oversight

Congressionally Requested Audit of the Outreach and Technical Assistance Grants and Intermediary Technical Assistance Grants awarded to the North Carolina Low Income Housing Coalition, Inc. Raleigh, North Carolina

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-09-27.

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

                                                             Issue Date:
                                                             September 27, 2002
                                                             Audit Case Number:
                                                             2002-AT-1005




TO:           Charles H. Williams, Director, HUD’s Office of Multifamily Housing Assistance
                 Restructuring, HY



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


SUBJECT:      Congressionally Requested Audit of the
              Outreach and Technical Assistance Grants and
              Intermediary Technical Assistance Grants awarded to the
              North Carolina Low Income Housing Coalition, Inc.,
              Raleigh, North Carolina

                                     INTRODUCTION

We completed an audit of the two Outreach and Technical Assistance Grants (OTAG) and three
Intermediary Technical Assistance Grants (ITAG) awarded to the North Carolina Low Income
Housing Coalition, Inc. (Grantee). The audit found that the Grantee overcharged the grants
$63,457 for ineligible costs, and did not comply with other requirements under the Office of
Management and Budget’s (OMB) Circular A-122, Cost Principles for Non-Profit Organizations.
Our report contains nine recommendations to address the issues identified in the report and
strengthen management controls over the Grantee.

Section 1303 of the 2002 Defense Appropriation Act (Public Law 107-117) requires the
Department of Housing and Urban Development (HUD) Office of Inspector General to audit all
activities funded by Section 514 of the Multifamily Assisted Housing Reform and Affordability
Act of 1997 (MAHRA). The directive would include OTAG and ITAG administered by the
Office of Multifamily Housing Assistance Restructuring (OMHAR). Consistent with the
Congressional directive, we reviewed the eligibility of costs with particular emphasis on
identifying ineligible lobbying activities.

In conducting the audit, we reviewed the Grantee’s accounting records and interviewed
responsible staff. We also reviewed the requirements in MAHRA, the OTAG Notice of Fund
Availability, the OTAG grant agreement, HUD’s requirements for grant agreements for
nonprofit entities, and Office of Management and Budget’s guidance on the allowability of costs
for nonprofit grantees.

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The audit covered transactions and grant activity that occurred during the period October 1998
through June 2002. We performed the fieldwork at the Grantee’s offices located at
3948 Browning Place, Suite 210, Raleigh, North Carolina, 27609 during June and July 2002.
We conducted the audit in accordance with generally accepted government auditing standards.

We appreciate the courtesies and assistance extended by Grantee personnel during our review.

We provided our draft report to the Grantee for their comments on August 22, 2002. The
Grantee provided their written comments on September 12, 2002. The Grantee indicated they
have taken a number of corrective actions to address the findings. The Grantee’s comments are
summarized in each of the findings and included in Appendix B.

In accordance with 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 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 have provided the Grantee a copy of
this report.

Should you or your staff have any questions, please contact James D. McKay, Assistant Regional
Inspector General for Audit, at (404) 331-3369.

                                           SUMMARY

We did not identify any ineligible lobbying activities. However, the Grantee obtained advances
in excess of program needs, claimed reimbursement for expenditures not paid, and claimed
reimbursement for the same expenses twice, resulting in overcharges to the grants of $52,083.
Also, the Grantee did not use a cost allocation method or plan that complied with guidance in
OMB Circular A-122. The lack of an adequate cost allocation plan resulted in overcharges to the
grants of at least $9,030. Furthermore, the Grantee hired a nonprofit organization to conduct
portions of the grant activities under a cost reimbursable type contract. Of the invoices
submitted by the contractor in the amount of $166,470, we determined $73,361 was not
adequately supported. Without adequate supporting documentation, the $73,361 represents
potential overcharges to the grants. In addition, we determined that $2,344 in contractor salaries
and benefits represents overcharges to the grant. Our report contains recommendations to
address these issues and to strengthen management controls over the Grantee. We recommend
you consider suspending grant funding until the Grantee develops and implements appropriate
management controls to ensure that only eligible activities receive funding and that the
documentation for the expenditures complies with OMB Circular A-122.




