oversight

Audit of the Supportive Housing Program Grant to the National Scholarship Service and Veteran's Opportunity and Resource Center, Atlanta, Georgia

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-07-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    AUDIT REPORT




 AUDIT OF THE SUPPORTIVE HOUSING PROGRAM
               GRANT TO THE
    NATIONAL SCHOLARSHIP SERVICE AND
VETERAN’S OPPORTUNITY AND RESOURCE CENTER
             ATLANTA, GEORGIA

                         2002-AT-1003

                         JULY 25, 2002



                    OFFICE OF AUDIT, REGION 4




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                                                             Issue Date
                                                                     July 25, 2002
                                                            Audit Case Number
                                                                     2002-AT-1003




TO:           John Perry, Director, Office of Community Planning and Development, 4AD



FROM:         Nancy H. Cooper
              Regional Inspector General for Audit, 4AGA


SUBJECT:      Audit of SHP Grant to the National Scholarship Service and
              Veteran’s Opportunity and Resource Center, Inc.
              Atlanta, Georgia

At your request, we completed an audit of the Supportive Housing Program (SHP) grant and
matching fund expenditures by the National Scholarship Service (NSS)/Veteran’s Opportunity
and Resource Center, Inc. (VORCI). We initiated the audit based on your concerns that NSS-
VORCI could not adequately account for its 1997 SHP grant expenditures and could not identify
eligible matching fund expenditures. You also expressed concerns about VORCI properly
accounting for grant and matching fund expenditures from a 2000 renewal grant.

In accordance with the Department of Housing and Urban Development (HUD) Handbook
2000.06 REV-3, within 60 days please provide us, for each recommendation without
management decisions, a status report on: (1) the corrective action taken; (2) the proposed
corrective action and the date to be completed; or (3) why action is considered unnecessary.
Additional status reports are required at 90 days and 120 days after report issuance for any
recommendation without a management decision. Also, please furnish us copies of any
correspondence or directives issued because of the audit.

We provided a copy of this memorandum to NSS and VORCI.

If you have any questions, please contact me or contact Terry Cover, Assistant Regional
Inspector General for Audit, at (404) 331-3369.




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Executive Summary
We audited NSS-VORCI’s expenditures of a 3-year 1997 Supportive Housing Grant for
$1,885,338 as requested by the Director, Office of Community Planning and Development, in
Atlanta, Georgia. Our objectives were to determine whether grant and matching funds were
properly accounted for and expended for eligible costs. We also assessed whether a subsequent
2000 renewal grant was properly accounted for.

NSS-VORCI’s management did not responsibly manage grant accounting, expenditures, and
compliance with SHP requirements. They did not establish (1) accounting system procedures
and controls needed to comply with Federal requirements for grant fund accounting, (2)
procedures to ensure only eligible and necessary expenditures were charged to SHP grant funds,
and (3) procedures to monitor and compare SHP expenditures to the approved budget. Salaries
and other costs that benefited multiple programs were not allocated to programs and fund sources
in a documented and systematic manner. VORCI’s accounting journals and general ledger were
incomplete, inaccurate, and contained numerous misclassified costs. As a result, VORCI spent
grant funds on ineligible and unnecessary costs, deviated significantly from its approved budget
without HUD approval, and did not meet matching fund requirements. We attribute these
conditions to NSS-VORCI’s Executive Director and Board of Directors not ensuring responsible
management practices and compliance with HUD requirements for grants management.

NSS-VORCI expended about 25 percent of 1997 SHP grant funds for ineligible and unsupported
costs. Costs incurred were frequently not in the approved budget, were for unapproved housing
facilities, or were not in compliance with SHP program regulations. The improper expenditures
occurred because NSS-VORCI management did not establish management controls and did not
monitor expenses to ensure that grant funds were spent for eligible purposes and were adequately
documented. As a result, grant fund expenditures included $158,330 of ineligible costs and
$313,811 of unsupported costs. Additionally, $34,443 of operating expenditures was ineligible
for HUD funding because it was not matched by VORCI.



                                    We recommend that you terminate further SHP grant
 Recommendations                    funding to VORCI. New funding should not be considered
                                    until VORCI’s Board of Directors and Executive Director
                                    have established written management and accounting
                                    procedures and controls to ensure accounting is complete
                                    and accurate, and expenditures are monitored for eligibility,
                                    proper support, and correlation to the budget. We
                                    recommend that you require VORCI to replace its
                                    Executive Director and strengthen Board oversight
                                    processes before providing any new grant funding. We also
                                    recommend you require VORCI to repay $158,330 for
                                    ineligible costs, and $34,443 for grant funds that were not
                                    matched. VORCI should also provide adequate support for
                                    $313,811 of unsupported costs or repay those funds to
                                    HUD.

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Table of Contents
Management Memorandum                                                                         i



Executive Summary                                                                           iii



Introduction                                                                                 1



Findings

1.     Management Did Not Responsibly Manage Grant Funds,
       Accounting, and Compliance With SHP Requirements                                     3


2.     NSS-VORCI Expended SHP Funds for Ineligible and
       Unsupported Costs                                                                   15




Management Controls                                                                        23



Follow-Up On Prior Audits                                                                  25



Appendices
     A. Summary of Questioned Costs                                                        27

     B. Schedule of Ineligible Costs                                                       29

     C. Schedule of Unsupported Costs                                                      33

     D. Analysis of Eligible Costs and Grant Funding (excluding Rehabilitation Funds)      35

     E. Auditee Comments                                                                   37

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    F. Distribution Outside of HUD                                      45



Abbreviations

CFR            Code of Federal Regulations
HUD            Department of Housing and Urban Development
NSS            National Scholarship Service
OIG            Office of Inspector General
SHP            Supportive Housing Program
VORCI          Veteran’s Opportunity and Resource Center, Inc.




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Introduction
Title IV of the Stewart B. McKinney Homeless Assistance Act authorized the SHP. The
program is designed to promote the development of supportive housing and services. The
program encourages the use of innovative approaches to assist homeless persons and provides
supportive housing to enable them to live as independently as possible. Grant funds may be used
to (1) establish new supportive housing facilities or new facilities to provide supportive services;
(2) expand existing facilities in order to increase the number of homeless persons served; (3)
bring existing facilities up to a level that meets health and safety standards; (4) provide additional
supportive services for residents of supportive housing or for homeless persons not residing in
supportive housing; (5) purchase HUD-owned single family properties for use as a homeless
facility; and (6) continue funding supportive housing where the recipient has received funding for
leasing, supportive services, or operating costs. In its technical submission to HUD, NSS
(formerly the National Scholarship Service and Fund for Negro Students) proposed to provide
new and expanded transitional housing with supportive services for the homeless veteran
population of Atlanta. It stated that the expansion project would increase the number of
homeless persons served and provide additional supportive services for residents of supportive
housing and/or homeless persons not residing in supportive housing.

The NSS is a nonprofit community based organization and has provided services in Atlanta since
1947. NSS veterans programs began in 1972 and included two components that provided a
continuum of care for homeless veterans: Harris House Veterans Center, providing transitional
housing and supportive services since 1988; and Veterans Upward Bound, providing educational
enhancement since 1972. VORCI was a subsidiary of NSS, but separated from NSS effective
October 2, 2000. A 13-member board administers the VORCI organization. NSS and VORCI
offices are located at 2001 Martin Luther King Jr., Drive, Atlanta, Georgia.

On August 4, 1997, HUD awarded NSS $1,885,338 in SHP funds for a 3-year grant period to
provide new and expanded transitional housing and additional supportive services for residents
of supportive housing and/or homeless persons not residing in supportive housing. The grant
period was from March 1, 1998, through February 28, 2001. On October 2, 2000, the grant
agreement was amended to change the grantee to VORCI, which then became responsible for
grant administration. At that time, VORCI obtained the SHP accounting records that had been
maintained by NSS and reconstructed them. Grant funding initially included $891,720 for
supportive services, $503,840 for operations, $400,000 for rehabilitation of two scattered site
apartment complexes, which consisted of 48 units, and $89,778 for administration. In February
2000, at the grantee’s request, HUD redistributed $5,985 between budget line items.
Consequently, funding levels changed to $888,258 for supportive services, $509,825 for
operations, $400,000 for rehabilitation and $87,255 for administration.

On March 1, 2001, HUD awarded VORCI a $440,319 SHP renewal grant for a 1-year period.
Grant funding included supportive services ($241,282), operations ($178,069), and
administration ($20,968).




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Introduction




                     Our audit objectives were to determine whether
 Audit Objectives    1) expenditures of 1997 SHP grant funds and required
                     matching funds were adequately accounted for and eligible
                     as specified by SHP program regulations, and 2) VORCI’s
                     current accounting for the 2000 renewal grant and matching
                     funds complied with Federal requirements.


