Schedule of Federal Audit Findings and
Questioned Costs
City of Seattle
King County
January 1, 2008 through December 31, 2008
1.

The City of Seattle Department of Transportation does not have adequate
internal controls to ensure it requests reimbursement from the federal
grantor only for allowable costs.
CFDA Number and Title:
Federal Agency:
Federal Award Number:
Questioned Cost Amount:
Pass-through Entity:

CFDA 20.507 Federal Transportation Formula Grants
Federal Transit Administration
WA-90-X394-02
$41,114
N/A

Background
Seattle Department of Transportation project managers receive and review all contractor
invoices and approve them for payment, which serves as the primary internal control to
ensure the Department seeks reimbursement from federal grantors only for allowable
costs. Once contractor invoices are approved for payment, Department accountants use
project expenditure reports to prepare reimbursement requests.
Federal contracting regulations prohibit cost-plus-percentage-of-cost contracts, which
allow the contractor to increase its fees by increasing construction costs so the
contractor has no incentive to control costs.
The original $30.9 million construction contract for the South Lake Union Streetcar
project includes a general contractor/construction management (GCCM) fee based on
4.2 percent of construction costs and capped at $1.1 million. The cap serves to ensure
the GCCM fee does not create a cost-plus-percentage-of-cost situation. Since work
began on this project in 2006, the Department approved numerous change orders
totaling almost $10 million, resulting in increased payments to the contractor.

Description of Condition
Beginning in September 2006, the contractor automatically applied the 4.2 percent
GCCM fee to the value of these change orders, creating a cost-plus-percentage-of-cost
situation. The Program Manager approved the payments.
The Program Manager for the South Lake Union Streetcar project realized the contractor
was being paid for more than it was owed and kept track of almost $1.2 million in
questionable amounts. In April 2008, when the project was nearing completion, the
Program Manager entered into negotiations with the contractor to recoup these costs;

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 the negotiations resulted in an additional $271,997 being paid to the contractor. The
Department did not keep detailed documentation of these negotiations.
Department accountants rely on project managers‘ approval of contractor invoices for
payment to ensure only allowable costs are paid and sought for reimbursement.
However, in this case, the project manager approved the invoices for payment even
when they included unallowable costs.

Cause of Condition
Department accountants erroneously believed contractor invoices approved for payment
contained only allowable charges and used them to prepare requests for grant funding.
The South Lake Union Streetcar Program Manager failed to realize how payment of
unallowable costs negatively affects the Department‘s compliance with federal grant
requirements.

Effect of Condition and Questioned Costs
The contractor‘s GCCM fees on change orders created a cost-plus-percentage-of-cost
situation and the City paid the contractor $388,596.56 in unallowable fees, in excess of
the $1.1 million fee cap. The Department then included at least $41,114 of these
unallowable costs in its request to the federal grantor for reimbursement; the remainder
was charged to the City‘s other funding sources and/or departments such as Seattle City
Light or Seattle Public Utilities.
We question $41,114 of 2008 federal grant
expenditures.

Recommendation
We recommend the Seattle Department of Transportation establish effective internal
controls to ensure only allowable contractor costs are paid and sought for
reimbursement.

City’s Response
We concur with the finding and are looking to add an additional level of review of
contractor payments to ensure adequate controls exist to prevent these types of issues
in the future.

Auditor’s Remarks
We appreciate the Department‘s commitment to resolve this finding and thank the
Department and the City for their cooperation and assistance during the audit. We will
review the corrective action taken during our next regular audit.

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 Applicable laws and Regulations
Office of Management and Budget Circular A-133, Audits of States. Local Governments,
and Non-Profit Organizations, states in part:
The auditee shall:
(b) Maintain internal control over Federal programs that provides
reasonable assurance that the auditee is managing Federal awards in
compliance with laws, regulations, and the provisions of contracts or grant
agreements that could have a material effect on each of its Federal
programs.
Title 49, Code of Federal Regulations, Section 18.36
(f)(4) The cost plus a percentage of cost and percentage of construction
cost methods of contracting shall not be used.

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 Schedule of Federal Audit Findings and
Questioned Costs
City of Seattle
King County
January 1, 2008 through December 31, 2008
2.

The City of Seattle did not comply with federal procurement requirements
and did not have adequate internal controls in place to ensure compliance.
CFDA Number and Title:
Federal Agency:
Federal Award Number:
Questioned Cost Amount:
Pass-through Entity:

97.004, 97.071 and 97.067 Homeland Security Cluster
U.S. Department of Homeland Security
E07-148 ; E08-107
N/A
Washington State Military Department

Background
Regulations require grantees that purchase goods and services with federal grant
money to follow all applicable state laws as well as the federal Office of Management
and Budget Circular A-102 Common Rule. Because no state law governs the City‘s
procurement of consulting services, the City must adhere to the A-102 Common Rule,
which requires grantees to obtain quotes for goods and services costing less than
$100,000 and obtaining bids or requests for proposals for contracts of $100,000 or more.
However, federal regulations permit grantees to solicit services from only one vendor in
certain situations. For example, federal regulations permit noncompetitive transactions
in instances in which awarding the contract is not feasible under bids or competitive
proposals and the item is available only from a single source or competition is
determined to be inadequate. Documentation must be maintained to support this
procurement option.

Description of Condition
The City spent $3,352,643 of Homeland Security Cluster money during 2008. Because
the Seattle Police Department spent most of this, we reviewed a total of six Department
contracts, including four consulting contracts totaling $437,637.
We found the Department did not retain documentation to show consulting contracts
were competitively awarded, the rationale for vendor selection, or how the price was
determined.

Cause of Condition
Because operations at many City departments are not centralized, the Department of
Executive Administration is not able to effectively monitor all Police Department
procurement processes. The Police Department‘s own procurement policies do not fully
conform with the Common Rule.
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 The City‘s and the Police Department‘s internal controls over procurement are
inadequate. Department employees responsible for selection of contractors were not
aware of the requirements to document consultant selection decisions.