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                                        BACKGROUND

MAHRA established OMHAR within HUD. Utilizing the authority and guidelines under
MAHRA, OMHAR’s responsibility included the administration of the Mark-to-Market Program,
which included the award, and oversight of the Section 514 Outreach and Training Assistance
and Intermediary Technical Assistance Grants. The objective of the Mark-to-Market Program
was to reduce rents to market levels and restructure existing debt to levels supportable by these
reduced rents for thousands of privately owned multifamily properties with federally insured
mortgages and rent subsidies.          OMHAR worked with property owners, Participating
administrative entities, tenants, lenders, and others to further the objectives of MAHRA.

Congress recognized, in Section 514 of MAHRA, that tenants of the project, residents of the
neighborhood, the local government, and other parties would be affected by the Mark-to-Market
Program. Accordingly, Section 514 of MAHRA authorized the Secretary to provide up to $10
million annually ($40 million total) for resident participation, for the period 1998 through 2001.
The Secretary authorized $40 million and HUD staff awarded about $26.6 million to 38 grantees
(a total for 81 grants awarded). Section 514 of MAHRA required that the Secretary establish
procedures to provide an opportunity for tenants of the project and other affected parties to
participate effectively and on a timely basis in the restructuring process established by MAHRA.
Section 514 required the procedures to take into account the need to provide tenants of the
project and other affected parties timely notice of proposed restructuring actions and appropriate
access to relevant information about restructuring activities. Eligible projects are generally
defined as HUD insured or held multifamily projects receiving project based rental assistance.
Congress specifically prohibited using Section 514 grant funds for lobbying members of
Congress.

HUD issued a Notice of Fund Availability in fiscal year 1998 and a second in fiscal year 2000 to
provide opportunities for nonprofit organizations to participate in the Section 514 programs.
HUD provided two types of grants - ITAG and OTAG. The Notice of Fund Availability for the
ITAG states that the program provides technical assistance grants through Intermediaries to sub-
recipients consisting of: (1) resident groups or tenant affiliated community-based nonprofit
organizations in properties that are eligible under the Mark-to-Market program to help tenants
participate meaningfully in the Mark-to-Market process, and have input into and set priorities for
project repairs; or (2) public entities to carry out Mark-to-Market related activities for Mark-to-
Market-eligible projects throughout its jurisdiction. The OTAG Notices of Fund Availability
state that the purpose of the OTAG Program is to provide technical assistance to tenants of
eligible Mark-to-Market properties so that the tenants can: (1) participate meaningfully in the
Mark-to-Market program, and (2) affect decisions about the future of their housing.

OMHAR also issued a December 3, 1999, memorandum authorizing the use of OTAG and ITAG
funds to assist at-risk projects. OMHAR identified these as non-Mark-to-Market projects where
the owners were opting out of the HUD assistance or prepaying the mortgages.




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HUD’s regulations at 24 Code of Federal Regulations (CFR) Part 84 contain the uniform
administrative requirements for grants between HUD and nonprofit organizations. The
regulations (24 CFR 84.27) require that nonprofit grantees utilize OMB Circular A-122, Cost
Principles for Non-Profit Organizations, in determining the allowability of costs incurred. OMB
Circular A-122 outlines specific guidelines for allowability of charging salaries and related
benefits to the grants and the records needed to support those salaries. For indirect costs charged
to the grant, the Circular establishes restrictions for indirect costs, and specific methods and
record keeping requirements to support the allocation of costs.

The Circular also establishes the unallowability of costs associated with Federal and state
lobbying activities. Simply stated, the use of federal funds for any lobbying activity is
unallowable. OMB Circular A-122 identifies some examples of unallowable lobbying activities.
These include any attempt to influence an elected official or any Government official or
employee (Direct Lobbying) or any attempt to influence the enactment or modification of any
actual or pending legislation by propaganda, demonstrations, fundraising drives, letter writing, or
urging members of the general public either for or against the legislation (Grassroots Lobbying).

The Grantee received two separate OTAGs. HUD awarded the first grant1 in fiscal year 1998 in
the amount of $250,000. HUD awarded the second grant2 in fiscal year 2000 in the amount of
$450,000. Funding under both grants was for a period of 3 years. Only $270,000 of the second
grant has been authorized. The Grantee submitted vouchers to OMHAR for reimbursement of
expenditures. As of June 30, 2002, the Grantee had requested and received reimbursements
totaling $250,000 under the 1998 OTAG. For the 2000 OTAG, the Grantee had requested and
received reimbursements totaling $121,043.

