oversight

Audit of City of New Orleans Desire Community Housing Corporation New Orleans, Louisiana

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-06-22.

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

        AUDIT REPORT




       THE CITY OF NEW ORLEANS

DESIRE COMMUNITY HOUSING CORPORATION

       NEW ORLEANS, LOUISIANA


              2004-FW-1007

              June 22, 2004

         OFFICE OF AUDIT, REGION 6
            FORT WORTH, TEXAS
                                                                Issue Date
                                                                        June 22, 2004
                                                                Audit Case Number
                                                                        2004-FW-1007




TO:          Gregory Hamilton
             Director, Community Planning and Development, 6HD



FROM:        D. Michael Beard
             Regional Inspector General for Audit, 6AGA

SUBJECT: Audit of the City of New Orleans
         Desire Community Housing Corporation
         New Orleans, Louisiana


We are performing an audit of the City of New Orleans (City). The purpose of the audit is to
determine whether the City implemented its housing and economic development programs in an
effective, efficient, and economical manner and in accordance with HUD rules and regulations.
As part of the audit, we reviewed the Desire Community Housing Corporation (Desire), a
subrecipient of the City, to determine if Desire performed in accordance with HUD, City, and
contractual requirements.

The report contains three findings requiring follow-up actions by your office. We will provide a
copy of this report to the City and Desire.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days, please furnish this office,
for each recommendation in this report, a status on: (1) corrective action taken; (2) the proposed
corrective action and the date to be completed; or (3) why action is not considered necessary.
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 related to the audit.

Please call William W. Nixon, Assistant Regional Inspector General, at (817) 978-9309 if you or
your staff has any questions.
Management Memorandum




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2004-FW-1007                Page ii
Executive Summary
We completed a review of the Desire Community Housing Corporation (Desire) as part of our
audit of the City of New Orleans (City) housing and economic development programs. As a
subrecipient of the City, Desire received HUD funding through the City’s Division of Housing
and Neighborhood Development.



                                    The objective of our review was to determine whether
    Objective                       Desire administered its HOME Program funds in an
                                    economical and efficient manner and in accordance with
                                    the terms of the grant agreements with the City and
                                    applicable HUD regulations and federal laws. Through the
                                    audit, we also determined whether the City properly
                                    monitored Desire and its use of HUD funds.

                                    We concluded Desire did not effectively and efficiently
                                    administer its programs in accordance with the terms of the
                                    grant agreements with the City and applicable HUD
                                    regulations and federal laws.1 Desire did not develop and
                                    implement a sound internal control environment to
                                    administer its programs. This resulted in Desire not
                                    providing adequate oversight and management of its HUD
                                    funded projects. Further, Desire mismanaged $1.1 million
                                    of HOME funds on its Bayou Apartments rehabilitation
                                    project and $2,039,150 of program income from Liberty
                                    Terrace. In addition, Desire made unsupported
                                    disbursements totaling $91,885, and violated HUD
                                    procurement regulations. The City should have provided
                                    sufficient monitoring of Desire to detect the problems
                                    sooner and possibly mitigated Desire’s mismanagement of
                                    limited HOME funds.

                                    We provided a discussion draft to Desire and City officials
                                    on April 26, 2004, and held an exit conference with City
                                    and Desire officials on May 6 and 7, 2004, respectively.
                                    The City provided a written response on June 8, 2004. We
                                    summarized and evaluated pertinent parts of the City’s
                                    response in the three findings. Generally, the City agreed
                                    with the report and recommendations. We have included
                                    the City’s entire response as Appendix B. Desire provided
                                    a written response on June 2, 2004. Desire generally
                                    disagreed with the conclusions and provided documentation
                                    supporting its positions. We summarized and evaluated
                                    pertinent parts of Desire’s response in the three findings.

1
    24 CFR 92.504(a).

                                        Page iii                                  2004-FW-1007
Executive Summary


                    Upon request, we will provide a copy of Desire’s response.
                    We considered Desire’s and the City’s response in
                    preparing our final report and amended the report as
                    necessary.

                    We recommend HUD and the City ensure Desire has the
  Recommendations   necessary controls before awarding any additional grants to
                    Desire. Further, Desire should repay the City the $1.1
                    million and either support or repay the $322,352 of unpaid
                    loans from program income and $91,885 in unsupported
                    disbursements. We also recommend HUD aid the City in
                    establishing the appropriate controls, reprogramming funds,
                    and taking appropriate administrative actions.




2004-FW-1007            Page iv
Table of Contents

Management Memorandum                                                 i



Executive Summary                                                   iii



Introduction                                                         1



Findings

1 Desire Failed to Adequately Administer HUD Funds                   5

2 Desire Expended Approximately $1.1 Million in Grant Funds        15
  without Benefiting the People Intended

3 Desire Misused $533,604 of Program Income                        23



Internal Controls                                                  31



Follow-Up on Prior Audits                                          33



Appendices
   A. Schedule of Questioned Costs                                 35

   B. Auditee Comments                                             37




                             Page v                       2004-FW-1007
Table of Contents



Abbreviations

CDBG           Community Development Block Grant
CHDO           Community Housing Development Organization
City           City of New Orleans
CPA            Certified Public Accountant
CPD            Community Planning and Development
Desire         Desire Community Housing Corporation
ESA            Eileen Shanklin Andrus, CPA
HOPWA          Housing Opportunities for People with AIDS
HUD            U.S. Department of Housing and Urban Development
OIG            Office of Inspector General




2004-FW-1007                          Page vi
Introduction
    Desire misused grant funds.        Desire Community Housing Corporation (Desire),
                                       established in 1968, is a 501 (c) nonprofit community
                                       development organization. According to its mission
                                       statement, Desire provides affordable housing and
                                       community revitalization. Desire offers housing
                                       management, housing counseling, housing rehabilitation,
                                       and planning and developing commercial developments
                                       services. Desire receives HUD funding through the City of
                                       New Orleans Division of Housing and Neighborhood
                                       Development (City).

                                       Desire has received City funds for various programs
                                       including:

                                       •    Repairing the homes of senior citizens;
                                       •    Constructing homes;
                                       •    Rehabilitating blighted houses;
                                       •    Providing daycare services; and
                                       •    Providing counseling and relocation services to
                                            families referred by the Housing Authority of New
                                            Orleans.



                                       We reviewed Bayou Apartments and Liberty Terrace
    Background.                        projects because of the large dollars involved and the City
                                       suggested them. We did not review Desire’s other
                                       programs. Between September 1993 and July 2003, Desire
                                       received and expended the following for the Bayou
                                       Apartments and Liberty Terrace grant allocations:2

                            GRANT NAME               AMOUNT             EXPENDED BALANCE
                            Liberty Terrace          $2,753,672           $2,235,320    $518,352
                            Bayou Apts.              $1,737,000           $1,070,255    $666,745
                            TOTALS                   $4,490,672           $3,305,575 $1,185,097*
                            * Desire lost its designation as a Community Housing Development Organization
                              (CHDO) in February 2003. Pending the litigation, the $1,185,097 remaining on
                              the two grants may be reallocated by the City.

