State of New Mexico OFFICE OF THE STATE AUDITOR

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1 Wayne A. Johnson State Auditor Via August 22, 2018 State of New Mexico OFFICE OF THE STATE AUDITOR C. Jack Emmons, CPA, CFE Deputy State Auditor Kyky Knowles, Acting Cabinet Secretary New Mexico Aging and Long Term Services Department P.O. Box Santa Fe, New Mexico Re: Special Audit of the Non-Metro Area Agency on Aging North Central New Mexico Economic Development District Dear Secretary Knowles: The Office of the State Auditor ( Office ) has completed the review of the audit report required by the special audit designation of the North Central Economic Development District (NCNMEDD), related to its role as the state s Non-Metro Area Agency on Aging under contract with the New Mexico Aging and Long Term Services Department (ALTSD) as described above, in accordance with Section (B) and NMAC. This letter is your authorization to make the final payment to the independent accounting firm ( IPA ) that completed the report. In accordance with the audit contract, the IPA will deliver to the agency the number of copies of the report specified in the contract. This report was presented to the ALTSD on Wednesday, June 22, 2018 at an exit conference, pursuant to Section NMSA 1978, and more than five (5) days have passed since the Agency received the report. The final copy of the report was delivered to the State Auditor s Office on August 17, The report shows a closing date of July 24, Pursuant to NMAC, all necessary copies of the final report have been provided to the Office. As of today s date, the Office will: send the report to the Office to the Department of Finance and Administration, the Legislative Finance Committee and other relevant oversight agencies; and post the report on its public website. The auditor s findings and comments are included in the report. As you are aware, the special audit report contains twelve (12) separate findings. The auditor specifically noted in Finding that the NCNMEDD had been improperly billing for administrative services, and had billed 1/12 of its administrative budget for Title III activities each month. The contract provided that the NCNMEDD was to be reimbursed based on its actual monthly expenditures. The report states that the NCNMEDD miscalculated the administrative reimbursements, resulting in an overdrawn amount of $336,000 for administrative purposes. Following the error, the NCNMEDD continued submitting incorrect SA-1 reports, which were relied upon by the ALTSD when it submitted its SF-425 reports to the federal oversight agency. The audit report notes that the error was not reported by NCNMEDD, but instead was discovered by the Agency after the end of the fiscal year during a site visit. The error was not corrected until June, 2017, and was offset by underdrawn amounts for service providers and programs.

2 Finding No notes that, after the date of the error in October, 2016, the NCNMEDD issued bonus pay to 22 of its employees for a total of $19,500. It also paid out $22,900 in employee bonuses in May, 2017, and an additional $15,000 in bonuses on July 27, The independent public accountant (IPA) found that these employee bonuses, totaling $57,400 were unallowable and noted that the federal government could ask for the return of those funds. On page 17 of the audit report, the IPA listed $118,395 in unallowable items, unsupported through adequate documentation items, incentive pay and waste items. Those unallowable expenditures appear to include $2,478 in payments to Eloisa Restaurant in Santa Fe for staff dinners. That list also includes $1842 in payments to an entertainment venue called the Main Event, as well as $7,921 for a staff retreat at the Hotel Andaluz. All of these disallowed expenditures appear to have occurred during the period when the NCNMEDD had overdrawn the administrative reimbursements, and was not billing for its administrative expenses in accordance with the contract. The audit report notes that the $336,000 error was offset by undrawn amounts for service providers and programs. It appears, therefore, that the NCNMEDD s expenses for restaurants, employee entertainment and employee bonuses caused a decrease in the services and programs provided to senior citizens in the areas of New Mexico outside of Bernalillo County. Those expenditures also appear to have come at a time when the Agency was working to reduce its own budget due to budget constraints imposed by the Governor and state legislature. We strongly recommend that the Agency take appropriate action to ensure that public dollars intended to benefit New Mexico s senior citizens are not misspent by working with the NCNMEDD, or any subsequent non-metro area agency on aging, to correct these issues. Sincerely, Wayne A. Johnson State Auditor 2540 Camino Edward Ortiz, Suite A, Santa Fe, New Mexico Phone (505) * Fax (505) * OSA-FRAUD

3 REPORT OF INDEPENDENT ACCOUNTANT S CONSULTING PROCEDURES NEW MEXICO AGING AND LONG-TERM SERVICES DEPARTMENT North Central New Mexico Economic Development District As Subrecipient for Grant Administration of Title III Federal Awards July 24, 2018

