oversight

Congressionally Requested Audit of the Outreach and Technical Assistance Grants Awarded to the Homeless and Housing Coalition of Kentucky, Inc. Frankfort, Kentucky

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-09-20.

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

                                                              Issue Date:
                                                              September 20, 2002
                                                              Audit Case Number:
                                                              2002-AT-1808




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 awarded to the
              Homeless and Housing Coalition of Kentucky, Inc.,
              Frankfort, Kentucky
              Grant Numbers FFOT98011KY and FFOT00016KY

                                      INTRODUCTION

We completed an audit of the two Outreach and Technical Assistance Grants (OTAG) awarded
to the Homeless and Housing Coalition of Kentucky, Inc. (Grantee). The audit found that the
Grantee overcharged the grants $16,287 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. In addition, the Grantee participated in state lobbying
activities, contrary to OMB Circular A-122. Our report contains 10 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 the Outreach and Training Assistance
Grants (OTAG) and Intermediary Technical Assistance Grants (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.




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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.

The audit covered the period January 1999 through May 2002. We performed the fieldwork at
the Grantee’s offices at 229 W. Main Street, Suite 105, Frankfort, KY 40601 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 14, 2002. The
Grantee provided their written comments on August 23, 2002. The Grantee attributed most of
the deficiencies to staff that are no longer employed, but 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.

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

                                           SUMMARY

The Grantee failed to maintain adequate records to support charges to the grants, and charged the
grants for ineligible activities. The ineligible activities included unreasonable consulting fees,
lobbying activities that are prohibited by OMB Circular A-122, and unrelated travel and training
costs. The Grantee’s failure to comply with requirements under OMB Circulars A-122 and A-
110 resulted in overcharges to the grants of at least $16,287 for ineligible activities. The Grantee
also failed to use a cost allocation method or plan that complied with guidance in OMB Circular
A-122 to allocate indirect costs to the grants. Consequently, the Grantee could not support
$54,625 of indirect costs charged to the grants. Also, the Grantee failed to submit required
supporting data for some payment vouchers. Our report contains recommendations to address
these issues and 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 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 lobby 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 $210,000. 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 May 31, 2002, the Grantee had requested and received reimbursements
totaling $201,449 under the 1998 OTAG. For the 2000 OTAG, the Grantee had charged
expenditures totaling $27,734, and received reimbursements in the amount of $18,141. The
Grantee had submitted payment vouchers for the balance of $9,593.

In addition to the OTAG funds, the Grantee received other HUD grants under the Technical
Assistance Provider to Community Planning and Development (CPD) Programs during the
period covered by our audit. The Grantee received other Federal funding through the
Corporation for National Service (CNS) for the AmeriCorps Program that is administered jointly
by CNS and the Kentucky Commission for Community Service and Volunteerism. The Grantee
also received state grants, donations, dues, fees, interest income, and other miscellaneous funds.

The Grantee’s financial statements were audited by a Certified Public Accountant for each of the
years ending December 31, 1999, 2000, and 2001. The CPA provided an unqualified opinion for
each of the years and included OMB Circular A-133 disclosures. The audit reports did not
identify a cost allocation method used by the Grantee.




1
     FFOT98011KY
2
     FFOT00016KY

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                          FINDINGS AND RECOMMENDATIONS

FINDING 1 – GRANTEE DID NOT MAINTAIN ADEQUATE RECORDS TO
            SUPPORT CHARGES TO THE GRANTS AND CHARGED
            THE GRANTS FOR INELIGIBLE ACTIVITIES.

The Grantee did not maintain adequate records to support charges to the grants, and charged the
grants for ineligible activities. The ineligible activities included unreasonable consulting fees,
lobbying activities that are prohibited by OMB Circular A-122, and unrelated travel and training
costs. The Grantee’s failure to comply with requirements under the OMB Circulars A-122 and
A-110 resulted in overcharges to the grants of at least $16,287 for ineligible activities.