In addition to the OTAG funds, the Grantee received three ITAGs awarded through the Low
Income Housing Fund (an intermediary Grantee). Each of these ITAGs was awarded in the
amount of $20,000. As of June 30, 2002, the Grantee had requested reimbursements totaling
$29,683 under the ITAGs.

The Grantee also received grants from non-federal sources, such as the North Carolina Housing
Finance Agency, and several local foundations as well as donations, dues, fees, interest income,
and other miscellaneous funds.

The Grantee’s financial statements were audited by a Certified Public Accountant (CPA) for
each of the years ending June 30, 1999, June 30, 2000, and June 30, 2001. The CPA provided an
unqualified opinion for each of the years. The audit reports did not identify a cost allocation
method used by the Grantee.




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     FFOT98022NC
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                          FINDINGS AND RECOMMENDATIONS

FINDING 1 – GRANTEE OBTAINED ADVANCES IN EXCESS OF PROGRAM
            NEEDS, CLAIMED REIMBURSEMENT FOR EXPENSES NOT
            ACTUALLY PAID, AND CLAIMED SOME EXPENSES TWICE.

The Grantee requested and received two advances but failed to account for these advances when
submitting subsequent requests for reimbursement of expenditures. Furthermore, the Grantee
lacked support to show that these advances represented immediate program needs.
Subsequently, the Grantee did not offset expenditures against the advances, claimed
reimbursement for expenses it did not actually pay, and claimed reimbursement for some
expenses twice. The Grantee’s failure to maintain adequate accounting records and reconcile
expenditures per the accounting records with the payment vouchers submitted for reimbursement
allowed the advances and overcharges to go undiscovered. The advances and incorrect
reimbursement requests resulted in overcharges to the grants totaling $52,083.

OMB Circular A-110, Paragraph 22 (b), states that recipients of grants can be paid in advance
provided the advances are limited to the minimum amounts needed and timed to be in
accordance with the actual, immediate cash requirements in carrying out the purpose of the
approved program or project. Furthermore, the Outreach and Training Grants Payment Voucher
form contains a certification statement that: “I certify the data reported and funds requested on
this voucher are correct and the amount requested is not in excess of immediate disbursement
needs for this program. In the event the funds provided become more than necessary, such
excess will be promptly returned, as directed by HUD.”

Furthermore, Paragraph 21 (b) (2) provides that the recipient’s financial management system
shall provide for records that identify adequately the source and application of funds for federally
sponsored activities. Paragraph 21 (b) (7) states that the system must provide accounting records
including cost accounting records that are supported by source documentation.

Advances in excess of program requirements.

On October 26, 1999, the Grantee submitted Payment Voucher 084000193 requesting total
reimbursement of $26,386 for the period of July 1, 1999, through September 30, 1999. Of this
total, $25,000 was requested as an advance and the remaining $1,386 was for reimbursement of
expenditures under the grant. The payment voucher contained notations identifying $25,000 as
an advance and identifying the person at OMHAR who had given verbal approval for the
advance.

On September 18, 2001, the Grantee submitted Payment Voucher 084000804 requesting total
reimbursement of $18,587 for the period of April 1, 2001, through September 30, 2001. Of this
total, $5,755 was requested as an advance and the remaining $12,832 was for reimbursement of
expenditures under the grant. The $5,755 was used to bring the total amount of reimbursements
under the 1998 OTAG up to the $250,000 award amount. The Grantee was in the process of
closing out the grant and drawing down the full award amount.



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We reviewed the subsequent payment vouchers submitted by the Grantee through June 2002 and
determined that neither of these advances was ever offset against subsequent expenditures.
Thus, the advances totaling $30,755 remain outstanding. The Grantee lacked documentation to
support that these advances represented immediate cash requirements for the OTAG Program as
required by OMB Circular A-110.

Neither of these advances was properly accounted for in the financial records and therefore was
not identifiable as outstanding advances. The current Executive Director stated that she was not
aware of the first advance. She was not employed by the Grantee at the time the advance was
requested and received. She said she was aware of the second advance but understood there
were offsetting expenditures.

Duplicate requests for reimbursement, and request for expenses not actually paid.