                     To accomplish our objectives, we reviewed HUD records
 Audit Scope and     and NSS/VORCI accounting records and funding
 Methodology         agreements at their offices in Atlanta, Georgia, interviewed
                     VORCI staff and visited SHP housing project sites at 2099
                     Martin Luther King Jr. Drive and 156 Fairfield Place in
                     Atlanta. Since NSS-VORCI could not provide adequate
                     accounting records and could not identify matching fund
                     expenditures, we expanded our audit testing. We reviewed
                     all expenditures ($2,847,719) charged to VORCI’s Harris
                     House Veteran’s Center accounts to identify eligible SHP
                     costs including matching costs, and we traced those costs to
                     supporting documents and bank statements to confirm
                     payment and amount. We obtained and analyzed payroll
                     records for the grant period from a payroll processing
                     company employed by NSS-VORCI, and estimated eligible
                     salary costs.    Lastly, we assessed the adequacy of
                     accounting records for the 2000 renewal grant by reviewing
                     available reports from VORCI’s new accounting system
                     and discussion with a VORCI official.

                     Our audit of the 1997 SHP grant covered the period March
                     1, 1998, through February 28, 2001. We assessed current
                     accounting reports for the renewal grant as of September
                     21, 2001. We performed the audit from August 2001
                     through April 2002. We conducted the audit in accordance
                     with generally accepted government auditing standards.

                     We provided a copy of this report to the Assistant Secretary
                     for Community Planning and Development and to
                     NSS/VORCI.




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                                                                                          Finding 1


  Management Did Not Responsibly Manage
Grant Funds, Accounting, and Compliance With
              SHP Requirements
NSS-VORCI's management did not responsibly manage grant accounting, expenditures, and
compliance with SHP requirements. They did not establish (1) accounting system procedures
and controls needed to comply with Federal requirements for grant fund accounting, (2)
procedures to ensure only eligible and necessary expenditures were charged to SHP grant funds,
and (3) procedures to monitor and compare SHP expenditures to the approved budget. Salaries
and other costs that benefited multiple programs were not allocated to programs and fund sources
in a documented and systematic manner. VORCI’s accounting journals and general ledger were
incomplete, inaccurate, and contained numerous misclassified costs. As a result, VORCI spent
grant funds on ineligible and unnecessary costs (see Finding 2), deviated significantly from its
approved budget without HUD approval, and did not meet matching fund requirements. We
attribute these conditions to NSS-VORCI’s Executive Director and Board of Directors not
ensuring responsible management practices and compliance with HUD requirements for grants
management. As a result, VORCI could not (1) reliably account for its expenditures of 1997 and
2000 SHP grant and matching funds, (2) identify eligible expenditures by approved grant and
funding purpose (operating, supportive services, and administration), (3) identify employee
salaries charged to grant funds, and (4) monitor and compare SHP expenditures to the approved
budget.

Title 24 of the Code of Federal Regulations (CFR), Part 84.21(b)(1), (2) and (4), require the grant
recipient to maintain a financial management system that provides: (1) accurate, current and
complete disclosure of the financial results of each federally-sponsored project, (2) records that
adequately identify the source and application of funds for federally-sponsored activities, and (3)
a comparison of outlays with budget amounts.

Office of Management and Budget Circular A-110, paragraphs 25 (b) and (c), state that recipients
are required to report deviations from budget and program plans, and request prior approvals for
budget and program plan revision. It states that recipients shall request prior approval from
Federal awarding agencies for (1) a change in the scope of the project or program, (2) the need
for additional federal funding, or (3) the transfer of amounts budgeted for indirect costs to absorb
increases in direct costs, or vice versa, if approval is required by the Federal awarding agency.

Title 24 of CFR 583.405 (a)(1) states that a recipient may not make any significant changes to an
approved program without prior HUD approval. A significant change is specified as a shift of
more than 10 percent of funds from one approved activity to another.




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Finding 1




                             During the 3-year 1997 SHP grant period, NSS-VORCI
 Accounting for SHP          expended $1,885,338 in grant funds without classifying any
 Expenditures and Receipts   expenditures to the three grant categories of SHP operating,
 Was Incomplete and          supportive services, and administration.
 Inaccurate
                             VORCI charged all of its expenditures (excluding SHP
                             rehab costs) to two cost centers: Harris House, which
                             included SHP activities, and Veterans Upward Bound.
                             After the grant period ended, HUD officials requested
                             accounting records for SHP expenditures, which VORCI
                             could not provide. As a result, VORCI’s Administrative
                             Operations Manager reviewed and classified Harris House
                             expenditures to the three grant-funding categories after the
                             fact. She said that NSS’ accounting system was incapable
                             of tracking accounting entries in a manner that would
                             satisfy grant accounting and reporting requirements, and
                             she had reconstructed the SHP records using bank
                             statements and disbursement request documents. Her
                             review did not identify matching fund expenditures and
                             classified only enough Harris House expenses to equal the
                             SHP grant. Afterward, the general ledger identified costs
                             VORCI charged to HUD funds, but did not show other
                             charges pertinent to the SHP. Consequently, the general
                             ledger could not be used to prepare a summation of SHP
                             expenditures during the 1997 grant period.

                             VORCI maintained a general ledger and cash receipts and
                             disbursements journals. We noted numerous inaccuracies
                             in these accounting records for both the 1997 and 2000
                             SHP grants. NSS-VORCI charged numerous expenses to
                             accounts that were not listed in its Chart of Accounts.
                             VORCI’s general ledger contained entries that had been
                             rounded, while the disbursements journal entries were for
                             actual amounts.

                             VORCI’s cash receipts journal was inaccurate. VORCI had
                             not accounted for all draw downs of grant funds. VORCI's
                             accounting records did not show any receipts from HUD
                             during the month of August 2000, while the HUD LOCCS
                             report and bank statements indicated that on August 2,
                             2000, $13,995 was drawn down from operating funds,
                             $24,770 from supportive services funds, and $2,493 from
                             administrative funds. VORCI also recorded draws prior to

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                                                                            Finding 1


                          actually making and receiving them. For example, VORCI
                          recorded receipt of a HUD draw on April 1, 1999, when the
                          LOCCS report showed a transaction date of April 12, 1999.
                          This occurred again in May and December 1999. We also
                          noted that VORCI had incorrectly recorded $37,346 in
                          security deposits collected from SHP participants. VORCI
                          recorded the security deposits as rent collections (revenue)
                          and did not record the deposits as a liability.

                          As of September 21, 2001, VORCI had drawn $293,544, or
                          67 percent, of its 2000 renewal grant. Although we
                          requested accounting records for the renewal grant several
                          times, we were only provided a cash receipts journal.
                          VORCI could not produce an accurate general ledger and
                          disbursements journal for the renewal grant. VORCI’s
                          Administrative Operations Manager told us that she had
                          charged SHP expenditures to other program accounts
                          because VORCI was not allowed to draw renewal grant
                          funds until June 2001. Subsequently, VORCI had not
                          adjusted its accounting records to charge the expenses to
                          SHP accounts.       VORCI's current accounting system
                          (hardware and software), if properly utilized, was capable
                          of complete grant accounting.

                          NSS-VORCI had not established a cost allocation plan.
 Salary and Other Costs   Direct and indirect costs that benefited multiple programs
 Benefiting Multiple      were not allocated to programs and fund sources in a
 Programs Were Not        supported and systematic manner. Salaries were VORCI’s
 Properly Allocated       largest expense, but its records did not identify which
                          employees were charged to the three SHP grant categories.
                          VORCI’s Executive Director, administrative staff and SHP
                          operating staff should have been allocated between the SHP
                          categories and non-SHP activities. No rational basis was
                          used to allocate salaries to the grant categories. Salaries
                          charged to the SHP operating category included portions of
                          only two biweekly payrolls in March 1998 and one full
                          biweekly payroll in November 1998. Salaries charged to
                          the administration category included varying portions of 12
                          biweekly payrolls between May 1998 and April 2000. The
                          majority of salaries were charged to the largest grant
                          category, support services. We obtained detailed payroll
                          information from a payroll processing company used by
                          NSS-VORCI and used it to estimate eligible salary charges
                          (see Finding 2). VORCI could have used the payroll
                          company to allocate charges to multiple cost centers and

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Finding 1


                               provide payroll reports supporting salary costs charged to
                               the SHP grant categories. Other general administration
                               costs, such as audit costs, telephone costs, etc., should also
                               have been allocated between programs and funding sources
                               but were not.

                               Because expenses were not classified during the grant
  Expenditures Significantly   period, VORCI management had no capability to measure
  Deviated From The            expenditures against the approved SHP budget. The
  Approved SHP Budget          Executive Director did not adhere to the budget for the
                               1997 SHP grant and sought no prior approval from HUD
                               for significant variances from the budget. VORCI charged
                               general and indirect costs to SHP funds when (1) those
                               costs were not included in their SHP budget, and (2) a
                               portion of those costs must be allocated to other programs
                               and fund sources.