Title 24 CFR 84, contains the administrative requirements for grants between HUD and
nonprofit organizations. Part 84.27 requires grantees to utilize OMB Circular A-122, Cost
Principles for Non-Profit Organizations, in determining the allowable costs. OMB Circular A-
122, Attachment B, Paragraph 7, Compensation for Personal Services, states that reasonable
compensation and fringe benefits to employees are fundable costs. The grantee must maintain
reports that account for the total activity for which an employee is compensated. The reports
must reflect an after the fact determination of actual activity for each employee; budget estimates
do not qualify as support for charges. Grantees must also maintain reports of distribution of
activity of each employee (professionals and nonprofessionals) whose compensation is charged,
in whole or in part, to awards. The employee or a responsible supervisor must sign the report. In
addition, in order to support the allocation of indirect costs, such reports must also be maintained
for other employees whose work involves two or more functions or activities if a distribution of
their compensation between such functions or activities is needed in the determination of the
organization's indirect cost rate.

OMB Circular A-122 also establishes that costs of Federal and State lobbying activities are not
allowable. The Circular identifies examples of unallowable lobbying activities. They 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).

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,
subpart 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.

Ineligible Consultant Fees

The Grantee charged the grants with consultant fees in the amount of $7,990 that were not
supported by detailed documentation that would support any portion being charged to the grants.
In addition, these consulting fees were also excessive and unreasonable as defined by OMB
Circular A-122.


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The Grantee did not have an Executive Director from May 2000 to March 2001. The Grantee
contracted with and paid The Partnership Center for management services during this period of
time. The Grantee charged approximately 16 percent of the total paid under the contract to the
OTAG Program. The contract provided that The Partnership Center would provide 16 hours of
management services per week at a cost of $2,126 semi-monthly. Under the contract, the
Grantee was also to reimburse the contractor for direct expenses (travel, copying, etc) incurred
by the consultant on behalf of the Grantee. Invoices submitted by The Partnership Center did not
provide any detail or support to show what specific management services were performed and
being billed for. Not only are the consultant fees not adequately supported, but also there was no
basis for the Grantee’s allocation of the costs to the OTAG Program.

The $2,126 semi-monthly computes to $66.43 per hour for the management services. This cost
is excessive when compared to approximately $14.20 per hour plus fringe benefits paid to the
former Executive Director who left the Grantee just prior to the start of the contract. The fee is
also excessive when compared with the $23.67 per hour plus fringe benefits paid to the current
Executive Director whose employment terminated the need for the management services under
the contract. The consultant fee does not meet the “reasonable” test of OMB Circular A-122.
The Grantee lacked information showing whether a competitive procurement process was used
in awarding the contract. The Grantee also lacked information to demonstrate whether the
contract was an arms-length transaction, which is one of the factors for consideration of
reasonableness under OMB Circular A-122. There was no justification presented to support the
payment of a management services fee almost 3 times what the newly hired Executive Director
was to be paid.

We consider the $7,990 ineligible because the Grantee lacked a basis for allocating any portion
of the costs to the OTAG Grant and the cost was not reasonable.

Ineligible Salary of OTAG Program Director

The Grantee charged 100 percent of the former Program Director’s salary to OTAG Program
activities. A total of $74,750 was paid to the former Program Director during his employment
with the Grantee (January 1999 through November 2001).

Activity reports, quarterly progress reports, planning worksheets, and the former director’s
laptop computer files clearly document that the Program Director engaged in activities other than
those specifically eligible under the OTAG Program, including lobbying.

These lobbying activities occurred as a part of the Grantee’s role as an Advocate for Homeless
and Low-Income individuals and families living in Kentucky. A large portion of the ineligible
activities performed by the OTAG Program Director was for lobbying and advocacy at the state
level. The Program Director participated in activities that constitute direct lobbying of staff
members of Kentucky State government in an attempt to influence legislation. One such effort
was his extensive participation in working to amend the Uniform Residential Tenant and
Landlord Act in Kentucky.




