oversight

The Legal Aid Society, Outreach and Technical Assistance Grants and Public Entity Grant New York, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-09-23.

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

                                                     Issue Date:
                                                     September 23, 2002
                                                     Audit Case Number:
                                                     2002-NY-1005



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


FROM: Alexander C. Malloy, Regional Inspector General for Audit, 2AGA

SUBJECT: The Legal Aid Society
         Outreach and Technical Assistance Grants1 and Public Entity Grant
         New York, New York


                                        INTRODUCTION

We completed an audit of The Legal Aid Society’s (herein referred to as Grantee)
Outreach and Technical Assistance Grants (OTAG) and Public Entity Grant (PEG). We
performed the review at the direction of Congress2. The primary objective of our review
was to determine whether the Grantee expended grant funds for only eligible activities as
identified in the OTAG/PEG agreements and in accordance with U.S. Department of
Housing and Urban Development (HUD) and other Federal requirements to further the
Mark-to-Market Program. Also, the review was conducted to determine whether the
Grantee used grant funds to pay expenses associated with lobbying activities. Federal
regulations specifically prohibit the use of grant funds for lobbying activities.

To accomplish our objectives, we interviewed members of the Grantee’s staff who are
responsible for the OTAG/PEG funded activities. Also, we reviewed the Grantee’s
accounting records, and other documents that support the expenditures of the OTAG and
PEG funds. This included reviewing the Grantee’s monthly board minutes, telephone
records, and employee timesheets for events that would indicate lobbying activities.
Additionally, we reviewed the requirements in the Multifamily Assisted Housing Reform
and Affordability Act of 1997 (MAHRA), the Notice of Fund Availability, the

1
 OTAG Nos. FFOT98021NY and FFOT00029NY
2
 The 2002 Defense Appropriation Act (Public Law 107-17) Section 1303 requires the U.S. Department of
Housing and Urban Development, Office of Inspector General to audit all activities funded by Section 514
of the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA).
OTAG/PEG agreements, and the Office of Management and Budget’s (OMB) guidance
on allowable cost for nonprofit grantees. We tested $58,783 or 34 percent of the
Grantee’s total OTAG expenditures of $172,384.15 that were incurred during the period
we reviewed. Regarding the PEG, we reviewed 71 percent or $12,772.13 of the
$17,976.14 in PEG expenditures incurred during the period reviewed.

The audit covered the period between January 1, 1998, and May 31, 2002. Where
necessary, we extended the audit period to meet our objectives. The audit fieldwork was
performed during the months of June 2002, and July 2002. We conducted the audit in
accordance with Generally Accepted Government Auditing Standards.

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 the date to be completed;
or (3) why action is considered unnecessary. Additional status reports are required at 90
days and 120 days after report issuance for any recommendation without a management
decision. Also, please furnish us copies of any correspondence or directives issued
because of the audit.

We appreciate the courtesies and assistance extended by the personnel of the Legal Aid
Society during our review. Should you or your staff have any questions, please contact
Edgar Moore, Assistant Regional Inspector General for Audit or me at (212) 264-8000,
extension 3976.


                                      SUMMARY

Our review disclosed that the Grantee charged ineligible and unsupported costs to its
OTAGs. More specifically, the Grantee: a) charged excessive salaries, fringe benefits and
administrative costs totaling $12,060.45 to OTAG II; and b) failed to provide us with
documentation to support costs of $7,822, which were charged to its Other Than Personal
Service (OTPS) account under OTAG I. In this regard, the Grantee did not comply with
the provisions of OMB Circular A-122, which require costs to be reasonable and
adequately documented. This occurred because the Grantee erroneously charged
expenses related to several employees to the grant even though they did not work on
grant activities; and because the Grantee failed to retrieve supporting documentation from
a storage facility for costs charged to OTAG I. Thus, we recommend that the Grantee be
instructed to reimburse HUD for the amount of the ineligible costs, and to retrieve and
submit supporting documentation for the unsupported OTPS costs to HUD, so that HUD
can make an eligibility determination on these costs (see Appendix A for total questioned
cost).