                               In its SHP operating budget, VORCI identified operating
                               costs for two building sites used as supportive housing (2099
                               MLK and 156 Fairfield). HUD requirements stipulate that
                               operating costs are those costs associated with the day-to-day
                               operations of the supportive housing. VORCI incurred
                               operating costs for at least five other locations, one of which
                               was their office location and one housing site that HUD
                               approved for SHP use during the grant period. The other
                               three housing facilities and the office were not approved for
                               SHP funding by HUD. VORCI budgeted $351,360 for
                               operating salaries and fringe benefits, but charged only
                               $21,170. VORCI budgeted $9,000 of operating funds for
                               telephones, but charged $94,991. VORCI also charged
                               unbudgeted general office costs to the operating portion of
                               the HUD grant. For example, VORCI charged $37,349 for
                               office supplies, $24,414 for office equipment, and $29,555
                               for equipment maintenance. These costs are not associated
                               with day-to-day operation of the supportive housing, and do
                               not appear to be eligible under 24 CFR Part 583.125.
                               However, HUD program officials stated that some general
                               office expenses pertaining to operation of the supportive
                               housing could be eligible (see Finding 2 for further
                               discussion.)

                               In its supportive services budget, VORCI included
                               $576,000 for salaries for six full time employees.
                               However, VORCI charged salaries totaling $842,111
                               during the grant period. We noted that the number of

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                                                                                Finding 1


                              supportive services employees paid each biweekly payroll
                              period varied from 4 to 11 during the grant period. Salaries
                              charged to HUD included a duplicate charge of $9,381.
                              The salaries charged exceeded the budget by $266,111, or
                              14 percent of the total $1,885,338 grant and constituted a
                              significant change without HUD approval. VORCI also
                              budgeted $96,000 for drug testing of participants, but
                              charged only $1,231 for drug testing supplies, of which,
                              $557 had been incorrectly charged to the operating portion
                              of the grant, and $674 had been incorrectly charged to
                              administration. According to the Executive Director, the
                              Veteran’s Administration began to offer free drug testing
                              and therefore, VORCI did not have to expend the total
                              amount it had budgeted for this program activity.

                              The Executive Director acknowledged that budget revisions
                              should have been made and submitted to HUD.

                              For the 1997 SHP grant, NSS-VORCI was required to
 VORCI Could Not Identify     provide matching funds for the rehabilitation and operating
 Matching Fund Expenditures   fund portions of the grant. VORCI was required to match
                              100 percent of the rehabilitation grant funds, and provide
                              25 percent of operating funds expended during the first 2
                              grant years and 50 percent in the third year. VORCI’s
                              required matching contributions were $400,000 for
                              rehabilitation and $244,000 for operating costs. We
                              reviewed funding source records and determined that
                              VORCI had received sufficient funds to meet the HUD
                              matching requirements. However, VORCI’s accounting
                              records did not identify matching fund expenditures. The
                              Executive Director maintained that VORCI had spent more
                              than enough to meet matching requirements, and therefore
                              he believed it was apparent the requirements were met
                              without specifically identifying costs.

                              NSS-VORCI maintained a separate bank account for SHP
                              rehabilitation activities. By reviewing records of
                              disbursements from the separate bank account, we
                              determined that the $400,000 rehab grant and matching
                              funds exceeding $400,000 were expended for eligible
                              purposes.

                              We could not identify enough eligible SHP operating costs to
                              meet the required match of $244,000. We identified
                              $962,381 in expenditures charged to Harris House that had

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                           not been charged to the SHP. Most of those expenditures
                           were not eligible as SHP operating costs or did not have
                           adequate supporting documentation to show the purpose of
                           the expenditure. We identified $730,046 that was ineligible,
                           including $299,428 in debt service payments, $64,089 for
                           salaries, $52,413 for employee fringe benefits, $2,366 for
                           operating non-SHP facilities, and $27,389 for credit card
                           payments. The remaining $284,361 of ineligible costs was
                           for various expenditures, such as rental of unapproved (non-
                           SHP) facilities, legal fees, pre-development costs, travel
                           expenses, subscriptions and membership dues. Program
                           regulations prohibit the use of operating funds for these types
                           of expenses and for debt payments. The salaries and fringe
                           benefits were unsupported as to employee name and whether
                           the SHP benefited and were deemed ineligible based on our
                           estimates of eligible salaries (see Finding 2 for estimates of
                           eligible salaries and fringe benefits).

                           We identified only $32,262 of eligible operating costs
                           available to meet the $244,000 matching-fund requirement.
                           We also identified $30,984 of potentially eligible operating
                           type costs such as telephone charges, work performed by
                           contract employees, utilities, property insurance, and
                           grounds maintenance.            However, the supporting
                           documentation did not identify the facility locations for
                           these costs. The remaining $169,090 consisted of payments
                           for contract employees, administrative fees, and general
                           office expenses, with documentation inadequate to show
                           the purpose of the expense and/or whether it pertained to
                           operation of SHP housing. As noted above, only the
                           portion of administrative and general office expenses
                           pertaining to approved supportive housing may be charged
                           to operating grant funds. Thus, we concluded that VORCI
                           did not incur sufficient eligible matching expenditures to
                           justify receipt of the full SHP grant for operations (see also
                           Finding 2.)

                           VORCI paid $23,976 for questionable charges by its
 Transactions Indicating
                           Executive Director to a credit card issued for travel
 Abuse of Funds
                           purposes. VORCI also paid interest to a Board member
                           equal to a 240 percent annual interest rate.

                           We reviewed available credit card statements for potentially
                           eligible matching costs and found many questionable
                           charges that did not appear to benefit VORCI or the SHP.

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                                                                     Finding 1


                    For example, credit card charges included: 16 transactions
                    at the New South Package Store totaling $1,124; 25
                    payments to Regal Car Wash totaling $748; 68 gasoline
                    purchases totaling $2,003; 7 transactions at a Ford dealer
                    totaling $806; 11 transactions at Home Depot totaling
                    $1,543; 1 transaction at Radio Active Car Stereos Inc. for
                    $991; and numerous other transactions that appeared to be
                    of a personal nature. VORCI did not have receipts to show
                    what these purchases were for. All of the questionable
                    credit card charges were made in the Atlanta metro area and
                    nearly all were in the vicinity of the Executive Director’s
                    residence. The types of charges and the complete absence
                    of receipts indicate abuse of funds by the Executive
                    Director. Since VORCI commingled SHP funds with other
                    funds, did not account for expenses by fund source, and
                    cannot document eligible expenditures equal the SHP grant,
                    misuse of SHP funds may have occurred.

                    NSS issued the credit card to VORCI’s Executive Director
                    and told us it should have been used for business travel
                    purposes only. According to NSS officials, they did not
                    require the Executive Director to sign the standard credit
                    card agreement, which all NSS employees must sign, but he
                    knew what the credit card restrictions were. NSS officials
                    stated they reviewed the credit card statements, but never
                    performed a thorough review. They further stated that they
                    questioned some charges and were told by the Executive
                    Director that they related to program activities. They did
                    not question it any further, but acknowledged they should
                    have looked closer at the charges.

                    VORCI obtained a short-term $30,000 loan, not to exceed
                    30 days, from a Board member. The Executive Director
                    told us that the loan was needed to cover payroll in May
                    2001, and was authorized by the Board’s executive
                    committee. He said he recommended the 10 percent
                    interest rate as being fair. However, $33,000 was repaid in
                    2 weeks, equaling an effective annual interest rate of 240
                    percent.     VORCI could not provide a signed loan
                    agreement. VORCI had not classified the source of funds
                    used to pay this debt, but we determined from accounting
                    and bank records that HUD funds were used to repay the
                    loan.




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Finding 1



                        VORCI misclassified operating, supportive services and
  Misclassified Costs
                        administrative costs totaling $35,425. The spreadsheet of
                        SHP charges prepared by VORCI incorrectly listed $6,342
                        in supportive services and operating costs as administrative
                        costs, $28,284 in supportive services costs as operating
                        costs, and $798 in administrative costs as supportive
                        services costs. (See Appendix D for audit adjustment of
                        those costs.)


                        “VORCI did establish a system of allocating employee
Auditee Comments        salaries among our various programs. Salaried employees
                        are initially charged to the programs based on percentage of
                        time spent, however, our system does not involve a periodic
                        formal confirmation of the percentage of time spent on each
                        activity. The accountant was charged with assuring that the
                        allocations were consistent and properly charged to the
                        SHP grant categories.

                        “We have used our external auditors to assist us with
                        identifying the year-end adjusting journal entries, such as
                        recording security deposit liabilities, accounts payable, cash
                        receipts classifications, etc. The OIG auditors may not
                        have taken these adjustments into account during their
                        audit.