Our review of the payment vouchers submitted by the Grantee identified that the Grantee had
included the same $5,657 in expenditures on two different vouchers; included expenditures of
$9,064 for the month of October 2001 twice in one voucher; and requested reimbursement of
subcontract expenses of $6,607 that were not paid. These items resulted in overcharges to the
grants totaling $21,328.

We determined that the Grantee did not maintain financial accounting system records in
compliance with requirements of OMB Circular A-110. The Grantee’s accounting records did
not identify adequately the source and application of funds for federally sponsored activities.
The Grantee’s lack of adequate accounting records, and failure to reconcile expenditures per the
accounting records with the payment vouchers submitted for reimbursement allowed the
overcharges to go undetected and remain unresolved.

AUDITEE COMMENTS

The Grantee responded that it had incurred at least $10,000 in direct and indirect costs relating to
the 1998 grant that had not been requested. The Grantee said it would ask OMHAR to allow it to
offset the unclaimed costs against the $25,000 advance.

The Grantee responded that it had extended a contract by $10,000 for the period July 1, 2001, to
October 2001 but inadvertently charged the costs to the 2000 grant. The Grantee plans to
reclassify the costs to the 1998 grant, offset the costs by the $5,755 advance and $5,657 claimed
twice, and reimburse the difference of $1,412.

The Grantee said it would reimburse the $6,607 for subcontract expenses that were not paid.

The Grantee said it had obtained a new CPA firm and that they were reviewing all
documentation to ensure all expenditures are appropriately reflected on the payment vouchers.
The new CPA is also assisting the Grantee in strengthening internal controls, establishing an
accounting system to track all funding sources and expenses, and implementing a grant
reimbursement method to prevent any future excessive grant draws.



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OIG EVALUATION OF AUDITEE COMMENTS

The Grantee’s response did not address the total overcharges of $52,083. Given the mistakes
discussed in this finding and the deficiencies in the supporting documentation for contractor and
subcontractor expenses discussed in this finding and Finding 3, we question whether the Grantee
can fully support the amounts claimed with adequate documentation.

The Grantee must keep in mind that OMB Circular A-122 specifies that expenses must be
incurred specifically for the award. Expenses cannot be shifted from one award to another for
the purpose of satisfying a deficiency identified in an audit report.

The Grantee must provide OMHAR documentation to support their claim for any additional
expenses and provide assurances that these expenses have not already been claimed against the
OTAG or other grants.

RECOMMENDATIONS

We recommend your office require the Grantee to:

1A.    Repay the grant $52,083 for advances in excess of program needs, expenses claimed
       twice, and expenses not actually paid, or offset the reimbursements by properly supported
       costs.

1B.    Reconcile expenditures per the accounting records with the payment vouchers submitted
       for reimbursement.

1C.    Maintain fund accounting systems and records that clearly identify the source and
       application of grant funds.




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FINDING 2 – GRANTEE FAILED TO USE A COST ALLOCATION METHOD
            THAT COMPLIED WITH OMB CIRCULAR A-122

The Grantee did not use a cost allocation method that complied with the guidance in OMB
Circular A-122, Attachment A, to allocate indirect costs to the grants. Instead, the Grantee used
methods based on estimates and predetermined percentages, and the methods, estimates, and
percentages were not always supported by adequate documentation. Due to the lack of an
adequate cost allocation method and deficiencies in the accounting records, the Grantee could
not support the appropriateness of allocating much of the indirect costs to the grants. These
same deficiencies prevented us from determining the exact extent of the overcharges to the
grants. However, we concluded that the lack of an adequate cost allocation plan resulted in
overcharges to the grants of at least $9,030.

Title 24 CFR 84 contains the administrative requirements for grants between HUD and nonprofit
organizations. Title 24 CFR 84.27 requires that nonprofit Grantees use OMB Circular A-122,
Cost Principles for Non-Profit Organizations, in determining costs that are allowable to be
charged against grants. The Circular establishes restrictions for indirect costs, and provides
specific cost allocation methods and record keeping requirements to support the allocation of
costs.

