Issue Date September 30, 2002 Audit Case Number 2002-BO-1006 TO: Charles H. Williams, Director HUD’s Office of Multifamily Housing Assistance Restructuring, HY FROM: Barry L. Savill, Regional Inspector General for Audit, 1AGA SUBJECT: Interim Report - Congressionally Requested Audit of the Outreach and Training Assistance Grant awarded to the People to End Homelessness, Providence, RI Grant Number: FFOT00034RI. INTRODUCTION We have partially completed our audit of People to End Homelessness (Grantee). This is an interim report containing findings to date. We have determined that the Grantee does not have adequate internal controls to ensure grant funds are properly used. Because of the condition of the internal controls and financial records, we have not yet completed our evaluation of grant expenditures. We will issue a final report covering that area after we finish evaluating the accounting records. Our interim report contains two recommendations to correct the conditions found to date. Section 1303 of the 2002 Defense Appropriation Act (Public Law 107-117) requires the 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. 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 the Office of Management and Budget’s guidance on the allowability of cost for nonprofit grantees. The audit covered the period of January 2001 through June 2002 for the OTAG grant We performed the fieldwork at People to End Homelessness, located at 807 Broad Street Providence, RI during June through August 2002. We conducted the audit in accordance with Generally Accepted Government Auditing Standards. Should you or you staff have any questions, please contact Cristine M. O’Rourke or me at 617-994-8380. SUMMARY The People to End Homelessness (Grantee) does not have adequate internal controls to ensure grant funds are used properly and does not use a reasonable method to allocate costs. These problems exist because the Grantee has a limited number of personnel, suspended its operations for five months, has a Contractor’s employee acting as Executive Director, and does not have personnel with the proper administrative experience. As a result, HUD lacks assurance that grant funds have been properly spent in accordance with program requirements. Because of the condition of the internal controls and financial records, we have not yet completed our evaluation of grant expenditures. We have no evidence of direct lobbying and are evaluating indirect lobbying. We will issue a final report covering these areas after we complete our evaluation. BACKGROUND The Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) established the Office of Multifamily Housing Assistance Restructuring (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 awarding, 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 HUD-held multifamily projects receiving project based rental Page 2 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 Notice of Fund Availability in fiscal year 2000 to provided opportunities for nonprofit organizations to participate in the Section 514 programs. HUD provided two types of grants: the Intermediary Technical Assistance Grant (ITAG) and the Outreach and Training Assistance Grants (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. HUD’s regulation, 24 Code of Federal Regulation Part 84, contains the uniform administrative requirements for grants between HUD and nonprofit organizations. The regulations (24 CFR 84.27) require that nonprofit grantees utilize the Office of Management and Budget (OMB) Circular A-122, Cost Principles for Non-Profit Organization, in determining the allowability of costs incurred to the grant. 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 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 activities of lobbying. 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 applied for the OTAG grant in fiscal year 2000. The Grantee received an OTAG of $400,0000, which HUD later amended to $266,667. The Grantee expended $44,835 from this Grant as of June 30, 2002. Page 3 In addition to the OTAG, the Grantee received funding from various other Federal, State and Nonprofits including: Type Amount Source Community Development Block Grant $18,000 HUD passed through the City of Providence, RI Intermediary Technical Assistance Grant $2,243 HUD Family Emergency Apartment Program $119,160 State of Rhode Island Non profit Grants $21,750 Various Private Foundations Total $161,153 FINDING The Grantee Lacks Internal Controls The Grantee does not have adequate internal controls to ensure: (1) grant funds are used properly and (2) its costs are reasonable and properly documented. These problems exist because the Grantee has a limited number of personnel, suspended operations when HUD temporarily halted funding the program, has a Contractor’s employee acting as Executive Director, and does not have personnel with the proper administrative experience. As a result, HUD lacks assurance that grant funds have been properly spent in accordance with program requirements. Because of the condition of the internal controls and financial records, we