AUDIT REPORT UNITED STATES VETERANS INITIATIVE, INC. SUPPORTIVE HOUSING PROGRAM GRANTEE INGLEWOOD, CALIFORNIA 2004-LA-1008 SEPTEMBER 27, 2004 OFFICE OF AUDIT PACIFIC/HAWAII REGION LOS ANGELES, CALFORNIA Issue Date September 27, 2004 Audit Case Number 2004-LA-1008 TO: Nelson R. Bregon, General Deputy Assistant Secretary for Community Planning and Development, D FROM: Joan S. Hobbs, Regional Inspector General for Audit, 9DGA SUBJECT: United States Veterans Initiative, Inc. Supportive Housing Program Grantee Inglewood, California Pursuant to a request from HUD’s Honolulu Community Planning and Development Office, we completed an audit of the United States Veterans Initiative, Inc., a Supportive Housing Program grantee based in Inglewood, California. The audit objectives were to determine whether the concerns raised by the Community Planning and Development Office had merit, and to determine whether the U.S. Veterans Initiative, Inc. administered its Supportive Housing Program grants in compliance with the pertinent HUD program requirements and applicable regulations. Our report contains three findings with recommendations requiring action by your office. In accordance with HUD Handbook 2000.06, REV-3, within 60 days please provide us for each recommendation without a management decision, a status report on: (1) the corrective action taken; (2) the proposed corrective action and the date to be completed; or (3) why corrective action is considered unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for each recommendation without a management decision. Also, please furnish us with copies of any correspondence or directives issued because of the audit. Should you or your staff have any questions, please contact me or Tanya Voigt, Assistant Regional Inspector General for Audit, at (213) 894-8016. Management Memorandum THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page ii Executive Summary Pursuant to a request from HUD’s Honolulu Community Planning and Development Office, we completed an audit of the United States Veterans Initiative, Inc., a Supportive Housing Program grantee based in Inglewood, California. The audit objectives were to determine whether the concerns raised by the Community Planning and Development Office had merit, and to determine whether U.S. Veterans Initiative, Inc. administered its Supportive Housing Program grants in compliance with the pertinent HUD program requirements and applicable regulations. Contrary to federal regulations and grant requirements, U.S. Veterans Initiative U.S. Veterans Initiative was unable to support that it met Did Not Meet Supportive cash matching funds requirements for any of the Housing Program Grant $7,222,590 in Supportive Housing Program grant funds Matching Funds expended during the audit period. We attribute the deficiencies to U.S. Veterans Initiative officials’ failure to ensure it understood and complied with the pertinent matching funds requirements, as well as its failure to implement an adequate financial management system to record and track the funds. As a result, this lack of required matching funds prevented U.S. Veterans Initiative from the ability to further carry out eligible activities to enable them to fully meet program goals and requirements to house and support homeless veterans. U.S. Veterans Initiative spent at least $633,348 in U.S. Veterans Initiative Supportive Housing Program funds for ineligible Spent Supportive Housing ($498,248) and unsupported ($135,100) salaries and other Program Funds For expenses. We attribute the deficiencies to U.S. Veterans Ineligible And Initiative officials’ insufficient emphasis on its Supportive Unsupported Expenses Housing Program responsibilities and requirements, including its failure to establish and implement an adequate financial management system to record and track grant expenditures. As a result, these improper expenditures prevented U.S. Veterans Initiative from carrying out other eligible activities to enable them to fully meet program goals and requirements. U.S. Veterans Initiative did not administer its Supportive U.S. Veterans Initiative Housing Program grants in accordance with requirements. Did Not Administer Its More specifically, we found that U.S. Veterans Initiative Supportive Housing failed to: Program Grants In Accordance With Develop an adequate financial management system; Requirements Page iii 2004-LA-1008 Executive Summary Comply with procurement and contract administration requirements; Establish and implement indirect cost rates as required; and Close out expired grants. We attribute the deficiencies to U.S. Veterans Initiative officials’ insufficient emphasis on its Supportive Housing Program responsibilities and requirements. Collectively, these conditions precluded U.S. Veterans Initiative from conducting its Supportive Housing Program activities more efficiently and effectively, as well as prevented U.S. Veterans Initiative from fully meeting its program goals and requirements. In addition, these deficiencies may have contributed to Supportive Housing Program