State of Arizona

Four State agencies did not perform required subrecipient monitoring procedures, increasing the risk that program monies may have been misused and not spent in accordance with the award terms Assistance Listings number(s) and name(s): 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery (SLFRF) Funds Award number(s) and year(s): None Federal agency: U.S. Department of the Treasury Compliance requirement(s): Subrecipient monitoring Questioned costs: $1,623,846 Condition Contrary to federal regulation, the Arizona Department of Housing (ADOH), Arizona Department of Water Resources (ADWR), Arizona Office of Tourism (AOT), and Industrial Commission of Arizona (ICA) did not perform the required monitoring of their subrecipients’ activities or compliance with the award terms and program requirements. Specifically, we found that 4 of 10 State agencies we tested did not perform the various and required monitoring procedures identified in Table 1 below and Tables 2 through 4, page 129. In addition, as of the report date, April 23, 2026, the Governor’s Office of Strategic Planning and Budgeting (OSPB) took appropriate action by identifying and self-reporting to us $1,623,846 of expenditures for 8 SLFRF program subrecipients, who were awarded monies prior to fiscal year 2024, and may not have spent the monies in accordance with program requirements.1 Specifically, based on our fiscal year 2023 audit recommendations in finding 2023-102, OSPB performed missing risk assessments for subrecipients awarded monies during fiscal years 2022 and 2023. As a result of these assessments, OSPB conducted additional onsite monitoring or desk reviews based on those results and identified $1,623,846 in questionable costs by its subrecipients. Additionally, OSPB identified several of these questioned costs as potentially fraudulent or inappropriate and forwarded this information to the Attorney General’s Office for further review. We selected OSPB as part of the 10 State agencies tested during fiscal year 2024. Of 24 OSPB subrecipients we tested, we did not identify any deficiencies with OSPB performing the required monitoring of their subrecipients’ activities or compliance with the award terms and program requirement during fiscal year 2024. In total during fiscal year 2024, there were 14 State agencies that paid $270.2 million to subrecipients, as shown in Table 5 below, or 56.2% of the State’s $480.4 million total federal expenditures for this program. Effect The 4 State agencies’ lack of required monitoring increased the risk that the $41.4 million of program monies they paid to 131 subrecipients may have been misused and not spent in accordance with the award terms and program requirements as shown in Table 5, page 130. If monies are spent inconsistent with program requirements, those who were intended to benefit from the program may not receive all the services or other benefits they otherwise would have received. ADOH, ADWR, AOT, and ICA are at risk that this finding applies to other federal programs they administer. Further, OSPB’s previously identified expenses that may not have been spent in accordance with program requirements may result in OSPB being required to return up to $1,623,846 of program monies to the federal agency in accordance with Uniform Guidance requirements.2 Cause Despite subrecipient monitoring requirements being included in the federal regulations, 4 State agencies did not develop and/or implement sufficient subrecipient monitoring policies and procedures to comply with federal regulations. Specifically, X ADOH’s management reported that its policies and procedures did not contain clear criteria for when single audits should be obtained and the process for conducting risk assessments. X ADWR’s management reported that it lacked policies and procedures for obtaining single audits and conducting risk assessments. X AOT’s management reported that it performed only limited monitoring procedures for subrecipients who expended more than $750,000 of AOT awards during the year. Additionally, AOT’s management reported that it misunderstood the detailed transactions required to substantiate the $50,214 in payroll expenditures. X ICA’s management reported that there was a misunderstanding on which State agency was responsible for performing the subrecipient monitoring of the monies it passed through to subrecipients and consequently did not develop all the necessary subrecipient monitoring policies and procedures. Further, OSPB previously reported that it hired additional staff in fiscal year 2023 to begin addressing audit finding issues noted in prior years and began performing required risk assessments in fiscal year 2024. 2 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, OSPB, takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take action, as directed by the federal awarding agencies (2 CFR §200.521). Criteria Federal regulation requires State agencies to monitor subrecipients, which includes required monitoring procedures, as follows (2 CFR §200.332): X Assess the risk of each subrecipient’s noncompliance and perform monitoring activities based on those risk assessments. Based on risk, additional monitoring procedures could include providing training or technical assistance on program-related matters, performing site visits, and/or other monitoring procedures. X Review financial and performance reports. X Verify single audits were conducted timely; following up on and ensuring corrective action is taken on audit findings that could potentially affect the program; and issuing a management decision for audit findings pertaining to the federal award. X Include required information in subrecipient subaward agreements, including required federal award information; requirements imposed by federal statutes, regulations, and the terms and conditions of the federal award; any additional requirements that the pass-through entity imposes, and a requirement that the subrecipient permit the pass-through entity to access the subrecipient’s records and financial statements to fulfill its monitoring requirements. In addition, the State’s subrecipient monitoring policies and procedures require State agencies to consider and assess risk of each subrecipient and carry out required and various other monitoring procedures based on those risk assessments.3 Finally, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). Recommendations to ADOH, ADWR, AOT, and ICA Work with the State’s Office of Strategic Planning and Budgeting to either update or develop and implement policies and procedures and train responsible staff to perform required monitoring of their subrecipients to ensure compliance with award terms and program requirements, including procedures to: 1. Assess the risk of each subrecipient’s noncompliance and perform additional monitoring procedures based on those risk assessments such as reviewing financial and performance reports, providing training or technical assistance on program-related matters, performing site visits, and/or other monitoring procedures. (ADOH, ADWR, and ICA) 2. Verify subrecipients receive timely single audits, follow up on and ensure that corrective action is taken on audit findings that could potentially affect the program, and issue management decisions for audit findings pertaining to the federal award. (ADOH, ADWR, AOT, and ICA) 3 Arizona Department of Administration Office of Grants and Federal Resources. (2018). Grants Management Manual – Grantor, Chapter 8: Award Monitoring. Retrieved 10/29/2025 from https://ospb.az.gov/sites/default/files/2026-01/Arizona%20Grants%20Management%20 Grantor%20Manual%20Edition%202022.pdf 3. Request and view supporting transaction details prior to paying subrecipients for payroll costs to verify they meet the requirements of the award terms and program requirements. (AOT) 4. Establish subaward agreements with subrecipients communicating allowable uses of program monies and other information required by federal regulations prior to distributing program monies. (ICA) Recommendations to OSPB 5. Work with the federal agency and the subrecipients to resolve the $1,623,846 of program monies that may have been spent in violation of its federal award terms and that may need to be returned to the federal agency. 6. Continue to assess the risk of each subrecipient’s noncompliance and perform additional monitoring procedures based on those risk assessments such as reviewing financial and performance reports, providing training or technical assistance on program-related matters, performing site visits, and/or other monitoring procedures to ensure questioned costs are timely identified and remedied. This finding is similar to prior-year finding 2023-102 and was initially reported in fiscal year 2022. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Governor’s Office of Strategic Planning and Budgeting inaccurately reported $33.1 million expenditures to the federal agency and may be required to return excess monies reported Assistance Listings number(s) and name(s): 21.027 COVID-19—Coronavirus State and Local Fiscal Recovery Funds Award number(s) and year(s): None Federal agency: U.S. Department of the Treasury Compliance requirement(s): Reporting Questioned costs: Not applicable Condition The Governor’s Office of Strategic Planning and Budgeting (OSPB) administration inaccurately reported $33.1 million of program expenditures as of June 30, 2024, to the federal agency in its quarterly reports when compared to the State’s records. Upon our analysis of all projects within the 4 quarterly reports, we found a total cumulative overstatement of program expenditures of $33.1 million reported as of June 30, 2024. Additionally, we tested 2 of 4 quarterly reports and found that OSPB inaccurately reported 23 of 126 projects totaling $16.5 million in expenditures during fiscal year 2024. The $16.5 million represents over 9% of the $181.4 million of program expenditures we tested for fiscal year 2024. Effect OSPB’s reporting inaccurate program information results in the federal agency being unable to rely on the reports to monitor OSPB’s program administration, including its compliance with program requirements and ability to prevent and detect fraud, and to evaluate the program’s success. Further, there is a risk that OSPB may be required to return excess monies reported as spent to the federal agency if the expenditures have not been fully reconciled at the end of the program, which occurs during fiscal year 2027. 1 Cause OSPB staff responsible for preparing the reports did not compile the reports from the State’s accounting records, which are the official record of expenditures made for the program, and instead compiled them from OSPB’s internal grants management system that had not been reconciled to the State’s accounting records for accuracy. OSPB’s management reported that 1 The Coronavirus State and Local Fiscal Recovery Funds Frequently Asked Questions as of April 29, 2025, indicate that recipients may expend funds to cover administrative closeout costs until the final Project and Expenditure Report is due on April 30, 2027. Further, funds not expended by the applicable deadline must be returned to the U.S. Treasury. Retrieved 2/20/2026 from https://home.treasury.gov/system/ files/136/SLFRF-Final-Rule-FAQ.pdf they developed and began implementing a procedure to reconcile the quarterly reports to the State’s accounting records near the end of fiscal year 2024. However, this procedure was not fully implemented and would not be reflected in quarterly reports until fiscal year 2025. Criteria Federal law, regulation, and guidance requires OSPB to quarterly accurately report its cumulative obligations and expenditures by type, such as contracts, grants, loans, direct payments, and transfers to other governmental entities, beginning December 2020.2 Accordingly, OSPB’s policies and procedures, including federal reporting templates, provide instructions for employees to follow to meet these reporting requirements. Also, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms and conditions (2 CFR §200.303). Recommendations to OSPB 1. Report accurate and complete program information to the federal agency. 2. Implement procedures requiring employees to reconcile expenditure amounts to the State’s accounting records and investigate and resolve any differences prior to submitting the report to the federal agency. 3. Perform a reconciliation for reports OSPB has already submitted to the federal agency to identify those that contain errors, and revise and resubmit those reports if practicable or notify the federal agency of these reporting errors. This finding is similar to prior-year finding 2023-103 and was initially reported in fiscal year 2022. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy. 2 The American Rescue Plan Act established the State and Local Fiscal Recovery Fund (SLFRF) and was enacted March 11, 2021. Federal interim guidance for implementing SLFRF was established by the U.S. Treasury in May 2021 and finalized in January 2022 in effect until April 1, 2022. All the U.S. Treasury’s SLFRF guidance was finalized in the Federal Register (FR) on January 27, 2022 (FR Vol. 87, No. 18, Doc. 2022-00292) and became effective on April 1, 2022. Retrieved 10/14/2025 from https://home.treasury.gov/system/files/136/FRF-Interim-Final- Rule.pdf

The Department of Economic Security made unallowable benefits payments totaling $64,131, increasing the risk that the program applicants received utility and rental payments for which they were not entitled Assistance Listings number(s) and name(s): 21.023 COVID-19 – Emergency Rental Assistance Program Award number(s) and year(s): ERA2-0165 May 10, 2021 through September 30, 2025 Federal agency: U.S. Department of the Treasury Compliance requirement(s): Activities allowed or unallowed, allowable costs/cost principles, and eligibility Questioned costs: $37,901 Assistance Listings number(s) and name(s): 21.027 COVID-19 – Coronavirus State and Local Fiscal Recovery Funds Award number(s) and year(s): None Federal agency: U.S. Department of the Treasury Compliance requirement(s): Activities allowed or unallowed, allowable costs/cost principles Questioned costs: $26,230 Total questioned costs: $64,131 Condition Contrary to federal regulations and its policies and procedures, the Department of Economic Security—Child and Community Services Division (Division) made unallowable benefits payments totaling $64,131 during fiscal year 2024 to rental assistance program applicants for the Emergency Rental Assistance Program (ERAP) and Coronavirus State and Local Fiscal Recovery Funds (CSLFRF) federal programs.1 1 The Arizona Department of Economic Security’s ERAP was established by Section 501 of Title V, Division N, of the Consolidated Appropriations Act of 2021 (Public Law No. 116-260) in response to the coronavirus pandemic and to provide financial relief to help keep individuals who rent housing in their homes and provide financial assistance to landlords who rely on rental income. The initial program is referred to as ERAP 1. ERAP 2 was established by Sec. 3201 of Title III, Subtitle B, of the American Rescue Plan Act of 2021 (Public Law No. 117-2). Further, the Arizona Department of Economic Security’s ERAP was extended through the federal Coronavirus State and Local Fiscal Recovery Funds, an American Rescue Plan Act of 2021 program (Public Law 117-2), as administered by the Arizona Governor’s Office. The Department of Economic Security began operating the program on July 1, 2022 (State of Arizona, Office of the Governor and Department of Economic Security Interagency Service Agreement No. ISA-DES-ARPA-021623-01). Specifically, for 14 of 60 ERAP and 7 of 60 CSLFRF benefit payments tested, we found that the Division made unallowable benefits payments of $37,901 for ERAP and $26,230 for CSLFRF to or on behalf of ineligible program applicants or those who lacked required eligibility documentation and for other inappropriate costs, as follows: X The Division inappropriately paid $43,607 of benefit payments to or on behalf of 9 ineligible program applicants, including: y $36,622 paid to or on behalf of 7 program applicants who did not reside in an eligible Maricopa County service area at the time of application ($29,647 for 6 ERAP program applicants and $6,975 for 1 CSLFRF applicant). y $6,300 paid to or on behalf of 1 CSLFRF applicant who previously received ERAP payments and was thus ineligible. y $685 paid to or on behalf of 1 ERAP program applicant whose income exceeded allowable program limits. X The Division inappropriately paid $14,815 of benefit payments to or on behalf of 10 program applicants, including: y $8,640 paid to or on behalf of 1 CSLFRF applicant for a lease buyout, which is an unallowed activity under Division policies. y $3,959 paid to or on behalf of 5 program applicants for rental arrears—rent not paid by the date specified in the lease agreement—payments exceeding the allowable 1-time, lump sum payments ($3,121 for 3 ERAP applicants and $838 for 2 CSLFRF applicants). y $2,216 paid to or on behalf of 4 program applicants for rental assistance exceeding the amount documented on the lease ($2,210 for 3 ERAP applicants and $6 for 1 CSLFRF applicant). X The Division inappropriately paid $5,709 of benefit payments to or on behalf of 2 program applicants without obtaining required documentation to support they were eligible to receive them, including: y $5,709 paid to or on behalf of 2 program applicants without required proof of income, a lease agreement, and other documentation supporting household size and the reimbursement of late penalties and fees related to rent and/or utility account bills ($2,238 for 1 ERAP program applicant and $3,471 for 1 CSLFRF applicant). Effect The Division’s making unallowable benefits payments to ineligible program applicants or without required documentation increases the risk that the program applicants received utility and rental payments for which they were not entitled. Also, the Division’s paying for inappropriate costs spent inconsistent with program requirements increases the risk that those who were intended to benefit from the program may not receive all the benefits they otherwise would have received. Consequently, the Division may be required to return these monies to the federal agency in accordance with federal requirements.2 During fiscal year 2024, the Division paid $44.2 million in benefit payments to or on behalf of program applicants requesting emergency rental and utility assistance for these 2 federal programs, as illustrated in Table 1 below, and is at risk that more of its benefit payment expenditures are inappropriate than those identified in our sample. Cause Division management reported that personnel responsible for evaluating program applications and determining program applicants’ eligibility and allowability of related costs fell behind on reviewing applications and did not have time to perform thorough evaluations, including making appropriate eligibility determinations, obtaining required documentation, or ensuring costs were allowable, because of the large quantity of program applications and staffing shortages due to employee turnover. Further, Division management reported that it did not detect and correct inaccurate eligibility determinations because its policies and procedures did not require 2 Federal Uniform Guidance audit requirements require its federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, the Department, takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). adjudicators to perform a postreview of the benefits subsystem’s automated review of eligibility requirements, such as verifying the income thresholds and geographical location aligned with the Division’s written policies and procedures and were supported by required documentation. Criteria Federal regulations require costs to be reasonable and adequately documented to be allowable under federal awards, and the Division’s written policies and procedures require certain documentation to support eligibility requirements related to where the applicant lives and their income.3,4,5 Specifically, Division policy requires a program application evaluation to ensure complete and reasonable documentation is obtained, including lease agreements; any bills related to utility accounts; and proof of income, household size, eligible service area residency, and risk of homelessness or housing instability. Also, the Division’s policies prohibit benefit payments for lease buy-offs and prohibit incomplete applications to be acted upon until applicants provide the required information and documentation to complete their applications. Finally, the Division also must establish and maintain effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). Recommendations to the Division 1. Ensure benefit payments are for allowable costs paid to or on behalf of eligible program applicants. 2. Update existing policies and procedures to include a postreview of the benefits subsystem’s automated review of eligibility requirements, such as verifying the income thresholds and geographic location aligned with the Division’s written policies and procedures and were supported by required documentation. The Division should correct any inaccurate eligibility determinations identified during the postreview. 3. Allocate sufficient staffing resources to perform a thorough evaluation of program benefits applications and provide training on eligibility requirements and allowable benefit payments. 3 Federal Uniform Guidance cost principles require costs to be adequately documented (2 CFR 200.403[g]) and reasonable (2 CFR 200.404). In determining the reasonableness of a given cost, consideration must be given to several factors including requirements imposed by federal laws and regulations and the terms and conditions of the federal award (2 CFR 200.404[b]). 4 U.S. Department of the Treasury published guidance to assist grantees in ERAP administration, including a requirement for ERAP grantees to establish policies and procedures to govern the implementation of their ERAP programs consistent with the ERAP statutes and U.S. Department of the Treasury FAQs (U.S. Department of the Treasury Emergency Rental Assistance Frequently Asked Questions, Revised March 5, 2024. Retrieved 10/16/2025 from https://home.treasury.gov/system/files?file=136/ERA-FAQs03052024.pdf). 5 To be eligible for program benefits, individuals had to have filed, received, and been deemed eligible in accordance with the Division’s written policies and procedures. The benefit payments consisted of rent and/or utility payments for past due amounts (a 1-time lump sum payment) and for 3 months of payments on each reapplication up to a total of 18 months. Applicants must provide proof of income or self-attestation of no income and cannot earn an income that is above the area median income as determined by the HUD income limits (Section 8) set at 80% AMI (Area Median Income). These limits are updated annually and can be viewed at https://www.huduser.gov/portal/datasets/il. html#year2024. Further, applicants who live in Maricopa County must reside in Phoenix or Mesa. Rental applications must include a housing agreement with the applicant’s name and current rental address. Utility assistance applications must include bills or invoices or outstanding payments. Applications are reviewed by adjudicators who ensure the documentation for proof of residence, proof of income, housing agreement, any bills related to utility accounts, and proof of risk of homelessness or housing instability are complete and reasonable. Any decisions made contrary to policy must include a rationale for the decision in the supporting documentation for the application (Department of Economic Security Emergency Rental Assistance Program Policy, Rev 8 [7/1/2022] and Rev 9 [4/1/2023]). 4. Work with the federal agencies to resolve the $64,131 of program monies that were spent in violation of federal regulations and its policies and procedures and that may need to be returned to the federal agencies. This finding is similar to prior-year finding 2023-105 and was initially reported in fiscal year 2023. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Department of Economic Security failed to perform required subrecipient monitoring, increasing the risk that $9.3 million may have been spent inconsistent with program requirements Assistance Listings number(s) and name(s): 21.027 COVID-19 - Coronavirus State and Local Fiscal Recovery Funds Award number(s) and year(s): None Federal agency: U.S. Department of the Treasury Compliance requirement(s): Subrecipient monitoring Questioned costs: Unknown Condition The Department of Economic Security (DES) awarded $9.3 million to 13 subrecipients during fiscal year 2024, or 16.3% of DES’ $56.9 million of total federal expenditures for this federal program, but failed to include required information in its subawards to subrecipients and perform required monitoring. Specifically, DES: X Did not include information required by federal regulations in its subawards to subrecipients for 4 of 4 subrecipients tested. This included missing federal award identification information and any additional requirements DES imposed on the subrecipients to meet its responsibilities under the federal award. X Did not perform the required monitoring of the subrecipients’ activities or compliance with the award terms and program requirements for all 13 subrecipients. Effect DES’ failure to include required information in its subawards to subrecipients and perform required monitoring increased the risk that the $9.3 million of program monies DES awarded to subrecipients may not have been spent in accordance with the award terms and program or contract requirements. If monies were spent inconsistent with program and contract requirements, those intended to benefit from the program may not receive all the services or other benefits they otherwise would have received. Cause DES lacked entity-wide subrecipient-monitoring policies and procedures for its divisions to follow and instead relied on each division to design and implement its own subrecipient-monitoring procedures. However, the Child and Community Services Division (CCSD) personnel responsible for notifying and monitoring subrecipients reported they were either not aware of the subrecipient-monitoring requirements or did not follow its subrecipient-monitoring policies and procedures, as follows: X The CCSD personnel responsible for monitoring 6 subrecipients reported that they were not aware of the program’s subrecipient-monitoring requirements because of the program manager being on extended leave, turnover in staff knowledgeable of these requirements, and lack of established policies and procedures over monitoring the program’s subrecipients’ activities. Further, neither DES nor the CCSD personnel responsible for identifying subrecipients provided guidance to CCSD personnel responsible for subrecipient monitoring. X The CCSD personnel responsible for monitoring 7 subrecipients reported that they did not follow CCSD’s procedures for monitoring the program’s subrecipients’ activities because they were short staffed and prioritized monitoring other federal and State grants’ subrecipients’ activities. Criteria Federal regulation requires DES to ensure that every subaward is clearly identified to the subrecipient as a subaward by including in its award terms with subrecipients information necessary for the subrecipient to administer the program in accordance with federal requirements. Required information includes federal award identification, all requirements of the subaward, any additional requirements DES imposes on the subrecipient for DES to meet its responsibilities under the federal award, indirect cost rate, and audit and closeout requirements. Further, federal regulation requires DES to monitor subrecipients, which includes required monitoring procedures for (2 CFR §200.332): X Assessing the risk of each subrecipient’s noncompliance and performing monitoring activities based on those risk assessments, such as providing training or technical assistance on program-related matters and performing on-site reviews, selective audits, and/or other monitoring procedures. X Reviewing financial and performance reports. X Verifying single audits were conducted timely. X Following up on and ensuring corrective action is taken on audit findings that could potentially affect the program. X Issuing a management decision for audit findings pertaining to the federal award. Finally, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). Recommendations to DES 1. Include information required by federal regulations in its subawards to subrecipients, including federal award identification information and any additional requirements DES imposed on the subrecipients to meet its responsibilities under the federal award. 2. Perform required monitoring of its subrecipients and their compliance with the award terms and program requirements. Develop, implement, and train all divisions on entity-wide written subrecipient-monitoring policies and procedures requiring all divisions to: 3. Ensure that every subaward is clearly identified to the subrecipient as a subaward by including in its award terms with subrecipients information necessary for the subrecipient to administer the program in accordance with federal requirements. Required information includes federal award identification, all requirements of the subaward, any additional requirements the DES imposes on the subrecipient for the DES to meet its responsibilities under the federal award, indirect cost rate, and audit and closeout requirements. 4. Assess the risk of each subrecipient’s noncompliance and carry out monitoring activities based on those risk assessments such as providing training or technical assistance on program-related matters, and performing on-site reviews, selective audits, and/or other monitoring procedures. 5. Review financial and performance reports. 6. Verify subrecipients receive timely single audits, if required; follow up on and ensure that corrective action is taken on any audit findings that could potentially affect the program; and issue management decisions for any audit findings pertaining to the federal award. 7. Maintain documentation of monitoring procedures demonstrating they were performed, including the monitoring procedures’ results and any DES actions taken, if appropriate. 8. Allocate sufficient resources, such as staffing, to comply with the award terms and program requirements, and designate individuals within each division to perform necessary subrecipient-monitoring procedures. This finding is similar to prior-year finding 2023-106 and was initially reported in fiscal year 2023. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Department of Economic Security could not support information reported to the federal agency and we were unable to determine whether the expenditures were appropriate Assistance Listings number(s) and name(s): 21.023 COVID-19 – Emergency Rental Assistance Program Award number(s) and year(s): ERA2-0165 May 10, 2021 through September 30, 2025 Federal agency: U.S. Department of the Treasury Compliance requirement(s): Reporting Questioned costs: Not applicable Condition Contrary to federal regulations and guidance, for information it reported to the federal agency for its Emergency Rental Assistance Program (ERAP) 2 award, the Department of Economic Security—Child and Community Services Division (Division) did not retain documentation to support information reported to the federal agency.1 Specifically, for the 2 quarterly reports we selected for test work, we found that the Division did not retain documentation, such as system reports, queries, or screenshots, to support the performance reporting information it reported in its 2 reports as required.2,3 Specifically, we found that the Division did not retain any support for the ERAP 2 quarter 4 compliance report (December 2023) and had only partial support for the ERAP 2 quarter 1 compliance report (March 2024) submitted to the grantor. Effect The Division’s failure to retain associated documentation for audit purposes resulted in us being unable to determine whether the reports were complete and accurate. Also, it results in the federal agency being unable to rely on the reports to monitor the Division’s program administration, including its compliance with program requirements and ability to prevent and detect fraud, and to evaluate the program’s success. 1 The ERAP was established by Section 501 of Title V, Division N, of the Consolidated Appropriations Act of 2021 (Public Law No. 116-260) in response to the coronavirus pandemic and to provide financial relief to help keep individuals who rent housing in their homes and provide financial assistance to landlords who rely on rental income. ERAP 2 was established by Sec. 3201 of Title III, Subtitle B, of the American Rescue Plan Act of 2021 (Public Law No. 117-2). 2 The U.S. Department of the Treasury published reporting guidance for the required monthly, quarterly, final reporting, and closeout reports (U.S. Department of the Treasury. [2022]. Reporting Guidance—Emergency Rental Assistance Program, Version 3.4. Monthly, Quarterly, and Final Reporting. Retrieved 10/17/2025 from https://home.treasury.gov/system/files/136/ERA-Reporting-Guidance-v2.pdf). 3 On October 6, 2023, the U.S. Department of the Treasury published ERAP 2 Treasury Portal User Guide, which included a recommendation for ERAP recipients to take screenshots of portal screens as the downloadable PDF documents display only key components of the overall report (U.S. Department of the Treasury. [2025]. Emergency Rental Assistance Program (ERA2) Treasury Portal User Guide, Version 4.0. Retrieved 10/17/2025 from https://home.treasury.gov/system/files/136/ERA2-Portal-Users-Guide.pdf). Cause The Division did not follow its policies and procedures to retain documentation to support the information it included in its 2 reports. Criteria For quarterly financial and compliance reports, federal guidance requires the Division to report information, such as the administrative cost ratio, housing stability services ratio, and system for prioritizing assistance so that the federal agency can monitor performance and compliance. Further, the Division’s policies and procedures require the Division to retain all records relating to a federal award for a period of at least 5 years after all funds allocated to the State have been expended, which generally exceeds the federal regulation requirement to retain all records relating to a federal award for a period of 3 years from the date of its submission of the final expenditure report (2 CFR §200.334). Lastly, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). Recommendations to the Division 1. Prepare and retain detailed documentation, such as system reports, queries, or screenshots, to support the program information it reports to the federal agency. 2. Follow its policies and procedures to retain all records relating to a federal award for a period of 5 years after all funds are expended. This finding is similar to prior-year finding 2023-107 and was initially reported in fiscal year 2022. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Department of Economic Security did not retain supporting documentation for its provider’s expenditures and may be required to return nearly $2.9 million to the federal agency Cluster name(s): CCDF Cluster Assistance Listings number(s) and name(s): 93.575 Child Care and Development Block Grant 93.575 COVID-19 - Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund 93.596 COVID-19 - Child Care Mandatory and Matching Funds of the Child Care and Development Fund Award number(s) and year(s): 2101AZCCC5 October 1, 2020 through September 30, 2023 2101AZCDC6 October 1, 2020 through September 30, 2024 2101AZCSC6 October 1, 2020 through September 30, 2023 2201AZCCDD October 1, 2021 through September 30, 2024 2301AZCCDD October 1, 2022 through September 30, 2025 2301AZCCDF October 1, 2022 through September 30, 2025 2401AZCCDD October 1, 2023 through September 30, 2026 Federal agency: U.S. Department of Health and Human Services Compliance requirement(s): Activities allowed or unallowed and allowable costs/cost principles Questioned costs: $2,880,442 Condition The Department of Economic Security (DES) provided $374 million to childcare providers during fiscal year 2024, or 64 percent of the State’s nearly $582 million total federal expenditures for this federal program, and contrary to federal regulations, DES did not always retain documentation to support its provider’s expenditures. Specifically, DES could not provide supporting documentation, such as a signed childcare provider payment form certifying that the charges for services provided to individuals were full and complete, for 1 of 40 provider payments selected for test work totaling $181,703. We expanded testing to include all 126 payments DES made to this provider during fiscal year 2024 and determined amounts totaling $2,880,442 were unsupported. Effect DES’ failure to retain supporting documentation increased the risk that the $2,880,442 paid to the provider may not have been spent in accordance with the award terms and conditions. Consequently, DES may be required to return these monies to the federal agency in accordance with federal requirements.1 Further, the federal agency may not be able to rely on the records to effectively monitor DES’ program administration, including its compliance with program requirements, ability to prevent and detect fraud, and evaluate the program’s success. Cause DES personnel reported that the childcare provider was authorized to enter payment information directly in DES’ benefits system, and DES lacked a process to ensure that a signed childcare provider payment form was received prior to paying the provider. Although DES’ procedures require the provider to print the form, sign a statement certifying that the charges for services provided to individuals were full and complete, and send it to DES as supporting documentation for the information entered into the benefits system, DES lacked policies and procedures to ensure signed childcare provider payment forms were received prior to payment. Criteria Federal regulation requires that a cost be adequately documented and supported to be allowable under federal awards (45 CFR §75.403[g]). Federal regulation and DES’ records management policies and procedures also require DES to retain all records related to a federal program for a period of 3 years from the date the program’s final report was submitted to the federal awarding agency or passthrough grantor (45 CFR §75.361). Finally, DES also must establish and maintain effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (45 CFR §75.303). Recommendations to DES 1. Follow federal regulations and DES’ records-management policies and procedures to retain all records relating to a federal award, including signed childcare provider payment forms, for a period of 3 years from the date of its submission of the final expenditure report. 2. Develop and implement policies and procedures to require signed childcare provider payment forms certifying that, prior to payment, the charges for services provided to individuals were full and complete. This finding is similar to prior-year finding 2023-111 and was initially reported in fiscal year 2023. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy. 1 U.S. Department of Health and Human Services audit requirements require its federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, DES, takes appropriate and timely corrective action (45 CFR §75.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (45 CFR §75.521).