                        “Unfortunately, our accounting system did not specifically
                        identify and classify the expenditures as “SHP matching
                        expenditures,” however our records do identify the
                        expenditures and we can provide specific (and sufficient)
                        expenditure details to justify the match.

                        “VORCI will revisit its general ledger chart-of-accounts to
                        be sure sufficient accounts are established to permit
                        classification of expenditures by SHP budget categories.
                        Our revised system will include posting the HUD approved
                        budget line items so that we can monitor budget
                        compliance. The OIG has indicated that our Peachtree
                        Accounting software is adequate provided that it is properly
                        maintained. VORCI will also establish a cost allocation
                        plan to ensure all direct costs are properly allocated and all
                        indirect costs are allocated using an acceptable
                        methodology. To solve the matching funds requirement,
                        we will establish specific general ledger accounts for the

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                     SHP grant entitled “SHP matching funds” in which we will
                     post our various matching expenditures consistent with
                     HUD regulations. This will provide an unquestionable
                     audit trail of our matching funds.

                     “We will move expeditiously to hire a more experienced
                     accountant with specific nonprofit grants accounting
                     experience, preferably with five or more years of field
                     experience.

                     “The Executive Committee will investigate the abuse of
                     funds referenced in the OIG audit and issue written
                     recommendations to the Board of Directors. The written
                     report will be shared with OIG and HUD.

                     “As for future compliance, we will modify our corporate
                     by-laws to establish a standing audit and finance committee
                     to strengthen the Board of Directors’ oversight of fiscal
                     management and audit resolution. In keeping with our
                     existing five-year action plan, we have already increased
                     the size of the Board of Directors and filled the vacant
                     positions with persons with more fiscal experience.

                     “As evidence of our compliance, we have requested that
                     our auditors (The Wesley Peachtree Group), who have
                     significant nonprofit and governmental grants experience,
                     provide a certification to HUD of our accounting system
                     compliance within six (6) months.”



OIG Evaluation of    As noted in Finding 1, salary charges posted in VORCI’s
Auditee Comments     general ledger and to the spreadsheet (prepared after the
                     fact to document charges to the SHP grant categories), were
                     not allocated by any rational or documented methodology.
                     VORCI’s bookkeeper was not an accountant and the
                     Executive Director and Board provided no written policies
                     and procedures to ensure grant accounting was properly
                     performed.

                     Adjusting entries by VORCI’s independent auditor have no
                     bearing on the spreadsheet of SHP charges prepared by
                     VORCI. SHP expenditures were not identified in VORCI’s
                     general ledger until after the 3-year grant period was over.


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                     Prior to our audit, HUD program staff requested that
                     VORCI’s Executive Director identify matching expenditures.
                     During the audit, OIG made the same request. The
                     Executive Director ignored both requests, stating that
                     expenditures not charged to SHP far exceeded the required
                     match and thus the adequacy of matching costs was obvious.
                     As noted in Finding 1, there were insufficient eligible costs
                     charged to the Harris House cost center, and not charged to
                     SHP funds, to satisfy the matching funds requirement.

                     As noted in our recommendations, VORCI should be
                     required to demonstrate that it has established an adequate
                     financial management and accounting system by producing
                     actual monthly financial reports from its general ledger,
                     before HUD considers providing any further grant funds.
                     VORCI needs to develop written procedures specifying its
                     accounting approval process, other accounting controls, a
                     budget monitoring process, and delineating eligible costs
                     for the SHP grant categories (versus other non-SHP
                     activities) and methods for allocating salaries and other
                     direct and indirect costs between SHP and other activities.
                     As noted in the report section, Follow up on Prior Audits,
                     VORCI’s independent auditor did not identify any of the
                     accounting and control deficiencies noted in this report, and
                     we concluded that its audit opinions on VORCI’s financial
                     statements could not be relied upon.

                     Regarding proposed changes in Board composition and
                     function, VORCI will need to provide evidence of actual
                     changes, to demonstrate to HUD that Board oversight will
                     be satisfactorily improved.          We have added
                     recommendation 1C to separate recommended actions
                     relating to the Executive Director and the Board, which
                     were previously both included in 1B.



Recommendations      We recommend that HUD:

                     1A.      Terminate further SHP grant funding to VORCI.
                              VORCI should not be considered for new funding
                              until its Board of Directors and Executive Director
                              have established written procedures and controls to
                              ensure accounting is complete and accurate, and

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                             expenditures are monitored for eligibility, need, and
                             correlation to the budget. VORCI should also
                             demonstrate complete and accurate accounting for
                             its activities before new grants are considered.

                    1B.      Require that VORCI strengthen Board oversight
                             processes before providing any further grant
                             funding.

                    1C.      Require VORCI to replace its Executive Director
                             before providing any further grant funds and
                             consider a Limited Denial of Participation of the
                             Executive Director.




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         NSS-VORCI Expended SHP Funds For
           Ineligible and Unsupported Costs
NSS-VORCI expended about 25 percent of 1997 SHP grant funds for ineligible and unsupported
costs. Costs incurred were frequently not in the approved budget, were for unapproved housing
facilities, or were not in compliance with SHP program regulations. The improper expenditures
occurred because NSS-VORCI management did not establish management controls (see Finding
1) and did not monitor expenses to ensure that grant funds were spent for eligible purposes and
were adequately documented. As a result, grant fund expenditures included $158,330 of
ineligible costs and $313,811 of unsupported costs. Additionally, $34,443 of operating
expenditures was ineligible for HUD funding because it was not matched by VORCI. See
Appendix A for a summary of questioned costs.

Title 24 CFR 84.21(b)(3) and (7) require that a recipient's financial management system provide:
(1) effective control over and accountability for all funds, property and assets, (2) adequate
safeguards for all such assets and assurance that they are used solely for authorized purposes, and
(3) accounting records that are supported by source documentation.

NSS was the original applicant for the SHP grant. Its Executive Director said that housing for the
homeless was a VORCI initiative, and NSS gave VORCI’s Executive Director full authority and
responsibility for administering the SHP grant. VORCI was responsible for the allocation of
expenses to SHP funds and performed this classification after the grant period and after the funds
had been spent.


                                      NSS-VORCI charged $158,330 in ineligible costs to the
                                      1997 HUD SHP grant. Of this amount, $135,141 was
 Ineligible Costs                     charged to operating, $12,393 to supportive services, and
                                      $10,796 to administration funds. See Appendix B for a
                                      detailed listing of ineligible costs.

                                      •      VORCI charged $23,075 for telephone costs that
                                             did not benefit the SHP, including payments for
                                             financing the telephone system, ISDN lines, and
                                             internet services. Financing costs are not eligible.
                                             The ISDN and internet costs primarily served a
                                             computer lab used in a non-SHP program. VORCI
                                             also charged various other ineligible costs including
                                             $18,249 for legal fees, $2,104 for office supplies,
                                             $3,621 for utilities, $239 for postage, $9,008 for
                                             equipment, $11,009 for facility maintenance, $249
                                             for security equipment, $318 for insurance, $672 for

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                            membership dues, $40 for subscriptions, and $1,332
                            for property taxes. These costs were ineligible under
                            SHP regulations and/or were related to non-SHP
                            facilities and activities.

                            During the audit exit discussion, HUD officials
                            stated that operating grant funds could be used for
                            some general office or administrative expenses, if
                            supported as pertaining to the day-to-day operation
                            of supportive housing as prescribed in Title 24 CFR
                            Part 583.125. No general office costs were included
                            in the SHP operating budget. However, based on
                            HUD’s interpretation, we reclassified $113,570
                            from ineligible costs to unsupported costs in this
                            final audit report. These costs are unsupported
                            because VORCI did not maintain documentation to
                            identify costs pertaining to the SHP versus other
                            programs and activities, and/or did not maintain
                            invoices to document the nature of the expenses.

                     •      VORCI duplicated $6,677 of operating charges for
                            various transactions including office supplies,
                            maintenance, and repairs.

                     •      VORCI expended $46,920 for operation of existing,
                            non-approved housing and office facilities. In its
                            technical submission to HUD, VORCI identified
                            two transitional housing facilities (2099 MLK and
                            156 Fairfield) that were to be rehabilitated as new
                            and expanded transitional housing. During the
                            grant period, in a letter dated November 8, 1999,
                            VORCI requested approval to use one existing
                            facility (438 Frazier Street) for intake and
                            assessment interviews.       According to a HUD
                            official, VORCI was also to use the facility to house
                            some of its homeless clients. HUD approved this
                            use on December 22, 1999. Operating funds were
                            approved for these three specific facilities, not to
                            operate existing facilities.