grant funds being spent for ineligible and unsupported grant expenses. We are recommending that HUD require U.S. Veterans Recommendations Initiative, and/or its continuums Los Angeles Homeless Services Authority and City of Long Beach to: (1) repay HUD from non-federal funds for the $6,589,242 in Supportive Housing Program grant expenditures that did not have the required matching funds, unless it can provide supporting documentation; (2) comply with federal requirements in carrying out its Supportive Housing Program grant activities; (3) reimburse the Supportive Housing Program grants and/or repay HUD from non- federal funds for the $633,348 in ineligible and unsupported expenses; (4) revise U.S. Veterans Initiative’s financial management system; (5) competitively procure the services in the Business Services Agreement; (6) develop and/or update indirect cost rates; and (7) submit financial closeout reports for expired grants. We discussed the findings with U.S. Veterans Initiative Audit Results Discussed officials, and their Cantwell-Anderson Inc. accounting With Auditee Controller during the audit and at an exit conference held on August 6, 2004, which also included the Los Angeles Homeless Services Authority and the City of Long Beach. We also met with U.S. Veterans Initiative on August 18, 2004, and August 31, 2004, to further discuss the findings. We also provided U.S. Veterans Initiative, Los Angeles Homeless Services Authority, the City of Long Beach and HUD with a copy of the draft audit report for comments on 2004-LA-1008 Page iv Executive Summary September 1, 2004. We received a written response from U.S. Veterans Initiative on September 15, 2004, disagreeing with our findings. We also received a written response from the Los Angeles Homeless Services Authority on September 15, 2004, in which they disagreed with some issues, particularly with regard to Finding 1, but agreed with others. We received the City of Long Beach’s written response on September 14, 2004, disagreeing with Finding 1, but they did not comment on the other two findings. We considered the responses in preparing our final report. We have summarized the three grantees’ responses for each finding, and included the complete responses as Appendix H (U.S. Veterans Initiative – without attachments), Appendix I (Los Angeles Homeless Services Authority), and Appendix J (City of Long Beach). Page v 2004-LA-1008 Executive Summary THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page vi Table of Contents Management Memorandum i Executive Summary iii Introduction 1 Findings 1. U.S. Veterans Initiative Did Not Meet Matching Funds Requirements for $7.2 Million in Supportive Housing Program Funds Expended 5 2. U.S. Veterans Initiative Spent At Least $633,348 in Supportive Housing Program Funds for Ineligible and Unsupported Expenses 15 3. U.S. Veterans Initiative Did Not Administer Its Supportive Housing Program Grants In Accordance with Requirements 33 Management Controls 53 Follow Up On Prior Audits 55 Appendices A. Schedule of Questionable Costs and Funds Put to Better Use 57 B. Schedule of Active Supportive Housing Program Grants 59 Page vii 2004-LA-1008 Table of Contents C. Schedule of Supportive Housing Program Grant Matching Funds Required and Provided 61 D. Schedule of Ineligible Expenses 63 E. Schedule of Unsupported Expenses 65 F. Schedule of Consulting Expenses Allocated by Grant 67 G. Schedule of Ineligible and Unsupported Expenses by Grant 69 H. Auditee Comments – U.S. Veterans Initiative 71 I. Auditee Comments – Los Angeles Homeless Services Authority 97 J. Auditee Comments – City of Long Beach 103 2004-LA-1008 Page viii Introduction Background The Supportive Housing Program is authorized under Title IV of the McKinney-Vento Homeless Assistance Act. Supportive Housing Program grants are awarded on a competitive basis to develop supportive housing and services to enable homeless persons to live as independently as possible. Eligible activities include: transitional housing; permanent housing for homeless persons with disabilities; innovative housing that meets the intermediate and long-term needs of homeless persons; and supportive services provided to homeless persons not in conjunction with supportive housing. HUD is one of several agencies charged with supporting the care and services provided to veterans at the state and local levels to address the problem of homelessness. Within HUD, the Office of Community Planning and Development is responsible for overseeing the homeless initiatives for the Department. U.S. Veterans Initiative is a non-profit homeless assistance provider based in Inglewood, California, and is one of the largest organizations in the country dedicated to helping homeless veterans. Currently, they provide assistance at seven facilities located in five states: California, Nevada, Arizona, Texas, and Hawaii. U.S. Veterans Initiative initially began operations on July 16, 1992, as the Los Angeles Veterans Initiative, Inc. On September 24, 1999, they changed their name to United States Veterans