Effect of Condition and Questioned Costs
The lack of clarity in the procedures resulted in the City not following federal
procurement requirements for the two of the four consulting contracts we audited.
Failure to comply with federal requirements may jeopardize the City‘s eligibility for future
assistance.
The City cannot ensure it secures the best possible price and did not ensure that
qualified vendors were given the opportunity to participate in the procurement process
as intended by federal regulations.

Recommendation
We recommend the City establish and follow internal controls to ensure procurement
records are retained to sufficiently demonstrate compliance with procurement
requirements.

City’s Response
We concur with the finding that the Police Department’s procurement procedures for two
out of six consultant contracts that were reviewed by the auditors were not fully
documented. Other records show that the Department exercised due diligence in
selecting the contractor, ensuring the price was reasonable and that the vendor was
competent to perform the scope of work, and that the objectives of the grant were
achieved.
To ensure that all federal grant procurement regulations are followed, 1) The
Department’s internal Contracting Manual shall be amended to clearly include federal
requirements; 2) All affected staff shall be trained accordingly; and 3) the Department
shall periodically review grant procurements to monitor compliance with the
requirements. These changes will be implemented by October 15, 2009.

Auditor’s Remarks
We appreciate the Department‘s commitment to resolve this finding and thank the
Department and the City for their cooperation and assistance during the audit. We will
review the corrective action taken during our next regular audit.

Applicable Laws and Regulations
Circular A-102 Common Rule, Uniform Administrative Requirements For Grants And
Cooperative Agreements To State And Local Governments (codified for Homeland
Security Emergency Management programs at Title 44 Code of Federal Regulations,
Section 13.36 – Procurement).

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 Section 13.36(b)(9) states: Grantees and subgrantees will maintain
records sufficient to detail the significant history of a procurement. These
records will include, but are not necessarily limited to the following:
rationale for the method of procurement, selection of contract type,
contractor selection or rejection, and the basis for the contract price.
Section 13.36(c)(1) states: All procurement transactions will be conducted
in a manner providing full and open competition consistent with the
standards of section 13.36 . . .
Section 13.36(d) prescribes methods to be used for procurement:
(1) Procurement by small purchase procedures. Small purchase
procedures are those relatively simple and informal procurement methods
for securing services, supplies, or other property that do not cost more
than the simplified acquisition threshold fixed at 41 U.S.C. 403(11)
(currently set at $100,000). If small purchase procedures are used, price
or rate quotations shall be obtained from an adequate number of qualified
sources.
(2) Procurement by sealed bids (formal advertising). Bids are publicly
solicited and a firm-fixed-price contract (lump sum or unit price) is
awarded to the responsible bidder whose bid, conforming with all the
material terms and conditions of the invitation for bids, is the lowest in
price. The sealed bid method is the preferred method for procuring
construction, if the conditions in §13.36(d)(2)(i) apply.
(i) In order for sealed bidding to be feasible, the following
conditions should be present:
(A) A complete, adequate, and realistic specification or
purchase description is available;
(B) Two or more responsible bidders are willing and able to
compete effectively and for the business; and
(C) The procurement lends itself to a firm fixed price
contract and the selection of the successful bidder can be
made principally on the basis of price.
(ii) If sealed bids are used, the following requirements apply:
(A) The invitation for bids will be publicly advertised and
bids shall be solicited from an adequate number of known
suppliers, providing them sufficient time prior to the date
set for opening the bids;
(B) The invitation for bids, which will include any
specifications and pertinent attachments, shall define the
items or services in order for the bidder to properly
respond;
(C) All bids will be publicly opened at the time and place
prescribed in the invitation for bids;
(D) A firm fixed-price contract award will be made in writing
to the lowest responsive and responsible bidder. Where
specified in bidding documents, factors such as discounts,
transportation cost, and life cycle costs shall be considered
in determining which bid is lowest. Payment discounts will
only be used to determine the low bid when prior

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 experience indicates that such discounts are usually taken
advantage of; and
(E) Any or all bids may be rejected if there is a sound
documented reason.
(3) Procurement by competitive proposals. The technique of competitive
proposals is normally conducted with more than one source submitting an
offer, and either a fixed-price or cost-reimbursement type contract is
awarded. It is generally used when conditions are not appropriate for the
use of sealed bids. If this method is used, the following requirements
apply:
(i) Requests for proposals will be publicized and identify all
evaluation factors and their relative importance. Any response to
publicized requests for proposals shall be honored to the
maximum extent practical;
(ii) Proposals will be solicited from an adequate number of
qualified sources;
(iii) Grantees and subgrantees will have a method for conducting
technical evaluations of the proposals received and for selecting
awardees;
(iv) Awards will be made to the responsible firm whose proposal is
most advantageous to the program, with price and other factors
considered; and
(v) Grantees and subgrantees may use competitive proposal
procedures
for
qualifications-based
procurement
of
architectural/engineering (A/E) professional services whereby
competitors' qualifications are evaluated and the most qualified
competitor is selected, subject to negotiation of fair and
reasonable compensation. The method, where price is not used
as a selection factor, can only be used in procurement of A/E
professional services. It cannot be used to purchase other types of
services though A/E firms are a potential source to perform the
proposed effort.
(4) Procurement by noncompetitive proposals is procurement through
solicitation of a proposal from only one source, or after solicitation of a
number of sources, competition is determined inadequate.
(i) Procurement by noncompetitive proposals may be used only
when the award of a contract is infeasible under small purchase
procedures, sealed bids or competitive proposals and one of the
following circumstances applies:
(A) The item is available only from a single source;
(B) The public exigency or emergency for the requirement
will not permit a delay resulting from competitive
solicitation;
(C) The awarding agency authorizes noncompetitive
proposals; or
(D) After solicitation of a number of sources, competition is
determined inadequate.
(ii) Cost analysis, i.e., verifying the proposed cost data, the
projections of the data, and the evaluation of the specific elements
of costs and profits, is required.