The Department of Economic Security failed to report complete, accurate information on the federal reporting system, risking transparent reporting on CCDF Cluster subawards Cluster name(s): CCDF Cluster Assistance Listings number(s) and name(s): 93.575 Child Care and Development Block Grant 93.575 COVID-19 Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund 93.596 COVID-19 Child Care Mandatory and Matching Funds of the Child Care and Development Fund Award number(s) and year(s): 2101AZCCC5 October 1, 2020 through September 30, 2023 2101AZCDC6 October 1, 2020 through September 30, 2024 2101AZCSC6 October 1, 2020 through September 30, 2023 2201AZCCDD October 1, 2021 through September 30, 2024 2301AZCCDD October 1, 2022 through September 30, 2025 2301AZCCDF October 1, 2022 through September 30, 2025 2401AZCCDD October 1, 2023 through September 30, 2026 Federal agency: U.S. Department of Health and Human Services Compliance requirement(s): Reporting Questioned costs: Not applicable Condition Contrary to federal laws and regulations and the State of Arizona Accounting Manual (SAAM), the Department of Economic Security—Child and Community Services Division (Division) failed to report complete and accurate information on the federal government’s reporting system for $52.6 million in subawards that were made to 1 State agency and 5 subrecipients under assistance listings number 93.575. As shown in Table 1, page 149, we tested a total sample of 10 subawards for this cluster at the Division and found that for 7 subawards, the Department failed to report the correct subaward amounts, totaling $52.6 million, including 1 subaward totaling $12.8 million that was terminated during fiscal year 2023 and should have been removed. Of the $52.6 million, the Division reported $39.1 million less than the total for 2 subawards and $13.5 million more than the total for 5 subcontracts. Effect The State’s stakeholders and the public did not have access to transparent, timely, and accurate information about the Division’s federal award spending decisions on USAspending.gov as required by federal laws and regulations. Additionally, the Division is at risk that this finding applies to other federal programs it administers. During fiscal year 2024, the Division spent $103.2 million of federal monies related to these subawards, or 17.7% of the State’s total $581.7 million expended, for this cluster. Cause Although the cluster’s reporting requirements were provided as additional award terms and conditions on the federal agency’s website, and the SAAM instructed State departments to follow them, Division staff responsible for reporting required subaward information on the federal government’s reporting system did not follow them. Division staff were not always aware of new contracts or contract amendments that contained Federal Funding Accountability and Transparency Act (FFATA) reporting requirements, and the Division lacked written procedures during fiscal year 2024 to confirm that the Division’s contracts team communicated all new contracts and contract amendments in the Arizona Procurement Portal (APP). Criteria The FFATA and federal Uniform Guidance regulations require the Division, as a direct recipient of federal awards, to report certain information about each subaward action equaling or exceeding $30,000 in federal monies on the federal government’s reporting system no later than monthend of the month following the subaward action so that the information can be displayed to the public on USAspending.gov.1 Specifically, the federal Uniform Guidance requires the Division to report the subrecipient organization’s name, award amount, award term, and other information about the subaward, if applicable, for each subaward action equaling or exceeding the $30,000 threshold (2 CFR §170.220 and Appendix A to part 170). Additionally, the SAAM requires the Division to perform this reporting for federal awards.2 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (45 CFR §75.303). Recommendations to the Division 1. Immediately report on the federal government’s reporting system the required information for its subawards for this cluster, including reviewing, correcting, and/or resubmitting any inaccurately reported information. 2. Follow the SAAM for reporting subaward actions equaling or exceeding $30,000 no later than month-end of the month following the subaward action, as required by the FFATA and federal Uniform Guidance, which may require providing training to Division staff responsible for reporting the Division’s subaward actions to the federal government’s reporting system. 3. Develop and implement written policies and procedures requiring Division staff responsible for FFATA reporting requirements to confirm that the Division’s contracts team communicates all new contracts and contract amendments in the APP. This finding is similar to prior-year finding 2023-112 and was initially reported in fiscal year 2023. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy. 1 The FFATA of 2006 (Public Law 109-282), as amended by section 6202 of Public Law 110-252, was enacted to provide the public with transparency on federal award spending to hold the recipient government accountable for each spending decision and to help reduce wasteful spending of federal monies. As such, federal Uniform Guidance requires reporting on the U.S. General Services Administration website at https://sam.gov/fsrs 2 State of Arizona’s Department of Administration, General Accounting Office. (2022). SAAM: 7045, FFATA and the DATA Act. Retrieved 10/28/2025 from https://gao.az.gov/sites/default/files/2022-08/7045%20FFATA%20and%20the%20DATA%20Act%20220523.pdf

The Arizona Department of Education’s Health and Nutrition Services Division (Division) did not perform all required monitoring procedures, resulting in an increased risk that $63.9 million of program monies the Division awarded to subrecipients during fiscal year 2024 may not be spent in accordance with the award terms, program requirements, and federal regulations Assistance Listings number(s) and name(s): 10.558 Child and Adult Care Food Program Award number(s) and year(s): 237237AZ300AZ3 October 1, 2022 through September 30, 2023 247AZ300AZ3 October 1, 2023 through September 30, 2024 Federal agency: U.S. Department of Agriculture Compliance requirement(s): Subrecipient Monitoring Questioned costs: None Condition The Division awarded $63.9 million to 322 subrecipients during fiscal year 2024, or 99.3% of the Division’s total program expenditures, but did not perform all the required monitoring of its subrecipients’ activities. While the Division did conduct on-site monitoring visits of subrecipients in accordance with its risk-assessment plan, it did not always obtain and review the responses to its written questionnaires from its subrecipients. For example, for 30 of the 40 subrecipients we tested, the Division did not review the submitted monitoring questionnaires to verify the accuracy of responses. Additionally, 10 of the 40 subrecipients we tested did not respond to the Division’s monitoring questionnaire at all, and the Division never followed up with these subrecipients. These questionnaires are designed to capture essential information from each subrecipient, including confirmation of total federal expenditures from all sources in addition to the program and whether the subrecipient is required to have a single audit performed. As a result, the Division did not determine whether required single audits were performed or, if applicable, whether the subrecipients took timely and appropriate action on all deficiencies noted. Effect The Division’s not verifying subrecipient single audits were conducted may result in the Division’s not following up on and ensuring corrective action is taken on audit findings that could potentially affect the program and/or issue management decisions for audit findings pertaining to the federal award. Further, there is an increased risk that $63.9 million of program monies the Division awarded to subrecipients may not be spent in accordance with the award terms, program requirements, and federal regulations. If monies are spent inconsistent with program requirements, those who intended to benefit from the program may not receive all the services or other benefits they otherwise would have received. Finally, the Arizona Department of Education is at risk that this finding applies to other federal programs it administers. Cause The Division’s written policies and procedures lacked requirements to obtain, review, verify, and analyze the subrecipient-monitoring questionnaires to confirm that those subrecipients required to obtain a single audit had a single audit completed, or to review those single audit reports for findings related to the program and issue management decisions when applicable. Criteria Federal regulation requires the Division to monitor subrecipients, which includes (2 CFR §200.332[e-f]): X Verifying single audits were conducted timely. X Following up on and ensuring corrective action is taken on audit findings that could potentially affect the program. X Issuing a management decision for audit findings pertaining to the federal award. Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with applicable laws, regulations, and terms of the award (2 CFR §200.303). Recommendations to the Division 1. Perform all required monitoring of its subrecipients, including reviewing completed questionnaires submitted by its subrecipients to ensure they are complying with single audit requirements. If a single audit was completed for a subrecipient, ensure corrective action is taken on audit findings that could affect the program, and issue management decisions, as applicable. 2. Update and implement written policies and procedures that require the Division to obtain all subrecipient-monitoring questionnaires, document its review of each subrecipient’s submitted questionnaire, follow up on and ensure corrective action is taken on audit findings that could potentially affect the program, and issue management decisions pertaining to the federal award. 3. Train personnel responsible for reviewing monitoring questionnaires on the updated policies and procedures. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Arizona Department of Education did not monitor procedures of charter schools with relationships with charter management organizations, risking funds not being spent in accordance with the award terms and program requirements, and reduced future awards Assistance Listings number(s) and name(s): 84.010 Title I Grants to Local Educational Agencies 84.367 Supporting Effective Instruction State Grants (formerly Improving Teacher Quality State Grants)* *referred to as Title II Award number(s) and year(s): S010A200003 July 1, 2020 through September 30, 2023 S010A210003 July 1, 2021 through September 30, 2023 S010A220003 July 1, 2022 through September 30, 2023 S010A230003 July 1, 2023 through September 30, 2024 S367A210049 July 1, 2021 through September 30, 2023 S367A220049 July 1, 2022 through September 30, 2023 S367A230049 July 1, 2023 through September 30, 2024 Federal agency: U.S. Department of Education Compliance requirement(s): Special tests and provisions Questioned costs: Unknown Condition The Arizona Department of Education’s Grants Management Department (Department) disbursed over $59 million and over $6.8 million in Title I and Title II funds, respectively, to 242 Title I and 233 Title II charter school local educational agencies (LEAs) during fiscal year 2024 but did not perform certain monitoring procedures required by the U.S. Department of Education. Specifically, the Department did not identify which of the 242 Title I and 233 Title II charter school LEAs receiving federal grant monies had relationships with charter management organizations (CMOs) in order to perform additional required monitoring to assess the additional risk posed by conflicts of interest, related-party transactions, or insufficient segregation of duties at these charter schools.1 1 The term “charter management organization” means a nonprofit organization that operates or manages a network of charter schools linked by centralized support, operations, and oversight (20 USC 7221i[3]). Retrieved 11/11/2025 from https://www.law.cornell.edu/uscode/ text/20/7221i#2 Effect The Department’s not identifying or performing additional monitoring of charter schools with relationships with CMOs increases the risk that funds allocated to these charter school LEAs may not have been spent in accordance with the award terms and program requirements and could result in the U.S. Department of Education reducing future awards.2 Further, if monies were spent inconsistently with program requirements, those who were intended to benefit from the program may not have received all the services or other benefits they otherwise would have received. Additionally, the Department is at risk that this finding applies to other federal programs it administers. Cause The Department’s documented program policies and procedures for monitoring LEAs did not differentiate between regular LEAs, charter schools without CMOs, or charter schools with relationships with CMOs and did not include specific procedures to assess the additional risk posed by conflicts of interest, related-party transactions, or insufficient segregation of duties. The Department reported that it began incorporating policy changes into grant administration and monitoring policies in early 2024; however, these policies were not completed until May 2024 and did not become effective until fiscal year 2025. Criteria Federal regulations require the Department to monitor subrecipients, including charter schools, which includes required monitoring procedures for assessing the risk of each subrecipient’s noncompliance and monitoring activities based on those risk assessments. Those federal regulations also provide that monitoring procedures may include reviewing financial and performance reports, providing training or technical assistance on program-related matters, and performing on-site reviews, selective audits, and/or other monitoring procedures (2 CFR §200.332[b and d]) As part of these monitoring responsibilities, the U.S. Department of Education requires the Department to monitor charter schools with relationships with CMOs and assess the additional risk posed by conflicts of interest, related-party transactions, or insufficient segregation of duties.3,4 Also, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). 2 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, the Department, takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). 3 On September 28, 2015, the U.S. Department of Education issued a letter to State Educational Agencies (SEAs) reminding them of their role in helping to ensure that federal funds accessed by public charter schools are used for intended, appropriate purposes, and provided additional resources for states, and specifically SEAs, to consult as they consider improvements to their monitoring and oversight procedures for charter schools (U.S. Department of Education. [2015, September]. Letter to SEAs. Retrieved 11/18/2025 from https://oese.ed.gov/files/2020/07/ finalsignedcsp.pdf 4 On September 29, 2016, the U.S. Department of Education’s Office of Inspector General issued an audit report on charter schools with CMOs and identified risks such as conflicts of interest, related-party transactions, or insufficient segregation of duties (U.S. Department of Education. [2016, September]. Nationwide Assessment of Charter and Education Management Organizations. Retrieved 11/18/2025 from https://oig.ed. gov/sites/default/files/reports/2023-11/a02m0012.pdf Recommendations to the Department 1. Perform annual monitoring over charter schools with relationships with CMOs, including performing risk-assessment procedures over the additional risk posed by conflicts of interest, related-party transactions, or insufficient segregation of duties, and carry out monitoring activities based on those risk assessments such as reviewing financial and performance reports, providing training or technical assistance on program-related matters, and performing on-site reviews, selective audits, and/or other monitoring procedures. 2. Implement revisions to existing LEA-monitoring policies and procedures and train employees to identify charter schools that have relationships with CMOs and to then assess and design monitoring procedures over conflicts of interest, related-party transactions, or insufficient segregation of duties. This finding is similar to prior-year finding 2023-125 and was initially reported in fiscal year 2023. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Arizona Department of Education failed to follow State law for $30.2 million of goods and services purchases and risks not receiving the most advantageous prices Assistance Listings number(s) and name(s): 84.425U COVID-19-Education Stabilization Fund-American Rescue Plan - Elementary and Secondary School Emergency Relief (ARP ESSER) Award number(s) and year(s): S425U210038-21C March 24, 2021 through September 30, 2026 Federal agency: U.S. Department of Education Compliance requirement(s): Procurement Questioned costs: $13,604,457 Condition The Arizona Department of Education (ADE) and Arizona Department of Administration took appropriate action by reporting to us and the Arizona Attorney General an instance of potential fraud. As part of our review, we determined that contrary to federal regulation, State law, and the Arizona Procurement Code, ADE’s Procurement Division (Division) failed to follow State law and related administrative rules when procuring $30.2 million of goods or services from third-party vendors, of which $13.6 million was spent during fiscal year 2024. Specifically, the Division did not obtain proper approvals and/or prepare written determinations for exceptions to using competitive procurement methods for 7 of 8 vendors we tested as follows: X For 6 vendors, the Division did not obtain approval from the State Procurement Officer to use noncompetitive procurements or prepare written determinations for exceptions to competition when awarding contracts for $27.2 million of goods or services, such as student diagnostic assessments, of which $13.5 million was spent during fiscal year 2024. Specifically, the Division used a Request for Grant Application noncompetitive method, which is used when ADE is seeking to provide financial or other assistance to another entity. X For 1 vendor, the Division issued a noncompetitive waiver to award a contract totaling $3 million without obtaining written approval from the State Procurement Officer. ADE spent nearly $121,000 during fiscal year 2024 with this vendor. Effect The Division’s failure to follow State law and related administrative rules for procuring goods and services increased ADE’s risk of not receiving the most advantageous price for the $37.3 million paid to 57 vendors for goods and services purchased with federal monies during fiscal year 2024, thereby increasing the risk of wasting federal monies. If ADE could have obtained these goods or services at a lower cost, these savings could have been used in other areas to benefit the State and its residents, such as diagnostic and learning loss assessments. Finally, ADE is at risk that this finding applies to other federal programs it administers. Cause The Division reported that it had limited time to obligate monies within the program period. However, we found that ADE had at least 4 months to conduct a competitive solicitation for the goods and services. ADE also reported that because of procurement staff turnover, ADE is unable to justify the procurement decisions reflected in the items we tested. ADE’s policies lacked procedures to obtain approval from the State Procurement Officer and to prepare written determinations for exceptions to using competitive procurement methods, such as noncompetitive waivers, when purchasing goods and services from third-party vendors, as required by the Arizona Procurement Code. Criteria Federal regulation requires ADE to follow the same policies and procedures it uses for nonfederal procurements (2 CFR § 200.317). State law and the Arizona Procurement Code require ADE to conduct all procurements in accordance with established thresholds, methods, and documentation standards, including approval from the State Procurement Officer for noncompetitive procurements, and further require written determinations for exceptions to competition, such as noncompetitive waivers, and that such determinations include sufficient justification, approvals, and supporting documentation.1,2 Further, federal regulation also requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). Recommendations to the Division 1. Follow federal regulation, State law, and the Arizona Procurement Code for procurements related to federal grant awards. 1 A.R.S. Title 41, Ch. 23, and the Arizona Administrative Code Title 2, Ch. 7, R2-7-101. 2 State of Arizona, Department of Administration Procurement. (2022). Arizona Procurement Code. Retrieved 3/5/2026 from https://spo.az.gov/ sites/default/files/2025-05/Arizona%20Procurement%20Code_11-22_0.pdf 2. Update and implement policies and procedures and responsible employees to use competitive procurement methods or otherwise obtain approval from the State Procurement Officer and to prepare written determinations for exceptions to using competitive procurement methods, such as noncompetitive waivers, when purchasing goods and services from third-party vendors. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Arizona Department of Education failed to report complete, accurate information on the federal reporting system, risking transparent reporting on its federal programs’ subawards Assistance Listings number(s) and name(s): 84.010 Title I Grants to Local Educational Agencies Award number(s) and year(s): S010A200003 July 1, 2020 through September 30, 2023 S010A210003 July 1, 2021 through September 30, 2023 S010A220003 July 1, 2022 through September 30, 2023 S010A230003 July 1, 2023 through September 30, 2024 Assistance Listings number(s) and name(s): 84.367 Supporting Effective Instruction State Grants (formerly Improving Teacher Quality State Grants) Award number(s) and year(s): S367A210049 July 1, 2021 through September 30, 2023 S367A220049 July 1, 2022 through September 30, 2023 S367A230049 July 1, 2023 through September 30, 2024 Assistance Listings number(s) and name(s): 84.425D COVID-19 – Education Stabilization Fund - Elementary and Secondary School Emergency Relief (ESSER) Fund 84.425U COVID-19 - Education Stabilization Fund - American Rescue Plan - Elementary and Secondary School Emergency Relief (ARP ESSER) Award number(s) and year(s): S425D210038 January 5, 2021 through September 30, 2023 S425U210038-21C March 24, 2021 through September 30, 2026 Federal agency: U.S. Department of Education Compliance requirement(s): Reporting Questioned costs: Not applicable Condition Contrary to federal laws and regulations and the State of Arizona Accounting Manual, the Arizona Department of Education (ADE) failed to report complete and accurate information on the federal government’s reporting system for nearly $5.3 million, $887,450, and over $11.8 million in subawards it made to local education agencies (LEAs) under the Assistance Listings numbers 84.0101 (Title I), 84.367 (Title II), and 84.425D/U (ESSER) programs, respectively, during fiscal year 2024. As shown in the bullets and Table 1 below, we tested a total sample of 8 subawards for the Title I program at ADE and found that, for 8 subawards, ADE failed to report the following: X Any required information about the subawards, including the subaward organization names and subaward amounts and terms for 3 subawards tested, totaling $289,225. X Required information within the time frame for 5 subawards tested, totaling nearly $5 million, resulting in the reports being submitted between 20 and 21 months late. As shown in the bullets and Table 2 below, we tested a total sample of 9 subawards for Title II program at ADE and found that, for 9 subawards, ADE failed to report the following: X Any required information about the subawards, including the subaward organization names and subaward amounts and terms for 3 subawards tested, totaling $118,651. X Required information within the time frame for 6 subawards tested, totaling $768,799, resulting in the reports being submitted 21 months late. As shown in the bullets below and page 165 and Table 3, page 163, we tested a total sample of 16 subawards for ESSER program at ADE and found that, for 16 subawards, ADE failed to report the following: X Any required information about the subawards, including the subaward organization names and subaward amounts and terms for 3 subawards tested, totaling $8.0 million. X Required information within the time frame for 13 subawards tested, totaling $3.8 million, resulting in the report being submitted between 20 and 37 months late. X Accurate key elements for 2 subawards tested, totaling $303,740, that included incorrect subawards obligation dates. Effect The State’s stakeholders and the public did not have access to transparent and timely information about ADE’s federal subaward spending decisions on USAspending.gov as required by federal laws and regulations. Additionally, ADE is at risk that this finding applies to other federal programs it administers. ADE is at risk of not transparently reporting expenditures to subrecipients for these federal programs during fiscal year 2024, as shown in Table 4, page 164. Cause Although the programs’ reporting requirements were provided as additional award terms and conditions on the federal agency’s website, and the State of Arizona Accounting Manual instructed State departments to follow them, ADE did not require independent reviews of the reports for accuracy and completeness prior to uploading subaward data to the federal government’s reporting system. In addition, ADE did not require a post review to verify that the subaward data it uploaded to the federal government’s reporting system was complete and correctly displayed. Therefore, ADE was unaware of the errors. Criteria The Federal Funding Accountability and Transparency Act (FFATA) and federal Uniform Guidance regulations require ADE as a direct recipient of federal awards, to report certain information about each subaward action equaling or exceeding $30,000 in federal monies on the federal government’s reporting system no later than month-end of the month following the subaward action so that the information can be displayed to the public on USAspending.gov.1 Specifically, the federal Uniform Guidance requires ADE to report the subrecipient organization’s name, award amount, award term, and other information about the subaward, if applicable, for each subaward action equaling or exceeding the $30,000 threshold (2 CFR §170.320 and Appendix A to Part 170). Additionally, the State of Arizona Accounting Manual requires ADE to perform this reporting 1 The FFATA of 2006 (Public Law 109-282), as amended by section 6202 of Public Law 110-252, was enacted to provide the public with transparency on federal award spending to hold the recipient government accountable for each spending decision and to help reduce wasteful spending of federal monies. As such, federal Uniform Guidance requires reporting at sam.gov for federal awards.2 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). Recommendations to ADE 1. Immediately report on the federal government’s reporting system the required information for its subawards for these 3 programs, including reviewing, correcting, and/or resubmitting any inaccurately reported information. 2. Follow the State of Arizona Accounting Manual for reporting subaward actions equaling or exceeding $30,000 no later than month-end of the month following the subaward action, as required by the FFATA and federal Uniform Guidance, which may include providing training to ADE staff responsible for reporting ADE’s subaward actions to the federal government’s reporting system. Implement procedures requiring independent reviews to: 3. Ensure the subaward data is complete and accurate prior to uploading it to the federal government’s reporting system. 4. Verify that the subaward data it uploaded to the federal government’s reporting system was complete and correctly displayed. This finding is similar to prior-year finding 2023-126 and was initially reported in fiscal year 2021. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy. 2 State of Arizona’s Department of Administration, General Accounting Office. (2022). State of Arizona Accounting Manual: 7045, FFATA and the DATA Act. Retrieved 12/11/2025 from https://gao.az.gov/sites/default/files/2022-08/7045%20FFATA%20and%20the%20DATA%20Act%20 220523.pdf