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The Grantee also participated in teleconferences and conferences, and paid membership dues to
the National Alliance of HUD Tenants. According to the Alliance’s teleconference and
conference agenda, activities consisted of items grant fundable under the grant and OMB’s
guidance. The activities also consisted of unallowable lobbying activities. For example, part of
the Alliance’s conference in July 2001 contained sessions on local and statewide strategies to
cope with prepayment of the property. According to the conference information, the session
informed participants how to use state and local legislation to save Section 8 projects. Another
session provided participants with information on creating local and citywide tenant coalitions.
The teleconference agenda identified, that of the 1-hour and 30-minute session planned for the
teleconference, only 5 minutes related to the Mark-to-Market program. Based on OMB’s
guidance, only that portion of the activity related to the purpose of the grant can be charged to
the grant. In these examples, the Grantee charged the full amount to the OTAG Program.

The time keeping records and other reports did not provide the required elements necessary to
support the full amount of these salary expenses charged to the grants. In many cases the time
sheets were also not signed by an approving supervisor, only the employee. The Grantee did not
maintain time keeping records necessary to support salary expenses in accordance with OMB
Circular A-122, Attachment B, Paragraph 7(m).

We reviewed monthly activity reports for the period April through August 2001. We concluded
the Program Director spent at least 2 days per month working on activities that were not eligible
OTAG activities. Two days per month is approximately 10 percent of the Program Director’s
total time (based on 160 hours worked per month). Accordingly, we consider 10 percent or
$7,475 of the Program Director’s salary as ineligible.

We were not able to interview the former Program Director to determine the reasons for charging
time spent on advocacy and lobbying to the OTAG grants since he is no longer employed by the
Grantee. The current Executive Director now performs these activities and does not charge time
or expenses spent on these activities to the OTAG Program.

Ineligible Travel and Training Expenses

Based on our review of the travel and staff training expenses charged to the grants, we identified
travel and staff training expenses totaling $370 and $452, respectively, that were unrelated to
OTAG activities. These items should not have been charged to the grants and are therefore
ineligible.

The current Executive Director was not familiar with the specific requirements of OMB Circular
A-122 pertaining to salary expense record keeping and cost allocation methods. The Grantee
relies on HUD to provide detailed guidance on program requirements.

AUDITEE COMMENTS

The Grantee did not fully concur with our conclusions in the draft report. The Grantee explained
that it hired the consultant after an unsuccessful period of time in trying to find and hire a
qualified executive director. The Grantee also provided additional documentation in an attempt
to justify the hourly fee paid to the consultant.




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The Grantee believed the former program director’s participation with State working groups was
consistent with the OTAG legislation to help protect low-income tenants and assist them in
retaining their housing. The Grantee explained that the former program director participated in
the Kentucky Legal Services Housing Task Force, and the Governor’s Housing Policy Advisory
Committee. His role on the Task Force was primarily to share information pertaining to the
status of OTAG activities and to share the kinds of problems that tenants in Kentucky face,
which were brought to his attention through his OTAG work. He also played a similar role on
the Advisory Committee, which is chaired by a State Representative. The Advisory Committee
conceived of the idea of trying to introduce a statewide uniform residential landlord tenant act,
and the former director was asked by the Advisory Committee to analyze the potential effect of
such legislation in areas of Kentucky where there is no existing legislation to protect tenants. He
also participated with the Representative in drafting the legislation. The legislation was never
introduced in the Kentucky General Assembly, and the program director did not contact state
legislators or their staff to influence legislation. The Grantee stated it had ceased charging any
hours to the OTAG grant for work that is not explicitly supported by the grant.

The Grantee did not dispute the $822 identified as ineligible travel and training expenses.

OIG EVALUATION OF AUDITEE COMMENTS

We considered the Grantee’s comments and documentation concerning the reasonableness of the
consultant fees. However, the consultant fees were not supported by detailed documentation that
would support any portion being charged to the grants. This was our primary point and reason
for treating these fees as overcharges to the grants. The Grantee has failed to obtain and
maintain documentation that complies with OMB Circular A-122 that would support any valid
basis for allocating any portion of the consultant fees to the grants.