4 CERTIFIED PUBLIC CERTIFIED ACCOUNTANTS PUBLIC ACCOUN CONSULTANTS

5 CERTIFIED PUBLIC ACCOUNTANTS CONSULTANTS ATKINSON & CO. LTD 6501 AMERICAS PARKWAY NE, SUITE 700, ALBUQUERQUE, NM PO BOX 25246, ALBUQUERQUE, NM T F ATKINSONCPA.COM REPORT OF INDEPENDENT ACCOUNTANT S CONSULTING PROCEDURES To Kyky Knowles, Acting Cabinet Secretary New Mexico Aging and Long-Term Services Department and Wayne Johnson, New Mexico State Auditor Santa Fe, New Mexico Subject: Consulting Procedures Performed for the New Mexico Aging and Long-Term Services Department (ALTSD) regarding North Central New Mexico Economic Development District (NCNMEDD) operations, grant compliance and administration from fiscal year 2016 to January 31, 2018, as recorded by NCNMEDD who was the subrecipient under the Title III Federal Grant Awards. Thank you for the opportunity to work with you to complete this consulting engagement for the New Mexico Aging and Long-Term Services Department (ALTSD). This report summarizes our objectives, scope of work, procedures and findings in relation to these consulting procedures. We have performed the consulting procedures enumerated below as items 1-4, which were agreed to by responsible management of the New Mexico Aging and Long-Term Services Department and the Office of the State Auditor, solely to assist you in evaluating the selected transactions, amounts and results of the procedures performed. The period of our engagement is from July 1, 2015, to January 31, This consulting engagement was conducted in accordance with the 12-6 NMSA 1978, and NMAC and the Standards for Consulting Services established by the American Institute of Certified Public Accountants. The scope of the engagement is outlined in the body of our report. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the consulting procedures described below either for the purpose for which this report has been requested or for any other purpose. The responsible parties to the Title III Federal Awards operations and administration are North Central New Mexico Economic Development District (NCNMEDD) and its operating bureau for the administration of Title III Federal Awards, Non-Metro Area Agency on Aging (NMAAA). The parties remain responsible for the accounting records, fraud prevention and detection, and for maintaining effective internal controls over the financial statements, federal grants, and compliance as subrecipient of subawards each year. The New Mexico Aging and Long-Term Services Department (ALTSD) is primary award recipient and pass-through entity (PTE) to NCNMEDD. PRECISE. PERSONAL. PROACTIVE.

6 Page 2 ENGAGEMENT PROCEDURES AND SCOPE The following procedures are taken from the signed contract for the Engagement: 1) Review 100% of bank statements and bank reconciliations, including but not limited to cancelled checks, transfers and wires for unusual transactions such as potentially fraudulent endorsements or transfers. Consider expanding if appropriate or necessary the sample on a random basis to ensure that at least 100 disbursements are tested in each fiscal year (minimum sample of 300). Perform additional procedures including the examination of supporting documentation to verify the compliance of such disbursement with federal and state guidelines. 2) Examine reimbursement requests from NMAAA to ALTSD for the six U.S. Department of Health and Human Services Awards including those questioned by ALTSD. These tests will include procedures such as review of journal vouchers to ensure the overhead rates charged are in compliance with federal and state guidelines as well as the contract. 3) Review the timeliness of reimbursement requests from NMAAA to ALTSD, the response time for payments from ALTSD and the timeliness of NCNMEDD payments to subrecipients for compliance with state, federal and contractual requirements. 4) Review and assess paid bonuses to employees for indications of fraud, waste or abuse. DEFINTIONS AND ACRONYMS USED IN THIS REPORT NCNMEDD North Central New Mexico Economic Development District is a governmental entity classified as a local public body. NMAAA Non-Metro Area Agency on Aging is an identified segment of NCNMEDD primarily responsible for the administration of Title III funds. It is not a separate government. In this report, most references will be to NCNMEDD but references to NMAAA may exist. Both NCNMEDD and NMAAA are used interchangeably to refer to the operations and administration of subawards of federal funds made by ALTSD. Contracts entered into by the Pass-Through Entity (PTE) and Subrecipient referenced both NCNMEDD and NMAAA. Administrative Costs Administrative costs used in this report refers to the portion of federal and state funds that are retained by NCNMEDD rather than passed through directly to any of 32 counties served by NCNMEDD under the Title III programs. Retained funds are composed of both direct and indirect costs. Direct Costs are those costs that can be identified specifically with a federal award (2 CFR ) and can be directly assigned to such activities relatively easily with high accuracy.

7 Page 3 Indirect Costs are those costs that benefit federal programs in addition to nonfederal programs and the determination of the federal share would be difficult to compute without an inordinate amount of effort. Overhead Cost is a common business term generally referring to all costs of operating an activity rather than direct materials, direct labor and direct expenses. In this report we will use the terms direct and indirect costs rather than overhead costs. BARs Budget Adjustment Requests This is a formal amendment of the original budget to incorporate into the budget new funding or new financial circumstances that is subject to approval by the oversight agency. Pass-Through Entity (PTE) For this report the PTE is the Aging and Long-Term Services Department who receives Title III Federal Awards. Title III Federal funds refers to the following federal awards that are described as the Aging Cluster, CFDA Numbers , , , , and , further detailed as follows: Title III Federal funds: CFDA Number Federal Program IIIB Support Services IIIC-1 Congregate Meals IIIC-2 Home-Delivered Meals IIID Health Promotion and Disease Prevention IIIE Care Giver Support Nutrition Services Incentive Program (NSIP) State Personal Care Services (State) State general funding in connection with home and community based federal programs for older Americans in New Mexico. State funding serves as required matching and maintenance of efforts funds to federal programs with excess funds for the program. NFE Non Federal Entity which is a term referring to an entity receiving federal awards that is not associated with the federal government. NCNMEDD as a local government organization is an NFE. Fiscal Years FY 2016 covers July 1, 2015, through June 30, 2016; FY 2017 covers July 1, 2016, through June 30, 2017; and FY 2018 (partial) covers July 1, 2017, through January 31, 2018