The Department of Health Services failed to report complete, accurate information on the federal reporting system, risking transparent reporting on 2 federal programs’ subawards Assistance Listings number(s) and name(s): 93.268 Immunization Cooperative Agreements 93.268 COVID-19 - Immunization Cooperative Agreements Award number(s) and year(s): 5 NH23IP922599-05-00 July 1, 2019 through December 31, 2024 6 NH23IP922599-05-01 July 1, 2019 through December 31, 2024 6 NH23IP922599-05-02 July 1, 2019 through December 31, 2024 6 NH23IP922599-05-03 July 1, 2019 through December 31, 2024 6 NH23IP922599-05-04 July 1, 2019 through December 31, 2024 Assistance Listings number(s) and name(s): 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases (ELC) 93.323 COVID-19 - Epidemiology and Laboratory Capacity for Infectious Diseases (ELC) Award number(s) and year(s): 6 NU50CK000511-05-01 August 1, 2019 through July 31, 2024 6 NU50CK000511-02-16 August 1, 2019 through July 31, 2026 6 NU50CK000511-05-07 August 1, 2019 through July 31, 2027 6 NU50CK000511-05-13 August 1, 2019 through July 31, 2027 6 NU50CK000511-05-15 August 1, 2019 through July 31, 2027 6 NU50CK000511-05-16 August 1, 2019 through July 31, 2027 Federal agency: U.S. Department of Health and Human Services Compliance requirement(s): Reporting Questioned costs: Not applicable Condition Contrary to federal laws and regulations and the State’s accounting manual, the Department of Health Services (DHS) failed to report complete and accurate information on the federal government’s reporting system for nearly $17.3 million and $6.0 million in subawards it made to subrecipients under the Immunization Cooperative Agreements program (Immunization) and Epidemiology and Laboratory Capacity for Infectious Diseases program (ELC), respectively, during fiscal year 2024. As shown in the bullets and Table 1 below, we tested a total sample of 27 subawards for the Immunization program at DHS and found that, for 26 subawards, DHS failed to report the following: X Any required information about the subawards, including the subaward organization names and subaward amounts and terms, for 26 subawards tested, totaling over $17 million. X Required information within the time frame for 1 subaward tested, totaling $212,203, resulting in the report being submitted approximately 3 months late. X Accurate key elements for 1 subaward tested, totaling $212,203, that included incorrect subaward obligation dates. As discussed in the bullets and Table 2 below, we tested a total sample of 7 subawards for DHS’ ELC program and found that DHS failed to report the following: X Any required information about the subawards, including the subaward organization names and subaward amounts and terms, for 4 ELC subawards totaling $712,848. X Required information within the time frame for 3 ELC subawards totaling $5.3 million, resulting in the reports being submitted between 1 to 5 months late. X Accurate key elements for 2 ELC subawards totaling over $5.2 million, which included incorrect subaward obligation dates. Effect The State’s stakeholders and the public did not have access to transparent and timely information about DHS’ federal award spending decisions on USAspending.gov as required by federal laws and regulations. Additionally, DHS is at risk that this finding applies to other federal programs it administers. DHS is at risk of not transparently reporting expenditures to subrecipients for these 2 federal programs during fiscal year 2024, as shown in Table 3 below. Cause Although the programs’ reporting requirements were provided as additional award terms and conditions on the federal agency’s website, and the State’s accounting manual instructed State departments to follow them, DHS lacked procedures to communicate new subawards and modifications and did not require independent reviews. Specifically, the DHS’ program administrators did not always communicate new and modified subawards to the employee responsible for reporting to the federal government’s reporting system. In addition, DHS did not require independent reviews of the reports for accuracy and completeness prior to uploading subaward data to the federal government’s reporting system and did not require a post-upload review to verify that the subaward data it uploaded was complete and correctly displayed. Therefore, DHS was unaware of the errors. Criteria The Federal Funding Accountability and Transparency Act (FFATA) and federal Uniform Guidance regulations require DHS as a direct recipient of federal awards, to report certain information about each subaward action equaling or exceeding $30,000 in federal monies on the federal government’s reporting system no later than month-end of the month following the subaward action so that the information can be displayed to the public on USAspending.gov.1 Specifically, the federal Uniform Guidance requires DHS to report the subrecipient organization’s name, award amount, award term, and other information about the subaward, if applicable, for each subaward action equaling or exceeding the $30,000 threshold (2 CFR §170.320 and Appendix A to Part 170). Additionally, the State’s accounting manual requires DHS to perform this reporting for federal awards.2 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (45 CFR §75.303). Recommendations to DHS 1. Immediately report on the federal government’s reporting system the required information for its subawards for these 2 programs, including reviewing, correcting, and/or resubmitting any inaccurate reported information. 2. Follow the State’s accounting manual for reporting subaward actions equaling or exceeding $30,000 no later than month-end of the month following the subaward action, as required by the FFATA and federal Uniform Guidance, which may include providing training to DHS staff responsible for reporting DHS’ subaward actions to the federal government’s reporting system. 3. Implement a procedure for DHS program administrators to communicate subaward activities, such as new subawards or modifications to existing subawards, to those employees responsible for reporting the DHS’ subaward actions to the federal government’s reporting system. Implement procedures requiring independent reviews to: 4. Ensure the subaward data is complete and accurate prior to uploading it to the federal government’s reporting system. 5. Verify that the subaward data it uploaded to the federal government’s reporting system was complete and correctly displayed. This finding is similar to prior-year finding 2023-121 and was initially reported in fiscal year 2022. 1 The FFATA of 2006 (Public Law 109-282), as amended by section 6202 of Public Law 110-252, was enacted to provide the public with transparency on federal award spending to hold the recipient government accountable for each spending decision and to help reduce wasteful spending of federal monies. As such, federal Uniform Guidance requires reporting at http://www.sam.gov/ 2 State of Arizona’s Department of Administration, General Accounting Office. (2022). State of Arizona Accounting Manual: 7045, FFATA and the DATA Act. Retrieved 12/11/2025 from https://gao.az.gov/sites/default/files/2022-08/7045%20FFATA%20and%20the%20DATA%20Act%20 220523.pdf Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Department of Emergency and Military Affairs’ Emergency Management Division did not always retain documentation supporting payroll, increasing the risk that $103,045 may not have been spent in accordance with award terms and conditions Assistance Listings number(s) and name(s): 97.042 Emergency Management Performance Grants Award number(s) and year(s): EMF-2021-EP-0016-S01 October 1, 2020 through September 30, 2023 EMF-2021-EP-0018-S01 October 1, 2020 through June 30, 2025 EMF-2022-EP-0009-S01 October 1, 2021 through September 30, 2025 EMF-2023-EP-0008-S01 October 1, 2022 through September 30, 2025 Federal agency: U.S. Department of Homeland Security Compliance requirement(s): Activities Allowed or Unallowed/Allowable Costs/Cost Principles Questioned costs: $103,045 Condition Contrary to federal regulations and its policy, the Department of Emergency and Military Affairs’ Emergency Management Division (Division) did not always retain documentation supporting the payroll costs it charged to the program. Specifically, the Division did not retain personnel action forms supporting and approving employees’ pay rates and/or authorization to work on the program for 5 of 40 employees we tested totaling $103,045, as follows: X $95,080 for 2 employees’ annual payroll costs lacked supported pay rates and authorization to work on the program. These employees transferred to other State agencies after the fiscal year ended, and contrary to Division policy and federal regulation, the Division did not retain their personnel records. X $7,965 for 3 employees annual payroll costs lacked supported pay rates. Previous personnel action forms authorized these 3 employees to work on the program. Effect The Division’s failure to retain documentation supporting payroll costs increased the risk that $103,045 may not have been spent in accordance with award terms and conditions. Consequently, the Division may be required to return monies to the federal agency in accordance with federal requirements.1 The Division’s $1.7 million overall program payroll costs paid to 76 employees, or 23% of $7.3 million total program costs during fiscal year 2024, are at an increased risk of not being spent in accordance with the award terms and conditions. Finally, the Division is at risk that this finding applies to other federal programs it administers. Cause The Division’s Administrative Services Office (Office) was not trained on or aware of Division policy requirements to prepare personnel action forms authorizing all employee pay rate changes and program assignments and to retain the records of employees who subsequently transferred to another State agency. Criteria Federal regulation requires the Division to maintain records for salaries and wages charged to federal awards that accurately reflect the work performed to ensure they are accurate, allowable, and properly allocated (2 CFR §200.430 [g][1][i]) and retain these records for a period of 3 years from the date the program’s final report was submitted to the federal awarding agency or passthrough grantor (2 CFR §200.334). In addition, the Department of Emergency and Military Affairs’ policy requires the Division to prepare and retain for 5 years after an employee’s termination all the employee’s employment records, including personnel action forms authorizing employee pay rate changes and program assignments. It also requires the Division to retain necessary personnel records of employees who transfer to another State agency for no less than 5 years.2 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). 1 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, the Division, takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). 2 State of Arizona, Department of Emergency and Military Affairs. (2007). DEMA Directive 20.1: State Human Resources Administration, Sections 1.3: The Official Personnel File, 1.5: Employees Transferring to Another State Agency. Recommendations to the Division 1. Retain documentation for all payroll costs, including personnel action forms, to demonstrate employees’ salaries and wages are authorized to be charged to the federal program and spent in accordance with the program’s award terms and conditions. 2. Review the fiscal year 2024 payroll costs for the program to ensure they were properly supported and spent in accordance with the award terms and conditions and coordinate with the U.S. Department of Homeland Security, as necessary, to adjust future federal reimbursement requests or repay any unallowable costs the Division charged to the program. 3. Implement its written policy and train employees to prepare and retain for no less than 5 years the personnel action forms authorizing all employee pay rate changes and program assignments, including those who transfer to another state agency. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Department of Emergency and Military Affairs’ Emergency Management Division (Division) did not retain adequate documentation supporting reimbursement requests, matching requirements, and financial reports, risking the Division receiving monies it was not entitled to Assistance Listings number(s) and name(s): 97.042 Emergency Management Performance Grants Award number(s) and year(s): EMF-2021-EP-0016-S01 October 1, 2020 through September 30, 2023 EMF-2021-EP-0018-S01 October 1, 2020 through June 30, 2025 EMF-2022-EP-0009-S01 October 1, 2021 through September 30, 2025 EMF-2023-EP-0008-S01 October 1, 2022 through September 30, 2025 Federal agency: U.S. Department of Homeland Security Compliance requirement(s): Cash management, matching, and reporting Questioned costs: Unknown Condition Contrary to federal regulations, the Division did not retain adequate documentation supporting reimbursement requests, matching requirements, and financial reports as follows: X Cash management For 4 of 5 requests for reimbursement we tested, the Division did not retain adequate documentation to support the amounts requested for reimbursement from the federal agency. The Division used documentation provided by its subrecipients to calculate the amount to both reimburse the subrecipient and request from the federal government. However, while the Division provided documentation of the invoices paid under their requests for reimbursement, they were unable to indicate which invoice applied to the respective request for reimbursement. X Matching The Division was unable to demonstrate through its reimbursement requests or other supporting documentation how it used nonfederal funds for at least 50% of the total project cost. X Reporting The Division did not retain documentation supporting 3 of 3 Federal Financial Reports (FFR) we tested, as follows: y For the 2023 quarter 4 FFR, the Division could only provide an unapproved draft copy and could not demonstrate that it submitted the FFR to the federal agency. y For the 2024 quarter 1 FFR and the annual FFR, the Division did not retain underlying general ledger data or other records to support costs reported, including indirect costs calculated from an approved indirect cost rate agreement. Effect The Division’s failure to retain adequate documentation supporting reimbursement requests, matching requirements, and financial reports resulted in our being unable to determine whether the reimbursements were appropriate, matching requirements were met, and the reports were complete and accurate. There is also an increased risk that Division could receive federal monies to which it is not entitled. Also, if matching requirements are not met, the Division may be required to return program monies to the federal agency in accordance with federal requirements.1 Further, the federal agency is unable to rely on the financial reports to monitor the Division’s program administration, including its compliance with program requirements and ability to prevent and detect fraud, and evaluate the program’s success. Finally, the Division is at risk that this finding applies to other federal programs it administers. Cause The Division reported that turnover of staff who previously prepared documentation to support reimbursement requests, matching requirements, and financial reports and submitted the reimbursement requests and financial reports resulted in the Division’s inability to locate the supporting documentation for the reports, including the applicable indirect cost agreement, or explain how to reconcile a large number of invoices that were provided to the reimbursement requests tested. The Division also did not have formal policies and procedures requiring an independent review to ensure the accuracy and completeness of the information included in the reports, and the retention of all documentation supporting data included in its reports. Consequently, only 2 of the 3 reports we tested were reviewed and approved prior to submitting the reports to the federal agency. 1 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient takes appropriate and timely corrective action (2 CFR §200.513(c)). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). Criteria Federal regulation requires the Division to retain all public records, including financial records and supporting documentation, related to a federal program for a period of 3 years from the date the program’s final report was submitted to the federal awarding agency or pass-through grantor (2 CFR §200.334). In addition, federal regulation requires the Division to submit its quarterly reports no later than 30 days after the reporting period (2 CFR §200.328). Federal regulation also requires the Division to use the reimbursement method to administer the program, whereby the Division is reimbursed with federal program monies only after it spends its own monies for authorized program purposes and requests reimbursement from the federal grantor (2 CFR §200.305[B][3]). Also, the program’s grant agreement requires the Division to match 50% of the approved project costs from nonfederal sources. Finally, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). Recommendations to the Division 1. Retain documentation for all reimbursement requests, matching requirements, and financial reports, such as the underlying general ledger data, approved indirect cost rate agreements, or information provided by its subrecipients for a period of 3 years from the date the program’s final report is submitted to the federal agency. 2. Review the reports identified above to ensure they were accurate. If any inaccuracies are identified, work with the federal grantor to correct these reports. 3. Develop and implement written policies and procedures over the preparation of reimbursement requests and financial reports, and the monitoring of the Division’s matching requirements as well as the retention of these records. The Division should train responsible staff on these policies and to perform an independent review of these documents to ensure accuracy and completeness prior to submission to the federal agency. 4. Allocate sufficient resources, such as staffing, to comply with the award terms and program requirements over reimbursement requests, matching requirements, and financial reports. Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The University of Arizona did not support salary and employee-related expenses costs of over $4.8 million that it may be required to repay to the federal agency Cluster name(s): Research and Development Cluster Assistance Listings number(s) and name(s): Various Award number(s) and year(s): Various, 2024 Federal agency: Various Compliance requirement(s): Allowable costs/cost principles Questioned costs: $4,849,561 Condition Contrary to federal regulation and the University of Arizona’s (University) policies and procedures, the University did not properly support the distribution of salary and employee-related expenses (ERE) costs of $4,849,561 to ensure they were accurate, allowable, and properly allocated to the Research and Development Cluster during fiscal year 2024. Specifically, principal investigators or supervisors who had knowledge of work performed on the federally funded Research and Development Cluster projects either did not review and approve effort certification reports or approved them late. We tested 17 employees’ salary and ERE costs charged to the Research and Development Cluster and found that principal investigators or supervisors:1 X Did not approve 3 effort-certification reports for 2 employees. X Did not approve 5 effort-certification reports for 5 employees within the required 30 working-day time frame. Reports were approved between 4 and 35 days late. Further, we obtained a report from the University’s financial system of outstanding effortcertification reports for fiscal year 2024 and found 240 reports supporting salary and ERE costs that were charged to the Research and Development Cluster were not approved, as shown in Table 1, page 184. 1 ERE are determined by applying the appropriate percentage to actual salary expense. Benefits provided to employees, which may include health, dental, long-term disability, retirement, unemployment compensation, qualified tuition remission—employee, termination leave, employee wellness, FICA taxes, workers compensation, and liability insurance. Employees are charged a flat fringe benefit rate regardless of participation. University of Arizona. ERE Rates Overview and FAQs. Retrieved 11/28/25 from https://finance.arizona.edu/accounting/ere-rates/ overview Effect The University’s not approving the effort-certification reports or approving them late increased the risk that the University received $4,849,561 in Research and Development Cluster monies it was not entitled to and may be required to repay to the federal agency. In fact, for 1 of the employees for whom a principal investigator failed to approve effort-certification reports, the University informed us that it improperly paid this former employee $99,762 of salary and ERE for approximately 1 year and 10 months past the employee’s resignation date in June 2023. The University placed a hold on the former employee’s Arizona State Retirement System (ASRS) account and reclaimed the employee’s and employer’s ASRS contribution amounts, resulting in a recovery of $21,648. The University’s improper payments to the former employee resulted in a net loss of $78,114 to the University as of June 30, 2025.2 However, the University reimbursed the Research and Development Cluster by transferring the costs to State appropriated funds for local funding of departments in May 2025; therefore, no questioned cost resulted from this instance of noncompliance. Finally, the University is at risk that this finding applies to other federal programs it administers. 2 [the auditor]. (2025). Report on Internal Control and on Compliance Year Ended June 30, 2025. Retrieved 02/9/2026 from https:// www.azauditor.gov/sites/default/files/2026-02/UniversityofArizonaJune30_2025ReportonInternalControlandonCompliance.pdf Cause Despite periodic notifications by the University’s Sponsored Projects Services, the principal investigators or supervisors either did not review and approve effort certification reports or approved the effort certification reports after the 30-working-day requirement because the policies and procedures for effort certification do not contain enforcement actions for noncompliance. In addition, the University’s policies and procedures did not provide separate time frames for the 2 required effort-certification report reviews, including the fiscal officers and principal investigators or supervisors, to approve the effort-certification reports. For example, for 2 effort-certification reports we tested that were 5 and 17 days late, the principal investigators were given limited time to complete their reviews after the fiscal officers approved the reports in 26 and 28 working days, respectively. Criteria Federal regulation requires the University to base charges to federal awards for salaries on records that accurately reflect the work performed. These records must comply with the University’s established accounting policies and procedures. Federal regulation also allows budget estimates to be used for interim accounting purposes, provided that the University’s system of internal controls includes processes to perform periodic after-the-fact reviews of interim charges made to a federal award based on budget estimates. All necessary adjustments must be made so that the final amount charged to the federal award is accurate, allowable, and properly allocated (2 CFR §200.430[g][1]). University policies and procedures require the University to perform periodic after-the-fact reviews of effort certification reports that include budgeted percentages charged to the federal awarding agency and the distribution of salary and ERE costs based on budgeted percentages amongst all applicable federal awards. These policies and procedures require a fiscal officer to perform the first review and approval of the effort-certification report in the University’s financial system. Then, the principal investigators of federally sponsored projects should approve the effort-certification reports of all employees who are paid fully or partially from federal sources for work performed on a project. If the principal investigator does not have specific knowledge of the work performed, then a direct supervisor who has knowledge of work performed should approve the report. Effort-certification reports are due within 30 working days of the document-creation date in the University’s financial system.3,4 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). 3 University of Arizona. Research & Partnerships – Effort Reporting Policy. Retrieved 11/18/2025 from https://research.arizona.edu/researchsupport 4 University of Arizona. Research & Partnerships – Effort Reporting Procedure. Retrieved 11/18/2025 from https://research.arizona.edu/ research-support Recommendations to the University 1. The principal investigators or supervisors should approve the effort-certification reports within the required 30-working-day time frame. The University should improve its written policies and procedures over effort-certification to include: 2. Enforcement actions when principal investigators or supervisors do not approve the effort certifications within the required time frame. 3. Establish separate time frames in the approval process over effort-certification reports for fiscal officers and principal investigators and supervisors. Views of responsible officials University management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

The Arizona Office of Economic Opportunity did not ensure conference meals, graphic design services, and promotional item costs were appropriate, necessary, and managed to minimize charges and may be required to return $90,015 of WIOA Cluster funds Cluster name(s): WIOA Cluster Assistance Listings number(s) and name(s): 17.258 WIOA Adult Program 17.259 WIOA Youth Activities 17.278 WIOA Dislocated Worker Formula Grants Award number(s) and year(s): AA-34755-20-55-A-4 April 1, 2020 to June 30, 2023 AA-36307-21-55-A-4 April 1, 2021 to June 30, 2024 AA-38516-22-55-A-4 April 1, 2022 to June 30, 2025 23A55AW000049-01-00 July 1, 2023 to June 30, 2026 Federal agency: U.S. Department of Labor Compliance requirement(s): Not applicable Questioned costs: $90,015 Condition Contrary to federal regulations and the Department of Economic Security’s (DES) policy, the Arizona Office of Economic Opportunity (Office) paid for meals and promotional items provided to conference participants using WIOA Dislocated Worker Formula Grants federal program (WIOA federal program) funds without ensuring that the costs were appropriate, necessary, and managed to minimize charges to the federal award. Specifically, the Office hosted a 2-day Workforce Summit (Summit) conference in June 2024 and spent: X $61,038 on meals for 300 attendees over 2 days for lunch buffets, snacks, and beverages with an average attendee cost of $102 per person per day. X $25,302 for graphic design services without documenting how the services benefited the Summit. Office management reported the services were used to develop Summit communications and materials. X $3,675 on other promotional items, including pens, notebooks, lanyards, clips, vinyl pouches, and flyers, without maintaining evidence, such as photos, that the items displayed the required branding or funding tagline required by DES policies. The Office spent $5,066,045—including the questioned costs of $90,015—or nearly 5% of the State’s total $104,973,072 WIOA Cluster expenditures for the year ended June 30, 2024. We did not audit the WIOA Cluster for fiscal year 2024 because the Cluster did not meet the major federal program criteria. However, during fieldwork for the performance audit and sunset review of the Office, our contract auditors identified the above $90,015 unallowable costs charged to the WIOA federal program. Effect The Office’s paying for Summit costs without ensuring that they were appropriate, necessary, and managed to minimize charges to the federal award increased the risk that those who were intended to benefit from the program may not receive all the benefits they otherwise would have received. Consequently, the Office and/or DES may be required to return monies to the federal agency in accordance with federal requirements.1 Cause Office staff responsible for reviewing and approving Summit expenditures lacked sufficient guidance to identify unallowable costs because the Office lacked documented procedures, including a standardized review process, to ensure that costs charged to the WIOA federal program were allowable. DES passed WIOA federal program funds to the Office through an interagency service agreement (ISA) subaward but did not include conference-specific requirements imposed by federal regulations or additional requirements that DES imposed regarding promotional materials. Further, DES monitors the Office’s WIOA federal program expenditures during an annual desk review that takes place in May or June following the end of the prior fiscal year. DES management reported DES did not review any 2024 Summit costs since they will be subject to review during the May 2026 desk review. The review was scheduled almost 2 years after the unallowable costs were incurred because they were included in the Office’s July 2024 reimbursement request, which fell at the beginning of fiscal year 2025. Criteria Federal regulations and the Department’s Notice of Award for the WIOA federal program require the Office to sponsor conferences primarily to disseminate technical information. Further, the Office must exercise discretion and judgment in ensuring that conference costs are appropriate, necessary, and managed to minimize charges to the federal award. Allowable costs may include facility rental, speakers’ fees, registration fees, meals and refreshments, and other incidental expenses, unless further restricted by the terms and conditions of the federal award (2 CFR §200.432). 1 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). In addition, DES’ policy requires that all promotional material must include a specific funding source tagline and the State brand.2 Further, federal regulations require DES to: X Evaluate the Office’s fraud risk and risk of noncompliance with its ISA subaward to determine the appropriate subrecipient monitoring procedures (2 CFR §200.332[c]). X Ensure its subaward with the Office includes all requirements imposed by federal statutes, regulations, and the terms and conditions of the federal award and any additional requirements that DES imposes on the Office to meet its responsibilities under the federal award (2 CFR §200.332[b][2] and [3]). Finally, federal regulations require establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). Recommendations to the Office 1. Ensure Summit costs charged to the WIOA federal program are appropriate, necessary, and managed to minimize charges to the federal award. 2. Develop and implement written procedures, including a standardized review process, to ensure that costs charged to the WIOA federal program are allowable prior to requesting reimbursement from DES. 3. Work with federal grantor and/or DES to resolve the $90,015 of questioned costs associated with the 2024 Summit and any subsequently held Summits. Recommendations to DES 4. Amend its ISA subaward with the Office to include conference-specific requirements imposed by federal regulations and additional requirements that DES imposed regarding promotional materials. 5. Adjust its monitoring procedures over the Office’s activities, which may include more frequent desk reviews of reimbursed costs, based on DES’ evaluation of the Office’s risk of noncompliance with federal regulations and DES’ notice of award for the WIOA federal program. 6. Provide Office staff responsible for reviewing and approving Summit expenditures with training and technical assistance on conference-related requirements. 2 Arizona Department of Economic Security. (2023). Workforce Innovation and Opportunity Act Policy Manual Title I-B, Chapter 3, Section 102.01 (C). Retrieved 4/8/2026 from https://des.az.gov/sites/default/files/media/Allowable-Costs-Fiscal-Policy-Section-100.pdf?time=1775665811357 Views of responsible officials State management concurs with this finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

Other auditors’ federal award findings The other auditors who audited the Arizona Health Care Cost Containment System (AHCCCS) reported this finding. AHCCCS’ initial findings of credible and willful fraud by soberliving providers across the State resulted in the suspension of more than 300 providers Assistance Listings number(s) and name(s): 93.778 Medical Assistance Program (Medicaid; Title XIX) *part of the Medicaid Cluster 93.778 COVID-19 - Medical Assistance Program (Medicaid; Title XIX) Award number(s) and year(s): 11-W-00275/09 July 1, 2023 through June 30, 2024 Federal agency: U.S. Department of Health and Human Services Compliance requirement(s): Special Tests and Provisions – Utilization Control and Program Integrity Questioned costs: Unknown Condition The AHCCCS Office of Inspector General and the Arizona Attorney General’s Office became aware of potential fraudulent billing practices including significant increases in billing for outpatient behavioral health services. These circumstances triggered a multi-agency review and investigation of potential fraud, waste, and abuse. Ultimately, this led AHCCCS to connect the irregular billing of these services with alleged criminal activity targeting Indigenous peoples and other vulnerable Arizonans. In May 2023, AHCCCS announced its initial findings of credible and willful fraud by sober-living providers across the State. Since then, AHCCCS has suspended more than 300 providers. These provider suspensions are known as the Credible Allegations of Fraud (CAF) suspensions. The CAF payment suspensions noted above are associated with wide-ranging investigations into fraudulent Medicaid billing by the named providers. The investigations are ongoing. However, AHCCCS believes that credible evidence has been established that individuals were targeted and aggressively recruited with false promises of food, treatment, and housing, only to be taken to locations where providers billed for services that were not provided or were not appropriate or necessary. For example, providers billed for: X Excessive hours of service in a 24-hour period for a single member. X Multiple services for the same member at the same time. X AHCCCS members who were not physically present (“ghost billing”). X Services after a member’s date of death. X Services that were not medically necessary. Under 42 CFR §455.23 and the terms of the Provider Participation Agreement, AHCCCS may suspend payments to a provider if a CAF has been identified. Providers are informed of the reason for their suspension in a Notice of CAF Suspension. CAF suspensions are based on preliminary findings of reliable indicia of fraud and may be lifted if AHCCCS determines there is no fraud occurring and/or good cause has been established under 42 CFR §455.23. Upon the conclusion of an investigation, AHCCCS may terminate a provider and/or lift their suspension at that time. At the point a referral is made and payment is suspended, only a preliminary investigation has been conducted, and no total overpayment or amount of improper payments made to the provider has been identified. At the conclusion of the investigation, AHCCCS will terminate a provider’s enrollment and require repayment of the identified overpayment. The investigation is ongoing, and AHCCCS is not currently able to estimate a total overpayment or amount of improper payments made to the providers. Therefore, we are unable to estimate any questioned costs related to the fraud allegations. Effect In May 2023, AHCCCS announced its initial findings of credible and willful fraud by sober-living providers across the State. Since then, AHCCCS has suspended more than 300 providers. Once a credible allegation of fraud determination is made, AHCCCS is required to suspend all payments to a provider unless there is good cause not to while investigations are conducted. The credible allegation of fraud determination results from the agency’s preliminary investigation, and the agency must then make a fraud referral to the Arizona Attorney General’s Healthcare Fraud and Abuse Section or a federal law enforcement agency for a full investigation. During this time, providers may continue to bill AHCCCS for services provided, but any reimbursement to these providers is withheld pending the outcome of further investigation. Under State statute, providers are entitled to appeal a suspension placed by AHCCCS. AHCCCS is working closely with the Arizona Attorney General’s Healthcare Fraud and Abuse Section, the Federal Bureau of Investigation (FBI), the U.S. Department of Health and Human Services (HHS), the U.S. Attorney’s Office, the Internal Revenue Service (IRS), and local and tribal law enforcement to disrupt organized bad actors, apprehend them, and prosecute them to full extent allowed by law. At present, the investigation is ongoing, and a determination of the amount of fraud or improper payments, potential recovery from the providers, or amount that may be due back to the federal government cannot be made at this time as AHCCCS is still in the process of investigating and working with the Attorney General’s Office for prosecution of substantiated claims, which is a highly complex and manual process and can take many years to finalize. As a result, we have issued a qualified opinion on the basic financial statements as of and for the year ended June 30, 2024. As a result of this matter, we have concluded that AHCCCS did not comply with the compliance requirements and have issued a qualified opinion on compliance. This is deemed to be a material weakness in internal control over compliance. Cause The fraud was a result of several bad actors colluding against the program. AHCCCS did not have complementary controls in place to detect unnecessary utilization of care and services in a timely manner. Additionally, AHCCCS did not have sufficient procedures for the ongoing pre- and post-payment review of behavioral health claims. AHCCCS’ claims-processing system uses the Centers for Medicare & Medicaid Services (CMS) required claim-edit protocols to look for improperly billed claims as noted in the National Correct Coding Initiative (NCCI), and such edit protocols are updated regularly per CMS requirements. However, AHCCCS could have implemented additional controls that may have detected these issues more timely. While not required by CMS, AHCCCS did not have sufficient edits to restrict the inappropriate use of per diem codes or restrict some behavioral health codes from being billed for the same member on the same date of service. Further, AHCCCS did not have sufficient controls in which claims were reviewed by a medical professional pre- and post-payment to assess if the claim was medically necessary and to assess if the codes being used were excessive and age appropriate. Criteria AHCCCS is required to provide methods and procedures to safeguard against unnecessary utilization of care and services. In addition, AHCCCS must have (1) methods of determining criteria for identifying suspected fraud cases; (2) methods for investigating these cases; and (3) procedures developed in cooperation with legal authorities for referring Credible Allegations of Fraud (CAF) cases to law enforcement officials (42 CFR parts 455, 456, and 1002). Credible allegations of provider fraud must be referred to the State Medicaid Fraud Control Unit (MFCU) or an appropriate law enforcement agency in states with no certified MFCU (42 CFR §455.21). AHCCCS must establish and use written criteria for evaluating the appropriateness and quality of Medicaid services. AHCCCS must have procedures for the ongoing post-payment review, on a sample basis, of the need for, and the quality and timeliness of, Medicaid services. AHCCCS may conduct this review directly or may contract with an independent entity (42 CFR §§456.5, 456.22, and 456.23). Recommendations to AHCCCS 1. Continue its investigations and refer CAF cases to law enforcement officials. 2. Continue to work with CMS to determine what, if any, amounts may be required to be remitted to CMS. 3. Review and enhance existing policies and procedures and related controls to ensure sufficient processes and controls are in place to timely detect unnecessary utilization of care and services and to prevent fraud. For example, AHCCCS could implement additional edits to restrict the inappropriate use of per diem codes or restrict some behavioral health codes from being billed for the same member on the same date of service. 4. Add additional controls in which claims are reviewed by a medical professional pre- and post- payment to assess if the claim was medically necessary and to assess if the codes being used were excessive and age appropriate. 5. Continue to examine the existing Medicaid payment system and continue to implement system-wide improvements. These improvements should include the establishment of additional reporting to flag concerning claims for prepayment review, setting of billing thresholds, and establishing prepayment review for various behavioral health claim types. 6. Establish sufficient controls in which claims are reviewed by a medical processional pre- and post-payment to assess if the claim was medically necessary and to assess if the codes being used were excessive and age appropriate. This finding is similar to prior-year finding 2023-130 and was initially reported in fiscal year 2022. Views of responsible officials State management concurs in part with the finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

Other auditors’ federal award findings The other auditors who audited the Arizona Health Care Cost Containment System (AHCCCS) reported this finding. AHCCCS did not follow up in a timely manner for certain deferred member investigations, increasing the risk of AHCCCS making unnecessary payments and compromising its ability to investigate cases Assistance Listings number(s) and name(s): 93.767 Children’s Health Insurance Program 93.767 COVID-19 – Children’s Health Insurance Program 93.778 Medical Assistance Program (Medicaid; Title XIX) *part of the Medicaid Cluster 93.778 COVID-19 - Medical Assistance Program (Medicaid; Title XIX) Award number(s) and year(s): 11-W-00275/09 July 1, 2023 through June 30, 2024 21-W-00064/09 July 1, 2023 through June 30, 2024 Federal agency: U.S. Department of Health and Human Services Compliance requirement(s): Special Tests and Provisions – Utilization Control and Program Integrity Questioned costs: Unknown Condition AHCCCS did not follow up in a timely manner for certain deferred member investigations. In a population of 1,494 member and provider cases with identified credible allegations of provider and member fraud assigned during fiscal year 2024, we conducted a nonstatistical sample of 40 member and provider investigations to ascertain if AHCCCS performed a preliminary investigation of potential incidents of fraud or abuse committed by members and providers on a timely basis. We also reviewed to ensure AHCCCS was following up on any deferred member and provider cases in a timely manner. In our sample of 40 member and provider investigations, we noted that for 39 of 40 member investigations in which the investigation had been deferred, AHCCCS did not follow up in a timely manner and in accordance with their internal policy on those deferred investigations. Effect Untimely followup on fraud or abuse incident investigations could result in AHCCCS making unnecessary payments and compromise its ability to investigate cases. This is deemed to be a material weakness in internal control over compliance. Cause Management has reported to us that insufficient investigative staff and increased volumes of provider and member investigations impacted AHCCCS’ ability to investigate and follow up on potential fraud or abuse incidents in a timely manner. In fiscal year 2023, the process of holding quarterly reviews of deferred cases did not occur due to resources being diverted to focus on Strike Force activities involved in addressing the Behavioral Health (BH) crisis. Additionally, the AHCCCS Office of Inspector General (OIG) announced a reorganization in December 2023 that resulted in permanent transitions to other teams for several staff. Teams were given time to finalize cases and move items to other investigators to limit disruption to cases. By April 2024, after the Strike Force initiative had been unwound and the member team structure changes for personnel were finalized, the member team restated its process of quarterly deferred case reviews. At the first review in April 2024, cases in the deferred backlog that were not completed in the time frame set for the reviews were postponed to the next quarterly review in July. Criteria AHCCCS is required to provide methods and procedures to safeguard against unnecessary utilization of care and services. In addition, AHCCCS must have (1) methods of determining criteria for identifying suspected fraud cases; (2) methods for investigating these cases; and (3) procedures developed in cooperation with legal authorities for referring CAF cases to law enforcement officials (42 CFR parts 455, 456, and 1002). Credible allegations of provider fraud must be referred to the state MFCU or an appropriate law enforcement agency in states with no certified MFCU (42 CFR §455.21). Additionally, in accordance with AHCCCS policy, the OIG is required to regularly follow up on deferred investigations and provide updates at least every 90 days to the State MFCU. Recommendations to AHCCCS 1. Conduct a workload/cost analysis to evaluate whether its funding and staffing levels are sufficient to timely investigate member and provider fraud or abuse incidents. 2. Reassign staff/resources to deferred member/provider investigations. 3. Follow its existing policy, which includes clear time frames in which follow up on deferred investigation occurs. This finding is similar to prior-year finding 2023-131 and was initially reported in fiscal year 2023. Views of responsible officials State management concurs with the finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

