oversight

Connexions Enterprise, Inc.'s Supportive Housing Grant Program; Chicago, IL

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-06-17.

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

           AUDIT REPORT




        CONNEXIONS ENTERPRISE, INC.
       SUPPORTIVE HOUSING PROGRAM

            CHICAGO, ILLINOIS

                2004-CH-1005

                JUNE 17, 2004




           OFFICE OF AUDIT, REGION V
               CHICAGO, ILLINOIS




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                                                                  Issue Date
                                                                          June 17, 2004
                                                                 Audit Case Number
                                                                           2004-CH-1005




TO:            Ray E. Willis, Director of Community Planning and Development, 5AD
               Margarita Maisonet, Director of Departmental Enforcement Center, CV


FROM:          Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT:       Connexions Enterprise, Inc.
               Supportive Housing Program
               Chicago, Illinois

We completed an audit of Connexions Enterprise, Inc.’s Supportive Housing Grant Program. We
conducted the audit of Connexions’ Program based on a request from HUD’s Chicago Regional
Office of Community Planning and Development. The objectives of our audit were to determine
whether Connexions: (1) had adequate management controls over the Program; (2) obtained
matching funds and used Program funds according to HUD’s requirements; and (3) Program
participants received the in-kind services as set forth in the HUD-approved Grant Application.
The audit resulted in four findings.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each
recommendation without a management decision, 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.

Should you or your staff have any questions, please contact Rose Capalungan, Assistant Regional
Inspector General for Audit, at (312) 353-6236 extension 2679 or me at (312) 353-7832.




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Executive Summary
We completed an audit of Connexions’ Supportive Housing Grant Program. We conducted the
audit based on a request from HUD’s Chicago Regional Office of Community Planning and
Development. The objectives of our audit were to determine whether Connexions: (1) had
adequate management controls over the Program; (2) obtained matching funds and used Program
funds according to HUD’s requirements; and (3) Program participants received the in-kind
services as set forth in the HUD-approved Grant Application.

Although Connexions met its cash matching requirements under the Supportive Housing
Program (number IL01B110028), we concluded that Connexions lacked adequate management
controls to ensure that Program costs were eligible and adequately supported; Program
participants received the required services; and its Financial Management Policies and
Procedures were followed. Specifically, we determined that Connexions:

      Used $30,788 of Program funds for ineligible costs;
      Lacked sufficient documentation that its use of another $174,583 benefited the Program;
      Did not receive the in-kind services for its Program participants as set forth in the HUD-
      approved Grant Application; and
      Did not ensure that its Chief Executive Officer followed its Financial Management Policies
      and Procedures.



                                   The Board of Directors of Connexions was not actively
 Supportive Housing                involved and diligent in monitoring Connexions’ operation
 Program Was Not                   of the Supportive Housing Program and disbursement of
 Operated According To             Program funds. Connexions failed to implement adequate
 Requirements                      controls to ensure: HUD funds were used for eligible and
                                   supported Program costs; Program participants actually
                                   received the services as committed under the Program; and
                                   Financial Management Policies and Procedures were
                                   always followed.

                                   Connexions failed to maintain sufficient controls over
 Controls Over HUD                 HUD funds designated for its Supportive Housing Program.
 Funds Were Not                    Connexions used $30,788 of HUD funds for ineligible
 Adequate                          Program costs that did not benefit the Program. Also,
                                   Connexions lacked sufficient documentation to support that
                                   its use of another $174,583 benefited the Program.

                                   Connexions’ Chief Executive Officer submitted and
 Program Participants Did          certified a Supportive Housing Program Technical
 Not Actually Receive The          Submission that contained inaccurate information, which
 Services As Committed             HUD relied on to award Connexions a renewal Grant
                                   totaling $346,458. As a result, project participants did not
                                   actually receive the services as committed. Such services
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                           included medication management, psychiatric assessments,
                           and evaluation of the Grant for a one-year period.

                           The Chief Executive Officer did not follow Connexions’
 Financial Management      Financial Management Policies and Procedures when he
 Policies and Procedures   signed checks payable to himself and to cash without
 Were Not followed         approval from the Board.

                           We recommend that HUD’s Director of Community
 Recommendations           Planning and Development, Chicago Regional Office,
                           declares Connexions in default as permitted by the
                           Supportive Housing Program Grant Agreements and
                           recaptures any ineligible Program funds used. HUD’s
                           default notice should help ensure that Supportive Housing
                           Program funds are used appropriately.

                           We presented our draft audit report to Connexions’ Board
                           Chairperson, its Chief Executive Officer, and HUD’s staff
                           during the audit. We held an exit conference with
                           Connexions’ Chief Financial Officer on April 26, 2004.
                           Connexions provided written comments to the draft audit
                           report on May 26, 2004 that generally did not address all
                           the report’s findings. We included excerpts of the
                           comments with each finding (see Findings 1, 2, 3, and 4).

                           The complete text of Connexions’ comments is in
                           Appendix B with the exception of attachments. We
                           provided HUD’s Director of the Chicago Regional Office
                           of Community Planning and Development with a complete
                           copy of Connexions’ comments with the attachments.




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Table Of Contents
Management Memorandum                                                   i



Executive Summary                                                     iii



Introduction                                                           1



Findings

1. Supportive Housing Program Was Not Operated According To
   Requirements                                                        3


2. Controls Over HUD Funds Were Not Adequate                         11


3. Program Participants Did Not Actually Receive Services
   As Committed                                                      19


4. Financial Management Policies and Procedures Were Not
   Followed                                                          23



Management Controls                                                  27



Follow-Up On Prior Audits                                            29



Appendices

   A Schedule Of Questioned Costs And Recommendation For
     Funds To Be Put To Better Use                                   31


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   B Auditee Comments             33




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Introduction
Connexions Enterprise incorporated in 1994 as a non-profit organization under the laws of the
State of Illinois. Connexions contracts with HUD to provide residential and day treatment
programs for homeless persons diagnosed with mental illness and substance abuse. A nine
member Board of Directors governs Connexions. Connexions’ President and Chief Executive
Officer is responsible for carrying out the day-to-day operations and ensuring that Board
decisions, policies, rules, and regulations are carried out and communicated to Connexions’ staff.
Connexions’ books and records are located at 1500 West Garfield in Chicago, Illinois.



