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January 18, 2012 Kwame R. Brown Chainnan Council of the District of Columbia Yolanda Branche District of Columbi
Financial Controls ov Grantees and Subrecipients
This is in response to your request to review previous recommendations offered by the Office of the D.C. Auditor (ODCA) to the Council of the District of Columbia (Council) to improve financial controls over grantees and subrecipients of District funds.
ODCA issued two audit reports that contained recommendations to improve financial controls over grantees and subrecipients of District funds. On February 24, 2010, ODCA issued a report titled, District Eannark Process Needs Improvement. The report examined Fiscal Year (FY) 2009 eannarks totaling $47,922,000 and found significant financial and management deficiencies. The Auditor found that some recipients of the FY 2009 eannarks did not comply with requirements set forth in Section 8003 of the FY 2009 Budget Support Act of 2008; and that sufficient internal controls were not developed to effectively ensure that District funds were properly managed, accounted for, and used only for their intended purposes. While the Council eliminated eannarks from the budget in FY 2010, the recommendations contained in the ODCA report of February 2010 remain relevant to the current discussion of improvements in financial controls over grantees and subrecipients.
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On August 17, 2011, ODCA issued a report titled, Audit of Funding Agreements Including Contracts, Loans, Grants, and Sub-grants Issued By the District of Columbia to Peaceoho1ics, Inc. From Fiscal Year 2006 to Fiscal Year 2010. The Auditor found that grant funding entities did not adequately monitor grant funds provided to Peaceoholics.
As you know, on December 1, 2011, Mayor Vincent C. Gray signed an agreement with the Children and Youth Investment Trust Corporation (CYITC) pertaining to grant administration. We note that the agreement addresses three recommendations previously presented by ODCA. Specifically, Section IV of the agreement requires awards of sub-grants on a competitive basis/ Section V of the agreement requires grantees to document the delivery of services by subgrantees and Section XII requires CYITC to reinvest unspent District funds 2 • Based on recommendations contained in audit reports previously issued by ODCA, we reiterate the following key recommendations:
Grantees and subrecipients of District funds should be 501(c)(3) organizations.
According to 26 United States Code Service §501(c)(3), to be tax-exempt, an organization must be organized and operated exclusively for exempt purposes as set forth in §501(c)(3) and none of its earnings may inure to any private shareholder or individual. Amendments to the FY 2009 Budget Support Act of 2008 allowed organizations, which were unable to secure 501(c)(3) certification by the Internal Revenue Service, to submit a notarized statement designating a 501 (c)(3) organization to serve as its fiscal agent. The ODCA report recommended that subrecipients of District grant funds should be 501(c)(3) organizations. In retrospect, if a fiscal agent is required, the grantee must exercise due diligence to validate the 501(c)(3) status of subrecipeints. Prior to the award of the grant, grantees should be required to document the 501 (c)(3) status of subrecipients in the grant file.
Office of the District of Columbia Auditor report titled, Audit of Funding Agreements Including Contracts, Loans, Grants, and Sub-grants Issued by the District of Columbia to Peaceoholics, Inc. From Fiscal Year 2006 to Fiscal Year 2010, issued August 17, 2011 included the recommendation that District agencies and the Children and Youth Investment Trust Corporation comply with the requirements of 1 DCMR Section 5002.1 by issuing competitively bid grants and sub-grants. 2 Office of the District of Columbia Auditor report titled, District's Earmark Process Improvement Needs Improvement, issued February 24,2010 included the recommendation that the Council should require agencies and the CYITC to provide a formal assessment of their designated earmark recipients' program and financial performance at the end of each fiscal year. The report also included the recommendation that the Council of the District of Columbia should consider requiring oversight agencies and the CYITC to return all unspent Fiscal Year 2009 earmark funds to the General Fund of the District of Columbia.
Further, the ODCA report found that fiscal agents were not properly licensed or registered with the Department of Consumer and Regulatory Affairs, or were non-compliant with District tax laws. Therefore, we recommend, that prior to the award of a grant, the grantee must ensure that fiscal agents are responsible, experienced and competent to perform the required duties. Specifically, the grantee must base the award on a determination that fiscal agents: (1) are in compliance with District licensing and tax laws; (2) have the necessary financial stability, (3) a history of performance; and (4) a record of integrity. Grantees of District funds should establish and implement measures to ensure that sub recipients are properly monitored and comply with all grant agreement requirements. The Office of the Chief Financial Officer's Subrecipient Monitoring Manual (SMM) states in pertinent part: "Monitoring is the review process used in determining a subrecipient's compliance with the requirements of a District program ... adhering to applicable laws and regulations, and measuring progress toward stated results and outcomes. [It] includes an assessment of documentation and data maintained by the subrecipient; ... and information obtained through observation. Monitoring also determines if the financial management and the accounting system are adequate to account for program funds in accordance with District and/or Federal requirements." " ... methods that can be used for monitoring subrecipient activity are ... scheduled site visits, review[ing] subrecipient reports [and] require[ing] prior approval for certain activities." The purpose of the SMM is to serve as a guide in monitoring District programs administered by grant recipients. The SMM identifies important requirements that the District should monitor to provide reasonable assurance that grant recipients are in compliance with all applicable statutory, regulatory, and program requirements. Grantees of District funds should establish and implement measures to ensure that subrecipients are properly monitored and comply with all grant agreement requirements.
Grantees of District funds should implement measures to effectively monitor financial management systems maintained by subrecipients to ensure that funds are properly managed, accounted for and used only for their intended purposes.
According to GAO standards for internal control: "Transactions should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. This applies to the entire process or life cycle of a transaction or event from the initiation or authorization through its final classification in summary records.,,3 Grantees of District funds should periodically review the financial management systems of subrecipients to determine whether sufficient internal controls are properly developed, implemented and maintained. The Auditor's ability to accurately and completely determine whether subrecipients used District funds in accordance with the terms of grant agreements is significantly impaired when subrecipients do not establish and maintain financial systems that accurately and properly record all financial data relating to District funds.
Since a lack of sufficient, appropriate internal controls enabled the embezzlement of $353,500 in District of Columbia funds, we strongly urge the Council to immediately take steps toward restoring public trust and protecting the resources of the District of Columbia from further fraud, mismanagement, and abuse by implementing the recommendations contained in this memorandum.
See Standards for Internal Control in Federal Government, GAOl AIMD-OO-21.3.1 (11/99) p.l7.
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