Other auditors’ federal award findings The other auditors who audited the Arizona Health Care Cost Containment System (AHCCCS) reported this finding. AHCCCS did not timely return nearly $5.4 million of the federal share of fraud and abuse recoupments Assistance Listings number(s) and name(s): 93.767 Children’s Health Insurance Program 93.767 COVID-19 - Children’s Health Insurance Program 93.778 Medical Assistance Program (Medicaid; Title XIX) *part of the Medicaid Cluster 93.778 COVID-19 - Medical Assistance Program (Medicaid; Title XIX) Award number(s) and year(s): 11-W-00275/09 July 1, 2023 through June 30, 2024 21-W-00064/09 July 1, 2023 through June 30, 2024 Federal agency: U.S. Department of Health and Human Services Compliance requirement: Special Tests and Provisions – Refunding of Federal Share of Medicaid Overpayments to Providers Questioned costs: $111,638 (93.767) and $5,245,026 (93.778) Total questioned costs: $5,356,664 Condition AHCCCS did not return the federal share of fraud and abuse recoupments back to the CMS in a timely manner. In a population of 4,117 member and provider cases during fiscal year 2024, we conducted a nonstatistical sample of 60 member and 60 provider investigations to ascertain if AHCCCS had properly remitted to CMS any recoupments as a result of the investigations. For 1 of 60 provider fraud cases, we noted AHCCCS did not timely return the federal share of fraud and abuse recoupments back to CMS. We then obtained from AHCCCS OIG a detail of all recoupments received during the period July 1, 2022 through June 30, 2024, noting a total of 392 unique OIG cases for which recoupments were received. Of this total of 392 cases, 136 cases were identified for which the federal share of the total recoupment amount was not properly reported on the CMS-64 report, and therefore, the funds were not properly remitted to CMS for a total of $5,356,664. Effect Recoupments were not reported and repaid timely to CMS. This is deemed to be a material weakness in internal control over compliance. Cause Management has reported to us that this was a result of staffing turnover as well as a breakdown of inter and intradepartmental communication and collaboration between AHCCCS OIG and the Division of Business and Finance. Criteria 42 CFR 433 Subpart F outlines the requirements State Medicaid Agencies (SMAs) are to follow related to refunding the federal share of Medicaid overpayments made to providers. Pursuant to 1903(d)(2)(C) of the Act (the Act) (42 USC 1396b), states have up to 1 year from the date of discovery of the overpayment to recover or attempt to recover the overpayment before the federal share must be refunded to CMS regardless of whether recovery is made from the provider. Recommendations to AHCCCS 1. Timely report and remit recoupments to CMS. 2. Review and update their policies and procedures to ensure the federal share of any recoveries are reported and remitted to CMS timely. 3. Enhance communications between divisions to facilitate and ensure the timely and accurate communication on recoveries. This finding is similar to prior-year finding 2023-132 and was initially reported in fiscal year 2023. Views of responsible officials State management concurs with the finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials regarding these recommendations. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

Assistance Listings number and name: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds (SLFRF) Award number and year: None Federal agency: U.S. Department of the Treasury Questioned costs: $1,903,858

Assistance Listing number and name: 84.425C COVID-19 Education Stabilization Fund – Governor’s Emergency Education Relief (GEER) Fund Award numbers and years: S425C200052, June 2, 2020 through September 30, 2022; S425C210052, January 8, 2021 through September 30, 2023 Federal agency: U.S. Department of Education Questioned costs: Unknown

Compliance requirement: Subrecipient monitoring

Condition—The Governor’s Office of Strategic Planning and Budgeting (Office) awarded $135.1 million to 334 SLFRF program subrecipients and $10.2 million to 10 GEER program subrecipients during fiscal year 2023, or 88 percent and 98 percent, respectively, of each of the Office’s federal program expenditures, but did not perform all required risk assessments to assess whether its monitoring procedures were sufficient to evaluate whether subrecipients used program monies in accordance with the award terms and program requirements. Specifically, risk assessments were not performed for 37 of 42 SLFRF program subrecipients and 5 of 5 GEER program subrecipients tested.

Effect—The Office’s delay in performing required risk assessments did not allow the Office to properly design and prioritize its monitoring efforts, resulting in the Office not timely identifying questioned costs of approximately $1,903,858 for 3 SLFRF program subrecipients that may not have been spent in accordance with program requirements.1 The Office identified several of these questioned costs as potentially inappropriate and has forwarded this information to the Attorney General’s Office for further review. As a result, the Office may be required to return these monies to the federal agency in accordance with Uniform Guidance requirements.2 Further, if monies were spent inconsistent with program requirements, those who were intended to benefit from the program may not have received all the services or other benefits they otherwise would have received. Subrecipient program expenditures are not related to the revenue loss expenditure category.

Cause—Office management reported that it hired additional staff in fiscal year 2023 to begin addressing issues noted in prior year findings 2022-104 and 2022-10 but had not done so in time to complete required risk assessments for the more than 300 SLFRF program and 10 GEER program subrecipients.3

Criteria—Federal regulation requires the Office to monitor subrecipients, which includes required monitoring procedures for assessing the risk of each subrecipient’s noncompliance and monitoring activities based on those risk assessments. This federal regulation also provides that monitoring procedures may include reviewing financial and performance reports, providing training or technical assistance on program-related matters, and performing on-site reviews, selective audits, and/or other monitoring procedures (2 CFR §200.332[b] and [e]). Further, Office policy requires an annual risk assessment of open, active subawards to determine which subawards will be selected for review and monitoring priority (Grants Management Manual – Grantor, Chapter 8 – Award Monitoring). Finally, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Office should:

1. Ensure it performs required monitoring of its subrecipients and their compliance with the award terms and program requirements by following its established policies and procedures to assess the risk of each subrecipient’s noncompliance annually and carry out monitoring activities based on those risk assessments such as reviewing financial and performance reports, providing training or technical assistance on program-related matters, and performing on site reviews, selective audits, and/or other monitoring procedures. 2. Continue to assess its resources, such as staffing, to perform required risk assessments and monitoring procedures to comply with the award terms and program requirements. 3. Work with the federal agency and the subrecipients to resolve the $1,903,858 of program monies that may have been spent in violation of its federal award terms and that may need to be returned to the federal agency.2

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year findings 2022-104 (GEER) and 2022-106 (SLFRF) and were initially reported in fiscal years 2021 (GEER) and 2022 (SLFRF).

1 The Office reported during fiscal year 2024 it began performing missing risk assessments for subrecipients awarded monies during fiscal years 2022 and 2023 that were not completed by June 30, 2023, and is currently conducting additional onsite monitoring or desk reviews based on those results. As of the report date, December 17, 2024, the Office identified and reported to us approximately $1,903,858 of expenditures for 3 SLFRF program subrecipients that may not have been spent in accordance with program requirements. Since the Office is still performing monitoring procedures for subaward monies spent during fiscal year 2023, there may be additional questioned costs that the Office has not identified. 2 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, the Office, takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). 3 [the auditor]. (2023). State of Arizona June 30, 2022, Single Audit Report. Phoenix, AZ. Retrieved 08/13/2024 from https://www.azauditor.gov/sites/default/files/2024-01/StateOfArizonaJune30_2022SingleAudit.pdf

Assistance Listings number and name: 21.027 COVID-19 - Coronavirus State and Local Fiscal Recovery Funds Award number and year: None Federal agency: U.S. Department of the Treasury Questioned costs: Not applicable Compliance requirement: Reporting

Condition—The Governor’s Office of Strategic Planning and Budgeting Office’s (Office) administration reported $257.0 million of inaccurate program expenditures to the federal agency in its quarterly reports when compared to the State’s records. Specifically, for 2 of 12 projects initially tested, we found a cumulative overstatement of $3.8 million, or 3.2 percent of the $120.6 million in expenditures for the identified projects during fiscal year 2023. Upon further analysis of all projects within the 4 quarterly reports, we found a total cumulative overstatement of program expenditures of $257.0 million reported as of June 30, 2023, as follows:

Quarterly report date Total program expenditures as of report date Cumulative overstatement of program expenditures when compared to the State’s records Cumulative overstatement of program expenditures as a percentage of total program expenditures as of report date September 30, 2022 $1.9 billion $28,209,828 1.5 percent December 31, 2022 $2.1 billion $63,408,917 3.1 percent March 30, 2023 $2.2 billion $145,604,993 7.0 percent June 30, 2023 $2.4 billion $256,990,948 12.2 percent

Effect—The Office’s reporting inaccurate program information results in the federal agency being unable to rely on the reports to monitor the Office’s program administration, including its compliance with program requirements and ability to prevent and detect fraud, and to evaluate the program’s success. Further, there is a risk that the Office may be required to return excess monies reported as spent to the federal agency if the expenditures have not been fully reconciled at the end of the program, which occurs during fiscal year 2027.

Cause—The Office staff responsible for preparing the reports did not reconcile them to the State’s accounting records, which are the official record of expenditures made for the program, and instead reconciled them to the Office’s internal grants-management system. Additionally, the Office’s policies and procedures lacked detailed reconciliation procedures.

Criteria—Federal law, regulation, and guidance requires the Office to quarterly accurately report its cumulative obligations and expenditures by type, such as contracts, grants, loans, direct payments, and transfers to other governmental entities, beginning December 2020.1 Accordingly, the Office’s policies and procedures, including federal reporting templates, provide instructions for employees to follow to meet these reporting requirements. Also, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms and conditions (2 CFR §200.303).

Recommendations—The Office should:

1. Report accurate and complete program information to the federal agency. 2. Improve its reporting policies and procedures to require employees to reconcile expenditure amounts to the State’s accounting records and investigate and resolve any differences prior to submitting the report to the federal agency. 3. Perform a reconciliation for reports the Office has already submitted to the federal agency to identify those that contain errors, and revise and resubmit those reports if practicable or notify the federal agency of these reporting errors.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-107 and was initially reported in fiscal year 2022.

1 The American Rescue Plan Act established the State and Local Fiscal Recovery Fund (SLFRF) and was enacted March 11, 2021. Federal interim guidance for implementing the SLFRF was established by the U.S. Treasury in May 2021 and finalized in January 2022 in effect until April 1, 2022. All the U.S. Treasury’s SLFRF guidance was finalized in the Federal Register (FR) on January 27, 2022 (FR Vol. 87, No. 18, Doc. 2022-00292) and became effective on April 1, 2022. Retrieved 10/1/2024 from https://www.govinfo.gov/content/pkg/FR-2022-01-27/pdf/2022-00292.pdf

Assistance Listings number and name: 84.425C COVID-19 - Education Stabilization Fund – Governor’s Emergency Education Relief (GEER) Fund Award number and year: S425C200052, June 2, 2020 through September 30, 2022; S425C210052, January 8, 2021 through September 30, 2023 Federal agency: U.S. Department of Education Compliance requirement: Reporting Questioned costs: Not applicable

Condition—Contrary to federal laws, regulations, and guidance, the Governor’s Office of Strategic Planning and Budgeting (Office), as the prime recipient responsible for the programs’ federal reporting, failed to report correct key elements, such as the subrecipient organization’s name and related awards or expenditures, on the federal government’s reporting system and Annual Performance Report (APR) during fiscal year 2023. Specifically, the Office incorrectly reported the subrecipient organization’s name as the Arizona Department of Education (ADE), to which it delegated authority to administer the program, rather than ADE’s subrecipient organizations’ names as required by federal guidance, for:1

• $20.7 million of federal awards reported on the federal government’s reporting system, or 20.7 percent of the total $100.1 million awarded to the Office for this federal program as of fiscal year 2023. • $10.3 million of cumulative expenditures reported on the fiscal year 2022 APR, or 23.4 percent of the total $44.1 million expended for this federal program as of fiscal year 2022.

Effect—The State’s stakeholders and the public did not have access to accurate, transparent, and timely information about the Office’s federal award spending decisions on USAspending.gov as required by federal laws and regulations. Also, the Office’s reporting inaccurate subrecipient information resulted in the federal agency being unable to rely on the reports to effectively monitor the ADE’s program administration, including its compliance with program requirements and ability to prevent and detect fraud, and to evaluate the program’s success. Finally, the Office is at risk that this finding applies to other federal programs it administers.

Cause—Despite federal guidance specifying reporting requirement responsibilities when delegating authority, Office management reported to us that they were not aware of the requirement to report ADE’s subrecipient organizations’ names on the federal government’s reporting system and APR.

Criteria—Federal Funding Accountability and Transparency Act (FFATA) and federal Uniform Guidance regulations require the Office, as a direct recipient of federal awards, to report certain information about each subaward action equaling or exceeding $30,000 in federal monies on the FFATA Subaward Reporting System no later than month-end of the month following the subaward action so that the information can be displayed to the public on USAspending.gov. 2 Specifically, the federal Uniform Guidance requires the Office to report the subrecipient organization’s name, award amount, award term, and other information about the subaward, if applicable, for each subaward action exceeding the $30,000 threshold (2 CFR §170.320 and Appendix A to Part 170). Federal guidance clarifies that the Office is required to treat awards made by the State agency as subawards and report them in the FFATA Subaward Reporting System when an agreement is established between the Office and a State agency that delegates authority to the State agency for the program’s administration.1

Further, federal agency guidance requires the Office to prepare and submit an annual performance report, which includes information specified by federal agency guidance such as a subrecipient organization’s name.3 Finally, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Office should:

1. Immediately report on the FFATA Subaward Reporting System the required information for ADE’s subrecipients for this program, including reviewing, correcting, and/or resubmitting any inaccurately reported information. 2. Immediately amend and resubmit the fiscal year 2022 APR to include required information for ADE’s subrecipients for this program. 3. Develop a process to regularly review federal guidance and review and update its written policies and procedures and interagency service agreements to ensure they are current and relevant to include U.S. Department of Education guidance updates.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-105 and was initially reported in fiscal year 2021.

1 On March 3, 2022, the U.S. Department of Education published guidance to clarify the reporting requirement responsibilities for federal awards and expenditures when a Governor grants funds to State Educational Agencies (SEAs), and those SEAs then awarded monies to Local Educational Agencies and Institutes of Higher Education. Specifically, because the Office established an interagency service agreement with ADE that delegated authority to ADE for the program’s administration, federal guidance states that the Office should treat the awards made by ADE as subawards and report them in the FFATA Subaward Reporting System. Alternatively, if the Office had subawarded funds to a State agency without an agreement delegating authority to the State agency, the Office would treat the State agency as a subrecipient and would not be required to report any further subawards made by the State agency. (U.S. Department of Education. [2022, March]. GEER Year 2 Form Review Webinar Questions and Answers. Retrieved 10/16/2024 from https://covid-relief-data.ed.gov/grantee-help/geer). 2 The FFATA of 2006 (Public Law 109-282), as amended by section 6202 of Public Law 110-252, was enacted to provide the public with transparency on federal award spending to hold the recipient government accountable for each spending decision and to help reduce wasteful spending of federal monies. As such, federal Uniform Guidance requires reporting on the FFATA Subaward Reporting System at https://www.fsrs.gov/ 3 U.S. Department of Education. (2023). Education Stabilization Fund, Governor’s Emergency Education Relief Fund (GEER Fund) Recipient Reporting Data Collection Form. Retrieved 10/18/2024 from https://api.covid-relief-data.ed.gov/collection/api/v1/public/docs/1810-0748_GEER%20Form%20-%20Clean.pdf

Assistance Listings number and name: 21.023 COVID-19 - Emergency Rental Assistance Program Award numbers and years: ERA-2101070596, January 8, 2021 through September 30, 2022; ERA2-0165, May 10, 2021 through September 30, 2025 Federal agency: U.S. Department of the Treasury Compliance requirements: Activities allowed or unallowed, allowable costs/cost principles, and eligibility Questioned costs: $36,945 Assistance Listings number and name: 21.027 COVID-19 - Coronavirus State and Local Fiscal Recovery Funds Award number and year: None Federal agency: U.S. Department of the Treasury Compliance requirements: Activities allowed or unallowed and allowable costs/cost principles Questioned costs: $38,169

Total questioned costs: $75,114

Condition—Contrary to federal regulations and its policies and procedures, the Department of Economic Security—Division of Community Assistance and Development (Division) made unallowable benefits payments totaling $75,114 during fiscal year 2023 to rental assistance program applicants for the Emergency Rental Assistance Program (ERAP) and Coronavirus State and Local Fiscal Recovery Funds (CSLFRF) federal programs.1 Specifically, for 10 of 50 CSLFRF and 10 of 65 ERAP benefit payments tested, we found that the Division made unallowable benefits payments of $38,169 for CSLFRF and $36,945 for ERAP, to or on behalf of ineligible program applicants or those that lacked required eligibility documentation and for other inappropriate costs, as follows:

• The Division inappropriately paid $43,642 of benefit payments to or on behalf of 8 ineligible program applicants, including: o $42,993 paid to or on behalf of 7 program applicants who did not reside in an eligible Maricopa County service area at the time of application ($30,618 for 5 ERAP program applicants and $12,375 for 2 CSLFRF applicants). o $649 paid to or on behalf of 1 ERAP program applicant whose income exceeded allowable program limits. • The Division inappropriately paid $17,655 of benefit payments to or on behalf of 8 program applicants without obtaining required documentation to support they were eligible to receive them, including: o $12,567 paid to or on behalf of 6 CSLFRF program applicants without required proof of income, a signed lease agreement, and other documentation supporting household size and the reimbursement of late penalties and fees related to rent and/or utility account bills. o $5,088 paid to or on behalf of 2 ERAP program applicants without a required lease agreement listing the applicants. • The Division inappropriately paid $13,817 of benefit payments to or on behalf of 4 program applicants, including: o $13,731 paid to or on behalf of 3 participants for rental arrears—rent not paid by the date specified in the lease agreement—payments exceeding the allowable one-time, lump sum payments ($13,227 for 2 CSLFRF participants and $504 for 1 ERAP participant). o $86 paid to or on behalf of 1 ERAP applicant for utility services the Division previously paid. Effect—The Division’s making unallowable benefits payments to ineligible program applicants or without required documentation increases the risk that the program applicants received utility and rental payments for which they were not entitled. Also, the Division’s paying for inappropriate costs spent inconsistent with program requirements increases the risk that those who were intended to benefit from the program may not have received all the benefits they otherwise would have received. Consequently, the Division may be required to return these monies to the federal agency in accordance with federal requirements.2

During fiscal year 2023, the Division paid $193.7 million in benefit payments to or on behalf of program applicants requesting emergency rental and utility assistance for these 2 federal programs, as illustrated in the figure below, and is at risk that more of its benefit payment expenditures are inappropriate than those identified in our sample.

Benefit payments expenditures (in millions) Total program expenditures (in millions) Percent of benefit payments expenditures to total program expenditures ERAP $162.8 $194.7 83.6% CSLFRF $30.9 $379.5 8.1% Totals for ERAP and CSLFRF $193.7 $574.2 33.7%

Cause—Division management reported that personnel responsible for evaluating program applications and determining program applicant’s eligibility and allowability of related costs did not have time to perform thorough evaluations, including making appropriate eligibility determinations, obtaining required documentation, or ensuring costs were allowable, because of the large quantity of program applications. Further, the Division failed to identify the program evaluation errors during post-reviews of eligibility determinations because the checklist Division personnel used lacked detailed guidance for verifying that the determinations aligned with the Division’s written policies and procedures and were supported by required documentation.

Criteria—Federal regulations require costs to be reasonable and adequately documented to be allowable under federal awards, and the Division’s written policies and procedures require certain documentation to support eligibility requirements related to where the applicant lives and their income.3,4,5 Specifically, Division policy requires a program application evaluation to ensure complete and reasonable documentation is obtained including lease agreements; any bills related to utility accounts; and proof of income, household size, eligible service area residency, and risk of homelessness or housing instability. Also, the Division’s policies prohibit incomplete applications to be acted upon until applicants provide the required information and documentation to complete their applications. Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303). Recommendations—The Division should:

1. Ensure benefit payments are for allowable costs paid to or on behalf of eligible program applicants. 2. Follow existing policies and procedures to obtain required documentation to support requirements related to where the applicant lives and their income to ensure program applicants are eligible to receive benefit payments. 3. Allocate sufficient staffing resources to perform a thorough evaluation of program benefits applications and provide training on eligibility requirements and allowable benefit payments. 4. Update the checklist Division personnel use to perform a post-review of eligibility determinations to include detailed guidance for verifying the determinations aligned with the Division’s written policies and procedures and supported by adequate documentation.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 The Arizona Department of Economic Security’s Emergency Rental Assistance Program (ERAP) was established by Section 501 of Title V, Division N, of the Consolidated Appropriations Act of 2021 (Public Law No. 116-260) in response to the coronavirus pandemic and to provide financial relief to help keep individuals who rent housing in their homes and provide financial assistance to landlords who rely on rental income. The initial program is referred to as ERAP 1. ERAP 2 was established by Sec. 3201 of Title III, Subtitle B, of the American Rescue Plan Act of 2021 (Public Law No. 117-2). Further, the Arizona Department of Economic Security’s ERAP was extended through the federal Coronavirus State and Local Fiscal Recovery Funds, an American Rescue Plan Act of 2021 program (Public Law 117-2), as administered by the Office of the Governor. The Department of Economic Security began operating the program on July 1, 2022 (State of Arizona, Office of the Governor and Department of Economic Security, Interagency Service Agreement No. ISA-DES-ARPA-021623-01). 2 Federal Uniform Guidance audit requirements require its federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, the Department, takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). 3 Federal Uniform Guidance cost principles require costs to be adequately documented (2 CFR 200.403[g]) and reasonable (2 CFR 200.404). In determining the reasonableness of a given cost, consideration must be given to several factors, including requirements imposed by federal laws and regulations and the terms and conditions of the federal award (2 CFR 200.404[b]). 4 U.S. Department of the Treasury published guidance to assist grantees in ERAP administration, including a requirement for ERAP grantees to establish policies and procedures to govern the implementation of their ERAP programs consistent with the ERAP statutes and U.S. Department of the Treasury FAQs (U.S. Department of the Treasury Emergency Rental Assistance Frequently Asked Questions, Revised March 5, 2024. Retrieved 10/16/2024 from https://home.treasury.gov/system/files?file=136/ERA-FAQs03052024.pdf). 5 To be eligible for program benefits, individuals had to have filed, received, and been deemed eligible in accordance with the Division’s written policies and procedures. The benefit payments consisted of rent and/or utility payments for past-due amounts (a one-time lump sum payment) and for 3 months of payments on each reapplication up to a total of 18 months. Applicants must provide proof of income or self-attestation of no income and cannot earn an income that is above the area median income as determined by the HUD income limits (Section 8) set at 80 percent AMI (Area Median Income). These limits are updated annually and can be viewed at https://www.huduser.gov/portal/datasets/il.html#year2024. Further, applicants who live in Maricopa County must reside in the City of Phoenix. This policy was updated in April 2023 to include the City of Mesa. Rental applications must include a housing agreement with the applicant’s name and current rental address. Utility assistance applications must include bills or invoices or outstanding payments. Applications are reviewed by adjudicators, who ensure the documentation for proof of residence, proof of income, housing agreement, any bills related to utility accounts and proof of risk of homelessness or housing instability are complete and reasonable. Any decisions made contrary to policy must include a rationale for the decision in the supporting documentation for the application (Department of Economic Security Emergency Rental Assistance Program Policy, Rev 8 [7/1/2022] and Rev 9 [4/1/2023]).

Assistance Listings number and name: 21.027 COVID-19 - Coronavirus State and Local Fiscal Recovery Funds Award number and year: None Federal agency: U.S. Department of the Treasury Compliance requirement: Subrecipient monitoring Questioned costs: Unknown

Condition—The Department of Economic Security (Department) awarded $3.3 million to 11 subrecipients during fiscal year 2023, or 8.3 percent of the Department’s $40.2 million of total federal expenditures for this federal program, but did not perform the required monitoring of the subrecipients’ activities or compliance with the award terms and program requirements. Further, the Department improperly classified $2.4 million of contractor expenditures, or 6 percent of the program’s total federal expenditures, as subrecipient expenditures on the State’s initial schedule of expenditures of federal awards (SEFA).

Effect—The Department’s failure to perform required monitoring increased the risk that the $3.3 million of program monies the Department awarded to subrecipients may not have been spent in accordance with the award terms and program or contract requirements. Further, the Department’s not properly reporting contractor versus subrecipient expenditures on the SEFA increased the risk that subrecipients are not properly identified and monitored by the Department. If monies are spent inconsistent with program and contract requirements, those who were intended to benefit from the program may not receive all the services or other benefits they otherwise would have received. Further, although the Department corrected the subrecipient misclassification error before the State issued its Single Audit Report, there is an increased risk that the State’s SEFA could contain significant errors and misinform those who are relying on the information.

Cause—The Department lacked entity-wide subrecipient-monitoring policies and procedures for its divisions to follow and instead relied on each division administering the program to design and implement its own subrecipient-monitoring procedures. However, of the 2 Department divisions administering the program, 1 was not aware of the subrecipient-monitoring requirements, and the other did not follow its subrecipient-monitoring policies and procedures, as follows:

• The Child and Community Services Division (CCSD) personnel responsible for monitoring 5 subrecipients reported that they were not aware of the program’s subrecipient-monitoring requirements because of the program manager being on extended leave, turnover in staff knowledgeable of these requirements, and lack of established policies and procedures over monitoring the program’s subrecipients’ activities. Further, neither the Department nor the CCSD personnel responsible for identifying subrecipients provided guidance to CCSD personnel responsible for subrecipient monitoring. • The CCSD personnel responsible for monitoring 6 subrecipients reported that they did not follow CCSD’s procedures for monitoring the program’s subrecipients’ activities because they were short-staffed and prioritized monitoring other federal and State grants’ subrecipients’ activities.

Further, the incorrect determination and reporting of a subrecipient relationship on the initial SEFA resulted from the Department’s entity-wide form used to determine whether other parties receiving program monies had the role of a subrecipient or contractor lacking detailed guidance for determining the characteristics that support a subrecipient versus a contractor relationship.

Criteria—Federal regulation requires the Department to monitor subrecipients, which includes required monitoring procedures for assessing the risk of each subrecipient’s noncompliance and monitoring activities based on those risk assessments; reviewing financial and performance reports, verifying single audits were conducted timely; following up on and ensuring corrective action is taken on audit findings that could potentially affect the program; and issuing a management decision for audit findings pertaining to the federal award. Those federal regulations also provide that monitoring procedures may include providing training or technical assistance on program-related matters and performing on-site reviews, selective audits, and/or other monitoring procedures (2 CFR §200.332[b] and [d–e]). Further, federal regulation requires the Department to evaluate the substance of its federal award agreements with other parties to determine whether each of the other parties receiving the monies have the role of a subrecipient or contractor and whether they are required to comply with any of the federal program’s requirements that the Division should monitor (2 CFR §200.331). Finally, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Perform required monitoring of its subrecipients and their compliance with the award terms and program requirements. 2. Properly classify and report subrecipient expenditures on the State’s SEFA. 3. Develop, implement, and train all divisions on entity-wide written subrecipient-monitoring policies and procedures requiring all divisions to: a. Assess the risk of each subrecipient’s noncompliance and carry out monitoring activities based on those risk assessments such as reviewing financial and performance reports, providing training or technical assistance on program-related matters, and performing on-site reviews, selective audits, and/or other monitoring procedures. b. Verify subrecipients receive timely single audits, if required; follow up on and ensure that corrective action is taken on any audit findings that could potentially affect the program; and issue management decisions for any audit findings pertaining to the federal award. c. Maintain documentation of monitoring procedures demonstrating they were performed, including the monitoring procedures’ results and any Department actions taken, if appropriate. 4. Allocate sufficient resources, such as staffing, to comply with the award terms and program requirements, and designate individuals within each division to perform necessary subrecipient-monitoring procedures. 5. Update the form it uses to determine whether other parties receiving program monies have the role of a subrecipient or contractor to include guidance for how to determine each characteristic of a subrecipient and contractor relationship and require a conclusion to be documented. In addition, train staff to properly complete the form and perform supervisory reviews of it.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

Assistance Listings number and name: 21.023 COVID-19 - Emergency Rental Assistance Program Award numbers and years: ERA-2101070596, January 8, 2021 through September 30, 2022; ERA2-0165, May 10, 2021 through September 30, 2025 Federal agency: U.S. Department of the Treasury Compliance requirement: Reporting Questioned costs: Not applicable

Condition—Contrary to federal law and guidance, for information it reported to the federal agency for its Emergency Rental Assistance Program (ERAP) 1 and 2 awards, the Department of Economic Security—Division of Community Assistance and Development (Division) did not retain documentation to support and/or accurately report information and failed to report required elements.1 Specifically, for 3 reports we selected for test work, we found that the Division:

• Did not retain documentation—The Division did not retain documentation, like the system reports, queries, or screenshots, to support the performance and financial reporting information it reported in its 3 reports as required. Specifically, we found that the Division did not retain full copies of 1 closeout report and 2 quarterly reports: the ERA 1 Closeout compliance report and the ERA 1 Q3 (September 2022) and ERA 2 Q1 (March 2023) compliance reports submitted to the grantor. The Division provided auditors incomplete copies of these reports they obtained from the grantor. • Did not accurately report information—The Division incorrectly reported comingled ERAP 1, ERAP 2, and/or Coronavirus State and Local Fiscal Recovery Funds (Assistance Listings number 21.027) program applicant expenditures in its 3 reports specified in the previous bullet instead of separately reporting the expenditures by award. See related Coronavirus State and Local Fiscal Recovery Funds reporting finding at 2023-103. 2 • Failed to report required elements—The Division did not report several key performance and financial reporting data points required by the federal agency in its 3 reports, thereby limiting the amount of data we could audit. Specifically, the Division: o Failed to report ERAP 1 expenditures in the ERAP 1 September 2022 quarterly report and ERAP 1 closeout report, including those made over the period of performance, during the closeout period, and cumulatively, even though we identified ERAP 1 expenditures recorded in the system as of the report dates. o Failed to report ERAP 2 project data and participants demographics, performance narrative, narrative on effective practices, and selective current quarter and cumulative obligations and expenditures in its ERAP 2 March 2023 quarterly report, even though we identified ERAP 2 expenditures recorded in the system as of the report date.

