Hitchcock Independent School District

2025-003 Time & Effort and Semi-Annual Certifications Type of Finding: Significant Deficiency in Internal Control Over Compliance New or Repeat Finding: Repeat; see prior year finding #2024-007. Federal Program: Special Education Cluster (ALNs 84.027, 84.173); Head Start Cluster (ALN 93.600) Federal Agency: U.S. Department of Education (Special Education Cluster); U.S. Department of Health and Human Services (Head Start Cluster) Pass-through Entity(ies): Special Education Cluster - Texas Education Agency (246600010849086600, 256600010849086600, 246610010849086610, 256610010849086610, 66002406); Head Start Cluster - N/A Compliance Requirement: B - Allowable Costs / Costs Principles Criteria: Under 2 CFR 200.430(g), when employees work solely on a single federal award or cost objective, charges for their salaries must be supported by a system of internal control that provides reasonable assurance that the charges are accurate, allowable, and properly allocated. One allowable method is through completion of semi-annual certifications signed by the employee or a supervisory official with firsthand knowledge. These certifications provide assurance that salary costs charged to the federal program reflects the total activity for which the employee is compensated by the District, not exceeding 100% of compensated activities. Condition: The District was not able to provide in a timely manner the required time & effort and semiannual certifications for employees who worked on the Special Education and Head Start clusters. These certifications, which confirm that the employee worked 100% on the program for the period covered, were not completed timely, but were ultimately provided prior to conclusion of the audit. Cause: The District was in the process of implementing the corrective action plan from the previous fiscal year's audit, which consisted of procedures to ensure the forms were prepared, signed, and retained in accordance with federal requirements. Effect or Potential Effect: Without semi-annual certifications, the District would lack the required documentation to fully support salary costs charged to the grant. This raises the risk that unallowable or unsupported personnel costs were charged to the program, even if employees were appropriately assigned. Questioned Costs: No questioned costs were identified, as the District ultimately provided audit evidence to support the time worked on the grant. In addition, the personnel records of the employees sampled contained approval of the employee to be hired into the appropriate job duties to be funded by their appropriate grant-funded position. Context: The District was unable to provide timely the required semi-annual certifications for 2 out of 5 employees selected in our sample for testing for the Special Education Cluster. The District was unable to provide timely the required semi-annual certifications for 39 out of 39 employees selected in our sample for testing for the Special Education Cluster. Ultimately, semi-annual certifications were provided for all employees in our sample that remained charged to their respective grant for fiscal year 2025. Recommendation: We recommend that the District continue to implement procedures to ensure that semi-annual certifications are prepared, signed, and retained for all employees working solely on federal programs. The District should provide training to finance and program staff to ensure continued compliance with federal documentation requirements. Views of Responsible Officials: District officials agree with the finding. The District has implemented new procedures in fiscal year 2026 to ensure semi-annual certifications are completed appropriately.

