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January 18, 2012Kwame R. BrownChainnanCouncil of the District ofColumbiaYolanda Branche fistrict ofColumbi itorFinancial Controls ovGrantees and Subrecipients

This is in response to your request to review previous recommendations offered by the Office ofthe D.C. Auditor (ODCA) to the Council of the District ofColumbia (Council) to improvefinancial controls over grantees and subrecipients ofDistrict funds.BackgroundODCA issued two audit reports that contained recommendations to improve financial controlsover grantees and subrecipients ofDistrict funds.On February 24, 2010, ODCA issued a report titled, District Eannark Process NeedsImprovement. The report examined Fiscal Year (FY) 2009 eannarks totaling $47,922,000 andfound significant financial and management deficiencies. The Auditor found that somerecipients of the FY 2009 eannarks did not comply with requirements set forth in Section 8003of the FY 2009 Budget Support Act of 2008; and that sufficient internal controls were notdeveloped to effectively ensure that District funds were properly managed, accounted for, andused only for their intended purposes. While the Council eliminated eannarks from the budget inFY 2010, the recommendations contained in the ODCA report of February 2010 remain relevantto the current discussion of improvements in financial controls over grantees and subrecipients.

717 14th Street, N.W., Suite 900, Washington, D.C. 20005 (202) 727-3600

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On August 17, 2011, ODCA issued a report titled, Audit of Funding Agreements IncludingContracts, 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 entitiesdid not adequately monitor grant funds provided to Peaceoholics.

RecommendationsAs you know, on December 1, 2011, Mayor Vincent C. Gray signed an agreement with theChildren 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 funds2Based on recommendations contained in audit reports previously issued by ODCA, we reiteratethe 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 mustbe organized and operated exclusively for exempt purposes as set forth in 501(c)(3) and none ofits earnings may inure to any private shareholder or individual. Amendments to the FY 2009Budget 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 a501 (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 diligenceto validate the 501(c)(3) status of subrecipeints. Prior to the award of the grant, grantees shouldbe required to document the 501 (c )(3) status of subrecipients in the grant file.

1 Office of the District ofColumbia Auditor report titled, Audit ofFunding Agreements Including Contracts, Loans,Grants, and Sub-grants Issued by the District ofColumbia to Peaceoholics, Inc. From Fiscal Year 2006 to FiscalYear 2010, issued August 17, 2011 included the recommendation that District agencies and the Children and YouthInvestment Trust Corporation comply with the requirements of 1 DCMR Section 5002.1 by issuing competitivelybid grants and sub-grants.2 Office of the District of Columbia Auditor report titled, District's Earmark Process Improvement NeedsImprovement, issued February 24 ,2010 included the recommendation that the Council should require agencies andthe CYITC to provide a formal assessment of their designated earmark recipients' program and financialperformance at the end of each fiscal year. The report also included the recommendation that the Council of theDistrict of Columbia should consider requiring oversight agencies and the CYITC to return all unspent Fiscal Year2009 earmark funds to the General Fund of the District of Columbia.

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Further, the ODCA report found that fiscal agents were not properly licensed or registered withthe Department of Consumer and Regulatory Affairs, or were non-compliant with District taxlaws. Therefore, we recommend, that prior to the award of a grant, the grantee must ensure thatfiscal 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 incompliance with District licensing and tax laws; (2) have the necessary financial stability, (3) ahistory ofperformance; and (4) a record of integrity.

Grantees of District funds should establish and implement measures to ensure thatsubrecipients 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'scompliance with the requirements of a District program .. .adhering to applicablelaws and regulations, and measuring progress toward stated results and outcomes.[It] includes an assessment of documentation and data maintained by thesubrecipient; .. .and information obtained through observation. Monitoring alsodetermines if the financial management and the accounting system are adequate toaccount for program funds in accordance with District and/or Federalrequirements."" .. .methods that can be used for monitoring subrecipient activity are .. .scheduledsite visits, review[ing] subrecipient reports [and] require[ing] prior approval forcertain 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 Districtshould monitor to provide reasonable assurance that grant recipients are in compliance with allapplicable statutory, regulatory, and program requirements. Grantees of District funds shouldestablish and implement measures to ensure that subrecipients are properly monitored andcomply with all grant agreement requirements.

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Grantees of District funds should implement measures to effectively monitor financialmanagement systems maintained by subrecipients to ensure that funds are properlymanaged, accounted for and used only for their intended purposes.

According to GAO standards for internal control: "Transactions should be promptlyrecorded to maintain their relevance and value to management in controlling operations andmaking decisions. This applies to the entire process or life cycle of a transaction or event fromthe initiation or authorization through its final classification in summary records.,,3

Grantees of District funds should periodically review the financial management systemsof subrecipients to determine whether sufficient internal controls are properly developed,implemented and maintained. The Auditor's ability to accurately and completely determinewhether subrecipients used District funds in accordance with the terms of grant agreements issignificantly impaired when subrecipients do not establish and maintain financial systems thataccurately and properly record all financial data relating to District funds.

ConclusionSince 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 stepstoward restoring public trust and protecting the resources of the District of Columbia fromfurther fraud, mismanagement, and abuse by implementing the recommendations contained inthis memorandum.

3 See Standards for Internal Control in Federal Government, GAOlAIMD-OO-21.3.1 (11/99) p.l7.

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