8 Page 4 SCOPES PERFORMED We tested various transactions and documents to equal or exceed our scope of work given in the contract. Test items by area are as follows: Item FY 2016 FY 2017 FY months Total Bank statements reviewed - 6 bank accounts including reconciliations and cleared checks Bank reconciling items including: transfer, missing endorsements, signatures and other questionable items Expenditures arising from check disbursements Payroll transactions with staff Service provider payments Credit card statements 3 cards Payments from ALTSD to NCNMEDD and corresponding payments to Service Providers Total test items as defined

9 Page 5 ITEM 1 REVIEW OF BANK STATEMENTS AND BANK RECONCILIATIONS INCLUDING CANCELLED CHECKS, ACH TRANSFERS AND WIRES NCNMEDD maintained six bank accounts. Their names and purposes are described below. 1. NM Cares Foundation account: solely for operations of NM Cares, mostly Hunger Summit related amounts. 2. RediNet account: for RediNet specific transactions, stopped being used in June EDA-RLF (Economic Development RLF): a loan collection account for the Ultimate Sports, Quickfix Home Improvement, Accu Blueprint, and one of the two NM Algae Production loans. 4. TCR-RLF (Tri County Regional RLF): a loan collection account for the other NM Algae Production loan, the Comida de Campos Inc. and the Shear Encounters Hair Salon loans. 5. Veterans Program account: used specifically for operations of that program. 6. General Operating account: for all other operations and functions for NCNMEDD, including receipt of the Title III awards. For the period of our engagement from July 1, 2015, through January 31, 2018, bank statements and reconciliations that we reviewed totaled 178. We reviewed the bank reconciliations for the following information: 1. Timeliness of preparation 2. Proper documented approvals 3. Propriety of outstanding items 4. Agreement of reconciliations to the general ledger 5. Large and unusual payees The Finance Director or the Accountant Specialist prepares the bank reconciliations. We observed that no documented review or approval for bank reconciliations occurred through June 2016, but we subsequently observed documented review and approval of bank reconciliations starting July 1, 2016, through the end of our engagement period. Bank reconciliations were not current for the earlier months of our engagement period. Account reconciliations were behind by about four to five months. The longest period of late preparation was 185 days observed at May 31, This improved over the next six months to only 34 days to prepare the reconciliation. A second period of late preparation occurred about one year later, July 2017, for one month. The late preparation in this case was just after the end of the fiscal year. The general trend was improvement in preparation time from May 2016 and thereafter.

10 Page 6 Bank Reconciliations # of Days to Reconcile FY 2016 FY 2017 FY 2018 Total < 30 days days days > 121 days Undetermined Total Checks clearing with the bank statements were reviewed for all accounts. We reviewed cancelled checks for proper signatures and endorsements and possible transfers. NCNMEDD s policy is to sign checks with two electronic signatures consisting of the Executive Director and a Board member. We reviewed vendors paid, endorsements, timeliness of check clearings and any other unusual items. Atkinson noted five checks that were carried as outstanding checks for a period of over a year. These checks were voided after attempts by North Central to contact original payees. Per client interviews and review of supporting documentation including the amounts on the checks, we believe the outstanding checks did not represent any error or irregularity. We observed approximately 13 checks with missing or faded endorsements. The lack of endorsement is a circumstance that can occur in our experience. We researched all available information including vendor files together with client interviews and believe that none of these checks represent an error or irregularity. There were missing signatures observed on eight checks. Six had only one signature and two were stamped verbally authorized. These checks were from the first year of our review and four of the eight were in relation to REDInet activity. REDInet checks were unrelated to Title III Federal funds. We concluded that the absence of missing signatures on these items did not indicate an error or irregularity. We reviewed bank transfers whereby an amount was transferred from one account to another exclusive of ACH transfers to service providers or to ALTSD. There were just five total transfers and we concluded that the transfers had a reasonable business purpose. We traced 120 checks to supporting documentation. We selected these checks in a random manner. Items were also selected judgmentally. Certain checks principally in connection with credit card payments had inadequate support documentation in relation to business purpose and did not document individuals receiving training or traveling for training or other purposes.

11 Page 7 We reviewed all credit card statements and noted a lack of supporting documentation and documented purpose for some specific transactions. NCNMEDD did not have a procurement policy or procedures over credit card use before July 21, 2017, but as a governmental entity it is subject to the state procurement code. New Mexico law cited under NMSA 1978 specifies that requests for procurement shall contain a statement of need and the general characteristics of the procurement. The policy to follow the state procurement code was formally adopted at July 21, Obtaining and maintaining proper documentation and support for purchases is essential for all state government purchases. See schedule of unallowable, unsupported, and waste transactions on page 17. See Finding Also, during our review of credit card statements, the Organization paid $2,217 of interest calculated on unpaid beginning balances and paid $977 for penalties which included late payment fees on credit cards, a penalty paid to the IRS for a reapplication of tax exempt status for New Mexico Cares and an unemployment insurance assessment of $10,501 including $954 penalty and interest from the state of New Mexico. NCNMEDD is the fiscal agent for New Mexico Cares. The interest and penalty amounts were not charged against federal or state awards but indicate a lack of fiscal responsibility. See Findings and As part of our review of the internal controls surrounding the cash disbursement function we identified a material weakness deficiency in internal control. See Finding In connection with bank reconciliation preparation times, see Finding