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 (iii) Grantees and subgrantees may be required to submit the
proposed procurement to the awarding agency for pre-award
review in accordance with paragraph (g) of this section.
Section 13.36(f) prescribes requirements for contract cost and price:
(1) Grantees and subgrantees must perform a cost or price analysis in
connection with every procurement action including contract
modifications. The method and degree of analysis is dependent on the
facts surrounding the particular procurement situation, but as a starting
point, grantees must make independent estimates before receiving bids
or proposals. A cost analysis must be performed when the offeror is
required to submit the elements of his estimated cost, e.g., under
professional, consulting, and architectural engineering services contracts.
A cost analysis will be necessary when adequate price competition is
lacking, and for sole source procurements, including contract
modifications or change orders, unless price resonableness can be
established on the basis of a catalog or market price of a commercial
product sold in substantial quantities to the general public or based on
prices set by law or regulation. A price analysis will be used in all other
instances to determine the reasonableness of the proposed contract
price.
(2) Grantees and subgrantees will negotiate profit as a separate element
of the price for each contract in which there is no price competition and in
all cases where cost analysis is performed. To establish a fair and
reasonable profit, consideration will be given to the complexity of the work
to be performed, the risk borne by the contractor, the contractor's
investment, the amount of subcontracting, the quality of its record of past
performance, and industry profit rates in the surrounding geographical
area for similar work.
U S. Office of Management and Budget Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations, Section 300, states in part:.
The auditee shall:
(b) Maintain internal control over Federal programs that provides
reasonable assurance that the auditee is managing Federal awards in
compliance with laws, regulations, and the provisions of contracts or grant
agreements that could have a material effect on each of its Federal
programs.

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 Schedule of Audit Findings and Responses
City of Seattle
King County
January 1, 2008 through December 31, 2008
1.

The City of Seattle’s internal controls over financial statement preparation
are inadequate.
Background
City management, including the Council and Mayor, the state Legislature, state and
federal agencies, bondholders and other interested parties rely on financial statement
information and reports to make decisions. It is the responsibility of City management to
design and follow internal controls that provide reasonable assurance regarding the
reliability of financial reporting. The City Council delegated these responsibilities to the
Departments of Executive Administration and Finance.
Government Auditing Standards, prescribed by the Comptroller General of the United
States, require the auditor to communicate significant deficiencies, as defined below in
the Applicable Laws and Regulations section, as a finding. Our audit identified a
significant deficiency in internal control over financial reporting that adversely affects the
City‘s ability to produce reliable financial statements.

Description of Condition
The City uses a sophisticated and highly functional accounting system. The City has
established a structure within the system used by most City departments. This structure
allows the Departments of Executive Administration and Finance to maintain internal
control over accounting and financial statement preparation.
The City‘s Department of Transportation maintains a separate accounting structure that
is significantly more complicated than the system used by most other City departments.
The Department of Transportation tracks its revenue and expenditures in a way that
does not allow consistent use of the system‘s accounting and reporting tools to prepare
financial statements.

Cause of Condition
Because the Department of Transportation does not use the City‘s general ledger
accounting system as the basis for its financial reporting, the Department of Executive
Administration is not able to have consistent citywide internal controls over financial
statement preparation and is left to develop transportation-specific, manual internal
controls for which reliablity depends on the specialized knowledge of its employees.

Effect of Condition
The City‘s financial reporting system is not being used to its fullest potential. The annual
financial reports are based on numbers generated from an electronic worksheet and not

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 by the general ledger, as would be the usual practice. As a result, the Department of
Transportation and Executive Administration have to rely on manual internal control
processes that create a greater risk of error. Also, having separate internal controls for
the Department of Transportation and reliance on specialized knowledge create
opportunities for future material misstatements.
The opportunities for errors due to this internal control weakness became clear when the
former Finance Manager left in early 2009. We noted the Department‘s original 2008
financial statements presented for audit overreported capital outlays due to using both
the general ledger and manual worksheets as the basis for determining the amounts.
This undetected misclassification of expenditures on the operating statement also
affected the accuracy of other statements and note disclosures. The misclassification
we identified was $19 million, or 9.6 percent of total reported transportation
expenditures. While the City has corrected the error, it is reasonably possible that this
internal control deficiency could allow other large misstatements to go undetected.

Recommendation
We recommend the following:
The Department of Executive Administration establish internal controls to ensure
reported transportation expenditures are based on the City‘s general ledger.
The Departments of Executive Administration, Finance and Transportation
coordinate efforts on a consistent, citywide accounting structure.

City’s Response
We concur with the finding. Although the Seattle Department of Transportation uses the
same financial management system as other City departments, it currently maintains
highly summarized information in the General Ledger and tracks more detailed
information in Project Cost. The Department performs additional manual review of
project data downloaded from the system onto spreadsheets to determine classification
of costs. The misclassification of costs as capital instead of operating costs occurred
during the manual review. However, the reported total expenditure amount is accurate
and reconciles with the General Ledger.
The Department is currently working with the Department of Executive Administration as
part of a citywide effort to review and develop standardized accounting policies and
procedures to facilitate uniform reporting and implement effective controls over financial
statement preparation throughout the City.

Auditor’s Remarks
The City was very helpful during our investigation and we appreciate its commitment to
strengthening its policies and procedures. We are committed to providing any help we
can to ensure strong control systems are in place.