                                     Our audit objectives were to determine whether
 Audit Objectives                    Connexions: (1) had adequate management controls over
                                     its Supportive Housing Grant Program; (2) obtained
                                     matching funds and used Program funds according to
                                     HUD’s requirements; and (3) Program participants received
                                     the in-kind services as set forth in the HUD-approved Grant
                                     Application.

                                     We conducted the audit at HUD’s Chicago Regional Office
 Audit Scope And                     of Community Planning and Development, and
 Methodology                         Connexions’ previous and current Offices. We performed
                                     our audit work between September 2003 and March 2004.

                                     To accomplish our audit objectives, we interviewed HUD’s
                                     staff, Connexions’ staff, and Connexions’ provider of in-
                                     kind services.

                                     We reviewed Connexions’: Supportive Housing Program
                                     Grant Applications and corresponding Technical
                                     Submissions; Supportive Housing Program Grant
                                     Agreements with HUD; Financial Management Policies
                                     and Procedures; Annual Progress Reports; Board meeting
                                     minutes; By-Laws; Audited Financial Statements for Fiscal
                                     Years 2001 and 2002; and Grant vouchers.

                                     We analyzed Grant vouchers to determine whether
                                     Supportive Housing Program funds were used
                                     appropriately. During our audit, we selected a sample of 42
                                     Grant vouchers from a universe of 93 vouchers using
                                     statistical sampling. Based upon our results, we used the
                                     One-Step Acceptance statistical sampling method to obtain
                                     an additional audit sample of 19 additional vouchers from a
                                     universe of 41 vouchers. We also analyzed a sample of 170
                                     checks to determine whether Connexions’ Financial

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               Management Policies and Procedures were followed and
               check disbursements were adequately supported.

               The audit covered the period from May 1, 1999 to
               November 30, 2003. The period was adjusted as necessary.
               We conducted the audit in accordance with Generally
               Accepted Government Auditing Standards.

               We provided a copy of this report to the Chairperson of
               Connexions’ Board of Directors, and its President and
               Chief Executive Officer.




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                                                                                       Finding 1


Supportive Housing Program Was Not Operated
         According To Requirements
The Board of Directors of Connexions Enterprise, Inc. was not actively involved and diligent in
monitoring Connexions’ operation of its Supportive Housing Grant Program and disbursement of
Program funds. Connexions lacked adequate controls to ensure that: HUD funds were used for
Program costs; services were provided to Program participants as required; and Financial
Management Policies and Procedures were always followed. As a result, HUD lacks assurance
that the Program was operated in accordance with HUD’s requirements and Connexions’
Policies and Procedures.


                                    24 CFR Part 84.86 states HUD may terminate grant awards
 Federal Requirements               in whole or in part if a recipient materially fails to comply
                                    with the terms and conditions of an award. If a recipient
                                    materially fails to comply with the terms and conditions of
                                    an award, whether stated in a Federal statute, regulation,
                                    assurance, application, or notice of award, HUD may, in
                                    addition to imposing any of the special conditions outlined
                                    in 24 CFR Part 84.14, take one or more of the following
                                    actions, as appropriate in the circumstances:

                                           Temporarily withhold cash payments pending
                                           correction of the deficiency by the recipient or more
                                           severe enforcement action by HUD;
                                           Wholly or partly suspend or terminate the current
                                           award; or
                                           Take remedies that may be legally available.

                                    24 CFR Part 24.110 permits HUD to take administrative
                                    sanctions against employees of recipients under HUD
                                    assistance agreements that violate HUD’s requirements.
                                    The sanctions include debarment, suspension, or limited
                                    denial of participation that are authorized by 24 CFR Parts
                                    24.300, 24.400, or 24.700, respectively. HUD may impose
                                    administrative sanctions based upon the following
                                    conditions:

                                           Failure to honor contractual obligations or to proceed
                                           in accordance with contract specifications or HUD
                                           regulations (limited denial of participation);


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                           Deficiencies in ongoing construction projects (limited
                           denial of participation);
                           Violation of any law, regulation, or procedure relating
                           to the application for financial assistance, insurance
                           or guarantee, or to the performance of obligations
                           incurred pursuant to a grant of financial assistance or
                           pursuant to a conditional or final commitment to
                           insure or guarantee (limited denial of participation);
                           Violation of the terms of a public agreement or
                           transaction so serious as to that affect the integrity of
                           an agency program such as a history of failure to
                           perform or unsatisfactory performance of one or more
                           public agreements or transactions (debarment);
                           Any other cause of so serious or compelling a nature
                           that it affects the present responsibility of a person
                           (debarment); or
                           Material violation of a statutory or regulatory
                           provision or program requirements applicable to a
                           public agreement or transaction including
                           applications for grants, financial assistance, insurance
                           or guarantees, or to the performance of requirements
                           under a grant, assistance award, or conditional or
                           final commitment to insure or guarantee (debarment).

