Avoiding Financial Management Pitfalls: The Mississippi Story Bonnie Graham, Esq. bgraham@bruman.com www.bruman.com

In 2016, the Mississippi Department of Education misappropriated $11,644,855.02 of Title I funds to reimburse 21st Century subrecipients.

Financial Management System 2 CFR § 200.302(b) Identification of Awards Financial Reporting Accounting Records (Source Docs) Internal Control Budget Control Written Cash Management Procedures Written Allowability Procedures

July 2015 In the 15-16 21st Century subgrant competition, MDE over-awarded approximately $19 million in 21st Century funds Did not account for continuation awards

Accounting Records 200.302(b)(3) Source Documentation Must Be Kept On: Federal Awards Authorizations Obligations Unobligated balances Assets Expenditures Income Interest (New) (Eliminated liabilities) 5

“The lack of understanding of the statewide accounting system contributed to the inability of the Office of Federal Programs to correctly reconcile unobligated balances for federal grants.”

Requirements for Pass-through Entities 200.331 All pass-through entities MUST: Ensure subawards are clearly identified with specific data, including: Amount of Federal Funds Obligated by this action; Total Amount of Federal Funds Obligated to the subrecipient; Total Amount of the Federal Award 7

April 2016 “The Office of Federal Programs was informed by Accounting personnel that there were no funds available to repay the afterschool centers as all the grant funds had been distributed.”

Budget Control 200.302(b)(5) Comparison of expenditures with budget amounts for each award 9

Written Cash Management Procedures 200.302(b)(6) Must have written cash management procedures to implement requirements of § 200.305 Payment

Payment § 200.305(b)(1)-(4) Written procedures must describe whether non-federal entity uses: Advance Payments (preferred) Limited to minimum amounts needed to meet immediate cash needs Reimbursement Pass through must make payment within 30 calendar days after receipt of the billing Working Capital Advance The pass through determines that the nonfederal entity lacks sufficient working capital. Allows advance payment to cover estimated disbursement needs for initial period

Payment (cont.) § 200.305(b)(7)-(8) Advances must be maintained in insured accounts Pass through cannot require separate depository accounts Accounts must be interest bearing unless: Aggregate federal awards under $120,000 Account not expected to earn in excess of $500 per year Bank requires minimum balance so high, that such account not feasible A foreign gov’t or banking system prohibits or precludes interest bearing accounts.

Payment (cont.) § 200.305(b)(9) Interest amounts up to $500 may be retained by non federal entity for administrative purposes Interest earned must be remitted annually to HHS Payment Management System.

Cash Management (cont.) Timely Obligation of Funds When Obligations are made Period of performance of federal awards Carryover Program income

When Obligations Are Made § 76.707 Type of Obligation When Obligation Occurs Acquisition of Property Date of binding written commitment Personal Services by Employee When services are performed by Contractor Date of binding written commitment Travel When travel is taken Approved Pre-Agreement Cost On the first day of the grant or subgrant performance period.

When May Begin to Obligate § 76.708 Formula Grants: Grantees and subgrantees may begin to obligate funds when: Awarding agency approves application; or Awarding agency determines application is “substantially approvable” Reimbursement subject to final approval Discretionary Grants: When subgrant is made. However, pre-agreement costs are permissible (reference to 2 CFR Part 200)

Obligations During Carryover § 76.709 Funds may be obligated during the carryover period of one additional fiscal year. Tydings Amendment Allows extra year to obligate funds Does not apply to all grants Under Tydings, funds are available for 24-27 months: 12-15 months under the grant award (July 1, 2014 – September 30, 2015) Plus 12 months (carryover period) (October 1, 2015 – September 30, 2016)

Obligations During Carryover § 76.710 Carryover funds must be used in accordance with the Federal statute and regulation that apply and are in effect for the carryover period and any state plan or application required.

April - July “The Director of the Office of Federal Programs instructed the Accounting personnel to pay the 21st Century grant reimbursements from Title I funds until more money could be located.”

