City of LynnwoodLocal Government

The City did not have adequate internal controls for ensuring compliance with federal suspension and debarment requirements. Assistance Listing Number and Title: 21.027 – COVID 19 – Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: N/A Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A Known Questioned Cost Amount: $0 Prior Year Audit Finding: N/A Background The purpose of the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) is to respond to the COVID-19 pandemic’s negative effects on public health and the economy, provide premium pay to essential workers during the pandemic, provide government services to the extent COVID-19 caused a reduction in revenues collected, and make necessary investments in water, sewer or broadband infrastructure. In fiscal year 2023, the City spent $2,290,160 to administer the program. 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. Federal requirements prohibit recipients from contracting with or purchasing from parties suspended or debarred from doing business with the federal government. Whenever the City enters into contracts or purchases goods and services that it expects to equal or exceed $25,000, paid all or in part with federal funds, it must verify that the contractors are not suspended, debarred or otherwise excluded from participating in federal programs. The City may verify this by obtaining a written certification from the contractor, adding a clause or condition into the contract that states the contractor is not suspended or debarred, or checking for exclusion records in the U.S. General Services Administration’s System for Award Management at SAM.gov. The District must verify this before entering into the contract, and must maintain documentation demonstrating compliance with this federal requirement. Description of Condition Our audit found the City did not have adequate controls in place to verify one of three contractors it paid more than $25,000 in federal funds was not suspended or debarred from participating in federal programs before entering the contract or paying them. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. Cause of Condition City’s finance staff responsible for checking federal suspension and debarment status are aware of such requirements and typically check suspension and debarment for contracts procured using federal awards. In this case, the project was not originally identified as a federally funded project and therefore, did not go through the finance department’s review of verifying the contractor was not suspended or debarred. Effect of Condition The City did not obtain a written certification from the contractor, insert a clause into the agreement or check for exclusion records at SAM.gov to verify one contractor it paid $49,396 was not suspended or debarred. Without this verification, the City increases its risk of awarding federal funds to contractors that are excluded from participating in federal programs. Any program funds the City used to pay contractors that were suspended or debarred would be unallowable, and the federal grantor could potentially recover them. We subsequently verified the contractor was not suspended or debarred, so we are not questioning the costs.   Recommendation We recommend the City strengthen its internal controls to ensure all contractors it pays $25,000 or more, all or in part with federal funds, are not suspended or debarred from participating in federal programs before contracting with or purchasing from them. City’s Response The City of Lynnwood has a standard practice in place that requires departments to identify if federal funding will be used prior to soliciting quotes and/or bids for projects. For federally funded projects, the status of the contractor is confirmed on SAM.gov and saved in vendor files before any payments are made to ensure the contractor is not suspended or disbarred from working on federally funded projects. In this unique occurrence, the Parks Recreation and Cultural Arts Department identified the project as non-federally funded before quotes were obtained, but then subsequently asked the City Council to allocate federal funds for the project after the low bid was already accepted. The Finance Department will continue to ensure that departments follow the existing process of confirming suspension/disbarment status for any federally funded projects. Departments have been advised that if they subsequently obtain City Council approval to utilize federal funds for projects that have already been bid/quoted as non-federal funded, then they must re-bid/re-quote the project as federally funded and save proof that the contractor is in good standing before any payments are made. Auditor’s Remarks We appreciate the City’s commitment to resolve this finding and thank the City for its cooperation and assistance during the audit. 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. Title 2 CFR Part 180, OMB Guidelines to Agencies on Governmentwide Debarment and Suspension (Nonprocurement), establishes nonprocurement debarment and suspension regulations implementing Executive Orders 12549 and 12689. 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.

