City of NovatoLocal Government

Federal Award U.S. Department of Transportation; Highway Planning and Construction; Assistance Listing Number 20.205 Criteria In accordance with Title 2 of the Code of Federal Regulations (2 CFR) section 200.303, the City must establish andmaintain effective internal controls over federal awards that provide reasonable assurance of compliance with federal statutes, regulations, and the terms and conditions of the award. Condition During our testing of five certified payroll reports, we noted the reports maintained by the City did not include certification of the payroll by the contractor. Context The agreement with the contractor requires a copy of the payroll and statement of compliance be submitted to the City weekly. We selected five weeks for testing and found that all five weeks did not have a signed statement of compliance. Cause The City did not maintain the signed statement of compliance submitted by the contractor. Effect The absence of the signed statement of compliance with the certified payroll reports increases the risk that errors or irregularities in compliance with federal program requirements may not be detected and corrected in a timely manner. Questioned Costs No costs are questioned. Identification as Repeat Finding This is not a repeat finding from the prior year. Recommendation We recommend the City strengthen procedures to ensure proper documentation is maintained to demonstrate compliance with the Uniform Guidance requirements. View of Responsible Officials Management agrees with the comment and will ensure a process is in place for the receipt of signed certified payrolls.

Criteria The A-102 Common Rule, OMB Circular A-110 and 2 CFR section 200.303 require that non-Federal entities receiving Federal awards establish and maintain internal control designed to reasonably ensure compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. 2 CFR section 200.514 requires auditors to obtain an understanding of the non-Federal entity’s internal control over Federal programs sufficient to plan the audit to support a low assessed level of control risk of noncompliance for major programs, and, unless internal control is likely to be ineffective, plan the testing of internal control over major programs to support a low assessed level of control risk for the assertions relevant to the compliance requirements for each major program and perform testing of internal control as planned. Condition As noted in finding 2021-004, the City informed the auditors of a significant break down of internal controls resulting in them to be ineffective through most of the fiscal year. Cause Due to personnel turnover and the recent implementation of a new accounting system, the City did not have adequate controls and oversight in place to ensure accounting transactions were being processed accurately and timely. Unfamiliarity with the financial accounting system lead to inconsistencies in how transactions were being recorded Effect The City lacked internal controls to support a low assessed level of control risk for the assertions relevant to compliance requirements for the major program tested. Recommendation We recommend that the City institute a program to methodically identify and document its significant operational and accounting processes as they relate to Federal grants and compliance. Documenting a process involves identifying and gaining an understanding of the required compliance requirements, the automated or manual procedures used in performing the required processes, the person(s) or position(s) responsible for performing the procedures, the source documents used or generated, the procedures for approval and review and correction of any errors detected, and the financial or operational entries or reports summarizing the result of the process. View of Responsible Officials Management informed the auditors of this condition and agrees with the comment. Management also acknowledges that this occurred due to the staff turnover and subsequent difficulties in hiring mentioned in comments 2021-001, 002, and 003. In 2021-2022 the foundational processes have been stabilized (accounts payable, payroll, deposits) allowing staff to focus on reconciliations, procedures, and audit. As processes are brought current or accounts are reconciled, staff will document procedures and ensure that internal controls are incorporated into the procedures.

Criteria On May 17, 2017, the Office of Management and Budget (OMB) issued an addendum to Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) allowing nonfederal entities an additional year to implement the Uniform Guidance procurement requirements and the entity must document the decision to utilize the extension. Condition The City has not updated the Federal Grant Procedures manual for compliance with the Uniform Guidance as required for the fiscal year. Cause City management was not aware of the Uniform Guidance requirements and implementation dates. Effect The City's procurement policies and procedures are not in compliance with the Uniform Guidance. Recommendation We recommend the City review the Uniform Guidance procurement requirements and update the Federal Grant Procedures manual for compliance with the Uniform Guidance. View of Responsible Officials The City will implement procedures to ensure that the City's federal grant procedures manual will be updated to comply with OMB's Uniform procurement requirement.

