City of Soap LakeLocal Government

The City did not have adequate internal controls for ensuring compliance with procurement requirements and charged expenditures that lacked support for the Water and Waste Disposal Systems for Rural Communities program. Assistance Listing Number and Title: 10.760, Water and Waste Disposal Systems for Rural Communities Federal Grantor Name: United States Department of Agriculture (USDA) Federal Award/Contract Number: N/A Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A Known Questioned Cost Amount: $47,764 Prior Year Audit Finding: Yes for Procurement, Finding 2020-002 Background The Water and Waste Disposal Systems for Rural Communities program is designed to assist rural communities in obtaining safe drinking water and adequate waste disposal facilities, which are prerequisites for economic growth. During fiscal year 2021, the City spent $1,669,307 in loan and grant funds awarded by the U.S. Department of Agriculture Rural Utilities Service. The City used this program funding for its water and sewer improvement projects. Federal regulations require recipients to establish, document and maintain internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Procurement Federal regulations require recipients to follow their own documented procurement procedures, which must conform to the Uniform Guidance procurement standards found in 2 CFR § 200.318-327. The procedures must reflect the most restrictive of applicable federal requirements, state or local procurement thresholds and methods when using federal funds. Federal regulations also require recipients to maintain written standards of conduct covering conflicts of interest and governing the actions of employees engaged in selecting, awarding or administering contracts with federal funds. Allowable Costs Federal regulations establish principles and standards for determining allowable direct and indirect costs for federal awards. All costs that recipients charge to the program must comply with program requirements and recipients must support this compliance with proper documentation that demonstrates costs are allowable. Description of Condition Procurement Our audit found the District did not have adequate internal controls for ensuring compliance with federal procurement requirements. Specifically, the City did not establish written procurement procedures and standards of conduct that conform to Uniform Guidance requirements, as federal regulations require. We consider this deficiency in internal controls to be a significant deficiency. Allowable Costs Although the City’s internal controls were adequate for ensuring it materially complied with the program’s allowable activities and costs requirements, the City charged the program for costs that did not have support. Cause of Condition Procurement The City typically does not receive a federal grant compliance audit, and staff and management did not know about the requirements to update the City’s written procurement policies and procedures to comply with federal regulations and establish written standards of conduct until our previous audit that was issued in May 2023. Allowable Costs The City has experienced staff turnover since it charged these costs to the program. Current staff and officials from the granting agency could not locate support for these costs during the audit. Effect of Condition and Questioned Costs Procurement Although the City’s policies did not conform to Uniform Guidance, we found the City complied with federal requirements for competitive solicitation of public works contractors in the project tested. However, without written procurement procedures, the City is at an increased risk of not complying with the most restrictive of federal, state or local procurement methods and standards of conduct requirements when using federal funds. Allowable Costs The City charged two expenditures to the program, totaling $47,764, for professional services and other service fees that lacked support. By not retaining support for these expenditures, the City cannot demonstrate the costs were allowable. As a result, we are questioning these costs. Federal regulations require the State Auditor’s Office to report known questioned costs that are more than $25,000 for each type of compliance requirement. We question costs when we find the City has not complied with grant regulations and/or when it does not have adequate documentation to support expenditures. Recommendation Procurement We recommend the City establish written procurement and standards of conduct procedures that conform to federal procurement standards in Uniform Guidance (2 CFR 200.318-327). Allowable Costs We recommend the City ensure all costs it charges to federal programs are allowable and comply with cost principles, and retain support for all costs charged to the programs. We further recommend the City consult with the grantor to determine whether it needs to repay the questioned costs. City’s Response City’s Response: The City acknowledges the finding regarding unsupported charges to the Water and Waste Disposal Systems for Rural Communities program. We recognize that inadequate procurement controls contributed to this finding. In response, we are implementing comprehensive procedures to ensure that all federal grant expenditures are adequately documented and comply with the requirements of 2 CFR Part 200. This includes establishing formal procurement policies aligned with federal requirements, creating pre-approval workflows for all federal grant purchases, implementing supervisory review processes, and developing strengthened document retention protocols for all federal award transactions and supporting procurement documentation. Auditor’s Remarks We appreciate the City’s commitment to resolving the issues noted and we will follow up during the 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 200, Uniform Guidance, section 318 General procurement standards, establishes requirements for documented procurement procedures which reflect applicable state, local and federal laws and regulations.

