Commonwealth Utilities CorporationLocal Government

Federal Agency: U. S. Department of Treasury AL No.: 21.027 Program Title: Coronavirus State and Local Fiscal Recovery Funds Area: Reporting Repeat Finding from Prior Audit? No Questioned Cost: $0.00 Criteria: Pursuant to 2 CFR 200.328, recipients of federal grants must submit performance reports that document project progress. These reports should compare actual accomplishments to established goals, explain any delays, and outline corrective actions. For construction projects, additional reporting is required, including project schedules, completion percentages, quality control documentation, and related materials. Additionally, 31 CFR Section 35.4(c) mandates that recipients of federal funds submit periodic reports as required by the awarding agency. Recipients must maintain accurate records supporting financial and performance reports and provide additional information upon request to ensure compliance with federal requirements. As specified in the grant award, recipients must submit quarterly progress reports by the end of the month following each quarter. Condition: For all four quarters, CUC prepared the quarterly reports; however, no assurance was provided as to whether the reports were submitted on time. Cause: The inability to confirm the timely submission of the reports stems from a lack of internal processes or tracking mechanisms to ensure that reports are submitted by the required deadlines. There was no systematic follow-up or verification to ensure compliance with reporting deadlines. Effect: The failure to ensure the timely submission of quarterly reports impacts the federal agency’s ability to effectively monitor and assess the project’s progress. It also creates a risk of noncompliance with federal guidelines, which could lead to delays in funding, increased scrutiny from the awarding agency, and potential administrative penalties. Recommendation: CUC should implement the following corrective actions: 1. Establish and enforce internal controls to ensure the timely preparation and submission of monthly progress reports. 2. Assign responsibility to a designated compliance officer to monitor and verify compliance with reporting requirements. 3. Develop a tracking system to document the submission and review of reports. 4. Provide training to project managers and relevant personnel on reporting obligations under 2 CFR 200.328 and 31 CFR35.4(c). 5. Implement corrective action steps for future noncompliance, including escalation procedures for late or missing reports. Views of the Officials: CUC’s response is documented in the corrective action plan.

Criteria: As per the Administrative Conditions of the grant notification from the US EPA, CUC must submit EPA Form 5700-52A by October 30 of the same year. Condition: The EPA Form 5700-52A was submitted after October 30, 2022. Cause: The EPA Form 5700-52A MBE/WBE Report was submitted on a later date. Effect: CUC submitted the EPA Form 5700-52A late and is not complying with grant requirements. Recommendation: CUC should discuss the monitoring efforts for preparing EPA Form 5700-52A. Views of the Officials: CUC’s response is documented in the corrective action plan.

Criteria: As per the Programmatic Conditions of the grant notification from the US EPA, CUC must submit quarterly project performance and progress reports to the EPA Project Officer beginning three months after the agreement's initiation. The reports must include brief information for each individual project covered under this grant and are due fifteen (15) days following the end of the quarter. Condition: For quarters 1, 2, and 4, the quarterly project performance and progress reports were submitted after the 15-day deadline. For quarter 3, the quarterly project performance and progress report were not submitted. Cause: There is a lack of monitoring procedures to ensure the timely submission of quarterly project performance and progress reports. Effect: CUC is not complying with grant requirements. Recommendation: CUC should establish a monitoring procedure such as a checklist or personnel that will review submissions of reports. Views of the Officials: CUC’s response is documented in the corrective action plan.

Criteria: According to the Administrative Conditions of the grant agreement, the Commonwealth Utilities Corporation must prepare an SF 425 annually and submit it on or before December 31 of the same year. Condition: Of the five projects under CFDA No. 66.600, the SF 425 for all five projects was submitted late. M00T33715 was submitted on February 23, 2022. M-00T33717, M-00T33719,M-00T33721, and M-98T07701 were submitted on March 1, 2023. Cause: The Grant Administrator did not submit the report on time but requested an extension. No proof was provided that the extension was filed or approved by the grantor. Effect: There is a risk that the grantor may not approve future grants due to CUC’s noncompliance with the grant requirements. Recommendation: The Commonwealth Utilities Corporation should properly maintain their accounting, financial, and project records in a manner that will facilitate timely preparation and submission of required reports. Views of the Officials: CUC’s response is documented in the corrective action plan.