Internal Controls 200.302(b)(4) Effective control over and accountability for: All funds Property Other assets Must adequately safeguard all assets Use assets solely for authorized purpose 20

Internal Controls 200.303 Non-Federal entities must establish and maintain effective internal control over the Federal award that provides reasonable assurances that the entity is managing the award in compliance with federal statutes, regs, and terms of the award. Internal controls “should” be in compliance with: The U.S. Comptroller General’s Standard for Internal Controls in the Federal Government; and Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)

Internal Controls (cont.) 200.303 Comply with Federal statutes, regs, and the terms and conditions of the Federal awards. Evaluate and monitor the non-Federal entity's compliance with statutes, regs and the terms and conditions of Federal awards. Take prompt action when instances of noncompliance are identified including in audit findings. Take reasonable measures to safeguard protected personally identifiable info (PII) and other information designated or deemed sensitive

Written Allowability Procedures 200.302(b)(7) Not a restatement of Subpart E But a roadmap through grant development and budget process Training tool for employees

Cost Principles: “Factors Affecting Allowability of Costs” § 200.403 All Costs Must Be: Necessary, Reasonable and Allocable Conform with federal law & grant terms Consistent with state and local policies Consistently treated In accordance with GAAP Not included as match Net of applicable credits (moved to 200.406) Adequately documented

Reasonable 200.404 Consideration must be given to: Whether cost is a type generally recognized as ordinary and necessary for the operation of the non-Federal entity or the proper and efficient performance of the Federal award; The restraints or requirements imposed such as: Arms length bargaining (hint: procurement processes); Federal, state and local laws; and Terms of the grant award. Market Prices for comparable goods or services in the geographical area; Whether the individuals acted with prudence under the circumstances considering their responsibilities; and No significant deviation from established prices.

Allocable 200.405 A cost is allocable to a Federal award or cost objective if the goods or services involved are chargeable or assignable in accordance with relative benefits received. Incurred specifically for the award; Benefits both award and other work and can be distributed in proportions that may be approximated using reasonable methods; and Necessary to the overall operation of the entity and assignable to the award in accordance with this Part.

Allocable Costs 200.405(c) Cost Shifting: Any cost allocable to a particular Federal award under the principles in Part 200 may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by Federal Statutes, regulations, or terms and conditions of the Federal awards, or for other reasons. Does not preclude shifting costs that are allowable under two or more Federal awards.

“The former Director of Fiscal Management in OFP overrode MDE’s accounting procedures in order to cover a shortfall of available funds for the 21st Century program. MDE’s procedures and internal controls were inadequate to prevent and/or detect the override; as timely reconciliation of 21st Century and Title I’s expenditures, cash receipts and available funding may have disclosed the override in a timely manner.”

July/August 2016 MDE becomes aware of the miscalculation and over-commitment of 21st Century funds Disclosed to ED and OIG Asked about CAROI Began corrective actions

UGG Provisions Addressing Fraud, Waste, and Abuse

Mandatory Disclosures 2 CFR 200.113 Non-federal entities must disclose “all violations of Federal criminal law involving fraud, bribery, or gratuity violations potentially affecting the Federal award.”

Conflict of Interest 2 CFR 200.112 Non-federal entities must disclose in writing any potential conflict of interest to the federal awarding agency or pass-through entity

Required Certifications 2 CFR 200.415 Non-federal entities are required to sign certifications with each draw down and financial report stating: “I am aware that any false, fictitious, or fraudulent information, or the omission of any material fact, may subject me to criminal, civil or administrative penalties for fraud, false statements, false claims or otherwise.”

Self-Assessment 2 CFR 200.328 The non-federal entity must monitor its activities under Federal awards to assure compliance with applicable federal requirements and performance expectations are being achieved. Monitoring by the non-federal entity must cover each program, function or activity.

Internal Controls 2 CFR 200.303(d) The non-federal entity must … take prompt action when instances of noncompliance are identified including noncompliance identified in audit findings.

Cooperative Audit Resolution 200.25 Cooperative Audit Resolution: means the use of audit follow-up techniques which promote prompt corrective action by improving communication, fostering collaboration, promoting trust and developing an understanding between the Federal agency and non-Federal entity. 36

Federal Agency Responsibilities 200.513 The federal awarding agency must use cooperative audit resolution to improve federal program outcomes OIG audits of Illinois, North Carolina and Massachusetts’ procedures governing LEA single audit resolution Recommended: CAROI resolution between SEA and LEA 37

Cooperative Audit Resolution (cont.) Prompt corrective action Terminated the involved employees Canceled the 21st CCLC subgrants awarded in excess of available funds Linked 16-17 reimbursement requests to 16-17 award year, reducing misappropriated TI funds from $11.7 to $7.6 million Reimbursed Title I with state funds Strengthened policies and procedures

September 2017 Forensic Audit Results/Recommendations: Strengthen grants management procedures and training Provide supporting documentation re: the $7.6 Title I reimbursement Enhance grant monitoring activities (self-assessment) Strengthen tracking of obligations and unobligated balances Perform monthly reconciliations of grant funds received, committed, obligated and expended

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