Key takeaways:

The State Auditor’s Office says Edmonds did not properly monitor its COVID relief grant subrecipients in 2023.

The city has been cited for the same grant monitoring issue in past audits.

This year’s audit report covered Jan. 1-Dec. 31, 2023 and includes financial statements and a federal single audit.

The city was issued a positive “unmodified opinion” for its financial statements.

The SAO will release its final audit report for the city Thursday, June 12.

Releasing their findings to the Edmonds City Council during a Tuesday audit exit conference covering 2023, auditors from the Washington State Auditor’s Office (SAO) once again found problems with how the City of Edmonds monitored its COVID relief grant subrecipients to ensure they complied with federal requirements.

“We have been auditing this program for quite a few years now at the City, and the City does have a history of receiving either management letters or findings related to…subrecipient monitoring,” SAO Assistant Audit Manager Erika Davies told the Council during a special meeting Tuesday. In the City’s 2022 audit report, which the SAO presented in January 2024, auditors found issues related to subrecipient monitoring that prompted the SAO to issue a management letter on the topic. However, this year’s audit resulted in a more serious “finding.”

A finding is “our highest level of reporting that our office gives out,” Davies said. As a result, the finding will be included in the SAO’s published audit report “so that is accessible to citizens online as well,” she added.

The City was “starting to see some progress” in addressing subrecipient monitoring issues, Davies said, but the effort was impacted by turnover in the finance department in 2023. “Those kind of finer details about the compliance and those different processes may have gotten a little bit lost,” she said.

The state auditor’s office conducts regular audits of all local governments in Washington state. This year’s audit report for Edmonds, which covered Jan. 1-Dec. 31, 2023, includes financial statements and a federal single audit report.

In the financial statements audit, the City was issued a “unmodified opinion” in accordance with government auditing standards, “which is a good clean audit opinion,” Davies said. “We take a look not only at the numbers that you are presenting on your financial statements, but the processes behind those numbers. How do they get onto the financial statements? What are the day-to-day transactions that are being booked into your general ledger, and what do journal entries look like? How is your accounts payable process looking like? So all those different processes we look we look at as well as just looking at the numbers itself on your financial statements.”

As a part of the audit process, the auditors also address what Davies described as management override of controls that could result non-compliance., inaccurate financial reports or numbers fraud. “And we’re very happy to report that we didn’t identify any instances of management override of controls,” Davies said.

For the federal single audit report, the auditor’s office chose to focus on the city’s $3.6 million Coronavirus State and Local Fiscal Recovery Funds program, which represents about 84% of the total federal expenditures for the city for 2023. “We have audited this program and its various iterations since COVID began,” Davies said.

The auditors determined that the City did not have adequate internal controls for ensuring compliance with federal requirements related to use of COVID-19 relief funds in two areas: procurement and subrecipient monitoring.

Related to the procurement issue, the City didn’t comply with federal requirements governing alternative purchasing processes, Davis said. In one case, the City entered into interlocal agreements with both the State of Arizona and Snohomish County to explore other markets for buying city police vehicles — in part using COVID dollars — at a time when such vehicles were in short supply. In the other case, the city made a sole-source purchase of a software system but didn’t have adequate documentation required by state law.

“Those types of procurement processes are completely allowable,” Davies said. “It’s all up to the documentation and how you kind of evaluate those processes.”

As part of its work to procure the police vehicles, the City did comply with one main requirement — establishing an interlocal agreement, Davies said. “But the second part is actually obtaining the bid documentation that that outside entity used to make sure that they fully complied with the requirements as well. And that was the part that was lacking — that that we weren’t able to see documentation that the City retained and evaluated,” she said.

The subrecipient monitoring issue was related to the City’s decision to pass along some of its COVID funding to other agencies for distribution. “Once you pass those funds through to those organizations — which we call subrecipients — the overall requirements for the program don’t just go away,” Davies said. The City is required to monitor the entities that have received federal funds to ensure that they are meeting those program requirements, she added.

Subrecipient monitoring was also a problem for City of Edmonds in SAO audits conducted for 2020 and 2021. In both years, auditors determined that City did not comply with requirements governing the distribution of federal COVID relief funds. They also noted that this was a problem not unique to Edmonds, and was experienced by other Washington state jurisdictions as they worked to administer coronavirus relief funds at the height of the pandemic.

In the latest 2023 audit, auditors said the City spent $3.6 million in COVID relief funds, which included expenses related to public health, household utility relief, and direct assistance payments to local businesses and nonprofit organizations financially affected by COVID. The funds also included $886,240 that was passed through to two subrecipients: Washington Kids, for emergency household assistance to families and Edmonds College, for students financially impacted by the pandemic.

However, “the City did not obtain any documentation from one subrecipient and did not obtain documentation for the final quarter of its agreement with another subrecipient to ensure program participants were eligible for assistance,” the audit stated. In addition, the City did not meet requirements from past audits that it verify whether subrecipient awardees in prior years received an audit if they spent more than $750,000 in federal awards — and to follow up on any findings issued.

“We saw that the City did send out letters to the different organizations that they were working with and we were able to see evidence of some some monitoring that the City did do,” Davies said. “However, we weren’t able to see any follow up beyond those initial emails that were sent to the entities, and so we weren’t able to see that some of the different requirements — such as determining if the subrecipient spent over $750,000 in federal funds combined — that would then trigger the subrecipient to be have to receive a federal audit.

“Our recommendations for the City would just be to continue to really lean in as far as ensuring all staff that are involved in the process for monitoring and administering these grants receive adequate training and are knowledgeable about the different requirements of spending these funds,” she added. In addition, she said, the City should ensure purchasing policies are up to date, including those that are “a little bit more on the alternative side, such as those purchasing through those out-of-state cooperatives.”

Councilmember Will Chen asked whether the City, given the findings, would be required to pay back any of the COVID dollars. While that determination would ultimately be made by the U.S. Treasury Department after audit results are reported, Davies stressed that the auditors did determine the City’s spending was an allowable use of funds. “What we’re really talking about is documentation and process improvements going forward,” Davies said. “So it’d be unusual that the City would be asked to repay these funds.”