Local Noncompliance - Procurement Procurement and Suspension and Debarment: CFDA 66.600 Questioned Cost: $157,647 Finding No. 2020-003 Criteria: CUC procurement regulations state the following requirements: ? Adequate public notice of the invitation for bids shall be given a reasonable time prior to the date set forth for the opening of bids. Publication of notice in a newspaper of general circulation in the Commonwealth once in each week over a period of calendar days shall be deemed to be adequate notice. ? Per ? 50-50-210 Small Purchases: (a) Any procurement not exceeding the amounts established herein may be made in accordance with small purchase procedures. However, procurement requirements shall not be artificially divided so as to constitute a small purchase. (b) No bidding is required for procurement under $25,000. (c) For procurement valued at $25,000 to $50,000, the Director must obtain price quotations from at least three vendors and base the selection on competitive price and quality. (d) Purchase orders may be utilized for small purchases in subsections (b) and (c) only. In no other instance may purchase orders be utilized instead of contracts. ? Per ?50-50-225 Competitive Sealed Proposals: (a) Conditions for use. When the Director determines in writing that the use of a competitive sealed bidding is either not practical or not advantageous to the government and receives the approval of the Board of Directors, a contract may be entered into by competitive sealed proposals. (b) Request for proposals. Proposals shall be solicited through a request for proposals. (c) Public notice. Adequate public notice of the request for proposals shall be given in the same manner as provided for in competitive sealed bids. (d) Receipt of proposals. Proposals shall be opened so as to avoid disclosure of contents to competing offerors during the process of negotiation. A register of proposals shall be prepared and opened for public inspection after contract award. (e) Evaluation factors. The request for proposals shall state the relative importance of price and other evaluation factors. ? Per ?50-50-305 Architect-Engineer Services, the official with expenditure authority shall negotiate a contract with the highest qualified architect-engineer firm at a price determined to be fair and reasonable to CUC. If a fair and reasonable price cannot be negotiated, negotiations shall be terminated, and negotiations shall be undertaken with the second highest qualified firm. If a fair and reasonable price cannot be negotiated, negotiations shall be terminated and negotiations shall be undertaken with the third highest qualified firm. If a fair and reasonable price cannot be negotiated with any of the firms, then the officer with expenditure authority shall select additional firms in order of competence and qualifications and continue negotiations until a fair and reasonable price is agreed upon. ? Per ?50-50-270 Retention of Procurement Records: (a) All procurement records shall be retained by the Director. (b) The Director shall maintain a record listing all contracts made under sole-source procurement or emergency procurement for a minimum of years. The records shall contain: (1) Each contractor?s name; (2) The amount and type of each contract; and (3) A listing of the supplies, services or construction procured under each contract. (c) All procurement records, except those designated as not subject to disclosure, shall be available to public inspection. Condition: Tests of purchases/disbursements noted deficiencies. All transactions appear to be locally funded, except for those identified with a CFDA number. 1. Based on tests of capital assets and capital improvement projects, we noted the newspaper clippings or equivalent evidencing adequate public notices were partially provided, as we were advised that the documents are stored at CUC?s storage bunker and are not easily retrievable. No questioned cost is presented as CUC?s selections resulted from competitive processes as there were more than one contractor who submitted bids. See Schedule of Findings and Questioned Costs for chart/table 2. For the following contract procured by CUC?s Engineering Division, we noted that of the four consulting firms awarded to perform various design, construction management, construction inspection and electrical inspection works for water and wastewater infrastructure requirements, only two firms - the highest and third-highest qualified firms ? were provided the Scope of Work for the Isley Booster II Transmission and Booster Pump Upgrade. The project was awarded to the third-highest qualified firm for bidding the lowest. However, it was not evident that negotiations were also made with the second-highest qualified firm prior to awarding the project. In addition, the third-highest qualified firm submitted a revised Scope of Work and fee proposal, however, it was not evident that the highest qualified firm was also given the opportunity to submit a revise Scope of Work and fee proposal. See Schedule of Findings and Questioned Costs for chart/table 3. Of ten non-federal expenditures totaling $317,718, we noted that for one (or 10%), we were not provided with procurement documents. See Schedule of Findings and Questioned Costs for chart/table 4. Of twenty-four non-federal repair and maintenance expenditures totaling $11,676,719, we noted that for two (or 8%), there was no evidence in writing that the use of competitive sealed bidding is either not practical or not advantageous to the government and approval of the Board of Directors was obtained. See Schedule of Findings and Questioned Costs for chart/table Cause: CUC has inadequate controls, such as oversight responsibility and monitoring, over compliance with procurement rules and regulations. Furthermore, CUC?s personnel experienced difficulties with retrieving documents from CUC?s storage bunker. Effect: CUC is in local noncompliance with procurement rules and regulations requirements. CUC is in noncompliance with applicable procurement and suspension and debarment requirements for CFDA 66.600, and questioned costs of $157,647 exist. Identification as a Repeat Finding: Finding 2019-004. Recommendation: CUC should establish and implement adequate controls over compliance with applicable procurement rules and regulations and establish and maintain efficient filing of relevant documents for easier retrieval. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement with Conditions 1, 3 and 4 and states disagreement with Condition 2, as follows: Condition 2 - CUC does not concur. CUC RESPONSE: Section 50-50-305 of CUC?s Procurement Regulations applied to the creation of the contracts for the A&E services. Section 50-50-305 does not apply to solicitation of the scope of work for the Isley Booster II Station as a contract was already in place. CUC solicited to two firms whose knowledge and experience tailored to the design requirements. Auditor Response: Condition 2 - There is no documentation on file as to why CUC solicited only the two firms.

