NACDC FINANCIAL SERVICES, INC.

2021-002 Allowable Cost & Activities Allowed Federal Program Information: Funding agency: Department of the Treasury Title: Native Initiatives AL number: 21.012 Award year and number: 2019 - 191NA052821 & 2020 - 201NA054871 Criteria or Specific Requirement: Internal control activities over allowable costs and activities should be effectively designed and implemented to provide assurance of proper documentation, calculation, and authorization. Condition: NACDC FS updated its payroll tracking early in the year, however, as part of our sample we selected 2 items before this update and therefore we were not provided detailed support for these 2 transactions. An additional two items had activities on the timesheet that fell outside of the Direct Administrative expense category. Finally, another 2 payroll transactions were paid for activities that fell outside of the Development Services category. Context: We selected a sample of 10 payroll transactions out of a population of 99 payroll transactions charged to the Native Initiatives program. Our sample size was based on 10% of the population. Questioned Costs: $12,449. Effect: Payroll amounts charged to the Native Initiatives program could be misstated. Cause: NACDC FS has improved its payroll tracking process during 2021 which corrected issues noted in prior year. While controls have been updated, improvements in time tracking could be made to avoid charging payroll costs to categories not fully supported by timesheets. Repeat: Yes - Years as Repeat Finding: Two; 2020-004, 2019-003 Auditor's Recommendation: NACDC FS should continue to improve on its payroll tracking, specifically with regard to activities performed that are aligned with allowable financial assistance activities. View of Responsible Officials: A new finance manager was hired to replace the previous person who retired in April 2021. In the spring of 2021, the new finance manager immediately revised timesheets to include an area for employees to identify funding sources and functional allocation of time. The questioned costs were nominal and were timesheets prior to April 2021. An outside accounting firm was also hired in early 2022 to help develop and implement new financial systems to ensure strong internal controls and grant management systems. All issues have been addressed and strong financial policies and procedures are now in place.

Reporting Federal Program Information: Funding agency: Department of the Treasury Title: Native Initiatives CFDA Number: 21.012 Award year and number: 2018 181NA023065 & 2019 191NA052821 Criteria or Specific Requirement: For each award a "Uses of Award" report is required to be submitted annually. The Uses of Award report requires expenses during the period to be categorized under four areas: Direct Administrative Expenses, Development Services, Financial Products, and Loan Loss Reserves. Under the General Award Terms and Conditions for each grant, the recipient may use up to fifteen percent (15%) of the total Financial Assistance as Direct Administrative Expenses. Additionally, the Terms and Conditions note direct costs incurred to provide Development Services and Financial Services do not constitute Direct Administrative Expenses. Condition: The amounts reported as Direct Administrative Expenses, Development Services, Financial Products and Loan Loss Reserve on the Use of Awards reports were not directly supported by accounting records. Direct Administrative Expenses and Developments services were not specifically identified with expenses in the accounting records. The new loans made using Financial products did not have subsidiary loan receivable ledgers that completely reconcile to the Use of Awards reports. Context: We requested supporting documentation for the amounts reported on the two Use of Award Reports we reviewed. ? For each report received, we were able to trace the Direct Administrative Services and Development Services to an excel workbook that summarized payroll costs into these categories. However, we were not provided information as to how this excel workbook agreed to underlying payroll records. ? For the report related to the 2019 grant, the Direct Administrative Expense amount of $62,175 exceeded 15% of total expenses ($322,759) by $13,761. ? For the report related to the 2019 grant, a Loan Loss Reserve (LLR) amount of $189,168 was reported. The total loan balances across all CDFI loans amounted to $539,269 per the provided loan portfolio. NACDC FS uses a 10% allowance. Under this methodology the LLR should be approximately $53,927, resulting in a difference of $135,241. ? For the report related to the 2019 grant, Financial Products of $3,733 were reported. Per the loan portfolio we were provided, new loans made in 2020 related to CDFI funding totaled $230,163. Questioned Costs: Unknown Effect: The program does not appear in compliance with Reporting compliance requirements. Cause: Internal controls over the reporting compliance requirement do not appear to be in place to ensure amounts reported in the Uses of Awards reports were directly supported by accounting records. Repeat: No Auditor's Recommendation: Procedures should be implemented to ensure the reporting in accounting records agrees with the Uses of Award reporting. View of Responsible Officials: NACDC FS agrees with the finding and has a plan in place to correct it.