We believe the former program director’s participation with the State Representative, including
drafting legislation, is an unallowable lobbying activity. The activities in question might be
worthy causes and goals, and part of the Grantee’s charter and mission, but are not eligible for
funding under the OTAG.

RECOMMENDATIONS:

We recommend your office:

1A.    Require the Grantee to repay the grants $16,287 for ineligible activities.

1B.    Require the Grantee to maintain time keeping and salary expense documentation in
       accordance with OMB Circular A-122.

1C.    Require the Grantee to maintain supporting documentation for all OTAG Program
       expenditures in accordance with OMB Circular A-110.

1D.    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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FINDING 2 – GRANTEE DID NOT 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
allocated indirect costs based on predetermined percentages that were not supported by detailed
records or documentation. Expenses allocated using these predetermined percentages included
administrative personnel salaries, payroll taxes, rent, and audit expenses. Due to the lack of an
adequate cost allocation plan, timekeeping records, and other documentation, the Grantee could
not support $54,625 of indirect costs charged to the grants.

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. For indirect costs charged to the grant, OMB Circular A-122 establishes
restrictions for indirect costs, and provides specific cost allocation methods and record keeping
requirements to support the allocation of costs.

The Grantee had developed a detailed cost allocation plan that was documented in the Grantee’s
Financial Management Procedures Handbook (dated 1999). This cost allocation plan was to be
based on actual time spent on each program, supported by time sheets and activity reports.
Allocation percentages were to be computed based on time sheet charges, and the salary and
benefits were to be charged to each program based on these percentages. Indirect costs like rent
and telephone were to be allocated based on a per capita (full-time staff) basis among the various
programs. Other costs like postage, copier, and printing were to be allocated based on actual
usage. Based on our review of the cost allocation principles and matrix of the plan, this would
have been a valid basis for charging salaries and benefits. The plan also would have provided a
supportable basis for allocating other indirect costs to the various programs, including the OTAG
Program.

While this cost allocation plan existed on paper, it was never fully implemented. We were
provided with worksheets reflecting the results of computations that were made in an attempt to
come up with allocation plan percentages. One of the worksheets showed that 16 percent of the
Executive Director’s salary and benefits was charged to the OTAG and the balance was charged
to other programs. In addition, 30 percent of the Financial Director’s and Administrative
Assistant’s salary and benefits were charged to OTAG. It appears these worksheets were the
basis for the allocation of salaries and benefits, as well as indirect costs for the period of time
between January 1999 and sometime around July 2001. We reviewed a sample of the time
sheets for this period that should have been used in developing the worksheet and allocation
percentages. Although each employee prepared time sheets, the time sheets did not provide the
type of detail needed to show what program(s) the employees worked on and how much time
was spent on each. We could not relate the time sheets to the worksheet in our attempt to
validate the percentages that appeared to have been used by the Grantee.

In mid-year 2001, the Grantee hired a new financial coordinator who changed the method of
allocating costs to the various programs. The Grantee discontinued using an allocation method
based on the worksheets. Instead, the financial coordinator estimated the amount of time each
employee worked on each program. Although employees continued to fill out time sheets, the



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timesheets were not useful because they still did not show what programs the employees worked
on and how much time they spent on each program. The Financial Coordinator said it was
almost impossible to establish a reasonable basis for charging to the programs because the
employees’ duties kept changing due to turnovers in staff. The new method allocated 33 percent
of the salary and fringe benefits of the Executive Director, Financial Coordinator, and Executive
Assistant to the OTAG Program. Other indirect costs such as rent and audit fees were also
allocated using similar percentages.

Due to the lack of adequate time keeping records required to formulate and support a cost
allocation plan, we were not able to determine what portion of this $54,625 represented
overcharges to the grants. The records were limited and incomplete. Employees who were
primarily responsible for the OTAG Program no longer worked for the Grantee, making it
difficult to reasonably reconstruct what had occurred. A contributing factor for their decision to
leave was the long period of time when the OTAG funding was frozen and the Grantee was
unable to obtain reimbursement from OMHAR.