                                       Bayou Apartments3 Desire received $1,737,000 to
                                       purchase Bayou Apartments, a 78-unit complex located in
                                       eastern New Orleans, and rehabilitate 38 apartment units

2
     February 5, 2004.
3
     Grant number CHDO96-006.

                                            Page 1                                          2004-FW-1007
Introduction

                                           and 2 recreation rooms.4 Desire agreed to rehabilitate the
                                           remaining 38 units using the cash flow generated from rents
                                           received on the rehabilitated units. The apartments were to
                                           provide housing for mothers and children with AIDS.
                                           Desire purchased the site in two transactions in 1996 and
                                           1998. Construction began in 2000 and ceased in 2001
                                           without renovating one unit.

                                           Liberty Terrace Subdivision5 Under this grant, Desire
                                           received $2,753,672 in HOME funds to build 17 single
                                           family homes. Desire was to use program income derived
                                           from the sale of the houses to build an additional 26
                                           homes.6 Desire completed 28 homes and accumulated
                                           $2,039,150 in program income from the sale of the 28
                                           homes. Desire used some of the program income from the
                                           sale of the original 17 homes to build the other 11 homes as
                                           intended. Based upon a cursory visit to the area of the 28
                                           homes built, the homes appeared good quality and an
                                           enhancement to the neighborhood. Unfortunately, Desire
                                           did not continue the proper use of the program income to
                                           complete the remaining 15 houses promised.

                                           Desire’s offices are located at 2709 Piety Street, New
                                           Orleans, Louisiana. The City maintained its records at
                                           1515 Poydras Street, Suite 1150, New Orleans, Louisiana.

                                           With respect to Desire, our objective was to determine
    Scope and Methodology                  whether Desire administered its HUD funds in an
                                           economical and efficient manner and in accordance with
                                           the terms of the grant agreements, and applicable City and
                                           HUD requirements. Through the audit, we also determined
                                           whether the City properly monitored Desire and its use of
                                           HUD funds.

                                           To accomplish our audit objective we performed the
                                           following:

                                            •   Reviewed Desire’s grant agreements and applicable
                                                regulations.
                                            •   Non-statistically selected 29 of 75 drawdowns from the
                                                City’s 2000 through 2002 check register to determine
                                                accuracy and timeliness.

4
     Desire also received $150,000 from the City under the Neighborhood Housing Improvement Funds to assist in
     the purchase of the property.
5
     Grant number HOME95-015.
6
     According to the grant agreement amended on June 28, 1999, Desire agreed to build 43 homes.

2004-FW-1007                                     Page 2
                                                Introduction


•   Reviewed program income of Liberty Terrace for
    compliance with HOME requirements.
•   Non-statistically selected 32 of 316 disbursements from
    the Bayou Apartment and Liberty Terrace projects
    accounts to determine eligibility and controls over
    financial management.
•   Interviewed appropriate staff from Desire, the City,
    HUD, and others, including local contractors and
    former City employees.
•   Analyzed files, financial documents, records,
    monitoring reports, audit reports, and other reports
    maintained by Desire and the City.

Throughout the audit, we obtained and reviewed computer-
generated data from the Desire and the City. We did not
test the reliability of computer-generated data. Desire
lacked controls over receipts, disbursements, and program
performance to rely upon its data. Specifically, Desire
maintained over 60 bank accounts for which they were
cited in a previous audit. To complicate the matter further,
Desire commingled the accounts by making loans to and
from various accounts. The extensive work required to
trace the transactions limited our reliance upon the data.

We provided a discussion draft to Desire and City officials
on April 26, 2004, and held an exit conference with City
and Desire officials on May 6 and 7, 2004, respectively.
The City provided a written response on June 8, 2004. We
summarized and evaluated pertinent parts of the City’s
response in the three findings. Generally, the City agreed
with the report and recommendations. We have included
the City’s entire response as Appendix B. Desire provided
a written response on June 2, 2004. Desire generally
disagreed with the conclusions and provided documentation
supporting its position. We summarized and evaluated
pertinent parts of Desire’s response in the three findings.
Upon request, we will provide a copy of Desire’s response.
We considered Desire’s and the City’s response in
preparing our final report and amended the report as
necessary.




     Page 3                                    2004-FW-1007
Introduction

               We conducted our fieldwork on Desire from May 2003 to
               March 2004. The audit generally covered Desire
               operations from January 1, 2000, to July 31, 2003. We
               expanded our scope as necessary. We performed our audit
               in accordance with generally accepted government auditing
               standards.




2004-FW-1007       Page 4
                                                                                             Finding 1


                        Desire Failed to Adequately
                         Administer HUD Funds
Violating grant agreements and City and HUD requirements, Desire lacked controls over
disbursements, accounting, and procurement to adequately administer HUD funds. As a result,
Desire commingled HOME funds, lacked adequate support for $91,885 in disbursements, and
contributed to the conditions cited in Findings 2 and 3.7 Further, Desire hired an auditor who
may not have been independent. These deficiencies occurred because Desire did not have
adequate controls over disbursements or over its program administration. The City did not
properly monitor Desire. The City should ensure that Desire has the controls necessary to
comply with its agreements and either support or return the funds. Additionally, Desire may
have overstated the availability of funds it had in an application to HUD. HUD should consider
whether to reprogram these funds.



                                           Desire did not have receipts for 22 of the 32 disbursements
    Desire could not support
                                           reviewed totaling $91,885. Desire’s financial management
    $91,885 in
                                           system did not meet federal requirements. Desire’s
    disbursements.
                                           incomplete records and commingling of funds made it
                                           difficult to determine eligibility of expenditures. For
                                           instance, Desire made numerous payments to itself without
                                           any supporting documentation or explanation and some
                                           checks did not have matching invoices. We attempted to
                                           locate supporting documentation of our sample
                                           expenditures rather than deeming all expenditures
                                           unsupported.

                                           We reviewed 32 of 310 disbursements (10 percent) from
    Desire could not support               Desire’s Bayou Apartments and Liberty Terrace accounts.
    69 percent of the                      Desire did not have adequate and complete documentation
    disbursements reviewed.                for 22 of the 32 disbursements reviewed totaling $91,885.
                                           Of the $91,885, $90,867 related to Desire’s commingling of
                                           funds and Desire had no evidence that the funds were used
                                           for eligible purposes. Desire could not account for the
                                           numerous bank deposit slips missing from the bank
                                           statements. As a result, we did not rely upon Desire’s
                                           check register or bank reconciliations. Desire did not have
                                           documentation to support $1,018 in payments to First
                                           Insurance Funding Corporation. The unsupported amounts
                                           include payments to:



7
     The $91,885 does not comprise amounts included in Finding 2 or 3.

                                                 Page 5                                   2004-FW-1007
Finding 1


                                              Schedule of Unsupported Payments

                                       Payee                Number of               Total     Unsupported
                                                            Instances           Disbursement    Amount
                             Desire                             17                    $52,929     $52,929
                             Liberty Terrace                     2                    $29,859     $29,859
                             Desire-St. Ferdinard                1                     $7,079      $7,079
                             Place
                             Desire Square                        1                   $1,000        $1,000
                             First Insurance                      1                   $1,018        $1,018
                             Funding Corporation
                             Totals                              22                  $91,885       $91,885

                                             Desire should either support or repay the City for the
                                             $91,885 in unsupported funds. Desire should cease the
                                             commingling of funds. Further, the City should require
                                             Desire to provide a reconciliation of all payments that it
                                             made to itself with a determination of the eligibility of the
                                             transaction.