Regarding lobbying activities, the review did not disclose any instances where the
Grantee expended grant funds on such activities.




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On August 26, 2002, Grantee officials provided us with a written response to the finding,
which we included in its entirety as Appendix B of this report. We also provided a
summary and an evaluation of the Grantee’s responses at the end of the finding. On
September 18, 2002, we held an exit conference with officials of the Grantee to formally
discuss the results of our draft finding and recommendations.


                                     BACKGROUND

The 2002 Defense Appropriation Act (Public Law 107-17) Section 1303 requires the U.S.
Department of Housing and Urban Development, Office of Inspector General to audit all
activities funded by Section 514 of the Multifamily Assisted Housing Reform and
Affordability Act of 1997. The directive includes the Outreach and Technical Assistance
Grants (OTAG) and Intermediary Technical Assistance Grants (ITAG) administered by the
Office of Multifamily Housing Assistance Restructuring.

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 the MAHRA, OMHAR’s responsibility
includes the administration of the Mark-to-Market Program, which includes the awarding
and oversight of the Section 514 Outreach and Technical Assistance and Intermediary
Technical Assistance Grants. The objective of the Mark-to-Market Program is to reduce
rents to market levels and restructure existing debt to levels supportable by the reduced rents
for thousands of privately owned multifamily properties with federally insured mortgages
and rent subsidies. Congress recognized, in Section 514 of the MAHRA, that the Mark-to-
Market Program would affect tenants of the project, residents of the neighborhood, the local
government, and other parties; accordingly, Section 514 of the MAHRA authorized the
Secretary to provide up to $10 million annually ($40 million total) for resident participation,
for the period 1998 through 2001.

HUD issued NOFAs in Fiscal Years 1998 and 2000, to provide opportunities for nonprofit
organizations to participate in the Section 514 programs. Through NOFAs, HUD provided
two types of grants, the Intermediary Technical Assistance Grant (ITAG) and the Outreach
and Technical Assistance Grants (OTAG). The ITAG program provides technical
assistance grants through intermediaries to sub-recipients to include 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.
These ITAG grantees use Section 514 funds to provide Public Entity Grants (PEG) to sub-
recipients, including OTAG grantees, and other public entities. The OTAG program
provides technical assistance to tenants of eligible Mark-to-Market properties so that the
tenants can participate meaningfully in the Mark-to-Market Program, and affect decisions
about the future of their housing.




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The Legal Aid Society

The Legal Aid Society (Grantee) was incorporated in 1876 to provide legal assistance to
persons who are in need and who cannot afford an attorney. The Society consists of six
operating units: (1) Criminal Defense Division, (2) Juvenile Rights Division, (3) Criminal
Appeals Bureau, (4) Federal Defenders Division, (5) Civil Division, and (6) Volunteer
Division. Particularly, The Legal Aid Society’s Civil Division handles the administration
of OTAG and PEG funds. In addition, the Civil Division provides comprehensive client
services for senior citizens, survivors of domestic violence, disabled and chronically ill
children and adults, immigrants seeking refuge from oppression, unemployed New
Yorkers, persons living with HIV/AIDS, and the homeless.

The Grantee received two OTAGs, as shown below:

Fiscal Year    Grant Number                  Amount                 Authorized
1998           FFOT98021NY                   $250,000               $100,000
2000           FFOT00029NY                   $230,000               $119,333

The Grantee refers to its Fiscal Year 1998 grant as OTAG I, and its Fiscal Year 2000
grant as OTAG II. During our audit period, HUD disbursed a total of $172,384.15 in
OTAG funds: $82,724.73 of Fiscal Year 1998 OTAG I funds, and $89,659.42 of Fiscal
Year 2000 OTAG II funds.