Recipients of Federal Grants are also subject to OMB Circular A-110, Uniform Administrative
Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and
Other Non-profit Organizations. Circular A-110, Sub Part C, Financial and Program
Management, Paragraph 21 (b) (2) provides that the recipient’s financial management system
shall provide for records that identify adequately the source and application of funds for federally
sponsored activities. Paragraph 21 (b) (7) provides that the system must provide accounting
records including cost accounting records that are supported by source documentation.

Grantee’s various allocation methods

The Grantee used several different methods to allocate indirect costs to the grants. Due to
incomplete and inadequate supporting documentation, we were unable to identify all the methods
used by the Grantee, but did identify some of them. During the first 15 months of the grant
(October 1998 – December 1999) it appears the Grantee allocated salary expenses, plus a fixed
20 percentage for fringe benefits, based on the number of hours individual employees worked on
the various programs. These hours were also the basis for determining the percentages to be
used for allocating other indirect costs. In theory, this method would comply with most of the
principles of a valid cost allocation method under OMB Circular A-122, except for the use of the
fixed percentage for fringe benefits.

From the period January 1, 2001, to June 30, 2001, the Grantee allocated salaries based on 25
percent of the Executive Director’s time. Although there were no formal records to support the
allocation method, we reviewed the time sheets for this period and determined that the Executive
Director spent at least 25 percent of her time on OTAG activities.




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From July 1, 2001, to the present time, the Grantee used an estimate of time various employees
spent on each program to allocate salaries, payroll taxes, insurance, and retirement costs. This
method and resulting percentages was applied to the salary and fringe benefits expenses for the
Executive Director, Executive Assistant, Associate Director, Program/Policy Associate, and a
temporary worker. These percentages were adjusted in October 2001 but remained relatively the
same throughout the entire period. By averaging the individual percentages for these employees,
the Grantee developed an overall percentage for use in allocating other indirect costs to the
grants. These percentages also remained relatively the same throughout the period. The
Grantee’s accounting system automatically distributed the costs to various programs based on the
predetermined (estimated) percentages.

We tested the reasonableness of the estimates of time spent by employees on the OTAG
Program. To accomplish this, we obtained and reviewed the time sheets for the Executive
Director and Associate Director for the period of July 2001 to June 2002. The salaries and
benefits for these two individuals accounted for the majority of the total salaries and fringe
benefits charged to the grants. Both these individuals performed project specific activities as
well as administrative functions, thus their charges represented a combination of direct costs and
indirect costs.

Using the time sheets, we calculated the total hours spent on the various programs by these two
individuals and the percentage of time spent on the OTAG Program. We then compared our
results with the percentages used by the Grantee to allocate indirect costs. Our comparison
showed that the Grantee over charged the grants by at least $9,030 in salaries and benefits during
the period of July 1, 2001, through June 30, 2002. The Grantee’s payment vouchers did not
directly relate to the accounting system records, thus, we were not able to allocate the
overcharges between the two individual grants. The Grantee was continuing to use estimated
time rather than actual time. Therefore the actual overcharge to date is more than $9,030.

The time sheets contained the necessary detail that would allow them to be used to formulate a
cost allocation method that complied with OMB Circular A-122. However, the Grantee chose to
use predetermined percentages based on estimates. The Executive Director stated that she has
support for the estimates and predetermined percentages used to allocate indirect costs, including
salaries and fringe benefits. However, the support was not provided as of the completion of our
fieldwork.

The Executive Director stated that the time sheets we reviewed did not reflect the full amount of
time she actually worked on the OTAG Program. She said the time sheets only accounted for a
normal 8-hour workday. She said that she did not record additional time she worked because she
did not think she could. Additionally, the Executive Director provided additional time sheets for
the period from July 2000 to December 2000 when none of her time was charged to the grants.
These time sheets reflect that the Executive Director spent approximately 5 percent of her time
on OTAG activities, which would amount to approximately $1,562 for this period. These time
sheets were not prepared in accordance with OMB Circular A-122 requirements because they
showed only a notation of time charged to the OTAG Program and did not account for time spent
on other Grantee programs. In other words, her total time was not accounted for or allocated
among the various programs.


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We considered the information presented by the Executive Director concerning her time.
However, we did not make any adjustments because the time keeping records were not in
compliance with OMB Circular A-122. Also, since all of the Executive Director’s salary should
have already been distributed to the various programs, there would be no basis for applying the
results of any analysis without adjusting all programs where the Executive Director’s salary and
benefits had been charged. The condition of the accounting system records would not permit this
to be accomplished in a reasonable timeframe, if at all.

