to ensure accuracy of reporting as to amount and period. Re-emphasize procedures regarding review of all disbursement transactions to ensure that only allowable costs are coded, directly or indirectly, to federal grants. Views of responsible officials and planned corrective actions: Management agrees with the finding. See Corrective Action Plan.

Finding #2020-004 ? Material Weakness and Other Noncompliance Applicable federal and state programs: U. S. Department of Health and Human Services Passed through the Texas Department of State Health Services and Texas Health and Human Services Commission Block Grants for Prevention and Treatment of Substance Abuse CFDA #: 93.959 Contract Numbers: 2016-048481-003 SA/TRA Federal and State; 2016-048488-003 SA/TRF Federal and State; 2016-048478-003 SA/TRY Federal; 2016-048474-003 SA/TRA Federal and State; 2016-048519-003 SA/TRY Federal and State; 2016-048491-003 SA/TRY Federal and State; 2016-048500-003 SA/TRF Federal and State; PH16-001-23 Federal; 2017-049941-002 SA/TRY-LBHA Federal and State Contract Years: 09/01/18 ? 08/31/20 Criteria: Reporting ? Effective internal control requires the adoption and consistent application of accounting policies and procedures to ensure proper recording of transactions in accordance with generally accepted accounting principles. Phoenix Houses of Texas? procedures for revenue recognition are not sufficient to ensure that errors or fraud would be identified and corrected in a timely manner. Under the terms of the fee-for-service contracts, Phoenix Houses of Texas is to submit claims for services provided through the TDSHS claims system. Payment will be provided based on actual services provided at approved rates to financially and programmatically eligible clients. Condition and context: During our testing of 40 client service claims submitted through the Texas Department of State Health Services claims payment system, we noted the following: ? 1 client?s income information was entered incorrectly into the claim payment system, resulting in a $56 overcharge. ? 1 client service claim was incorrectly marked as unbillable and thus, the claim was denied. ? 1 claim was not billed within the required timeframe and was written off. ? 1 claim was entered with an incorrect date range, so the claim was denied. This is a repeat finding from fiscal year 2019, Finding #2019-006. Cause: Lack of training and/or oversight resulted in incorrect information being input into the TDSHS claims payment system. Effect: Same as Finding #2020-002. Questioned costs: $56 Recommendation: Same as Finding #2020-002. Views of responsible officials and planned corrective actions: Management agrees with the finding. See Corrective Action Plan.

Finding #2019-004 ? Significant Deficiency and Other Noncompliance Applicable federal programs: U. S. Department of Health and Human Services Passed through the Texas Department of State Health Services Block Grants for Prevention and Treatment of Substance Abuse CFDA #: 93.959 Contract Number: 2016-048481-003 SA/TRA, 2016-048488-003 SA/TRF, 2016-048478-003 SA/TRY, 2016-048474-003 SA/TRA, 2016-048519-003 SA/TRY, 2016-048491-003 SA/TRY Contract Years: 09/01/18 ? 08/31/20 Criteria: Financial Management ? Phoenix Houses of Texas is required to comply with the financial management standards in ?200.302 of the Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards, which states that a non-federal entity?s financial management systems, including records documenting compliance with federal statutes, regulations, and the terms and conditions of the federal award, must be sufficient to permit the preparation of reports required by general and program-specific terms and conditions; and the tracing of funds to a level of expenditures adequate to establish that such funds have been used according to the federal statutes, regulations, and the terms and conditions of the federal award. Condition and context: Phoenix Houses of Texas does not track expenses related to its outpatient and residential fee-for-service contracts separately in the general ledger for federal and non-federal programs. Cause: Phoenix Houses of Texas? general ledger chart of accounts is not set up to report program expenditures by contract year for its outpatient and residential fee-for-service contracts by funder. Effect: Failure to track federal program expenses separately in the general ledger adversely affects Phoenix Houses of Texas reporting expenditures of each federal award or program in accordance with the reporting requirements set forth in the Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards, including the preparation of a Schedule of Expenditures of Federal Awards, as required by ?200.510 of the Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards. Questioned costs: Unknown Recommendation: Develop policies and procedures to allocate and record the costs (cost pool) of all residential and outpatient programs by federal and non-federal cost codes, using a reasonable allocation method. Views of responsible officials and planned corrective actions: Management agrees with the finding. See Corrective Action Plan.