12 Page 8 ITEM 2 EXAMINE REIMBURSEMENT REQUESTS FROM NCNMEDD TO ALTSD FOR THE SIX U.S. HEALTH AND HUMAN SERVICES AWARDS Reimbursement requests are made on form SA-1 (provided by ALTSD) monthly. The billings have two components. First, the service providers entering their unit data monthly into the SAMs system is a significant part of the billing. The second component comes through from NCNMEDD as the administration billing for the month. Per interview with the Finance Director the billing protocol has been to bill 1/12 of the approved budget for the year as adjusted by BARs when applicable. This billing method was in place before the year beginning July 1, This billing method requires a final reconciliation of actual expenditures by program and fund to amounts reported to ALTSD as program expenditures. However, the contract entered into by NCNMEDD with ALTSD for the year ending June 30, 2017, indicates that reimbursements shall be made by the Agency on a monthly basis upon receipt of monthly expenditures and reports furnished by the Contractor. This contract provision does not provide for pro rata billings based on budgeted amounts which was used in previous years. See Finding During the year ending June 30, 2017, two budget modifications were made. After the first BAR was made during October 2016 which provided for additional funds to the program, the budget amount used for billing was miscalculated for the administrative category and the available administrative budget was reported higher than it should have been. Consequently, $336,000 was overdrawn for administrative purposes. The program director of NCNMEDD signed the SA-1 reports after her review and continued to sign monthly SA-1 reports as accurate for those submitted after October The submitted reports are also reviewed and accepted by ALTSD as the basis for filing the SF-425s. The error was not corrected until June 2017 and at that time revenue amounts in variance were transferred from administration to programs. ALTSD management reports that the error was not reported to them but was instead found by them after year-end during a field visit. Reported overdrawn amounts for administration were offset by underdrawn amounts for service providers and programs during year-end reconciliation procedures. Overall for the year ending June 30, 2017, the total federal and state award amounts drawn was $20,326,154 which was less than the purchase order issued by ALTSD for the year by $57,827. NCNMEDD also reported an amount of $29,953 which is to be reverted to ALTSD for units that were expected to be paid to a certain service provider but were never utilized. The internal controls in relation to the review and certification of SA-1 reporting by NCNMEDD did not catch this error for a significant part of the year and such reports were also accepted by ALTSD. The absence of a reconciliation policy and corresponding procedure indicate material weakness in the controls for this process. There are open questions about the accuracy of the SF-425s filed for this program by ALTSD working from SA-1s submitted by NCNMEDD. See Finding

13 Page 9 We tested individual transactions as indicated in the scope paragraph including time sheets of personnel charging time to the grants, payroll amounts, amounts of non-payroll expenditures, payments to service providers, and flow of information into the correct general ledger accounts which are organized by program. Our test work indicated that for transactions and relationships tested cost allocations were reasonable. In addition to individual test items we also made certain comparisons of data that should reconcile in relation to federal awards or for total program expenditures. Total expenditures for Title III programs, federal and state per program expenditure reports to those reported in the audited financial statements is scheduled below. A variance of $7,657 is reported between the two reports. Item Expenditures per YTD expenditures report Expenses per FS Reported Amounts $20,326,154 $21,114,044 Less SEP expenses Not part of Title III - ($825,500) Less Audit Adjustment for Reversion (29,953) - Total $20,296,201 $20,288,544 Difference - $7,657 A comparison was made between audited federal revenue per the statement of revenue, expenditures and changes in fund balance and the audited Schedule of Expenditures of Federal Awards (SEFA). There was a difference of $17,419. These amounts should be identical for reimbursement type federal awards. Item Audited Expenditures SEFA Audited Federal Revenue Reported Amounts $7,651,077 $7,561,746 Less Veterans Funds not Part of Title III (71,912) - Total 7,579,165 7,561,746 Difference - $17,419

14 Page 10 The total revenue, expenditures and changes in fund balances for NMAAA Title III programs presented on pages 54 and 55 of the audited financial statements as of and for the year ending June 30, 2017, report a residual fund balance by program that increased or decreased for the year by the excess or deficiency of revenues in comparison to expenditures. The changes in fund balances were not large by program and netted to an aggregate of $7,665 of revenues in excess of expenditures. There may be a general expectation to revert unused funds under the program or to budget positive fund balances not reverted, but we did not see a provision in the contract award for a reversion. NCNMEDD made a corrective adjustment at year end for the administrative overdraw during the year. The entry booked was as follows: Item Debit program revenue Credit program revenue Title III Admin $270, Title III E $ 6, Title III C-2 19, Title III C-1 233, Title III B 11, Title III Admin State - 77, State Grant 77, $347, $347, The total adjustment of $347, corresponds closely to the $336,000 amount identified as an overdrawn amount. The intention of the entry was to correct NCNMEDD General Ledger accounts revenue to match federal expenditures by program for the year. The entry was recorded August 9, 2017, after year-end but as a year-end adjustment. Atkinson reviewed the support for this entry. The adjustment shown here is incorporated into a reconciliation prepared by the Finance Director of NCNMEDD as part of the consulting procedures. The reconciliation shows federal draws made under Title III programs each month for FY Certain variances are reported comparing these federal draws made by NCNMEDD to those reported by ALTSD on its federal reports submitted. With the posting of the correcting entry immediately above, total variances are eliminated except for $100 and for an amount of $29,953 which was identified as due back to ALTSD in the external audit. The adjustment was made to align federal revenue to federal expenses incurred by program. We tested the revenues reported and the adjustments made. We did not verify SF-425 amounts reported by ALTSD. The reconciliation is presented as an appendix to the report, pages The payment procedures contained in 2 CFR indicate that recipients and subrecipients should be paid in advance but only if they meet the requirements of having strong financial and cash systems over federal programs. Under the protocol used by NCNMEDD (1/12 budget billing per month), it is expected that the amount of cash drawn, and the program expenditures would fully align by year end.

