North Kitsap School District No. 400

The District did not have adequate internal controls and did not comply with time-and-effort requirements. Assistance Listing Number and Title: 84.010 – Title I Grants to Local Educational Agencies Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: N/A Pass-through Entity Name: Office of the Superintendent of Public Instruction (OSPI) Pass-through Award/Contract Number: GT-03165, GT-03767, GT-03499   Known Questioned Cost Amount: $0 Prior Year Audit Finding: N/A       Background The objective of the Title I program is to improve the teaching and learning of children who are at risk of not meeting academic standards and reside in areas with high concentrations of children from low-income families. During fiscal year 2025, the District spent $1,103,151 in federal funds from Title I. Federal regulations require recipients to establish, document and maintain effective internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. The District is responsible for ensuring it supports all payroll costs it charges to the program with adequate time-and-effort documentation, as required by federal regulations and the awarding agency. Time-and-effort documentation must also be signed and dated after employees complete the work.   Description of Condition The District’s internal controls were ineffective for ensuring it supported all salaries and benefits it charged to the program with appropriate time-and-effort documentation, as federal regulations and OSPI require. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. Cause of Condition Although District staff tracked allowable payroll costs, they misunderstood the requirement to obtain time-and-effort documentation supporting actual time worked in the program. District staff responsible for time-and-effort documentation incorrectly believed staff assignments and budget allocations established at the beginning of the year were sufficient to meet requirements. Effect of Condition The District did not obtain time-and-effort documentation for 16 employees whose payroll costs totaling $$796,079 it charged to the program.  Without adequate time-and-effort documentation, the District cannot demonstrate compliance with the awarding agency’s documentation requirements to support costs charged to federal programs. Further, the District cannot assure federal grantors that payroll costs it charged to the program were accurate and valid. During the audit, the District obtained and provided the signed time-and-effort records to support the payroll costs it charged to the program; therefore, we are not questioning these costs.  Recommendation We recommend the District design and follow internal controls to ensure it complies with federal and OSPI requirements for obtaining signed time-and-effort-documentation timely, such as documenting time-and-effort procedures in a policy as required by the Uniform Guidance and OSPI. District’s Response North Kitsap School District acknowledges that personnel responsible for the Title I program misunderstood the requirements outlined in OSPI Bulletin 039-24 regarding Time and Effort documentation under the Fixed Schedule system. Although North Kitsap School District had been approved by OSPI to use the Fixed Schedule Time and Effort substitute system, we misinterpreted the guidance and did not obtain the required Time and Effort Certifications. Despite this misunderstanding, North Kitsap School District has consistently tracked all allowable payroll costs and maintained documentation supporting the distribution of employee salaries through established work schedules at the beginning of each school year. Any revisions to these schedules have been properly documented in accordance with district procedures. In response to this finding, North Kitsap School District has already taken corrective action and reinstated the use of Time and Effort Certifications to ensure full compliance moving forward. Auditor’s Remarks We thank the District for its cooperation and assistance during the audit and acknowledge its commitment to resolve this finding. We will review the corrective action taken during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. Title 2 CFR Part 200, Uniform Guidance, Subpart E, Cost Principles, establishes requirements for determining allowable costs and supporting costs allocated to federal programs. Office of Superintendent of Public Instruction to Bulletin 039-24, Time and Effort (T&E) Reporting, establishes requirements for documenting time-and-effort, including fixed schedule systems.

Finding ref number: 2025-001 Finding caption: The District did not have adequate internal controls and did not comply with time-and-effort requirements. Name, address, and telephone of District’s contact person: Renata Sorna, Assistant Director of Business, Finance and Operations North Kitsap School District 18360 Caldart Ave NW Poulsbo, WA 98370 Tel: (360) 396-3011 Corrective action the auditee plans to take in response to the finding: We have reinstated the semi-annual and annual certification process requiring signatures from both employees and their direct supervisors to verify the work completed after that fact. In addition, we are developing a procedure for policy 6106: Allowable Costs for Federal Programs. Anticipated date to complete the corrective action: Reinstating the semi-annual certifications has already been completed for the 2025-2026 school year. We anticipate finalizing the procedure by the end of school year 2025-2026.

