FRANKFORT, Ky. (December 11, 2023) – Today, Kentucky Auditor Mike Harmon's office released the Fiscal Year 2023 audit of the Purchase Area Development District (PADD). Auditor Harmon joined with his staff in presenting the audit report to PADD's board at a meeting in Mayfield. The audit report contains four findings.
“The cornerstone of good government is bringing greater transparency and accountability to those we all serve, the taxpayers of our great Commonwealth," Auditor Harmon said. “That has been the mantra of my administration for the past eight years, and one of those achievements was the passage of House Bill 189 during the 2017 Regular Session of the General Assembly. That bill gives my office the right to either audit Kentucky's area development districts by our staff, or to review audits of ADDs conducted by private accounting firms."
House Bill 189 came to fruition thanks to the efforts between Auditor Harmon, members of the General Assembly, the Kentucky Council of Area Development Districts, the Kentucky Chamber of Commerce, and others.
The audit contains the following findings:
The Purchase Area Development District has insufficient internal controls over federal awards: The Purchase Area Development District (PADD) internal controls failed to recognize contradictions in federal award agreements as well as material errors in the Schedule of Expenditures of Federal Awards (SEFA). A delivery order modification for various Title III programs provided a Federal Assistance Listing Number (ALN) as National Family Caregiver Support, Title III Part E Grant (ALN 93.052). However, the description was for Title III Expanded Senior Meals Program (ESMP). In actuality, the funds were part of Coronavirus State and Local Fiscal Recovery Funds (SLFRF) (ALN 21.027) that passed through from the state to be used for the ESMP. Additionally, SLFRF Funds were incorrectly labeled as part of the National Family Caregiver Support, Title III Part E Grant on the Purchase Area Development District's SEFA.
The Purchase Area Development District relied on conflicting information provided by the Kentucky Department of Aging and Independent Living (DAIL), the pass-through agency. There was no internal review of the delivery order modification nor was there verification of Federal Assistance Listing Numbers on the PADD's SEFA.
Noncompliances in the federal programs could have occurred by following the incorrect program requirements of the federal funds provided to PADD. As a result of the errors above, two programs contained on PADD's SEFA were materially misstated. Coronavirus State and Local Fiscal Recovery Funds were understated by $953,477 and National Family Caregiver Support, Title III Part E funds were overstated by the same amount. Additionally, inaccurate reporting of federal awards expended could affect future federal awards.
Strong internal controls over federal awards are vital in ensuring that the federal awards are expended, accounted for, and reported correctly in accordance with federal program requirements. Strong internal controls are also important in safeguarding the area development district's assets and those given the responsibility of accounting for them.
2 CFR 200.303 states “The non-Federal entity must (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award." Additionally, 2 CFR 200.510(b) states “The auditee must also prepare a schedule of expenditures of Federal awards for the period covered by the auditee's financial statements which must include the total Federal awards expended."
We recommend the Purchase Area Development District implement adequate internal controls over federal awards to ensure that the correct federal program requirements are being met successfully and that federal programs are reported on the SEFA correctly.
Executive Director's Response: The Purchase ADD has a long-standing relationship with several of our state partners. In this instance, the ADD used delivery orders and documentation provided by a state agency that was believed to be accurate, however was incorrect. The error was uncovered by the team from the state auditor completing the Purchase ADD's audit. Fortunately, all funding was accounted for and used for its intended purpose. To avoid this type of occurrence in the future, the ADD will verify the CFDA# and descriptions through sams.gov.
The Purchase Area Development District failed to implement adequate internal controls over the preparation of the budgetary comparison schedules: The Purchase Area Development District (PADD) failed to implement adequate internal controls over the preparation of the budgetary comparison schedules, which resulted in material misstatements. The following misstatements were noted on these schedules:
- The original and final budget amounts for the beginning fund balance of the general fund were overstated by $1,995,930. This was due to the actual fund carryover being used as original and final budget amounts.
- The original budget amount for intergovernmental revenues of the special revenue fund was overstated by $69,041. This was due to the final budget amount being used as the original budget amount.
- The original budget amount for employee benefits of the special revenue fund was overstated by $242,900.
- The original budget amount for other expenditures of the special revenue fund was overstated by $104,500.
- The original and final budget amounts for the beginning fund balance of the special revenue fund were overstated by $9,735,209. This was due to the actual fund carryover being used as original and final budget amounts.
PADD's system of internal controls failed to identify and correct material misstatements. This is largely due to the PADD's reliance on a third-party accounting firm for the preparation of the financial statements. Providing incorrect financial information to stakeholders such as grantors and other users could cause them to make incorrect financial evaluations of the financial position of PADD.
Good internal controls require an adequate review of financial statements and schedules in order to detect and correct any misstatements or errors.
We recommend the PADD establish sufficient controls to properly monitor the preparation of all financial statements and schedules. These controls should include a thorough review of all statements and schedules prepared by outside firms or entities.
Executive Director's Response: The Purchase ADD has been going through a transition period between personnel, accounting software and audit firms for the last three years. As a result, this transition has caused the ADD to continually adapt policies & procedures for correctness. In the future the budgetary comparison schedules will be checked more closely by the finance director after being prepared by the CPA firm. Fortunately, all funding was accounted for and used for its intended purpose.
The Purchase Area Development District failed to implement internal controls over interfund balances: This is a repeat finding and was included in the prior year audit report as Finding 2022-006. As of June 30, 2023, the general fund of the Purchase Area Development District (PADD) owed the special revenue fund $3,171,208, while the special revenue fund owed the general fund $697,323 for a net amount of $2,473,885 due to the special revenue fund.