Other documentation (activity reports, progress reports, financial records, newsletters, etc)
maintained by the Grantee supports that some portion of these expenses would have been
incurred for OTAG Program activities, and therefore would be legitimate expenses allocable to
the grants. Accordingly, we did not disallow any of the costs.

AUDITEE COMMENTS

The Grantee acknowledged that the hours worked on OTAG activities were not fully supported
by documentation. The Grantee said it failed to read OMB Circular A-122 carefully and
explained that the inconsistencies in their charges to the OTAG grant from September 2001 on
were exacerbated by the fact that the grant was frozen and no drawdowns were allowed between
September 2001 and April 2002.

The Grantee contended the OTAG charges during the period in question were reasonable despite
the absence of timesheets reflecting direct hour for hour charges to the grant. The Grantee
provided documentation to show it had changed its timekeeping policies and practices.

OIG EVALUATION OF AUDITEE COMMENTS

We understand and appreciate the hardship that the freeze on OTAG funding and drawdowns
had on the Grantee. We agree that the Grantee has performed eligible grants activities and did
not challenge the $54,625 of indirect costs as being excessive. The documentation submitted by
the Grantee for our consideration only shows the percentages used and the dollar amounts
charged to the grants. It does not provide a supportable basis for these percentages or the dollar
amounts charged. Our position has been and remains that these expenses were not supported by
a cost allocation plan/method that complied with OMB Circular A-122.




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RECOMMENDATIONS

We recommend your office:

2A.   Require the Grantee to develop and use a cost allocation method that complies with OMB
      Circular A-122 before allocating any more indirect costs to the OTAG Program.

2B.   Determine the actions or documentation necessary to resolve the unsupported indirect
      costs.




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FINDING 3 – PAYMENT VOUCHERS DID NOT HAVE REQUIRED SUPPORTING
            INFORMATION.

The Grantee submitted payment vouchers that were not complete and did not contain required
supporting data. OMHAR processed and approved the vouchers for payment even though it
lacked the supporting data to assess the validity of the request. In addition, some of the
Grantee’s reports submitted to OMHAR included information that should have alerted OMHAR
to the fact that the Grantee was engaging in activities that were not eligible under OTAG.
However, OMHAR did not question the activities. Consequently, the Grantee received
reimbursements for unsupported expenditures and ineligible activities, including lobbying as
discussed in Finding 1.

The Grant Agreements required the Grantee to use the Line of Credit Control System (LOCCS)
to draw down grant funds. OMHAR issued M2M Technical Assistance Memo 99-2, dated
February 18, 1999, to all OTAG and ITAG grantees. The subject of this memo was LOCCS
Draws and Grantee Reporting Requirements. This memo required the grantees to submit a Mark
to Market Activity Report with each LOCCS payment voucher. The memo provided an example
of the activity report format that was to be used. The memo stated that no voucher payment
would be approved without a completed and attached M2M Activity Report. This activity report
format did not provide for any reporting of time spent on the activities or notation of who
performed the activities.

On March 12, 2001, OMHAR issued a memorandum to OTAG/ITAG grantees with the
following instructions: “fulfilling the duties of a HUD Grantee also requires that you comply
with all of the Department’s administrative reporting requirements. Because of this, all invoices
that are submitted for payment must include: a description of the activity; the number of hours
required to perform the activity, which may include travel to and from the activity, the date
performed, and the name of the person who performed the activity.” The memo also stated:
“adhering to all administrative reporting procedures is required by law and federal regulations in
order to maintain the integrity of the OTAG/ITAG grant programs, and enables OMHAR to
process all vouchers in a more efficient and expeditious manner.”

Beginning in April 2001, the payment vouchers submitted by the Grantee included the specific
information cited in the March 2001 OMHAR memo. This continued for several months, but
then the Grantee went back to submitting payment vouchers without the required data. OMHAR
paid these vouchers, and we did not find any communications from OMHAR to the Grantee
concerning the missing data. Thus, it would appear OMHAR’s review and processing of the
payment vouchers was not consistent or comprehensive.