                                             Violating HUD requirements, Desire did not have effective
    Desire did not have an                   controls and accountability over HOME funds. According
    effective financial                      to staff, Desire did not have an operations manual prior to
    management system.                       January 2003.8 HUD regulations state: “Records shall
                                             contain information pertaining to Federal awards,
                                             authorizations, obligations, unobligated balances, assets,
                                             outlays, income and interest.” 9 As shown with the
                                             commingling of and unsupported funds, Desire did not
                                             meet these requirements.

                                             Desire did not implement a procurement policy that
     Desire procurement
                                             complied with applicable City and federal requirements by
     policy did not comply
                                             providing full and open competition; procurement history;
     with requirements.
                                             cost analyses, contract administration; and standards of
                                             conduct. As a result, Desire did not have adequate controls
                                             over procurement and expenditure of funds. Further,
                                             Desire could not assure HUD that Desire properly managed
                                             the grant funds.




8
      Desire provided copies of the manuals. The manuals appeared sufficient.
9
      24CFR84.21(b)1-3.

2004-FW-1007                                      Page 6
                                                                                   Finding 1


     HUD required an            HUD required Desire’s procurement policy to reflect the
     adequate procurement       City and federal regulations as it relates to procurement.
     policy.                    Specifically, the procurement policy should contain
                                procedures on the necessity of full and open competition;
                                cost analyses; documentation of procurement history;
                                contract administration and standards of conduct.10

                                Desire’s 2-page procurement policy failed to meet the
                                minimum requirements of 24 CFR 85.36. Desire’s policy
                                limited competition. The policy did not delineate the need
                                to advertise for proposals or bids or explain the method for
                                conducting evaluations of the proposals received and the
                                method for selecting the awardees. The policy lacked
                                competitive proposals procedures.

                                HUD required Desire to perform a cost or price analysis for
                                all procurements including contract modifications and
                                change orders. Desire’s procurement policy did not discuss
                                price or cost analyses. These analyses ensure the
                                reasonableness of contract prices. Without the analyses
                                Desire had no way of knowing whether it paid a reasonable
                                price for goods and services received.

                                Desire did not maintain procurement documentation or
                                files, as required by the regulations. HUD required Desire
                                to document the procurement history. Documentation of
                                procurement history helps ensure adequate and/or required
                                procedures were performed during the procurement
                                process. Desire procurement policy did not address the
                                need to document and maintain procurement history.

                                Due to the ineffective procurement policy and
     Inadequate controls over   management’s inability to implement adequate policies,
     procurement of goods       Desire did not procure goods and services as required by
     and services.              HUD. Specifically:

                                    Desire non-competitively procured a $1 million
                                    construction contract

                                    As discussed in Finding 2, Desire failed to advertise a
                                    $1 million rehabilitation contract at Bayou
                                    Apartments. Instead of advertising, Desire solicited
                                    bids from seven contractors from a City approved list
                                    and received quotes from only one contractor. HUD
                                    required Desire to conduct all procurement in a
10
      24 CFR 85.36.

                                     Page 7                                     2004-FW-1007
Finding 1

                                                 manner to provide full and open competition. Desire
                                                 should have publicly advertised for this contract and
                                                 accepted sealed bids.

                                                Accounting and auditing services contracts procured
                                                without full and open competition

                                                During the procurement of the accounting services
                                                contract, Desire contracted with Eileen Shanklin
                                                Andrus, Certified Public Accountant, L.L.C. (ESA), for
                                                an accounting services based upon the recommendation
                                                of an outgoing accountant. Desire did not advertise for
                                                the accounting services and did not consider other
                                                providers. As discussed later, ESA may have impaired
                                                her independence by accepting the audit engagement
                                                for the year that she was contracted to perform
                                                accounting work. Although Desire was not required to
                                                advertise for these services, it should have documented
                                                its selection methodology to ensure competition and
                                                price reasonableness.

                                            Desire inappropriately claimed it would commit $1.7
     Desire misinformed HUD                 million in CDBG funds11 in a June 2002 application for a
     in its $1.2 million                    $1.2 million HUD HOPWA12 grant. According to HUD
     HOPWA grant                            staff, HUD awarded Desire the HOPWA grant based upon
     application.                           the claim by Desire. Desire stated it would commit $1.7
                                            million of its City CDBG funds to the HOME-HOPWA
                                            Collaborative. According to its application, Desire would
                                            make the funds available from October 1, 2002, to
                                            September 30, 2003. However, as of July 2002, Desire
                                            only had $666,745 remaining under this grant that it could
                                            commit.

                                            Including the $1.7 million, HUD gave Desire’s application
                                            75 points, the minimum points needed to receive funding.
                                            According to HUD’s scoring system, Desire received 8 of
                                            10 points for leverage funds. HUD would not comment on
                                            whether Desire would have received less points if it
                                            provided accurate information on its application.
                                            Therefore, it is unknown whether the overstatement of
                                            available funds would have affected HUD’s award, but it
                                            does seem plausible.


11
     Desire did not have $1.7 million in CDBG funds; it appears Desire meant its $1.7 million Bayou Apartments
     HOME grant.
12
     Housing Opportunities For People With AIDS.

2004-FW-1007                                     Page 8
                                                                                               Finding 1

                                           HUD granted Desire $1.2 million in HOPWA funds
                                           effective March 10, 2003. Desire received $631,000 for
                                           Supportive Services, $400,000 for Rehabilitation and
                                           $248,890 for Administrative and Other. Desire pledged to
                                           use Bayou Apartments as the housing component for the
                                           HOPWA program and planned to use the $400,000 in
                                           rehabilitations funds on Bayou Apartments. When HUD
                                           learned of the possible misleading statements and a lawsuit
                                           filed by the City, HUD suspended funding on the HOPWA
                                           grant. HUD has allowed Desire access to the supportive
                                           services funds of the HOPWA grant. HUD should evaluate
                                           whether it should recapture and reprogram the $400,000 in
                                           rehabilitation funds and determine if it should terminate the
                                           entire grant. If HUD does not terminate the grant or
                                           reprogram the rehabilitation funds, then HUD should
                                           consider the grant high-risk and monitor appropriately.

                                           In October 2003, Desire, in a move to resuscitate the
                                           rehabilitation of Bayou Apartments, received a $2.5 million
                                           commitment letter from a bank using Bayou Apartments as
                                           collateral. Due to the pending litigation, Desire will not
                                           have access to the funds.