Effect—The Division’s failure to report required elements and accurate program information in its reports, and to retain associated documentation for audit purposes resulted in us being unable to determine whether the expenditures were appropriate, and the reports were complete and accurate. Also, it results in the federal agency being unable to rely on the reports to monitor the Division’s program administration, including its compliance with program requirements and ability to prevent and detect fraud, and to evaluate the program’s success. Further, the Division is unable to resubmit reports because the federal agency does not allow grantees to revise reports after the reporting period has closed.3,4

Cause—The Division relied on a new benefits system’s federal reporting dashboard that produced inaccurate reports, and its personnel responsible for reviewing and approving ERAP reports did not verify the reported information to the underlying benefits and financial systems data or ensure all required report element sections were completed or accurate. Specifically, the Division reported that it contracted to use a new benefits system for ERAP in March 2021 and relied on the system’s federal reporting dashboard screen for the summarized program information to compile its reports, which incorrectly included commingled records for ERAP 1, ERAP 2, and Coronavirus State and Local Fiscal Recovery Funds. The Division reported that in 2022 it notified the contractor of programming issues related to separately reporting each award’s expenditures, and that the contractor reported that it had corrected the error. However, when implementing the new system and after the contractor reportedly corrected the system programming error, the Division did not verify that the federal reporting dashboard reported complete program information and accurately summarized the underlying system data. Despite this knowledge, the Division continued to use the inaccurate and incomplete dashboard as the data source for its reports. Finally, the Division continued to not follow its policies and procedures to retain documentation to support the information it included in its 3 reports.

Criteria—Federal law and guidance require the Division to separately report and certify accurate and complete program information for each ERAP award to the federal agency and prohibits commingling of funds, data, or records across awards (15 USC 9058a [g]).1 For quarterly financial and compliance reports, federal guidance requires the Division to report information, such as cash it disbursed, the federal share of expenditures, unliquidated obligations, and the cumulative amounts it obligated and expended so that the federal agency can monitor performance and compliance, including funding needs and the spending of any reallocated monies. For closeout reports, federal guidance requires the Division to confirm that all reports previously submitted accurately reflect the aggregate financial and programmatic data throughout the award.3 Further, the Division’s policies and procedures require the Division to retain all records relating to a federal award for a period of at least 5 years after all funds allocated to the State have been expended, which generally exceeds the federal regulation requirement to retain all records relating to a federal award for a period of 3 years from the date of its submission of the final expenditure report (2 CFR §200.334).4 Lastly, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Division should:

1. Prepare and retain detailed documentation, such as system reports, queries, or screenshots, to support the program information it reports to the federal agency for each ERAP award. 2. Follow its policies and procedures to retain all records relating to a federal award for a period of 5 years after all funds are expended. 3. Develop and implement written policies and procedures to: a. Ensure the benefits system used to process ERAP claims and report program information produces summarized data on its federal reporting dashboard that is complete and accurate and complies with the federal agency’s reporting guidelines. b. Separately identify and segregate each ERAP award and other federal awards in the benefits and financial systems and ensure awards are separately reported and not commingled. 4. Require Division personnel responsible for reviewing and approving ERAP reports to verify the reported program information to the underlying benefits and financial systems data and to ensure all required report element sections are accurate and complete.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-109 and was initially reported in fiscal year 2022.

1 The ERAP was established by Section 501 of Title V, Division N, of the Consolidated Appropriations Act of 2021 (Public Law No. 116-260) in response to the coronavirus pandemic and to provide financial relief to help keep individuals who rent housing in their homes and provide financial assistance to landlords who rely on rental income. The initial program is referred to as ERAP 1. ERAP 2 was established by Sec. 3201 of Title III, Subtitle B, of the American Rescue Plan Act of 2021 (Public Law No. 117-2). 2 The federal Coronavirus State and Local Fiscal Recovery Funds, an American Rescue Plan Act of 2021 program (Public Law 117-2), was administered by the Office of the Governor. The Department of Economic Security began operating the program on July 1, 2022 (State of Arizona, Office of the Governor and Department of Economic Security Interagency Service Agreement No. ISA-DES-ARPA-021623-01). 3 The U.S. Department of the Treasury published reporting guidance for the required monthly, quarterly, final reporting, and closeout reports (U.S. Department of the Treasury. [2022, December]. Reporting Guidance—Emergency Rental Assistance Program, Version 3.4. Monthly, Quarterly, and Final Reporting. Retrieved 9/5/2024 from https://home.treasury.gov/system/files/136/ERA-Reporting-Guidance-v2.pdf and U.S. Department of the Treasury. [2023, January]. Emergency Rental Assistance [ERA1]: Closeout Resource. Retrieved 10/9/2024 from https://home.treasury.gov/system/files/136/ERA-CloseoutResource_1-5-23.pdf). Further, both program guides indicate that the grantee cannot resubmit a report once it’s submitted unless the U.S. Department of Treasury initiates resubmission of a revised report. 4 On October 6, 2023, the U.S. Department of the Treasury published ERAP 2 Treasury Portal User Guide, which included a recommendation for ERAP recipients to take screenshots of portal screens as the downloadable PDF documents display only key components of the overall report. Further, the guide indicate that the grantee cannot resubmit a report once it’s submitted unless the U.S. Department of Treasury initiates resubmission of a revised report. (U.S. Department of the Treasury. [2023, October]. Emergency Rental Assistance Program [ERA2] Treasury Portal User Guide, Version 3.0. Retrieved 9/5/2024 fro

Assistance Listings number and name: 21.023 COVID-19 - Emergency Rental Assistance Program Award numbers and years: ERA-2101070596; January 8, 2021 through September 30, 2022; ERA2-0165, May 10, 2021 through September 30, 2025 Federal agency: U.S. Department of the Treasury Compliance requirement: Period of performance Questioned costs: None

Condition—Contrary to federal law and regulations, the Department of Economic Security (Department) inappropriately recorded $278,245 in its financial system as Emergency Rental Assistance Program (ERAP) 1 costs, meaning costs for its first ERAP grant, up to 311 days past the allowable award period, despite reporting to the federal agency that it spent all available advanced award ERAP 1 monies during the allowable award period.1 Specifically, we scanned the financial system for transactions recorded after ERAP 1’s allowable period of performance ended on September 30, 2022, and identified 872 direct administrative costs that were unobligated and inappropriately recorded as ERAP 1 costs, including:

• $144,721 for 740 employee compensation and related expenses between 14 and 224 days past the allowable period. • $133,524 for 132 professional, communication, and community services expenses between 136 and 311 days past the allowable period.

Although these transactions were recorded as ERAP 1 costs in the Department’s financial system, the Department paid for these costs with ERAP 2 monies. We compared the transactions to documentation supporting the amounts the Department reported to the U.S. Department of the Treasury in its ERAP 1 closeout report submitted in January 2023 and verified that the Department did not include these transactions in the amount it reported as ERAP 1 costs. After bringing this to management’s attention in May 2024, the Department recorded a correcting journal entry in its financial system to record these transactions as ERAP 2 costs.

Effect—The Department’s inappropriately recording $278,245 as ERAP 1 program costs in its financial system past the allowable period without having ERAP 1 grant funding available to spend when instead it paid for these costs with ERAP 2 monies increased the risk that the Department could have inappropriately spent future advanced ERAP 2 program monies and would have to repay the federal agency. Additionally, the Department is at risk that this finding applies to other federal programs it administers.

Cause—Department grant-management closeout procedures were not followed, and the Department also lacked procedures for expenditures made during the liquidation period, which is 120 days after the period of performance ends. Specifically, Department management reported it did not follow grant-management closeout procedures to deactivate the grant in the financial system to prevent further activity after the liquidation period due to a lack of staffing and influx of COVID-19 pandemic monies. Further, the Department’s grant-management closeout procedures lacked a review-and-approval requirement for expenditures during the liquidation period to ensure the monies were appropriately obligated and allowable.

Criteria—Federal law allows program costs to be incurred during the period of performance to provide financial assistance and housing stability services to include rental assistance, utility assistance, and rental and utility arrears through September 30, 2022, for ERAP 1 (15 U.S.C. 9058a[e][1]).1 In addition, federal regulation and U.S. Department of Treasury guidance requires funds to be obligated prior to the end of the award period for administrative costs to support program closeout activities. These funds may be expended during the liquidation period, which is up to 120 calendar days after the end of the period of performance.2 Also, the Department’s grant-management closeout procedures require grants to be deactivated in the financial system by the liquidation period deadline. Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Ensure program costs are properly recorded in the financial system during the period of performance and only obligated costs are spent during the liquidation period. Specifically, closeout activities, such as direct administrative costs, must be obligated prior to the end of the award period and must be spent within the liquidation period, or 120 calendar days after the period of performance ends. 2. Allocate sufficient resources, such as staffing, to perform essential grant closeout functions such as deactivating a grant in the financial system when the liquidation period has ended to help prevent inappropriate charges. 3. Update existing grant closeout procedures to require a review and approval of grant expenditures during the liquidation period to ensure they are allowable and properly obligated prior to the period of performance end date.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 ERAP was established by Section 501 of Title V, Division N, of the Consolidated Appropriations Act of 2021 (Public Law No. 116-260) in response to the coronavirus pandemic and to provide financial relief to help keep individuals who rent housing in their homes and provide financial assistance to landlords who rely on rental income. This finding and related questioned costs are related to the initial program referred to as ERAP 1 (ERA-2101070596). ERAP 2 was established by Sec. 3201 of Title III, Subtitle B, of the American Rescue Plan Act of 2021 (Public Law No. 117-2) and has a period of performance beginning on May 5, 2021, and ending on September 30, 2025. 2 The applicable federal requirements related to period of performance can be found in the Code of Federal Regulations at 2 CFR §200.344(b) and U.S. Department of Treasury Emergency Rental Assistance (ERAP1): Closeout Resource Updated January 3, 2023. Retrieved 7/8/2024 from https://home.treasury.gov/system/files/136/ERACloseoutResource_1-5-23.pdf

Assistance Listings number and name: 17.225 Unemployment Insurance Award number and year: None Federal agency: U.S. Department of Labor Compliance requirement: Special tests and provisions—Benefits payments Questioned costs: Not applicable

Condition—Contrary to federal regulation, the Department of Economic Security (DES) did not meet all the minimum percentage completion rates for its Benefit Accuracy Measurement (BAM) program to investigate cases of its regular unemployment insurance (UI) program’s paid and denied claims for the fiscal year ended June 30, 2023. Specifically, for batches 202227 through 202326 of paid and denied claims we tested, DES’ percentage completion rates for its paid and denied claims case investigations were as follows:

Percentage of paid claims case investigations completed within: Required minimum percentage completed DES percentage completed 60 days of the batches’ week ending date 70.00% 58.63% 90 days of the batches’ week ending date 95.00% 77.76% 120 days of calendar year-end 98.00% 85.24%

Percentage of denied claims case investigations completed within: Required minimum percentage completed DES percentage completed 60 days of the batches’ week ending date 60.00% 75.05% 90 days of the batches’ week ending date 85.00% 88.08% 120 days of calendar year-end 98.00% 93.38%

Effect—By not completing all the required minimum percentage of paid and denied claims case investigations, DES’ BAM unit, which performs the investigations, is at an elevated risk of not detecting and reporting accurate error rates and the types and causes of benefit payment errors to DES’ management and the federal agency. Consequently, lacking complete and accurate information, DES management may not develop and implement plans for corrective actions to improve its benefit accuracy rates, as required by the federal agency.

Cause—DES reported that it failed to meet the required minimum percentage completion rates for its paid and denied claims case investigations because they have been consistently understaffed since August 2019 and had a staffing level of 90 percent as of June 30, 2023.

Criteria—The BAM program is the federal agency’s quality control system designed to assess the accuracy of UI program paid and denied claims, and states are required to investigate paid and denied claims as part of this program unless exempted from these requirements by the federal agency. Federal regulation requires DES to complete prompt and in-depth case investigations of paid and denied claims to determine if its administration of the UI benefit program is consistent with State and federal law (20 CFR §602.21[d]). Accordingly, federal guidance requires DES to complete its paid and denied claims case investigations as described in the tables presented above.1 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendation—DES should meet the required minimum percentage rates for completing UI program paid and denied claims case investigations by DES management allocating sufficient staffing and providing training to new staff of its BAM unit.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-111 and was initially reported in fiscal year 2020.

1 U.S. Department of Labor. (2009). Benefit Accuracy Measurement State Operations Handbook, No. 395, 5th Edition, Chapter VI, Completion of Cases and Timely Data Entry, page VI-11, Chapter VIII, Completion of CDA Cases and Timely Data Entry, pages VIII-2 and VIII-3. Retrieved 7/15/24 from https://www.dol.gov/sites/dolgov/files/ETA/handbooks/2009/ETHandbook_395_Ch5_acc.pdf

Assistance Listings number and name: 17.225 Unemployment Insurance Award number and year: None Federal agency: U.S. Department of Labor Compliance requirement: Reporting Questioned costs: Not applicable

Condition—Contrary to federal regulation, the Department of Economic Security (DES) did not retain documentation to support information it reported to the federal agency for its Unemployment Insurance (UI) federal program during fiscal year 2023. Specifically, for all 12 monthly 9050 – Time Lapse of All First Payments except Workshare reports, DES did not retain supporting documentation, like system reports, queries, or screenshots, for the key line item we tested, which consisted of the following data elements:

• First payment time lapse 14/21 days. • Interstate and intrastate UI. • Unemployment compensation for federal employees (UCFE). • Unemployment compensation for ex-service members (UCX). • Full and partial weeks.

Effect—DES’ failure to retain supporting documentation results in the federal agency being unable to rely on the reports to effectively monitor DES’s program administration, including its compliance with program requirements and the timeliness of benefits paid, and evaluate the program’s success.

Cause—DES had not developed written policies and procedures to require employees to prepare and retain supporting documentation to support the program information it reports to the federal agency for the UI program. Further, the DES staff member responsible for compiling the reports reported to us that not retaining the documentation was an oversight, and she thought the supporting documentation was being retained.

Criteria—Federal regulation and the UI Handbook require DES to retain financial records, supporting documents, statistical records, and all other nonfederal entity records pertinent to a federal award for a period of 3 years from the date of submission of the final report (2 CFR §200.334).1 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendation—DES should develop and implement written policies and procedures to ensure it prepares and retains detailed documentation, such as system reports, queries, or screenshots, to support the program information it reports to the federal agency for the UI program.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 The UI Handbook outlines the criteria for compiling the 9050 – Time Lapse of All First Payments except Workshare report, including requirements to retain source data supporting reported information for at least 3 years (U.S. Department of the Labor. [2017]. “Section V: Benefits Time Lapse and Quality.” and “Section L: Record Retention.” Unemployment Insurance 401 Handbook, 5th ed., retrieved 7/22/24 from https://www.dol.gov/sites/dolgov/files/ETA/handbooks/2017/ETHand401_5th.pdf)

Cluster Name: CCDF Cluster Assistance Listings numbers and names: 93.575 Child Care and Development Block Grant 93.575 COVID-19 - Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund 93.596 COVID-19 - Child Care Mandatory and Matching Funds of the Child Care and Development Fund Award numbers and years: 2001AZCCC3 (2020); 2101AZCCC5 (2021); 2101AZCCDD (2021); 2101AZCDC6 (2021); 2101AZCSC6 (2021); 2201AZCCDD (2022); 2201AZCCDF (2022); 2301AZCCDD (2023); 2301AZCCDF (2023) Federal agency: U.S. Department of Health and Human Services Compliance requirements: Activities allowed or unallowed and allowable costs/cost principles Questioned costs: $41,005

Condition—The Department of Economic Security (Department) provided $699 million to childcare providers during fiscal year 2023, or 94 percent of the Department’s nearly $744 million total federal expenditures for this federal program, and contrary to federal regulations, the Department did not always retain documentation to support its provider’s expenditures. Specifically, the Department could not provide supporting documentation, such as a signed childcare provider payment form certifying that the charges for services provided to individuals were full and complete, for 1 of 40 provider payments selected for test work totaling $41,005.

Effect—The Department’s failure to retain supporting documentation increased the risk that the $41,005 paid to the provider may not have been spent in accordance with the award terms and conditions. Consequently, the Department may be required to return these monies to the federal agency in accordance with federal requirements.1 Further, the federal agency may not be able to rely on the records to effectively monitor the Department’s program administration, including its compliance with program requirements, and ability to prevent and detect fraud and evaluate the program’s success.

Cause—Department personnel reported that the childcare provider was authorized to enter payment information directly in the Department’s financial system, and the Department lacked a process to ensure that a signed childcare provider payment form was received prior to paying the provider. Although the Department’s procedures require the provider to print the form, sign a statement certifying that the charges for services provided to individuals were full and complete, and send it to the Department as supporting documentation for the information entered into the financial system, the Department lacked policies and procedures to ensure signed childcare provider payment forms were received prior to payment.

Criteria—Federal regulation requires that a cost be adequately documented and supported to be allowable under federal awards (45 CFR §75.403[g]). Federal regulation and the Department’s records management policies and procedures also require the Department to retain all records related to a federal program for a period of 3 years from the date the program’s final report was submitted to the federal awarding agency or pass-through grantor (45 CFR §75.361). Finally, the Department also must establish and maintain effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (45 CFR §75.303).

Recommendations—The Department should:

1. Follow federal regulations and the Department’s records-management policies and procedures to retain all records relating to a federal award, including signed childcare provider payment forms, for a period of 3 years from the date of its submission of the final expenditure report. 2. Develop and implement policies and procedures to require signed childcare provider payment forms certifying that, prior to payment, the charges for services provided to individuals were full and complete.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 U.S. Department of Health and Human Services audit requirements require its federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, the Department, takes appropriate and timely corrective action (45 CFR §75.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (45 CFR §75.521).

Cluster name: CCDF Cluster Assistance Listings numbers and names: 93.575 Child Care and Development Block Grant 93.575 COVID-19 - Child Care and Development Block Grant 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund 93.596 COVID-19 - Child Care Mandatory and Matching Funds of the Child Care and Development Fund Award numbers and years: 2001AZCCC3 (2020); 2101AZCCC5 (2021); 2101AZCCDD (2021); 2101AZCDC6 (2021); 2101AZCSC6 (2021); 2201AZCCDD (2022); 2201AZCCDF (2022); 2301AZCCDD (2023); 2301AZCCDF (2023) Federal agency: U.S. Department of Health and Human Services Compliance requirement: Reporting Questioned costs: Not applicable

Condition—Contrary to federal laws and regulations and the State’s accounting manual, the Department of Economic Security (Department) failed to report certain information on the federal government’s reporting system for $60.8 million in subawards that were made to 3 State agencies, 3 universities, and 13 subrecipients under assistance listing number 93.575. Specifically, the Department did not report subaward amount changes for 7 subawards totaling $4.2 million it previously reported and did not report any required information about 12 subawards totaling $56.6 million, including subaward organization names and subaward amounts and terms, during fiscal year 2023.

Effect—The State’s stakeholders and the public did not have access to transparent and timely information about the Department’s federal award spending decisions on USAspending.gov as required by federal laws and regulations. Additionally, the Department is at risk that this finding applies to other federal programs it administers.

During fiscal year 2023, the State spent $48.1 million of federal monies related to these subawards, or 5.6 percent of the State’s total $861.5 million expended, for this cluster.

Cause—Although the cluster’s reporting requirements were provided as additional award terms and conditions on the federal agency’s website, and the State’s accounting manual instructed State departments to follow them, the Department reported that the division that manages the cluster was newly formed in fiscal year 2023 and was short-staffed. Further, the division reported it did not have experienced staff knowledgeable about the requirements for Federal Funding Accountability and Transparency Act (FFATA) reporting.

Criteria—The FFATA and federal Uniform Guidance regulations require the Department, as a direct recipient of federal awards, to report certain information about each subaward action equaling or exceeding $30,000 in federal monies on the FFATA Subaward Reporting System no later than month-end of the month following the subaward action so that the information can be displayed to the public on USAspending.gov.1 Specifically, the federal Uniform Guidance requires the Department to report the subrecipient organization’s name, award amount, award term, and other information about the subaward, if applicable, for each subaward action equaling or exceeding the $30,000 threshold (2 CFR §170.320 and Appendix A to Part 170). Additionally, the State’s accounting manual requires the Department to perform this reporting for federal awards (State of Arizona Accounting Manual, Topic 70: Grants, Section 45). Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (45 CFR §75.303).

Recommendations—The Department should:

1. Immediately report on the FFATA Subaward Reporting System the required missing information for its subawards for this cluster. 2. Follow the State’s accounting manual for reporting subaward actions equaling or exceeding $30,000 no later than month-end of the month following the subaward action, as required by the FFATA and federal Uniform Guidance, which may include providing training to Department staff responsible for reporting the Department’s subaward actions to the federal government’s reporting system. 3. Allocate sufficient resources, such as staffing, to compile, review, and submit FFATA reports.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

¹ The FFATA of 2006 (Public Law 109-282), as amended by section 6202 of Public Law 110-252, was enacted to provide the public with transparency on federal award spending to hold the recipient government accountable for each spending decision and to help reduce wasteful spending of federal monies. As such, federal Uniform Guidance requires reporting on the FFATA Subaward Reporting System at https://www.fsrs.gov/

Cluster name: WIOA Cluster Assistance Listings numbers and names: 17.258 WIOA Adult Program 17.259 WIOA Youth Activities 17.278 WIOA Dislocated Worker Formula Grants Award numbers and years: AA-33216-19-55-A-4, October 1, 2019 through June 30, 2022; AA-34755-20-55-A-4, April 1, 2020 through June 30, 2023; AA-36307-21-55-A-4, April 1, 2021 through June 30, 2024; AA-38516-22-55-A-4, April 1, 2022 through June 30, 2025 Federal agency: U.S. Department of Labor Compliance requirement: Subrecipient monitoring Questioned costs: Unknown

Condition—The Department of Economic Security (Department) awarded $58.2 million to 24 subrecipients during fiscal year 2023, or 85.6 percent of the Department’s $68.0 million total federal expenditures for this federal program, but contrary to federal laws and regulations and Department policy, it did not perform on-site monitoring reviews for 2 of its 24 subrecipients.

Effect—The Department’s lack of required monitoring increases the risk that the $137,368 of program monies the Department awarded to the 2 subrecipients may not have been spent in accordance with the award terms and program requirements. If monies are spent inconsistent with program requirements, those who were intended to benefit from the program may not receive all the services or other benefits they otherwise would have received.

Cause—The Department’s Finance and Business Operations Administration Division (Division) management responsible for administering the program reported that they postponed the planned June 2023 on-site reviews of these 2 subrecipients to relieve staffing shortages due to turnover in key positions. Specifically, between April and July 2023 the Division underwent leadership transitions for several key positions including the compliance manager, the finance operations manager who oversees the compliance and accounting team, the deputy administrator, and the administrator.

Criteria—Federal laws and regulations and Department policies and procedures require the Department to monitor subrecipients and perform annual on-site monitoring reviews.1 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Ensure it performs required monitoring of its subrecipients and their compliance with the award terms and program requirements by following its established policies and procedures to perform and document an annual on-site monitoring review. 2. Allocate sufficient resources, such as staffing, to comply with the award terms and program requirements, and designate an individual to perform on-site monitoring reviews.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 The Workforce Innovation and Opportunity Act (WIOA) of 1998 and Code of Federal Regulation (CFR) require states to conduct annual on-site monitoring of each local area within the state to ensure compliance with the uniform administrative requirements ([WIOA §184{a}{4}] and [20 CFR §683.410{b}{3}]). Further, the Department’s Policy and Procedure manual includes subrecipient monitoring tools that require performing annual on-site monitoring reviews (Arizona Department of Economic Security. Title I-B Policy and Procedure Manual. Retrieved 8/6/2024 from https://des.az.gov/services/employment/workforce-innovation-and-opportunity-act-wioa/title-i-b-policy-and-procedure

Cluster name: WIOA Cluster Assistance Listings numbers and names: 17.258 WIOA Adult Program 17.259 WIOA Youth Activities 17.278 WIOA Dislocated Worker Formula Grants Award numbers and years: AA-33216-19-55-A-4, October 1, 2019 through June 30, 2022; AA-34755-20-55-A-4, April 1, 2020 through June 30, 2023; AA-36307-21-55-A-4, April 1, 2021 through June 30, 2024; AA-38516-22-55-A-4, April 1, 2022 through June 30, 2025 Federal agency: U.S. Department of Labor Compliance requirement: Reporting Questioned costs: Not applicable

Condition—Contrary to federal laws and regulations and the State’s accounting manual, the Department of Economic Security (Department), as the prime recipient responsible for the clusters’ federal reporting, failed to report complete and accurate information on the federal government’s reporting system related to $6.4 million in subawards made to subrecipients during fiscal year 2023 for this cluster. As shown in the bullets and table below, we tested a total sample of 13 subawards for these federal programs at the Department and found that for 4 subawards, the Department failed to report the following:

• Any required information about the subawards, including the subaward organization names and subaward amounts and terms for 3 subawards, totaling $6.0 million of the total $28.6 million in our sample. • Correct subaward amount for 1 subaward tested, totaling $406,630.

Number of subawards Total subawards tested Subaward not reported Report not timely Subaward amount incorrect Subaward missing key elements Subaward with incorrect key elements 13 3 0 1 0 0

Dollar amount of subawards Total subawards tested Subaward not reported Report not timely Subaward amount incorrect Subaward missing key elements Subaward with incorrect key elements $28,616,009 $5,973,604 $0 $406,630 $0 $0 Total errors $6,380,234

Effect—The State’s stakeholders and the public did not have access to transparent and timely information about the Department’s federal award subaward spending decisions on USAspending.gov as required by federal laws and regulations. Additionally, the Department is at risk that this finding applies to other federal programs it administers.

During fiscal year 2023, the State spent $68.0 million in federal monies related to the cluster subawards, or 84 percent of the State’s total $81.2 million expended for this cluster.

Cause—The Department reported that it failed to catch the errors during its review and approval process prior to reporting the subaward information to the federal government’s reporting system. In addition, the Department did not require a post review to verify that the subaward data it uploaded to the federal government’s reporting system was complete and correctly displayed. Therefore, the Department was unaware of the errors. Further, the Department did not have written policies and procedures over the review process for subaward information reported to the federal government’s reporting system.