                    Page 2 of Connexions’ April 16, 1999 and May 31, 2002
 Grant Agreements   Grant Agreements permit HUD to take actions when a
                    default occurs. A default is the: (1) use of Grant funds not
                    authorized by the Grant Agreements; (2) failure to provide
                    supportive housing in accordance with 24 CFR Part 583;
                    (3) failure to comply with the Stewart B. McKinney
                    Homeless Assistance Act; and/or (4) misrepresentation of
                    information contained in the Application submissions to
                    HUD which, if known by HUD, would have resulted in
                    these Grants not being provided. Upon due notice of the
                    occurrence of any such default and the provision of a
                    reasonable opportunity to respond, HUD may take one or
                    more of the following actions:

                       Direct Connexions to submit progress schedules for
                       completing approved activities;
                       Issue a letter of warning advising Connexions of the
                       default, establishing a date by which corrective actions
                       must be completed, and putting Connexions on notice
                       that more serious actions will be taken if the default is
                       not corrected or is repeated;

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                              Direct Connexions to establish and maintain a
                              management plan that assigns responsibilities for
                              carrying out remedial actions;
                              Direct Connexions to suspend, discontinue, or not incur
                              costs for the affected activity;
                              Reduce or recapture the Grant;
                              Direct Connexions to reimburse the Program accounts
                              for costs inappropriately charged to the Program;
                              Continue the Grant with a substitute Recipient of
                              HUD’s choosing; or
                              Other appropriate action including, but not limited to,
                              any remedial action legally available, such as
                              affirmative litigation seeking declaratory judgment,
                              specific performance, damages, temporary or
                              permanent injunctions, and any other available
                              remedies.

                           Connexions’ Board of Directors are: (1) charged with
Responsibilities Of        ensuring Connexions’ integrity and compliance with
Board Of Directors         HUD’s requirements, policies, and procedures; and (2)
                           determining the policies, collecting and disbursing funds,
                           and adopting rules and regulations for the conduct of
                           Connexions’ business.

                           Connexions used $30,788 of Supportive Housing Grant
Controls Over HUD          Program funds for ineligible expenses, and lacked sufficient
Funds Were Not             documentation that its use of another $174,583 benefited the
Adequate                   Program. The problems occurred because Connexions’
                           Board of Directors was not actively involved and diligent
                           in monitoring its Supportive Housing Program’s operations
                           to ensure that adequate controls over HUD funds were
                           implemented. As a result, Grant funds were not always
                           used for the benefit of the homeless and mentally ill
                           Program participants. Also, HUD funds were not used
                           efficiently and effectively (see Finding 2).

                           Connexions’ Chief Executive Officer submitted and
Program Participants Did   certified a Supportive Housing Program Technical
Not Actually Receive The   Submission that contained inaccurate information that
Services As Committed      HUD relied on before it awarded Connexions $346,458.
                           The Chief Executive Officer could not adequately explain
                           why the Technical Submission for renewal Grant number
                           IL01B110028       contained     inaccurate    information.
                           Nevertheless, it was the Chief Executive Officer’s
                           responsibility to ensure the truthfulness and accuracy of
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                              information contained in the Grant Application/Technical
                              Submission prior to submitting it to HUD. As a result,
                              HUD lacks assurance that Program participants actually
                              received the services from the provider of in-kind services
                              as committed (see Finding 3).

                              Connexions’ Financial Management Policies and
 Financial Management         Procedures were not always followed. Specifically, the
 Policies And Procedures      Chief Executive Officer signed checks payable to himself
 Were Not Always              and to cash for personal expenses without approval from a
 Followed                     Board member. This occurred because the Board was not
                              involved in monitoring the disbursement of Grant funds.
                              As a result, HUD lacked assurance that Grant funds were
                              used only for the intended purposes (see Finding 4).

                              Connexions’ inadequate control over HUD funds, use of
 Board Was Not Actively       Program funds for ineligible and unsupported costs, and its
 Involved In The Operations   Chief Executive Director not following policies and
 Of The Supportive            procedures could have been avoided if Connexions’ Board
 Housing Program              was actively involved and diligent in monitoring Program
                              operations and fund disbursements. HUD must take
                              immediate action to ensure that Program funds are used
                              solely for the intended purposes. As of April 26, 2004,
                              Connexions’ current Supportive Housing Program Grant
                              has a remaining balance of $906 and such balance needs to
                              be recaptured. Additionally, HUD conditionally awarded
                              Connexions an additional $173,228 of Program funds in
                              December 2003. These funds should not be provided to
                              Connexions based upon the information contained in this
                              audit report.



  Auditee Comments            [Excerpts paraphrased from the comments provided by
                              Connexions on our draft audit report follow. Appendix B,
                              pages 33, 34, 36 and 37, contains the complete text of
                              Connexions’ comments for this finding.]

                              Connexions met HUD’s cash matching requirements.
                              Connexions also incurred Grant expenditures that matched
                              the Grant drawdowns with the corresponding back up
                              documents as reflected in our reports to HUD. Further,
                              Connexions follows HUD’s policies and procedures in order
                              to keep and maintain its harmonious working relationship
                              with HUD. Our management applies good behavior,
                              honesty, maturity, common sense, and conceptual skills in
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                                                            Finding 1


       managing our services and finances. The strength of our
       management is its diligence in serving and meeting the needs
       of the homeless.

       Connexions disagrees that due to the Board’s inactive
       involvement and lack of diligence in monitoring its operation
       of the Program and disbursement of Program funds,
       Connexions lacked adequate controls to ensure that HUD
       funds were used for Program costs; services were provided to
       Program participants; and Financial Management Policies
       and Procedures were always followed.

       Connexions has served at least 3,000 homeless for over the
       last 10 years and has not experienced any issues with other
       fund providers, or violations of policies and regulations, or
       lawsuits questioning its integrity and compliance.
       Connexions never once received negative reports on clients
       not receiving adequate and professional service. HUD-OIG’s
       suggestion that Connexions did not always use its funds for
       the benefit of the homeless and mentally ill participants is not
       true.

       Connexions disagrees with the recommendation relating to
       an issuance of a notice of default. We believe it would be a
       harsh decision to issue a default notice when in fact our
       drawdowns since May 2002 were monitored and approved
       by HUD. Connexions can support the $15,784 that HUD-
       OIG determined to be unsupported costs.