                                           ESA may not have been independent when she performed
     Desire’s CPA may have
                                           Desire’s audits for years ending December 31, 2000, and
     violated professional ethics.         2001. Federal regulations require auditors to be free in
                                           both fact and appearance from personal, external and
                                           organizational impairment to independence.13 Furthermore,
                                           the State of Louisiana prohibits a licensed Certified Public
                                           Accountant (CPA) to perform professional services for a
                                           client whom the CPA has performed such services as an
                                           audit or review of financial statements and prepare original
                                           or amended tax returns.14

                                           In August 2000, Desire contracted with ESA to perform
                                           accounting and annual services. Here is a partial listing of
                                           services listed in ESA’s contract:

                                                 Prepare monthly financial statements and a detailed
                                                 general ledger;
                                                 Monitor accounting staff in the most efficient use of
                                                 time and talents;
                                                 Approve preparation of bank reconciliations;


13
      Government Auditing Standards 3.11-3.12.
14
      Louisiana Revised Statutes 37.83L(1).

                                                  Page 9                                    2004-FW-1007
Finding 1

                                                   Meet with the Executive Director no less than monthly
                                                   to discuss problems and concerns; and
                                                   Preparation of annual payroll tax forms.

                                              According to the contract, ESA would perform services for
                                              Desire for 1 year from September 5, 2000. According to
                                              ESA, ESA stopped performing accounting services in
                                              January 2001. Shortly thereafter ESA entered into a
                                              contract to perform the 2000 audit. Eventually, ESA
                                              performed the 2001 audit and according to ESA, Desire
                                              still owes ESA fees. ESA received almost $33,000 in
                                              accounting and auditing fees between October 2000 and
                                              December 2002. ESA claims it did not perform accounting
                                              services but rather worked with management “putting out
                                              fires.” Nonetheless, it appears ESA audited work that ESA
                                              performed or supervised in 2000 and as a result appears to
                                              have violated independence standards. Desire should have
                                              known that ESA was not independent and should not have
                                              hired ESA to perform the audit. Since Desire did not
                                              receive an independent audit as required, Desire should
                                              return any portion of the $31,068 that came from the City
                                              that Desire paid to ESA for the audits that came from HUD
                                              funds.15

                                              Desire did not submit the annual audit report for the year
     Desire did not submit the                ending December 31, 2002 in a timely manner. The Desire
     December 31, 2002 annual                 audit report for the year ending December 31, 2002, was
     audit report in a timely                 due by June 30, 2003. According to the Louisiana
     manner.                                  Legislative Auditor, Desire submitted the report on July 31,
                                              2003. Desire was required to submit the audit report 6
                                              months after the close of the fiscal year. Desire was cited
                                              for untimely audit reports on three occasions in the last 4
                                              years: 2002, 2001, and 1999.

                                              Based upon City correspondence, the City provided
     The City did not properly                inadequate oversight of Desire. The City could not provide
     monitor Desire.                          documentation that it reviewed Desire’s performance
                                              annually as required by HUD.16 Further, when the City
                                              determined a problem existed, it did not take sufficient
                                              action to correct the problem or limit its loss.

                                              For instance, it appears the City knew of the lack of
                                              progress on the rehabilitation of Bayou Apartments but was
                                              unsuccessful at resolving the problems it noted. According

15
      In its response, Desire claimed it only paid ESA $13,010 from federal sources for the 2000 and 2001 audits.
16
      24 CFR 92.504(a).

2004-FW-1007                                       Page 10
                                                                                                         Finding 1

                                            to February 2002 correspondence, City officials knew
                                            Desire had been “struggling for several years with the
                                            redevelopment of” Bayou Apartments. According to
                                            documentation, Desire had not performed any work since at
                                            least June 2001, 8 months earlier. Considering the
                                            consistency of concerns throughout the grant, the City
                                            should have terminated Bayou Apartments sooner and
                                            reviewed all of its operations to determine if the causes
                                            were systemic.

                                            In another example, at Liberty Terrace, the City knew there
                                            was a funding flaw17 with Liberty Terrace, but took no
                                            action to reduce the funding flaw. To the contrary, the City
                                            knew the actions taken by it and Desire would only
                                            increase the funding flaw.

                                            Irrespective of Desire’s actions, the City’s inadequate
                                            oversight of Desire contributed to the delays and problems
                                            cited in both Findings 2 and 3. As the participating
                                            jurisdiction, the City is responsible for managing the day-
                                            to-day operations of its HOME Program, ensuring that
                                            HOME funds are used in accordance with all program
                                            requirements and written agreements, and taking
                                            appropriate action when performance problems arise.
                                            Further, use of Desire did not relieve the City of this
                                            responsibility.18



Auditee Comments                            On June 2, 2004, Desire provided its response. Desire
                                            disagreed with the finding and included documents to
                                            support its position. Specifically, Desire stated it supplied
                                            documentation supporting the $91,885. It contended the
                                            City was responsible for its lack of effective financial
                                            management system. Further, Desire believed the City
                                            approved of its procurement practices. In addition, Desire
                                            stated the Certified Public Accountant was responsible for
                                            making the determination of independence. Desire
                                            believed the report was “very harsh” in describing the error
                                            in its HOPWA grant application. Further, Desire wanted to
                                            make it clear that the City required on-site inspection
                                            approval before any drawdown of funds. Desire listed
                                            actions it would take to address the recommendations.


17
     A funding flaw exists when the amount of grant funds exceeds the allowed subsidy for the project.
18
     24 CFR 92.504(a).

                                                   Page 11                                          2004-FW-1007
Finding 1

                     On June 8, 2004, the City provided its response. The City
                     concurred with this finding and cited the April 8, 2003
                     lawsuit against Desire as one of the corrective actions. In
                     addition, the City stated it plans to improve the procedures
                     for certifying subrecipients. Specifically, the City will
                     perform a thorough review of the subrecipients’ financial
                     system and staff credentials.

                     With respect to monitoring Desire, the City maintained it
                     adequately monitored the construction activities of the
                     project and adequately reviewed the payment requests prior
                     to processing.



 OIG Evaluation of   Desire provided some of the missing documentation.
 Auditee Comments    Based upon review, Desire did not provide sufficient
                     documentation to eliminate any of the $91,885 determined
                     unsupported. Contrary to its position, Desire is responsible
                     for following HUD requirements and establishing the
                     necessary controls. With respect to the HOPWA grant, we
                     have clarified the issues in the report.

                     We commend the City’s commitment to implement or
                     enhance controls to correct the deficiencies cited. We
                     maintain if City had adequately monitored Desire that the
                     City would have taken preventative and corrective actions
                     much sooner.



                     We recommend the New Orleans CPD Director require the
 Recommendations     City to:

                     1A. Require Desire to support or repay the City for the
                         $91,885 in unsupported funds. Further, the City
                         should require Desire to provide a reconciliation of
                         all payments that it made to itself with a
                         determination of the eligibility of the transaction.

                     1B. Prior to awarding an additional grant or making
                         payments on existing grants, require Desire to
                         implement proper controls to ensure it:

                            • Properly accounts for grants, i.e. does not
                              commingle funds;

2004-FW-1007             Page 12
                                                  Finding 1


        •   Properly procures goods and services; and
        •   Timely submits annual reports.

1C. Provide procurement training to Desire staff.