The Grant Agreements also provided that the Grantee submit quarterly progress reports. We
reviewed some of the quarterly progress reports submitted to OMHAR. These reports are after
the fact reports, and generally the reimbursements for the quarterly activities they covered would
have already been made based solely on the payment vouchers and information (activity reports)
submitted with the payment vouchers. Our review identified that some of the activity reports
submitted with the payment vouchers, and some of the quarterly progress reports submitted to
OMHAR included identification of activities performed by the OTAG Program Director that
were ineligible, including lobbying. While the information in these reports only listed the
activities by name and were not comprehensive narratives, we believe the descriptive terms



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should have raised suspicion to a reader knowledgeable of eligible and ineligible activities under
OTAG. Specific examples include activities listed as “preparing for and participating in Legal
Services Housing Task Force meetings” and “preparing and distributing materials to State
Housing Policy Advisory Committee.”

We performed our audit at the Grantee level and therefore reviewed only the documentation
provided by the Grantee. We did not interview anyone at OMHAR to ascertain what procedures
were in place for reviewing and processing payment vouchers, activity reports, and quarterly
progress reports. We compared the documentation maintained by the Grantee with the
administrative reporting requirements contained in the Grant Agreements and the memos issued
by OMHAR. Clearly, OHMAR accepted payment vouchers that were not complete and did not
contain required supporting data in the case of this Grantee.

We believe a more comprehensive and consistent review of the payment vouchers, activity
reports, and quarterly progress reports by OMHAR would have identified potential ineligible
activities being charged to the grants. This could have prevented reimbursing the Grantee for
ineligible activities, including prohibited advocacy and lobbying activities. We also believe that
if OMHAR had withheld approval and payment of payment vouchers that did not contain the
required information, then the Grantee would have more likely complied with the administrative
reporting requirements in order to obtain reimbursement for eligible OTAG activities.

AUDITEE COMMENTS

The Grantee responded that it is in the process of correcting its practices with respect to this
finding. The June 2002 invoice contained a description of activities, but it failed to reflect the
hours worked on OTAG. This was corrected in the July 2002 draw down request. The Grantee
said it now has accurate documentation with respect to all of the hours dedicated to OTAG
activities.

OIG EVALUATION OF AUDITEE COMMENTS

The Grantee’s action should ensure that future reports submitted to OMHAR are complete and
contain the required supporting data.

RECOMMENDATIONS

We recommend that your office:

3A.    Remind the Grantee to submit all required supporting data for payment vouchers.

3B.    Review OMHAR procedures for reviewing and approving payment vouchers and make
       necessary improvements to ensure that payment vouchers submitted that do not comply
       with applicable administrative reporting requirements are rejected.




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3C.   Review OMHAR procedures for reviewing activity reports and quarterly progress reports
      and place increased emphasis on identifying grantees engaged in ineligible activities,
      including lobbying.

3D.   Consider adding a requirement for grantees to certify on the Mark-to-Market Activity
      Reports that reimbursements are being requested for only eligible activities under the
      MAHRA, and that indirect cost allocations are based on a method or plan that 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:

   •   Ineligible costs were charged to the grant.
   •   Salary and time records did not meet the standards of OMB Circular A-122.
   •   Supporting documentation was not maintained for all expenditures charged in whole or in
       part to the OTAG program.
   •   The method for allocating indirect costs did not comply with OMB Circular A-122.

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.

The Grantee’s financial statements were audited by a Certified Public Accountant for each of the
years ending December 31, 1999, 2000, and 2001. The CPA provided an unqualified opinion for
each of the years and included OMB Circular A-133 disclosures. The audit reports did not
identify a cost allocation method used by the Grantee.




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                                                                                     Appendix A

                          SCHEDULE OF QUESTIONED COSTS




                    Recommendation              Type of Questioned Costs
                       Number               Ineligible 1/      Unsupported 2/
                         1A                    $16,287
                         2B                                         $54,625




1/   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.

2/   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

Director, Homeless and Housing Coalition of Kentucky, Inc., Frankfort, Kentucky
Director, HUD’s Office of Multifamily Housing Assistance Restructuring, HY
Acquisitions Librarian, Library, AS

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



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