                     •      VORCI charged $18,304 to SHP operating funds for
                            custom-made curtains at the two renovated SHP
                            housing facilities. The Executive Director said that
                            this charge to operating funds was an error and was
                            reimbursed to the Harris House account from the

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                            construction account. We confirmed the Harris
                            House account was reimbursed. However, by
                            eliminating the $18,304 cost, total costs charged to
                            SHP operating funds were $18,304 less than the
                            grant funds received from HUD. The total cost of
                            the custom curtains was $52,997, and appeared to
                            be exorbitant and unnecessary. A second payment
                            of $15,689 was also charged to Harris House, but
                            was not classified as an SHP cost and a third
                            payment of $18,304 was paid from the construction
                            account. We observed the housing facilities and
                            found that VORCI also installed mini-blinds with
                            the custom curtains. In our experience, it is not
                            customary and reasonable to provide more than
                            basic window coverings in commercial and
                            Federally subsidized apartments.

                     •      Under supportive service funds, VORCI charged
                            $9,381.25 of duplicate salary costs and $3,011.88
                            for loan closing costs and late payment fees. The
                            latter two costs were recorded incorrectly as
                            Workman’s Compensation and are ineligible.

                     •      Under administration funds, VORCI charged
                            $3,127.08 of duplicate salary costs and $5,405.92
                            for insurance, membership dues, leasing forms,
                            advertising, stationery, business cards, and late fees.
                            In addition, $2,263.20 for audit costs should have
                            been allocated to other programs. HUD regulations
                            are specific as to eligible uses of administrative
                            grant funds, allowing only costs associated with
                            accounting for the use of grant funds, preparing
                            reports for submission to HUD, obtaining program
                            audits, and other similar costs.

                     NSS-VORCI did not maintain adequate supporting
 Unsupported Costs   documentation to show the nature, purpose, and eligibility
                     of numerous expenditures including $313,811 charged to
                     SHP funds. See Appendix C for a detailed listing of
                     unsupported costs.

                     Documentation for salary and fringe benefit costs did not
                     identify which employees were charged to Harris House
                     accounts and SHP funds. VORCI did not systematically
                     allocate payroll costs to SHP grant categories and other

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                           non-SHP activities (see Finding 1). Therefore, we deemed
                           it necessary to estimate eligible salary and fringe benefit
                           costs for each grant category for the purpose of determining
                           if claimed amounts were reasonable.

                           We estimated eligible salary costs based on several factors
                           including: the ratio of SHP funding to total funding (60
                           percent), interviews with several VORCI employees, and
                           analyses of total Harris House salaries detailed by
                           employee, which we obtained from a payroll processing
                           company used by NSS-VORCI. Actual salary charges to
                           the SHP included employer payroll taxes of 8.2 percent.
                           Fringe benefit costs (other than employer payroll taxes)
                           included 403b pension costs, and health, life, and worker
                           compensation insurance. VORCI charged fringe benefits
                           totaling $93,604 to Harris House, including $41,191
                           charged to SHP funds (operating, supportive services, and
                           administrative). Total recorded fringe costs were 8.69
                           percent of the $1,077,699 in total salaries charged to Harris
                           House per payroll company records.            We allocated
                           employer payroll taxes and fringe benefits to our salary
                           estimates at the documented percentages. The following
                           table compares our salary and fringe benefit estimates to
                           VORCI’s actual charges to the SHP. Note that we adjusted
                           VORCI’s actual charges for errors in salary and fringe costs
                           found by the audit.


                                          Audit Estimates               VORCI Charges
                        SHP                  Salary +               Salary and
                      Category     Salary      Taxes      Fringe      Taxes       Fringe
                     Operating    $140,544 $152,068 $12,213        $ 18,408.36 $ 2,316.06
                     Support       672,987    728,172     58,483    851,855.24   20,431.12
                     Svc.
                     Admin.         88,563     95,825     7,696      43,401.73    18,443.98
                     Subtotals     902,094    976,065    78,392    $913,665.33    41,191.16
                     Non-SHP           NA         NA        NA       64,088.89    52,412.79
                     Totals       $902,094   $976,065   $78,392    $977,754.22   $93,603.95

                           As shown in the table, our estimates for salary, employer
                           payroll taxes, and fringe costs were greater overall than the
                           amounts charged to SHP funds. The salary and fringe
                           benefit costs charged to the operating and administration
                           grant categories were less than our estimates. Fringe
                           benefit costs charged to support services were also less than
                           our estimates. Therefore, we deemed those salary and
                           fringe charges to be reasonable and eligible. Salaries

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                    charged to supportive services exceeded our estimates by
                    $123,683 ($851,855 - $728,172), which we deemed to be
                    unsupported for that grant category. HUD may wish to
                    allow VORCI to reallocate the $123,683 to the operating
                    and/or administration category, within our salary estimates
                    or within amounts budgeted. Note that our salary estimates
                    were made as a test of reasonableness, not to determine
                    eligible costs.

                    In the payroll company records, VORCI salaries had been
                    charged to two cost centers, Harris House and Veterans
                    Upward Bound. Nearly all employees were charged 100
                    percent to one program or the other. The Executive
                    Director's salary had been allocated between the two cost
                    centers. However, there was no documented rational for the
                    allocation. The percentage of his salary charged to Harris
                    House steadily increased during the grant period from 32
                    percent in March 1998 to 70 percent in October 1999 and
                    thereafter. These percentages were unsupported and were
                    not used to charge salary to SHP funds in NSS-VORCI
                    records. However, they demonstrate that NSS-VORCI could
                    have allocated salary costs to SHP cost centers via payroll
                    company record keeping.

                    Other unsupported or inadequately supported costs charged
                    to SHP funds totaled $190,128. Of this amount, $183,963
                    was charged to operating funds, $2,400 to supportive
                    services, and $3,765 to administration.

                    •      Under SHP operations, VORCI charged $39,517 for
                           property and other insurance, $38,183 for
                           telephones, $35,245 for office supplies, $27,466 for
                           equipment maintenance, $15,407 for equipment,
                           $12,220 for facility maintenance, and $12,214 for
                           property taxes. It also charged $2,021 for postage
                           (with $445 misclassified as fringe benefits), $793
                           for utilities, $541 for furnishings, and $356 for
                           grounds maintenance. These expenditures either
                           had no supporting documentation or inadequate
                           documentation to determine whether the costs
                           pertained to the SHP. Charges not related to
                           operation of the three approved SHP facilities
                           would not be eligible. Because VORCI operated
                           other housing facilities and other programs, only a
                           portion of these expenses would benefit the SHP.

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                       •      Under supportive services, VORCI charged $2,400
                              for facility maintenance. This charge was for
                              temporary contract labor, but supporting
                              documentation provided no indication what services
                              were provided, nor what facility was involved.
                              Also, facility maintenance is not an eligible
                              supportive services cost.

                       •      Under administration, VORCI charged $1,669 for
                              work-study employee salaries. Records did not
                              indicate what services they provided. VORCI also
                              charged $778 for postage and postal box rental, and
                              $30 for overnight shipping.       Considering the
                              restrictive nature of eligible administrative
                              expenditures, these costs would not be eligible
                              unless VORCI can document that they pertain to
                              administration of the grant.

                       VORCI expended a total of $1,413,197 for eligible program
  Eligible Costs and   costs including the $400,000 in rehabilitation costs.
  Matching Funds       VORCI expended $200,314 for eligible operating costs
                       including $32,262 in matching costs we identified during
                       the audit, $777,995 for eligible supportive service costs,
                       and $67,150 for eligible administrative costs. For grant
                       operating funds, HUD regulations require that the grant
                       recipient provide a 25 percent match in the first 2 years and
                       an equal match (50 percent) for the third year. Of the
                       $200,314 of eligible operating expenditures we identified,
                       $133,609, or 67 percent (3-year average of HUD funding),
                       was eligible for funding via the SHP operating grant, and
                       the remaining $66,705, or 33 percent, is VORCI’s cost-
                       sharing obligation. Since our audit identified only $32,262
                       of eligible matching costs not charged to SHP funds,
                       VORCI received $34,443 of excessive, unmatched
                       operating funds. See Appendix D for an analysis of eligible
                       costs and grant funding.



Auditee Comments       “We believe that if provided sufficient opportunity, VORCI
                       can research the alleged ineligible, unsupported and
                       unnecessary costs and prove that substantially all such costs
                       can be justified as being consistent with HUD regulations.

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                     We will need to reconstruct our records by obtaining
                     missing documentation from vendors, demonstrate
                     competitive bidding, show where duplicate charges were
                     subsequently corrected, document necessity/relevance of
                     charges, prove our matching expenditures, etc.

                     “We propose to research our records as stated above. This
                     review has already begun and will be continued by the
                     Accountant to be retained as noted above. In addition, we
                     are requesting that our auditors (The Wesley Peachtree
                     Group) review our research results and certify its correctness.
                     Any significant differences in the OIG amounts and the
                     certified amounts will be scheduled for repayment to HUD.”