1D. Implement the systems to ensure that subrecipients
    have and implement adequate policies and
    procedures.

1E. Refer ESA to the State Board of Certified Public
    Accountants of Louisiana for possible independent
    violations. If independent violations occurred,
    require Desire to reimburse it for the $31,068 paid for
    audits performed by ESA.

1F.   Adequately monitor its subrecipients and take timely
      action against subrecipients that do not meet its
      performance requirements.

Further we recommend the CPD Director to:

1G. Evaluate whether it should recapture and reprogram
    the $400,000 in rehabilitation funds and determine if
    it should terminate the entire grant.

1H. Consider the recently awarded HOPWA grant high-
    risk and monitor appropriately, if it does not
    terminate the grant. Further, HUD should satisfy
    itself that Desire has corrected the control problems
    cited in this report.

1I.   Consider taking administrative sanctions against
      Desire for conditions cited in this report.




      Page 13                                 2004-FW-1007
Finding 1




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                   BLANK
                INTENTIONALLY




2004-FW-1007    Page 14
                                                                                                          Finding 2


      Desire Expended Approximately $1.1 Million
           in Grant Funds without Benefiting
                  the People Intended
After spending approximately $1.1 million in grant funds to purchase and rehabilitate Bayou
Apartments, Bayou Apartments was still uninhabitable. Desire solicited City funds to purchase 2
buildings and renovate 78 units19 to provide housing for women and children with HIV/AIDS and
battered women assigned by the courts. However, Desire did not efficiently and effectively
rehabilitate Bayou Apartments and violated its grant agreement. As a result of Desire’s inability to
provide adequate oversight and management, it spent $1.1 million in grant funds without renovating
one unit or benefiting the people intended. After construction stopped, Desire did not take sufficient
measures to safeguard the site and protect the improvements. Desire should repay the City the $1.1
million HOME funds since it did not comply with the grant agreement. Further, the City should
deobligate the remaining $666,745 balance under its grant agreement.



                                              According to the grant agreement, Desire agreed to renovate
     HUD and the City                         76 apartments and 2 recreational units in accordance with
     required Desire to                       regulations.20 HUD regulations21 required Desire to “provide
     adequately safeguard all                 effective controls over and accountability for all funds,
     assets.                                  property and other assets”, and adequately safeguard such
                                              assets and assure the assets were used solely for authorized
                                              purposes. Ultimately, HUD holds the City accountable for
                                              ensuring the proper use of the funds, irrespective of its grant
                                              agreement with Desire.22

                                              Desire agreed to rehabilitate the Bayou Apartments23 located
      Desire agreed to
                                              in eastern New Orleans. The rehabilitation entailed the
      rehabilitate 78 apartments
                                              renovation of 76 apartment units and 2 recreational units.
      units for HIV/AIDS
                                              According to the grant agreement, Desire agreed to complete
      victims.
                                              the rehabilitation of all 78 units in 2 phases. Phase I involved
                                              the complete renovation of the 38 apartments and 2
                                              recreational units composing 1 building. In Phase II, Desire
                                              would renovate the remaining 38 units in the other building
                                              with the cash flow generated from Phase I operations along
                                              with private financing.

19
      Desire would renovate 38 apartment units and 2 recreational facilities with the grant and then use proceeds from
      the renting of the units to complete the renovation of the remaining 38 units.
20
      HOME regulations are located at 24 CFR 92.
21
      24 CFR 84.21.
22
      24 CFR 92.504(a).
23
      The apartment complex is composed of two buildings located at 13545 and 13565 Chef Menteur Highway.

                                                   Page 15                                             2004-FW-1007
Finding 2



                                            When completed, Desire intended to provide safe, clean, and
                                            sanitary housing for women and children with HIV/AIDS
                                            and battered women assigned by the courts.

                                         Picture of Phase 1 building24




                                             The City and Desire executed the first Bayou Apartments
     Desire received $1.7                    grant agreement on September 1, 1993, for $300,000.25 On
     million in grant funds.                 three occasions, Desire requested and the City approved
                                             additional grant funds. From January 1, 1998, to March
                                             2001, the grant increased from $300,000 to $1,737,000. The
                                             grant agreement was to expire on March 31, 2002.

                                            In April 2000, Desire hired a contractor to begin the
     Rehabilitation ceased in               rehabilitation of the apartments. The contractor worked on
     June 2001 without                      the building from May 2000 through June 2001, when work
     completion of one unit.                ceased. Desire was unable to complete the renovation of any
                                            units.




24
      Picture taken June 24, 2003.
25
      Desire only used $188,646 of these HOME funds for the purchase of the property. Desire received $150,000 in
      non-HUD City funds that it also used to purchase the property.

2004-FW-1007                                     Page 16
                                                                                                          Finding 2

                                             In June 2001, renovation of Bayou Apartments stopped when
                                             Desire refused to pay the contractor. According to City
                                             records, Desire received $1,070,255 reimbursement from the
                                             City.


                                                            Bayou Apartment Reimbursements
                                                  Soft costs26                             $188,646
                                                  Payments to contractors                  $636,120
                                                  Desire’s developer’s fees                $166,575
                                                  Permits, financing, fees, and             $56,607
                                                  inspections
                                                  Other                                     $22,307
                                                  Total                                 $1,070,255

                                             According to the City, the contractor had completed 50
                                             percent of the construction work. None of the units were
                                             habitable. Since the project was terminated prior to
                                             completion, the City spent $1,070,255 ineligibly and must
                                             repay its program.27

                                     Picture of unit being rehabilitated.28




26
     According to Desire, these funds never went into their accounts. The City paid the seller of the property
     directly.
27
     24 CFR 92.503.
28
     Picture taken on June 24, 2003.

                                                    Page 17                                           2004-FW-1007
Finding 2



                                              Based upon the review of its records, Desire lacked the
  Desire lacked financial                     financial capacity to complete the renovation of Bayou
  capacity to complete                        Apartments. The grant agreement required the City to
  Bayou Apartments.                           reimburse Desire for eligible expenditures. This
                                              necessitated Desire to exercise fiscal responsibility
                                              including timely submission of drawdown requests and
                                              payment of expenditures to ensure the continuation of the
                                              rehabilitation. Under a cost reimbursement system, Desire
                                              should have sufficient capital to finance the timing
                                              differences between expenditures and reimbursement. As
                                              of May 2002, Desire received $166,575 in developer’s fees.
                                              However, the contractor stopped performing because
                                              Desire did not pay them. Desire did not have the capital to
                                              keep the project going.

                                              In October 1998, Desire obtained a $200,000 line of credit
                                              for interim financing of Bayou Apartments. Desire used
                                              the City’s grant as collateral for the line of credit. Desire
                                              should have used these funds to cover expenditures until it
                                              received reimbursement from the City. However, it
                                              appears Desire did not use the line of credit effectively
                                              because it continued to have financial problems with the
                                              project. Further, the grant agreement did not permit Desire
                                              to use the grant as collateral without the prior written
                                              approval of the City, which it did not have.