have not yet completed our evaluation of grant expenditures. Without proper internal controls, supporting documentation, and strict adherence to program requirements, HUD lacks assurance that grant funds are properly spent. Office of Management and Budget Circular A-122, Attachment B, Section 7m states the distribution of salaries and wages to awards (grants) must be supported by personnel activity reports and these reports must reflect the distribution of activity by each employee and must be maintained for all staff members whose compensation is charged to the Federal awards. Attachment A of the Office of Management and Budget Circular A-122 also advises that the grantee must support a cost allocation by taking into account all activities of the organization. If the grantee does not have an approved cost allocation plan, the grantee must submit an initial cost allocation plan for approval within three months of receiving the award. The Office of Management and Budget Circular A-122, Attachment A, Section D states actual conditions shall be taken into account in selecting the basis for allocating expenses and the essential consideration in selecting a method is that method’s suitability for assigning the pool of costs to cost objectives in accordance with the benefits derived; a traceable cause and effect relationship; or logic and reason, where neither the cause nor the effect of the relationship is determinable. Page 4 Inadequate Internal Controls The Grantee’s internal controls are not adequate and provide no assurance that grant funds are properly controlled. We identified the following weaknesses in the Grantee’s control structure: · The Grantee does not have an Executive Director. The person acting in that capacity is an employee of the contractor hired by the Grantee in July 2001 to act as contract manager of the HUD OTAG program. · The Grantee’s policies and procedures are not adequate. The Grantee does not have policies and procedures that cover how to account for grant funds and segregate costs between grants. · Accounting records are not complete or reliable. While the Grantee uses a computerized financial program to maintain its books and records; however, this program was not used consistently during the grant period. Information is fragmented between the computer hard drive, the administrative contractor’s filing cabinets, and storage units. · The computerized financial system does not reconcile with available supporting documentation for payroll costs. · The Grantee used OTAG funds for expenditures that took place before the award of the Grant. The above weaknesses occurred because the Grantee had a small staff that did not have the necessary experience or skills to set up a proper system of internal controls. The Grantee does not have an independent Executive Director because the person acting as Executive Director is an employee of a contractor hired by the Grantee. An effective system of internal controls is necessary to ensure OTAG funds are properly controlled and effectively spent. AUDITEE COMMENTS AND OIG EVALUATION OF AUDITEE COMMENTS We provided our draft report to the Grantee for their comments on September 12, 2002. The Grantee provided their comments on September 25, 2002. We included the Grantee’s entire response in Appendix A of the report. · The Grantee agreed that they did not have an Executive Director, and has appointed a board member as Acting Executive Director. Page 5 · The Grantee stated that they revised its internal control procedures and documented them in writing. The Grantee identified that they made the following changes to its policies: (1) Opened a separate bank account for OTAG funds, and (2) Modified their accounting system to segregate costs between grants. The Grantee has recently drafted written policies and procedures. At the time of our review, the grantee did not have these procedures and our review showed that these new procedures were not in use during our audit period. · The Grantee believes their records are complete and reliable. Since the report does not provide specific examples, the Grantee stated that they were unable to properly response to this comment. Specific examples include: 1. The Grantee billed payroll charges to the Grant that exceeded paychecks to employees by $10,498. The paychecks to employees also did not match payments disbursed through the accounting system. 