2020-002 The City did not have adequate internal controls for ensuring compliance with federal procurement requirements. Assistance Listing Number and Title: 10.760 - Water and Waste Disposal Systems for Rural Communities Federal Grantor Name: U.S. Department of Agriculture Federal Award/Contract Number: N/A Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A Known Questioned Cost Amount: $0 Background The Water and Waste Disposal Systems for Rural Communities program is designed to assist rural communities in obtaining safe drinking water and adequate waste disposal facilities, which are prerequisites for economic growth. During fiscal year 2020, the City spent $3,960,279 in loan and grant funds awarded by the U.S. Department of Agriculture Rural Utilities Service. The City used this program funding for its water and sewer improvement projects. Federal regulations require recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Federal regulations require recipients to follow their own documented procurement procedures, which must conform to the Uniform Guidance procurement standards found in 2 CFR ? 200.318-327. The procedures must reflect the most restrictive of applicable federal requirements, state laws and local policies. When using federal funds to procure goods and services, governments must apply the more restrictive requirements by obtaining quotes or following a competitive procurement process, depending on the estimated cost of the procurement activity. Additionally, federal regulations require recipients to maintain written standards of conduct covering conflicts of interest and governing the actions of employees engaged in selecting, awarding or administering contracts with federal funds. Description of Condition Although the City has written procurement policies that allow it to initiate and approve the procurement of goods and services, the policies do not conform to the most restrictive requirements and do not include required procedures to follow for soliciting and awarding public works contracts. Additionally, the City?s policies do not include other required procedures for procuring transactions, such as obtaining quotations for small purchases, requesting proposals for architectural and engineering services, piggybacking, contract cost and price analysis, bonding requirements, and more. We also found the City has not established written standards of conduct procedures, which federal regulations require. We consider these deficiencies in internal controls to be a material weakness that led to material noncompliance. This issue was reported as a finding in the prior audit as finding 2019-002. Cause of Condition The City has not received regular federal grant compliance audits, and staff and management were not aware of the requirements to update the City?s written procurement policies and procedures to comply with federal regulations. Staff and management also did not know the City was required to establish standards of conduct policies. Effect of Condition Although the City?s policies did not conform to Uniform Guidance, our testing found the City complied with federal requirements for competitive solicitation of public works contractors. However, without updated written procurement procedures, the City is at greater risk of noncompliance with the most restrictive procedures when procuring contractors with federal funds. Recommendation We recommend the City update its written procurement policies to conform to Uniform Guidance (2 CFR ? 200.318-327) for all procurement activities. We further recommend the City establish written standards of conduct procedures that also comply with Uniform Guidance requirements. City?s Response We are reviewing current Procedure and Purchasing Policy for updating, to correctly reflect the Federal requirements. Auditor?s Remarks We appreciate the City?s commitment to respond to these issues and thank the city for its cooperation and assistance during the audit. We will review the corrective action taken during the 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 200, Uniform Guidance, section 318 General procurement standards, establishes requirements for documented procurement procedures which reflect applicable state, local and federal laws and regulations.