                                              Desire claimed the City did not pay them timely. As the
                                              table shows, there was no evidence of significant delays
                                              between the time Desire requested the funds and the City
                                              reviewed the invoices and made payments promptly. It
                                              appears Desire delayed in requesting the funds from the
                                              City.

                                     Schedule of Invoices and Date Paid by the City
               Contractor Invoices               Desire Drawdown           City            Payments to
                                                      Request           Payments1          Contractor2
                      Date       Amount           Date      Amount        Date          Date       Amount
                   4/11/2000     $150,000      5/10/2000   $154,000     5/15/2000    5/10/2000    $150,000
                    5/4/2000      228,459      7/10/2000     170,549    7/13/2000    7/17/2000     170,549
                    8/7/2000      126,800      10/3/2000      90,118
                                               10/3/2000      36,682    10/9/2000    10/11/2000    126,800
               10/24/2000          60,250     11/28/2000       95,418   11/30/2000    12/5/2000     60,250
                1/8/2001           32,230      3/27/2001       32,230    3/29/2001   4/05/2001      32,230
                TOTALS           $597,739                    $578,997                             $539,829
               1
                   Payments equaled Desire requests.
               2
                   Date of check to the contactor.

2004-FW-1007                                       Page 18
                                                                                         Finding 2



     Desire did not safeguard         Once construction stopped, Desire failed to safeguard the
     units from theft and             property from theft, vandalism, and exposure to the
                                      elements. HUD required Desire to adequately safeguard all
     vandalism.
                                      assets.29 As of June 24, 2003, the buildings were unsecured
                                      and unprotected from theft, vandalism, and exposure to the
                                      elements. With tables, sofas, and water heaters being
                                      discarded in the rear of the property, the site apparently
                                      served as a dump. Further, Desire may have increased its
                                      exposure to litigation if something happened in the
                                      unsecured complex.

                                 Example of an un-renovated unit




                                      The units were in such poor condition that a United States
     A Navy SEAL unit used            Navy SEAL unit (SEAL unit) used the structures for
     the property to conduct          tactical maneuvers. The Navy contracted with Desire to
     special tactics training.        conduct special tactics training in November 2002. The
                                      contract stipulated the Navy would repair any damage.
                                      According to the Navy, SEAL units routinely conduct
                                      special tactics training at condemned or isolated buildings.
                                      In essence, after Desire had spent $1.1 million to purchase
                                      and renovate Bayou Apartments, Navy officials considered
                                      the property condemned or isolated.



29
      24 CFR 84.21(b)3.

                                           Page 19                                   2004-FW-1007
Finding 2



                                   Even though the units were not safe, decent, and sanitary,30
     Squatter dwelled at Bayou     Desire allowed a squatter to reside at the site. The squatter
     Apartments.                   obtained electricity for the unit, possibly through theft.
                                   After questioning, Desire officials acknowledged the
                                   squatter. They contend the squatter protected the buildings
                                   and cleaned up debris at the site. Further, Desire stated
                                   they did not pay or have a written agreement with the
                                   squatter. Nonetheless, Desire should properly secure the
                                   units and not allow people to reside in unsafe, unsanitary,
                                   and indecent units. Desire’s unwillingness to properly
                                   secure the units may have created a potential liability.

                                 Unit where squatter lived




                                   In an April 2003 lawsuit filed against Desire, the City
     The City files a lawsuit      alleged Desire abandoned the project and failed to secure
     against Desire.               the property from vandalism. The City alleged "Desire did
                                   not rise to the ability demonstrated and Desire failed
                                   miserably to perform its obligations." The petition asked
                                   that Desire repay the City $1,070,255 that Desire received
                                   pursuant to the grant agreement.

                                   According to the grant agreement, Desire must repay grant
                                   funds to the City in the event that Desire failed to
                                   implement the program in accordance with the

30
      24 CFR 92.251.

2004-FW-1007                           Page 20
                                                                        Finding 2

                    requirements of the grant agreement and HUD
                    regulations.31 The City should require liens against
                    properties purchased with grant funds to allow more
                    expeditious recovery of assets and resolution of disputes.
                    Further, the City could identify problems if it timely
                    performed on-site monitoring of subrecipients.




 Auditee Comments   Generally, Desire disagreed with the finding and the
                    recommendations to repay and reprogram funds. Desire
                    stated it did its best to secure the property and complete the
                    rehabilitation of Bayou Apartments. It cited its $200,000 of
                    interim financing as evidence that it wanted to complete the
                    rehabilitation work. Desire stated the reason the apartments
                    were not completed was "due to the City of New Orleans
                    (sic) failure to honor the organization's a (sic) contract to
                    continue renovating the property." Desire disagreed with
                    the amount of funds it spent and some of the information in
                    the tables, specifically the dates of Desire's requests for
                    payments. Desire disagreed with the reasons stated in the
                    report of why the Navy Seal team selected Bayou
                    Apartments for maneuvers. Desire stated its disagreement
                    with the City's lawsuit and reiterated: "the project needs to
                    be completed."

                    The City agreed with this finding and again cited the
                    April 8, 2003 lawsuit as a means to recover funds from
                    Desire. It cited successes it has had in the litigation. The
                    City agreed to reprogram the remaining funds and to seek
                    administrative sanctions against Desire.



OIG Evaluation of   We reviewed Desire’s documentation and revised the report
                    as necessary. When information obtained from Desire and
Auditee Comments    the City differed, such as dates, we placed more reliance
                    upon the City’s data.

                    We appreciate the City’s response. Irrespective of how its
                    litigation with Desire is resolved, it is the City’s
                    responsibility to support or repay any unsupported or
                    ineligible funds.



31
     24 CFR 92.

                         Page 21                                     2004-FW-1007
Finding 2



 Recommendations   We recommend HUD require the City to:

                   2A. Repay its program $1,070,255 that it gave to Desire to
                       purchase and renovate the buildings. The City should
                       obtain the funds from Desire. Alternatively, the City
                       could complete the rehabilitation of Bayou
                       Apartments with non-federal funds.

                   2B. Ensure subrecipients secure property being renovated
                       with grant funds.

                   2C. Prohibit subrecipients from allowing people to live in
                       unsafe, indecent, or unsanitary units.

                   2D. Legally cancel Desire’s grant on Bayou Apartments
                       and reprogram the $666,745 balance.

                   2E.    Seek administrative sanctions against Desire.

                   2F.    Ensure subrecipients have adequate financial
                          management procedures in place.