2024-006 Unauthorized Use of Child Nutrition Funds Type of Finding: Material Weakness in Internal Control Over Compliance New or Repeat Finding: Repeat; see prior year finding #2023-005 and #2023-006. Federal Program: Child Nutrition Cluster (ALNs 10.553, 10.555, 10.582) Federal Agency: U.S. Department of Agriculture Pass-through Entity and Identifying Numbers: Texas Department of Agriculture (NT4XL1YGLGC5), Texas Education Agency (71402401, 71302401) Compliance Requirement(s): A - Activities Allowed or Unallowed, B - Allowable Costs / Costs Principles Criteria: Under 2CFR200.403 and 2CFR200.405, federal program costs must be allocable to the program, allowable under applicable federal cost principles, and properly supported by accounting records. Additionally, the Texas Department of Agriculture (TDA) and federal program guidelines require that Child Nutrition funds be accounted for separately and used solely for the operation of the school food service program. All uses of funds must be properly documented and justified to ensure restricted federal funds are not used for unallowable general government purposes. Condition: The district’s general ledger and cash transfer records indicated that funds were transferred between the Child Nutrition Service (CNS) fund and the general fund during the year. Due to inadequate tracking and reconciliation controls, the district was unable to provide clear documentation demonstrating that restricted CNS funds were used solely for allowable Child Nutrition Cluster program expenditures and were not applied to general fund purposes. As a result, the auditors were unable to fully verify that all CNS program expenditures were allowable under federal requirements. Cause: The district did not have adequate internal controls to track, reconcile, and document transfers of restricted CNS funds. Turnover in key finance positions and implementation of new finance software contributed to the weak oversight over cash transfers between funds. Effect or Potential Effect: There is a risk that restricted federal Child Nutrition funds were used for unallowable general fund expenditures, potentially resulting in noncompliance with federal cost principles. Although the auditors did not identify specific questioned costs, the district’s lack of clear tracking and documentation limits the ability to demonstrate compliance and increases the risk of future unallowable expenditures. Questioned Costs: None identified, as auditors were unable to quantify specific unallowable costs due to the lack of sufficient documentation. Context During review of the District's response to the corrective action plan, we noted the Child Nutrition Fund was reimbursed $701,402 for the amount due from the General Fund as of August 31, 2023. However, due to lack of proper reconciliation controls during fiscal year 2024, we were unable to determine the general fund was reimbursed for additional improper transfers that could have occurred during the year. Recommendation: We recommend the district strengthen internal controls by establishing clear written procedures for tracking, approving, and reconciling any transfers between the CNS fund and the general fund. The district should ensure all restricted Child Nutrition funds are used solely for allowable program purposes, consistent with federal and state requirements. Staff responsible for financial oversight should receive training on federal cost principles and documentation standards to ensure continued compliance. Views of Responsible Officials: District officials agree with the finding. The District will review transfers made after September 1, 2022 to determine if made in compliance with legal restrictions.

2024-007 Lack of Semi-Annual Certifications for Special Education Personnel Type of Finding: Material Weakness in Internal Control Over Compliance New or Repeat Finding: New Federal Program: Special Education Cluster (ALNs 84.027, 84.173) Federal Agency: U.S. Department of Education Pass-through Entity(ies): Texas Education Agency (246600010849086600, 246610010849086610, 66002406, 225350020849025000, 225360020849025360), Region 10 Education Service Center (236600497110001) Compliance Requirement: B - Allowable Costs / Costs Principles Criteria: Under 2 CFR 200.430(g), when employees work solely on a single federal award or cost objective, charges for their salaries must be supported by a system of internal control that provides reasonable assurance that the charges are accurate, allowable, and properly allocated. One allowable method is through completion of semi-annual certifications signed by the employee or a supervisory official with firsthand knowledge. These certifications provide assurance that salary costs charged to the federal program reflects the total activity for which the employee is compensated by the District, not exceeding 100% of compensated activities. Condition: The district did not maintain required semi-annual certifications for employees who worked solely on the Special Education Cluster (IDEA) programs. These certifications, which confirm that the employee worked 100% on the program for the period covered, were missing for all employees. Cause: The district did not have adequate procedures in place to ensure the forms were prepared, signed, and retained in accordance with federal requirements. Staff turnover and limited awareness of the documentation rules contributed to the oversight. Effect or Potential Effect: Without semi-annual certifications, the district lacks required documentation to fully support salary costs charged to the Special Education Cluster. This raises the risk that unallowable or unsupported personnel costs were charged to the program, even if employees were appropriately assigned. Questioned Costs: No questioned costs were identified, as auditors were able to verify through alternative procedures that employees worked solely on the program. The personnel records of the employees sampled contained approval of the employee to be hired into the appropriate job duties to be funded by special education cluster grant funds. Context: The district was unable to provide required semi-annual certifications for 14 out of 14 employees selected in our sample for testing. Recommendation: We recommend that the district develop and implement written procedures to ensure that semiannual certifications are prepared, signed, and retained for all employees working solely on federal programs. The district should provide training to finance and program staff to ensure continued compliance with federal documentation requirements. Views of Responsible Officials: District officials agree with the finding. The District has implemented new procedures in fiscal year 2025 to ensure semi-annual certifications are completed appropriately.