In addition to the OTAG funds, the Grantee received one Public Entity Grant (PEG) for
$20,000 from the Intermediary and Technical Assistant Grantee (ITAG) “Georgetown
University Law Center” doing business as the “National Center for Tenant Ownership.”
As of June 2001, the grantee had expended $17,976.14 of its $20,000 PEG funds. These
funds were used to pay the cost of tenants to attend two National Alliance of HUD
Tenants (NAHT) conferences that were held in June 2000 and June 2001. The funds were
also used to provide training and leadership development to tenants.

For the period reviewed, we noted that an Independent Public Accountant (IPA) audited
the Grantee in accordance with OMB Circular A-133. The IPA’s audit report does not
contain any findings. We also noted that the Grantee did not receive any on-site
monitoring from HUD’s Office of Multifamily Housing Assistance Restructuring.
Nevertheless, the Grantee used OTAG funds to provide assistance to 83 eligible Mark-to-
Market projects located in the Bronx and Brooklyn, New York. The Grantee provided
services such as: assisting tenants in forming tenants associations, organizing tenants so
that they can effectively participate in the decisions related to the expiration of project-
based assistance, distributing flyers on the project-based expiration process, distributing
forms for tenants to identify physical building problems, developing tenant education
materials related to the project-based assistance expiration, and providing legal
representation on a variety of civil legal issues.

The Grantee does not bill HUD dollar-for-dollar for OTAG/PEG expenses; therefore
contributions by private and public foundations absorb the unbilled OTAG costs. The


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Grantee’s funding from non-Federal sources amounted to approximately $114 million
during calendar year 2001.

Due to the September 11, 2001 disaster at the World Trade Center in New York City, the
Grantee was forced to abandon its 90 Church Street office and relocate to 48 Wall Street.
In addition, the Grantee moved its OTAG documents that were generated before July
2000 into a storage facility. During our review the Grantee did not have access to the
warehoused records due to a labor strike at the storage facility; however, the strike ended
in mid-July 2002.

                                      FINDING

  The Grantee Charged Ineligible And Unsupported Costs To The
                            OTAGs
Our review disclosed that the Grantee charged ineligible and unsupported costs to its
OTAGs. More specifically, the Grantee: a) charged excessive salaries, fringe benefits and
administrative costs totaling $12,060.45 to OTAG II; and b) failed to provide us with
documentation to support costs of $7,822, which were charged to its Other Than Personal
Service (OTPS) account under OTAG I. In this regard, the Grantee did not comply with
the provisions of OMB Circular A-122, which require costs to be reasonable and
adequately documented. This occurred because the Grantee erroneously charged
expenses related to several employees to the grant even though they did not work on
grant activities; and because the Grantee failed to retrieve supporting documentation from
a storage facility for costs charged to OTAG I. Thus, we recommend that the Grantee be
instructed to reimburse HUD for the amount of the ineligible costs, and to retrieve and
submit supporting documentation for the unsupported OTPS costs to HUD, so that HUD
can make an eligibility determination on these costs.

OMB Circular A-122, Attachment A, paragraph (3), entitled “Reasonable costs” states
that “A cost is reasonable if, in its nature or amount, it does not exceed that which would
be incurred by a prudent person under the circumstances prevailing at the time the
decision was made to incur the costs…in determining the reasonableness of a given cost,
consideration shall be given to a) whether the cost is of a type generally recognized as
ordinary and necessary for the operation of the organization or the performance of the
award”.

In addition, OMB Circular A-122, Attachment A, Paragraph (2)(g) provides that to be
allowable under an award, costs must be adequately documented.