2019-002 The City did not have adequate internal controls for ensuring compliance with federal procurement and reporting requirements.CFDA Number and Title: 10.760 ? Water and Waste DisposalSystems for Rural CommunitiesFederal Grantor Name: U.S. Department of AgricultureFederal Award/Contract Number: N/APass-through Entity Name: N/APass-through Award/ContractNumber: N/AQuestioned Cost Amount: $0BackgroundThe Water and Waste Disposal Systems for Rural Communities program is designed to assist rural communities in obtaining safe drinking water and adequate waste disposal facilities, which are prerequisites for economic growth. During fiscal year 2019, the City spent $916,498 in loan and grant funds awarded by the U.S. Department of Agriculture Rural Utilities Service. The City used this program funding for its water and sewer improvement projects.Federal regulations require recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls.ProcurementFederal regulations require recipients to follow their own documented procurement procedures, which must conform to the Uniform Guidance procurement standards found in 2 CFR ? 200.318-327. The procedures must reflect the most restrictive of applicable federal requirements, state laws and local policies. When using federal funds to procure goods and services, governments must apply the more restrictive requirements by obtaining quotes or following a competitive procurement process, depending on the estimated cost of the procurement activity.Additionally, federal regulations require recipients to maintain written standards of conduct covering conflicts of interest and governing the actions of employees engaged in selecting, awarding or administering contracts with federal funds.ReportingTo comply with federal reporting requirements, the City must annually submit forms RD 442-2, Statement of Budget, Income and Equity, and RD 442.3, Balance Sheet, to the U.S. Department of Agriculture (USDA). These forms report the financial operations and financial status of the borrower?s water and waste disposal projects.Description of ConditionProcurementAlthough the City has written procurement policies that allow it to initiate and approve the procurement of goods and services, the policies do not conform to the most restrictive requirements and do not include required procedures to follow for soliciting and awarding public works contracts. Additionally, the City?s policies did not include other required procedures for procuring transactions, such as obtaining quotations for small purchases, requesting proposals for architectural and engineering services, piggybacking, contract cost and price analysis, bonding requirements, and more.We also found the City has not established written standards of conduct procedures, which federal regulations require.ReportingThe City did not have procedures in place to submit its required forms to USDA during fiscal year 2019.We consider these internal control deficiencies to be material weaknesses, which led to material noncompliance.These issues were not reported as findings in the prior audit.Cause of ConditionProcurementThe City has not received a federal grant compliance audit recently, and staff and management were not aware of the requirements to update the City?s written procurement policies and procedures to comply with federal regulations. Staff and management also did not know the City was required to establish standards of conduct policies.ReportingThe City experienced turnover in its key management position that was responsible for preparing these forms, and did not adequately train new staff or inform them of the federal reporting requirements.Effect of ConditionProcurementAlthough the City?s policies did not conform to Uniform Guidance, our testing found the City complied with federal requirements for competitive solicitation of public works contractors. However, without updated written procurement procedures, the City is at greater risk of noncompliance with the most restrictive procedures when procuring contractors with federal funds.ReportingUSDA uses the financial reports to assess the City?s compliance with grant and loan requirements, and to evaluate if it can maintain financial operations and maintenance of its water and wastewater disposal systems. Because the City did not provide the required financial information to USDA during 2019, the grantor could not use these reports to assess the City?s compliance or its ability to financially operate and maintain its water and wastewater disposal systems.Although the City did not submit its required reports during fiscal year 2019, we verified USDA subsequently received the reports in September 2020.RecommendationWe recommend the City update its written procurement policies to conform to Uniform Guidance (2 CFR ? 200.318-327) for all procurement activities. We further recommend the City establish written standards of conduct procedures that also comply with Uniform Guidance requirements.Additionally, we recommend the City ensure it submits all required annual reports to USDA.City?s Response?We are reviewing current Procedure and Purchasing Policy for updating, to correctly reflect the Federal requirements.Auditor?s RemarksWe appreciate the City?s commitment to respond to these issues and thank the city for its cooperation and assistance during the audit. We will review the corrective action taken during the next audit.Applicable Laws and RegulationsTitle 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 200, Uniform Guidance, section 318 General procurement standards, establishes requirements for documented procurement procedures which reflect applicable state, local and federal laws and regulations.Title 7 CFR, Part 1780, Water and Waste Loans and Grants, section 47, Borrower accounting methods, management reporting and audits, establishes requirements for submitting annual management reports to the grantor

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