2004-FW-1007             Page 22
                                                                                                     Finding 3


      Desire Misused $533,604 of Program Income
Desire failed to use or sufficiently report $533,604 in program income as required. Desire obtained
the funds from the sale of homes in the Liberty Terrace subdivision. Instead of using program
income to build additional homes as intended, Desire inappropriately used the $533,604 for other
activities. Based upon its records, Desire only repaid its Liberty Terrace accounts $211,252, leaving
a balance of $322,352. The inappropriate use of program income occurred because Desire did not
follow requirements and commingled funds.32 As a consequence of Desire’s actions, Desire only
built 28 of the 43 homes that it had committed to in its application. Further, Desire did not report
the program income to the City as required. However, the City did not compel Desire to submit the
reports or follow-up on deficiencies in the rare instances where Desire submitted the reports. The
City should require an accounting of the $533,604 in program income and obtain reimbursement for
all funds improperly used. The City needs to implement the necessary management information
systems to ensure all subrecipients submit the required reports and properly account for program
income. Due to the inactivity on this project and problems listed, the City should legally cancel its
agreement and reprogram the remaining $518,352 it has obligated for this project. Since Desire
only constructed 28 of the 43 (65 percent) homes promised, HUD should make a determination if
the entire $2,235,32033 needs to be repaid to the City’s program under 24 CFR 92.503. Also, HUD
needs to determine if the $2,039,150 in program income needs to be returned under 24 CFR 92.503.



                                            Under its grant agreements, Desire agreed to construct 43
     Desire agreed to build 43              single family homes using a grant totaling $2,753,672. The
     homes.                                 development was called Liberty Terrace. As planned,
                                            Desire would construct 17 homes using the grant funds and
                                            construct the remaining 26 homes using the sale proceeds
                                            (program income) of the homes. Desire could only use
                                            program income for eligible HOME activities and with the
                                            approval of the City.

                                            From January 1997 to July 2001, Desire completed 28 of the
     Desire built 28 homes.                 43 homes required in the grant agreement. Desire
                                            constructed the first 17 homes with grant funds and the
                                            additional 11 homes with program income. The 28 homes,
                                            located in eastern New Orleans, appeared to be well
                                            constructed and adequately maintained by the owners. The
                                            homes, intended for low-income first time homebuyers, were
                                            constructed using one of five designs. According to the
                                            construction contract, the cost of each home ranged from
                                            $86,128 to $98,280, and Desire sold the homes for $69,000 to
                                            $75,800. Even though it appears Desire had the program

32
      As previously mentioned, Desire commingled its numerous accounts and did not have an adequate accounting
      system to document and support the transfers.
33
      The amount of the $2,753,672 grant expended.

                                                 Page 23                                         2004-FW-1007
Finding 3

                                               income to continue to construct additional homes, Desire did
                                               not complete the 15 homes promised.

                                           Home constructed by Desire




     Program income misused                    Based upon Desire’s bank records, Desire gave $533,604 of
     by Desire.                                Liberty Terrace program income to other Desire activities.34
                                               This represented approximately 25 percent of the
                                               $2,039,150 program income resulting from the sale of the
                                               homes.35 The purpose of the program income was to
                                               construct additional houses and not to subsidize other
                                               activities. HUD required program income be used on
                                               eligible HOME activities. From May 10, 2000, to March 8,
                                               2002, Desire made a total of 55 transfers from Liberty
                                               Terrace to other Desire activities. Desire did return
                                               $211,252 of these funds, but the transfers were never
                                               appropriate.36




34
      Desire officials considered the funds “loaned” to the other accounts.
35
      Total sales price of the 28 homes.
36
      Expenditures did not relate to Liberty Terrace.

2004-FW-1007                                        Page 24
                                                                                   Finding 3



                                 Liberty Terrace Program Income Account

                                   Expenditure          Transfer       Returned  Amount
                                                        amount                   Owed
                                Bayou Apartments          $213,872      $183,859 $30,013
                                Developers Fees            $51,105       $11,032 $40,073
                                Desire                    $245,850       $10,351 $235,499
                                Legal fees                 $12,992                $12,992
                                Insurance                   $1,918                 $1,918
                                Accounting and              $6,010        $6,010
                                Auditing fees
                                Telephone                   $1,857                 $1,857
                                Totals                    $533,604      $211,252 $322,352


                                 As an example of how Desire commingled and misused
                                 program income, on May 10, 2000, Desire transferred
                                 $181,000 of Liberty Terrace program income to Bayou
                                 Apartments. On May 19, 2000, Desire returned $154,000
                                 to the Liberty Terrace account, leaving $27,000 unreturned.
                                 It appears Desire needed the funds from Liberty Terrace to
                                 pay the Bayou Apartments contractors.37 As another
                                 example, on September 11, 2000, Desire transferred a total
                                 of $67,208 to itself. Desire provided no evidence that it
                                 returned these funds or why it transferred the funds.

                                 Desire did not have Liberty Terrace bank records or
     Desire had missing          documentation for:
     records.
                                     13 checks in 2000 totaling $190,635;
                                     11 deposits in 2000 totaling $94,719; and
                                     35 deposits in 2001 totaling $505,925.

                                 Desire officials maintained City officials informed them the
                                 program income belonged to Desire and they could use the
                                 funds as they wanted. Neither Desire nor the City had
                                 documentation to support this claim. To the contrary, the
                                 grant agreement stated program income belongs to the City
                                 and any other use must be in writing.

                                 As a result of the misuse of program income, it appears
                                 Desire did not have sufficient funds to complete the


37
      See Table in Finding 2.

                                      Page 25                                    2004-FW-1007
Finding 3

                                             remaining 15 houses under its grant. Desire should return
                                             all misused program income funds to the City.

                                             Between January 2000 through July 2003, Desire submitted
     Desire failed to report                 only 2 monthly reports out of a possible 4338 reports. In
     program income to the                   March 28, 2000, Desire submitted a report covering
     City.                                   January and February 2000. Desire was required to submit
                                             reports monthly.

                                             The City did not compel Desire to comply with the grant
     The City did not                        requirements. Furthermore, the City did not document
     adequately monitor                      Desire’s failure to submit monthly reports. The City did
     Desire.                                 not have systems in place to collect or obtain program
                                             income data or follow-up when reports were not submitted.
                                             According to HUD requirements,39 the City was responsible
                                             for:

                                              •   Managing the day-to-day operations of its HOME
                                                  program;
                                              •   Ensuring that HOME funds are used in accordance
                                                  with all program requirements and written agreements;
                                                  and
                                              •   Taking appropriate action when performance problems
                                                  arise.

                                             The misuse of the program income by Desire did not
                                             relieve the City of its obligations. The City needs to have
                                             systems in place to require subrecipients to report the
                                             accumulation and use of program income and to take
                                             appropriate action when subrecipients fail to meet its
                                             obligations under HUD requirements and grant agreements.

                                             Based upon the City’s documentation, the City knew there
                                             was a funding flaw40 with Liberty Terrace but took no
                                             action to reduce the funding flaw. To the contrary, the City
                                             knew the actions taken by it and Desire would only
                                             increase the funding flaw.

                                             As of February 5, 2004, the City still had $518,352
                                             obligated for Liberty Terrace. Due to the inactivity of the
                                             project and the problems cited, the City should legally
                                             terminate its agreement with Desire and reprogram the
                                             $518,352.

38
      January 2000 through July 2003 is 43 months.
39
      24 CFR 92.504.
40
      A funding flaw exists when the amount of grant funds exceeds the allowed subsidy for the project.