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 Applicable Laws and Regulations
Budget Accounting and Reporting System (BARS) Manual, Part 3, Accounting,
Chapter 1, Accounting Principles and General Procedures, Section C, Internal Control,
states:
Internal control is a process – affected by those charged with governance,
management and other personnel (collectively referred to as
―management‖ throughout the rest of this section) – designed to provide
reasonable assurance regarding the achievement of objectives in the
following categories:
•
•
•

Effectiveness and efficiency of operations
Compliance with applicable laws and regulations
Reliability of financial reporting

Management is responsible for the entity‘s performance, compliance and
financial reporting. Therefore, the adequacy of internal controls to provide
reasonable assurance regarding the achievement of such objectives is
also the responsibility of management.
Internal controls should not be viewed as separate, distinct systems or
processes. Rather, controls should be recognized as an integral or
inherent part of the systems and policies management uses to operate
and oversee the organization. This is not to say effective internal control
will never require additional, incremental effort. Rather, controls exist to
provide reasonable assurance about the achievement of objectives and
so should be integrated into all of the organization‘s fundamental
business processes. Controls are often most effective when they are built
into the entity‘s infrastructure rather than being treated as an ―add-on.‖
Government Auditing Standards, January 2007 Revision, Section 5.11, states:
For all financial audits, auditors should report the following deficiencies in
internal control:
a. Significant deficiency: a deficiency in internal control, or
combination of deficiencies, that adversely affects the entity‘s
ability to initiate, authorize, record, process, or report financial
data reliably in accordance with GAAP such that there is more
than a remote likelihood that a misstatement of the entity‘s
financial statements that is more than inconsequential will not be
prevented or detected.
b. Material weakness: a significant deficiency, or combination of
significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the financial statements
will not be prevented or detected.

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 Schedule of Audit Findings and Responses
City of Seattle
King County
January 1, 2008 through December 31, 2008
2.

The Seattle Department of Transportation’s internal controls over reporting
grant revenue and expenses are inadequate.
Background
City management, including the Council and Mayor, the state Legislature, state and
federal agencies, bondholders and other interested parties rely on financial statement
information and reports to make decisions. It is the responsibility of City management to
design and follow internal controls that provide reasonable assurance regarding the
reliability of financial reporting. The City Council delegated these responsibilities to the
Departments of Executive Administration and Finance.
Government Auditing Standards, prescribed by the Comptroller General of the United
States, require the auditor to communicate significant deficiencies, as defined below in
the Applicable Laws and Regulations section, as a finding. Our audit identified a
significant deficiency in internal control over financial reporting that adversely affects the
City‘s ability to produce reliable financial statements.
Generally accepted accounting principles for government funds allow recipients to
record grant revenue before cash is received if ―availability‖ criteria are met. City policy
states the criteria are met if cash is received within 60 days. If grant receivables are not
collected within the period of availability, related receivables are to be offset by deferred
revenue.

Description of Condition
We noted the following deficiencies in the Department‘s internal controls over grant
revenue and expense reporting:
The Department recorded federal expenditures before securing a grant. The
Department also recorded related grant revenue and grant reimbursement
receivables at the same time. The Department did not request reimbursement or
receive cash within 60 days; therefore, recognition of expenditures, revenue and
receivables is inappropriate.
Amounts reported on the Schedule of Expenditures of Federal Awards are based
on recorded revenue rather than on expenses, as required.

Cause of Condition
The Department incorrectly interpreted grant guidance, which led staff to believe
expense reporting and revenue recognition criteria were met. The Department‘s practice

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 of recording federal grant revenues before it determines whether expenses will be
submitted for reimbursement is inconsistent with generally accepted revenue recognition
principles.
The Department reports revenue on the Schedule of Expenditures of Federal Awards.

Effect of Condition
The Department incorrectly reported revenue in the 2008 financial statements and
incorrectly reported expenditures in the 2008 Schedule of Expenditures of Federal
Awards:
The Department reported expenditures of $788,900 in the schedule based on its
interpretation of ―pre-award authority.‖ It also reported the $788,900 as revenue
and receivables in the City‘s financial statements. However, the Department did
not have the grant agreement it needed to do either of these.
The Department reported $133,234 of federal grant revenue and expenditures
under a completed grant agreement, but later determined those costs would not
be billed or applied to the project.

Recommendation
We recommend the Departments of Executive Administration and Transportation
establish control procedures to ensure:
Accurate reporting of federal grant revenue and receivables in the financial
statements.
Correct reporting of grant expenses in its grant reimbursement requests and on
the Schedule of Expenditures of Federal Awards.

City’s Response
With regard to the $788,900 grant, the Seattle Department of Transportation (SDOT)
agrees that a misapplication of revenue recognition has occurred as it applies to the 60day “availability” criteria established under modified accrual accounting. SDOT has
updated its procedures to ensure uniform compliance with the criteria. The revenue
from this grant was not received at the end of February 2009 as initially expected but will
be received later in 2009.
We disagree with the assertion that “The Department recorded federal expenditures
before securing a grant.” SDOT actually received a grant award letter dated March
2008, notifying it of the $788,900 award. Subsequently in November 2008, the
administration of the grant was transferred to another agency. Although the agency
administering the funds changed, the grant award letter was still in effect. SDOT has
subsequently received approval from the new agency for this grant in the amount
originally awarded. The $788,900 expenditures were therefore appropriately reported as
grant expenditures although the revenues could not be recognized or accrued at yearend since they were not collected within the 60-day availability criteria.

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 In reference to the $133,234 grant expenditure reporting and revenue recognition issues,
the Department agrees that the amount should not have been recorded as grant
expenditure and the revenue accrual should not have occurred. We have added an
additional level of review at the management level to ensure adequate controls exist to
prevent these types of issues in the future. These charges were not billed and did not
affect total funding for the project.
SDOT disagrees with the statement that “the Schedule of Expenditures of Federal
Awards are based on recorded revenues, rather than on expenses, as required.” Grant
expenditures are reconciled with grant revenues at year end so that amounts reported in
the SEFA would equal both expenditures and revenues. The misreporting of $133,234
expenditures in the SEFA was the result of error in initially attributing certain
expenditures to a grant. After the SEFA was submitted for audit, subsequent review by
the Department resulted in a determination that the expenditures were not applicable to
the grant and adjustments were made accordingly. The Department will henceforth
ensure that all grant transactions are reviewed in a timely manner to ensure accuracy of
the SEFA report before the start of audit.