Allowable Cost & Activities Allowed Federal Program Information: Funding agency: Department of the Treasury Title: Native Initiatives CFDA number: 21.012 Award year and number: 2018 181NA023065 & 2019 191NA052821 Criteria or Specific Requirement: Internal control activities over allowable costs and activities should be effectively designed and implemented to provide assurance of proper documentation, calculation, and authorization. Condition: We were unable to test the two main uses of the grant funds payroll and new loans made. However, our procedures to gain an understanding of the design and implementation of internal control over compliance discovered the following: ? The expenditures related to payroll could not be traced to underlying accounting records. We were able to review a summarized report, but the source of the information in the report could not be substantiated against payroll records. ? We were not given opportunity to test new loans made from the program after we determined the loan population to sample from. Context: We inquired of accounting staff as to how the expenditures reported on the Schedule of Expenditures of Federal Awards (SEFA) were derived and requested supporting information to agree these amounts to the underlying accounting records. Questioned Costs: Unknown Effect: Amounts reported on the SEFA could be misstated. The opinion on compliance was disclaimed. Cause: It doesn't appear that internal controls are in place that provide reasonable assurance that the payroll charges are accurate, allowable, and properly allocated. Repeat: No Views of Responsible Officials: NACDC FS agrees with the finding and has a plan in place to correct it.

Allowable Cost & Activities Allowed Federal Program Information: Funding agency: Department of the Treasury Title: Community Development Financial Institutions & Native Initiatives CFDA number: 21.020 & 21.012 Award year and number: 2018 - 181NA023065 & 2017 - 171NA021917 Criteria or Specific Requirement: Internal control activities over payroll should be effectively designed and implemented to provide assurance of proper documentation, calculation, and authorization. All Personnel Action Forms should properly approved. Employee timesheets should be properly approved. Condition: Our testing of controls over payroll noted the following issues: Seven Personnel Action Forms were not provided. Three timesheets were missing approvals and three timesheets were not provided. Context: We inquired of accounting staff and documented the payroll process during our walkthrough of the payroll cycle. We tested a sample of 25 payroll transactions out of 280 transactions for the period under audit. We sampled in accordance with generally accepted auditing standards, however, the sample was not statistically valid because we did not quantify sampling risk. Questioned Costs: None Effect: The risk of fraud and abuse is increased by not following properly designed and implemented controls over the processing of payroll. Cause: Management failed to always follow policies and procedures regarding approving Personnel Action Forms and Time Sheets. Repeat: No Auditor's Recommendation: NACDC Financial Services should implement effective controls over payroll ensuring proper documentation and retention of Personnel Action Forms and proper authorization of time sheets. View of Responsible Officials: Based on the testing, the auditor determined that controls were not in place to provide assurance of proper documentation, calculation, and authorization of payroll related activities. With its small employee base, NACDC FS has relied on a less formal, but consistent system of Executive Director approvals that trigger payroll actions which has worked to this date. To improve on its practices NACDC FS is implementing a more comprehensive time sheet system to better track staff hours. It already has a expense report system in place. Since most of the organization?s funding sources, with the exception of those designated for lending, are designated to support its varied program needs, costs are most often assigned in accordance with the timing of specific grant timeframes. Compliance with grant requirements is still maintained. Even with timesheets fully in use, in most cases, staff will be allocating their time by type of work activity. Unless they can identify a specific activity that is unique to a particular grant or other source of funds, management will maintain the flexibility to assign costs to appropriate funding sources.