       Connexions also disagrees with the recommendation for
       administrative action against its Board. The Board of
       Directors is valuable resource when raising funds needed not
       only to meet HUD’s cash matching requirements, but also to
       stabilize housing for the homeless and mentally ill Program
       participants.

       In most cases, Connexions’ Chief Executive Officer signed
       all checks over a certain amount. Some checks had two
       signatures except when the Executive Vice President, who
       was one of the designated check co-signers, resigned. As a
       result of the resignation, only one person was signing checks.
       Currently, two people sign the checks.

       Connexions did not have enough time to review each of the
       checks cited in OIG’s draft report. However, we were able to
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                       review the checks made payable to the Chief Executive
                       Officer and verified that they were for payroll. Since half of
                       our funds are from non-HUD sources, Connexions is not sure
                       how HUD-OIG used its check review results to determine
                       whether Connexions mismanaged or mishandled HUD funds.

                       HUD-OIG needs to consider that Connexions is a small
                       agency helping the homeless. Although it has made some
                       unintentional mistakes, Connexions became more
                       accountable and knowledgeable of handling its finances
                       within the last two years.



   OIG Evaluation Of   We are aware that Connexions has experience in serving the
   Auditee Comments    homeless and stated in the report that it met the cash
                       matching requirements.       However, Connexions lacked
                       adequate controls to ensure that: HUD funds were used for
                       Program costs; services were provided to Program
                       participants as required; and Financial Management Policies
                       and Procedures were always followed.

                       We did not suggest in our report that its general funds were
                       not always used for the participants’ benefits. We reported
                       instead that Connexions did not always use its HUD funds
                       for the benefits of the homeless and mentally ill participants.

                       With regards to Connexions’ contention that a default notice
                       would be a harsh decision, 24 CFR Part 84.86 states HUD
                       may terminate grant awards in whole or in part if a recipient
                       materially fails to comply with the terms and conditions of an
                       award.

                       We reviewed the documents that Connexions provided as
                       support for the unsupported costs identified during the audit.
                       As such, we reduced our original reported amount to
                       $174,583.

                       The recommendation for administrative action against the
                       Board of Directors was made because the Board was not
                       performing its responsibilities as set forth in Connexions’ By-
                       Laws and its Financial Management Policies and Procedures.
                       Most importantly, the Board was not monitoring Program
                       operations and fund disbursements.



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                                                                     Finding 1


                  Connexions’ response did not fully address its Executive
                  Officer’s violation of policies and procedures such as
                  signing and making checks payable to himself without the
                  approval of a Board member. After its Executive Vice-
                  President resigned, Connexions’ Board failed to take proper
                  actions to ensure that the Chief Executive Officer did not
                  have complete control of the disbursement process. The
                  Board should have appointed a new co-signer to the checking
                  account.

                  At the time of our audit, Connexions lacked adequate
                  support to determine whether the checks made payable to
                  the Chief Executive Officer were for payroll. We were
                  able to determine that $14,346 of the $20,160 in checks
                  lacked adequate support.

                  We clearly presented in our report how we arrived at our
                  conclusion that Connexions lacked adequate controls over
                  HUD funds. While Connexions may be a small agency,
                  this does not preclude them from following HUD’s
                  requirements and the Grant Agreement.



Recommendations   We recommend that HUD’s Director of Community
                  Planning and Development, Chicago Regional Office:

                  1A.    Issues a notice of default to Connexions as
                         permitted by the Grant Agreements. HUD’s default
                         notice should help ensure that $174,134 ($906 in
                         remaining Supportive Housing Program funds plus
                         the $173,228 conditionally awarded in December
                         2003) is used appropriately.

                  We also recommend that HUD’s Director of Departmental
                  Enforcement Center:

                  1B.    Takes administrative action against Connexions’
                         Board of Directors and its Chief Executive Officer for
                         failing to administer the Supportive Housing Program
                         in accordance with Federal requirements.




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                                                                                        Finding 2


 Controls Over HUD Funds Were Not Adequate
Connexions Enterprise, Inc. used $30,788 of Supportive Housing Grant Program funds for
ineligible expenses and lacked sufficient documentation that its use of another $174,583 benefited
the Program. The problems occurred because Connexions’ Board of Directors was not actively
involved and diligent in monitoring Connexions’ Supportive Housing Program operations to
ensure that adequate controls over HUD funds were implemented. As a result, Grant funds were
not always used for the benefit of the homeless and mentally ill Program participants. Also,
HUD funds were not used efficiently and effectively.


                                     24 CFR Part 583.120 states supportive services are
 Federal Requirements                designed to address the special needs of the homeless
                                     persons to be served by the project. Supportive Housing
                                     Program services funds may be used to pay for the actual
                                     costs of supportive services and other costs directly
                                     associated with providing such services. Costs associated
                                     with providing supportive services include salaries paid to
                                     providers of supportive services and any other costs
                                     directly associated with providing such services.

                                     24 CFR Part 84.53(b) requires the grantee to retain
                                     supporting financial documents for a period of three years
                                     after the final financial report is submitted to HUD.

                                     24 CFR Part 84.21 states recipients’ financial management
                                     systems must provide for the following: (1) effective
                                     control over and accountability for all funds. Recipients
                                     must adequately safeguard all such assets and assure they
                                     are used solely for authorized purposes; (2) accounting
                                     records that are supported by source documentation; (3)
                                     records that identify adequately the source and application
                                     of funds for Federally-sponsored activities. These records
                                     must contain information pertaining to Federal awards,
                                     authorizations, obligations, un-obligated balances, assets,
                                     outlays, income, and interest; and (4) written procedures for
                                     determining the reasonableness, allocability, and
                                     allowability of costs in accordance with the provisions of
                                     the applicable cost principles, and the terms and conditions
                                     of the awards.

