MERCER ISLAND SCHOOL DISTRICTLocal Government

2020-001 The District lacked adequate internal controls for ensuring compliance with procurement requirements for the Special Education program. "See Schedule of Findings and Questioned Costs for chart/table" Background The objective of the Special Education program is to ensure students with disabilities receive a free and appropriate public education. The program has specifically designed instruction that addresses the unique needs of an eligible student. During fiscal year 2020, the District spent $598,374 in federal funds through its Special Education program. Federal regulations require recipients to establish and follow internal controls for ensuring compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. When using federal funds to procure goods and services, federal regulations require recipients to follow their own written procurement procedures, which must conform to federal requirements and reflect the most restrictive of local, state or federal laws. Federal regulations are most restrictive for professional service contracts with an estimated cost between $3,500 and $150,000, and require recipients to obtain price or rate quotations from an adequate number of qualified sources. District policy allows noncompetitive procurement when the circumstance meets specific criteria, such as inadequate competition or single source purchases. The District must prepare and keep documentation supporting the applicable circumstance and rationale for noncompetitive procurement. Additionally, state law requires the governing body to record its waiver of competitive bidding requirements. Description of Condition District policy does not conform to federal requirements for professional service contracts. The District did not keep documentation demonstrating it performed a competitive process for soliciting quotes. Additionally, the District did not follow its policy for documenting its rationale for using noncompetitive procurement for two professional service contracts, including its conclusion that other contractors did not offer the same or similar service at the time of the procurement. Further, the District did not formally waive procurement requirements, as state law requires. We consider this internal control deficiency to be a material weakness that led to material noncompliance. The issue was not reported as a finding in the previous audit. Cause of Condition The District experienced significant turnover with the Director of Special Education position over the last four years; the Director is responsible for procuring transactions within the program and documenting the use of noncompetitive procurement. Additionally, the District did not dedicate the necessary time or resources for updating its procurement policy to reflect federal requirements and procedures for professional service contracts. As a result of turnover and policies not reflecting federal regulations, staff misunderstood the amount and type of documentation the District needed to keep to demonstrate it properly procured the services, and how it determined the two professional service contracts met sole source criteria at the time of procurement. Effect of Condition and Questioned Costs The District did not comply with its policy or federal procurement requirements. The District procured professional services from two contractors, totaling $83,681, without documenting its competitive process and quotes received or sole source determinations. Therefore, the District cannot demonstrate it received the best price for the services it purchased. These transactions are allowable under the federal program; therefore, we are not questioning costs. Recommendation We recommend the District establish and follow internal controls for procuring professional service contracts made with federal funds, and keep documentation supporting its decision to obtain quotes or perform noncompetitive procurement. Further, we recommend the District formally waive procurement requirements, as state law requires. District?s Response The District concurs with the Auditor?s Recommendations and the District will revise the policies and procedures to include Federal regulations and guidance, internal practices and improve document retention. Auditor?s Remarks We appreciate the District?s commitment to resolve this issue and thank the District for its cooperation and assistance during the audit. We will review the corrective action taken during our next regular 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. 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, 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 200, Uniform Guidance, section 319, Competition, establishes the requirement that all procurement transactions with Federal funds be conducted in a manner providing full and open competition consistent with standards of this section. Title 2 CFR Part 200, Uniform Guidance, section 320 Methods of procurement to be followed, establishes requirements for procuring with Federal funds by non-federal entities. RCW 39.04.280, Competitive bidding requirements - Exemptions