Audit finds $51.96M in total questioned costs of federal funds

An independent auditor has found $51.96 million in total questioned costs of federal funds as it identified certain deficiencies in CNMI’s internal control over financial reporting and on compliance based on an audit of its financial statements.

The CNMI government agrees to certain findings and disagrees on some, and made correction action plans.

Ernst & Young (CNMI) Inc. was hired by the Office of the Public Auditor to audit the CNMI’s statements for the year ended Sept. 30, 2021.

Ernst & Young also recently submitted to Gov. Arnold I. Palacios an audit report on their consideration of the CNMI’s internal control over financial reporting and on their tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters.

Of the total $51.96 million questioned costs, among those found by the auditor were the $20.34 million from COVID-19 Coronavirus Relief Fund; $18.35 million from Community Disaster Loans; $3.37 million from CNMI Nutrition Assistance; $2.77 million from Coronavirus State and Local Recovery Funds Child Care and Development Fund; $1.30 million from Child Disaster Relief; $1.24 million from Economic, Social, and Political Development of the Territories; $1.13 million from Unemployment Insurance; and $1.03 million from Coronavirus State and Local Recovery Funds Child Care and Development Fund.

Regarding the questioned $20.34 million costs from COVID-19 Coronavirus Relief Fund, the auditor found that of nine expenditures tested, aggregating $20.8 million of a total population of $25 million, for two (or 22%), either the check payments and/or invoices were not provided.

One check and/or invoice was in the amount of $2,768, while the second was $20,339,145, or for a total amount of $20,341,913.

The auditor said the cause was that the CNMI did not enforce monitoring controls over compliance with applicable allowable costs/cost principle requirements.

The auditor said the CNMI is in noncompliance with applicable allowable costs/cost principles requirements and this resulted to $20,341,913 questioned costs.

The auditor recommends that the CNMI should strengthen monitoring controls over compliance with applicable allowable costs/cost principles requirements.

In the CNMI’s response, the Department of Finance agrees with the auditor’s findings. Finance said they have completed their review and proposed adjustments to accurately reflect expenditures in compliance with grant policies and requirements.

Moving forward, Finance said they have completed policies and procedures to ensure that all documentation is uploaded to the new financial system, and proper review and documentation are included to verify the allowability of expenditures within grant policies and requirements.

On the questioned $18.35 million costs from the Community Disaster Loans, under condition 1, the questioned costs was $18,281,454, while on condition 2, the questioned costs was $72,509.

Ernst & Young said of 14 expenditures tested, aggregating $18.4 million of a total population of $20.2 million in nonpayroll expenditures subject to procurement, they noted that on condition 1, for 11 (or 79%), either the procurement files, written justifications, and the Procurement & Supply Director’s written approvals of the emergency procurement method used were not provided.

In addition, the auditor found that the contracts for four documents (projects) indicated procurement methods used were for competitive sealed proposals; however, the procurement files support emergency procurement.

Further, the auditor said, the procurement information page that specifies the procurement method used for two other documents were left blank but were initialed by the legal reviewer

The auditor said on condition 2, for three or (21%), purchase orders do not specify the procurement methods used.

As to the cause, Ernst & Young said the CNMI did not enforce compliance with applicable procurement requirements and questioned costs of $18,353,963 result.

The auditor recommends that responsible personnel should monitor and enforce compliance with applicable procurement requirements, including the review of procurement files for completeness as to written rationale for deviations from applicable procurement requirements.

The auditor said responsible personnel should maintain procurement documents to substantiate compliance.

In the CNMI’s response, for condition 1, Finance-Procurement Services agrees with the auditor’s finding.

Procurement Services said the governor’s executive order 2022-04 was issued renewing the declaration of State of Public Health Emergency establishing response, quarantine, and preventive containment measures concerning COVID-19 and renewing the order directing the CNMI Homeland Security & Management Office, through the CNMI COVID-19 Task Force, and in partnership with Commonwealth Healthcare Corp.

Procurement Services said the emergency contract does not require the Procurement Services director’s signature.

Procurement Services said the emergency contract was created by HSEM and is a template being used when an emergency declaration is in effect.

Procurement Services said the person who prepared the emergency contract made an error in selecting the procurement method as it should have been selected as emergency procurement instead of competitive sealed proposal.

This purchase order, Procurement Services said, was issued to exercise the option to extend performance provided for in COVID-19-0163 and provide the CNMI with 40,800 square feet of warehouse space for staging and distribution of supplies, equipment, and other necessary support items including electricity (power) as well as other amenities in the initial contract.

Procurement Services said the governor’s Executive Order 2022-04 was issued renewing the declaration of State of Public Health Emergency establishing response, quarantine, and preventive containment measures concerning COVID-19 and renewing the order directing the CNMI Homeland Security & Management Office, through the CNMI COVID-19 Task Force, and in partnership with CHCC.

Procurement Services said the emergency contract does not require the Procurement Services director’s signature.