A. Excessive salaries, fringe benefits, and administrative fees were charged to the
   grant

Our review disclosed that the Grantee charged excessive salaries, fringe benefits and
administrative costs to its OTAG II. The excessive costs resulted from an internal


                                            5
miscommunication between the Grantee’s accounting department and the Program
Manager; thereby causing salary and related expenses to be charged to the OTAG II for
staff members who did not perform OTAG II related activities. The Grantee charged the
salaries of these staff members to the grant during the period between January 2001 and
April 2001. As a result, the grant was over charged for four months of salaries amounting
to $9,098.43. Accordingly, since fringe benefits are calculated based on a percentage of
salary cost, we determined that the fringe benefits were overstated by $2,286.87
($9,098.43 x 25.1% fringe rate). Furthermore, since administrative costs are determined
based on a percentage of total costs, administrative expenses were overstated by $675.15
($9,098.43 + $2,286.87 x 5.93%). Consequently, OTAG II was charged ineligible cost of
$12,060.45, which represent cost that does not meet the reasonableness criteria in OMB
Circular A-122, Attachment A, Paragraph 3. Regarding the ineligible cost, Grantee
officials stated that they plan to make adjustments to their Fiscal Year 2002 general
ledger that will be reflected in the next OTAG II voucher submission to HUD.

B. Unsupported costs paid with grant funds

The Grantee did not provide us with requested documentation to support $7,822 of costs
charged to OTAG I. Those costs were incurred during the period between December 1,
1998 and March 2000, and were Other Than Personal Service (OTPS) expenditures, such
as telephone, rent, maintenance supplies, and facility maintenance expenses.

Regarding the location of the documentation, we learned that as a result of the World
Trade Center disaster, the Grantee’s office was relocated and all documents generated
before July 2000 had been moved into a storage facility. Initially, the Grantee did not
have access to the warehoused records due to a labor strike at the storage facility;
however, we noted that when the strike ended in mid-July 2002, the Grantee still did not
obtain and provide us with supporting documentation for costs charged to the OTPS. In
this regard, the Grantee is not in compliance with OMB Circular A-122, Attachment A,
Paragraph (2)(g), which requires costs incurred with grant funds to be adequately
documented. Therefore, we consider the $7,822 of OTPS costs, for which the Grantee did
not provide supporting documentation, as being unsupported.

Grantee officials stated that the supporting documentation for $7,822 will be provided at a
later date. Accordingly, we recommend that the Grantee be instructed to obtain the
documents from its storage facility and submit them to HUD so that HUD can determine
the eligibility of the unsupported costs.


AUDITEE COMMENTS

Regarding the excessive salaries, fringe benefits and administrative fees charged to the
OTAG, the Grantee stated that on October 29, 2001, HUD-OMHAR requested Grantees
to voucher for all activities completed at September 30, 2001, by October 31, 2001.
However, due to the September 11, 2001, terrorist attacks on the World Trade Center, the
Grantee's records, including the computerized accounting system were inaccessible and


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nonfunctioning. Accordingly, the Grantee, based on the information available at the
time, made an estimate of the payroll amount chargeable to the OTAG. Subsequently,
the Grantee discovered that salaries of certain employees should not have been charged to
the OTAG, hence, an over billing of $12,060.45 had occurred. Grantee officials state that
this over billed amount was deducted from their next OTAG billing for the period
January 1, 2002 through March 31, 2002, which was submitted to HUD on August 12,
2002.

Regarding the unsupported costs paid with OTAG funds, the Grantee stated that the
September 11, 2001 terrorist attack had closed their building and rendered them with a
lack of adequate storage space; therefore, the Grantee’s records had to be moved to a
storage facility in New Jersey. In addition, at the time of our audit, the Grantee’s staff
was unable to retrieve the documentation due to a labor strike at the storage facility.
However, the Grantee expects to retrieve the supporting documentation before the exit
conference.

In addition, to the above the Grantee disagrees with our contention that because of the
above issues, management control weaknesses exist in the Grantees accounting system.
The grantee believes that it has maintained effective management controls as evidenced
by an independent auditor, in compliance with OMB Circular A-133, which contain no
findings, questioned costs, or material weaknesses in internal controls.


OIG EVALUATION OF AUDITEE COMMENTS

We agree and understand that the September 11, 2001 attack on the World Trade Center
caused undue hardships to normal business practices, and may have led to the over billing
to HUD. Nevertheless, since the Grantee’s adjusted OTAG voucher was not submitted to
HUD until August 12, 2002, which was after the completion of our audit field work, we
did not verify that the amount of the ineligible cost was deducted from the Grantee’s
subsequent billing to HUD and that HUD accepted the reduction as a repayment.
Therefore, appropriate HUD officials should ensure that the Grantee reimburses the
amount of the ineligible cost to HUD.