Allocation of other indirect costs was not supported.

Other indirect costs were allocated to the grants based on usage by the employees. This method
resulted in various percentages. For example, rent was allocated at 44 percent while office
supplies was allocated at 50 percent. The Executive Director said she kept notes on how she
determined the percentage of usage, but these were not formal and were not available at the
completion of our fieldwork. We were not able to tell from the accounting records how much
other indirect costs had been charged, and therefore, we were unable to determine the
reasonableness of these other indirect costs charged to the grants.

AUDITEE COMMENTS

The Grantee said it would request OMHAR to allow a $9,030 adjustment to the next draw
request for the overcharges in salaries and benefits during the period of July 1, 2001, through
June 30, 2002.

The Grantee said it had hired a new CPA firm who had assisted in the development of a new cost
allocation plan. The Grantee said it had submitted the new cost allocation plan to OMHAR and
would charge future costs to the grant based on OMHAR approved methodology.

OIG EVALUATION OF AUDITEE COMMENTS

The Grantee has begun to take actions that should correct the deficiencies noted in the
accounting system, management controls, and documentation of expenditures charged against
the Grants.

RECOMMENDATIONS:

We recommend your office:

2A.    Determine whether the Grantee’s new cost allocation method complies with OMB
       Circular A-122 before allocating any more indirect costs to the OTAG Program.

2B.    Require the Grantee repay the grants $9,030 for ineligible costs and any additional
       overcharges after June 2002 or offset the overcharges against future draws.




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FINDING 3 – GRANTEE CLAIMED REIMBURSEMENT FOR INADEQUATELY
            SUPPORTED CONTRACTOR EXPENSES

The Grantee claimed reimbursement under the OTAG for contractor expenses without having
adequate support. The Grantee hired a nonprofit organization to conduct portions of the grant
activities under a cost reimbursable type contract. The contractor in turn hired subcontractors to
perform portions of the grant activities. The contractor submitted invoices to the Grantee and
requested reimbursement for cash advances and expenses incurred by the contractor and
subcontractors. The Grantee did not verify that the contractor had supporting documentation
required by OMB Circulars A-122 and A-110 before paying these invoices or claiming
reimbursement under the OTAG. The Grantee claimed reimbursement for a total of $166,470
based on contractor invoices. Of this total, $73,667 was for the subcontractors. We determined
that $73,361 for subcontractor expenses was not adequately supported. Without adequate
supporting documentation, the $73,361 represents potential overcharges to the grant. In addition,
we determined that $2,344 in contractor salaries and benefits represents overcharges to the grant.

OMB Circular A-122, Cost Principles for Non-Profit Organizations, Attachment A, General
Principles, Paragraph 2 (g), provides that for costs to be allowable, they must be fully
documented. Attachment B, Paragraph 7 m (1), Support of salaries and wages, provides in part
that charges to awards for salaries and wages will be based on documented payrolls approved by
a responsible official of the organization. OMB Circular A-122, Paragraph 3 (b) states that the
requirements of the Circular also apply to subcontracts if the subcontractor is a non-profit
organization.

Recipients of Federal Grants are also subject to other OMB Circulars including OMB Circular
A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of
Higher Education, Hospitals, and Other Non-profit Organizations. OMB Circular A-110, Sub
Part C, Financial and Program Management, Paragraph 21(b)(2) provides that the recipient’s
financial management system shall provide for records that identify adequately the source and
application of funds for federally sponsored activities. Paragraph 21(b)(7) provides that the
system must provide accounting records including cost accounting records that are supported by
source documentation.

With the resignation of its executive director in July 1999 the Grantee contracted with the North
Carolina Justice and Community Development Center (Justice Center), a nonprofit organization,
to operate the OTAG Program until a new executive director could be hired. This arrangement
with the Justice Center began in October 1999 and continued until March 2001. The Justice
Center subcontracted with several other nonprofit organizations to perform portions of the
OTAG activities in various parts of the state. The Justice Center submitted quarterly invoices
that requested reimbursement for activities performed by it and its subcontractors. These
invoices generally included a request for an advance for the next quarter, plus a settlement for
the current quarter based on actual expenditures offset by previous advances.