2020-001 The City had inadequate internal controls for ensuring compliance with federal requirements for allowable costs, period of performance and subrecipient monitoring. "See Schedule of Findings and Questioned Costs for chart/table" Background The purpose of the Coronavirus Relief Fund (CRF) program is to provide direct payments to state, territorial, tribal and certain eligible local governments to cover necessary expenditures incurred because of the COVID-19 pandemic. During 2020, the City spent $1,996,104 in CRF program funds under three indirect awards. 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. Allowable Costs For the CRF program, the costs that recipients submit for 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 that 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. The Washington State Department of Commerce?s (Commerce) guidance states that CRF program ?funds are available on a reimbursement basis only, and cannot be advanced under any circumstances.? Period of Performance The U.S. Department of the Treasury (Treasury) required recipients to only charge costs to the CRF program that were incurred between March 1, 2020, and December 30, 2020. The Treasury subsequently extended this deadline to December 31, 2021. The Treasury passed funds to Commerce, who then awarded CRF funds to the City. While recipients must use program funds within the Treasury?s performance period, Commerce has the discretion to set a different performance period for its subrecipients as long as it is within the Treasury?s timeframe. As such, Commerce decided to set a more restrictive performance period in its agreement with the City, requiring it to incur costs by November 30, 2020. Subrecipient Monitoring The City passed through $294,523 in program funds from its indirect award from Commerce to two subrecipients to provide rental and food assistance to program participants. Whenever the City passes on federal funding to subrecipients, federal regulations require the City to monitor them to ensure they comply with the terms and conditions of the federal award. To determine the appropriate level of monitoring, the City must evaluate each subrecipient?s risk of noncompliance with federal requirements. For these awards, monitoring would include verifying the subrecipients only provided assistance to participants who met program eligibility requirements and claimed reimbursement for allowable costs. The amount of verification to conduct depends on each subrecipient?s risk of noncompliance. Description of Condition Allowable Costs The City?s reimbursement request process was ineffective for ensuring it only requested reimbursement for allowable expenses. The City paid its subrecipients with cash advances which is not allowed by Commerce. As a result, the City did not receive adequate support from subrecipients showing that they spent funds on allowable costs. We consider these deficiencies in internal controls to be material weaknesses that led to material noncompliance. Period of Performance While City officials were aware the award had a specific timeframe for using the funds, staff responsible for ensuring program compliance relied on expense reports from subrecipients that did not contain enough detail to demonstrate their costs were incurred within the period of performance. The design of this control is inadequate for ensuring compliance with the period of performance requirement for subrecipients? costs. We consider the control deficiency a material weakness. Subrecipient Monitoring The City did not perform a risk assessment for one of its two subrecipients, and it did not adequately monitor both subrecipients, as federal regulations require. We consider these deficiencies in internal controls to be material weaknesses that led to material noncompliance. These issues were not reported as a finding in the prior audit. Cause of Condition Due to the effects of the COVID-19 pandemic, it was crucial for the City establish programs and disburse available funds to subrecipients quickly in order to assist the public. The City did not dedicate adequate time for staff to understand Commerce?s program guidelines on how to award funds to subrecipients. Additionally, the City did not perform a risk assessment for one of the subrecipients because the City Council selected it on short notice, and City staff overlooked the requirement. Staff were also not aware the City was required to review source-level documentation to monitor whether the subrecipients were only disbursing funds to eligible participants during the period of performance. Key staff members who were responsible for overseeing the CRF award do not typically oversee other federal programs that require subrecipient monitoring, so they were not aware of federal requirements. Effect of Condition and Questioned Costs Allowable Costs/Period of Performance The City disbursed $294,523 in federal funds to two subrecipients as cash advances. the expense reports that subrecipients initially provided did not include adequate detail to demonstrate they spent funds on costs necessary for addressing the COVID-19 pandemic within the performance period. By not reviewing the costs subrecipients incurred prior to disbursing funds, the City increases its risk that subrecipients will use program funds for unallowable purposes or for costs incurred outside of the period of performance. Furthermore, noncompliance with program requirements can result in the City having to pay funds back to the awarding agency. During the audit, the City subsequently obtained detailed documentation from subrecipients demonstrating that they spent funds on costs necessary for addressing the COVID-19 pandemic within the period of performance. Therefore, we are not questioning costs. Subrecipient Monitoring The City did not perform a risk assessment for one of two subrecipients to determine the appropriate level of monitoring staff should perform to prevent or detect subrecipient noncompliance. The City also did not adequately monitor both subrecipients by reviewing source-level documentation to ensure they used federal funds in accordance with their subrecipient agreements. We statistically sampled participants from both subrecipient programs and verified that they met the City?s established eligibility criteria for receiving assistance. Therefore, we are not questioning costs. Without performing risk assessments for all subrecipients and monitoring them accordingly, the City cannot ensure they are complying with the terms and conditions of their subawards and only providing funding to eligible participants. Recommendation We recommend the City: ? Establish and follow internal controls to monitor its subrecipients? expenditures to ensure charges are allowable and based on actual costs incurred within the period of performance ? Perform risk assessments and monitor its subrecipients accordingly to verify they are complying with the terms and conditions of their subawards and only providing funds to eligible participants City?s Response The City of Lynnwood is committed to establishing and following effective internal controls in compliance with federal uniform guidance for grant administration. During 2020 the City endeavored to distribute Coronavirus Relief Funds as expeditiously as possible into the community through partnerships with two established community organizations. Given the urgent need and compressed time to distribute funds to those most impacted by the pandemic, the City did not complete a formal risk assessment and conduct specific subrecipient monitoring based on that risk assessment. For any future federal subrecipient contracts, the City will establish and follow a formal risk assessment process in accordance with federal guidance. Contracts will be structured to include specific terms and monitoring conditions based on the risk assessment. The City will conduct monitoring in accordance with contract terms to ensure all charges are allowable in accordance with federal guidelines and maintain proof of monitoring for audit purposes. Auditor?s Remarks We appreciate the City?s commitment to resolve this finding and thank the City 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. 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. 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/covidresiliency-grants/. These documents speak to the grantors? expectation that local governments obtain documentation which supports how businesses met eligibility criteria and also provided for the period of performance for their awards