                                     Office of Management and Budget Circular A-122
                                     establishes principles for determining costs of grants with
                                     non-profit organizations. Attachment A, paragraph 2, of
                                     the Circular states to be allowable, costs must: (1) be
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                   necessary and reasonable; (2) be allocable to Federal
                   awards; (3) be authorized or not prohibited under State or
                   local laws or regulations; (4) conform to any limitations or
                   exclusions set forth by Office of Management and Budget
                   cost principles, Federal laws, terms, and conditions of the
                   Federal award or other governing regulations; (5) be
                   consistent with policies, regulations, and procedures that
                   apply uniformly to both Federal awards and other activities;
                   (6) be accorded consistent treatment; (7) be determined in
                   accordance with generally accepted accounting principles;
                   and (8) with some exceptions, not be included as a cost or
                   used to meet cost sharing or matching requirements of any
                   Federal award.

                   Office of Management and Budget Circular A-122,
                   Attachment B, paragraphs 9, 14, 16, and 38 state the
                   following, respectively:

                      Contributions and donations by the organization to others
                      are unallowable;
                      Costs of amusement, diversion, social activities,
                      ceremonials, and costs relating, such as meals, lodging,
                      rentals, transportation, and gratuities are unallowable;
                      Cost of fines and penalties resulting from violation of or
                      failure of the organization to comply with Federal, State,
                      or local laws and regulations are unallowable; and
                      Pre-award costs are those incurred prior to the effective
                      date of the award where the costs are necessary to
                      comply with the proposed delivery schedule or period of
                      performance. Such costs are eligible only to the extent
                      that they would have been allowable if incurred after the
                      date of the award and only with written approval of the
                      awarding agency.

                   Paragraph 1 of Connexions’ Grant Agreement with HUD,
 Grant Agreement   effective April 16, 1999, states the purpose of the Grant is
                   to set forth the terms and conditions under which HUD will
                   provide Grant funds to Connexions in connection to the
                   approved project in its Application. Paragraph 5 of the
                   Agreement states Connexions’ Grant Application is
                   incorporated into the Grant Agreement. Under Paragraph
                   7, Connexions agreed to comply with all requirements of
                   the Grant Agreement and to accept responsibility for such
                   compliance by any entities to which it makes Grant funds
                   available. In its Application, Connexions promised HUD it
                   would fill one full-time equivalent employee for each of the
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                        following job positions: (1) Resident Counselor; (2) Case
                        Manager; (3) Clinical Therapist; and (4) Resident Mental
                        Health Worker.

                        Connexions had adequate funds to meet the cash matching
Connexions Met Cash     requirements. Specifically, during the first year of Program
Matching Requirements   operations under Grant number IL01B110028, Connexions
                        had a total of $122,073 of non-HUD funds, which were
                        more than the total required matching funds for operating
                        and supportive services. For the first year of the Grant,
                        HUD required Connexions to have $44,714 in matching
                        funds, including $18,207 in operating and $26,507 for
                        supportive services costs.

                        We reviewed a total of 61 Grant vouchers with a dollar
Sample Selection        value of $383,767. During our audit, we selected a sample
                        of 42 vouchers using attribute sampling, a statistical
                        sampling method. The sample was selected from a
                        universe of 93 vouchers under Grant number IL06B810032
                        from May 1999 to April 2002. The dollar value of the
                        sample was $269,634.

                        Based upon our results, we again used statistical sampling,
                        the One-Step Acceptance method. From a universe of 41
                        vouchers from May 2002 to November 2003 under Grant
                        number IL01B110028, we selected 19 additional vouchers
                        for review. The dollar value of this sample was $114,133.

                        Contrary     to    Federal    requirements,      Connexions
Inappropriate Costs     inappropriately used $30,788 of Supportive Housing
                        Program funds for costs that did not benefit its Safe Haven
                        project. The inappropriate costs included $25,087 of
                        improper supportive services and $5,701 in improper
                        operating costs as shown in the following table.




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                                                                 Supportive
                                      Costs                       Services      Operating
                     Salaries                                       $25,087         $ 689
                     Entertainment                                                  1,066
                     Late Charges/Rented Equipment                                     71
                     Donation                                                         150
                     Office Equipment for General Purpose                             385
                     Utility Bills Incurred Prior to Grant’s
                     Effective Start Date                                               309
                     Training                                                           340
                     Utility Cost for Non-Safe Haven Building                            61
                     Insurance for non-HUD Approved
                     Employee                                                           263
                     Books                                                            2,243
                     Groceries for Non-Safe Haven Project
                     Participants                                                       106
                     Groceries Already Paid With Food
                     Stamps                                                              18
                                        Totals                       $25,087         $5,701

                               24 CFR Part 583.125 states Supportive Housing Program
                               Grant funds may be used to pay a portion of the actual
                               operating costs of supportive housing for up to five years.
                               Operating costs are those associated with the day-to-day
                               operations of supportive housing. They also include the
                               actual expenses a recipient incurs for conducting on-going
                               assessments of the supportive services needed by residents
                               and the availability of such services, relocation assistance
                               including payments and services, and insurance.

                               Connexions lacked sufficient documentation that its use of
 Unsupported Costs             another $174,583 benefited the Program, including $96,890
                               under Program Grant IL06B810032; $13,197 under
                               Program Grant IL01B110028; and $64,496 from check
                               disbursements.

                               24 CFR Part 583.135 states up to five percent of any grant
                               awarded under this part may be used for the purpose of
                               paying costs of administering the assistance.
                               Administrative costs include the costs associated with
                               accounting for the use of grant funds, preparing reports for
                               submission to HUD, obtaining program audits, similar
                               costs related to administering the grant after the award, and
                               staff salaries associated with these administrative costs.


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                            24 CFR Part 583.115 states grant funds may be used to pay
                            for the actual costs of leasing a structure or structures, or
                            portions thereof, used to provide supportive housing or
                            supportive services for up to five years.