Auditor’s Remarks
We reaffirm our finding. The City was very helpful during our investigation and we
appreciate its commitment to strengthening its policies and procedures. We are
committed to providing any help we can to ensure strong control systems are in place.

Applicable Laws and Regulations
Seattle Municipal Code 3.04.010 creates the Department of Executive Administration
and charges it with establishing and monitoring departmental compliance with,
accounting practices and procedures and preparing the City‘s comprehensive annual
financial report in accordance with generally accepted accounting principles.
City of Seattle’s Comprehensive Annual Financial Report (CAFR) describes the
Transportation Fund as a governmental fund and contains a summary of significant
accounting policies.
Governmental Accounting Standards Board Statement No. 34, Measurement Focus and
Basis of Accounting, paragraph 79, states in part:
Financial statements for governmental funds should be presented using
the current financial resources measurement focus and the modified
accrual basis of accounting.
Governmental Accounting Standards Board Statement No. 33 , Recognition Standards
section, states in part:
On the modified accrual basis, revenues should be recognized when all
applicable eligibility requirements are met and the resources are
available.

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 NCGA Statement 1, Par. 62, provides definitions of availability revenue recognition
criteria:
Revenues and other governmental fund financial resource increments are
recognized in the accounting period in which they become susceptible to
accrual—that is, when they become both measurable and available to
finance expenditures of the fiscal period. "Available" means collectible
within the current period or soon enough thereafter to be used to pay
liabilities of the current period. Application of the "susceptibility to accrual"
criteria requires judgment, consideration of the materiality of the item in
question, and due regard for the practicality of accrual, as well as
consistency in application.
Federal Register, vol. 73, no. 18, Monday January 28, 2008, Part II – Federal
Transportation Administration; Section V, paragraph 3(a) states in part:
Pre-award authority is not a legal or implied commitment that the subject
project will be approved for FTA assistance or that FTA will obligate
Federal funds. Furthermore, it is not a legal or implied commitment that all
items undertaken by the applicant will be eligible for inclusion in the
project.
Office of Management and Budget Circular A-102, Uniform Administrative Requirements
for Grants and Cooperative Agreements to State and Local Governments, Section 23
states in part:
Any pre-award costs charged to the grant must be authorized by the
Federal awarding agency.
Office of Management and Budget Circular A-133, Attachment A, Subpart C,
Section 310 requires recipients of federal funds to prepare a Schedule of Expenditures
of Federal Awards that shall:
Provide total federal awards expended for each individual federal
program . . . .

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 Schedule of Audit Findings and Responses
City of Seattle
King County
January 1, 2008 through December 31, 2008
3.

The City inappropriately omitted federal funds from its Schedule of
Expenditures of Federal Awards.
Background
City management, including the Council and Mayor, the state Legislature, state and
federal agencies, bondholders and other interested parties rely on financial statement
information and reports to make decisions. It is the responsibility of City management to
design and follow internal controls that provide reasonable assurance regarding the
reliability of financial reporting. The City Council delegated these responsibilities to the
Departments of Executive Administration and Finance.
Government Auditing Standards, prescribed by the Comptroller General of the United
States, require the auditor to communicate significant deficiencies, as defined below in
the Applicable Laws and Regulations section, as a finding. Our audit identified a
significant deficiency in internal control over financial reporting that adversely affects the
City‘s ability to produce reliable financial statements.

Description of Condition
We identified the following deficiency in internal controls over financial reporting that
represent a significant deficiency:
The City‘s grants are managed at the department level. Departmental staff responsible
for the administration and reporting of federal awards did not provide accurate
information for the preparation of the Schedule of Expenditures of Federal Awards
(SEFA) to the Department of Executive Administration. This schedule is required by the
federal Office of Management and Budget Circular A-133 for entities spending federal
grant money. Additionally, the Department of Executive Administration does not have
adequate processes to ensure the accuracy of information it includes in the SEFA.

Cause of Condition
Employees responsible for reporting federal expenditures lacked a full understanding of
Circular A-133 reporting requirements. In this case, loans were omitted because the
SEFA preparation process does not include review of outstanding federal loans.

Effect of Condition
We identified $1.67 million of outstanding federal loans that were inappropriately omitted
from the 2008 SEFA. Failure to include complete expenditures on the SEFA may result
in not meeting federal audit requirements established by Circular A-133.
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 The 2007 SEFA also omitted $6.54 million for similar type loans. Because they were
omitted from the 2007 SEFA, U.S. Department of Housing and Urban Development
program (CFDA 14.248) expenditures were not subjected to audit, as required by
Circular A-133.

Recommendation
We recommend:
The Department of Executive Administration establish appropriate internal control
processes to ensure information received from its departments and reported on
the SEFA is accurate and complete.
The City consult with the U.S. Department of Housing and Urban Development
for a decision regarding audit of the loans omitted from the 2007 SEFA.

City’s Response
We agree with the finding. We have corrected the 2008 SEFA to include the HUD
Section 108 loans and have established procedures to ensure that similar information
will be reported accurately and completely in the future.
The City has made inquiries to HUD’s local office to determine if that agency will require
an audit of the 2007 HUD Section 108 loans which were inadvertently omitted from the
2007 SEFA. A program manager indicated it is unlikely that HUD will ask for an audit of
our 2007 grant activities based on her experience in monitoring and assessing the City’s
administration of the program over the last several years, but she will confirm HUD’s
official position on this issue after further consultation with staff. We will inform the State
Auditor of HUD’s position as soon as we hear from the agency.

Auditor’s Remarks
The City was very helpful during our investigation, and we appreciate its commitment to
strengthening its policies and procedures. We are committed to providing any help we
can to ensure strong control systems are in place.