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We reviewed all of the LOCCS Payment Vouchers totaling $250,000 submitted by the Grantee
under the 1998 OTAG and determined that $166,470 was based on invoices from the Justice
Center. Of this total, $73,667 was for the subcontractors and the balance was for expenses
incurred by the Justice Center. We requested supporting documentation for these invoices from
the Grantee and Justice Center. In response to our request, we were provided a copy of a budget
report, a summary cost ledger listing OTAG expenditures, invoices from the subcontractors, and
other documentation. The Justice Center also provided time sheets for its employees whose time
was charged to the grant.

We reviewed the information provided by the Grantee and Justice Center, and found that only
$306 of the $73,667 for the subcontractors was adequately supported. In addition, we
determined that $2,344 in salaries and benefits claimed by the contractor represented
overcharges to the grant.

Payments to subcontractors

Only $306 of the $73,667 the Justice Center claimed to have paid to subcontractors was
adequately documented. The unsupported costs included charges for salaries and fringe benefits
that were not supported with time records prepared in accordance with OMB Circular A-122,
payments that were based on budgeted amounts instead of actual costs, and costs that had no
support at all. For example, the Justice Center submitted an invoice on January 29, 2001, for
$52,748.65. The invoice included payments to three subcontractors for $11,244.18, $7,353.25,
and $6,587.49. A discussion of the documentation for the payments follows:

   The documents provided to support the $11,244.18 payment included a check for $11,106.34
   and a breakdown of this amount. The breakdown showed the $11,106.34 included expenses
   of $11,696.34, and a 3-month advance of $9,835.85, less a prior request of $10,425.85.
   There was nothing to support the expenses of $11,696.34, and the prior request of
   $10,425.85. The $9,835.85 was based on budgeted amounts.

   The documents provided to support the $7,353.25 included only an invoice for $7,353.25 and
   two payments to the subcontractor for prior period costs that were not related to the current
   invoice.

   The documents provided to support the $6,587.49 payment to the subcontractor included
   time sheets that showed six people charged time to the contract. However, the time sheets
   did not show what the individuals worked on. The documents showed the subcontractor
   charged 1/6 of its rent to the contract. There was no lease provided to show what the actual
   rent was and how the proration was computed. The documents showed the subcontractor
   also charged $232 for office supplies. There were no invoices to support the expenses.

We found similar conditions in the other invoices we reviewed. The net unsupported costs
amounted to $73,361 ($73,667 - $306).




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The Justice Center over charged the grant for salaries and fringe benefits

The Justice Center charged the grant with salaries and fringe benefits for three of its employees -
the OTAG Project Director, a consultant/supervisor, and an accountant. The Project Director
worked full time on grant activities and his salary and fringe benefits were charged 100 percent
to the grant. The consultant/supervisor and the accountant only worked part time on the grant
and their salaries and fringe benefits were only partially charged to the grant. The charges for
these two individuals were based on budgeted amounts, not actual time spent working on the
grant.

We obtained the time records to identify the actual time spent on the grant by the
consultant/supervisor and the accountant. We reviewed the consultant/supervisor time records
for the period December 1, 1999, to October 31, 2001, and the accountant’s time records for the
period October 1, 1999, to December 31, 1999. Using the time records, we determined the
percentage of time each employee actually spent on the OTAG Program and calculated what the
actual charges should have been. The Justice Center charged $2,497 and $1,248 per quarter for
the consultant/supervisor and accountant, respectively. Based on the actual time, the quarterly
charges should have been $2,231 and $1,046, respectively. The quarterly overcharges amounted
to $266 for the consultant/supervisor and $202 for the accountant, or a total of $468 per quarter.
Thus, the Justice Center over charged the grant by $2,344 for the period we reviewed.

AUDITEE COMMENTS

The Grantee concurred it did not consistently verify that the contractor had supporting source
documentation before paying invoices or claiming reimbursement under the OTAG. The
Grantee contended that it had obtained source documentation to support the majority of
subcontractor costs, and would provide the documentation to OMHAR.

The Grantee concurred in the $2,344 overcharge for salaries and fringe benefits and agreed to
repay that amount.

The Grantee agreed to maintain supporting documentation for all OTAG expenditures.