2004-FW-1007                                       Page 26
                                                                                                        Finding 3



                                            HUD needs to make a determination of whether the City
                                            and Desire completed its project when it constructed only
                                            28 of the 43 homes promised. If HUD considers the entire
                                            43 homes the project, then the City should repay to its
                                            program the $2,235,320 paid to Desire as of February 5,
                                            2004. Further, if HUD determines the City did not
                                            complete the project then it should also repay its program
                                            the $1,505,546 in program income it earned on the grant
                                            funds.41



Auditee Comments                            Desire disagreed with the finding and recommended that
                                            HUD and the City allow Desire to utilize the remaining
                                            funds to complete the project. Specifically, Desire
                                            maintained, "proceeds which it was allowed to retain, were
                                            not considered program income." Further, Desire stated it
                                            had an accounting of the program income and used the
                                            funds "within the spirit of the program requirements."
                                            Desire believed the net amount received for the sale of the
                                            homes, $1,921,212, should have been cited.

                                            The City agreed with this finding and agreed to “seek to
                                            obtain repayment of any and all funds not sued for eligible
                                            project costs under the Liberty Terrace agreement.”
                                            Further, the City agreed to reprogram the grant balance of
                                            $518,352 to other eligible HOME activities.

                                            According to its response, the City has implemented
                                            policies and procedures to monitor program income and to
                                            ensure compliance by subrecipients with HOME Program
                                            requirements.



 OIG Evaluation of                          Desire did not supply evidence supporting its contention
 Auditee Comments                           that they could retain and use the program income as it
                                            wanted. Desire did not supply evidence supporting the use
                                            of program income for "loans" to other activities. Further,
                                            neither Desire nor the City supplied evidence that the City
                                            approved of Desire's position in writing as required.
                                            According to Desire's response, of the $1,921,212 received
                                            from the sale of the homes, Desire received $173,869 as a

41
     $2,039,150 in program income less the $533,604 determined ineligible or unsupported in other areas of the
     finding.

                                                   Page 27                                          2004-FW-1007
Finding 3

                   developer's fee and $292,200 for operating costs, almost 25
                   percent of the amount received. Further, as Desire
                   acknowledges, the project called for the construction of 43
                   homes and Desire and the City completed 28. Desire did
                   supply support for the repayment of $29,859 in loans and
                   provided some of the missing documentation. We have
                   made the necessary adjustments to the report.

                   We commend the City for its willingness to obtain
                   repayment and strengthen its controls. However, the City
                   will need to repay any amounts not used for eligible costs
                   irrespective if it obtains repayments or not.




 Recommendations   We recommend the New Orleans CPD Director require the
                   City to:

                   3A. Require Desire to provide an accounting of the
                       $533,604; immediately return the $322,352; and
                       return any other funds improperly used.

                   3B. Determine if Desire should reimburse the City for
                       interest earned on the loans.

                   3C. Establish controls and systems to ensure
                       subrecipients comply with grant agreements.

                   3D. Establish controls and systems to ensure the reporting
                       of the accumulation and disposition of program
                       income.

                   3E.    Require Desire to provide an accounting of all
                          program income since 2000 to determine if Desire
                          expended the program income in accordance with
                          requirements. Further, any funds spent
                          inappropriately should be returned to the program or
                          the City.

                   3F.    Legally cancel Desire’s grant on Liberty Terrace and
                          reprogram the $518,352 balance.

                   Further, we recommend the New Orleans CPD Director:

                   3G. Determine if actions of those responsible warrant
                       administrative action.

2004-FW-1007             Page 28
                                                                                                        Finding 3



                                            3H. Make a determination of whether Desire and the City
                                                completed the project by constructing only 28 of the
                                                43 homes. If not, then the City should repay its
                                                program the $2,235,320 if Desire and the City did not
                                                complete the project. Alternatively, the City could
                                                complete the construction of the remaining house
                                                using non-federal funds.

                                            3I.    Make a determination of whether Desire and the City
                                                   completed the project by constructing only 28 of the
                                                   43 homes. If HUD determines the City did not
                                                   complete the project, then it should also repay its
                                                   program the $1,505,546 in program income it earned
                                                   on the grant funds.42 Alternatively, the City could
                                                   complete the construction of the remaining house
                                                   using non-federal funds.




42
     $2,039,150 in program income less the $533,604 determined ineligible or unsupported in other areas of the
     finding.

                                                   Page 29                                          2004-FW-1007
Finding 3




               THIS PAGE LEFT
                   BLANK
                INTENTIONALLY




2004-FW-1007    Page 30
Internal Controls
In planning and performing our audit, we obtained an understanding of the internal controls that
were relevant to our audit. Management is responsible for establishing effective internal controls.
Internal controls, in the broadest sense, include the plan of organization, methods, and procedures
adopted by management to ensure that its goals are met. Internal controls include the processes for
planning, organizing, directing, and controlling program operations. Internal controls include the
systems for measuring, reporting, and monitoring program performance.




                                      We determined the following internal controls were relevant
 Relevant Internal Controls           to our audit objectives:

                                      •   Adequacy of procedures over cash management
                                          including receipts and disbursements.
                                      •   Assuring eligibility of expenditures.
                                      •   Adequacy of controls over and compliance with
                                          program policies and procedures.
                                      •   Management philosophy and operating style.
                                      •   Monitoring performance to ensure program goals are
                                          met.
                                      •   Ensuring physical safeguarding of assets.
                                      •   Ensuring reliability of financial data.
                                      •   Ensuring proper procurement of services.

                                      A significant weakness exists if internal controls do not
  Significant Weaknesses              give reasonable assurance that resource use is consistent
                                      with laws, regulations and policies; that resources are
                                      safeguarded against fraud, waste, and abuse; and that
                                      reliable data is obtained, maintained, and fairly disclosed in
                                      reports. Based on our review, we believe significant
                                      weaknesses existed in the following areas:

                                      •   Cash management including receipts and
                                          disbursements.
                                      •   Eligibility of expenditures.
                                      •   Compliance with program requirements and procedures
                                          including procurement requirements.
                                      •   Management philosophy and operating style.
                                      •   Ensuring program goals are met.

                                          Page 31                                      2004-FW-1007
Internal Controls


                    •   Safeguarding of assets.
                    •   Ensuring reliability of financial data.




2004-FW-1007            Page 32
Follow-Up on Prior Audits
This is the first audit of Desire Community Housing Corporation, New Orleans, Louisiana, by
the Office of Inspector General.




                                        Page 33                                  2004-FW-1007
Follow-Up on Prior Audits




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2004-FW-1007                 Page 34
                                                                                                      Appendix A

Schedule of Questioned Costs

          Recommendation                    Ineligible 1          Unsupported 2             Funds Put to
               No.                                                                           Better Use3
               1A                                                         $ 91,855
               1E                               $ 31,068
               1F                                                                                  $ 400,000
               2A                                1,070,255
               2C                                                                                     666,745
               3A                                  322,352                  211,252
               3G                                                                                     518,352
               3I                                                         2,235,320
               3H                                                         1,505,546

                 Totals                        $1,423,675               $4,043,973                $1,585,097




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 the 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 A




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2004-FW-1007    Page 36
                             Appendix B

Auditee Comments




                   Page 37   2004-FW-1007
Appendix B




2004-FW-1007   Page 38