Applicable Laws and Regulations
Seattle Municipal Code 3.04.010 creates the Department of Executive Administration
and charges it with establishing and monitoring departmental compliance with,
accounting practices and procedures and preparing the City‘s comprehensive annual
financial report in accordance with generally accepted accounting principles.
Budget Accounting and Reporting System (BARS) Manual, Part 3, Accounting,
Chapter 1, Accounting Principles and General Procedures, Section C, Internal Control,
states:
Internal control is a process – affected by those charged with governance,
management and other personnel (collectively referred to as
―management‖ throughout the rest of this section) – designed to provide
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 reasonable assurance regarding the achievement of objectives in the
following categories:
•
•
•

Effectiveness and efficiency of operations
Compliance with applicable laws and regulations
Reliability of financial reporting

Management is responsible for the entity‘s performance, compliance and
financial reporting. Therefore, the adequacy of internal controls to provide
reasonable assurance regarding the achievement of such objectives is
also the responsibility of management.
Internal controls should not be viewed as separate, distinct systems or
processes. Rather, controls should be recognized as an integral or
inherent part of the systems and policies management uses to operate
and oversee the organization. This is not to say effective internal control
will never require additional, incremental effort. Rather, controls exist to
provide reasonable assurance about the achievement of objectives and
so should be integrated into all of the organization‘s fundamental
business processes. Controls are often most effective when they are built
into the entity‘s infrastructure rather than being treated as an ―add-on.‖
Government Auditing Standards, January 2007 Revision, Section 5.11, states:
For all financial audits, auditors should report the following deficiencies in
internal control:
a. Significant deficiency: a deficiency in internal control, or
combination of deficiencies, that adversely affects the entity‘s
ability to initiate, authorize, record, process, or report financial
data reliably in accordance with GAAP such that there is more
than a remote likelihood that a misstatement of the entity‘s
financial statements that is more than inconsequential will not be
prevented or detected.
b. Material weakness: a significant deficiency, or combination of
significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the financial statements
will not be prevented or detected.
Office of Management and Budget Circular A-133 provides guidance on reporting of
federal expenditures:
Section 105 defines federal assistance and loans:
Federal financial assistance means assistance that non-Federal
entities receive or administer in the form of grants, loans, loan
guarantees, property (including donated surplus property),
cooperative agreements, interest subsidies, insurance, food
commodities, direct appropriations, and other assistance, but does
not include amounts received as reimbursement for services
rendered to individuals as described in §___.205(h) and
§___.205(i).

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 Loan means a Federal loan or loan guarantee received or
administered by a non-Federal entity.
Section 205 provides basis for determining Federal awards expended:
(b) Loan and loan guarantees (loans). Since the Federal
Government is at risk for loans until the debt is repaid, the
following guidelines shall be used to calculate the value of Federal
awards expended under loan programs, except as noted in
paragraphs (c) and (d) of this section:
(1) Value of new loans made or received during the fiscal
year; plus
(2) Balance of loans from previous years for which the
Federal Government imposes continuing compliance
requirements; plus
(3) Any interest subsidy, cash, or administrative cost
allowance received.
(d) Prior loan and loan guarantees (loans). Loans, the proceeds of
which were received and expended in prior-years, are not
considered Federal awards expended under this part when the
laws, regulations, and the provisions of contracts or grant
agreements pertaining to such loans impose no continuing
compliance requirements other than to repay the loans.
Section 200, establishes annual audit requirements when federal
expenditures reach $500,000.
Section 300 requires recipients of federal funds to prepare a Schedule of
Expenditures of Federal Awards.
Section 310 establishes minimum reporting requirements for federal
expenditures:
(a) Identify, in its accounts, all Federal awards received and
expended and the Federal programs under which they were
received . . .
(d) Prepare appropriate financial statements, including the
schedule of expenditures of Federal awards in accordance with
§___.310.
(e) Ensure that the audits required by this part are properly
performed and submitted when due.

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 Schedule of Audit Findings and Responses
City of Seattle
King County
January 1, 2008 through December 31, 2008
4.

The Seattle City Employees Retirement System’s internal controls over
investments and financial statements were inadequate.
Background
City management, the state Legislature, state and federal agencies and bondholders
rely on information in financial statements and reports to make decisions. City
management is responsible for designing and following internal controls that provide
reasonable assurance regarding the reliability of financial reporting. The Seattle City
Employees‘ Retirement System‘s financial statements were audited by a certified public
accounting firm that furnished reports on the statements to our Office. Government
Auditing Standards, prescribed by the Comptroller General of the United States, require
the auditor to communicate material weaknesses, as defined below in the Applicable
Laws and Regulations section, as a finding. We are reporting on material weaknesses
in controls identified by the firm that result in more than a remote likelihood that a
material misstatement of the financial statements will not be prevented or detected by
the System's internal control.

Description of Condition
The firm noted internal control deficiencies over two areas: monitoring and valuation of
investments and the year-end financial closing and reporting process.
Monitoring and Valuation of Investments
The System‘s internal control over investments is inadequate. It does not have
documentation to show monitoring and valuation take place throughout the year and at
year-end, particularly for the System‘s alternative investments. Alternative investments
are defined as any investment in which a readily determinable fair value does not exist
(investments not listed on national exchanges or over-the-counter markets or for which
quoted market prices are not available). Alternative investments were approximately 25
percent of the System‘s investment portfolio at December 31, 2008.
Management relies primarily on its investment fund managers to supply valuations for its
alternative investments. Due to the volatility of global markets during late 2008 and the
delayed financial reporting of many of the System‘s investment holdings, management
was unable to ascertain the fair value of certain investments in a timely manner.
Management has employed minimal procedures to monitor its alternative investments.
Although management may look to the fund manager for the mechanics of the valuation,
management should have sufficient information to evaluate and independently challenge
each investment‘s valuation.

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 Financial Closing and Reporting Process
The System does not maintain an adequate internal control structure governing the yearend financial closing and reporting processes. The System did not accurately, reliably
and timely account for the value of its investments in the general ledger.