Criteria—The Federal Funding Accountability and Transparency Act (FFATA) and federal Uniform Guidance regulations require the Department, as a direct recipient of federal awards, to report certain information about each subaward action equaling or exceeding $30,000 in federal monies on the FFATA Subaward Reporting System no later than month-end of the month following the subaward action so that the information can be displayed to the public on USAspending.gov.1 Specifically, the federal Uniform Guidance requires the Department to report the subrecipient organization’s name, award amount, award term, and other information about the subaward, if applicable, for each subaward action equaling or exceeding the $30,000 threshold (2 CFR §170.320 and Appendix A to Part 170). Additionally, the State’s accounting manual requires DES to perform this reporting for federal awards (State of Arizona Accounting Manual, Topic 70: Grants, Section 45). Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Immediately report on the FFATA Subaward Reporting System the required information for its subawards for this cluster, including reviewing, correcting, and/or resubmitting any inaccurately reported information. 2. Follow the State’s accounting manual for reporting subaward actions equaling or exceeding $30,000 no later than month-end of the month following the subaward action, as required by the FFATA and federal Uniform Guidance, which may include providing training to Department staff responsible for reporting the Department’s subaward actions to the federal government’s reporting system. 3. Implement procedures requiring independent reviews to: a. Ensure the subaward data is complete and accurate prior to uploading it to the federal government’s reporting system. b. Verify that the subaward data it uploaded to the federal government’s reporting system was complete and correctly displayed.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 The FFATA of 2006 (Public Law 109-282), as amended by section 6202 of Public Law 110-252, was enacted to provide the public with transparency on federal award spending to hold the recipient government accountable for each spending decision and to help reduce wasteful spending of federal monies. As such, federal Uniform Guidance requires reporting on the FFATA Subaward Reporting System at https://www.fsrs.gov

Assistance Listings numbers and names: 14.231 Emergency Solutions Grant Program 14.231 COVID-19 - Emergency Solutions Grant Program Award numbers and years: E-20-DW-04-001, July 1, 2020 through September 30, 2022; E-21-DC-04-001, July 1, 2021 through September 30, 2023 Federal agency: U.S. Department of Housing and Urban Development Questioned costs: $1,820

Assistance Listings numbers and names: 93.558 Temporary Assistance for Needy Families 93.558 COVID-19 - Temporary Assistance for Needy Families Award numbers and years: 2201AZTANF, October 1, 2021 through September 30, 2022; 2301AZTANF, October 1, 2022 through September 30, 2023 Federal agency: U.S. Department of Health and Human Services Questioned costs: $10,330

Compliance requirement: Subrecipient monitoring Total questioned costs: $12,150

Condition—Contrary to federal regulations and its federal award terms, the Department of Economic Security (DES) reimbursed 1 nonprofit organization subrecipient for federal program costs totaling $12,150 during fiscal year 2023 that were unsupported, unallowable, and/or paid to the nonprofit organization’s principal officers or their immediate family member in violation of conflict-of-interest disclosure requirements. Specifically, we reviewed 14 reimbursements that included Emergency Solutions Grant Program (ESG) and Temporary Assistance for Needy Family (TANF) program costs totaling $26,120 and $65,730 for the year, respectively, and found that DES reimbursed the subrecipient:

• $4,733 for financial and accounting services that were paid to 1 of the nonprofit organization’s principal officers, who served as the Treasurer, and their company, which was not disclosed as a conflict of interest to DES as required by DES’ contract with the subrecipient and federal regulations. Also, the subrecipient allocated these costs to other federal programs and nonfederal activities; however, DES did not verify that the allocation method the subrecipient used was reasonable or that the costs, as allocated, were allowed by the program’s requirements ($112 for ESG and $4,621 for TANF). • $7,417 for bookkeeping services that were not adequately supported by sufficiently detailed invoices and a signed, written contract having a specified price rate for the services and terms; therefore, we were unable to verify if the amounts paid were appropriate. Further, DES reimbursed the subrecipient for payments made to the Treasurer’s family member, whose bookkeeping services company was not disclosed as a conflict of interest to DES as required by federal regulations. Also, the subrecipient allocated these costs to other federal programs and nonfederal activities; however, DES did not verify that the allocation method the subrecipient used was reasonable or that the costs, as allocated, were allowed by the program’s requirements ($1,708 for ESG and $5,709 for TANF).

Additionally, contrary to federal regulations, DES had not ensured that the subrecipient implemented competitive purchasing procedures when procuring the professional services described above, and the subrecipient was unable to provide documentation that it had competitively procured the services.

ESG was not audited as a major federal program for the State’s fiscal year 2023 single audit; therefore, the scope of our review was not sufficient to determine whether DES or its subrecipients complied with all applicable federal requirements for this program. We audited the TANF program as a major federal program for the State’s fiscal year 2023 single audit, and we performed follow-up procedures to the review that we conducted during fiscal year 2022. During the audit, we became aware of the potentially noncompliant 14 reimbursements involving 1 of DES’ nonprofit subrecipients with which it partnered to carry out federal and State programs, including the Continuum of Care Program (Assistance Listings number 14.267), ESG, and TANF, which was audited as a major federal program for fiscal year 2023, as well as the State Housing Trust Fund. Our review of select reimbursements to this subrecipient resulted in similar findings for the federal Continuum of Care Program and the State Housing Trust Fund that are described in findings 2023-116 and 2023-06, respectively.

Effect—DES’ reimbursing a nonprofit organization subrecipient for $12,150 of unallowable or unsupported costs and/or costs paid to the nonprofit organization’s principal officer or their immediate family member in violation of conflict-of-interest disclosure requirements resulted in those monies being unavailable to be spent for their intended purpose of providing housing assistance to those in need. Consequently, DES may be required to return these monies to the federal agencies in accordance with federal requirements.1

Cause—Although DES’ subrecipient monitoring policies and procedures did not require it to obtain from subrecipients documentation supporting charges for personal and contracted professional services to verify allowability when subrecipients requested reimbursement, the policies and procedures required an on-site monitoring visit once every 3 years for each subrecipient in which it reviews a sample of the subrecipient’s personal and professional services charges. However, DES had not performed an on-site monitoring visit of the nonprofit subrecipient since 2018 because it had not yet resumed all its subrecipient-monitoring activities, such as conducting on-site reviews and providing training and technical assistance, since suspending these activities during the COVID-19 pandemic during fiscal year 2020. In addition, DES had not properly assessed the subrecipient’s risk of noncompliance with its award contract and program requirements to determine the level of monitoring procedures it should put in place or training the subrecipient needed. For example, DES was unaware that the subrecipient had not informed it of a principal officer’s conflicts of interest so that it could ensure that the principal officer and their immediate family member were not involved in decision-making related to those conflicts and selectively reviewed the related costs and activities for compliance purposes.

Criteria—Federal regulations require DES to monitor subrecipients and include required procedures for assessing the risk of each subrecipient’s noncompliance and implementing appropriate monitoring procedures to address those risk assessments; verifying single audits were conducted timely, if required; reviewing financial and performance reports; following up on and ensuring corrective action is taken on deficiencies that could potentially affect the program; and issuing management decisions on the results of audit findings or monitoring.2 Federal regulations provide that monitoring procedures DES may implement to address a subrecipient’s risk assessment include providing training or technical assistance on program-related matters and performing on-site reviews and selective audits of reimbursed costs.2 In addition, federal regulations require DES’ subrecipients to allocate allowable costs using a reasonable basis, to use competitive purchasing standards when procuring goods and services, and to disclose in writing to DES any potential conflicts of interest.3 Finally, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303 and 45 CFR §75.303).

Recommendations—DES should:

1. Immediately stop reimbursing the nonprofit subrecipient for costs that are unsupported, unallowable, and/or paid to the nonprofit subrecipient’s principal officer or their immediate family member in violation of federal regulations and take appropriate enforcement actions in accordance with its subaward contract. 2. Update its written policies and procedures for reviewing and approving subrecipient reimbursement requests to include a process to ensure costs are adequately supported, allowable in accordance with program requirements, and approved by the appropriate level of management. 3. Train personnel responsible for reviewing and approving subrecipient reimbursement requests on how to identify costs that are unallowable under federal regulations. 4. Assess the risk of each subrecipient’s noncompliance and perform the appropriate monitoring procedures based on the assessed risk, such as providing training or technical assistance on program-related matters and performing on-site reviews and selective audits of reimbursed costs for allowability. 5. Ensure subrecipients allocate allowable costs using a reasonable basis, use competitive purchasing standards when procuring goods and services, and disclose in writing to DES any potential conflicts of interest. DES may need to provide training and technical assistance to subrecipients that address these compliance areas, including DES obtaining conflict-of-interest disclosures from subrecipients as part of the subaward contract, as an example, or otherwise establishing a communication mechanism for subrecipients to use as such conflicts arise. 6. Continue to work with the nonprofit subrecipient to resolve the $12,150 of unallowable costs, including recovering these monies from the subrecipient and assessing the continued need to use this subrecipient for services. 7. Work with the federal agencies to resolve the $12,150 of unallowable costs that it reimbursed, which may involve returning monies to the agencies.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year findings 2022-114 (TANF) and 2022-115 (ESG) and was initially reported in fiscal year 2022.

1 Federal Uniform Guidance and U.S. Health and Human Services audit requirements require federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient takes appropriate and timely corrective action (2 CFR §200.513[c] and 45 CFR §75.513[c]). Further, they require that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521 and 45 CFR §75.521). 2 The applicable federal requirements related to subrecipient monitoring can be found in the Code of Federal Regulations at 2 CFR §§200.332, .339, and .521 and 45 CFR §§75.352, .371, and .521. 3 The applicable federal requirements related to allowable costs, competitive purchasing, and conflicts of interest can be found in the Code of Federal Regulations at 2 CFR §§200.112, .318-.327, and Subpart E; 24 CFR §578.95; and 45 CFR §§75.112, .326-.335, and Subpart E.

Assistance Listings number and name: 14.267 Continuum of Care Program Award number and year: AZ9999U9T002101, February 1, 2022 through June 30, 2023 Federal agency: U.S. Department of Housing and Urban Development Compliance requirement: Subrecipient monitoring Questioned costs: $40,455

Condition—Contrary to federal regulations and its federal award terms, the Department of Housing (Department) reimbursed 1 nonprofit organization subrecipient for federal program costs totaling $40,455 during fiscal year 2023 that were unsupported, unallowable, and/or paid to the nonprofit organization’s principal officers or their immediate family members in violation of conflict-of-interest disclosure requirements. Specifically, we reviewed 40 reimbursements that included Continuum of Care costs totaling $346,747 for the year and found that the Department reimbursed the subrecipient for:

• $18,385 for financial and accounting services and supplies that were paid to 1 of the nonprofit organization’s principal officers, who served as the Treasurer, and their company, which was not disclosed as a conflict of interest to the Department as required by its contract with the subrecipient and federal regulations. Also, the subrecipient allocated these costs to other federal programs and nonfederal activities; however, the Department did not verify that the allocation method the subrecipient used was reasonable or that the costs, as allocated, were allowed by the program’s requirements. • $20,664 for bookkeeping services that were not adequately supported by sufficiently detailed invoices and a signed, written contract having a specified price rate for the services and terms; therefore, we were unable to verify if the amounts paid were appropriate. Further, the Department reimbursed the subrecipient for payments made to the Treasurer’s family member, whose bookkeeping services company was not disclosed as a conflict of interest to the Department as required by federal regulations. Also, the subrecipient allocated these costs to other federal programs and nonfederal activities; however, the Department did not verify that the allocation method the subrecipient used was reasonable or that the costs, as allocated, were allowed by the program’s requirements. • $831 for repairs and maintenance, travel, supplies, and other contracted services that were paid to another principal officer ($705) and the Executive Director’s immediate family member ($126) who performed various handyman services, including plumbing, painting, and building repairs, that were not adequately supported by a signed contract having specified price rates for the services and terms; therefore, we were unable to verify if the amounts reimbursed by the Department were appropriate. Further, the Department reimbursed the subrecipient for payments made to the principal officer and the Executive Director’s immediate family member, whose services were not disclosed as a conflict of interest to the Department as required by its contract with the subrecipient and federal regulations. • $476 for unallowable loan payments to the subrecipient’s Executive Director, which was for personal use. • $99 for incentive payments to 1 contractor and 1 principal officer without documentation demonstrating that they were authorized by an agreement, reasonable for the services performed as provided in the subrecipient’s policies, and consistent with compensation paid for similar work in other activities; therefore, we were unable to verify if the amounts reimbursed were allowable.

Additionally, contrary to federal regulations, the Department had not ensured that the subrecipient implemented competitive purchasing procedures when procuring the professional services and handyman services described above, and the subrecipient was unable to provide documentation that it had competitively procured the services.

We audited the Continuum of Care Program as a major federal program for the State’s fiscal year 2023 single audit, and we performed follow-up procedures to the review that we conducted during fiscal year 2022. During the audit, we became aware of the potentially noncompliant 40 reimbursements involving 1 of the Department’s nonprofit subrecipients with which it partnered with to carry out federal and State programs, including the Continuum of Care Program, the Emergency Solutions Grants Program (Assistance Listings number 14.231), and Temporary Assistance to Needy Families (Assistance Listings number 93.558), which was audited as a major federal program for fiscal year 2023, as well as the State Housing Trust Fund. Our review of select reimbursements to this subrecipient resulted in similar findings for the federal Temporary Assistance to Needy Families and Emergency Solutions Grants Program and the State Housing Trust Fund that are described in findings 2023-115 and 2023-06, respectively.

Effect—The Department’s reimbursing a nonprofit organization subrecipient for $40,455 of unallowable or unsupported costs and/or costs paid to the nonprofit organization’s principal officers or their immediate family members in violation of conflict-of-interest disclosure requirements resulted in those monies being unavailable to be spent for their intended purpose of providing housing assistance to those in need. Consequently, the Department may be required to return those monies to the federal agency in accordance with federal requirements.1

Cause—The Department had not yet resumed all its subrecipient monitoring activities, such as conducting on-site reviews and providing training and technical assistance, since suspending them starting in fiscal year 2020 due to the COVID-19 pandemic. Also, the Department had not properly assessed the subrecipient’s risk of noncompliance with its award contract and program requirements to determine the level of monitoring procedures it should put in place or training the subrecipient needed. For example, the Department was unaware that the subrecipient had not informed it of principal officers’ conflicts of interest so that it could ensure that those principal officers or their immediate family members were not involved in decision-making related to those conflicts and selectively reviewed the related costs and activities for compliance purposes. Further, Department personnel responsible for reviewing and approving the subrecipient’s reimbursement requests reported to us that dating back to at least 2021, staff were trained to not follow the Department’s policies and procedures because they were not sufficiently detailed to provide direction on how to ensure costs are adequately supported and allowable in accordance with program requirements but, instead, to approve any costs that had been previously reimbursed.

Criteria—Federal regulations require the Department to monitor subrecipients and include required procedures for assessing the risk of each subrecipient’s noncompliance and implementing appropriate monitoring procedures to address those risk assessments; verifying single audits were conducted timely, if required; reviewing financial and performance reports; following up on and ensuring corrective action is taken on deficiencies that could potentially affect the program; and issuing management decisions on the results of audit findings or monitoring (2 CFR §§ 200.332, .339, and .521). Federal regulations provide that monitoring procedures the Department may implement to address a subrecipient’s risk assessment include providing training or technical assistance on program-related matters and performing on-site reviews and selective audits of reimbursed costs (2 CFR §200.332[e]). In addition, federal regulations require the Department’s subrecipients to allocate allowable costs using a reasonable basis, to use competitive purchasing standards when procuring goods and services, and to disclose in writing to the Department any potential conflicts of interest.2 Finally, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Immediately stop reimbursing the nonprofit subrecipient for costs that are unsupported, unallowable, and/or paid to the nonprofit subrecipient’s principal officers or their immediate family members in violation of federal regulations and take appropriate enforcement actions in accordance with its subaward contract. 2. Update its written policies and procedures for reviewing and approving subrecipient reimbursement requests to include a process to ensure costs are adequately supported, allowable in accordance with program requirements, and approved by the appropriate level of management. 3. Train personnel responsible for reviewing and approving subrecipient reimbursement requests on how to identify costs that are unallowable under federal regulations. 4. Assess the risk of each subrecipient’s noncompliance and perform the appropriate monitoring procedures based on the assessed risk, such as providing training or technical assistance on program-related matters and performing on-site reviews and selective audits of reimbursed costs for allowability. 5. Ensure subrecipients allocate allowable costs using a reasonable basis, use competitive purchasing standards when procuring goods and services, and disclose in writing to the Department any potential conflicts of interest. The Department may need to provide training and technical assistance to subrecipients that address these compliance areas, including the Department’s obtaining conflict-of-interest disclosures from subrecipients as part of the subaward contract, as an example, or otherwise establishing a communication mechanism for subrecipients to use as such conflicts arise. 6. Continue to work with the nonprofit subrecipient to resolve the $40,455 in unallowable costs, including recovering these monies from the subrecipient and assessing the continued need to use this subrecipient for services. 7. Work with the federal agency to resolve the $40,455 of unallowable costs that it reimbursed, which may involve returning monies to the federal agency.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-115 and was initially reported in fiscal year 2022.

1 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). 2 The applicable federal requirements related to allowable costs, competitive purchasing, and conflicts of interest can be found in the Code of Federal Regulations at 2 CFR §§200.112, .318-.327, and Subpart E, and 24 CFR §578.95.

Assistance Listings number and name: 14.267 Continuum of Care Program Award number and year: AZ9999U9T002101, February 1, 2022 through June 30, 2023 Federal agency: U.S. Department of Housing and Urban Development Compliance requirement: Subrecipient monitoring Questioned costs: Unknown

Condition—The Arizona Department of Housing (Department) awarded $4.5 million to 15 subrecipients during fiscal year 2023, or 90 percent of the Department’s $5.0 million total federal expenditures for this federal program, but did not perform all the required monitoring of the subrecipients’ activities or compliance with the award terms and program requirements. Specifically, the Department’s only monitoring procedure during the year consisted of reviewing and approving the subrecipients’ invoices of program expenditures for reimbursement, which we also found to be deficient during a review of 1 nonprofit subrecipient’s reimbursement requests. See financial statement finding 2023-06 and federal award finding 2023-116 for specific issues noted and related recommendations. Further, that procedure alone was insufficient to evaluate whether the subrecipients used program monies in accordance with the award terms and program requirements.

Effect—The Department’s failure to perform all required monitoring increased the risk that the $4.5 million of program monies the Department awarded to subrecipients may not have been spent in accordance with the award terms and program requirements. If monies are spent inconsistent with program requirements, those who were intended to benefit from the program may not receive all the services or other benefits they otherwise would have received. Consequently, the Department may be required to return any misspent monies to the federal agency in accordance with federal requirements.1

Cause—The Department did not perform all required monitoring procedures and did not have sufficient policies and procedures. Specifically, the Department did not develop and implement procedures to evaluate the substance of its federal award agreements with other parties to determine whether each of the other parties receiving the monies have the role of a subrecipient or contractor and whether they are required to comply with any of the federal program’s requirements that the Department should monitor until near the end of the grant period in May 2023. Prior to that, the Department had an informal process to identify subrecipients. Also, the Department did not develop and implement procedures to perform subrecipient risk assessments until March 2023 and had not yet resumed other subrecipient monitoring activities during fiscal year 2023, such as conducting on-site reviews and providing training and technical assistance, since suspending these activities starting in fiscal year 2020 due to the COVID-19 pandemic. Additionally, the Department’s written policies and procedures lacked procedures for performing risk assessments; designing monitoring procedures, training, or technical assistance based upon the assessed risk; and verifying that a subrecipient received a single audit if it was expected to meet or exceed the federal expenditure threshold of $750,000 for requiring a single audit.

Criteria—Federal regulation requires the Department to evaluate the substance of its federal award agreements with other parties to determine whether each of the other parties receiving the monies have the role of a subrecipient or contractor and whether they are required to comply with any of the federal program’s requirements that the County should monitor (2 Code of Federal Regulation [CFR] §200.331). Additionally, federal regulation requires the Department to monitor subrecipients, which includes required monitoring procedures for assessing the risk of each subrecipient’s noncompliance and monitoring activities based on those risk assessments; verifying single audits were conducted timely; following up on and ensuring corrective action is taken on audit findings that could potentially affect the program; and issuing a management decision for audit findings pertaining to the federal award. This federal regulation also provides that monitoring procedures may include providing training or technical assistance on program-related matters and performing on-site reviews, selective audits, and/or other monitoring procedures (2 CFR §§200.332[b] and [d–f]). Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Perform required monitoring of its subrecipients and their compliance with the award terms and program requirements. 2. Update and follow written policies and procedures to: a. Evaluate the substance of its federal award agreements with other parties to determine whether each of the other parties receiving the monies have the role of a subrecipient or contractor and whether they are required to comply with any of the federal program’s requirements that the Department should monitor. b. Assess the risk of each subrecipient’s noncompliance and carry out monitoring activities based on those risk assessments such as providing training or technical assistance on program-related matters, and performing on-site reviews, selective audits, and/or other monitoring procedures. c. Verify subrecipients receive timely single audits, if required; follow up on and ensure that corrective action is taken on any audit findings that could potentially affect the program; and issue management decisions for any audit findings pertaining to the federal award. d. Maintain documentation of monitoring procedures demonstrating they were performed, including the monitoring procedures’ results and any Department actions taken, if appropriate.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521).

Assistance Listings number and name: 14.267 Continuum of Care Program Award number and year: AZ9999U9T002101, February 1, 2022 through June 30, 2023 Federal agency: U.S. Department of Housing and Urban Development Compliance requirement: Procurement Questioned costs: Unknown

Condition—Contrary to federal regulations, the Department’s policies and procedures did not include provisions required by the federal regulations, and the Department did not retain documentation to support procurement actions for 2 vendors we tested. Specifically, the Department’s policies and procedures did not require procurement transactions to be documented or conducted in a manner providing full and open competition. Further, the Department did not include items required by federal regulations such as contracting with small and minority businesses, women’s business enterprises, veteran-owned businesses, and labor surplus area firms; domestic preferences for procurements; procurement of recovered materials; and required federal contract provisions. Further, the Department paid the 2 vendors we tested $257,165 for administrative support services during fiscal year 2023 without retaining procurement action documentation such as requests for proposals, contracts, or other documents demonstrating the Department’s compliance with federal procurement requirements.

Effect—The Department’s policies and procedures not complying with federal regulations and not maintaining documentation of its procurement actions increased the Department’s risk of not:

• Receiving the most advantageous prices for the goods and services purchased with federal monies. • Considering eligible small and minority businesses, women's business enterprises, veteran-owned businesses, and labor surplus area firms as potential vendors. • Giving preference to procure goods, products, and materials produced in the United States. • Considering purchasing products or services that can be reused, refurbished, or recycled.

Finally, the Department is at risk that this finding applies to other federal programs it administers.

Cause—The Department did not establish and maintain effective internal control over the program’s procurement requirements that provided reasonable assurance that it was managing the program’s awards in compliance with federal regulations. Department management reported that because the Department does not have to comply with State procurement requirements, they did not think about and consider federal regulations when developing written procurement policies and procedures and procuring program services for federal awards.1 Further, Department management reported they have no record of when the Department awarded the administrative service contracts because the contracts are at least 15 years old, and the records are either not accessible in storage or were destroyed.

Criteria—Federal regulations require the Department to follow the same policies and procedures it uses for nonfederal procurements and to retain all records related to a federal program, including procurement action documentation, for a period of 3 years from the date the program’s final report was submitted to the federal awarding agency or pass-through grantor (2 CFR §§ 200.317 and 200.334). Federal regulations also require the Department to comply with procurement standards for contracting with small and minority businesses, women’s business enterprises, veteran-owned businesses, and labor surplus area firms; domestic preferences for procurements; and procurement of recovered materials; and ensure that every purchase order or contract includes required federal contract provisions (2 CFR §§200.321, 200.322, 200.323, and 200.327). Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal program is being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Establish and maintain effective internal control over the program’s procurement requirements by updating its written policies and procedures to: a. Retain procurement action documentation for a period of 3 years from the date the program’s final report was submitted to the federal awarding agency. b. Require full and open competition using requests for competitively bid proposals. Alternatively, document each sole source procurement only after conducting a good-faith search for available sources and concluding there is only a single source and include it in the contract file. c. Document compliance with procurement standards for contracting with small and minority businesses, women’s business enterprises, veteran-owned businesses, and labor surplus area firms; domestic preferences for procurements; and procurement of recovered materials. d. Ensure that every purchase order or contract includes required federal contract provisions. 2. Retain procurement action documentation when procuring property and services using federal funds in accordance with federal records retention requirements, ensuring compliance with federal procurement requirements.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 The Department is exempt from following the State’s procurement code (Arizona Revised Statutes §41-3953[D]).

Assistance Listings number and name: 14.267 Continuum of Care Program Award number and year: AZ9999U9T002101, February 1, 2022 through June 30, 2023 Federal agency: U.S. Department of Housing and Urban Development Compliance requirements: Matching, level of effort, and earmarking Questioned costs: Not applicable

Condition—Contrary to federal regulation, the Department of Housing (Department) did not develop, document, or implement internal control procedures to monitor compliance with the program’s matching, level of effort, and earmarking requirements. Specifically, the Department did not have a process in place to identify required matching amounts, level of effort requirements, and earmarking limits or to monitor and review these requirements to ensure compliance with federal regulations.1 Despite lacking internal control procedures, we performed tests and determined the Department materially complied with the program’s matching, level of effort, and earmarking requirements during fiscal year 2023.

Effect—Without effective internal control procedures in place, there is an increased risk that the Department will not comply with the program’s matching, level of effort, and earmarking requirements in future periods, which may result in having to return program monies to the federal awarding agency.2

Cause—The Department did not develop, document, or implement internal control procedures to monitor compliance with matching, level of effort, and earmarking requirements because according to management, it did not have a process to regularly review and update its policies and procedures to make sure they were current and relevant.

Criteria—Federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms. (2 CFR §200.303)

Recommendations—The Department should:

1. Update and implement written policies and procedures to address matching, level of effort, and earmarking requirements, including processes to: a. Identify grant award requirements over matching amounts, level of effort requirements, and earmarking limits and communicate applicable requirements to the subrecipient. b. Monitor and review these requirements to ensure the source and use of the monies used for matching are allowable and the required matching amounts are met, earmarking calculations are accurate and within the limit, and State or local funding levels increase at least proportionally to any increases in federal funding. c. Maintain documentation of accounting methods and amounts used to calculate the amounts claimed for matching, level of effort, and earmarking requirements. 2. Develop a process to regularly review and update its written policies and procedures to ensure they are current and relevant.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 Federal regulation requires that the recipient or subrecipient must match all Continuum of Care (CoC) grant funds, except for leasing funds, with no less than 25 percent of funds or in-kind contributions, and the recipient must ensure that any funds used to satisfy the matching requirements are eligible under the laws governing the funds in order to be used as matching funds for a grant awarded under this program. (24 CFR §578.73[a-b]) Also, federal regulation requires the Department to ensure that no more than 10 percent of the grant be used to pay for costs of administering assistance, including general management, oversight, and coordination; training on the CoC program requirements; and environmental review. (24 CFR §578.59) Further, federal regulation also requires that no assistance provided under the CoC program may be used to replace State or local funds previously used, or designated for use, to assist homeless persons (24 CFR §578.87[a]). 2 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521).

Assistance Listings numbers and names: 93.658 Foster Care―Title IV-E 93.658 COVID-19 - Foster Care―Title IV-E Award numbers and years: 2201AZFOST, October 1, 2021 through September 30, 2022; 2301AZFOST, October 1, 2022 through September 30, 2023 Federal agency: U.S. Department of Health and Human Services Compliance requirements: Reporting Questioned costs: Not applicable

Condition—Contrary to federal laws and regulations, the Arizona Department of Child Safety’s (Department) policies and procedures, and the State’s accounting manual, the Department failed to report certain information on the federal government’s reporting system related to $5.6 million in subawards it made to 15 Arizona counties under this program during fiscal year 2023. Specifically, the Department awarded federal monies to the counties to supplement, but not supplant, costs of legal representation in child welfare court cases. However, the Department had not reported any required information about the subawards, including subaward organization names and subaward amounts and terms for its awards ending on September 30, 2023. During fiscal year 2023, the Department spent $5.6 million of federal monies related to these subawards, or 4.1 percent of the Department’s $136.1 million total federal expenditures for this federal program. Further, the Department had not yet reported any required information for $14.4 million in subawards noted in prior year findings related to awards ending on September 30, 2020 and September 30, 2022.

Effect—The State’s stakeholders and the public did not have access to transparent and timely information about the Department’s federal award spending decisions on USAspending.gov as required by federal laws and regulations. Additionally, the Department is at risk that this finding applies to other federal programs it administers.

Cause—Although the Department established new reporting policies and procedures in August 2022, Department personnel administering the program reported that due to oversight, they delayed attempting to submit outstanding subaward information to the Federal Funding Accountability and Transparency Act (FFATA) Subaward Reporting System until June 2023. When they tried to report information, they were only able to submit subaward information for the award ending on September 30, 2021. Specifically, they were unable to submit information for awards ending on September 30, 2020, 2022, and 2023, in the FFATA Subaward Reporting System as another State agency was listed as the prime awardee. Subsequently, the Department reported it initially contacted the federal grantor in October 2023, which then implemented a remedy in the FFATA Subaward Reporting System on January 1, 2024. However, the remedy is prospective and only allows the Department to submit reports for its award ending on September 30, 2024, for periods beginning on or after January 1, 2024, although that award began on October 1, 2023, and for new awards where the Department is listed as the prime awardee.

Criteria—The FFATA and federal Uniform Guidance regulations require the Department, as a direct recipient of federal awards, to report certain information about each subaward action equaling or exceeding $30,000 in federal monies on the FFATA Subaward Reporting System no later than month-end of the month following the subaward action so that the information can be displayed to the public on USAspending.gov.1 Specifically, the federal Uniform Guidance requires the Department to report the subrecipient organization’s name, award amount, award term, and other information about the subaward, if applicable, for each subaward action equaling or exceeding the $30,000 threshold (2 CFR §170.320 and Appendix A to Part 170). Additionally, the Department’s policies and procedures require it to perform this reporting for federal awards (DCS 07-18-4.1 Grantor Procedures Manual, Other Reports, page 16), and the State’s accounting manual requires the Department to perform this reporting for federal awards (State of Arizona Accounting Manual, Topic 70: Grants, Section 45). Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (45 CFR §75.303).

Recommendations—The Department should:

1. Immediately report on the FFATA Subaward Reporting System the required information for its subawards for this program. For periods prior to January 1, 2024, the Department should work with the federal agency to resolve the reporting of outstanding subaward information. 2. Follow its policies and procedures and the State’s accounting manual for reporting subaward actions equaling or exceeding $30,000 no later than month-end of the month following the subaward action, as required by the FFATA and federal Uniform Guidance, which may include providing training to Department staff responsible for reporting the Department’s subaward actions to the federal government’s reporting system.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-119 and was initially reported in fiscal year 2021.