Finding No.: 2020-005 Federal Agency: U.S. Department Commerce CFDA Program: 11.300 Investments for Public Works and Economic Development Facilities Federal Award No.: 07-01-07128 Area: Allowable Costs/Cost Principles Questioned Costs: $-0- Criteria: Non-federal entities receiving Federal awards are required to establish and maintain internal control over the Federal awards that provides reasonable assurance that the non-Federal entity is managing the Federal awards in compliance with Federal statutes, including written internal control procedures governing its Federal awards. In addition, in accordance with the grant?s special awards conditions, the Program is under a reimbursement basis only, accordingly, program expenditures are to be paid using local funding prior to requesting reimbursement from the Economic Development Administration (EDA). Condition: 1. CUC does not have overall written internal control procedures governing Federal awards. The written procedures provided were for administrative and accounting functions only. 2. Of ten expenditures tested, aggregating $869,214 of a population of $957,476, we noted that two invoices (or 20%), amounting to $348,019, were paid from the federal grant bank account, into which funding from other federal awarding agencies are being deposited. CUC subsequently replenished $200,000 from its local operation?s bank account to the federal grant bank account on April 2, 2020, however, documentation substantiating that the remaining $148,019 was ultimately paid using local funds were not provided. As of September 2, 2020, all Federal deposits are comingled with local deposits in one bank account. No questioned costs are presented, as based on extensive analysis of the federal bank account, we concluded that the remaining $148,019 was ultimately paid using local funds. See Schedule of Findings and Questioned Costs for chart/table Cause: CUC has inadequate internal controls over compliance with applicable allowable costs/cost principles requirements. CUC has inadequate monitoring procedures over payment processing and inadequate internal controls over a recordkeeping process that would clearly demonstrate whether CUC uses non-Federal funds for Program transactions prior to drawing Federal funds. Effect: CUC is in noncompliance with applicable allowable costs/cost principles requirements. Recommendation: CUC should establish overall written internal control procedures governing Federal funds. In addition, CUC should monitor all payment processing to make certain that program expenditures are paid using non-Federal funding sources prior to requesting reimbursement from EDA. We further recommend that CUC establish adequate internal control procedures to clearly track receipts and uses of federal and local funds. CUC should consider transferring from the Federal bank account to the general fund bank account only those Federal deposits that are reimbursements. CUC should consider retaining Federal advances in the federal bank account and issuing corresponding payments from the federal bank account so that federal and local funds are properly segregated for easy monitoring. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement with Condition 1 and states disagreement with Condition 2, as follows: Condition 2 - CUC does not concur. CUC RESPONSE: CUC has provided numerous documents. After extensive analysis of the federal bank account and it was concluded that $148,019 was ultimately paid using local funds. Auditor Response: Condition 2 - The numerous documents provided by CUC did not include an audit trail to demonstrate the funding source for expenditures. The extensive analysis was performed by the Auditors.

Finding No.: 2020-006 Federal Agency: U.S. Department Commerce CFDA Program: 11.300 Investments for Public Works and Economic Development Facilities Federal Award No.: 07-01-07128 Area: Matching, Level of Effort, Earmarking Questioned Costs: $-0- Criteria: CUC must match Federal dollars with local dollars for eligible project expenses in proportion to the federal share in accordance with the grant terms and conditions. The 25% local match is determined by the Federal share as indicated on the approved grant award. Condition: Tests of local matching requirements determined that CUC was deficient with its local match requirement at September 30, 2020, as noted below: See Schedule of Findings and Questioned Costs for chart/table Of the deficient local match, no questioned cost is presented as $63,814 and $28,069 were subsequently paid in FY2021 and FY2022, respectively. Cause: CUC has inadequate monitoring procedures over compliance with applicable matching requirements. Effect: CUC is in noncompliance with applicable matching requirements. Recommendation: CUC should establish adequate monitoring procedures to make certain that applicable matching requirements are met in the period program expenditures are incurred. Views of Responsible Officials: CUC?s Corrective Action Plan states disagreement, as follows: CUC does not concur. CUC RESPONSE: Documents provided to the auditor showed that the required local match is the obligation of the CNMI Government, which is beyond the control of CUC. Auditor Response: CUC lacked communication with the CNMI Government to substantiate compliance with applicable matching requirements.

Finding No.: 2020-007 Federal Agency: U.S. Department Commerce CFDA Program: 11.300 Investments for Public Works and Economic Development Facilities Federal Award No.: 07-01-07128 Area: Reporting Questioned Costs: $-0- Criteria: In accordance with applicable reporting requirements, the grantee shall submit an accurate Federal Financial Report (SF 425) on a semi-annual basis for the periods ending March 31 and September 30, or any portion thereof, for the entire project period, which should be supported by underlying accounting records. Condition: The total federal and recipient shares of expenditures reported on the SF 425 report for the 09/30/20 semi-annual reporting period differ from underlying accounting records. See Schedule of Findings and Questioned Costs for chart/table Cause: CUC did not effectively monitor the accuracy and completeness of the SF-425 report based on underlying accounting records. Effect: CUC submitted an inaccurate SF 425 report for the 09/30/20 semi-annual reporting period. No questioned costs are presented as the variances do not represent program overpayments and the expenditures that were under reported were determined to be allowable based on invoices provided. Recommendation: Responsible personnel should take steps to monitor reports and determine that the federal and recipient shares of expenditures reported on the SF-425 report are supported by underlying accounting records. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement.

Finding No.: 2020-008 Federal Agency: U.S. Department Commerce CFDA Program: 11.300 Investments for Public Works and Economic Development Facilities Federal Award No.: 07-01-07128 Area: Special Tests and Provisions - Wage Rate Requirements Questioned Costs: $-0- Criteria: All laborers and mechanics employed by contractors or subcontractors to work on construction contracts in excess of $2,000 financed by federal assistance funds must be paid wages not less than those established for the locality of the project (prevailing wage rates) by the Department of Labor (DOL). Non-federal entities shall include in their construction contracts subject to the Wage Rate Requirements a provision that the contractor or subcontractor comply with those requirements and the DOL regulations (29 CFR part 5, Labor Standards Provisions Applicable to Contacts Governing Federally Financed and Assisted Construction). This includes a requirement for the contractor or subcontractor to submit to the non-federal entity weekly, for each week in which any contract work is performed, a copy of the payroll and a statement of compliance. Condition: Of four invoices pertaining to a construction contract tested, aggregating $588,799 of program costs of $873,270, either the contractor?s certified payroll reports and/or signed statements of compliance were not submitted for 100% of all four invoices. No questioned costs are presented as the certified payroll reports and statements of compliance covering the payroll periods of the contractor?s laborers, were subsequently obtained on July 14, 2021. See Schedule of Findings and Questioned Costs for chart/table Cause: CUC has inadequate internal controls over compliance with applicable special tests and provisions for wage rate requirements. Effect: CUC is in noncompliance with applicable special tests and provisions for wage rate requirements. Recommendation: CUC should implement adequate procedures in accordance with applicable special tests and provisions for wage rate requirements. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement.