                            The expenditure of Supportive Housing Program funds for
Board Was Not Actively      ineligible and unsupported costs could have been avoided if
Involved In The Operation   Connexions’ Board was actively involved and diligent in
Of The Supportive           monitoring its Program operations and disbursements.
Housing Program
                            Eight percent ($30,788) of the $383,767 for the 61
                            vouchers reviewed was used for ineligible costs. An
                            additional 45 percent ($174,583) was used for costs that
                            lacked adequate supporting documentation.

                            Three of Connexions’ Board members said the Board was
                            actively participating in fund raising. Also, Connexions’
                            Board meeting minutes did not show that the Board was
                            involved in monitoring its Supportive Housing Program’s
                            operations and disbursements. Instead, the Board minutes
                            showed it was involved in planning, assisting, or
                            performing fundraising events for Connexions. The Board
                            members were not aware of their responsibilities to monitor
                            Connexions’ Supportive Housing Program Grant
                            disbursements; and adopt adequate policies and procedures
                            to ensure that Grant funds were spent in accordance with
                            HUD’s requirements.

                            As a result, HUD’s Supportive Housing Program funds
                            were not used efficiently and effectively. Additionally,
                            Program funds were not always available to benefit the
                            homeless and mentally ill Program participants.



 Auditee Comments           [Excerpts paraphrased from the comments provided by
                            Connexions on our draft report follow. Appendix B, pages
                            34 and 35, contains the complete text of Connexions’
                            comments for this finding.]

                            Connexions is making a good faith effort to meet all HUD
                            requirements. We are unable to provide full and complete
                            documentation for the total unsupported costs because of a
                            computer failure, the inability to locate archived files, and
                            insufficient time to respond to the draft audit report. During
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                       the course of the audit, HUD-OIG did not inform us that we
                       needed to provide documentation for the unsupported
                       expenses.

                       We implemented several changes in management structures
                       and established new procedures for financial accountability.



   OIG Evaluation Of   Connexions’ Chief Executive Officer was informed verbally
   Auditee Comments    and by written correspondences that adequate documentation
                       was needed to support the Supportive Housing Program
                       expenses. In addition, the Chief Executive Officer was
                       informed during a status update meeting in January 2004 that
                       Connexions had not provided sufficient documentation to
                       support all the Supportive Housing Program costs under
                       review.

                       We reduced the total unsupported costs that we initially
                       reported to $174,583 based upon the additional
                       documentation provided by Connexions.

                       Connexions must implement adequate procedures and
                       controls to ensure it operates its Supportive Housing
                       Program in accordance with Federal requirements.



   Recommendations     We recommend that HUD’s Director of Community
                       Planning and Development, Chicago Regional Office, ensure
                       Connexions Enterprise, Inc.:

                       2A.     Reimburses HUD $30,788 from non-Federal funds
                               for the ineligible costs cited in this finding.

                       2B.     Provides documentation to support that $174,583 in
                               Grant funds benefited its Supportive Housing
                               Program.    If Connexions cannot provide the
                               necessary documentation, then it should reimburse
                               HUD from non-Federal funds for the appropriate
                               amount.

                       2C.     Implements adequate procedures and controls to
                               ensure it operates the Supportive Housing Program
                               in accordance with Federal requirements, if HUD

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         allows Connexions to continue administering the
         Program.




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                                                                                         Finding 3


 Program Participants Did Not Actually Receive
           Services As Committed
Connexions Enterprise, Inc.’s Chief Executive Officer submitted and certified a Supportive Housing
Program Technical Submission that contained inaccurate information, which HUD relied on to
award Connexions $346,458. The Chief Executive Officer could not adequately explain why the
Technical Submission for the renewal of Grant number IL01B110028 contained inaccurate
information. Nevertheless, it was the Chief Executive Officer’s responsibility to ensure the
truthfulness and accuracy of the information contained in the Grant Application/Technical
Submission prior to submitting it to HUD. As a result, HUD lacks assurance that Program
participants actually received the services from the provider of in-kind services as committed.



                                     Connexions’ Grant Agreement with HUD, effective May
 Grant Agreement                     31, 2002, states the purpose of the Grant is to set forth the
                                     terms and conditions under which HUD will provide Grant
                                     funds to Connexions in connection to the approved project
                                     in its Application. Paragraph 2 of the Grant Agreement
                                     states Connexions’ original and renewal Applications are
                                     incorporated into the Grant Agreement. Under Paragraph
                                     6, Connexions agreed to comply with all requirements of
                                     the Grant Agreement and to accept responsibility for such
                                     compliance by any entities to which it makes grant funds
                                     available.

                                     Page 1 of Connexions’ March 25, 2002 Technical
 HUD-Approved                        Submission required certification of the truthfulness and
 Technical Submission                accuracy of the information contained in the Technical
                                     Submission for Project Number IL01B110028.

                                     The 2001 Supportive Housing Program application process
 HUD’s Supportive                    had two essential phases. First, eligible organizations
 Housing Program                     submitted applications for Program projects in response to
 Application Process                 the Continuum of Care Homeless Assistance Notice of
                                     Funding Availability. An applicant that was successful in the
                                     competition, referred to as a conditionally selected grantee or
                                     selectee, then competed in a second phase by providing more
                                     detailed technical information not contained in the original
                                     application. This Technical Submission document contained
                                     all the information HUD required for the second and final
                                     phase prior to Grant execution. All selectees, whether funded
                                     for a new Program project or for a renewal project, would
                                     complete this document. HUD would enter into a Grant
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                          agreement with the selectee once the Technical Submission
                          was completed and approved. Connexions, a conditionally
                          selected grantee, competed in the second phase by providing
                          HUD the required Technical Submission.