Regarding the unsupported OTAG cost of $7,822, we believe that when the labor strike
ended the Grantee had sufficient time to obtain the documentation that supports the cost
for our review. Nevertheless, the Grantee failed to obtain the requested supporting
documentation. Accordingly, OIG still believes that the Grantee needs to obtain and
submit the supporting documentation for these costs to HUD OMHAR for an eligibility
determination. Furthermore, our assessment still stands that management control
weaknesses exist in controls over cash disbursements, payroll and related costs, as
evidenced by this finding.




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RECOMMENDATIONS

We recommend that the HUD Director of OMHAR:

1A.       Instruct the Grantee to reimburse the $12,060,45 in ineligible salaries, fringe
          benefits, and administrative costs to HUD from non-Federal funds.

1B.       Instruct the Grantee to obtain and submit to HUD the supporting documentation
          for the $7,822 of Other Than Personal Services costs charged to the OTAG I
          between December 1998 and March 2000, so that HUD can determine the
          eligibility of these costs. If HUD deems any amount ineligible, the Grantee should
          be instructed to immediately reimburse the ineligible amount to HUD, from non-
          Federal funds.

                              MANAGEMENT CONTROLS

In planning and performing our audit, we considered the management controls relevant to
the Grantee’s Section 514 programs 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:

      •   Controls over Allocating Costs and Reporting Activities
      •   Controls over Cash Receipts and Cash Disbursements
      •   Controls over Payroll

It is a significant weakness if management controls do not comply with applicable law
and regulation and provide reasonable assurance that the process for planning,
organizing, directing, and controlling program operations will meet an organization’s
objectives.

Based on the results of our review, we determined that management control weaknesses
exist in the following areas:

Controls Over Cash Disbursements

The Grantee did not provide supporting documentation for Other Than Personal Service
costs charged to its OTAG I (see finding part B).




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Controls Over Payroll and Related Costs

The Grantee charged excessive salaries, fringe benefits, and administrative costs to its
OTAG II (see finding part A).

                          FOLLOW-UP ON PRIOR AUDITS

This is the initial HUD-OIG audit performed on The Legal Aid Society.




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                                                                   Appendix A


               SCHEDULE OF QUESTIONED COSTS


                      Type of Questioned Costs
     Finding               Ineligible 1/               Unsupported 2/
        1                   $12,060.45                     $7,822



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.   This decision, in addition to obtaining supporting
      documentation, might involve a legal interpretation or clarification of
      Departmental policies and procedures.




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                        Appendix B
                        Page 1 of 3
AUDITEE COMMENTS




                   11
     Appendix B
     Page 2 of 3




12
     Appendix B
     Page 3 of 3




13
                                                                      Appendix C

Distribution
                                  OUTSIDE OF HUD

President, Legal Aid Society

The Honorable Joseph Lieberman
Chairman, Committee on Governmental 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, U.S. House of Representatives

Kay Gibbs
Committee on Financial Services

Stanley Czerwinski, Director
Housing and Telecommunications Issues, US General Accounting Office

Steve Redburn, Chief Housing Branch
Office of Management and Budget

Linda Halliday
Department of Veterans Affairs, Office of Inspector General

William Withrow
Department of Veteran Affairs, OIG Audit Operations Division

George Reeb
Assistant Inspector General for Health Care Financing Audits

The Honorable Dan Burton
Chairman, Committee on Government Reform, U.S. House of Representatives




                                          14
                                                                     Appendix C

The Honorable Henry A. Waxman
Ranking Member, Committee on Governmental Reform, U.S. House of Representatives


The Honorable Barbara A. Mikulski
Chairperson, Subcommittee on Veterans, Housing and Urban Development and
Independent Agencies




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