Finding No.: 2020-009 Federal Agency: U.S. Environmental Protection Agency CFDA Program: 66.600 Environmental Protection Consolidated Grants for the Insular Areas - Program Support Federal Award Nos.: M-00T33715, M-00T33717 and M-00T33719 Area: Equipment and Real Property Management Questioned Costs: $-0- Criteria: In accordance with applicable equipment and real property management requirements, a state must use, manage and dispose of equipment acquired under a Federal award by the state in accordance with state laws and procedures. CUC?s annual capital assets inventory policy states the following: ? An annual inventory will be conducted. ? The inventory coordinator should submit a listing of the existing infrastructures, plant or power plant equipment to the assigned Accounting personnel. ? When the inventory is complete, accounting records will be reconciled against the inventory worksheets. Condition: Tests of equipment and real property noted the following: 1. A physical inventory of equipment was performed in August 2020 at the entity level; however, a reconciliation was not performed between the program and Accounting. 2. Equipment records maintained by the program could not be provided as of 09/30/20. Cause: CUC has inadequate human resources and financial management system structure needed to effect compliance with applicable equipment and real property management requirements. Effect: CUC is in noncompliance with applicable equipment and real property management requirements. No questioned cost is presented as we are unable to quantify the extent of the noncompliance. Recommendation: CUC should consider seeking technical and financial support from Federal agencies to develop human resources and a financial management system that are capable of effecting compliance with applicable property management policies and procedures. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement with Condition 2 and states disagreement with Condition 1, as follows: Condition 1 - CUC does not concur. CUC RESPONSE: CUC has provided the documents to the auditors. Auditor Response: Condition 1 - A detailed program assets listing was not provided as of September 30, 2020 to substantiate records from Accounting.

Finding No.: 2020-010 Federal Agency: U.S. Environmental Protection Agency CFDA Program: 66.600 Environmental Protection Consolidated Grants for the Insular Areas - Program Support Federal Award Nos.: M-00T33715, M-00T33717 and M-00T33719 Area: Reporting Questioned Costs: $-0- Criteria: In accordance with applicable reporting requirements, the program is required to submit an SF-425, Federal Financial Report, which should agree to the underlying accounting records. Further, per the Administrative Conditions of the grant awards, CUC shall identify actual in-kind Intergovernmental Personnel Agreement (IPA) expenditures of the Federal Financial Report. Condition: 1. Based on total expenditures reported to the grantor for the reporting period ended September 30, 2020, we noted an under (over) reporting of expenditures, as follows: See Schedule of Findings and Questioned Costs for chart/table 2. CUC did not reflect the total in-kind IPA expenditures of $10,650 on the Federal Financial report for M-00T33715-4. 3. CUC failed to record prior year U.S. Environmental Protection Agency in-kind expenditures of $300,650. A proposed journal entry adjustment was made to correct the error. Cause: CUC reported the amounts using the cash basis instead of the accrual basis, and there was no indication that monitoring controls were implemented. Effect: CUC is in noncompliance with applicable reporting requirements. Further, the reported amounts are lower than the recorded amounts. No questioned cost is reported as the drawdowns were based on the SF-425 report. Recommendation: Responsible personnel should review the SF-425 report prior to submission to the grantor to verify that amounts are supported by underlying accounting records. Further, the total of the IPA expenditures should be reported in the `Remarks? section of the federal financial report. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement.

Finding No.: 2020-011 Federal Agency: U.S. Environmental Protection Agency CFDA Program: 66.600 Environmental Protection Consolidated Grants for the Insular Areas - Program Support Federal Award Nos.: M-00T33715, M-00T33717 and M-00T33719 Area: Special Tests and Provisions Questioned Costs: $-0- Criteria: 1. In accordance with the Administrative Conditions, the recipient shall identify actual in-kind Intergovernmental Personnel Agreement (IPA) expenditures of the Federal Financial Report. 2. In accordance with the Programmatic Conditions at part 30(5), the Recipient shall periodically interview a sufficient number of employees entitled to DB prevailing wages (covered employees) to verify that contractors or subcontractors are paying the appropriate wage rates. Condition: Tests of the Administrative and Programmatic Conditions noted the following: 1. The Intergovernmental Personnel Agreement (IPA) expenditures were not reported in Block 12 of the `Remarks? section of the Federal Financial Report per the Administrative Conditions for M-00T33715. 2. The Compliance Verification was not performed throughout FY 2020 per the Programmatic Conditions. Cause: CUC lacks internal controls over monitoring. Effect: CUC is in noncompliance with applicable special tests and provisions requirement. No questioned costs are presented as we are unable to quantify the extent of the noncompliance. Recommendation: CUC should design and implement an effective system of internal controls over the monitoring process for the Administrative and Programmatic Conditions. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement.