Initiative, Inc. U.S. Veterans Initiative was awarded its first Supportive Housing Program grant in 1997, and since then, has administered 18 additional Supportive Housing Program grants, of which 15 were active between July 1, 2001, and December 31, 2003, (our audit scope). In total, U.S. Veterans Initiative has been awarded or administered $13,565,881 in Supportive Housing Program grants. HUD awarded nine of the fifteen active Supportive Housing Program grants to U.S. Veterans Initiative as direct grants, and the remaining six grants were administered by U.S. Veterans Initiative as the sub-recipient through continuums Los Angeles Homeless Services Authority (four grants) and City of Long Beach (two grants). Between July 1, 2001, and June 30, 2003, U.S. Veterans Initiative expended over $21 million in federal funds, from several different sources, as shown: Funding Source FY 2002 FY 2003 Total HUD Supportive Housing Program $2,449,075 $3,120,567 $5,569,642 HUD CDBG 0 2,594,407 2,594,407 Veterans Affairs 2,837,439 3,214,847 6,052,286 Corporation of National Service 1,858,445 2,302,835 4,161,280 Department of Labor 1,430,930 1,469,418 2,900,348 Total $8,575,889 $12,702,074 $21,277,963 Page 1 2004-LA-1008 Introduction In March 2003, HUD’s Honolulu Community Planning and Development Office conducted a monitoring review of one of U.S. Veterans Initiative’s Supportive Housing Program grants, which disclosed significant weaknesses and instances of noncompliance with HUD regulations related to recording and reporting of grant financial transactions. More specifically, the Community Planning and Development Office found that U.S. Veterans Initiative failed to report financial transactions in compliance with the approved grant budget; failed to apply proper cost allocation procedures; and failed to sufficiently support expenses charged to the grant. The audit objectives were to determine whether the concerns Audit Objectives, Scope raised by the Community Planning and Development Office and Methodology had merit and to determine whether U.S. Veterans Initiative administered its Supportive Housing Program grants in compliance with the pertinent HUD program requirements and applicable regulations. We performed our audit during the period December 2003 through May 2004. The audit scope generally covered the period July 1, 2001, through December 31, 2003, and included 15 Supportive Housing Program grants, totaling $10,958,258, that were active between May 1, 2000, and December 31, 2003 (see Appendix B). To accomplish our objectives, we performed the following: Reviewed relevant HUD, OMB, and grant agreement requirements and regulations; Interviewed appropriate Community Planning and Development Office officials to obtain an understanding of Supportive Housing Program requirements, and to identify the issues prompting the request for audit; Interviewed U.S. Veterans Initiative officials to obtain an understanding of its operating procedures and practices; Reviewed Community Planning and Development Office and continuum monitoring reports, Annual Progress Reports, and audited financial statements to determine U.S. Veterans Initiative’s compliance with Supportive Housing Program requirements, and to identify any findings and any corrective actions taken; Evaluated U.S. Veterans Initiative’s indirect cost rates and Business Services Agreement to determine its basis 2004-LA-1008 Page 2 Introduction for costs allocated or charged as Supportive Housing Program grant expenses; Reviewed U.S. Veterans Initiative’s financial accounting system, including its chart of accounts and cost code structure, to determine how U.S. Veterans Initiative processed, classified and segregated Supportive Housing Program grant expenses; Selected and reviewed the non-salary grant expenses incurred between July 1, 2001, and December 31, 2003, for the 15 active Supportive Housing Program grants to determine the eligibility of the grant expenses; and Selected and reviewed the salaries and related expenses incurred between January 1 and December 31, 2003, for 14 of the 15 active grants to determine the eligibility of the grant expenses. Our review was conducted in accordance with generally accepted government auditing standards. Page 3 2004-LA-1008 Introduction THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 4 Finding 1 U.S. Veterans Initiative Did Not Meet Matching Funds Requirements For $7.2 Million In Supportive Housing Program Funds Expended Contrary to federal regulations and grant requirements, U.S. Veterans Initiative was unable to support that it met cash matching funds requirements for any of the $7,222,590 in Supportive Housing Program grant funds expended during the audit period. We attribute the deficiencies to U.S. Veterans Initiative officials’ failure to ensure that it understood and complied with the pertinent matching funds requirements, as well as its failure to implement an adequate financial management system to record and track the funds. As a result, this lack of required matching funds prevented U.S. Veterans Initiative from the