15 Page 11 The reconciliations presented report variances that are relatively small. We recommend that NCNMEDD define a monthly closing policy and corresponding procedure that reconciles federal expenditures from program subsidiary records and budget reports to the general ledger monthly. This should be done each month when a reimbursement type payment procedure is in the contract. The schedule of expenditures of federal award amounts for Title III expenditures should agree to subsidiary records and budget reports and to the general ledger for federal expenditures. A listing of federal expenditures, matching and maintenance of effort expenditures, and finally state expenditures should be separately maintained and should balance to total program expenditures. ADJUSTING JOURNAL ENTRIES Adjusting Journal Entries (AJEs) were reviewed and tested throughout the audit. AJEs include the following types; reversing, correcting and reclassification entries. We reviewed all AJEs for reasonableness. For 33 entries, we traced material entries to the accounts adjusted and determined if they were reasonable. For these 33 items, we did not note any AJEs that appeared to be indicative of any remaining error or irregularity after posting. During our testwork procedures performed, we learned that six account codes have to be input for each journal entry. When an entry is entered into the accounting software and an incorrect code is used for any of the six items, the error will later need to be corrected, thus requiring an AJE. Also, AJEs are made on a monthly and annual basis as part of the administration to Title III Federal Awards. These entries are made to adjust or reallocate expenditures to the correct funds and corresponding ledger accounts to properly and accurately report federal expenditures. For cash flow purposes, transfers have been made between federal and state funds under certain circumstances, principally when federal funds have been delayed or there exists an uncertain funding status. In our judgement there was not an excessive amount of correcting AJEs that might indicate possible issues with the initial input of adjustments. Among the 33 AJE s tested there were nine entries that were not sufficiently documented or did not have documented approval. We observed an entry made to effect instructions from ALTSD to remove a legal expense incorrectly recorded as Title III transactions and we noted one entry proposed by external auditors and booked by NCNMEDD to correct Title III funds for an expenditure that was not part of the program. Documented support that was currently attached to AJEs tested consisted of short explanations and copies of system printouts and in some cases copies of invoices or other items. Explanations for the entries tested in some cases were noted as correction of an error which might be viewed as inadequate in the event of federal review. The review of AJEs was documented by signoff of both the Finance Director and the Account Specialist but the character of the review leading to a signoff was unclear. See Finding

16 Page 12 ITEM 3 REVIEW TIMELINESS OF PAYMENTS TO NCNMEDD BY ALTSD AND THE RESPONSE TIME OF PAYMENTS The most relevant criteria governing cash payments of federal awards is the basic principle found in 2 CFR (b). For Non-Federal Entities (NFEs) other than states, payment methods must minimize the time elapsing between the transfer of funds from the United States Treasury or the pass-through entity and the disbursement by the NFE whether the payment is made by electronic funds transfer or issuance or redemption of checks, warrants or payments by other means. This standard indicates the federal government wants to put the award to work as soon as possible and not to have idle funds. Our engagement investigated the payment times of the award from the pass-through entity and the subrecipient and the response time for payment from the subrecipient and the next level of subrecipients, the service providers. Tables 1 and 2 below show the various response times for payments under this transaction process. All service providers must have their information (units) submitted to NCNMEDD by the 5 th business day of the month. NCMEDD then prepares the SA-1 form and sends to ALTSD for review and approval. There may be questions and revisions to this submission based on ALTSD s review. Invoicing for the monthly billing by NCNMEDD to ALTSD is prepared once ALTSD approves a payment. Invoicing is the last step in the process and the invoice date is the date it is prepared by NCNMEDD. The length of time from invoice date until payments are received by NCNMEDD is the time interval for ALTSD to prepare the payment and for DFA to pay the warrant. Additionally, we called 6 responsible officials associated with 26 service providers who indicated that it can take up to 2 months to receive payments. All telephone calls indicated that the time to receive payment is increasing since Fall of Before this period, payments submitted within 5 days of the beginning of a month would normally be paid by the th of the month. ALTSD indicated to us that they are receiving calls from service providers about this matter. NCNMEDD provided a schedule of payments as part of their response to Finding which demonstrates that NCNMEDD made payments to service providers consistently within three days from the deposit of funds received from ALTSD through the Department of Finance and Administration (DFA). The schedule indicates there was resubmission taking place on five occasions. The total time for service providers to receive their monthly payment would be measured from the 5 th business day of the month until NCNMEDD sends payment. The 5 th business day is the requirement for service providers to submit operating data. See schedule attached to Finding , page 47. The table results show instances where payments took longer than 28 days overall for all periods of the review and also for the seven-month period ending January 31, There are two instances (months) of payments taking longer than 28 days in this most recent seven-month period. Similar data is reported for the entire 30 months that payment timing was reviewed.