Capital Assets Equipment and Real Property Management: CFDA 97.036 Finding No. 2019-003 Criteria: An effective system of internal control includes policies and procedures for determining a threshold for capitalization of capital assets. In accordance with applicable property standards, capital assets should be properly recorded and maintained; must include a description of the property, a serial number or other identifiable information, the acquisition date and cost of the property, the location, use and condition of the property, and any ultimate disposition data including the date of disposal of the property; and should not include expense items. Further, CUC conducts physical counts of its capital assets every two years to help verify the existence and condition of the assets and reconcile with its financial records. Condition: 1. CUC does not have an updated written capitalization policy. 2. Of seventeen asset additions tested, we noted that transactions identified with a CFDA number were federally funded while funding sources for the other assets were not specifically identified on the fixed asset subledger. a. An asset was double recorded in the previous year. An audit adjustment was proposed to correct the error, which resulted in a restatement of net position. See Schedule of Findings and Questioned Costs for chart/table b. The total quantity of concrete poles received per receiving reports differs from the total quantity per invoices, resulting in unrecorded capital assets of $297,540. An audit adjustment was proposed to record the unrecorded capital assets and capital contributions. No questioned costs are presented as CUC received the concrete poles. See Schedule of Findings and Questioned Costs for chart/table c. For asset ID no. 1121405 (CFDA No. 97.036), with an acquisition cost of $4,959,287 and acquisition date of September 30, 2019, the following were noted: i. Of 80,928 material acquisitions received with no corresponding invoices, CUC determined the costs of 79,511 to be $749,419 from invoices having similar material descriptions. Of the $749,419, CUC only recorded $181,962, as the costs for the remaining $567,457 were only subsequently determined on May 25, 2021 and June 15, 2021. The remaining 1,417 in materials received were not recorded as costs were undeterminable. ii. The quantity and descriptions of materials for invoice no. 44 were not specified, accordingly, we were not able to verify completeness of the materials received, as there were no corresponding packing slips. iii. For materials with invoices, the following variances were noted. See Schedule of Findings and Questioned Costs for chart/table An audit adjustment was proposed to decrease the assets? acquisition costs and capital contributions by $332,717, which is a questioned cost at Finding No. 2019-006, Condition 2: See Schedule of Findings and Questioned Costs for chart/table d. Two assets pertain to materials that were issued between fiscal years 2013 and 2019 for typhoon restorations and/or mitigations. Certifications of the project completions were only subsequently prepared on April 29, 2021. In addition, the certifications do not specify the project completion dates. Additionally, of the $3,121,225 cost for asset ID no. 1121442, $413,155 of materials issued in fiscal years 2013 and 2014 were determined to be expenses in nature. An audit adjustment was proposed to record the expense in the period incurred, which resulted in a restatement of net position. See Schedule of Findings and Questioned Costs for chart/table 3. Of nine assets disposals tested, eight disposals pertain to assets damaged by a typhoon; however, the detailed schedule of the damaged assets did not contain the asset ID number, thus, we were not able to verify that assets disposed are part of the assets destroyed by the typhoon. In addition, asset ID nos. 9650741, 9680131 and 9680161 were only partially disposed to agree the total disposal amounts to the Fixed Assets Summary Assessment report. The remaining net book value was not adjusted and/or disposed, as CUC was not able to determine whether all materials associated with the assets were damaged. See Schedule of Findings and Questioned Costs for chart/table 4. Of fifty-one assets tested for existence verification, the following were noted: a. We sighted similar assets; however, we were unable to verify the assets tested, as either the assets and/or the subledger lacked sufficient descriptions (e.g., tag number, serial number or other identifying information) to match the asset to the fixed asset detail. See Schedule of Findings and Questioned Costs for chart/table b. We were unable to sight the assets, as the assets are part of either the electrical or water well grids for which location of the assets can only be determined by Feeder locations; however, the asset's exact location within the Feeders are undeterminable, as such are not being tracked. In addition, CUC could not determine if the assets are part of the assets that were damaged by a typhoon. See Schedule of Findings and Questioned Costs for chart/table c. We were unable to sight the assets, as we were advised that the assets had either been damaged, scrapped and/or could not be located. At September 30, 2019, the assets were included in the fixed assets subledger. An audit adjustment was proposed to retire the assets. See Schedule of Findings and Questioned Costs for chart/table d. The assets are inoperable; however, the assets have not been decommissioned. For asset ID #433010, the asset is comprised of two units, one of which is inoperable (serial no. G11S110650), and we were advised that although the unit is repairable, it would be more feasible to replace the unit with a new engine. Management has not made a determination as to the disposition of the assets. See Schedule of Findings and Questioned Costs for chart/table e. The assets have been decommissioned; however, at September 30, 2019, the assets were included in the fixed assets subledger. An audit adjustment was proposed to retire the assets. See Schedule of Findings and Questioned Costs for chart/table f. The asset had been demolished; however, at September 30, 2019, the asset was included in the fixed assets subledger. An audit adjustment was proposed to retire the asset. See Schedule of Findings and Questioned Costs for chart/table 5. Of the $6,423,876 of assets identified as damaged by a typhoon, CUC recorded a disposal of $4,974,887 based on the estimated costs to repair and/or replace the damaged assets, as CUC was not able to determine which of the damaged assets were repaired and/or replaced. In addition, the listing of damaged assets does not contain the asset I.D. numbers, thus, we were not able to determine whether the $4,974,887 in assets that were disposed at September 30, 2019, are the assets that were damaged and replaced. 6. Of nineteen capital improvement project additions tested, the journal vouchers or equivalent, approving the recordation of the transactions to capital improvement projects, were not provided. See Schedule of Findings and Questioned Costs for chart/table Cause: CUC lacks established policies and procedures for the accounting and maintenance of capital assets and for adequate file maintenance. Effect: Capital assets are misstated. Also, CUC is in noncompliance with applicable property standards, including equipment and real property management requirements for CFDA 97.036. Recommendation: CUC should: ? Establish policies and procedures for the accounting and maintenance of capital assets; ? Identify all assets with either a tag number, serial number or other identifying information to specifically account for the assets; ? Remove from the fixed assets subledger assets that have been decommissioned, disposed, or determined inoperable and irreparable; ? Properly classify non-capitalizable materials as expenses; and ? Adequately substantiate with underlying accounting records the asset acquisition costs and disposals of assets. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement with Conditions 1, 2a, 2b, 2c, 3, 4b, 4c, 4d, 4e, 4f, 5 and 6 and states disagreement with Conditions 2d and 4a, as follows: Condition 2d - CUC does not concur. These are Warehouse Material Transactions (WMT) issuances from 2013 to 2019 which were previously recorded as CWIP. Since these materials were used for typhoon restoration projects, they were installed and became part of the electric grid. These amounts are then, reclassified from CWIP to Fixed Assets. Reclassification was not done earlier since restoration projects were not final or completed yet. Certifications of project completions was not required since this was not a single project but a series of small work orders to complete the restoration project. The $413,155 was adjusted through a Client Adjusting Journal Entry. Condition 4a - CUC does not concur. CUC maintains its position on this finding. The finding is unwarranted. Management considers its current controls and the methodology for identifying assets meets the utility?s objective. Furthermore, all assets tested for physical existence by the auditor were identified by CUC and witnessed by the auditor. For a majority of CUC?s capital assets, CUC believes that the cost benefit of identifying the physical existence of assets outweigh the value of placing identifying information on the asset. These assets are fixed and permanent in nature i.e., power plants, power poles, fuel tanks, transformers, water wells, treatment plants, etc. For assets that are significant in number (and an integral part of the system) but have relatively small unit values and are below CUC?s 5K capitalization policy, they are grouped by year of acquisition and specific type of assets and similarity of economic useful life. Auditor Response: Condition 2d - The material issuances date back between 2013 and 2019 which were only capitalized in fiscal year 2019. Certification of project completion or equivalent documentation substantiates that the restoration project has been completed and is ready for its intended use. Condition 4a - We were unable to verify the assets tested, as either the assets and/or the subledger lacked sufficient descriptions (e.g., tag number, serial number or other identifying information) to match the asset to the fixed asset detail.