Due to and due from accounts are created when PADD uses one source of money to pay bills and salaries that cross fund and program types. The special revenue fund due from (the general fund) is primarily owed to the following state and federal programs and activity categories:
- Lending (Grant funds): $775,572
- Nutritional Services (Grant Funds): $778,522
- Housing (Grant Funds): $377,379
- Physical Planning (Mostly Grant Funds): $269,764
- Participant Directed Services (Grant Funds): $962,142
- Other Community and Economic Development (Grant Funds): $7,829
Additionally, the interest that could be earned in the special revenue fund is reduced by holding the money owed to the special revenue fund in the general fund accounts.
As of June 30, 2023, the general fund did not have enough readily available funds to repay the special revenue fund the monies owed without liquidating general fund investments.
GASB 54 paragraph 30 provides the following definition and guidance, “Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. The term proceeds of specific revenue sources establishes that one or more specific restricted or committed revenues should be the foundation for a special revenue fund."
GASB 54 paragraph 31 provides additional guidance, “The restricted or committed proceeds of specific revenue sources should be expected to continue to comprise a substantial portion of the inflows reported in the fund. Other resources (investment earnings and transfers from other funds, for example) also may be reported in the fund if those resources are restricted, committed, or assigned to the specified purpose of the fund." The various grant agreements for which the special revenue fund accounts for, also restrict the use of the funds.
In addition, good internal controls require policies and procedures be established and approved by the board of directors and management that detail the handling of the due to and due from accounts that are created by paying bills and salaries that cross fund types.
Because the PADD does not have detailed internal control policies and procedures directed at eliminating interfund balances, it failed to clear out interfund balances by the end of the fiscal year to the respective accounts of the special revenue fund. We recommend the PADD establish and implement internal control policies and procedures over interfund loans and balances. These policies and procedures should include steps that ensure restricted funds are paid back to the proper account by the end of each fiscal year in order to be used for their intended purpose.
We recommend the PADD establish and implement internal control policies and procedures over due to and due from accounts created by paying bills and salaries owed by the different funds from one source of money. These policies and procedures should include steps that ensure restricted funds are paid back to the proper accounts in a timely manner, in order to be used for their intended purpose.
Executive Director's Response: The ADD has been going through a transition period between personnel, accounting software and audit firms the last three years. As a result, this transition has caused the ADD to continually adapt policies & procedures for correctness. We are in the process of enacting a new policy that will prevent the ADD from having Due to Due From issues in the future.
The Purchase Area Development District lacks adequate internal controls over economic adjustment assistance reporting:
Federal Program: ALN 11.307 Economic Adjustment Assistance
Award Number and Year: ALN 11.307 Economic Adjustment Assistance 2021
Name of Federal Agency: U.S. Department of Commerce
Compliance Requirements: Reporting
Type of Finding: Material Weakness and Material Noncompliance
Amount of Questioned Costs: None
Opinion Modification: Qualified Opinion
COVID Related: Yes
The Purchase Area Development District (PADD) lacks adequate controls over federal Economic Assistance grant reporting. The following deficiencies were noted for the 2023 fiscal year:
- PADD reported the incorrect amount of principal outstanding on loans on the EDA 209 Report submitted for the American Rescue Plan Act Revolving Loan Fund (RLF). The amount reported as principal outstanding was $963,797. This amount represents the total amount of principal outstanding as of July 14, 2023. The amount outstanding as of June 30, 2023 was $523,151. This resulted in the report being materially overstated by $440,646. The report included three RLF loans that were issued in July of 2023 for a total of $439,250. There were also minor differences on two other RLF loans where payments made at the end of the year totaling $1,396 were not accounted for in the principal balance. The report was also not submitted by July 31, 2023 as required.
- PADD overstated their notes to the SEFA by $107,010. The balance for the Intermediary Relending Program was listed as $696,834 which was the amount of the loan from IRP not the amount expended/granted to local business. The total outstanding as of June 30, 2023 was $589,824.
The inaccurate EDA 209 report was primarily due to an oversight by the preparer, but it also appeared that the report was not reviewed by another employee prior to being submitted. The overstated SEFA notes were due to the PADD's reliance on an external party to prepare the financial statements and notes to the financial statements. A lack of a review from the PADD of the external party's work resulted in a misstatement.
Due to the lack of controls over the reporting process for federal awards, the PADD has an increased risk of misappropriation of funds, and noncompliance with grant requirements. This could result in potential questioned costs and being denied grants in the future.
13 CFR 307.14(b) provides the requirements for the EDA RLF reports and states: “RLF Recipients must certify as part of the RLF report to EDA that the RLF is operating in accordance with the applicable RLF Plan, and that the information provided is complete and accurate."
Additionally, strong internal controls over federal grant reporting are vital in ensuring that federal awards are accounted for properly. Strong internal controls are also important in safeguarding the area development district's assets and those given the responsibility of accounting for them, as well as helping make certain PADD complied with all requirements.
We recommend PADD follow the guidance contained within 13 CFR Part 307 for completing the Form ED-209 RLF Report. We also recommend PADD strengthen controls over federal awards by implementing review processes to ensure grant details and amounts reported on financial reports agree to amounts reported on financial statements. Furthermore, we recommend controls be put in place to ensure deadlines are met for all reporting requirements.
Executive Director's Response: The Purchase ADD has been going through a transition period between personnel, accounting software and audit firms the last three years. As a result, this transition has caused the ADD to continually adapt policies & procedures for correctness. The report to EDA by the loan staff included loans that had been approved in FY 2023 but not yet closed. In the future, loan staff and finance staff need to coordinate more closely what is being reported to avoid discrepancies. Fortunately, all funding was accounted for and used for its intended purpose.
The PADD audit, which can be reviewed here, is the fifth overall area development district audit to be conducted and released by Auditor Harmon's office since HB 189 became law, and the first for Fiscal Year 2023.