OIG Evaluation of    Both HUD program staff and OIG have given VORCI
Auditee Comments     ample time and opportunity to document its charges to the
                     SHP grant and matching funds. Thus, HUD should impose
                     a time limit for VORCI to submit any further
                     documentation for unsupported costs.          Many of the
                     unsupported costs charged to SHP funds or to Harris House
                     (as potential matching costs) are general or administrative
                     in nature and thus may not be allocated solely to the SHP.
                     Since VORCI-NSS did not have an approved cost
                     allocation plan, they will need to provide credible evidence
                     of the benefit to the SHP for general and administrative
                     costs. After more than 4 years from the start of the 1997
                     SHP grant, statements of recall from VORCI personnel
                     bearing on the purpose and eligibility of costs will not
                     provide reliable evidence. Most general and administrative
                     costs were not budgeted and could overall, if supported,
                     constitute a significant change in fund use. Thus, HUD
                     should consider whether to approve revised fund uses after
                     the fact.

                     NSS-VORCI should immediately remit $158,330 for
                     ineligible costs identified by this audit. Duplicated costs
                     identified by this audit were duplicated within the
                     spreadsheet of SHP charges prepared by VORCI as support
                     for its use of SHP funds. Thus, each duplicate charge
                     reduces the total costs identified as SHP expenditures to
                     less than the SHP funding received.




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Recommendations      We recommend that HUD:

                     2A.      Require NSS-VORCI to repay to HUD $158,330 for
                              ineligible costs.

                     2B.      Require NSS-VORCI to provide adequate support
                              for $313,811 of unsupported costs or repay those
                              costs to HUD.

                     2C.      Require NSS-VORCI to repay to HUD $34,443 for
                              operating grant funds that were not matched. Note
                              that this amount would increase if VORCI provides
                              adequate support for any additional operating costs.




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Management Controls
In planning and performing our audit, we considered management and accounting control
systems of VORCI to determine our auditing procedures. Our review of management control
systems was not performed to provide assurance on the management controls. Management
controls include the plan of organization, methods and procedures adopted by management to
ensure that goals are met. Management controls include the processes for planning, organizing,
directing, and controlling program management.



                                    We assessed the management controls that we determined to
 Relevant Management
                                    be relevant to our audit objectives. We assessed controls
 Controls
                                    pertaining to accuracy of accounting, financial reporting to
                                    HUD, and whether expenditures complied with HUD
                                    requirements.

                                    A significant weakness exists if management control does
 Significant Weaknesses             not give reasonable assurance that the entity’s goals and
                                    objectives are met; that resource use is consistent with laws,
                                    regulations, and policies; that resources are safeguarded
                                    against waste, loss, and misuse; and that reliable data are
                                    obtained, maintained, and fairly disclosed in reports.

                                    Significant weaknesses in the controls we assessed are
                                    discussed in Finding 1. The control weaknesses were
                                    primary causal factors for Finding 2.




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Follow-Up On Prior Audits
This was the Office of Inspector General’s first audit of NSS-VORCI. An independent public
accountant (IPA) expressed unqualified audit opinions on VORCI’s financial statements for the
three annual periods ended June 30, 1998, through 2000. Those audits did not identify
deficiencies in VORCI’s accounting processes and records, nor in its internal controls and
compliance with laws and regulations. Our audit noted material deficiencies in NSS-VORCI
accounting records, internal controls, budget monitoring, and compliance with HUD
requirements for grant and matching fund use (see Finding 1.) We concluded that the IPA’s
audit opinions could not be relied upon.




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                                                                                 Appendix A

Summary of Questioned Costs

     Recommendation No.                         Ineligible1             Unsupported2

              2A                                 $158,330

              2B                                                            $313,811

              2C                                   34,443                   _______

     Totals                                       $192,773                 $313,811




1/   Ineligible costs are costs charged to a HUD-financed program or activity that the auditor
     believes are not allowable by law, contract or Federal, State or local policies or
     regulations.

2/   Unsupported costs are costs charged to a HUD-financed program or activity and
     eligibility cannot be determined at the time of audit. The costs are not supported by
     adequate documentation or there is a need for a legal or administrative determination on
     the eligibility of the costs. Unsupported costs require a future decision by HUD program
     officials. This decision, in addition to obtaining supporting documentation, might
     involve a legal interpretation or clarification of Departmental policies and procedures.




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                                                                                Appendix B

Schedule of Ineligible Costs
  Expenditure               Supportive
  Charged As      Operating   Services      Administration            Comments

Salaries                       $ 9,381.25       $ 3,127.08 Duplicate Charges.

Workman’s                        3,011.88           738.59 Loan closing cost of $2,976,
Comp                                                       late fee of $35.88, and
                                                           insurance on storage facility
                                                           of $738.59.

Legal Fees         18,249.07                                 Legal Fees re: Conflict with
                                                             rehab contractor and legal
                                                             services.

Office Supplies     2,103.63                                 $594.22 Christmas cards, $45
                                                             late fee, and $1,464.41
                                                             duplicate charges.

Telephone          23,075.26                                 ISDN lines of $5,292.14,
                                                             internet services of $2,249.96,
                                                             phone system financing of
                                                             $11,213.45, Community
                                                             Network Fee of $2000,
                                                             collection service fee of
                                                             $551.39, phone bill for non-
                                                             SHP site of $193.16, and
                                                             duplicate charges of
                                                             $1,575.16.

Utilities           3,621.40                                 Building permits for 971/975
                                                             MLK facility of $2,068,
                                                             power bills for outdoor
                                                             lighting at 2103 MLK of
                                                             $705.03, both non-SHP sites,
                                                             and a duplicate charge of
                                                             $848.37.

Postage/Mailing      239.31                          55.00 Late charges for previous bills
Services                                                   ($55 and $50.50); and a
                                                           duplicate charge of $188.81.




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Appendix B



  Expenditure                  Supportive
  Charged As      Operating     Services Administration           Comments

Printing                                        2,759.00 VORCI banner and company
                                                         letterhead and business
                                                         cards.

Publications                                     421.56   Advertisements.

Equipment           9007.54                               Phone system financing.

Facility           11,009.41                              $5,959.41 building supplies
Maintenance                                               for a storage shed, $2,450 to
                                                          relocate fencing, and $2,600
                                                          in duplicate charges.

Security              248.91                              Alarm system at storage
Equipment                                                 facility.

Insurance - Not      318.24                               Property insurance for 2103
Employee                                                  MLK, a non-SHP site.

Membership Dues      672.00                      777.12   National Center for
                                                          Nonprofit Boards
                                                          membership ($672), and
                                                          other association
                                                          memberships, forms and
                                                          assessments ($777.12).

Subscriptions         39.95                      154.65   Subscription to NonProfit
                                                          Times ($39.95), real estate
                                                          advertisement and check
                                                          order ($154.65).

Property Taxes      1,332.33                              Property taxes for 2103 MLK,
                                                          a non-SHP site.

Furnishings        18,303.95                              Custom curtains charged to
                                                          construction funds,
                                                          erroneously listed as
                                                          operating cost. Cost also
                                                          deemed unnecessary.




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                                                                                   Appendix B




  Expenditure                      Supportive
  Charged As        Operating       Services Administration             Comments

Admin. Expenses                                        500.00 IRS Determination Letter fee.

Accounting Fees                                       2,263.20 Pro-rata non-SHP share of
                                                               audit expense.

Unapproved Costs    46,920.16                                    Costs for existing non-SHP
charged to various                                               housing and office facilities.
accounts.
Total
Ineligible Costs1 $135,141.16       $12,393.13      $10,796.20

Unmatched Grant        34,442.53
Funds

Total Ineligible
for Funding         $169,583.69     $12,393.13      $10,796.20




1/    Total for all categories $158,330.49.




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                                                                               Appendix C

Schedule of Unsupported Costs
  Expenditure                   Supportive
  Charged As       Operating     Service      Administration           Comments

 Salaries                       $123,683.10        $1,669.26 Unsupported salaries
                                                             ($123,683.10).
                                                             Payments for Work Study
                                                             employees ($1,669.26).

 Fringe Benefits      $445.28                                  Postage charged to Fringe
                                                               Benefits.

 Office Supplies    35,245.40                                  Office supplies, printers,
                                                               scanners, computers, and
                                                               other miscellaneous
                                                               charges.

 Telephone          38,182.79                                  Long distance charges,
                                                               office phone lines,
                                                               telephone maintenance
                                                               contract payments, and
                                                               other miscellaneous
                                                               charges.

 Utilities             793.49                                  Power and gas bills for
                                                               undocumented sites.

 Postage             1,576.18                         778.00 Postage ($1,576.18).
                                                             Postage and Post Office
                                                             Box rental ($778).