                          In May 2001, the Chief Executive Officer submitted to HUD
                          Connexions’ Supportive Housing Program renewal Grant
                          Application. In March 2002, the Chief Executive Officer
                          submitted the Technical Submission associated with the
                          renewal Grant Application, and certified the truthfulness and
                          accuracy of information contained in the Submission.

                          The Technical Submission submitted by Connexions’ Chief
 The Chief Executive      Executive Officer contained inaccurate information. HUD
 Officer Submitted And    relied on this inaccurate information when it awarded
 Certified A Technical    Connexions a $346,458 renewal Grant.
 Submission Containing
 Inaccurate Information   The Technical Submission included an in-kind commitment
                          letter dated February 23, 2002 from a service provider.
                          This commitment letter indicated that the service provider
                          would provide $5,000 of in-kind services that included
                          medication management and psychiatric assessments to
                          Connexions’ Safe Haven II project clients.

                          We interviewed the service provider to verify that he
                          provided the services to Connexions’ Safe Haven II project
                          clients. He said he did not commit for the provision of
                          medication management and psychiatric assessments to
                          Connexions’ Safe Haven II project clients. He also said he
                          is not a physician; therefore, he could not dispense
                          medication or perform psychiatric assessments. The
                          service provider further said he only agreed to provide
                          Connexions’ Safe Haven project clients in-kind services by
                          sending volunteers to serve food to the clients and to
                          perform janitorial chores. He confirmed he provided
                          volunteers to serve food to Connexions’ Safe Haven project
                          clients and to perform janitorial services.

                          The Chief Executive Officer said his administrative staff
                          person mistakenly typed the information contained in the
                          February 23, 2002 in-kind commitment letter. He also said
                          he was the one who actually signed the commitment letter on
                          behalf of the service provider because the service provider
                          authorized him to sign the commitment letter. As a result,
                          Connexions’ Safe Haven II project clients did not actually

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                    receive the in-kind services as set forth in the February 23,
                    2002 commitment letter.

                    HUD relied upon the inaccurate information when it awarded
                    Connexions a $346,458 Supportive Housing Program Grant.
                    HUD used the signed commitment letter or agreement when
                    it evaluated Connexions’ Grant application for project
                    leveraging. The Notice of Funding Availability required
                    HUD to award a conditional selectee such as Connexions
                    who submitted a signed commitment letter or agreement
                    during the application process. As a result, HUD funds were
                    inappropriately provided.



Auditee Comments    [Excerpts paraphrased from the comments provided by
                    Connexions on our draft report follow. Appendix B, page 35,
                    contains the complete text of Connexions’ comments for this
                    finding.]

                    Connexions realizes the mistake it made in the Technical
                    Submission. If we have the opportunity to apply in the
                    future, we will make sure that the information provided is
                    accurate and correct when submitting a grant application.



OIG Evaluation Of   While Connexions’ Chief Executive Officer admits that its
Auditee Comments    Technical Submission contained inaccurate information,
                    HUD relied on this inaccurate information when it awarded
                    Connexions a $346,458 renewal Grant. Connexions could
                    have informed HUD of the error and amended its Supportive
                    Housing Program Grant Application and Technical
                    Submission to reflect a change in provider or in the services.
                    Additionally, Connexions needs to implement procedures
                    and controls to ensure future submissions to HUD are
                    complete and accurate.


Recommendation      We recommend that HUD’s Director of Community
                    Planning and Development, Chicago Regional Office,
                    ensure Connexions Enterprise, Inc.:

                    3A.    Implements procedures and controls to ensure future
                           submissions to HUD are complete and accurate, if

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                HUD allows Connexions to continue administering
                the Supportive Housing Program.




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                                                                                      Finding 4


Financial Management Policies And Procedures
          Were Not Always Followed
Connexions Enterprise, Inc.’s Financial Management Policies and Procedures were not always
followed. Specifically, Connexions’ Chief Executive Officer signed checks payable to himself and
to cash for personal expenses without approval from a Board member. This occurred because the
Board was not involved in monitoring the disbursement of Supportive Housing Grant Program
funds. As a result, HUD lacked assurance that Grant funds were used only for the intended
purposes.



                                    The April 1996 Board-adopted Connexions’ Financial
 Connexions’ Financial              Management Policies and Procedures require:
 Management Policies And
 Procedures                                 The President/Chief Executive Officer to have a
                                            single signature authority up to and including
                                            $2,000 with the exception of the Executive
                                            Director’s (Chief Executive Officer) personal
                                            expense reimbursements, which must be approved
                                            by a Board member having check signing
                                            authorization (no matter the check amount); and

                                            The check signer(s) is not the person who writes
                                            checks.

                                    The Chief Executive Officer did not follow Connexions’
 Financial Management               Financial Management Policies and Procedures when he
 Policies And Procedures            wrote and signed checks payable to himself and to cash
 Were Not Followed                  without approval from a member of the Board. The Chief
                                    Executive Officer also functions as the President of
                                    Connexions.

                                    We performed a limited testing of a sample of 170 checks
 Checks Reviewed                    to determine whether Connexions’ Financial Management
                                    Policies and Procedures were followed, and whether the
                                    check disbursements were adequately supported. The 170
                                    checks totaled $104,041, of which $64,496 of this total was
                                    not adequately supported (see finding 2). There were 10
                                    checks with amounts greater than $2,000 that lacked
                                    approval and a second signature from a Board member.
                                    There were 28 checks ($20,160) payable to the Chief
                                    Executive Officer and 11 checks ($6,965) payable to cash.
                                    Of the $20,160 paid to Connexions’ Chief Executive
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                          Officer,     $14,346    lacked     adequate    supporting
                          documentation. Additionally, $1,659 of the $6,965 paid to
                          cash also lacked adequate support.

                          Furthermore, we found that Connexions’ Chief Executive
                          Officer wrote and signed checks for his personal expenses.
                          Specifically, there were 13 checks ($7,219) made payable
                          to the Chief Executive Officer’s various personal credit
                          cards’ creditors, and a check ($600) made payable to
                          himself without approval from the Board.