Local Noncompliance - Procurement Procurement and Suspension and Debarment: CFDA 66.600 Finding No. 2019-004 Criteria: CUC procurement regulations state the following requirements: ? Adequate public notice of the invitation for bids shall be given a reasonable time prior to the date set forth for the opening of bids. Publication of notice in a newspaper of general circulation in the Commonwealth once in each week over a period of calendar days shall be deemed to be adequate notice. ? ? 50-50-225 Competitive Sealed Proposals: (c) Public notice. Adequate public notice of the request for proposals shall be given in the same manner as provided for in competitive sealed bids. ? ? 50-50-215 Sole Source Procurement: (a) A contract may be awarded for a supply, service or construction item without competition when the Director determines in writing that there is a demonstrated benefit to CUC for sole source procurement for the required supply, service or construction item. (b) The written determination shall be prepared by the Director and shall contain the following information: (1) The unique capabilities required and why they are required and the consideration given to alternative sources. ? Per ?50-50-270 Retention of Procurement Records: (a) All procurement records shall be retained by the Director. (b) The Director shall maintain a record listing all contracts made under sole-source procurement or emergency procurement for a minimum of years. The records shall contain: (1) Each contractor's name; (2) The amount and type of each contract; and (3) A listing of the supplies, services or construction procured under each contract. (c) All procurement records, except those designated as not subject to disclosure, shall be available to public inspection. Further, an effective system of internal control includes policies and procedures to determine that transactions are adequately substantiated. Lastly, relevant supporting documents should be filed and maintained. Condition: Tests of purchases/disbursements noted deficiencies. All transactions appear to be locally funded, except for those identified with a CFDA number. 1. Based on tests of capital assets and capital improvement projects, we noted the newspaper clippings or equivalent evidencing adequate public notices were either not provided or partially provided, as we were advised that the documents are stored at CUC?s storage bunker and are not easily retrievable. No questioned costs are presented as the newspaper clippings were subsequently obtained from the newspaper publishers on July 29, 2021 and July 30, 2021 and CUC?s selections resulted from competitive processes as there were more than one engineer/contractor submitted statements of qualifications and/or bids. See Schedule of Findings and Questioned Costs for chart/table 2. Of seventeen non-federal expenditures totaling $3,038,186, we noted the following: a. For three (or 18%), procurement was done through sole source, but we were not provided with the determination in writing as to the demonstrated benefit to CUC and the unique capabilities required and why they are required and the consideration given to alternative sources for contract for the following: See Schedule of Findings and Questioned Costs for chart/table b. For three (or 18%), we were not provided with evidence that adequate public notice was given. See Schedule of Findings and Questioned Costs for chart/table 3. Of twenty-six typhoon-related expenditures totaling $40,636,380, the following was noted: a. For one (or 4%), we were not provided with procurement documents. See Schedule of Findings and Questioned Costs for chart/table b. For one (or 4%), we were not provided with evidence that adequate public notice was given. See Schedule of Findings and Questioned Costs for chart/table Cause: CUC lacks controls, such as oversight responsibility and monitoring, over compliance with procurement rules and regulations. Furthermore, CUC?s personnel experienced difficulties with retrieving documents from CUC?s storage bunker. Effect: CUC is in local noncompliance with procurement rules and regulations requirements; CUC is in noncompliance with applicable procurement and suspension and debarment requirements for CFDA 66.600. Recommendation: CUC should establish and implement controls over compliance with applicable procurement rules and regulations, including a policy clarification as to the minimum number of years required for records retention, and establish and maintain efficient filing of relevant documents for easier retrieval. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement with Condition 2a for obligating document no. 19-0391 and states disagreement with Conditions 1, 2a for obligating document nos. CUC-ADM-13-C030 and CUC-WW-19-C012, 2b, 3a and 3b, as follows: Condition 1 - CUC does not concur. Documents were furnished to the auditor last August 4, 2021. This finding should be removed. Condition 2a for obligating document nos. CUC-ADM-13-C030 and CUC-WW-19-C012 - CUC does not concur. ? CUC-ADM-13-C030 - This was the time that CUC did not have any board of directors. ? CUC-WW-19-C012 - Document was furnished to the auditor on July 16, 2021. This finding should be removed. Condition 2b - CUC does not concur. Documents were furnished to the auditor last August 4, 2021. This finding should be removed. Condition 3a - CUC does not concur. Documents were furnished to the auditor on 07/14/2021. This finding should be removed. Condition 3b - CUC does not concur. Documents were furnished to the auditor on 07/19/2021. This finding should be removed. Auditor Response: Condition 1 - In accordance with CUC?s procurement regulation, ?50-50-270 Retention of Procurement Records, all procurement records shall be retained by the Director. The newspaper clippings or equivalent evidencing adequate public notices were either not provided or partially provided, as we were advised that the documents are stored at CUC?s storage bunker and are not easily retrievable. Accordingly, CUC was not able to substantiate that the newspaper clippings are being retained on file. CUC subsequently obtained copies of the newspaper clippings from the newspaper publishers on July 29, 2021 and July 30, 2021, as a result of our audit finding. Condition 2a for obligating document nos. CUC-ADM-13-C030 and CUC-WW-19-C012 - The justification provided did not give consideration to other vendors. Condition 2b - Documents were not provided to show that adequate public notice was given. The finding remains. Condition 3a - The procurement documents were not provided. The finding remains. Condition 3b - Advertising orders did not confirm that services were actually performed by newspaper outlets. The finding remains.