Cause of Condition
During 2008, the control structure over investment monitoring deteriorated due to
reduced personnel assigned to actively monitor the investment valuations and activity.
We believe the identified issues were a result of the System not employing a sufficient
number or accounting staff with dedicated responsibilities to financial reporting. This
issue is exacerbated by a lack of qualified personnel working directly with the System‘s
investment holdings. The lack of a robust financial closing and reporting process
prevented the System from being able to close its general ledger on a timely and
accurate basis and resulted in material audit adjustments.

Effect of Condition
Significant audit adjustments were required to correct the System‘s reported investment
values. Audit adjustments totaling $49.6 million were made that reduced the investment
balances reported in the financial statements to reflect the estimated fair value of
investments as of December 31, 2008. These adjustments represent unrealized losses,
actual losses or possible gains would be realized when the investments are actually
liquidated at a future date.
Many of the subledgers did not properly support the general ledger an December 31,
2008 and had not been reconciled during the year. System staff did not reconcile the
differences until the second quarter of 2009. Additionally, material audit adjustments
were made to the System‘s investment balances and assistance was provided by the
auditors in drafting the financial statements and the notes to the financial statements.
The identified financial closing and reporting matters had a pervasive and material effect
on the accuracy and timeliness of the completion of the System‘s financial statements.

Recommendation
The firm recommended the System:
Develop robust controls to effectively monitor its investments, especially its
alternative investment holdings.
As part of fulfilling its responsibility,
management should establish procedures for determining fair value
measurements and disclosures, select appropriate valuation methods, identify
and adequately support any significant assumptions used, prepare the valuation
and ensure the presentation of the fair value measurements are in accordance
with generally accepted accounting principles. Key processes and controls to
accomplish these objectives include physical site visits, a comprehensive
understanding of the valuation techniques used by fund management and an
independent determination of whether such valuation methods prove reasonable.
Formal documentation of the evidence obtained to support the valuation for each
investment holding should be updated on at least on a quarterly basis.

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 Seek a qualified candidate for employment as an investment specialist. The
System‘s investment portfolio is comprised of a number of complex,
nonmarketable investments, which require significant monitoring and valuation
consideration. A portfolio as large and complex as the System‘s requires
constant and diligent oversight by qualified personnel. The employment of such
an individual should result in more accurate, complete and timely financial
reporting surrounding the System‘s investments.
Management complete its planned hiring process and fill the open senior
manager positions, which remained vacant for most of 2008. The addition of
these manager positions and additional qualified accounting personnel would
allow for executive management to effectively and efficiently perform its oversight
and monitoring duties. Additional personnel would also allow the System to
employ more effective and robust segregated controls.

City’s Response
We agree with the finding and appreciate the auditor’s recommendations. SCERS
management is committed to strengthening internal controls over monitoring and
valuation of investments, and the financial close and reporting process. SCERS has
started the hiring process for an investments specialist to provide additional support in
ensuring effective monitoring as well as accurate, complete and timely financial reporting
on the System’s investments. SCERS is also in the process of hiring a senior manager
to strengthen overall accounting and reporting functions as well as implement effective
internal controls. Operating procedures related to investments monitoring, accounting
and reporting will be reviewed and strengthened; appropriate training will be provided to
staff; and compliance with established procedures will be monitored regularly.

Auditor’s Remarks
The City was very helpful during our investigation, and we appreciate its commitment to
strengthening its policies and procedures. We are committed to providing any help we
can to ensure strong control systems are in place.

Applicable Laws and Regulations
RCW 43.09.200 states:
The state auditor shall formulate, prescribe, and install a system of
accounting and reporting for all local governments, which shall be uniform
for every public institution, and every public office, and every public
account of the same class.
The system shall exhibit true accounts and detailed statements of funds
collected, received, and expended for account of the public for any
purpose whatever, and by all public officers, employees, or other persons.
The accounts shall show the receipt, use, and disposition of all public
property, and the income, if any, derived there from; all sources of public
income, and the amounts due and received from each source; all
receipts, vouchers, and other documents kept, or required to be kept,

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 necessary to isolate and prove the validity of every transaction; all
statements and reports made or required to be made, for the internal
administration of the office to which they pertain; and all reports published
or required to be published, for the information of the people regarding
any and all details of the financial administration of public affairs.
Budget Accounting and Reporting System (BARS) Manual, Part 3, Accounting,
Chapter 1, Accounting Principles and General Procedures, Section B, Internal Control,
states in part:
Internal control is a management process for keeping an entity on course
in achieving its business objectives, as adopted by the governing body.
This management control system should ensure that resources are
guarded against waste, loss and misuse; that reliable data is obtained,
maintained, and fairly disclosed in financial statement and other reports;
and resource use is consistent with laws, regulations and policies.
Each entity is responsible for establishing and maintaining an effective
system of internal control throughout their government.
Government Auditing Standards, January 2007 Revision, Section 5.11, states in part:
For all financial audits, auditors should report the following deficiencies in
internal control:
a. Significant deficiency: a deficiency in internal control, or
combination of deficiencies, that adversely affects the entity‘s
ability to initiate, authorize, record, process or report financial data
reliably in accordance with generally accepted accounting
principles such that there is a more than remote likelihood that a
misstatement of the entity‘s financial statements that is more than
inconsequential will not be prevented or detected.
b. Material weakness: a significant deficiency, or combination of
significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the financial statements
will not be prevented or detected . . . .

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 Schedule of Audit Findings and Responses
City of Seattle
King County
January 1, 2008 through December 31, 2008
5.

