State audit finds NC Dept of Commerce did not adequately monitor millions in federal funds

North Carolina’s Department of Commerce was one of the departments called out in the Statewide Single Audit for the fiscal year ending June 30, 2023. The North Carolina Office of State Auditor released a report on the audit on Thursday.

For fiscal year 2023, the state spent $35 billion in federal awards that were distributed to 618 programs managed by 103 different state entities, including the university and community college systems.

“This is an essential audit to ensure federal tax dollars are being spent appropriately and in the most efficient way possible,” said State Auditor Jessica Holmes in a press release. “By identifying areas for improvement, the state can serve as better stewards of taxpayer dollars and resources.”

Auditors found 15 areas for improvement. The total amount of questioned costs identified was $467,246. Each entity’s management agreed upon all findings.

findings for NC Commerce:

The Department of Commerce did not adequately monitor $19.6 million in federal funds used to support community development activities. Specifically, the NC Commerce didn’t:

• Perform risk assessments.
• Complete monitoring activities.
• Adequately review reimbursement requests. 

NC Commerce’s monitoring plan required risk assessments over all subawards when funding is initially provided and then again after 20 months to determine which subawards to monitor. However, auditors reviewed the 50 subawards that required a risk assessment during the audit and found that none of the risk assessments were performed.

In addition, auditors reviewed the monitoring activities over all subawards open during the audit period and found that 148 out of 152 (97%) subawards did not have monitoring activities completed during the year.

Lastly, auditors reviewed a sample of 60 reimbursement requests, totaling $5.1 million, that were paid during the audit period and found eight (13%) requests totaling $426,260 that were paid outside the subaward period. 

As a result, NC Commerce may be required to pay $426,260 back to the federal government. Auditors also say that inadequate monitoring increases the risk that federal funds may not be used in accordance with federal requirements, which may reduce funding available to communities for providing housing and expanding economic opportunities for low- and moderate-income families.

NC Commerce management told auditors that reviews of the reimbursement requests were not detailed enough to ensure that payments were within the subaward period. In addition, staff turnover resulted in incomplete monitoring procedures.

Auditors’ recommendations included developing and implementing detailed review procedures over expenditures and prioritizing the development of a contingency plan to ensure annual monitoring is completed when employee turnover occurs.

Regarding risk assessments, the Rural Economic Development Division (REDD) of the Commerce Department will modify the monitoring plan and risk assessment process to account for the extenuating circumstances. The assessment will be completed by June 30, with an effective date of July 1. The same dates apply for corrective action for the monitoring of sub-awardee activities.

Auditors also found that NC Commerce didn’t accurately report Community Development Block Grant (CDBG) data to the US Department of Housing and Urban Development (HUD).

Specifically: 

• Obligated amounts ranged from an underreported amount of $4.2 million to an overreported amount of $7.5 million.
• Expenditure amounts ranged from an underreported amount of $8.3 million to an overreported amount of $6.1 million.
• Program performance data ranged from an underreported amount of $8.6 million to an overreported amount of $13.1 million.

Recommendations from the auditors included that department management should develop and implement detailed reconciliation and review procedures over the annual Financial Summary Report to ensure accuracy.

Both NC Commerce and REDD acknowledge that there is currently no process in place to reconcile the data in the Commerce’s Grant Management System (GMS) with the data in the federal Integrated Disbursement and Information System (IDIS). Staff also blamed the over 25-year-old internal database of the GMS, stating CDBG staff had a tremendous challenge reconciling the data to the federal system, IDIS.

By Oct. 1, the REDD CDBG staff plans on working with the Commerce Information Technology staff to explore and implement interim solutions until the current GMS system is replaced.

Other findings include errors in Federal Funding Accountability and Transparency Act (FFATA) reporting.

Auditors reviewed all 39 subawards totaling $50.4 million that were required to be reported to the FSRS during the audit. They found that 34 subawards totaling $49.1 million were reported 29 to 180 days late. In addition, one subaward totaling $5 million was reported with the incorrect subaward number. Four subawards totaling $1.3 million were not reported at all. One subaward totaling $950,000 was reported, although the subaward was cancelled prior to report submission 

According to department management, the required FFATA reporting for the CDBG program was not completed because the staff responsible for FFATA reporting misunderstood the applicability of the requirement to CDBG subaward allocations.

Auditors recommended that department management ensure that the staff clearly understands the reporting requirements applicable to the CDBG program.

Lastly, the Department of Commerce did not adequately monitor $58 million in federal funds passed to subrecipients to provide employment and training programs for adults, dislocated workers, and youth who face barriers to employment.

Department management told auditors that employee turnover in positions responsible for overseeing the monitoring process prevented the completion of monitoring during the year.

Auditors recommended that they should prioritize the development of a contingency plan to ensure annual monitoring is completed when employee turnover occurs.

Other departments called out in the audit were North Carolina Department of Health and Human Services (DHHS) and North Carolina Department of Public Instruction (NC DPI).