ability to further carry out eligible activities to enable them to fully meet program goals and requirements and maximize the effectiveness of the programs intent to house and support homeless veterans. HUD regulations and grant agreements require that grantees Cash Match Requirements must share in the Supportive Housing Program costs. The grantee must pay for the actual program costs not funded by HUD. The cash match can be from federal, state, local or other funding sources, identified in the Supportive Housing Program grant technical submissions. The amount to be funded by the grantee varies depending upon the grant awarded. The cash match requirement is based on appropriation law and grant agreements. Matching funds must be in the form of cash payments. Beginning with fiscal year 1999, the appropriation for HUD’s budget states that in the Supportive Housing Program, “all funding for services must be matched by 25 percent.” This provision was stipulated as part of the funding availability notice (Super Notice of Funding Availability) published in the Federal Register/ Vol. 64, No 38/ February 26, 1999 page 9827 and was incorporated into grant agreements. Grant agreements require this appropriation law based on cash match, plus any additional cash match requirements. These cash match requirements are specific to the Supportive Housing Program grant project, and are required to be a firm commitment of cash resources for the first year of the grant term, and certification that cash resources will be provided in the second and third years of the grant term. These commitments and certifications must be submitted as part of Page 5 2004-LA-1008 Finding 1 the technical submission. At the end of each operating year, grantees must demonstrate that they have met their match requirements in an Annual Progress Report and within the grantee’s financial management system. 24 CFR 84 generally requires the grantee shall: Ensure cost sharing or matching are: 1) verifiable from the recipient’s records; 2) not included as contributions for any other Federally assisted project or program; and 3) Necessary and reasonable for proper and efficient accomplishment of project or program objectives; Provide a financial management system that ensures accurate, current, and complete disclosure of the financial results of each Federally sponsored project or program. We reviewed the cash matching funds for the 15 active Cash Match Requirements Supportive Housing Program grants included in our audit Not Met scope and found that U.S. Veterans Initiative was unable to support that it met cash matching funds requirements for any of the $7,222,590 in Supportive Housing Program grant funds expended as of December 31, 2003. The required cash match requirements for the fifteen grants included in our audit ranged from 16 to 66 percent of total program costs. These requirements were signed (with certification and/or grant agreements) for availability in the technical submission prior to the issuance of the grant agreement. The funding requirements for these Supportive Housing Program grants were: Total HUD Supportive Housing Program Funding $10,958,258 U.S. Veterans Initiative Cash Match Required $ 7,689,624 Total Supportive Housing Program Project Budget $18,647,882 We initially reviewed the most current Annual Progress Reports for the 15 grants, which had total expenditures of $3,720,172, which required cash matching funds of $1,287,638. Annual Progress Reports were only available for 10 grants since the remaining five grants had not been operational long enough to require an Annual Progress Report. In the Annual Progress Reports, U.S. Veterans Initiative reported that $1,277,490 in cash match funding 2004-LA-1008 Page 6 Finding 1 were provided and used for eligible program activities. Even though the signed grant agreements stipulated mandatory cash match requirements (U.S. Veterans Initiative reflected in the Annual Progress Reports), only 5 of 10 grants met their cash match requirements with three grants reflecting no cash match was provided. Therefore, there was a cash matching funds shortfall of $464,989. The remaining five grants’ accounting records (not yet requiring an Annual Progress Report) did not reflect any cash match was provided. Subsequently, the cash matching funds reported in the Annual Progress Reports were not supported as expenditures of a specific Supportive Housing Program project, nor were the cash matching funds recorded in the accounting system for each grant. Consequently, it is questionable whether the cash matching funds of $1,277,490 for the grants were actually provided. Details of our analyses are shown in Appendix C. Collectively, based on our reviews of the Annual Progress Reports and the accounting records, we found that for 11 of 15 grants the cash match funding was not supported as expenditures in the accounting records for the individual grants. The remaining four grants commingled funds from various federal agencies and the accounting records did not substantiate what agency paid for the program, who provided