                          We were not able to trace whether the checks were
                          disbursed against the Supportive Housing Program funds
                          because Connexions maintained one account for HUD
                          funds and non-HUD funds. Thus, HUD lacked assurance
                          that Grant funds were used only for the intended purposes
                          when the checks were disbursed.

                          Connexions’ Chief Executive Officer said he wrote and
                          signed checks to himself because local merchants such as
                          grocery stores did not accept checks as payments. He also
                          said he wrote checks payable to cash because he was
                          instructed to do so by a HUD Community Planning and
                          Development Representative.           HUD’s Community
                          Planning and Development Representative said he did not
                          instruct Connexions’ Chief Executive Officer to write
                          checks payable to cash. Rather, HUD’s Representative said
                          he told the Chief Executive Officer that it would be a poor
                          business practice to sign and write checks payable to cash.

                          The Chief Executive Officer said he was aware of
 Board Was Not Involved   Connexions’ Financial Policies and Procedures. However,
 In Monitoring Grant      he was able to circumvent the Policies and Procedures
 Funds’ Disbursements     because Connexions’ Board was not involved in
                          monitoring the disbursement of Grant funds. As previously
                          stated, the Board was not involved in monitoring the
                          operations of Connexions’ Supportive Housing Program,
                          including the disbursement of Grant funds (see Finding 2).



   Auditee Comments       [Excerpts paraphrased from the comments provided by
                          Connexions on our draft report follow. Appendix B, page 35,
                          contains the complete text of Connexions’ comments for this
                          finding.]

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                    Since 2002, Connexions followed HUD’s guidelines and its
                    policies and procedures for providing documentation to
                    support its drawdowns. Despite a few exceptions, we were
                    able to support our drawdowns. However, we revised our
                    Financial Policy and anticipate implementing the Policy by
                    September 4, 2004 after our Board’s review and approval.



OIG Evaluation Of   We disagree with Connexions’ contention that it followed
Auditee Comments    HUD’s guidelines and its policies and procedures. The
                    documentation provided to us supports our conclusion that
                    Connexions’ Financial Management Policies and
                    Procedures were not always followed.          The Chief
                    Executive Officer wrote and signed checks payable to
                    himself and to cash without approval from a member of the
                    Board. HUD started requiring Connexions in 2002 to
                    provide HUD all supporting documents for its future
                    drawdowns.

                    The procedures recommended by Connexions, if fully
                    implemented, should improve its financial accountability.




Recommendation      We recommend that HUD’s Director of Community
                    Planning and Development, Chicago Regional Office, ensure
                    Connexions Enterprise, Inc.:

                    4A.     Implements procedures and controls to ensure its
                            Financial Management Policies and Procedures are
                            followed and its Board provides adequate
                            monitoring of Grant disbursements to ensure that
                            Supportive Housing Program funds are safeguarded
                            against waste, loss, or misuse, if HUD allows
                            Connexions to continue administering the Program.




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Management 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
 Relevant Management                 were relevant to our audit objectives:
 Controls
                                     •   Program Operations - Policies and procedures that
                                         management has implemented to reasonably ensure that
                                         a program meets its objectives.

                                     •   Validity and Reliability of Data - Policies and
                                         procedures that management has implemented to
                                         reasonably ensure that valid and reliable data are
                                         obtained, maintained, and fairly disclosed in reports.

                                     •   Compliance with Laws and Regulations - Policies and
                                         procedures that management has implemented to
                                         reasonably ensure that resource use is consistent with
                                         laws and regulations.

                                     •   Safeguarding Resources - Policies and procedures that
                                         management has implemented to reasonably ensure that
                                         resources are safeguarded against waste, loss, and
                                         misuse.

                                     We assessed all of the relevant controls identified above
                                     during our audit of Connexions’ Supportive Housing
                                     Program.

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

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




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                      •   Program Operations

                      Connexions lacked adequate procedures and controls to
                      ensure that its Supportive Housing Program was operated
                      efficiently and Grant funds were used for eligible costs,
                      adequately supported, and with proper Board oversight (see
                      Finding 1).

                      •   Validity and Reliability of Data

                      Connexions’ Chief Executive Officer submitted and
                      certified a Supportive Housing Program Technical
                      Submission that contained inaccurate information (see
                      Finding 3).

                      •   Compliance with Laws and Regulations

                      Connexions did not follow HUD’s regulations when it paid
                      expenses for ineligible and unsupported costs (see Finding
                      2).

                      •   Safeguarding Resources

                      Connexions lacked adequate controls to safeguard Grant
                      funds from loss or misuse (see Findings 2 and 4).




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Follow-Up On Prior Audits
This is the first audit of Connexions Enterprise, Inc.’s Supportive Housing Program by HUD’s
Office of Inspector General.

The latest Independent Auditor’s Report for Connexions covered the periods ending December
31, 2001 and December 31, 2002. The report contained no findings.




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                                                                                        Appendix A

Schedule Of Questioned Costs And
Recommendation For Funds To Be Put To
Better Use
                                      Type of Questioned Costs
               Recommendation                                                Funds To Be Put
                   Number             Ineligible 1/   Unsupported 2/         To Better Use 3/

                      1A                                                     $174,134
                      2A               $30,788
                      2B                               $174,583
                     Totals            $30,788         $174,583              $174,134


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.

3/          Funds To Be Put To Better Use are quantifiable savings that are anticipated to occur if
            an OIG recommendation is implemented, resulting in a reduced expenditure in
            subsequent periods for the activity in question. Specifically, this includes an
            implemented OIG recommendation that causes a non-HUD entity not to expend Federal
            funds for a specific purpose. These funds could be reprogrammed by the entity and not
            returned to HUD.




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                                Appendix B

Auditee Comments




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