The Seattle City Light Department’s internal controls over inventory are
inadequate.
Background
City management, the state Legislature, state and federal agencies and bondholders
rely on information in financial statements and reports to make decisions. City
management is responsible for designing and following internal controls that provide
reasonable assurance regarding the reliability of financial reporting. The Seattle City
Light Department‘s financial statements were audited by a certified public accounting
firm that furnished reports on the statements to our Office. Government Auditing
Standards, prescribed by the Comptroller General of the United States, require the
auditor to communicate significant deficiencies, as defined below in the Applicable Laws
and Regulations section, as a finding. We are reporting on significant deficiencies in
controls identified by the firm that have the potential to adversely affect the City‘s ability
to initiate, authorize, record, process or report inventory data reliably in accordance with
generally accepted accounting principles, such that there is more than a remote
likelihood that a misstatement of the City's financial statements that is more than
inconsequential will not be prevented or detected by the City's internal control.
Although the firm notes the Department responded to the issues identified in the 2007
audit in a timely manner, it noted additional concerns related to internal controls over
inventory in 2008.

Description of Condition
The firm noted several large reels of electrical power cable at a City Light service center
were not recorded in the inventory system. The firm also noted that when unused
materials issued for work orders are returned to the warehouse, they are not consistently
recorded into inventory records. When warehouse employees discover returned
materials, they conduct research to determine the materials‘ initial purpose (i.e. to be
used in capital or maintenance work orders, other service centers, etc.). The employees
then adjust inventory records to eliminate the returned amounts from work orders or
record them as inventory at the service centers.
During the 2008 audit, the firm noted additional concerns related to the timeliness and
accuracy of inventory adjustment documentation given to the Cost Accounting Unit. The
firm found it is common practice for the warehouse staff to fail to notify the Cost
Accounting Unit of inventory adjustments in a timely manner following physical counts. It
also noted adjustments in the inventory system lack sufficient supporting documentation
and appear to be recorded to merely reconcile the balance to the general ledger.

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 Cause of Condition
The cable was not a regular warehouse item and therefore was not recorded in the
inventory.
The Department crew members and warehouse staff do not communicate effectively to
ensure all issued and returned material is accounted for and recorded in the inventory
system.

Effect of Condition
Due to the lack of communication, the Department risks a misstatement in its financial
statements. For instance, if a significant amount of inventory is returned and the
warehouse staff is not notified, this could result in overstating the value of materials used
in capital and maintenance projects and understating the value of materials remaining in
inventory.

Recommendation
The firm recommended the Department:
Establish stronger controls to ensure information on returned materials is
adequately communicated to the warehouse staff and properly recorded.
Investigate all unidentified inventory discovered during physical counts and make
sufficient supporting documentation available to the Cost Accounting Unit.
Ensure that the Cost Accounting Unit obtain all supporting documentation related
to inventory variances immediately following the physical test counts and prior to
recording any adjustments.

City’s Response
The Department has taken steps to enhance the controls over inventory issue and return
procedures, controls over documentation, and for the timely recording of inventory
variances. A work plan was developed in the second quarter of 2009 to define the
actions needed to address the issues identified.
New procedures have been
implemented or in some cases are in the process of being implemented to resolve the
control deficiencies.
The manager in charge of Energy Delivery Support Services issued a memo on June 8.
This memo details new material handling and restocking procedures documenting
material return document requirements, as well as new requirements for material
requests, out-of-service material, and exempt material. City Light’s Contracting and
Purchasing staff will monitor and report on compliance with the procedures.
City Light Shipping now requires that any material transported, relocated or moved have
identification on the actual material. This process includes all materials going to or from
generation facilities, jobsites and substations. All warehouse staff received notification to
comply with this requirement in June.

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 Based on guidelines developed in March of 2009, warehouse staff also now works
directly with the Cost Accounting technician when cycle count audits are conducted and
assists with documenting any adjusting transactions.
By Cost Accounting and
Warehouse staff working together to resolve discrepancies at the time they are found,
inventory variances should be resolved immediately following the physical test counts
and the need for adjustments should be minimized or eliminated completely.
City Light has begun the process to develop a report to search for open Material
Requests tied to work closed or completed in City light’s work tracking system. This
report will be used to close Material Requests.

Auditor’s Remarks
The City and Department were very helpful during our investigation and we appreciate
their commitment to strengthening policies and procedures. We are committed to
providing any help we can to ensure strong control systems are in place.

Applicable Laws and Regulations
RCW 43.09.200 states:
The state auditor shall formulate, prescribe, and install a system of
accounting and reporting for all local governments, which shall be uniform
for every public institution, and every public office, and every public
account of the same class.
The system shall exhibit true accounts and detailed statements of funds
collected, received, and expended for account of the public for any
purpose whatever, and by all public officers, employees, or other persons.
The accounts shall show the receipt, use, and disposition of all public
property, and the income, if any, derived there from; all sources of public
income, and the amounts due and received from each source; all
receipts, vouchers, and other documents kept, or required to be kept,
necessary to isolate and prove the validity of every transaction; all
statements and reports made or required to be made, for the internal
administration of the office to which they pertain; and all reports published
or required to be published, for the information of the people regarding
any and all details of the financial administration of public affairs.
Budget Accounting and Reporting System (BARS) Manual, Part 3, Accounting,
Chapter 1, Accounting Principles and General Procedures, Section B, Internal Control,
states in part:
Internal control is a management process for keeping an entity on course
in achieving its business objectives, as adopted by the governing body.
This management control system should ensure that resources are
guarded against waste, loss and misuse; that reliable data is obtained,
maintained, and fairly disclosed in financial statement and other reports;
and resource use is consistent with laws, regulations and policies.

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Washington State Auditor's Office
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 Each entity is responsible for establishing and maintaining an effective
system of internal control throughout their government.
Government Auditing Standards, January 2007 Revision, Section 5.11, states in part:
For all financial audits, auditors should report the following deficiencies in
internal control:
a. Significant deficiency: a deficiency in internal control, or
combination of deficiencies, that adversely affects the entity‘s
ability to initiate, authorize, record, process or report financial data
reliably in accordance with generally accepted accounting
principles such that there is a more than remote likelihood that a
misstatement of the entity‘s financial statements that is more than
inconsequential will not be prevented or detected.
b. Material weakness: a significant deficiency, or combination of
significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the financial statements
will not be prevented or detected . . . .

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