Fifth Ward Community Redevelopment Corporation and Subsidiaries

Condition: During our review of expense allocations charged to the Economic Development Administration (EDA) for the Chew Street Technology Center Project, we noted that the client did not appropriately account for EDA grant draws: - January 2024 Draw #3 totaling $144,654 was fully paid by the City of Houston. However, 80% of the same amount ($115,723) was also drawn from EDA funds. - February 2024 Draw #4 totaling $668,967 was partially paid by the City of Houston and the FWCRC. Nonetheless, 80% ($535,173) was also drawn from EDA funds. These duplicate reimbursements resulted in an overcharge of $330,523 to the EDA. The client subsequently funded future draws from its own resources, and no further adjustments were deemed necessary. Cause: The overcharges were primarily due to errors in the initial draw submissions, likely stemming from inadequate internal controls and oversight in the grant reporting process. Effect: This resulted in noncompliance with federal cost principles and an overstatement of expenses charged to the federal award. If not corrected, such issues could lead to questioned costs or potential disallowance of funds. Criteria Per 2 CFR §200.403–405, only actual, unreimbursed, and allocable costs may be charged to a federal award. Duplicate reimbursement of expenses violates these principles and may result in noncompliance with the Uniform Guidance. Overcharges or duplicate reimbursements must be formally corrected, typically through: - Repayment to the grantor, or - Offsetting future draws, with written approval from the grantor agency. Recommendation: We recommend that the organization strengthen its internal controls over the grant reporting process to prevent similar overcharges in the future. Specifically: - Implement regular reviews of draw submissions to ensure expenses have not been previously reimbursed. - Provide targeted training to accounting and grants management staff on federal cost principles and drawdown procedures. - Enhance oversight mechanisms, including supervisory review and reconciliation of funding sources prior to draw submissions.

Condition: The Schedule of Expenditures of Federal Awards (SEFA) initially prepared by management did not include the required detail on expenditures incurred under federal programs. The client’s accounting system (QuickBooks) lacked the functionality to effectively track grantfunded expenditures that were capitalized for construction projects, resulting in incomplete reporting. Subsequent versions of the SEFA contained inconsistencies and did not reconcile with supplemental reports or other audit evidence. These limitations increased the complexity of the Single Audit process. Despite these challenges, it remains management’s responsibility to ensure the SEFA is complete, accurate, and prepared in accordance with Uniform Guidance. The issues noted reflect a breakdown in internal controls over federal award reporting and underscore the need for stronger oversight and reconciliation procedures. Cause: The deficiency appears to stem from a combination of system limitations within QuickBooks, which does not natively support federal grant tracking, and a lack of formalized internal processes for identifying and reporting federal expenditures—particularly those capitalized for construction projects. Additionally, there was a misunderstanding of SEFA requirements and insufficient reconciliation between grant activity reports and the SEFA. Effect: The SEFA submitted did not comply with federal reporting requirements under Uniform Guidance, which may increase the risk of noncompliance with federal grant terms and conditions, require expanded audit procedures, and may prompt further scrutiny from oversight bodies. Criteria: Per Uniform Guidance (2 CFR Part 200, Subpart F), entities expending federal funds are required to prepare and submit a SEFA that accurately reflects expenditures by federal program. The SEFA must include total federal expenditures for each award, CFDA numbers (now referred to as Assistance Listing Numbers), and other required details. Revenue listings or unreconciled supplemental reports do not satisfy these requirements. Recommendation: We recommend management implement a system or process to track federal grant expenditures, including capitalized costs, in accordance with Uniform Guidance, prepare the SEFA based on actual expenditures incurred, ensuring reconciliation with supporting documentation, and provide training to relevant personnel on SEFA preparation, federal compliance requirements, and the distinction between revenue and expenditure reporting.