NORTON SOUND HEALTH CORPORATION

2021-001 Significant Deficiency in Internal Controls over Compliance and Compliance ? Allowable Costs/Cost Principles ? Fringe Allocation Agency: U.S. Department of Health and Human Services Program(s) and Federal Award Identification Number(s): Health Center Program Cluster ALN 93.224 and ALN 93.527 FAIN: H80CS01130, H8ECS38316 (COVID-19), H8FCS41232 (COVID-19) New or Repeat: Repeat Criteria: 45 CFR Part 75.430(i), ?Uniform Administrative Requirements, Cost Principles, and Audit Requirements for HHS Awards?, Compensation Subpart E ? Cost Principles - ?75.430 (Compensation ? personal services) states, ?charges to Federal awards?must be based on records that accurately reflect the work performed? and ?be supported by a system of internal controls which provides reasonable assurances that charges are accurate, allowable, and properly allocated...? Further, 2 CFR Part 200.430(i)(viii) (Standards for Documentation of Personnel Expenses) indicates that ?budget estimates (i.e., estimates determined before the services are performed) alone do not qualify as support for charges to Federal awards, but may be used for interim accounting purposes, provided that?the non-Federal entity?s system of internal controls includes processes to review after-the-fact interim charges made to a Federal award based on budget estimates. All necessary adjustment must be made such that the final amount charged to the federal award is accurate, allowable, and properly allocated.? Condition: Fringe costs for grant funded programs were allocated using a budgeted percentage rate which was in excess of the actual percentage calculated for all fringe as a percentage of direct salaries (the allocation basis) for the quarter ended December 31, 2020. This caused an overstatement of recognized revenue and fringe expense for grant funded programs with budget periods ending December 31, 2020. This condition was isolated to the first quarter of fiscal year 2021, as management corrected in the next quarter for ongoing grants. Since some Health Center Program Cluster grants ended December 31, 2020, they were not corrected.Cause: Actual fringe costs were less than were anticipated during the budgeting process and, in the first quarter of fiscal year 2021, the allocation and reconciliation process was not designed to ensure that the fringe amounts allocated to grant awards using budgeted rates were subsequently adjusted during the grant close-out process so that fringe expense was properly allocated to the grant award using allocation rates based on actual cost pool totals. Context and effect: The allocation of fringe at budgeted rates in excess of the actual rate based on period-end cost pool totals was an issue that was identified in the prior year audit. The audit was not completed until after the first quarter of fiscal year 2021, so management was not aware of the issue at the time of the close-out of the H80CS01130-18 award (budget period 1/1/20 ? 12/31/20) and had allocated fringe at the higher budgeted rates for the October 2020 to December 2020 period for this award. This resulted in a $26,004 overstatement of recognized revenue and fringe expense. Because management identified additional eligible payroll costs that could be moved into the program to replace the $26,004 reduction in fringe expense, it was determined that no adjustment was necessary to reduce the revenue recognized or the expenditures reported for this award. Questioned costs: The amount of overallocated fringe costs was $26,004. Management identified additional eligible payroll costs that could be moved into the program to replace the $26,004 reduction in fringe expense. Recommendation: In the second quarter of fiscal year 2021, management began implementing procedures to ensure pooled fringe costs are allocated at a rate based on period-end cost pool totals and had fully implemented these procedures by fiscal year 2021 year-end. We recommend that management continue to perform quarterly reconciliations of budgeted allocations to actual costs and make necessary adjustments to ensure that fringe amounts are allocated using rates based on actual cost pool totals. View of responsible officials: Management concurs with this finding, see corrective action plan.

Federal Award Findings and Questioned Costs Finding: 2020-001: Significant Deficiency in Internal Controls over Compliance and Compliance ? Allowable Costs/Cost Principles - Fringe Allocation Name of Contact Person: Debra Peacock Chief Financial Officer Norton Sound Health Corporation 1000 Greg Kruschek Avenue Nome, AK 99762 Corrective Action: Finding 2020-01 was resolved, but because the Q4/2020 reporting fell within NSHC?s FY21, the report submitted contained the higher percentage of fringe. During the FY21 audit, there were additional expenditures discovered that covered the difference, resulting in no net change to the reported amounts. NSHC will continue to analyze fringe on a quarterly basis due to all the variables that contribute to the fluctuating rates to ensure that the appropriate fringe rate is being allocated to grants and non-grants. Proposed Completion Date: 12/31/21

