Auditors flag half of Washington counties over COVID-19 aid

As billions of dollars in COVID-19 relief flowed into Washington communities, many local officials appear to have overlooked background checks on contractors or detailed accounting of money passed to nonprofit partners.

Recent audits from the Washington State Auditor’s Office show about half of the state’s counties had issues tracking and vetting federal grant spending amid evolving guidelines on complying with multiple emergency relief programs.

Local officials emphasized that most audits revealed relatively minor procedural oversights, while misuse or fraud remained rare. State auditors acknowledged local agencies had faced many new challenges in administering unprecedented federal aid, but stressed that detailed monitoring helped guard against abuse.

These audits of federal spending will trigger additional scrutiny of financial practices in the agency’s next annual audit, and in some rare cases could lead to requests from the federal government to return funding. Crosscut has not found any Washington cases where an audit led to returning money to the federal government.

Walla Walla County Auditor Karen Martin said some of their smaller departments did not have previous experience handling federal grant money. Some departments simply struggled with the scale of funding coming down.

“There’s no accusations … that any of those dollars were misappropriated,” she said of their latest audit. “[It’s] people just sending too much money all at once.”

Walla Walla County had five new “findings” for shortcomings in accounting practices in its audit of 2021 federal spending released last week. Agencies that spend more than $750,000 in federal funding in a year must undergo a separate audit.

Auditors flagged inadequate monitoring of the organizations the county paid to administer rental assistance and incomplete checks to ensure those organizations, classified as “subrecipients” of federal funding, were eligible for federal dollars.

The county had racked up just three findings in all across its 15 previous audits of federal funding going back to 2007.

This story is a part of Crosscut’s WA Recovery Watch, an investigative project tracking federal dollars in Washington state.

Kelly Collins, director of Local Audits at the State Auditor’s Office, said Walla Walla County reflected a broader uptick the agency has seen in findings for Washington cities and counties still accounting for federal spending at the height of the pandemic. Many local governments have failed to properly document how subrecipients have spent the money they received, or missed risk assessments on those service providers. Officials must check that contractors have not been previously disqualified from receiving federal funds.

“They’re not used to monitoring to see how those nonprofits are using those funds,” Collins said. “It’s not something they’re comfortable or used to doing.”

Of the 36 counties that have had 2021 federal audits released, 21 received findings for shortcomings on federal grant accounting. (Three counties have not yet released audits.) Dozens of cities and towns have received similar financial warnings in recent months. State-level agencies also drew a number of findings over their previous pandemic relief spending.

Eric Johnson, executive director of the Washington State Association of Counties, said some federal programs, like the Coronavirus Relief Fund, sent hundreds of millions of dollars to local agencies with vague guidance and just months to spend the money.

“It was really a time crunch,” he said, adding, “There’s a lot of technicality in some of these [audit] findings that we would argue were pretty bureaucratic.”

Johnson said local officials had a hard time getting clarifications on how they should use and document federal spending. The U.S. Department of Treasury would not always provide timely technical assistance on grant spending, and the State Auditor’s Office cannot give direct advice because it would undermine an independent audit.

“It wasn’t a very collaborative approach to trying to make sure our members stayed out of trouble,” he said. “I think that was frustrating for our members sometimes.”

WSAC Policy Analyst Curtis Steinhauer said direct funding to local governments in the American Rescue Plan created new requirements about vetting contractors, in some cases requiring new risk assessments of providers that agencies had worked with for many years. Other changes to spending rules over time have left officials negotiating with auditors about how they interpreted the rules at different stages.

Steinhauer noted smaller governments did not get to plan their staffing or financial practices around the huge influx of federal relief in 2020 and 2021. And in some cases, guidance from federal officials conflicted with state laws or standards.

“It’s pretty amazing to have this amount of money pumped into every local government in the state, and the findings that we’re seeing are like we missed one piece of paperwork,” he said. “I think overall counties have done a tremendous job.”

State auditors recognize that local officials faced a variety of shifting and complex rules on spending federal aid on tight deadlines. Collins said their audits have still surfaced some significant deficiencies or outdated practices.

Auditors identified $215,408 in questioned costs for pandemic-era salary increases and associated benefits given to Island County workers for hours spent on sick or other leave. County officials argued in their response that auditors had misread federal guidance, and premium pay could cover additional forms of compensation.

In Douglas County, auditors found officials charged $276,530 in unallowable road project costs to federal State and Local Fiscal Recovery Funds outside the mandated time period for spending. County officials responded that they had initially planned to use other funds to pay for the road project, but did not notice that some of the work had occurred prior to the spending period.

In Cowlitz County, auditors issued two findings for closer monitoring of subrecipients over business and rental assistance programs. Cowlitz County Accounting Manager Brooke Poor said the county has reviewed its practices and is working on a new risk-assessment tool to provide better oversight on that spending.

“It was challenging for our county because the funds came at us so quickly,” she said. “These were new types of funds.”

Cowlitz County last year lost, then recovered, about $184,000 in county funds to a phishing scheme in which someone provided a fraudulent bank account for a public works contractor, according to a separate accountability audit. The county also paid $21,000 to a vendor who reportedly never delivered on their agreed services.

Poor said the county has since worked to introduce new cybersecurity training for staff and account verification practices.

Sadie Armijo, director of State Audit and Special Investigations at SAO, said security and verification around electronic payments will continue to be a focus for both auditors and local officials as they continue spending down federal aid. She noted the details that governments must share about their project bids can sometimes leave them more vulnerable to scams that impersonate vendors or contractors.

“You have to be very deliberate and very cautious,” she said.

Find tools and resources in Crosscut’s Follow the Funds guide to track down federal recovery spending in your community.

Johnson with the Washington State Association of Counties said local leaders value the work of auditors, and they hope to continue partnering with them to make sure the public’s money is spent wisely. He said he expects local governments to need guidance on how they can commit or adjust remaining American Rescue Plan dollars as deadlines approach in 2024 and 2026.

“They are highly committed to the accountability of these resources,” he said. “We want this money to go to legitimate uses.”

State and local officials came together in Walla Walla this week for a county auditors conference to discuss ongoing challenges with accounting for public funding including federal COVID-19 relief money. Martin, the local county auditor, said she believes her office will be better equipped to address audit concerns now that they have been through a couple cycles of federal relief.

“We learn from all of these audits all the time,” she said. “The departments take them seriously.”

Collins at the State Auditor’s Office expected similar improvements in future audits.

“It should be better,” she said. “They should have the knowledge now.”