OIG EVALUATION OF AUDITEE COMMENTS

We have concerns whether the Grantee has obtained the necessary supporting documentation for
the subcontractor costs. We reviewed several submissions of the Grantee’s documentation
during the audit and report process, and found that the documentation did not comply with OMB
Circular A-122. We advised the Grantee of the inadequate support on numerous occasions, both
during the audit and subsequent to the issuance of the draft report.

RECOMMENDATIONS:

We recommend your office:

3A.    Require the Grantee to obtain and provide supporting documentation for the unsupported
       subcontractor payments totaling $73,361, or repay any unsupported costs to the grant.

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3B.   Require the Grantee repay the grant $2,344 for overcharges of salaries and benefits, or
      offset the overcharge against future draws.

3C.   Require the Grantee maintain supporting documentation for all OTAG Program
      expenditures in accordance with OMB Circulars A-110 and A-122.

3D.   Consider suspending grant funding until the Grantee develops and implements
      appropriate management controls to ensure that only eligible activities receive funding
      and that the documentation for expenditures complies with OMB Circular A-122.




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                                MANAGEMENT CONTROLS

In planning and performing our audit, we considered the management controls relevant to the
Grantee’s Section 514 Program to determine our audit procedures, not to provide assurance on
the controls. Management controls include the plan of organization, methods, and procedures
adopted by management to ensure that its goals are met. Management controls include the
processes for planning, organizing, directing, and controlling program operations. They include
the systems for measuring, reporting, and monitoring program performance.

We determined that the following management controls were relevant to our audit objectives:

           •   Identification of projects and activities eligible under Section 514,
           •   Controls and documents to support costs of assistance provided, and
           •   Controls and procedures over the reporting of activities and cost.

A significant weakness exists if management controls do not provide 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.

Based on our review, we believe the following items are significant weaknesses:

   •   Lack of controls to account for and requisition advances.
   •   Lack of controls to assure payment vouchers were accurately prepared and did not
       include expenses that were previously requested or that had not been paid.
   •   Lack of controls to assure expenditures are properly supported.
   •   Lack of controls to assure its method for allocating indirect costs complied with OMB
       Circular A-122.
   •   Lack of controls to assure its accounting system and records clearly identify the source
       and application of grant funds as required by OMB Circular A-110.

All of these weaknesses are addressed in the body of our report with corresponding
recommendations for corrective actions.




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                            FOLLOW-UP ON PRIOR AUDITS

The Office of Inspector General performed no previous audit of the Grantee.




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                                                                                                   Appendix A

                              SCHEDULE OF QUESTIONED COSTS


                    Recommendation                   Type of Questioned Costs
                       Number                     Ineligible 3        Unsupported 4
                         1A                          $52,083
                         2B                             9,030
                         3A                                                $73,361
                         3B                             2,344




3
    Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor
    believes are not allowable by law, contract, or Federal, State or local policies or regulations.
4
    Unsupported costs are costs charged to a HUD-financed or HUD-insured 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. The 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

AUDITEE COMMENTS




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                                                                             Appendix C

                       DISTRIBUTION OUTSIDE OF HUD

Executive Director, North Carolina Low Income Housing Coalition, Raleigh, North Carolina

The Honorable Barbara A. Mikulski
Chair, Subcommittee on Veteran Affairs, HUD and Independent Agencies

The Honorable Christopher S. Bond
Ranking Member, Subcommittee on Veterans Affairs, HUD and Independent Agencies

Sharon Pinkerton, Senior Advisor
Subcommittee on Criminal Justice, Drug Policy & Human Resources

Stanley Czerwinski, Director
Housing and Telecommunications Issues

Steve Redburn, Chief Housing Branch
Office of Management and Budget

Linda Halliday (52P)
Department of Veterans Affairs

William Withrow (52KC)
Department of Veterans Affairs
OIG Audit Operations Division

The Honorable Joseph Lieberman
Chairman, Committee on Government Affairs

The Honorable Fred Thompson
Ranking Member, Committee on Governmental Affairs

The Honorable Dan Burton
Chairman, Committee on Government Reform

The Honorable Henry A. Waxman
Ranking Member, Committee on Government Reform

Andy Cochran
House Committee on Financial Services

Clinton C. Jones, Senior Counsel
Committee on Financial Services

Jennifer Miller
Professional Staff, House Committee on Appropriations
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