City of Arlington

2020-001 The City?s internal controls were inadequate for ensuring compliance with federal requirements for allowable activities and costs and subrecipient monitoring activities. ?See Schedule of Findings and Questioned Costs for chart/table? Background The purpose of the Coronavirus Relief Fund (CRF) program is to provide funding to state, territorial, tribal and certain eligible local governments to cover necessary expenditures incurred because of the COVID-19 pandemic. During fiscal year 2020, the City spent $1,073,162 in program funds to cover additional costs the City incurred during the pandemic, including teleworking equipment and payroll. Additionally, the City spent $349,363 of these funds to establish a program that provided assistance payments to local businesses affected by COVID-19. The program funds also included $150,000 passed through to one subrecipient to fulfill components of the program?s objectives. The portion of program funds the City passed through to the subrecipient provided emergency assistance to households financially affected by COVID-19. Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. For the CRF program, the costs that recipients submit for federal reimbursement must have been necessary for responding to the COVID-19 pandemic and not previously included in budgets prior to March 27, 2020. All costs recipients charge to the CRF program must comply with program requirements and be supported by proper documentation demonstrating costs are specifically related to COVID-19 activities. When the City passes on federal funds to subrecipients, federal regulations require the City to ensure every subaward agreement clearly identifies if it is a federal award and includes the applicable federal requirements. Further, the City must evaluate each subrecipient?s risk of noncompliance with federal requirements to determine the appropriate amount and type of subrecipient monitoring. Subrecipient monitoring requirements include ensuring compliance with program requirements. Description of Condition Activities Allowed/Allowable Costs The City established nine eligibility criteria for local businesses to receive assistance payments, but it did not have a process for verifying that businesses met all of these criteria. City employees did verify that businesses met six of the 14 criteria. However, for the remaining criteria, City employees relied on each business? application and self-attestation without verifying the information was accurate to ensure businesses were eligible to receive assistance payments. Subrecipient Monitoring The City contracted with a local nonprofit organization to administer the housing assistance program. The nonprofit determined which households were eligible to receive funds and used program funds to provide emergency rental assistance to households affected by COVID-19. The nonprofit is considered a subrecipient because determining household eligibility is carrying out part of the program?s objectives on the City?s behalf. However, the City incorrectly determined the nonprofit was a beneficiary and, as a result, did not follow subrecipient monitoring requirements. As a subrecipient, the contract with the nonprofit did not clearly identify it was a subaward and did not include other information required for federal awards. Additionally, the City did not perform a risk assessment and did not have documentation showing it monitored the nonprofit for program compliance. We consider these deficiencies in internal controls to be material weaknesses, which led to material noncompliance. These issues were not reported as a finding in the prior audit. Cause of Condition Many businesses and people experienced sudden financial hardship due to the COVID-19 pandemic. To help preserve its local economy, the City acted quickly by providing assistance payments to businesses and passing funds to a nonprofit for individual housing relief. However, the CRF program was a new type of federal funding for the City. The City has not previously used federal funds to provide direct assistance payments to its local businesses or passed funding through to subrecipients. Additionally, City employees said they were unaware of the Washington State Department of Commerce?s guide that clarified the distinctions between contractor, subrecipient, and beneficiary relationships for this program. As such, City employees lacked adequate experience and needed training to know that they should have independently verified each business met all eligibility criteria before awarding assistance and correctly identified the nonprofit agency as a subrecipient. Effect of Condition and Questioned Costs Activities Allowed/Allowable Costs Without obtaining documentation from business grant applicants, the City cannot ensure business relief grant costs were allowable. The City retroactively requested and reviewed supporting documentation from state agencies and applicants to confirm they met eligibility requirements. However, the City could not obtain support for 26 of 108 applicants, which received a total of $79,093. Without this support, we cannot confirm the expenditures the City charged to the program were allowable. As such, we are questioning these costs. Subrecipient Monitoring When contracts do not indicate they are federal subawards and do not include the required information, subrecipients are at an increased risk of not knowing the award comes from a federal program. This also increases the risk subrecipients would not know they need to comply with specific program requirements, which could lead to spending funds for unallowable purposes. Further, without performing risk assessments and monitoring subrecipients, the City cannot ensure it is performing the proper level of monitoring and ensure subrecipients are complying with program requirements. The City performed a risk assessment and reviewed the subrecipient?s expenditures for compliance with program requirements during the audit. Therefore, we are not questioning the subrecipient costs. Recommendation We recommend the City provide adequate training to staff responsible for administering federal programs. We also recommend the City dedicate the necessary time and resources to staying updated on program guidance and ensuring compliance with all program requirements. This includes verifying that all funding recipients meet all of the City?s eligibility criteria, ensuring all subawards are clearly identified, and including all required elements in the subaward agreements. City?s Response We want to thank the Washington State Auditor?s Office for the opportunity to respond to the audit conclusions. We value their relationship and appreciate their feedback on the Coronavirus Relief Fund (CRF) activity. The pandemic caused significant financial hardship to local businesses and households within the Arlington community. The city?s priority was to distribute CRF funds as quickly as possible to provide much needed and immediate support to the community. Businesses were closing because they couldn?t pay rent and in an effort to provide financial assistance, the city developed a rent relief program based upon eligibility and reporting requirements. While the city obtained documentation to support many of the eligibility requirements, it did rely on a certification statement for some of the criteria in lieu of obtaining physical documentation. It is the City?s understanding that (this) has been an allowed practice to accept a certification statement for verification of other federal compliance requirements such as suspension and debarment without obtaining further documentation, the City followed this practice in good faith and believed it had complied with confirming eligibility requirements for rent relief. The City would also like to clarify that although questioned costs are noted, the city believes that all rent relief payments were justified and allowable by the documentation that was provided by each applicant. The City also acknowledges that it misinterpreted the distinction between a beneficiary and sub-recipient and incorrectly classified one payment made to a subrecipient. The city did retroactively perform a risk assessment and audit of the payment to the subrecipient in which no issues were identified. The City is committed to establishing and following effective internal controls to ensure compliance with federal grant requirements. Going forward, under similar circumstances, the city will obtain documentation to support all eligibility criteria for assistance payments and ensure appropriate subrecipient monitoring is performed. Auditor?s Remarks We appreciate the steps the City has taken to resolve this issue and will review the condition 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. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes subrecipient monitoring and management requirements for pass through entities. Title 2 CFR Part 200, Uniform Guidance, section 331, Subrecipient and contractor determinations, establishes the requirements for pass through entities to make case-by-case determinations whether the agreement it makes for the disbursement of federal program funds casts the party receiving the funds in the role of a subrecipient or contractor and provides characteristics of the relationships. 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 42 U.S. Code of Federal Regulations (CFR) Part 801, Coronavirus Relief Fund establishes allowable costs of the program. 2 CFR Part 200, Subpart E, cost principles do not apply to the Coronavirus Relief Fund. Therefore, auditors refer to guidance and FAQs from the U.S. Department of the Treasury and the pass-through agency, the Washington State Department of Commerce, as the criteria when testing the allowability of costs under the Fund. Guidance and FAQs from both the U.S. Department of the Treasury and the Washington State Department of Commerce can be found at https://www.commerce.wa.gov/serving-communities/local-government/covid-resiliency-grants/. These documents speak to the grantors? expectation that local governments obtain documentation that supports how businesses met eligibility criteria.