Criteria The United States Department of Agriculture has established several grant programs for the purpose of providing school breakfast and lunch for eligible children, known as the Child Nutrition Grant Program. These programs contain requirements on how the grants can be used related to the District providing child nutrition services. Condition As noted in comment 2023.003, the District borrowed legally restricted monies to support general fund operations, which included monies borrowed from the Child Nutrition Grant Program. The Child Nutrition Program, for purposes of the District’s single audit for 2023, is classified as a major program resulting in test of internal control and compliance with laws and regulations. Accordingly, we are required to specifically report the material weakness in internal control and noncompliance with laws and regulations for this program separately, although part of the District-wide issue. The use of cash for general fund operations from the Child Nutrition Grant Program is not considered an allowable activity or allowable costs for grant compliance purposes. Context Review of the District’s bank reconciliation as of year end for the Child Nutrition Grant Program listed a material transfer into the restricted bank account. It was noted that this amount was not received within 30 days of year end. Cause The core issue stems from the declining fund balance of the general fund and general fund operating cash balance, which appear to result in District personnel addressing the matter by holding restricted cash in the general fund bank account, effectively borrowing monies from restricted sources as well as not reporting the matter to the Board. Effect It appears the District likely violated legal and contractual obligations by using monies for unauthorized purposes. Recommendation The District should promptly reimburse the restricted cash accounts utilized for general fund operations. A thorough review of cash flow management practices is imperative, accompanied by the implementation of strategies to enhance liquidity, such as short-term financing or improved budgetary planning. Strengthening internal controls, providing staff training on fund management, and conducting regular cash flow projections are recommended. The District should consider implementing supervision and review procedures over the bank reconciliation process. These procedures should include: reviewing the reconciliations for unusual activity, including large transfers and deposits; looking for repeat reconciling items from month-to-month; and reviewing the following month’s bank statement to ensure deposits and transfers of monies listed on the reconciliation cleared the bank. This review should be documented within the system or on the bank reconciliation by initialing and noting the date of the individual performing the review. View of Responsible Officials See Corrective Action Plan

Criteria The United States Department of Agriculture has established several grant programs for the purpose of providing school breakfast and lunch for eligible children, known as the Child Nutrition Grant Program. These programs contain requirements for what the grants can be used for related to the District providing child nutrition services. Condition As noted in Comment 2023.003, the District borrowed monies legally restricted to support general fund operations, which included monies borrowed from the Child Nutrition Grant Program. The Child Nutrition Program, for purposes of the District’s single audit for 2023, is classified as a major program resulting in test of internal control and compliance with laws and regulations. Accordingly, we are required to specifically report the material weakness in internal control and noncompliance with laws and regulations for this program separately, although part of the District-wide issue. There is a deficiency in internal control over the bank reconciliation process regarding appropriate segregation of duties and/or supervision and review. Context Review of the District’s bank reconciliation as of year end for the Child Nutrition Grant Program listed a material transfer into the restricted bank account. It was noted that this amount was not received within 30 days of year end. Cause The District currently has the same individual who’s authorized to make bank transactions also perform the bank reconciliation process without any supervision and review. Effect It appears the District likely violated legal and contractual obligations by using monies for unauthorized purposes. Recommendation The District should immediately return all borrowed cash. The District should look for additional opportunities to allow for segregation of duties among individuals who are authorized to make bank transactions and those who perform bank reconciliations. The District should consider implementing supervision and review procedures over the bank reconciliation process. These procedures should include: reviewing the reconciliations for unusual activity, including large transfers and deposits; looking for repeat reconciling items from month-to-month; and reviewing the following month’s bank statement to ensure deposits and transfers of monies listed on the reconciliation cleared the bank. This review should be documented within the system or on the bank reconciliation by initialing and noting the date of the individual performing the review. View of Responsible Officials See Corrective Action Plan