2. The Grantee allowed their Contract Manager to charge the Grant for audit costs of the Contract Manager that were already included in the Contract Manager’s contract. The Grantee did not have an audit, nor was one required. · The Grantee believes that financial records did not reconcile to supporting documentation for payroll cost was because the employee putting together the vouchers for reimbursement was using a cash basis of accounting while the Contract Manager’s employee was using an accrual basis of accounting. The Grantee believes the differences are immaterial and indicated that they have changed their billing procedure. Payroll charges reimbursed by the Grant exceeded paychecks to employees by $10,498. Cash Basis and Accrual Basis differ in the manner in which they deal with the issue of when to recognize revenues and expenses. Temporary timing differences, caused by recognition of expenses at different times under different bases of accounting, do not account for the difference between billings reimbursed by the Grant for payroll and paychecks to employees. · The Grantee believes that the grant began on January 1, 2001. The Grantee provided a grant agreement signed by the Director of OMHAR and the person acting as the Executive Director. The person acting as Executive Director is an employee of the Contract Manager. The Director of OMHAR’s signature is undated and the signature from the Grantee is dated January 9, 2001. The grant agreement does not specify the term of the grant. The Grantee believes that expenditures of $2500 for the period January 1, 2001 to March 31, 2001 were appropriately charged to the Grant. Page 6 OIG will be performing additional work to determine the correct term of the grant and will address the issue in our final audit report. At OIG’s request, the Grantee provided an electronic accounting report delineating all expenditures for the period of January 1, 2001 to June 30, 2002. This listing showed expenditures from January 1, 2001 to March 31, 2001 of $234. RECOMMENDATIONS We recommended that the Director of the Office of Multifamily Housing and Restructuring: 1. Deny the Grantee’s draw down requests until: a. The People to End Homelessness hires an Executive Director who does not have a relationship to its contractors, b. The People to End Homelessness develops and implements internal control procedures, and c. Your staff verifies that the control procedures are implemented and effective. 2. Require the Grantee to maintain adequate salary records and supporting documentation for salaries and other expenditures. MANAGEMENT CONTROLS In planning and performing our audit, we considered the management controls relevant to the People to End Homelessness’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 and include the systems for measuring, reporting, and monitoring program performance We determined that the following management controls were relevant to our audit objectives: · Receipt of grant funds, · Disbursement of grant funds, · Financial recording and reporting for grant funds, · Selection and award of consulting and other service contracts, and · Administrative reporting to HUD of the grant fund’s usage and results. A significant weakness exists if management controls do not provide reasonable assurance that: resource use is consistent with laws, regulations, and policies; that resources are safeguarded against waste, loss and misuse; and that reliable data is obtained, maintained and fairly disclosed in financial statements and reports. Based on our review, we believe the following items are significant weaknesses: Page 7 · Lack of adequate internal controls. · Conflict of Interest in having a Contractor’s employee act as Executive Director · Lack of supported cost allocation plan. FOLLOW-UP ON PRIOR AUDITS The Office of Inspector General has performed no previous audits of the People to End Homelessness. Page 8 Appendix A AUDITEE COMMENTS Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Appendix B EXTERNAL REPORT DISTRIBUTION The Honorable Joseph Lieberman, Chairman, Committee on Government Affairs The Honorable Fred Thompson, Ranking Member, Committee on Governmental Affairs Sharon Pinkerton, Senior Advisor, Subcommittee on Criminal Justice, Drug Policy & Human Resources Andy Cochran, House Committee on Financial Services Clinton C. Jones, Senior Counsel, Committee on Financial Services Kay Gibbs, Committee on Financial Services Stanley Czerwinski, Director, Housing and Telecommunications Issues, U.S. GAO Steve Redburn, Chief Housing Branch, Office of Management and Budget Linda Halliday, Department of Veterans Affairs, Office of Inspector General William Withrow, Department of Veterans Affairs, OIG Audit Operations Division George Reeb, Assistant Inspector General for Health Care Financing Audits Jennifer Miller, Professional Staff, House Committee on Appropriations The Honorable Christopher S. Bond, Ranking Member, Subcommittee on Veterans Affairs, HUD and Independent Agencies, 274 Russell Building, United States Senate, Washington, DC 20510 The Honorable Dan Burton, Chairman Committee on Government Reform, 2185 Rayburn Building House of Representatives, Washington, D.C. 20515 The Honorable Barbara A. Mikulski, Chair Subcommittee on Veterans Affairs, HUD and Independent Agencies 274 Russell Building United States Senate Washington, DC 20510 The Honorable Henry A. Waxman, Ranking Member Committee on Government Reform, 2204 Rayburn Building, House of Representatives, Washington, DC 20515 Page 21 (THIS PAGE LEFT BLANK INTENTIONALLY) Page 22
INTERIM REPORT - Congressionally Requested Audit of the Outreach and Training Assistance Grant Awarded to the People to End Homelessness, Providence, Rhode Island Grant Number: FFOT00034ri
Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)