oversight

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)

                                                         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


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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.




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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.




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                                  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.




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·   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.


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       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:

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   · 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.




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                   Appendix A
AUDITEE COMMENTS




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                                                                                 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




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