2020-002

2020-002 Material Weakness in Internal Controls over Compliance and Compliance ? Allowable Costs/Cost Principles - Fringe Allocation Agency: U.S. Department of Health and Human Services Program(s) and Federal Award Identification Number(s): Major Programs: Health Center Program Cluster CFDA 93.224 and CFDA 93.527 FAIN: H80CS01130-17, H80CS01130-18, 1H8ECS38316-01-00 (COVID-19), 1H8CCS33969-01-00 (COVID-19), 1H8DCS35377-01-00 (COVID-19) Tribal Self-Governance Program: IHS Compacts/Funding Agreements CFDA 93.210 FAIN: 58G950016 Non-Major Program: Special Diabetes Program for Indians CFDA 93.237 FAIN: H1D4IHS0061-22-00, H1D4IHS0061-23-00 New or Repeat: New Criteria: 2 CFR Part 75.430(i), ?Uniform Administrative Requirements, Cost Principles, and Audit Requirements for HHS Awards?, Compensation Subpart E ? Cost Principles - ?75.430 (Compensation ? personal services) states, ?charges to Federal awards?must be based on records that accurately reflect the work performed? and ?be supported by a system of internal controls which provides reasonable assurances that charges are accurate, allowable, and properly allocated...? Further, section 200.431(i)(viii) (Standards for Documentation of Personnel Expenses) indicates that ?budget estimates (i.e., estimates determined before the services are performed) alone do not qualify as support for charges to Federal awards, but may be used for interim accounting purposes, provided that? the non-Federal entity?s system of internal controls includes processes to review after-the-fact interim charges made to a Federal award based on budget estimates. All necessary adjustment must be made such that the final amount charged to the federal award is accurate, allowable, and properly allocated.? Condition: As reported in Finding 2020-001, fringe cost for grant funded programs was allocated using a budgeted percentage which was in excess of the percentage calculated for all fringe as a percentage of direct salaries (the allocation basis) calculated at year-end. The reduction in actual fringe costs should have resulted in a reduction to previously allocated amounts but instead non-grants departments were allocated fringe using a lower rate based on the remaining fringe to be allocated at year-end. This left an overstatement of recognized revenue and fringe expense for grant funded programs. Internal controls over compliance were not sufficiently designed or implemented to prevent or detect this issue. Cause: See Finding 2020-001. Context and effect: Numerous adjustments were required to adjust federal grant program fringe expense to an amount equal to their share based on the pooled actual fringe costs and to adjust revenue recognition related to those programs. Questioned costs and opinions: Programs, in which the over allocation of fringe costs exceeded $25,000, are the three listed above. The identified excess fringe was adjusted as part of the audit process for all three programs. For CFDA 93.224, 93.527 and 93.327, additional eligible costs were identified and moved into the program to replace the reduction in eligible costs when fringe was corrected. For CFDA 93.210, fringe and recognized revenue were both adjusted to remove excess fringe and related revenue recognized. Major Programs: Health Center Program Cluster CFDA 93.224 and CFDA 93.527 FAIN: H80CS01130-17, H80CS01130-18, 1H8ECS38316-01-00 (COVID-19), 1H8CCS33969-01-00 (COVID-19), 1H8DCS35377-01-00 (COVID-19) Amount of questioned costs: $181,547 Opinion: Qualified; questioned costs are material to the program. Tribal Self-Governance Program: IHS Compacts/Funding Agreements CFDA 93.210 FAIN: 58G950016 Amount of questioned costs: $314,504 Opinion: Unmodified; questioned costs are under program materiality. Non-Major Programs: Special Diabetes Program for Indians CFDA 93.237 FAIN: H1D4IHS0061-22-00, H1D4IHS0061-23-00 Amount of questioned costs: $32,876 Opinion: No opinion expressed; this is not a major program, however, this is being included as a material non-compliance for this non-major program per 2 CFR 200.516 (a). Recommendation: See Finding 2020-001. View of responsible officials: Management concurs with this finding, see corrective action plan.

Finding: 2020-002: Material Weakness in Internal Controls over Compliance and Compliance ? Allowable Costs/Cost Principles - Fringe Allocation Name of Contact Person: Debra Peacock Chief Financial Officer Norton Sound Health Corporation 1000 Greg Kruschek Avenue Nome, AK 99762 Corrective Action: Fringe will now be analyzed quarterly due to all the variables that contribute to the fluctuating rates to ensure that the appropriate fringe rate is being allocated to grants and non-grants. Proposed Completion Date: 9/30/21

2020-003 Significant Deficiency in Internal Controls over Compliance and Compliance ? Allowable Costs/Cost Principles ? Duplicate COVID-19 Payroll Expense Program: U.S. Department of Health and Human Services, Tribal Self-Governance Program: IHS Compacts/Funding Agreements CFDA: 93.210 FAIN: 58G950016 New or Repeat: New Criteria: 2 CFR Part 75.430(i), ?Uniform Administrative Requirements, Cost Principles, and Audit Requirements for HHS Awards?, Compensation Subpart E ? Cost Principles - ?75.430 (Compensation ? personal services) states, ?charges to Federal awards?must be based on records that accurately reflect the work performed? and ?be supported by a system of internal controls which provides reasonable assurances that charges are accurate, allowable, and properly allocated...? Condition: Internal controls over the review process for costs charged to the COVID-19 funded portion of the Compact agreement funding were not operating effectively to ensure that costs charged to the program were allowable, and as a result unallowable costs were charged to the grant. Cause: An error in the summary of costs to be accrued was not detected by the review of the costs charged to the COVID-19 funded portion of the Compact program. Context and effect: The expense associated with a COVID-19 specific leave accrual was charged twice to the Compact program COVID-19 grants for one month of the year. The duplicate charged cost was not detected by management as part of their review process over the spreadsheet tracking costs, or as part of their year-end reconciliation of the accrual account associated with this expense to the payroll system. Questioned costs: $135,148 was overcharged to the program. The amount overcharged was adjusted as part of the audit process. Recommendation: We recommend a comprehensive review of significant cost allocations and amounts charged to funding sources, which includes tracing data to source documentation and the general ledger, and other reconciliation procedures to ensure accuracy and completeness, as necessary, be completed periodically to ensure final grant reports and year-end amounts are based on actual costs. The review process should be segregated from the preparation of the spreadsheets prepared as basis for the allocations. View of responsible officials: Management concurs with this finding, see corrective action plan.

Finding: 2020-003: Significant Deficiency in Internal Controls over Compliance and Compliance ? Allowable Costs/Cost Principles ? Duplicate COVID-19 Payroll Expense Name of Contact Person: Debra Peacock Chief Financial Officer Norton Sound Health Corporation 1000 Greg Kruschek Avenue Nome, AK 99762 Corrective Action: A monthly reconciliation of COVID-19 liability accruals will be performed in the event of any additional COVID-19 bonuses paid in the future. Proposed Completion Date: 9/30/21