Finding #2019-005 ? Material Weakness and Other Noncompliance Applicable federal programs: U. S. Department of Health and Human Services Passed through the Texas Department of State Health Services Block Grants for Prevention and Treatment of Substance Abuse CFDA #: 93.959; 10.553; 10.555; 10.579 Contract Number: 2016-048018-003 YPS, 2016-048018-002 YPS, 2016-048017-003 YPS, 2016-048017-002 YPS, 2016-048068-003 YPU, 2016-048068-002 YPU, 2016-048069-003 YPU, 2016-048069-002 YPU, 2016-047903-003 CCP, 2016-047903-002 CCP, 2016-048211-003 YPI, 2016-048211-002 YPI, 2016-048481-003 SA/TRA, 2016-048488-003 SA/TRF, 2016-048478-003 SA/TRY, 2016-048474-003 SA/TRA, 2016-048519-003 SA/TRY, 2016-048491-003 SA/TRY, School Breakfast Program, National School Lunch Program, 6TX300355 Contract Years: 09/01/17-08/31/18, 09/01/18-08/31/19, 09/01/18-08/31/20, 07/01/18-06/30/19, 01/01/18-08/31/18 Criteria: Allowable costs ? An effective internal control system includes a system that requires retention of documentation to evidence proper approval of transactions and to provide accurate reporting of transactions. Additionally, the internal control system should include review of transactions for verification of accuracy as to amount and period. Management is responsible for having an internal control system in place to ensure that only allowable costs in accordance with the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ?200.400 are recorded and allocated to federal awards. Condition and context: Same as Finding #2019-002 Cause: Inadequate policies and procedures over the retention of documentary evidence of transactions and review and approvals. Effect: Failure to adequately establish and maintain effective internal controls over non-payroll and payroll disbursements may result in misstatements to the financial statements and/or fraud or errors not being identified in a timely manner. Additionally, it could result in unallowable costs being charged to a program. Questioned costs: Unknown Recommendation: Develop policies and procedures to ensure retention of documentary evidence of disbursements and review of transactions to ensure accuracy of reporting as to amount and period. Re-emphasize procedures regarding review of all disbursement transactions to ensure that only allowable costs are coded, directly or indirectly, to federal grants. Views of responsible officials and planned corrective actions: Management agrees with the finding. See Corrective Action Plan.

Finding #2019-006 ? Material Weakness and Other Noncompliance Applicable federal programs: U. S. Department of Health and Human Services Passed through the Texas Department of State Health Services Block Grants for Prevention and Treatment of Substance Abuse CFDA #: 93.959 Contract Number: 2016-048481-003 SA/TRA, 2016-048488-003 SA/TRF, 2016-048478-003 SA/TRY, 2016-048474-003 SA/TRA, 2016-048519-003 SA/TRY, 2016-048491-003 SA/TRY Contract Years: 09/01/18 ? 08/31/20 Criteria: Reporting ? Effective internal control requires the adoption and consistent application of accounting policies and procedures to ensure proper recording of transactions in accordance with generally accepted accounting principles. Phoenix Houses of Texas? procedures for revenue recognition are not sufficient to ensure that errors or fraud would be identified and corrected in a timely manner. Under the terms of the fee-for-service contracts, Phoenix Houses of Texas is to submit claims for services provided through the TDSHS claims system. Payment will be provided based on actual services provided at approved rates to financially and programmatically eligible clients. Condition and context: Same as Finding #2019-003 Cause: Lack of training and/or oversight resulted in incorrect information being input into the TDSHS claims payment system. Effect: Same as Finding #2019-003 Questioned costs: $33.25 (net effect) Recommendation: Same as Finding #2019-003. Views of responsible officials and planned corrective actions: Management agrees with the finding. See Corrective Action Plan.