Across the United States, watchdog entities such as Inspectors General and State Auditors regularly assess the work of grant-making agencies tasked with carefully monitoring both their own use of federal funds and use by subrecipients and grantees. Every year, dozens of agencies are penalized for inadequate internal controls and insufficient, incomplete, or non-existent monitoring programs.
In a close analysis of 79 audit reports—both Federal Inspector General and Government Accountability Office (GAO) reports, and statewide Single Audits—the Vander Weele Group reviewed 492 findings related to deficiencies in either internal controls or subrecipient monitoring. A breakdown of the results is included below.
Internal Controls
Insufficient internal controls were far and away the most common finding, noted in areas as diverse as payroll, subrecipient monitoring, eligibility testing, and reconciliations.
Significant examples of the impact of inadequate internal controls from these reports include:
Payments on ineligible or fraudulent unemployment claims, including to deceased recipients;
Overstatement of expenditures and understatement of received funding, leading to grossly inaccurate Schedule of Expenditure of Federal Awards (SEFA) preparation and delays in statewide Single Audits;
Unsupported, unallowable, or questioned expenditures and costs totaling billions of dollars nationwide, and;
Organized, intentional disregard for and violation of state and Federal regulations, including those governing allowable costs and activities and prohibiting fraud.
In most cases, staffing challenges (such as high turnover and vacant positions), lack of training, insufficient technological resources, and the sudden influx of funding and new requirements associated with COVID-19 relief money were identified as reasons for substandard internal control processes and procedures. Even in organizations with otherwise sufficient internal controls, these policies were frequently relaxed or abandoned to meet federal mandates regarding the need to deploy COVID relief funds quickly.
Reporting Requirements
Depending on the year and funding source, uneven implementation of federal or state reporting requirements was a common finding, both at the agency level and among subrecipients. Typically, findings were focused on the completeness and accuracy of reporting, and whether sufficient supporting documentation was available.
Mistakes in reporting were most commonly attributed to human error, employee or subrecipient inexperience, and technical problems with online reporting systems. Lack of training and high turnover, coupled with the shift in priorities brought about by the COVID-19 pandemic, were identified as the root causes.
Documentation
A significant number of programs received findings related to documentation, whether it was for incomplete records, missing required elements, clerical errors, or lack of retention.
In more than one case, agencies did not notify subrecipients and grantees of their obligation to collect, record, or submit specific types of documentation. In others, Time and Effort was not sufficiently documented and auditors could not adequately assess whether programs met all federal requirements. Among the most egregious of these was a finding that one agency had so little documentation available, the auditors were not able to assess the department’s compliance with allowable activities/costs; procurement, suspension, and disbarment; eligibility; and subrecipient monitoring requirements.
Lack of training was consistently the most cited cause for this finding, followed by a lack of written retention policies, technological issues, and the disruption of business caused by the COVID-19 pandemic.
Monitoring
Despite it being mandatory, there were several instances in which agencies had no monitoring programs in place. Even among those that did, the quality and completeness of their monitoring plans—and the extent to which they followed them—varied significantly.
For example, one agency was reprimanded for failure to cite subrecipients and grantees in violation of federal regulations, and failure to create and execute corrective action plans. Another failed to build a mandatory public service program required by the terms of the grant. Another incorrectly categorized subrecipients as contractors, and so did not conduct the required monitoring. A fourth did not inform subrecipients and grantees of their respective status, or of their responsibility to retain documents, submit performance reports, and adhere to updated regulations concerning the use of federal funds.
In many cases, staffing challenges, lack of training, aging infrastructure, and the ongoing effects of the COVID-19 pandemic were cited as contributing factors to absent or deficient monitoring.
Risk Assessment
Conducting risk assessments is a key component of, among other mandatory processes, subrecipient monitoring, as decisions about who will be monitored are required to be risk-based. However, in the case of findings related to risk assessments, the most common was that they had not been conducted, or if they had, the auditors could not be reasonably assured they were conducted in compliance with federal standards. This was sometimes true even in cases in which the agency had a formal risk assessment process in place.