Finding No.: 2019-006 Pass Through Entity: CNMI Government Federal Agency: U.S. Department of Homeland Security CFDA Program: 97.036 Disaster Grants - Public Assistance (Presidentially Declared Disasters) Federal Award Nos.: FEMA-4235-DR, HMGP-4235-01-09R, FEMA-4236-DR and FEMA-4404-DR Area: Allowable Costs/Cost Principles Questioned Costs: $332,717 Criteria: Non-federal entities receiving Federal awards are required to establish and maintain internal control over the Federal awards that provides reasonable assurance that the non-Federal entity is managing the Federal awards in compliance with Federal statutes. Condition: 1. Of forty control items tested, aggregating $163,060 of a population of $75,387,512, we noted that there was at least one instance wherein the obligating document was prepared after the service was completed. See Schedule of Findings and Questioned Costs for chart/table No questioned cost is presented as the amount was subsequently approved by management. 2. Of twenty items tested, aggregating $65,255,883 of a population of $79,762,138, one or (5%) was for $15,274,558 per JV#247125, dated 09/30/19. Of the JV total, $749,419 were estimated amounts for items delivered without an invoice, and only $181,962 was recorded. This resulted in an understatement of $567,457. The $567,457 amount was subsequently determined on May 25, 2021 and June 15, 2021 during fieldwork. Further, invoice no. 123400 for $179,997 was subsequently provided. Additionally, the capital assets additions testing noted a shortage of materials received amounting to $900,147, resulting in an overstatement of materials cost of $332,717. An audit adjustment was proposed to decrease the assets acquisition costs and capital contributions by $332,717. See details below: See Schedule of Findings and Questioned Costs for chart/table 3. No approved purchase order or equivalent document authorizing the purchase of materials was provided. The transaction is covered under a Memorandum of Agreement (MOA) between CUC and an off-island utility agency wherein both utility agencies could share and provide resources to one another during times of need. The MOA agreement, however, is a blanket agreement wherein the effective date, agreed upon amount, and the type of resources and services to be rendered were not specified on the agreement. Thus, transactions covered under such agreement should be supported with an approved purchase order or equivalent to substantiate management approval of the resources and/or services to be purchased/rendered. No questioned costs are presented as expenditures are determined to be allowable based on invoices provided. See Schedule of Findings and Questioned Costs for chart/table 4. Of twenty-six typhoon-related expenditures totaling $40,636,380, four (or 15%) expenditures were incurred before the item was obligated. No questioned costs are presented as expenditures are determined to be allowable. See Schedule of Findings and Questioned Costs for chart/table Cause: CUC lacks internal controls over compliance with applicable allowable costs/cost principles requirements. Effect: CUC is in noncompliance with applicable allowable costs/cost principles requirements, and questioned costs of $332,717 exist. Recommendation: CUC should comply with applicable federal requirements by implementing an accounting system capable of segregating federal and non-federal charges. Also, CUC should implement adequate procedures in the review, authorization, and documentation of costs in accordance with applicable allowable costs/cost principles requirements. Views of Responsible Officials: CUC?s Corrective Action Plan states agreement with Condition 2 and states disagreement with Conditions 1, 3 and 4, as follows: Condition 1 - CUC does not concur. CUC maintains its position on this finding. The finding is unwarranted. Procurement regulations were suspended by way of Executive Order No. 2018-25 on account of a natural disaster. The Order authorized the CUC to procure needed materials and services waiving procurement regulation for the acquisition of typhoon restoration materials and supplies. The related expenditures and corresponding payments were authorized and approved by the Executive Director. The Order was furnished to the auditor. Condition 3 - CUC does not concur. CUC maintains its position on this finding. The finding is unwarranted. These were power poles purchased from GPA, a government agency in Guam, pursuant to a Memorandum of Agreement (MOA) between CUC and GPA. The acquisition is consistent with the scope of the MOA. Additionally, purchase orders are not a requirement under current procurement regulations for purchases between government agencies. Condition 4 - CUC does not concur. CUC maintains its position on this finding. The finding is unwarranted. Procurement regulations were suspended by way of Executive Order No. 2018-25 on account of a natural disaster. The Order waived procurement regulations and authorized the CUC to procure typhoon restoration supplies and services. The related expenditures and corresponding payments were authorized and approved by the Executive Director. The Order was furnished to the auditor. Auditor Response: Condition 1 - Costs should be properly reviewed and approved by management before they are incurred notwithstanding the situation. Finding stays. Condition 3 - The MOA agreement is a blanket agreement wherein the effective date, agreed upon amount, and the type of resources and services to be rendered were not specified on the agreement. Thus, transactions covered under such agreement should be either supported with an approved purchase order or equivalent documentation to substantiate management approval of the resources and/or services to be purchased/rendered. Condition 4 - Although procurement regulations were suspended, the process by which items are procured should be obligated before the expense is incurred. The finding remains.