17 Page 13 Table 1 30 Months Table 2 6 Months Number of Days Monthly Billing 7/2015-1/2018 5th business day to the invoice date Invoice date to the deposit to NCNMEDD from Aging Total time 5th Business day of Month to Subrecipient paid date Number of Days Monthly Billing 7/2017-1/2018 5th business day to the invoice date Invoice date to the deposit to NCNMEDD from Aging Total time 5th Business day of Month to Subrecipient paid date 0 to 7 days to 7 days to 14 days to 14 days to 21 days to 21 days to 28 days to 28 days and greater and greater unknown unknown Total Total Per interview NCNMEDD notes the following factors that can delay a payment: 1. There are instances where payments are withheld from subrecipients due to contract noncompliance. The subrecipients are required to provide insurance documentation for their program, financial reports at the end of each quarter, reports due from site assessments, etc. If the subrecipient fails to provide documents by the contractual due dates, payments are withheld until the program is back in compliance. Non-Metro AAA staff will be in contact with the subrecipient to work with NCNMEDD to get the service provider back into compliance so that ALTSD can release the funds to NCNMEDD as soon as possible. This happens when there is turnover in key positions like a director or fiscal management for the program. Instances of noncompliance as described herein might apply to a small subset of service providers from time to time. It is our observation that this factor would not account for the slowing down of payments in the recent periods unless there has been an increase in the total amount of noncompliance by service providers for the last seven months of our engagement review compared to other periods. NCNMEDD s policy manual dated December 2015 lists the various reporting requirements that pertain to the operations for Service Providers. 2. NCNMEDD notes that starting in fall 2017, it took longer to get the submitted SA-1 approved by ALTSD which is necessary to receive payments from ALTSD. Questions on submitted reports, errors and changes in reporting certain information requested by ALTSD would cause a revised report to be submitted which lengthened the time it took to approve payments. We observed one AJE posted by NCNMEDD that was in response to instructions from ALTSD to remove a certain expenditure from Title III funds submission because it did not qualify. 3. Cash flows appear to be a factor during this time because the Organization received cash on a reimbursement basis after July 1, Previously, they billed 1/12 of the annual budget award each month. Per NCNMEDD, cash reserves were not adequate to fund payments to service providers in advance of receiving their monthly award amount. Additionally, advancing funds before receiving that month s billing assumes all amounts billed would be paid in a timely manner. A delayed payment or a payment of a different amount from ALTSD might affect NCNMEDD s cash flow. See Finding

18 Page 14 ITEM 4 REVIEW AND ASSESS PAID BONUSES We reviewed bonuses/incentive pay for the time periods of July 1, 2015, through January 31, There were three sets of bonuses paid. NCNMEDD paid bonuses/incentive pay of $19,500 on April 29, 2016, to 22 employees. NCNMEDD paid bonuses/incentive pay of $22,900 on May 26, 2017, to 25 employees. NCNMEDD paid $15,000 on July 27, 2017, to 26 employees. The Executive Director did not receive any payments in any year. There was no documented incentive plan at the beginning of any period of our review. The payment of bonuses occurring two or three months before year-end reflects a process whereby towards the end of the year, the organization could determine the final availability of administrative funds after determining all possible unit claims to providers. NCNMEDD would then allocate remaining funds to identified staff in the judgment of the Executive Director with advice from other members of management. The payment of the $15,000 bonus amount on July 27, 2017, was after year-end and the circumstances surrounding that payment amount represented a second payment of bonuses as approved by management. We reviewed incentive pay award memos distributed to employees for those that received incentive pay. We also received written representation from the Executive Director that detailed how the incentive pay was determined. The memos congratulate employees and communicate that their job performance was noted and contributed to NCNMEDD s overall results during the year. The memo indicated that not all employees received an incentive pay amount. The character of the memo was to incentivize and retain employees who have performed well in the judgment of the Executive Director with advisement from his staff. Since the bonuses were the last disbursement decision for the years 2016 and 2017 and are made from expected residual funds, they reflect the practice of NCNMEDD to consume 100% of the grants each year. Reversions were not considered The contract with ALTSD has a provision that NCNMEDD should spend at least one quarter of their award through the first quarters of the year, to stimulate early disbursement of funds to eligible individuals. Our analysis of the incentive pay is that there is business purpose to the disbursements and that they were distributed in a broad manner to employees and not to top management. There is no apparent indication of fraud, waste or abuse. However, per our review of the Uniform Guidance, the incentive payments are not allowed for the following reasons. (1) There must be an incentive pay plan in place at the beginning of the year that details the performance criteria on which the possible payment of incentive bonuses amounts will be made. There is no such plan in place. 2 CFR (f). (2) A basic principle of federal award administration is that the federal government wants to pay its fair share of items including fringe benefits, for instance, but only pay what is the customary practice for the awardee organization in its normal operations. In this case, incentive bonuses were not paid to employees from other grants, so in effect the federal government bore the entire cost of incentive pay for the years 2016 and 2017.