1 The FFATA of 2006 (Public Law 109-282), as amended by section 6202 of Public Law 110-252, was enacted to provide the public with transparency on federal award spending to hold the recipient government accountable for each spending decision and to help reduce wasteful spending of federal monies. As such, federal Uniform Guidance requires reporting on the FFATA Subaward Reporting System at https://www.fsrs.gov/

Assistance Listings numbers and names: 93.268 Immunization Cooperative Agreements 93.268 COVID-19 - Immunization Cooperative Agreements Award numbers and years: 6 NH23IP922599-02-08, 5 NH23IP922599-03-00, 6 NH23IP922599-03-01, 6 NH23IP922599-03-02, July 1, 2019 through June 30, 2024 Assistance Listings numbers and names: 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases (ELC) 93.323 COVID-19 - Epidemiology and Laboratory Capacity for Infectious Diseases (ELC) Award numbers and years: 6 NU50CK000511-02-14, 5 NU50CK000511-03-00, 6 NU50CK000511-03-01, 6 NU50CK000511-03-02, 6 NU50CK000511-03-03, 6 NU50CK000511-03-04, 6 NU50CK000511-03-05, 6 NU50CK000511-03-06, August 1, 2019 through July 31, 2024 Federal agency: U.S. Department of Health and Human Services Compliance requirements: Reporting Questioned costs: Not applicable

Condition—Contrary to federal laws and regulations and the State’s accounting manual, the Arizona Department of Health Services (Department) failed to report complete and accurate information on the federal government’s reporting system related to $165,372,612 in subawards it made to subrecipients during fiscal year 2023 for 2 federal programs as shown below:

Immunization (93.268) ELC (93.323) Total Dollar amount of incomplete or inaccurate reports $35,172,550 $130,200,062 $165,372,612

As shown in the bullets below and tables on the next page, we tested a total sample of 19 subawards for these federal programs at the Department and found that for 19 subawards, the Department failed to report the following:

• Any required information about the subawards, including the subaward organization names and subaward amounts and terms, for all 6 Immunization subawards tested, totaling over $35 million. • Required information within the time frame for all 13 ELC subawards tested, totaling $130.2 million, resulting in the reports being submitted between 3 to 32 months late. • Correct subaward amounts for 1 ELC subaward tested, totaling $944,471. • Accurate key elements for all 13 ELC subawards tested, totaling $130.2 million, that included incorrect subaward obligation dates, and 8 of those subawards tested, totaling $98.3 million, included incorrect subaward numbers.

The table below describes results for the subawards we tested.

Immunization (93.268) ELC (93.323) Total subawards tested 6 13 Total subaward amount tested $35,172,550 $130,200,062 Subawards not reported 6 0 Total subaward award not reported $35,172,550 $0 Report not timely 0 13 Total subaward amount not timely $0 $130,200,065 Subaward amount incorrect 0 1 Total subaward amount incorrect $0 $944,471 Subaward with other incorrect key elements 0 13 Total subaward amount with other incorrect key elements $0 $130,200,062

Effect—The State’s stakeholders and the public did not have access to transparent and timely information about the Department’s federal award spending decisions on USAspending.gov as required by federal laws and regulations. Additionally, the Department is at risk that this finding applies to other federal programs it administers.

During fiscal year 2023, the Department made expenditures to subrecipients for these 2 federal programs, as follows:

Immunization (93.268) ELC (93.323) Subrecipient expenditures $13.6 million $40.6 million Total program expenditures $144.5 million $137.3 million Percent of subrecipient expenditures to total expenditures 9% 30%

Cause—Although the programs’ reporting requirements were provided as additional award terms and conditions on the federal agency’s website, and the State’s accounting manual instructed State departments to follow them, the Department lacked procedures to communicate new subawards and modifications and did not require independent reviews. Specifically, the Department’s program administrators did not always communicate new and modified subawards to the employee responsible for reporting to the federal government’s reporting system. In addition, the Department did not require independent reviews of the reports for accuracy and completeness prior to uploading subaward data to the federal government’s reporting system and did not require a post-upload review to verify that the subaward data it uploaded was complete and correctly displayed. Therefore, the Department was unaware of the errors. Further, the Department reported that it did not have an opportunity during the fiscal year to develop and implement the recommendations in the State’s Single Audit Report for the year ended June 30, 2022, since the report was not issued until December 20, 2023, nearly 6 months after fiscal year-end.1

Criteria—The Federal Funding Accountability and Transparency Act (FFATA) and federal Uniform Guidance regulations require the Department, as a direct recipient of federal awards, to report certain information about each subaward action equaling or exceeding $30,000 in federal monies on the FFATA Subaward Reporting System no later than month-end of the month following the subaward action so that the information can be displayed to the public on USAspending.gov.2 Specifically, the federal Uniform Guidance requires the Department to report the subrecipient organization’s name, award amount, award term, and other information about the subaward, if applicable, for each subaward action equaling or exceeding the $30,000 threshold (2 CFR §170.320 and Appendix A to Part 170). Additionally, the State’s accounting manual requires the Department to perform this reporting for federal awards (State of Arizona Accounting Manual, Topic 70: Grants, Section 45). Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (45 CFR §75.303).

Recommendations—The Department should:

1. Immediately report on the FFATA Subaward Reporting System the required information for its subawards for these 2 programs, including reviewing, correcting, and/or resubmitting any inaccurate reported information. 2. Follow the State’s accounting manual for reporting subaward actions equaling or exceeding $30,000 no later than month-end of the month following the subaward action, as required by the FFATA and federal Uniform Guidance, which may include providing training to Department staff responsible for reporting the Department’s subaward actions to the federal government’s reporting system. 3. Implement a procedure for Department program administrators to communicate subaward activities, such as new subawards or modifications to existing subawards, to those employees responsible for reporting the Department’s subaward actions to the federal government’s reporting system. 4. Implement procedures requiring independent reviews to: a. Ensure the subaward data is complete and accurate prior to uploading it to the federal government’s reporting system. b. Verify that the subaward data it uploaded to the federal government’s reporting system was complete and correctly displayed.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-122 and was initially reported in fiscal year 2022.

1 [the auditor]. (2023). State of Arizona June 30, 2022, Single Audit Report. Phoenix, AZ. Retrieved 8/21/24 from https://www.azauditor.gov/sites/default/files/2024-01/StateOfArizonaJune30_2022SingleAudit.pdf 2 The FFATA of 2006 (Public Law 109-282), as amended by section 6202 of Public Law 110-252, was enacted to provide the public with transparency on federal award spending to hold the recipient government accountable for each spending decision and to help reduce wasteful spending of federal monies. As such, federal Uniform Guidance requires reporting on the FFATA Subaward Reporting System at https://www.fsrs.gov/

Assistance Listings numbers and names: 84.010 Title I Grants to Local Educational Agencies 84.367 Supporting Effective Instruction State Grants (formerly Improving Teacher Quality State Grants)* *referred to as Title II Award numbers and years: S010A190003, July 1, 2019 through September 30, 2020; S010A200003, July 1, 2020 through September 30, 2021; S010A210003, July 1, 2021 through September 30, 2022; S010A220003, July 1, 2022 through September 30, 2023; S367A190049, July 1, 2019 through September 30, 2020; S367A200049, July 1, 2020 through September 30, 2021; S367A210049, July 1, 2021 through September 30, 2022; S367A220049, July 1, 2022 through September 30, 2023 Federal agency: U.S. Department of Education Compliance requirement: Activities allowed or unallowed, allowable costs/cost principles, eligibility, earmarking, and special tests and provisions Questioned costs: $8,696

Condition—During fiscal year 2023, the Arizona Department of Education’s Title I Department (Department) allocated and disbursed over $354.6 million and over $43.6 million in Title I and Title II funds, respectively, to local educational agencies (LEAs). However, contrary to federal requirements, the Department did not consider 110 Special LEAs (charter schools) for eligibility for federal Title I funding and 109 charter schools for federal Title II funding that may have been eligible and thus should have been included in its funding allocation calculations. Further, the Department included 6 ineligible LEAs in its Title II funding allocation calculation.

The U.S. Department of Education (USDE) awarded these Title I and Title II funds to the Department in October 2021, and they were allocated (specific grant amounts determined by the Department using statutory formulas) in April 2022, with the official grant period beginning July 1, 2022, and ending June 30, 2023. The Title I and Title II funds the Department allocated to the LEAs were then considered obligated (reserved) and could be disbursed (paid) by the Department each month after it received and processed a reimbursement request from an LEA.

Effect—The Department’s Title I and Title II awards to LEAs may be inaccurate. Specifically:

• 519 Title I and 550 Title II LEAs likely received more funds than they were entitled to. We were unable to determine the actual questioned cost as we could not determine the individual amount of over- or underpayment for each LEA without the Department recalculating the allocation, including gathering census data and poverty data for the 110 Title I charter schools and 109 Title II charter schools that were not considered for eligibility and not part of the original allocation. The Department stated that the recalculation process would require the use of historical census, and enrollment and would be an overly arduous process. For these reasons, the Department chose to focus on correcting and overhauling the allocation process for fiscal year 2024 and forward. • 110 Title I and 109 Title II charter school LEAs not part of the original allocation and referenced above may have been able to provide additional services to eligible students in fiscal year 2023 if the Department had appropriately evaluated and determined them to be eligible for Title I and Title II disbursements. • $8,696 of Title II funds awarded to 6 ineligible LEAs may require repayment to the USDE.1

Further, future Title I and Title II funding could be affected if the USDE requires the Department to recalculate the fiscal year 2023 allocations and provide subsequent funding to those entities that were eligible but did not receive funding. Additionally, the Department is at risk that this finding applies to other federal programs it administers.

Cause—Despite federal laws requiring the Department to allocate fiscal year 2023 Title I and Title II funds to LEAs beginning in July 2023, including charter schools, and detailed federal guidance on how to adjust the USDE allocations for new or significantly expanded charter schools, the Department lacked detailed procedures and reported that it only evaluated charter schools for inclusion in its allocation calculations upon direct requests from the schools, rather than evaluating charter schools annually. Specifically, the Department reported that it did not add charter schools to the list of eligible LEAs during their first year of operation or when the LEAs’ enrollment significantly expanded because Department staff used the prior fiscal year listing of eligible LEAs. The Department also did not perform a supervisory review and approval of this listing to ensure all eligible LEAs were properly included and evaluated.

Further, Department staff responsible for the administration and execution of Title I and Title II grants during fiscal year 2023 were no longer employed by the Department at the time of the audit, and current leadership reported they were unaware of what policies and procedures were followed during the grant-allocation process due to out-of-date and incomplete policies and procedures and because the grant allocation process for fiscal year 2023 was performed prior to their hire. Specifically, the program administrator responsible for the allocation of grant funds was no longer employed by the Department as of April 20, 2023, 2 months before the end of the LEA grant period. As of this date, preliminary allocations for fiscal year 2024 had been calculated and were able to be adjusted by current Department staff. Due to the timing of the adjustments the Department implemented, the results of the changes in procedures for the fiscal year 2024 allocation will be reviewed for accuracy and compliance in the 2024 Single Audit Report.

Lastly, the 6 ineligible LEAs that received Title II funds were Educational Service Agencies, such as a Juvenile Detention Center, that were ineligible for the funds due to the classification of their educational programs or organizational structure. When determining eligibility for these entities, the Department incorrectly classified the entities as public schools and therefore incorrectly deemed them eligible, resulting in $8,696 in improper payments.

Criteria—Federal laws require the Department to use a statutory formula to annually allocate Title I and Title II funds to LEAs, including charter schools, based on the number of children from low-income families attending them who meet the eligibility requirements established by the USDE (20 USC §§6303, 6303b, 6304, 6333-6337). Public schools are defined as eligible LEAs in accordance with 34 USC 303.23(a) and A.R.S. §§15-101 and 15-913. In addition, federal laws and guidance require the Department to provide Title I and Title II funding to eligible charter schools within 5 months of opening for the first time or significantly expanding enrollment (20 USC §7221e). 2,3 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Ensure the allocation of Title I and Title II funds is based on statutory formula and eligibility requirements and that awards are made to eligible charter schools within 5 months of opening for the first time or significantly expanding enrollment by developing and implementing detailed allocation policies and procedures. 2. Ensure that staff responsible for the allocation and performance of grant objectives are adequately supervised and managed by knowledgeable supervisors who have the understanding and training to review and approve allocation calculations prior to Title I and Title II disbursements being made to LEAs. 3. Work with the USDE to determine if it will require the Department to recalculate the allocation of funds for fiscal year 2023 and what steps may be necessary to correct the amounts paid to LEAs. 4. Work with the 6 ineligible LEAs that received funding to determine if the amounts disbursed should be repaid and how the LEAs can reimburse the Department for these unallowable costs.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, the Department, takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). 2 Significant expansion of enrollment means a substantial increase in the number of students attending a charter school due to a significant event that is unlikely to occur on a regular basis, such as the addition of one or more grades or educational programs in major curriculum areas. The term also includes any other expansion of enrollment that the state educational agency (SEA) determines to be significant (34 CFR §78.787). 3 U.S. Department of Education. (November 21, 2016). Non-regulatory Guidance: Fiscal Changes and Equitable Services Requirements under the Elementary and Secondary Education Act of 1965 (ESEA), as amended by the Every Student Succeeds Act (ESSA). Retrieved 08/26/2024 from https://oese.ed.gov/files/2020/07/essaguidance160477.pdf

Assistance Listings numbers and names: 84.010 Title I Grants to Local Educational Agencies 84.367 Supporting Effective Instruction State Grants (formerly Improving Teacher Quality State Grants)* *referred to as Title II Award numbers and years: S010A190003, July 1, 2019 through September 30, 2020; S010A200003, July 1, 2020 through September 30, 2021; S010A210003, July 1, 2021 through September 30, 2022; S010A220003, July 1, 2022 through September 30, 2023; S367A190049, July 1, 2019 through September 30, 2020; S367A200049, July 1, 2020 through September 30, 2021; S367A210049, July 1, 2021 through September 30, 2022; S367A220049, July 1, 2022 through September 30, 2023 Federal agency: U.S. Department of Education Compliance requirement: Level of effort Questioned costs: Unknown

Condition—The Department of Education’s Grants Management Department (Department) disbursed over $55.3 million and over $6.1 million in Title I and Title II funds, respectively, to 295 Title I and 307 Title II charter school local educational agencies (LEAs) during fiscal year 2023 without completing required maintenance-of-effort calculations and reducing grant funding when necessary as required by federal law. Specifically, the Department did not evaluate and reduce grant monies awarded to any charter school that failed to meet required spending levels (maintain fiscal effort) for more than once in a 5-year period.

Effect—The Department’s not completing required maintenance-of-effort calculations for charter schools increased the risk that charter schools may have received current or future grant funding through fiscal year 2028 they are not entitled to and may require repayment to the U.S. Department of Education.1 Further, other LEAs may have been entitled to additional grant monies and may have been able to provide additional services to eligible students. Additionally, the Department is at risk that this finding applies to other federal programs it administers.

Cause—The Department relied on its grant-management system to automatically calculate maintenance-of-effort without ensuring all necessary data was included in the calculations. The Department performs these maintenance-of-effort calculations on April 1 of each year using the prior-year data from the LEAs’ Financial Audit Report. Specifically, the Department reported that it changed where it stored the charter schools’ financial information in fiscal year 2023 but did not adjust grant-management system criteria to include the data in the maintenance-of-effort calculations run on April 1, 2023. Further, Department staff did not review the maintenance-of-effort calculation results to ensure all LEAs were included.

Criteria—Federal law requires the Department to disburse Title I and Title II grant monies to LEAs, including charter schools, only if maintenance-of-effort requirements are met. Specifically, the Department must calculate and verify that the combined fiscal effort per student or the LEA’s aggregate expenditures from State and local funds for free public education for the preceding year was not less than 90 percent of the combined fiscal effort or aggregate expenditures for the second preceding year. If the LEA fails to maintain fiscal effort, federal law requires the Department to reduce the LEA’s allocation under a covered program if the LEA also failed to maintain effort in 1 or more of the 5 immediately preceding fiscal years in exact proportion by which the LEA failed to maintain effort (20 USC 7901). Also, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Evaluate and reduce Title I and Title II funds annually for any LEA, including charter schools, that failed to maintain fiscal effort more than once in a 5-year period. 2. Develop and implement maintenance-of-effort policies and procedures that include verifying that its grants management system’s maintenance-of-effort calculations include necessary data for all applicable LEAs, including charter schools, and to review the calculation results to ensure all LEAs were included. 3. Determine if any LEAs, including charter schools, received funding they were not entitled to by completing the missing fiscal year 2023 charter school maintenance-of-effort calculations and identifying any LEAs that did not maintain fiscal effort more than once in a 5-year period. If improper payments were made, work with the U.S. Department of Education to determine if they will require the Department to reperform the allocation of Title I and Title II benefits for fiscal year 2023 and what steps may be necessary to correct any errors, if applicable, for the amounts paid to LEAs.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, the Department, takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521).

Assistance Listings number and name: 84.010 Title I Grants to Local Educational Agencies Award numbers and years: S010A200003, July 1, 2020 through September 30, 2021; S010A210003, Julu 1, 2021 through September 30, 2022 Federal agency: U.S. Department of Education Compliance requirement: Period of Performance Questioned costs: Not applicable

Condition—The Department of Education’s School Improvement Department (Department) did not effectively oversee the disbursement of nearly $4.5 million of fiscal year 2021 Title I funds and over $24.4 million of fiscal year 2022 Title I funds to local educational agencies (LEAs) during fiscal year 2023. These funds were set aside and statutorily required to be used as School Improvement funds to LEAs. The Department did not establish the necessary controls to monitor the balance of School Improvement Title I funds not yet granted (unobligated) and ensure all the funds were allotted to LEAs, and to monitor the balance of LEA School Improvement Title I funds not yet spent (unexpended) in order to timely reallocate those funds to LEAs.

Effect—The Department’s lack of proper management and controls over monitoring the balance of unobligated and unexpended School Improvement Title I funds resulted in the following:

• $4,476,4541 of School Improvement Title I funds were either unallocated or unexpended during fiscal year 2021 and were scheduled to revert to the United States Department of Treasury as of September 30, 2024. • $24,433,6492 of School Improvement Title I funds were either unallocated or unexpended during fiscal year 2022 and were scheduled to revert to the United States Department of Treasury as of September 30, 2024.

Due to the ability of the Department to use the “first-in, first out” (FIFO) method of disbursing School Improvement Title I funds, the rolling effect of the Department’s failure to effectively oversee and disburse the funds during prior expired grant periods culminated in $4,476,454 and $24,433,649 of Title I funds in SFYs 2021 and 2022, respectively, that remained unexpended as of the end of the period of performance for both grants on September 30, 2024. Additionally, the Department is at risk that this finding applies to other federal programs it administers.

Cause—The Department operates the School Improvement Title I funds with a FIFO method, rolling forward the unused funds from each prior year to allocate in future grant awards. Based on a 3-year look back of the School Improvement Title I obligations and expenditures, the amount the Department has granted to LEAs has been historically underobligated and underexpended. School Improvement funds, as an earmark of Title I funding, has a 27-month period of performance, starting on July 1 of the fiscal year and ending September 30 of the second subsequent fiscal year (July 1, 2021 through September 30, 2023, for example). During that 27-month period, the funds may be obligated and expended, based on eligibility requirements. If the funds are not expended, or not expected to be expended by an LEA, the funds may be re-obligated during that period. Funds may not be obligated or expended once the period of performance ends (after September 30), without a waiver from the U.S. Department of Education (USDE). The Department obligates School Improvement funds by granting project-specific grants to LEAs during the period of performance. These project-specific grants are given their own grant periods, allowing the Department to re-grant funds as needed if an LEA does not expend all its obligated funds in a timely manner..

For SFY 2021 grant funds, the Department did not obligate $869,624 of available School Improvement Title I funds to LEAs and failed to re-obligate the unexpended balance of $6,302,741 during the period of performance. The Department requested and received an initial waiver in September 2022 to extend the period of performance by 1 year, giving it 39 months from the initial grant date of July 1, 2020, to expend the funds. For SFY 2022 grant funds, the Department did not obligate $5,642,535 of available School Improvement Title I funds to LEAs, and failed to re-obligate the unexpended balance of $4,492,279 during the period of performance. With the roll-forward of funds due to the FIFO method, the resulting cumulative amount of unexpended funds was $28,910,103 that were set to expire on September 30, 2023.

As of April 20, 2023, the Program Administrator responsible for granting funds to the respective LEAs and managing the balance of unexpended and unobligated funds was no longer employed by the Department. At this time, the Department was operating within the period of performance for SFY 2021 grant funds due to the September 30, 2022, extension, and the period of performance for federal fiscal year (FFY) 2021. According to current Department leadership, the Office of School Improvement (Office) was left without an understanding of the policies, procedures, and contextual information of the prior Office staff. A new deputy superintendent, hired in January 2023, took over leadership of the Office in April 2023. Further, according to current Department leadership, due to the lack of documented policies and prior knowledge of the meaning of various spreadsheets and documentation, the Office was unaware of the substantial unexpended balances that remained from the SFYs 2021 and 2022 School Improvement Title I funds and did not re-obligate the funds prior to September 30, 2023. Department staff further explained that a part of the reason LEAs’ unexpended balances were high was because LEAs did not utilize monies obligated to them.

The USDE first alerted the Department to the substantial balance of unexpended SFY 2021 Title I funds on June 7, 2024, with an email stating that the unexpended funds would be reverted to the U.S. Department of Treasury unless the Department had expended funds that required late liquidation. The USDE followed up with an additional email on June 10, 2024, alerting the Department to the additional SFY 2022 funds that were also set to expire and revert to the U.S. Department of Treasury. The USDE sent an additional email, dated August 8, 2024, stating that the Department could request a Tydings Waiver for both years that would allow the Department additional time to re-obligate and expend the funds. After the June 2024 emails, Department staff researched the School Improvement Title I funds obligations and expenditures and concluded the balance given by the USDE for the amounts set to revert was correct. The Department submitted a Tydings Waiver request to USDE on August 12, 2024, and it was approved by the USDE on September 27, 2024, extending the period of performance end date to September 30, 2025, for the SFYs 2021 and 2022 Title I funds. The Department also requested a Tydings Waiver on August 12, 2024, for SFY 2023 Title I funds to extend the period of performance an additional year, as the initial period of performance would end on September 30, 2024, and all the SFY 2023 funds would not have been expended. USDE also approved this waiver on September 27, 2024, extending the period of performance end date to September 30, 2025, as well.

Criteria—Federal laws require the Department to establish, document, and maintain effective internal control over the federal award such that it provides reasonable assurance that the Department is in compliance with federal statutes, regulations, and terms. Additionally, the internal controls designed and put in use by the Department must conform with standards put in place by the Comptroller General of the United States. Those standards require a robust system of written policies and procedures that are provided to Departmental staff and that are used to effectively monitor compliance with federal regulations. (2 CFR §200.303).

Recommendations—The Department should:

1. Prioritize re-obligating SFYs 2021, 2022, and 2023 School Improvement Title I funds to LEAs while also timely monitoring the amount of unexpended funds to ensure funds are best utilized by eligible LEAs to improve school performance. 2. Ensure current and newly awarded School Improvement Title I funds are properly obligated to LEAs at the beginning and during the period of performance for Title I funds and that unexpended balances are timely monitored to ensure funds are utilized during the period of performance. 3. Ensure documentation of carryforward of previous year School Improvement Title I funds is maintained and can be understood and followed by personnel. 4. Work with LEAs to better train and educate LEA staff on the types of allowable expenses for School Improvement Title I grants to help LEAs better utilize the grant funds. 5. Develop and implement a system to track expiring School Improvement Title I funds so that the unexpended funds can be re-granted or re-obligated during the period of performance to ensure effective grants management.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 $869,624 of State fiscal year (SFY) 2021 School Improvement Title I funds remained unobligated as of September 30, 2023, and $6,302,741 of allocated SFY 2021 School Improvement Title I funds remaining unexpended from the obligated awards to LEAs. Due to the FIFO method of funding the Department utilizes, these unobligated and unexpended grant funds resulted in the $4,476,454 of funds scheduled to revert. 2 $5,642,535 of SFY 2022 School Improvement Title I funds remained unobligated as of September 30, 2023, and $4,492,279 of allocated SFY 2022 School Improvement Title I funds remaining unexpended from the obligated awards to LEAs. Due to the FIFO method of funding the Department utilizes, these unobligated and unexpended grant funds resulted in the $24,433,649 of funds scheduled to revert.

Assistance Listings numbers and names: 84.010 Title I Grants to Local Educational Agencies 84.367 Supporting Effective Instruction State Grants (formerly Improving Teacher Quality State Grants)* *referred to as Title II Award numbers and years: S010A190003, July 1, 2019 through September 30, 2020; S010A200003, July 1, 2020 through September 30, 2021; S010A210003, July 1, 2021 through September 30, 2022; S010A220003, July 1, 2022 through September 30, 2023; S367A190049, July 1, 2019 through September 30, 2020; S367A200049, July 1, 2020 through September 30, 2021; S367A210049, July 1, 2021 through September 30, 2022; S367A220049, July 1, 2022 through September 30, 2023 Federal agency: U.S. Department of Education Compliance requirement: Special tests and provisions Questioned costs: Unknown

Condition—The Department of Education’s Grants Management Department (Department) disbursed over $55.3 million and over $6.1 million in Title I and Title II funds, respectively, to 295 Title I and 307 Title II charter school local educational agencies (LEAs) during fiscal year 2023 but did not perform certain monitoring procedures required by the U.S. Department of Education. Specifically, the Department did not identify which of the 295 Title I and 307 Title II charter school LEAs receiving federal grant monies had relationships with charter management organizations (CMOs) in order to perform additional required monitoring to assess the additional risk posed by conflicts of interest, related-party transactions, or insufficient segregation of duties at these charter schools.1

Effect—The Department’s not identifying or performing additional monitoring of charter schools with relationships with CMOs increases the risk that funds allocated to these charter school LEAs may not have been spent in accordance with the award terms and program requirements and could result in the U.S. Department of Education to reduce future awards.2 Further, if monies were spent inconsistently with program requirements, those who were intended to benefit from the program may not have received all the services or other benefits they otherwise would have received. Additionally, the Department is at risk that this finding applies to other federal programs it administers.

Cause—Despite the U.S. Department of Education providing related guidance in September 2015, the Department staff reported they were unaware of the requirement to perform additional monitoring steps over charter schools with relationships with CMOs. Further, the Department’s policies and procedures for monitoring LEAs did not differentiate between regular LEAs, charter schools without CMOs, or charter schools with relationships with CMOs. As such, the Department lacked specific procedures to assess the additional risk posed by conflicts of interest, related-party transactions, or insufficient segregation of duties.

Criteria—Federal regulations require the Department to monitor subrecipients, including charter schools, which includes required monitoring procedures for assessing the risk of each subrecipient’s noncompliance and monitoring activities based on those risk assessments. Those federal regulations also provide that monitoring procedures may include reviewing financial and performance reports, providing training or technical assistance on program-related matters, and performing on-site reviews, selective audits, and/or other monitoring procedures (2 CFR §200.332[b and d]). As part of these monitoring responsibilities, the U.S. Department of Education requires the Department to monitor charter schools with relationships with CMOs and assess the additional risk posed by conflicts of interest, related-party transactions, or insufficient segregation of duties.3 Also, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Perform annual monitoring over charter schools with relationships with CMOs, including performing risk-assessment procedures over the additional risk posed by conflicts of interest, related-party transactions, or insufficient segregation of duties, and carry out monitoring activities based on those risk assessments such as reviewing financial and performance reports, providing training or technical assistance on program-related matters, and performing on-site reviews, selective audits, and/or other monitoring procedures. 2. Update existing LEA-monitoring policies and procedures and train employees to identify charter schools that have relationships with CMOs and to then assess and design monitoring procedures over conflicts of interest, related-party transactions, or insufficient segregation of duties.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 The term “charter management organization” means a nonprofit organization that operates or manages a network of charter schools linked by centralized support, operations, and oversight (20 USC 7221i[3]. Retrieved 9/13/2024 from https://www.law.cornell.edu/uscode/text/20/7221i#2 2 Federal Uniform Guidance requires federal awarding agencies to follow up on audit findings and issue a management decision to ensure the recipient, the Department, takes appropriate and timely corrective action (2 CFR §200.513[c]). Further, it requires that federal awarding agencies’ management decisions clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action, as directed by the federal awarding agencies (2 CFR §200.521). 3 On September 28, 2015, the U.S. Department of Education issued a letter to State Educational Agencies (SEAs) reminding them of their role in helping to ensure that federal funds accessed by public charter schools are used for intended, appropriate purposes, and provided additional resources for states, and specifically SEAs, to consult as they consider improvements to their monitoring and oversight procedures for charter schools (U.S. Department of Education. [2015, September]. Letter to SEAs. Retrieved 8/29/2024 from https://oese.ed.gov/files/2020/07/finalsignedcsp.pdf). Further, in September 2016, the U.S. Department of Education’s Office of Inspector General issued an audit report on charter schools with CMOs and identified risks such as conflicts of interest, related-party transactions, or insufficient segregation of duties (U.S. Department of Education. [2016, September]. Nationwide Assessment of Charter and Education Management Organizations. Retrieved 8/29/2024 from https://oig.ed.gov/sites/default/files/reports/2023-11/a02m0012.pdf).