 Mailing                                               30.13 Overnight shipment.
 Services
 Equipment          15,406.69                                  Mail meter lease payments,
                                                               copier lease payments,
                                                               maintenance contract
                                                               payments on equipment,
                                                               and other miscellaneous
                                                               charges.




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  Expenditure                      Supportive
  Charged As        Operating       Service        Administration           Comments
 Equip.              27,465.51                                      Lock repair, additional
 Maintenance                                                        mail meter, copier and
                                                                    phone system leases,
                                                                    maintenance contract
                                                                    payments, and other
                                                                    miscellaneous charges.

 Grounds                 355.68                                     Landscaping material for
                                                                    undetermined location.

 Facility             12,219.50        2,400.00                     Building supplies and labor
 Maintenance                                                        payments for maintenance
                                                                    or repairs at undocumented
                                                                    locations, and other
                                                                    miscellaneous charges
                                                                    ($12,219.50).
                                                                    Temporary employee for
                                                                    undocumented work
                                                                    ($2,400).

 Insurance – Not      39,517.23                          1,287.52 Office, undetermined
 Employee                                                         property, and auto
 Related                                                          insurance.

 Property Taxes       12,214.02                                     Property taxes for
                                                                    undocumented site and
                                                                    vehicle registration renewal
                                                                    for undetermined vehicles.

 Furnishings             541.21                                     Business furniture with
                                                                    inadequate documentation.

 Total
 Unsupported
 Costs1            $183,962.98     $126,083.10          $3,764.91




1/   Total for all categories $313,810.99.




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                                                                                                     Appendix D

Analysis of Eligible Costs and Grant Funding
(excluding Rehabilitation Funds)
                                                   Supportive
                            Operating               Service            Administrative                Total

    Charged to SHP           $509,825.00           $888,258.00             $ 87,255.00          $1,485,338.00
    Less:
    Ineligible               (135,141.16)          ( 12,393.13)              ( 10,796.20)        ( 158,330.49)

    Unsupported             ( 183,962.98)           (126,083.10)1              ( 3,764.91)        ( 313,810.99)

    Misclassified            ( 28,284.48)              28,284.48
                                5,615.38                  727.12             ( 6,342.50)
                                                         ( 798.41)               798.41

    Eligible Costs           $168,051.76            $777,994.96             $ 67,149.80         $1,013,196.52

    Matching Costs             32,261.93                NA                     NA                    32,261.93

    Subtotal                 $200,313.69

    HUD Share                      x .6672                                                         ( 66,704.46)


    Eligible
    Funding                  $133,609.233           $777,994.96              $ 67,149.80         $ 978,753.99




1
      This amount includes $123,683.10 in salaries exceeding our cost estimate. HUD may wish to allow reallocation
      of these salaries to the Operating and Administration categories where our salary estimates were higher.
2
      The 3-year average 66.7 percent HUD share was after the required match (75 percent, 75 percent, and 50
      percent per year, respectively) The $66,704.46 is NSS/VORCI’s cost share (33.3 percent).
3
      The difference between eligible operating costs and eligible operating funding is $34,442.53 of unmatched
      expenditures that must be repaid. This amount would increase if VORCI provides HUD with support for, and
      HUD allows, additional operating costs.




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                                                                                               Appendix E

Auditee Comments

     July 1, 2002

     DELEIVED BY ELECTRONIC MAIL AND USPS RESGISTERED MAIL

    Ms. Nancy H. Cooper, Regional Inspector
     General for Audit Southeast/Caribbean
    U.S. DEPARTMENT OF HOUSING
     AND URBAN DEVELOPMENT
    Region IV Office of the Inspector General
    Office of Audit
    Richard B. Russell Federal Building
    75 Spring Street, SW, Room 330
    Atlanta, Georgia 30309

     Dear Ms. Cooper:

     Enclosed is our formal response to the recent audit that you conducted of the 1996 and 2000
     Supportive Housing Grants received by NSS-VORCI. The Board of Directors of both entities,
     NSSFNS, the parent Corporation and its subsidiary VORCI, fully recognizes the gravity of
     these findings and particularly any alleged abuse of funds by an individual. In developing our
     response we have consulted with our attorneys and our independent auditors, the Wesley
     Peachtree Group, CPA. As you review our response, there are several matters that we want to
     make abundantly clear.

      Ø    Since inception of the SHP grants, we have exceeded our program goals in serving the
           number of homeless veterans. Over 1,200 veterans have been served over the past three
           years. Our program has received several citations as an exemplary program in serving
           the needs of veterans.

      Ø    None of the SHP funds received have gone to personally enrich anyone at NSS-VORCI.
           All funds have been used to advance the programmatic cause of providing supportive
           housing for Atlanta’s homeless veterans.

      Ø    We have not purposely operated the programs inconsistent with the SHP requirements.
           We tried our best to establish the proper accounting systems, hire qualified personnel
           and follow the program regulations. We completed timely external audits and those
           audits revealed that we were on the right track.




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        Ms. Nancy H. Cooper, Regional Inspector
          General for Audit Southeast/Caribbean
        U.S. DEPARTMENT OF HOUSING
         AND URBAN DEVELOPMENT
        July 1, 2002
        Page 2



              Ø   Lastly, the Board of Directors (and the Executive Director) are committed to doing all
                  that is necessary to maintain our current programs and the U.S. Department of Housing
                  and Urban Development continued support. We have crafted a corrective action plan that
                  we believe addresses the matters raised in your audit. We ask for your input and comments.

        Should you have any question(s) as you review the enclosed material, please do not hesitate to contact
        either one or both of us.

        Very truly yours,

             //S//                                               //S//
        Geoffrey A. Heard                                     Percy D. Butler
        President & CEO                              President, Board of Directors
        NSSFNS, Inc.                                          VORCI


        BOD/db

        cc:       Board Files

        Enclosure(s):




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     VETERAN’S OPPORTUNITY AND RESOURCE CENTER, INC. (VORCI)

     RESPONSE TO DRAFT HUD OIG AUDIT DATED MAY 10, 2002




    General Comments


    The NSS-VORCI housing program is a direct outgrowth of the need to provide supportive

    housing services for Atlanta’s homeless veterans. Almost half of Atlanta’s homeless population

    is estimated to be armed services veterans. From a six room framed house over twelve years

    ago, VORCI has expanded its housing program to include the Harris House Veterans Center,

    Harris House Transitional Apartments and Harris House Stabilization Center, accommodating as

    many as 35 veterans (male and female) at any given time.

    Our program has been extremely successful and, overall, has accomplished the programmatic
    funding goals we promised to our sponsors, including the U.S. Department of Housing and
    Urban Development.

     During the three short years we have operated these facilities, we have assisted more than 1,200
     veterans and their families receive independent housing of some sort. We have seen residents
     move from a state of homelessness to homeownership in two (2) years or less. There have been
     twenty-nine (29) individuals to purchase homes after completing our transitional apartment
     program and thirty-four (34) persons have moved into unsubsidized apartment living and twenty-
     seven (27) have re-united with their families. This is a transitional housing program; therefore,
     residents sign a two-year license agreement to participate in the program. They agree to develop
     an ISS that will address their academic, social and employment needs with home ownership as
     the ultimate aim.



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        VETERAN’S OPPORTUNITY AND RESOURCE CENTER, INC. (VORCI)

        RESPONSE TO DRAFT HUD OIG AUDIT DATED MAY 10, 2002
        (Continued)


        In 1999, VORCI was approached by the owner of the property at 438 Fraser St., SE, and the
        Board President of the former Imperial Welcome House, a housing facility for Atlanta’s working
        poor, and was asked to operate the facility as a housing stabilization center for the existing
        population and those persons we would place in the facility. At the urging of the City of Atlanta
        and the State Department of Community Affairs, we agreed to this request and took over
        operation of this facility. During the ensuing months we worked with the people we inherited
        and were successful in moving them into independent living situations. We saw people address
        legal matters, rectify outstanding arrest warrants, become engaged and get married as well as
        obtaining career oriented employment.


        We have established collaborative relationships with the VA Hospital, the Salvation Army
        Lodge, and the Task Force for the Homeless and the Homeless Action Group so that qualified
        applicants can be referred to us through local area service providers for assistance.


        Unfortunately, as with many small nonprofit agencies, our outstanding programmatic success has

        come at the expense of not being able to afford the resources necessary to invest in a top-notch

        administrative infrastructure. We have diligently tried. However based on your report, we have

        considerable shortcomings in our fiscal management area. Our spin-off from NSSFNS into a

        separate subsidiary (VORCI) in October 2000 was done solely to focus on our core business of

        providing supportive housing to homeless veterans. We set up written polices and procedures, a

        new accounting system (Peachtree Accounting) and hired a new accountant to manage our fiscal

        affairs. Our systems have been audited twice by our external auditors and they have determined

        us to be substantially in compliance with applicable regulations governing the SHP requirements.