Procurement Services said the emergency contract was created by HSEM and is a template being used when an emergency arises.

Procurement Services said the person who prepared this contract should have selected the emergency procurement instead of competitive sealed proposal.

Procurement Services said for payment of blocked rooms needed for medical referral patients in San Diego, California, no justification was provided as it was approved by then-governor Ralph DLG Torres.

On condition 2, Procurement Services disagrees with the auditor’s finding. It said the three purchase orders were provided in the list for Community Disaster Loans and were available for testing during auditor fieldwork.

Procurement Services said the auditors failed to perform the required testing.

On $3.37 million questioned Nutrition Assistance Program costs, the auditor said CNMI did not reconcile differences between the submission of the monthly FNS-388 (State Issuance and Participation Estimates report) and the monthly reconciliation provided by the authorized redemption agent.

The redemption reports combine NAP and Supplemental Nutrition Assistance Program food coupons, and the ratio of program benefits to total redemptions is 88.4% for NAP and 11.6% for SNAP.

Ernst & Young found that the CNMI did not periodically perform a reconciliation of its recorded program benefit costs to the total good coupons redeemed.

The auditor said the CNMI is in noncompliance with applicable special tests and provisions requirements for NAP coupon reconciliations and questioned costs of $3,375,452 and $442,933 results for NAP and SNAP Cluster, respectively.

The auditor recommends that responsible CNMI personnel should periodically perform reconciliations of recorded program benefit costs with total food coupons redeemed.

In the government’s response, the CNMI-NAP disagrees with both findings.

In the government’s response, NAP administrator Margaret Aldan said FNS-388 (State Issuance and Participation Estimates report) is only for regular NAP benefits and thus reports only on benefit distribution.

Aldan said CNMI-NAP realized that FNS-388 Reports for FY 2021 records only regular CNMI Nutrition Assistance.

She said team auditors combined the Pandemic Benefit (P-EBT) and SNAP Cluster together with regular NAP.

Moreover, Aldan said, to derive from the actual redemption report, team auditor needs to recognize the old series.

These old series, she said are usually received and verified in the months following.

However, Aldan said, during the redemption process, one must abstract the old series and add to the previous month and vice versa deduct the amount from the current month received.

She said the CNMI-NAP, with the assistance of the grantor agency (Food and Nutrition Service), had implemented a tool called Recon Tool to identify the total benefit versus actual redemption reports.

In addition, Aldan said, a weekly virtual meeting with the grantor had enabled the CNMI-NAP to be able to work with the Recon Tool to ensure the reconciliation process is in place.

She said this process began in January 2024 with the reports starting in October 2023.

Aldan said the format for the Recon Tool is in excel which enable the person to work with flexibility.

On $2.77 million questioned Coronavirus State and Local Fiscal Recovery Funds, the auditor said non-federal entities other than states, including those operating federal programs as subrecipients of states, must follow the procurement standards.

The auditor said of 51 nonpayroll expenditures tested, aggregating $3.1 million of a total population of $6.7 million expenditures subject to procurement, for 34 (or 67%), no procurement documents were provided. The total questioned costs for the 34, was $1,921,834.

The auditor said for one or (2%) dated Aug. 10, 2021 amounting to $26,100, the contract and underlying procurement files were not provided, for which the amount is questioned.

For four (or 8%), vendor quotations were not provided. The total questioned costs was $63,686.

The auditor said for one (or 2%) document dated Aug. 17, 2021 amounting to $764,345, the procurement method used was not specified and the P&S director’s written determination was not provided, for which the amount is questioned.

The auditor said CNMI did not enforce compliance with established procurement regulations.

The auditor said the CNMI is in noncompliance with established procurement regulations and questioned costs of $2,775,965 result.

The auditor recommends that responsible personnel should monitor and enforce compliance with applicable procurement regulations, including the review of procurement files for completeness as to written rationale for deviations from applicable procurement requirements.

Further, responsible personnel should maintain procurement documents to substantiate compliance.

On condition 1, Procurement Services disagrees with the auditor’s finding.

Procurement Services said no procurement documents were provided because these 34 transactions were for payments made out for travel, medical referral patients, etc.

On condition 2, Procurement Services agrees with the finding, stating that the supporting documents were subsequently located and copy of purchase order is available for inspection.

On condition 3, PS disagrees with the auditor’s findings.

For that $13,440, Procurement Services said, no other quotes provided as it was the Procurement Services director’s discretion, and the purchase requisition was approved by then Finance secretary David Atalig.

For $8,789, Procurement Services said no other quotes provided as it was the Procurement Services director’s discretion, and the purchase requisition was approved by Atalig.

Procurement Services said the emergency declaration suspended the procurement regulations and authorized the expenditure authority to procure any items/procure services exceeding the threshold without obtaining any price quotes.

For two purchase orders 732176 and 728470, Procurement Services said, these are not part of the governor’s executive order.

Procurement Services will accept the findings as noncompliance with CNMI Procurement Regulations.