Assistance Listings number and name: 84.010 Title I Grants to Local Educational Agencies Award numbers and years: S010A210003, July 1, 2021 through September 30, 2022; S010A220003, July 1, 2022 through September 30, 2023 Assistance Listings number and name: 84.367 Supporting Effective Instruction State Grants (formerly Improving Teacher Quality State Grants)* *referred to as Title II Award numbers and years: S367A210049, July 1, 2021 through September 30, 2022; S367A220049, July 1, 2022 through September 30, 2023 Assistance Listings numbers and names: 84.425D COVID-19 - Education Stabilization Fund—Elementary and Secondary School Emergency Relief (ESSER) Fund 84.425U COVID-19 - Education Stabilization Fund - American Rescue Plan - Elementary and Secondary Schools Emergency Relief (ARP ESSER) Fund Award numbers and years: S425D210038, March 13, 2020 through September 30, 2023; S425U210038, March 13, 2020 through September 30, 2024 Federal agency: U.S. Department of Education Compliance requirements: Reporting Questioned costs: Not applicable

Condition—Contrary to federal laws and regulations and the State’s accounting manual, the Department of Education (Department) failed to report complete and accurate information on the federal government’s reporting system related to $161,857,168 in subawards it made to local education agencies (LEAs) during fiscal year 2023 for 4 federal programs, as shown below:

Title 1 (84.010) Title II (84.367) ESSER II (84.425D) ARP ESSER (84.425U) Total Dollar amount of incomplete or inaccurate reports $5,538,177 $680,068 $223,110 $155,415,813 $161,857,168

As shown in the bullets below and the table on the next page, we tested a total sample of 29 subawards for these federal programs at the Department and found that for 28 subawards, the Department failed to report the following:

• Any required information about the subawards, including the subaward organization names and subaward amounts and terms for: o 4 Title I subawards, totaling $335,688 of the total $5.5 million of Title I subawards we tested in our sample. o 3 Title II subawards, totaling $273,149 of the total $680,068 of Title II subawards we tested in our sample. • Required information within the required time frame for: o 5 Title I subawards tested, totaling $5.0 million, resulting in reports being submitted between 5 and 11 months late. o 3 Title II subawards tested, totaling $406,919, resulting in reports being submitted between 4 and 7 months late. o 3 ESSER II subawards tested, totaling $223,110, resulting in reports being submitted between 21 and 23 months late. o 1 ARP ESSER subaward tested, totaling over $4.3 million, resulting in the report being submitted over 9 months late. • Correct subaward amounts for 3 ESSER II subawards tested, totaling $223,110. • Accurate key elements for: o 6 Title I subawards tested, totaling over $5.2 million, that included incorrect assistance listing numbers, and 5 of those subawards included inaccurate subaward obligation dates. o 3 Title II subawards tested, totaling $406,919, that included incorrect subaward obligation dates. o 9 ARP ESSER subawards tested, totaling nearly $155.4 million, that included incorrect subaward numbers and subaward project descriptions, and 1 of those subawards included an inaccurate subawardee name.

Finally, the Department did not meet its quarterly reporting requirements for ESSER II and ARP ESSER monies it spent during fiscal year 2023, since the ESSER reporting requirements were fulfilled through this same reporting on the federal government’s reporting system.

The table below describes results for the subawards we tested.

Title 1 (84.010) Title II (84.367) ESSER II (84.425D) ARP ESSER (84.425U) Total subawards tested 10 6 4 9 Total subaward amount tested $5,538,177 $680,068 $432,230 $155,415,813 Subawards not reported 4 3 0 0 Total subaward amount not reported $335,688 $273,149 $0 $0 Report not timely 5 3 3 1 Total report amount not timely $5,037,057 $406,919 $223,110 $4,300,968 Subaward amount incorrect 0 0 3 0 Total subaward amount incorrect $0 $0 $223,110 $0 Subaward with other incorrect key elements 6 3 0 9 Total subaward amount with other incorrect key elements $5,202,489 $406,919 $0 $155,464,402 Effect—The State’s stakeholders and the public did not have access to transparent and timely information about the Department’s federal subaward spending decisions on USAspending.gov as required by federal laws and regulations. Further, the federal grantor, which relies on the Department’s data on the federal government’s reporting system for ESSER quarterly reports, lacked all needed information to effectively monitor the Department’s program administration. Therefore, the Department put the grantor at risk of not being able to carry out its oversight responsibilities and effectively evaluate the program’s success and prevent and detect fraud. Finally, the Department is at risk that this finding applies to other federal programs it administers.

During fiscal year 2023, the Department made expenditures to subrecipients for these 4 federal programs, as follows:

Title 1 (84.010) Title II (84.367) ESSER II (84.425D) ARP ESSER (84.425U) Subrecipient expenditures $354.6 million $43.6 million $295.0 million $666.3 million Total program expenditures $359.8 million $46.0 million $301.9 million $716.1 million Percent of subrecipient expenditures to total expenditures 99% 95% 98% 93%

Cause—Although the programs’ reporting requirements were provided as additional award terms and conditions on the federal agency’s website, and the State’s accounting manual instructed State departments to follow them, the Department did not require independent reviews of the reports for accuracy and completeness prior to uploading subaward data to the federal government’s reporting system. In addition, the Department did not require a post review to verify that the subaward data it uploaded to the federal government’s reporting system was complete and correctly displayed. Therefore, the Department was unaware of the errors.

Criteria—The Federal Funding Accountability and Transparency Act (FFATA) and federal Uniform Guidance regulations require the Department, as a direct recipient of federal awards, to report certain information about each subaward action equaling or exceeding $30,000 in federal monies on the FFATA Subaward Reporting System no later than month-end of the month following the subaward action so that the information can be displayed to the public on USAspending.gov.¹ Specifically, the federal Uniform Guidance requires the Department to report the subrecipient organization’s name, award amount, award term, and other information about the subaward, if applicable, for each subaward action equaling or exceeding the $30,000 threshold (2 CFR §170.320 and Appendix A to Part 170). Additionally, the State’s accounting manual requires the Department to perform this reporting for federal awards (State of Arizona Accounting Manual, Topic 70: Grants, Section 45). Also, federal laws require the Department to submit ESSER quarterly reports to the federal grantor unless the Department fulfills that requirement with more frequent reporting.2 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Immediately report on the FFATA Subaward Reporting System the required information for its subawards for these 4 programs, including reviewing, correcting, and/or resubmitting any inaccurately reported information. 2. Follow the State’s accounting manual for reporting subaward actions equaling or exceeding $30,000 no later than month-end of the month following the subaward action, as required by the FFATA and federal Uniform Guidance, which may include providing training to Department staff responsible for reporting the Department’s subaward actions to the federal government’s reporting system. 3. Implement procedures requiring independent reviews to: a. Ensure the subaward data is complete and accurate prior to uploading it to the federal government’s reporting system. b. Verify that the subaward data it uploaded to the federal government’s reporting system was complete and correctly displayed.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-121 and was initially reported in fiscal year 2021.

¹ The FFATA of 2006 (Public Law 109-282), as amended by section 6202 of Public Law 110-252, was enacted to provide the public with transparency on federal award spending to hold the recipient government accountable for each spending decision and to help reduce wasteful spending of federal monies. As such, federal Uniform Guidance requires reporting on the FFATA Subaward Reporting System at FSRS—Federal Funding Accountability and Transparency Act Subaward Reporting System at https://www.fsrs.gov/ ² For ESSER I, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 (Public Law 116-136), Section 15011, requires the Department to submit quarterly reports to the U.S. Department of Education if it received more than $150,000 in federal awards under the CARES Act, although the quarterly reporting requirements are met if more frequent monthly reporting is performed, such as under the FFATA. These same reporting requirements applied to ESSER II in accordance with Sec. 303(f) of the Consolidated Appropriations Act of 2021 (Public Law 116-260) and the Department’s award terms and conditions; however, this did not apply to ARP ESSER, as only annual reporting was required.

Assistance Listings numbers and names: 84.425D COVID-19 - Education Stabilization Fund—Elementary and Secondary School Emergency Relief (ESSER) Fund 84.425R COVID-19 - Coronavirus Response and Relief Supplemental Appropriations Act, 2021- Emergency Assistance to Non-Public Schools (CRRSA EANS) Award numbers and years: S425D210038, March 13, 2020 through September 30, 2023; S425R210003, January 15, 2021 through September 30, 2024 Federal agency: U.S. Department of Education Compliance requirements: Reporting Questioned costs: Not applicable

Condition—Contrary to federal regulations, the Department of Education (Department) reported inaccurate data for 4 local educational agencies (LEA) and 9 nonpublic schools on Annual Performance Reports (APR) submitted in fiscal year 2023. Specifically, the Department reported key line item information that did not agree to records and supporting documentation, as follows:

• For 4 of 48 LEAs tested on the 2021 ESSER APR, certain key line items, including unique entity ID, total amount expended by activity, and allocation of ESSER resources within the LEA, did not agree to the LEAs’ files.1 • For 9 of 9 nonpublic schools tested on the 2022 CRRSA EANS APR, certain key line items, including reporting on State Education Agency obligations (including reimbursements) by allowable activity for CRRSA EANS and reporting on nonpublic schools receiving services or assistance under CRRSA EANS, did not agree to the schools’ files. The Department reported that this would likely be applicable to all 83 nonpublic schools the Department was required to report on.

Effect—The Department’s reporting inaccurate program information results in the federal agency being unable to rely on the reports to effectively monitor the Department’s program administration, including its compliance with program requirements and ability to prevent and detect fraud, and to evaluate the programs’ successes. The Department is also at risk that this finding applies to other federal programs it administers.

Cause—The Department did not have written policies and procedures requiring a detailed, independent review of the APRs for accuracy prior to submission to the federal agency. Department staff reported to us that they were unaware these reports needed to be independently reviewed for accuracy prior to submitting them to the federal agency.

Criteria—Federal regulations and the Department’s federal award terms require it to submit annual performance reports to the U.S. Department of Education containing accurate, current, and complete information (2 CFR §§200.301 and 200.302). Further, federal regulation also requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that the federal program is being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Department should:

1. Report accurate data in the APRs that agree to records and supporting documentation contained in the LEAs’ or schools’ files, including reviewing, correcting, and/or resubmitting any inaccurately reported information. 2. Develop and implement written policies and procedures to require a detailed, independent review of the APRs for accuracy prior to their submission to the federal agency.

The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

1 The 2021 ESSER APR was due June 17, 2022; however, the Department received an extension for a submission deadline of September 9, 2022. Per the 2023 Compliance Supplement as of August 12, 2024, it is not necessary for auditors to test whether APRs were submitted in a timely manner because the federal agency is able to verify timeliness.

Cluster name: Student Financial Assistance Cluster Assistance Listings numbers and names: 84.007 Federal Supplemental Educational Opportunity Grants 84.033 Federal Work-Study 84.038 Federal Perkins Loan Program—Federal Capital Contributions 84.063 Federal Pell Grant Programs 84.268 Federal Direct Student Loans 84.379 Teacher Education Assistance for College and Higher Education Grants (TEACH Grants) Award numbers and year: Various, 2023 Federal agency: U.S. Department of Education Assistance Listings numbers and names: 93.364 Nursing Student Loans 93.925 Scholarships for Health Professions Students from Disadvantaged Backgrounds—Scholarships for Disadvantaged Students (SDS) Award numbers and year: Various, 2023 Federal agency: U.S. Department of Health and Human Services Compliance requirement: Eligibility Questioned costs: $138,135

Condition—Contrary to federal regulation and the U.S. Department of Education’s (ED) guidance, Northern Arizona University’s Office of Scholarships and Financial Aid (Office) failed to use new internet protocol (IP) techniques to verify 8 distance education students’ identities and awarded federal financial assistance to fraudulently enrolled students in a distance education program during the period of July 1, 2022 through June 30, 2023. Specifically, the Office determined that fraudsters stole 8 identities and manipulated the University’s student enrollment application process to receive federal student financial assistance awards. The fraudsters used and falsified stolen information to apply for and enroll in a distance education program. Upon acceptance, the fraudsters applied for federal student financial assistance awards through ED’s Free Application for Federal Student Aid process. The fraudsters then participated in the amount of online interaction necessary to establish participation in the distance education program and secured disbursements of SFA funds under the Office’s procedures. The Office was not alerted of the fraud until one of the victims questioned the outstanding loans on their student account with the University.1 As of November 14, 2023, the University updated each victim’s student records to eliminate the loans within the ED’s Common Origination and Disbursement System and repaid the loan balances to ED.

Effect—The Office awarded and reimbursed to ED $138,135 and of this amount, disbursed $91,030 in Direct Loans to fraudsters for the period July 1, 2022 through June 30, 2023, for 8 distance education students’ identities it did not initially verify. However, there is a risk that additional fraudulent identity-theft payments the Office has not identified were awarded to fraudulently enrolled students.

Cause—Despite ED’s guidance to identify and prevent distance education program fraud, the University stated that the Office did not implement more advanced anti-fraud measures in its distance education procedures because they felt existing controls focusing on email addresses were sufficient to detect fraud and adding the anti-fraud measures were not cost beneficial. As a result, the Office’s procedures lacked automated student information system protocols to identify instances where several students used the same Internet Protocol (IP) address to apply and participate in distance education programs. Also, the Office did not modify its disbursement rules for students participating exclusively in distance education programs to reduce the amount of monies that fraudsters can receive, which could include delaying disbursement of funds until the student has participated in the program for a longer period or disbursing funds to students more frequently rather than 1 lump sum payment at the beginning of the period.

Criteria—Federal regulation requires institutions to have processes in place to establish that a student who registers for distance education programs is the same student who academically engages in the program (34 CFR 602.17[g]). In addition, ED provided guidance on actions that institutions can take to identify and prevent distance education program fraud, including implementing automated student information system protocols and modifying disbursement rules for students participating exclusively in distance programs.2 Although preventing and detecting all fraud may not be practical, developing, implementing, and maintaining measures to address fraud risks identified in administering federal student financial assistance programs is an essential part of internal control standards. For example, the Standards for Internal Control in Federal Government, issued by the Comptroller General of the United States, can be integral to helping prevent or detect payments to fraudsters who commit identity theft.3 Further, federal regulation requires establishing and maintaining effective internal control over federal awards that provides reasonable assurance that federal programs are being managed in compliance with all applicable laws, regulations, and award terms (2 CFR §200.303).

Recommendations—The Office should:

1. Develop and implement anti-fraud measures, such as automated student Internet Protocols (IP) verifications and delayed disbursement rules, to help verify distance education students’ identities prior to disbursing federal student financial assistance. 2. Conduct a review of prior fiscal years to determine if additional fraudulently enrolled students received student financial assistance, and if fraudulent loans and grants were awarded, notify both ED and the victims. 3. Continue to work with law enforcement and ED, as necessary, to report and prosecute fraud the Office becomes aware of occurring within its federal programs.

The University’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-126 and was initially reported in fiscal year 2022.

1 The University filed a police report with the University’s Police Department on October 13, 2022, after being notified by the original victim. Subsequently, the University discovered additional fraudulent identities and reported that it notified each victim within 3-5 days. In addition, the University notified the U.S. Department of Education’s Office of the Inspector General (OIG) on June 16, 2023, and provided the OIG evidence and documentation about the fraudulent federal student financial assistance awards, as required by federal guidance (U.S. Department of Education—Federal Student Aid Partners. (2023.) Federal Student Aid Handbook, Chapter 5—Referral of Fraud Cases. Retrieved 6/20/2024 from https://fsapartners.ed.gov/knowledge-center/fsa-handbook/2022-2023/application-and-verification-guide/ch5-special-cases 2 U.S. Department of Education. (GEN-11-17) Subject: Fraud in Postsecondary Distance Education Programs - URGENT CALL TO ACTION (Updated 8/21/2020). Retrieved 7/19/2024 from (GEN-11-17) Subject: Fraud in Postsecondary Distance Education Programs - URGENT CALL TO ACTION (Updated 8/21/2020) | Knowledge Center 3 U.S. Government Accountability Office (GAO). (2014). Standards for Internal Control in the Federal Government. Retrieved 7/19/2024 from https://www.gao.gov/assets/670/665712.pdf

Assistance Listings numbers and names: 93.778 Medical Assistance Program (part of the Medicaid Cluster) 93.778 COVID-19 - Medical Assistance Program Award number and year: 11-W-00275/09, July 1, 2022 through June 30, 2023 Federal agency: U.S. Department of Health and Human Services Compliance requirement: Special Tests and Provisions – Utilization Control and Program Integrity Questioned costs: Unknown

Condition—In our testing of fee-for-service payments, out of a nonstatistical sample of 40, we identified 3 of 40 providers had been subsequently listed on the Suspension List related to the provider fraud matter. The AHCCCS Office of Inspector General and the Arizona Attorney General’s Office became aware of potential fraudulent billing practices, including significant increases in billing for outpatient behavioral health services. These circumstances triggered a multiagency review and investigation of potential fraud, waste, and abuse. Ultimately, this led AHCCCS to connect the irregular billing of these services with alleged criminal activity targeting Indigenous peoples and other vulnerable Arizonans. In May 2023, AHCCCS announced its initial findings of credible and willful fraud by sober-living providers across the state. Since then, AHCCCS has suspended more than 300 providers. These provider suspensions are known as Credible Allegations of Fraud (CAF) suspensions.

The CAF payment suspensions noted above are associated with wide-ranging investigations into fraudulent Medicaid billing by the named providers. The investigations are ongoing. However, AHCCCS believes that credible evidence has been established that individuals were targeted and aggressively recruited with false promises of food, treatment, and housing, only to be taken to locations where providers billed for services that were not provided or were not appropriate or necessary. For example, providers billed for:

• Excessive hours of services in a 24-hour period for a single member. • Multiple services for the same member at the same time. • AHCCCS members who were not physically present (“ghost billing”). • Services after a member’s date of death. • Services that were not medically necessary.

Under 42 CFR §455.23 and the terms of the Provider Participation Agreement, AHCCCS may suspend payments to a provider if a CAF has been identified. Providers are informed of the reason for their suspension in a Notice of CAF Suspension. CAF suspensions are based on preliminary findings of reliable indicia of fraud and may be lifted if AHCCCS determines there is no fraud occurring and/or good cause has been established under 42 CFR §455.23. Upon the conclusion of an investigation, AHCCCS may terminate a provider and/or lift their suspension at that time. At the point a referral is made and payment is suspended, only a preliminary investigation has been conducted, and no total overpayment or amount of improper payments made to the provider has been identified. At the conclusion of the investigation, AHCCCS will terminate a provider’s enrollment and require repayment of the identified overpayment. The investigation is ongoing, and AHCCCS is not currently able to estimate a total overpayment or amount of improper payments made to the providers. Therefore, we are unable to estimate any questioned costs related to the fraud allegations.

Effect—In May 2023, AHCCCS announced its initial findings of credible and willful fraud by sober-living providers across the State. Since then, AHCCCS has suspended more than 300 providers.

Once a credible allegation of fraud determination is made, AHCCCS is required to suspend all payments to a provider unless there is good cause not to while investigations are conducted. The credible allegation of fraud determination results from the agency’s preliminary investigation, and the agency must then make a fraud referral to the Arizona Attorney General’s Healthcare Fraud and Abuse Section or a federal law enforcement agency for a full investigation. During this time, providers may continue to bill AHCCCS for services provided, but any reimbursement to these providers is withheld pending the outcome of further investigation. Under State statute, providers are entitled to appeal a suspension placed by AHCCCS. AHCCCS is working closely with the Arizona Attorney General’s Healthcare Fraud and Abuse Section, the Federal Bureau of Investigation (FBI), the U.S. Department of Health and Human Services (HHS), the U.S. Attorney’s Office, the Internal Revenue Service (IRS), and local and tribal law enforcement to disrupt organized bad actors, apprehend them, and prosecute them to full extent allowed by law. At present, the investigation is ongoing, and a determination of the amount of fraud or improper payments, potential recovery from the providers, or amount that may be due back to the federal government cannot be made at this time as AHCCCS is still in the process of investigating and working with the Attorney General’s Office for prosecution of substantiated claims, which is a highly complex and manual process and can take many years to finalize. As a result, we have issued a qualified opinion on the basic financial statements as of and for the year ended June 30, 2023.

As a result of this matter, we have concluded that AHCCCS did not comply with the compliance requirements and have issued a qualified opinion on compliance. This is deemed to be a material weakness in internal control over compliance.

Cause—AHCCCS did not have sufficient controls in place to safeguard against unnecessary utilization of care and services and to prevent fraud. Additionally, AHCCCS did not have sufficient procedures for the ongoing pre- and postpayment review of behavioral health claims. While AHCCCS’ claims processing system uses the CMS required claim edit protocols to look for improperly billed claims as noted in the National Correct Coding Initiative and such edit protocols are updated regularly per CMS requirements, AHCCCS did not have sufficient additional claim edits that were necessary for behavioral health claims. For example, AHCCCS did not have sufficient edits to restrict the inappropriate use of per diem codes or restrict some behavioral health codes from being billed for the same member on the same date of service. Further, AHCCCS did not have sufficient controls in which claims were reviewed by a medical professional pre- and postpayment to assess if the claim was medically necessary and to assess if the codes being used were excessive and age appropriate.

Criteria—AHCCCS is required to provide methods and procedures to safeguard against unnecessary utilization of care and services. In addition, AHCCCS must have (1) methods of determining criteria for identifying suspected fraud cases; (2) methods for investigating these cases; and (3) procedures, developed in cooperation with legal authorities, for referring Credible Allegations of Fraud (CAF) cases to law enforcement officials (42 CFR parts 455, 456, and 1002). Credible allegations of provider fraud must be referred to the state Medicaid Fraud Control Unit (MFCU) or an appropriate law enforcement agency in states with no certified MFCU (42 CFR Part 455.21).

AHCCCS must establish and use written criteria for evaluating the appropriateness and quality of Medicaid services. AHCCCS must have procedures for the ongoing postpayment review, on a sample basis, of the need for, and the quality and timeliness of, Medicaid services. AHCCCS may conduct this review directly or may contract with an independent entity (42 CFR 456.5, 456.22 and 456.23).

Recommendation—We recommend that AHCCCS continue its investigations and refer CAF cases to law enforcement officials. Additionally, we recommend AHCCCS continue to work with CMS to determine what, if any, amounts may be required to be remitted to CMS.

We also recommend that AHCCCS review and enhance existing policies and procedures and related controls to ensure sufficient processes and controls are in place to safeguard against unnecessary utilization of care and services and to prevent fraud. We also recommend that AHCCCS institute an ongoing and appropriate pre- and postpayment review of behavioral health claims. Likewise, AHCCCS should increase their level of scrutiny over certain behavioral health provider types.

We further recommend that AHCCCS examine the existing Medicaid payment system and implement system-wide improvements. The improvements should include the establishment of additional reporting to flag concerning claims for prepayment review, setting of billing thresholds and establishing prepayment review for various behavioral health claim types. We also recommend that AHCCCS establish sufficient controls in which claims are reviewed by a medical processional pre- and postpayment to assess if the claim was medically necessary and to assess if the codes being used were excessive and age appropriate.

Management of AHCCCS concurs in part with the finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

This finding is similar to prior-year finding 2022-127 and was initially reported in fiscal year 2022.

Assistance Listings numbers and names: 93.778 Medical Assistance Program (part of the Medicaid Cluster 93.778 COVID-19 - Medical Assistance Program Award number and year: 11-W-00275/09, July 1, 2022 – June 30, 2023 Federal agency: U.S. Department of Health and Human Services Compliance requirement: Special Tests and Provisions – Utilization Control and Program Integrity Questioned costs: Unknown

Condition—AHCCCS did not follow up in a timely manner for certain deferred member investigations. In a population of 5,141 member and provider cases with identified credible allegations of provider and member fraud assigned during fiscal year 2023, we conducted a nonstatistical sample of 40 member and 40 provider investigations to ascertain if AHCCCS performed a preliminary investigation of potential incidents of fraud or abuse committed by members and providers on a timely basis. We also reviewed to ensure AHCCCS was following up on any deferred member and provider cases in a timely manner. In our sample of 40 member and 40 provider investigations, we noted that for 3 of 40 member investigations in which the investigation had been deferred, AHCCCS did not follow up in a timely manner and in accordance with their internal policy on those deferred investigations.

Effect—Untimely followup on fraud or abuse incident investigations could result in AHCCCS making unnecessary payments and compromise its ability to investigate cases. This is deemed to be a material weakness in internal control over compliance.

Cause—Management has reported to us that insufficient investigative staff and increased volumes of provider and member investigations impacted AHCCCS’ ability to investigate and follow up on potential fraud or abuse incidents in a timely manner.

Criteria—AHCCCS is required to provide methods and procedures to safeguard against unnecessary utilization of care and services. In addition, AHCCCS must have (1) methods of determining criteria for identifying suspected fraud cases; (2) methods for investigating these cases; and (3) procedures, developed in cooperation with legal authorities, for referring Creditable Allegations of Fraud (CAF) cases to law enforcement officials (42 CFR parts 455, 456, and 1002). Credible allegations of provider fraud must be referred to the state MFCU or an appropriate law enforcement agency in states with no certified MFCU (42 CFR Part 455.21). Additionally, in accordance with AHCCCS policy, the AHCCCS Office of Inspector General is required to regularly follow up on deferred investigations and provide updates at least every 90 days to the state MFCU.

Recommendations—We recommend that AHCCCS conduct a workload/cost analysis to evaluate whether its funding and staffing levels are sufficient to timely investigate member and provider fraud or abuse incidents. We also recommend that AHCCCS follow its existing policy, which includes clear time frames in which followup on deferred investigations occurs.

Management of AHCCCS concurs with the finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

Assistance Listings numbers and names: 93.778 Medical Assistance Program (part of the Medicaid Cluster 93.778 COVID-19 - Medical Assistance Program Award number and year: 11-W-00275/09, July 1, 2022 through June 30, 2023 Federal agency: U.S. Department of Health and Human Services Compliance requirement: Special Tests and Provisions – Refunding of Federal Share of Medicaid Overpayments to Providers Questioned costs: $9,813,624

Condition—AHCCCS did not return the federal share of fraud and abuse recoupments back to CMS in a timely manner. In a population of 5,141 member and provider cases during fiscal year 2023, we conducted a nonstatistical sample of 40 member and 40 provider investigations to ascertain if AHCCCS had properly remitted to CMS any recoupments as a result of the investigations. For 1 of 40 provider fraud cases, we noted AHCCCS did not timely return the federal share of fraud and abuse recoupments back to CMS. We then obtained from AHCCCS OIG a detail of all recoupments received during the period July 1, 2022 through June 30, 2023, noting a total of 392 unique OIG cases for which recoupments were received. Of this total of 392 cases, 150 cases were identified for which the federal share of the total recoupment amount was not properly reported on the CMS-64, and therefore, the funds were not properly remitted to CMS for a total of $9,813,624.

Effect—Recoupments were not reported and repaid timely to CMS. This is deemed to be a material weakness in internal control over compliance.

Cause—Management has reported to us that this was a result of staffing turnover as well as a breakdown of inter and intra-departmental communication and collaboration between AHCCCS OIG and the Division of Budget and Finance.

Criteria—42 CFR 433 Subpart F outlines the requirements State Medicaid Agencies (SMAs) are to follow related to refunding the federal share of Medicaid overpayments made to providers. Pursuant to 1903(d)(2)(C) of the Act (the Act) (42 USC 1396b), states have up to 1 year from the date of discovery of the overpayment to recover or attempt to recover the overpayment before the federal share must be refunded to CMS regardless of whether recovery is made from the provider.

Recommendations—We recommend that AHCCCS timely report and remit recoupments to CMS. We also recommend that AHCCCS review and update their policies and procedures to ensure the federal share of any recoveries are reported and remitted to CMS timely. We also recommend that AHCCCS enhance their communications between divisions to facilitate and ensure the timely and accurate communication on recoveries.

Management of AHCCCS concurs with the finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.

Assistance Listings numbers and names: 93.778 Medical Assistance Program (part of the Medicaid Cluster 93.778 COVID-19 - Medical Assistance Program Award number and year: 11-W-00275/09, July 1, 2022 through June 30, 2023 Federal agency: U.S. Department of Health and Human Services Compliance requirement: Eligibility – Disenrollment Questioned costs: Not applicable

Condition—AHCCCS did not timely inform members of discontinuance of eligibility. In a population of 426,615 member disenrollments occurring during fiscal year 2023, we conducted a nonstatistical sample of 40 disenrollments to ascertain if AHCCCS performed timely and accurate disenrollments. In our sample of disenrollments, 1 of 40 disenrollments lacked sufficient documentation to show the disenrolled member had been informed of the discontinuance of eligibility.

Effect—AHCCCS is not in compliance with the requirement to inform members of any adverse action, including discontinuance of eligibility in accordance with 42 CFR 435.917(b)(2). This is deemed to be a significant deficiency in internal control over compliance.

Cause—Management has reported to us that this was an oversight.

Criteria—AHCCCS is required to inform members of any adverse action, including discontinuance of eligibility (42 CFR 435.917(b)(2)).

Recommendations—AHCCCS should implement additional oversight controls to ensure members are properly and timely informed of any adverse action related to discontinuance of eligibility.

Management of AHCCCS concurs with the finding. The State’s corrective action plan at the end of this report includes the views and planned corrective action of its responsible officials. We are not required to audit and have not audited these responses and planned corrective actions and therefore provide no assurances as to their accuracy.