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    VETERAN’S OPPORTUNITY AND RESOURCE CENTER, INC. (VORCI)

    RESPONSE TO DRAFT HUD OIG AUDIT DATED MAY 10, 2002
    (Continued)


    Finding 1:

    Management did not responsively manage grant funds, accounting and compliance with SHP
    requirements. Accounting for SHP expenditures and receipts was incomplete and inaccurate.
    Salary and other costs benefiting multiple programs were not properly allocated. Expenditures
    significantly deviated from the approved SHP budget.

    Recommendations:          Terminate further SHP grant funding to VORCI. VORCI should not be
    considered for new funding until its Board of Directors and Executive Director have established
    written procedures and controls to ensure accounting is complete and accurate, and
    expenditures are monitored for eligibility, need and correlation to the budget. VORCI should
    also demonstrate complete and accurate accounting for its activities before new grants are
    considered.

    Require that VORCI replace its Executive Director and strengthen Board oversight processes
    before considered further grant funding.

    Response: The accounting system in place at VORCI during the OIG audit was initially
    established by National Scholarship Service, (the Parent Corporation also known as NSSFNS).
    From the beginning until NSS transferred accounting responsibility to VORCI in October 2000,
    NSS used its best efforts to ensure that all SHP funds were accounted for and categorized
    properly. VORCI continued the NSS accounting system through the OIG audit report. On
    several occasions, NSS and VORCI provided information to HUD on various aspects of the SHP
    funds utilization and accounting, and adopted changes requested by HUD to the same. We
    acknowledge below that our Accountants may have made mistakes. It is important to note,
    however, that neither NSS nor VORCI intentionally adopted an accounting system that violated
    SHP requirements, nor were any SHP funds misappropriated.

    NSS and then VORCI accounted for the SHP funds in one particular cost center: Harris House
    Veteran’s Center. Although our accounting system has the capability of tracking SHP
    expenditures by category (operating, supportive service and administration), unfortunately our
    Accountant did not complete the set up of the general ledger chart-of-accounts in this fashion.
    Instead, our Accountant maintained such information using MS Excel spreadsheets.
    Consequently, we did have expenditure classification issues among the SHP budget categories.
    However, we did not overspend the SHP grant nor did we spend any SHP funds on any non-SHP
    activities.

    VORCI did establish a system of allocating employee salaries among our various programs.
    Salaried employees are initially charged to the programs based on percentage of time spent,
    however, our system does not involve a periodic formal confirmation of the percentage of time

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        spent on each activity. The Accountant was charged with assuring that the allocations were
        consistent and properly charged to the SHP grant categories.

        We have used our external auditors to assist us with identifying the year-end adjusting journal
        entries, such as recording security deposit liabilities, accounts payable, cash receipts
        classifications, etc. The OIG auditors may not have taken these adjustments into account during
         their audit. As we most recently found, our Accountant was not experienced with accrual basis
        accounting but was primarily maintaining the general ledger on the cash basis of accounting.

        VORCI should have done a much better job in tracking budget-to-actual expenditures for the
        SHP budget categories. We should have been in a better position to obtain prior approval for
        budget revisions. This condition is a direct result of our accounting for SHP expenditures in total
        rather than by the grant categories.

        We have identified sufficient matching funds to satisfy the matching requirements for SHP grant.
        For example, for the years ended June 30, 2001, 2000, 1999 and 1998, we had $426,570,
        $303,524, $825,518 and $739,571, respectively of available matching funds. These amounts are
        well in excess of the required matching amounts. Unfortunately, our accounting system did not
        specifically identify and classify the expenditures as “SHP matching expenditures”, however
        our records do identify the expenditures and we can provide specific (and sufficient) expenditure
        details to justify the match.

        With regard to the alleged abuse of funds comment, (the $23,976 of questionable credit card
        charges by the Executive Director), the VORCI Executive Committee has initiated its own
        review of these transactions. In this regard, members of the Executive Committee that have
        accounting and auditing skills and these skills will be utilized to determine the propriety or
        impropriety of the credit card transactions. A full written report will be submitted to the Board
        of Directors with recommendations on correcting any wrongdoing, including the termination of
        the wrongdoers, if any.

        The Executive Committee will also revisit the issues surrounding the short-term loan from a
        Board member to VORCI. While the loan was made and approved in good faith to address an
        immediate financial emergency, we nonetheless will consider corrective action in view of the
        issues raised by the OIG.

        Corrective Action:          VORCI will revisit its general ledger chart-of-accounts to be sure
        sufficient accounts are established to permit classification of expenditures by SHP budget
        categories. Our revised system will include posting the HUD approved budget line items so that
        we can monitor budget compliance. The OIG has indicated that our Peachtree Accounting
        software is adequate provided that it is properly maintained. VORCI will also establish a cost
        allocation plan to ensure all direct costs are properly allocated and all indirect costs are allocated
        using an acceptable methodology. To solve the matching funds requirement, we will establish
        specific general ledger accounts for the SHP grant entitled “SHP matching funds” in which we
        will post our various matching expenditures consistent with HUD regulations. This will provide
        an unquestionable audit trail of our matching funds.

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     We will move expeditiously to hire a more experienced accountant with specific nonprofit grants
     accounting experience, preferably with five or more years of field experience.

     The Executive Committee will investigate the abuse of funds referenced in the OIG audit and
     issue written recommendations to the Board of Directors. The written report will be shared with
     OIG and HUD.

     As for future compliance, we will modify our corporate by-laws to establish a standing audit and
     finance committee to strengthen the Board of Directors’ oversight of fiscal management and
     audit resolution. In keeping with our existing five-year action plan, we have already increased
     the size of the Board of Directors and filled the vacant positions with persons with more fiscal
     experience.

     As evidence of our compliance, we have requested that our auditors (The Wesley Peachtree
     Group), who have significant nonprofit and governmental grants experience, provide a
     certification to HUD of our accounting system compliance within six (6) months.


     Finding 2:

     NSS-VORCI expended SHP funds for ineligible, unnecessary and unsupported costs.

     Recommendations: Require NSS-VORCI to repay to HUD, $253,596 for ineligible costs and
     $18,304 for unnecessary costs. Note that the $18,304 unnecessary cost also duplicated charges
     to construction funds.

     Require NSS-VORCI to provide adequate support for the $200,241 of unsupported costs or repay
     those costs to HUD.

     Require NSS-VORCI to repay to HUD, $34,443 for operating grant funds that were not matched.
     Note that this amount would increase if VORCI provides adequate support for any additional
     operating costs.

     Response:           We believe that if provided sufficient opportunity, VORCI can research the
     alleged ineligible, unsupported and unnecessary costs and prove that substantially all such costs
     can be justified as being consistent with HUD regulations. We will need to reconstruct our
     records by obtaining missing documentation from vendors, demonstrate competitive bidding,
     show where duplicate charges were subsequently corrected, document necessity/relevance of
     charges, prove our matching expenditures, etc.

     Corrective Action:            We propose to research our records as stated above. This review has
     already begun and will be continued by the Accountant to be retained as noted above. In
     addition, we are requesting that our auditors (The Wesley Peachtree Group) review our research
     results and certify its correctness. Any significant differences in the OIG amounts and the
     certified amounts will be scheduled for repayment to HUD.

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                                                               Appendix F

Distribution Outside of HUD
Executive Director, VORCI
Executive Director, National Scholarship Service
Principal Staff
Regional Directors
OIG Staff
Director, Office of Community Planning and Development, 4AD
Acquisitions Librarian, Library, AS

Sharon Pinkerton, Senior Advisor
Subcommittee on Criminal Justice
Drug Policy and Human Resources
B373 Rayburn House Office Building
Washington, DC 20515

Stanley Czerwinski, Associate Director
Resources, Community, and Economic Development Division
U.S. General Accounting Office
441 G Street N.W., Room 2T23
Washington, DC 20515

Steve Redburn, Chief Housing Branch
Office of Management and Budget
725 17th Street, NW, Room 9226
New Executive Office Building
Washington, DC 20503

The Honorable Joseph Lieberman
Chairman
Committee on Government Affairs
706 Hart Senate Office Building
United States Senate
Washington, DC 20510

The Honorable Fred Thompson
Ranking Member
Committee on Governmental Affairs,
340 Dirksen Senate Office Building
United States Senate
Washington, DC 20510




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The Honorable Dan Burton
Chairman
Committee on Government Reform,
2185 Rayburn Building
United States House of Representatives
Washington, DC 20515

The Honorable Henry A. Waxman
Ranking Member
Committee on Government Reform
2204 Rayburn Building
United States House of Representatives
Washington, DC 20515

Andy Cochran
House Committee on Financial Services
2129 Rayburn House Office Building,
Washington, DC 20515

Clinton C. Jones, Senior Counsel
Committee on Financial Services
U. S. House of Representatives
B303 Rayburn House Office Building
Washington, DC 20515




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