Another recurring finding was that although risk assessments had been conducted, they were not being used to identify subrecipients at greatest risk for misuse of federal funds. Lack of training—specifically, a lack of knowledge concerning the requirement to conduct risk assessments—was the primary reason offered for these findings. In the cases of Coronavirus Aid, Relief, and Economic Security Act (CARES Act) funds, the disruption of business caused by the COVID-19 pandemic, including abrupt staffing changes brought about by retirements, furloughs, layoffs, and employee departures was a major contributing factor.
Financial Reporting and Expenditures
Missing or inaccurate financial reports, delays in reconciling expenditures, and failure to review expenditures for allowability were common findings in the sample of reports reviewed for this article.
Staffing challenges and deficient communications regarding allowable costs were the two most cited causes, but in some cases, pass-through agencies failed entirely to communicate reporting requirements to subrecipients and grantees or did not review reports for completeness and accuracy.
Single Audits
In a substantial number of cases, agencies responsible for ensuring that subrecipients that expended more than $750,000 of federal funds in a single year underwent a Single Audit either did not do so, or they could not provide verification of having done so. In others, while the Single Audits were performed, they were not reviewed for accuracy and completeness by the pass-through agency.
Some Single Audits at the agency level found errors in the Schedule of Expenditure of Federal Awards that were not detected by internal controls, while others documented failures to segregate financial records for individual federal awards. In these cases, a lack of training and poor internal controls stemming from unclear or undocumented policies and procedures were frequently to blame.
Performance Assessment and Reporting
In 2020, performance assessments and reporting were almost universally late, incomplete, or missing across all levels of government and among subrecipients and grantees. The overwhelming majority of these were a direct result of the pandemic and its impact on both staffing and health and safety concerns around on-site visits. This data cannot be considered an accurate assessment of performance review and reporting rates under normal conditions.
In future years, we anticipate a significant reduction in these types of findings as states return to business as usual. The additional awareness-raising of requirements to assess and report performance, particularly of and among subrecipients and grantees, brought on by the influx of American Rescue Plan Act (ARPA) funding will likely also contribute to fewer findings of this type.
Corrective Action Plans and Corrective Action Follow Up
In this category, the most common finding was a lack of follow-up from state agency personnel on the status of corrective action plans issued to subrecipients. Other recurring themes were failure to issue management decisions that would have allowed subrecipients to implement corrective actions plans, failure to provide corrective action plans to subrecipients identified as noncompliant, and failure by agencies to implement corrective action plans provided during previous Single Audits.
As in many cases discussed in this article, staffing challenges, time constraints, and the disruption of the COVID-19 pandemic were cited as primary causes. In a small subset, the agencies affected by these findings also pointed to a lack of authority or reasonable ability to compel subrecipients and grantees to complete corrective actions more quickly, as they too struggled with staffing challenges, lack of training, and the ongoing impacts of the pandemic.
The Future of Grants Monitoring
The impact of the CARES Act and ARPA on grants monitoring across the board cannot be overstated. Nationwide, state governments are beginning to grapple with the fallout from the early days of the pandemic, when regulations and requirements were few and speed was emphasized over enforcement of internal controls. Decisions made in the immediate, such as suspending subrecipient risk assessments and payroll examinations, blanket funding of payroll expenditures not tied to Time and Effort reporting*, and delaying or canceling financial reviews and Single Audits, have left agencies without evidence to accurately support compliance in their use of federal funds.
However, not all the effects of the shakeup have been negative. Needless to say, the boon in grant funds has benefitted countless organizations, individuals, types of infrastructure, and causes. Benefits of the watchdogs’ work have included more leeway concerning Period of Performance restrictions, which can be a lifeline for understaffed agencies; a greater awareness of the general requirement to monitor subrecipients (and what that monitoring must include); and increased funding and technological resources aimed at strengthening a variety of internal controls.
A spate of emerging fraud investigations underscores the importance of measures that prevent, detect, and respond to fraud, including regulations that mandate internal controls, risk assessments, policies and procedures, and monitoring reviews. Whether it concerns their own use of funds or subrecipients, agencies must ensure compliance with federal regulations. We expect that the growing awareness of monitoring requirements will, in turn, lead organizations to adopt more sophisticated fraud-fighting tools, such as data analytics software. Tools like this allow agencies to detect potential fraud quickly and accurately in large data sets. We’ll cover this topic in more depth in our upcoming articles, Data Analytics in Grants Monitoring and What Grants Monitoring Software Can Do for You.
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