Finding No.: 2019-007 Pass Through Entity: CNMI Government Federal Agency: U.S. Department of Homeland Security CFDA Program: 97.036 Disaster Grants - Public Assistance (Presidentially Declared Disasters) Federal Award Nos.: FEMA-4235-DR, HMGP-4235-01-09R, FEMA-4236-DR and FEMA-4404-DR Area: Matching, Level of Effort, Earmarking Questioned Costs: $-0- Criteria: 1. Non-federal entities receiving Federal awards are required to establish and maintain internal control over the Federal awards that provides reasonable assurance that the non-Federal entity is managing the Federal awards in compliance with Federal statutes. 2. In accordance with applicable matching requirements, costs must be on a shared basis, as specified in the FEMA-State Agreement. The non-Federal share that is split between the State and each subrecipient may vary. Condition: For four (or 20%) of twenty nonpayroll expenditures tested, aggregating $65,255,883 of a population of $79,762,138, the match was not met for Project Worksheet (PW) No. 9. See details below. See Schedule of Findings and Questioned Costs for chart/table Details for #1 and #2: See Schedule of Findings and Questioned Costs for chart/table See Schedule of Findings and Questioned Costs for chart/table Details for #3 and #4: See Schedule of Findings and Questioned Costs for chart/table In a letter dated October 20, 2021, the Governor?s Authorized Representative from the CNMI Government (Pass-through Entity) confirmed that CUC subsequently paid outstanding local match amounts on October 20, 2021 and that for fiscal year 2019, CUC paid their total 10% cost share regarding PW No. 9. Therefore, no questioned costs are presented. Cause: CUC?s software system is not programmed to support matching amounts or limits or calculations. Further, CUC lacked communication with the CNMI Public Assistance (PA) Office to substantiate compliance with applicable matching requirements. Effect: CUC is in noncompliance with applicable matching requirements. Recommendation: CUC should seek assistance to support matching amounts or limits or calculations into its accounting software system. CUC should develop policies and procedures to coordinate and communicate with the CNMI PA Office of matching requirements and amounts that are due in a timely manner. Views of Responsible Officials: CUC?s Corrective Action Plan states disagreement as follows: CUC does not concur. CUC maintains its position on this finding. The finding is unwarranted. The 10% cost share was an arrangement and understanding between CUC and the CNMI government and was not intended to be a condition of the grant. Furthermore, a matching requirement by the CUC was not expressly stated in the CDFA 97-036 Disaster Grant Agreement. If the auditor believes otherwise, specific references to regulations, pronouncements, and grant requirements that serves as basis for the auditor?s finding is requested. Auditor Response: The Disaster Grant Agreement implicitly states a local share (matching) requirement, and this is also evident from the CNMI Public Assistance Program Request for Payment/Reimbursement which explicitly summarizes the project description into three categories: 1) amount requested; 2) federal share; and 3) CUC local share. Furthermore, CUC acknowledges a 10% cost share agreement between CUC and the CNMI government. The finding is retained because as of 09/30/19, CUC was noncompliant and deficient in its non-federal share match as the reimbursement request had not been received from the pass-through entity.

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