2019-001 The District did not have adequate internal controls to ensure compliance with federal Impact Aid program cost principles. Description of Condition The objective of the Impact Aid program is to provide financial assistance to local educational agencies whose local revenues or enrollments are adversely affected by federal activities. These activities include the federal acquisition of real property or the presence of children residing on tax-exempt federal property or residing with a parent employed on tax-exempt federal property (?federally connected? children). Payments are made based on the number of federally connected children reported on an annual application, with additional funds provided for certain federally connected children with disabilities. During the 2018-19 school year, the District received $1,411,842 in Impact Aid funds. Of this amount, it received $195,566 for federally connected children with disabilities. Much of the funding received was not subject to allowable costs/cost principles requirement. However, those requirements are applicable to the funding it receives for federally connected children with disabilities to conduct programs or projects for the free appropriate public education of the federally connected children with disabilities who generated those funds. The District used the funding received for federally connected children with disabilities to pay the salaries and benefits of special education staff. Of the total $195,566 in payroll costs, the District posted a journal entry to transfer $82,189 in costs from the Federal Special Education program to the Impact Aid program. We reviewed the payroll transactions to determine if the District supported salaries and benefits charged to Impact Aid with adequate time and effort documentation as required by federal regulations. The District provided time-and-effort documentation to show staff worked with children with disabilities but did not show that those students were federally connected. Federal regulations require recipients of federal funds to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of program controls. We found the District?s internal controls were not adequate to ensure compliance with the allowable costs principles applicable to funding received to support federally connected special education students. We consider this deficiency in internal controls to be a significant deficiency. This issue was not reported as a finding in the prior audit. Cause of Condition District staff were aware of time-and-effort requirements and thought the time and effort documentation used in the Federal Special Education program would be sufficient to meet Impact Aid program requirements. Staff were not aware that when it charged the payroll costs to the Impact Aid program, the time and effort documentation must demonstrate the charged costs served only federally connected children with disabilities. Effect of Condition and Questioned Costs Although the District did not have adequate time-and-effort documentation for the $82,189 in payroll costs charged to the Impact Aid program, the District provided alternative documentation to show special education staff worked with federally connected children with disabilities, supporting payroll costs of $21,088. The District did not provide support that staff worked with federally connected students for the remaining $61,101 in payroll costs. Therefore, we are questioning these costs. The District?s noncompliance with grant requirements could jeopardize future federal funding and might require it to return federal funds to the grantor. Recommendation We recommend the District establish and follow adequate internal controls and monitoring to ensure it complies with all federal compliance requirements for its Impact Aid grant. This includes obtaining adequate time-and-effort documentation to support staff worked with federally connected children with disabilities. District?s Response North Kitsap School District personnel in the Special Education Department and the Business Department did not fully understand the requirements for documentation of the Federal Impact Aid funding for federally connected special education children. Thus the documentation to connect expenditures using a detailed account code string to specific federally connected children was not completed. However, regardless of the insufficient documentation, the North Kitsap School District incurred more total expenditures for Special Education Children, including federally connected children, far in excess of the revenues received from all state and federal sources. Local levy revenues of $1,292,388 were used to supplement Special Education revenues from state and federal sources. While the Federal Impact Aid revenues received does not have all the documentation required, the federal revenues were utilized to support the Special Education needs of the federally connected Special Education children. Auditor?s Remarks We appreciate the District?s commitment to resolve the finding and thank the District for its cooperation and assistance during the audit. We will review the corrective action taken during the next regular audit. Applicable Laws and Regulations The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Audition Standards, section 935, Compliance Audits, paragraph 11. Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303 Internal controls, establishes internal control requirements for management of Federal awards to non-Federal entities. Title 2 CFR Part 200 Uniform Guidance, Subpart E, Cost Principles, ? establishes requirements for determining allowable costs and supporting costs allocated to federal programs. Office of Superintendent of Public Instruction (OSPI) Addendum to Bulletin 048-17, Federal Fiscal Policy, establishes requirements for documenting time-and-effort for employees that work in federal programs.

Finding ref number: 2019-001 Finding caption: The District did not have adequate internal controls to ensure compliance with Federal Impact Aid program cost principles. Name, address, and telephone of District contact person: Jason Rhoads, Executive Director of Business, Finance and Operations 18360 Caldart AVE NE Poulsbo, WA 98370 Tel: (360) 396-3010 Corrective action the auditee plans to take in response to the finding: North Kitsap School District has already taken steps to start correcting issues described in Finding 2019-001. To assure our understanding and compliance with federal Impact Aid program cost principles we have obtained Addendum 048-17, Federal Fiscal Policy, from the Superintendent of Public Instruction (OSPI), that establishes requirements for documenting time and effort for employees that work in the federal program. We now understand the grant requirements that all employees charged to Impact Aid grant must document time and effort they spent working specifically with federally connected children. We are in the process of establishing internal controls to assure that payroll costs charged to program 29 (federally connected children with disabilities) will have adequate time and effort documentation. Our District appreciates the State Auditor?s recommendations and will establish monitoring procedures to assure the effectiveness of internal controls. Anticipated date to complete the corrective action: August 31, 2020