19 Page 15 (3) Incentive pay disbursements do not qualify as reimbursable costs incurred in normal operations. In lieu of an incentive plan in place, the payments would be unallowable. See Finding RELATED PARTY TRANSACTIONS We reviewed transactions tested to identify any work entered with companies that may be associated with the Board or management. No such items were noted. CHAS PROGRAM For 2016 and 2017, NCNMEDD offered a CHAS card to eligible applicants. Two hundred dollars is available on the card to pay certain defined expenses. The funding of the program is part of the State matching money and is budgeted in advance each year. For the most recent year, 500 cards were distributed for a total distribution amount of $100,000. The CHAS program was operating for years before the year ending June 30, An instruction letter is distributed with the card directing the recipient to limit payments to certain expense types food, utilities and medical. Per interview of staff, there was a dedicated staff person assigned to this program who was able to review transactions online from the records of the issuing credit union. We did a telephone interview with the former assigned staff person who indicated that there were documented procedures for seniors to apply to the program but not for monitoring expenditures made under the program. However, the former staff person indicated that she routinely communicated with eligible participants. And due to the extreme need of recipients for food, utilities and medical, she felt that there was little chance of the cards being used in a noncompliant manner. The prior and current staff thought that there had not been any identification of inappropriate use of the cards at any time but that the possibility of such noncompliant activity was low. Early in the program a staff person was terminated by NCNMEDD because of an inappropriate use of the card. We were not able to test the information provided by the former staff person. The CHAS card is equivalent to a loaded charge card and can be used for noncompliant purposes. Based on our interviews with current and prior staff, we considered the procedures for monitoring the program expenditures not sufficient due to lack of documentation. See Finding

20 Page 16 POLICIES AND PROCEDURES In accordance with our charge to review the reimbursement requests and direct and indirect costs charged to the six U.S. Federal Awards from the Department of Health and Human Services, we reviewed the policies and procedures of NCNMEDD in place for the administration of federal awards. In accordance with 2 CFR (b)(7), any State personal award amounts used for matching or maintenance of efforts (both are requirements of Title III programs) must be expended in a manner consistent with the rest of the federal awards. That means that, if it is treated as part of the allowable grant costs, it must be used in accordance with the requirements that apply to the federal share. NCNMEDD has two recent policy and procedures manuals relevant to the period of our review. The standards and policy manual adopted December 14, 2015, is broad and is significantly directed to the policies and procedures that apply to service providers. That manual reflects the tone of the Older Americans Act and references the Single Audit Act practices as contained in Circulars A-133, A-87 and A-102 and A-110 which have been superseded unless there are continuing compliance requirements under a grant that originated before December 26, A second manual was revised and adopted July 21, 2017, and has included policy information about cost allocations, travel policies, records retention and cash receipts and bank information. Further, this manual adopts a conflicts of interest policy for NCNMEDD. Other accounting procedures included in the July 2017 manual by topic include check approvals, check signatures, and accounts receivable. There does not seem to be information brought forward concerning policies and requirements for service providers in the newer policy manual. The organization operated without any policies in connection with the Uniform Guidance for a period from the adoption of the Uniform Guidance (December 26, 2014) until July 21, Our review indicated that the organization did not have a written policy concerning cash management as required by the Uniform Guidance cited above. Cash management is a significant compliance attribute for the Title III programs authorized by the Older Americans Act that affects all stakeholders including pass-through entities, subrecipients and service providers. Our review indicated that the organization did have an allocation of cost policy as of July 21,2017, that is general and references the Uniform Guidance briefly. The allocation of costs and recording of revenue on federal awards is the most significant transaction cycle for NCNMEDD. The process of monthly and year-end accounting and reconciliation followed by NCNMEDD is currently undocumented. We did not see a closing policy for monthly reporting and financial reports. The emphasis on monthly reconciliations may help to minimize the year-end adjustments. The internal reporting section of the July 2017 policy and procedures manual requires that financial reporting be made monthly. We did not see the distribution of these reports in monthly executive committee meetings as documented in the minutes. Further, a financial perspective is not available to the Board at most meetings. See Finding Please refer to Finding in relation to our review of policies and procedures as required by the Uniform Guidance and sound accounting policy.