Criteria In accordance with CFR section 200.512 of the Uniform Guidance, the audit must be completed and the data collection form and reporting package must be submitted to the Federal Audit Clearinghouse within the earlier of 30 calendar days after receipt of the auditor's report(s), or nine months after the end of the audit period. In accordance with OMB Memo M-20-26, and due to the coronavirus pandemic, an extension of six months beyond the normal due date was granted for submission of the audit, data collection form, and reporting package. Condition The 2021 Single Audit reporting package and data collection form have not been submitted to the Federal Audit Clearinghouse by the original deadline of March 31, 2022, nor the extended deadline of September 30, 2022. Cause There were various accounting issues such as personnel turnover and accounting schedules not properly reconciling to the general ledger which caused delays in the completion of the 2020 annual audit. Effect The filing of the Single Audit Reporting package and data collection form is past the due date. Recommendation As noted in recommendation 2021-001, we recommend the City strive to close the year-end with properly prepared reconciliations within 3 - 4 months after year-end in order to complete the annual financial audit timely. View of Responsible Officials Management agrees with the finding. The City's Finance Department is implementing regular reconciliations of accounts and in 2022 started a year end closing process. Checklists have been developed and continue to be refined. Once the City becomes current this compliance issue will be mitigated.

Finding 2020-008: Internal Controls (Material Weakness) Criteria The A-102 Common Rule, OMB Circular A-110 and 2 CFR section 200.303 require that non-Federal entities receiving Federal awards establish and maintain internal control designed to reasonably ensure compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. 2 CFR section 200.514 requires auditors to obtain an understanding of the non-Federal entity?s internal control over Federal programs sufficient to plan the audit to support a low assessed level of control risk of noncompliance for major programs, and, unless internal control is likely to be ineffective, plan the testing of internal control over major programs to support a low assessed level of control risk for the assertions relevant to the compliance requirements for each major program and perform testing of internal control as planned. Condition As noted in finding 2020-004, the City informed the auditors of a significant break down of internal controls resulting in them to be ineffective through most of the fiscal year. Cause Due to personnel turnover and the recent implementation of a new accounting system, the City did not have adequate controls and oversight in place to ensure accounting transactions were being processed accurately and timely. Unfamiliarity with the financial accounting system lead to inconsistencies in how transactions were being recorded Effect The City lacked internal controls to support a low assessed level of control risk for the assertions relevant to compliance requirements for the major program tested. Recommendation We recommend that the City institute a program to methodically identify and document its significant operational and accounting processes as they relate to Federal grants and compliance. Documenting a process involves identifying and gaining an understanding of the required compliance requirements, the automated or manual procedures used in performing the required processes, the person(s) or position(s) responsible for performing the procedures, the source documents used or generated, the procedures for approval and review and correction of any errors detected, and the financial or operational entries or reports summarizing the result of the process.

Finding 2020-009: Federal Grants Procedures Manual (Repeat - Uniform Guidance Compliance) - Prior year finding 2019-007 Criteria On May 17, 2017, the Office of Management and Budget (OMB) issued an addendum to Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) allowing nonfederal entities an additional year to implement the Uniform Guidance procurement requirements and the entity must document the decision to utilize the extension. Condition The City has not updated the Federal Grant Procedures manual for compliance with the Uniform Guidance as required for the fiscal year. Cause City management was not aware of the Uniform Guidance requirements and implementation dates. Effect The City's procurement policies and procedures are not in compliance with the Uniform Guidance. Recommendation We recommend the City review the Uniform Guidance procurement requirements and update the Federal Grant Procedures manual for compliance with the Uniform Guidance.

Finding 2020-010: Financial Reporting Timeliness (Repeat - Uniform Guidance Compliance) Prior year finding 2019-008 Criteria In accordance with CFR section 200.512 of the Uniform Guidance, the audit must be completed and the data collection form and reporting package must be submitted to the Federal Audit Clearinghouse within the earlier of 30 calendar days after receipt of the auditor's report(s), or nine months after the end of the audit period. In accordance with OMB Memo M-20-26, and due to the coronavirus pandemic, an extension of six months beyond the normal due date was granted for submission of the audit, data collection form, and reporting package. Condition The 2020 Single Audit reporting package and data collection form have not been submitted to the Federal Audit Clearinghouse by the original deadline of March 31, 2021, nor the extended deadline of September 30, 2021. Cause There were various accounting issues such as personnel turnover and accounting schedules not properly reconciling to the general ledger which caused delays in the completion of the 2020 annual audit. Effect The filing of the Single Audit Reporting package and data collection form is past the due date. Recommendation As noted in recommendation 2020-001, we recommend the City strive to close the year-end with properly prepared reconciliations within 3 - 4 months after year-end in order to complete the annual financial audit timely.