21 Page 17 SUMMARY OF NONCOMPLIANT ITEMS A summary of unallowable items, unsupported through adequate documentation items, incentive pay and waste items as discussed in Finding is as follows: A = Unallowable: B = Unsupported: Use of funds violates the Uniform Guidance and State Procurement Code requirements. Supporting documentation does not provide a business purpose or other required information for the transaction required for an expense to be allowable. C = Incentive bonus pay - see Finding D = Fees, penalties, and/or fines - deemed waste Date Description/Items Amount Payment Type 2/18/2016 Flowers $ 60 Credit Card A 7/11/2016 Life Tribute - Flowers 120 Credit Card A 9/20/2016 Flowers for a staff family's funeral 177 Credit Card A 9/23/2016 Paladin Community Development Software 8,831 G/L Detail A 1/25/2017 Santa Fe Capital Grill Staff Dinner with Alcohol 459 Credit Card A 2/28/2017 Main Event 1,212 Credit Card A 3/25/2017 Nambe 80 Credit Card A 5/24/2017 Paladin - Panoramic SaaS Annual Subscription 6/30/2017-6/29/ ,092 G/L Account A 6/21/2017 Flowers 146 Credit Card A 9/20/2017 Nambe 109 Credit Card A 10/26/2017 AAA - Donation to the Hunger Summit 109 G/L Detail A 12/6/2017 Eloisa Restaurant Santa Fe 1,199 Credit Card A 12/22/2017 Eloisa Restaurant Santa Fe 1,279 Credit Card A 3/30/2017 Main Event 278 Credit Card A 3/30/2017 Tucanos Grill 630 Credit Card A 24,781 9/11/2015 NADO OMB 2 CFR 200 Webinars 124 G/L Detail A, B 11/3/2015 Courtyard by Marriott Santa Fe 5,262 Credit Card A, B 4/20/2016 Courtyard by Marriott Santa Fe 3,960 Credit Card A, B 5/5/2016 Courtyard by Marriott Santa Fe 1,334 Credit Card A, B 10/10/2016 NADO Membership renewal 9/1/16-12/31/ G/L Detail A, B 10/13/2016 NADO Membership renewal 9/1/16-12/31/ G/L Detail A, B 11/16/2016 NADO Annual Membership Dues 2,640 G/L Detail A, B 1/14/2017 Courtyard by Marriott Santa Fe 1,954 Credit Card A, B 3/24/2017 NADO 2017 Main Registration 125 G/L Detail A, B 4/19/2017 Marriott - Lodging 1,177 Credit Card A, B 4/19/2017 Staff Retreat - Andaluz Banquet Services/Lodging 7,921 Credit Card A, B 5/1/2017 Hotel Santa Fe 1,827 Credit Card A, B 8/15/2017 Isleta Hotel Albuquerque 507 Credit Card A, B 9/13/2017 Marriott Anchorage Alaska 1,152 Credit Card A, B 11/30/2017 NADO 2017 Training Conference 110 G/L Detail A, B 29,857 4/29/2016 Incentive Pay 19,500 Checks A, C 5/26/2017 Incentive Pay 22,900 Checks A, C 7/21/2017 Incentive Pay 15,000 Checks A, C 57,400 Various Unemployment Insurance Penalty and Fees 3,304 ACH Payments D 10/27/2017 IRS Fee for Reapplying for 501c(3) NM Cares 275 Credit Card D Various Credit Card Late Fees 506 Credit Card D Various Credit Card Interest 2,272 Credit Card D 6,357 Total unallowed, unsupported, and waste items $ 118,395

22 Page 18 We thank management and the accounting staff of NCNMEDD and the management of ALTSD who provided required information in a consistent manner for this audit. We are available to answer questions or provide information to ensure a complete and objective report and to maximize the value of the report. Albuquerque, New Mexico July 24, 2018 Atkinson & Co. Ltd.

23 Page 19 FINDINGS FINDING LACK OF SEGREGATION OF DUTIES (Material Weakness) CRITERIA The Uniform Guidance requires the establishment of effective internal controls over the administration of federal awards. See 2 CFR A fundamental principle in internal control is a proper segregation of duties whereby a single individual cannot undertake an irregular transaction because incompatible duties are kept separate. The Model Accounting Practices for the State of New Mexico requires the establishment and maintenance of sound internal controls over the operations of the Governmental entity MAP CONDITION NCNMEDD utilizes dual signature electronic checks for its disbursements made by check. The electronic check signing capacity is in the custody of the Finance Director (FD). A listing of planned disbursements is given to the Executive Director for approval in advance of disbursement and the Board receives a copy of disbursements made. The FD reconciles the bank and is one of two individuals who prepare adjusting journal entries (AJEs). The Account Specialist may also post AJEs and may also reconcile the bank. AJEs are entered in the ledger and documented as posted by either the FD or the Account Specialist. Both the FD and the Account Specialist sign off on adjustments made. The Executive Director signs off on bank reconciliations when complete. The bank reconciliations have been performed late at certain times during the period of our review. It is unclear the character of review made on AJEs or the bank reconciliations when documents are signed off. There is a weakness in controls in that the Finance Director (or Account Specialist) could write themselves a check, and not include it in the list of disbursements for approval and review. Further, such amounts may not be identified in the monthly bank reconciliation process due to the preparation by the FD. The custody of the electronic signature plate by accounting is equivalent to having signed checks available. Our review of check expenditures did not reveal any individual checks that we felt represented fraudulent or irregular transactions. EFFECTS NCNMEDD s internal control structure contains an identified control risk whereby an irregular or fraudulent transaction could be created and entered into the records of NCNMEDD and not be timely detected. An irregular or fraudulent transaction would have an impact on the reputation of the NCNMEDD and would harm its standing with federal oversight agencies and pass-through entities and may impact its ability to perform federal administrative services.