the cash match, and/or if expenses paid were required by the Supportive Housing Program grant agreement. Based on our determinations, we expanded our review and requested that U.S. Veterans Initiative provide cash match documentation supporting the full $7,222,590 (see Appendix B) in Supportive Housing Program funds expended during our audit review period. During the audit, U.S. Veterans Initiative was unable to provide documentation showing that any of the grant funds expended were supported by the required cash match funding. Instead, U.S. Veterans Initiative provided us with documentation from other federal sources that provided support to their veteran’s programs, however, costs paid with these funds were not included in the approved grant budgets or allowed in the associated HUD Supportive Housing Program grants. To qualify for cash match requirements, funding provided must specifically identify the funds that corresponded to each of the Supportive Housing Program grants, as required by HUD regulations Page 7 2004-LA-1008 Finding 1 and grant agreements. Therefore, U.S. Veterans Initiative was unable to support cash match requirements for any of the $7,222,590 for the Supportive Housing Program grant funds expended. We attribute the deficiencies to U.S. Veterans Initiative U.S. Veterans Initiative officials’ insufficient emphasis on ensuring that it understood Failed to Ensure It and complied with the pertinent cash match funding Understood and Complied requirements, as well as its failure to implement an adequate financial management system to record and track the funds. U.S. Veterans Initiative’s financial management system was not sufficiently developed and did not identify cash match requirements where we could: Verify cash match in Supportive Housing Program grants’ records; Ensure contributions were specific to Supportive Housing Program grants; Determine if cash match was necessary and reasonable for proper and efficient accomplishment of project or program objectives (see Finding 3). Initially, U.S. Veterans Initiative officials attributed the problem to a deficient financial management system that did not enable them to record and track the cash match funding. Subsequently, U.S. Veterans Initiative officials also informed us that they viewed the cash match as an overall “big picture” that associated support for various U.S. Veterans Initiative programs, and not specifically for a particular grant. During the exit conference, U.S. Veterans Initiative officials stated they did not have any Supportive Housing Program grant cash match requirements prior to 2000, and contended what we were reporting as cash match requirements were actually leveraging requirements. Later, U.S. Veterans Initiative officials acknowledged they did actually have cash match requirements prior to 2000. They stated “that they had met cash match requirements since the cash match provided on Supportive Housing Program grants was for costs that were not allowed on the Supportive Housing Program grant agreements and this is how cash match worked.” Also, discussed in Finding 3, U.S. Veterans Initiative officials informed us that they are currently modifying their accounting system to meet federal requirements; however they have stated they do not intend to reflect cash match by each Supportive Housing Program sponsored project (as required) since the program 2004-LA-1008 Page 8 Finding 1 funds identified for cash match cannot be directly associated with or reflected on Supportive Housing Program financial statements. As a result, the lack of required matching funds prevented U.S. Veterans Initiative U.S. Veterans Initiative from carrying out eligible activities Programs Not Maximized to enable them to fully meet program goals and requirements, and maximize the effectiveness of the programs. We reviewed the most current Annual Progress Reports for the 10 grants that had been operational long enough to require Annual Progress Reports. We found that for the seven grants that reported on program goals and progress, none had fully met the Supportive Housing Programs goals relating to residential stability, increased skills and income, and greater self-determination. For example, for the Hawaii grant, U.S. Veterans Initiative planned to have 100 percent of the program participants complete skills assessments and/or vocational assessments before completing the program, in order to accomplish the goal relating to increased skills or income. The Annual Progress Reports reported, however, that only three percent of the participants actually completed the assessments. Auditee Comments U.S. Veterans Initiative: U.S. Veterans Initiative disagreed with the finding with respect to cash match requirements not met; failure to ensure it understood and complied; and, program not maximized. Details are as follows: Cash Match Requirements Not Met U.S. Veterans Initiative disagreed with OIG’s interpretation of cash match requirements, and contended the cash match requirements for all its grants were met and they provided documentation to support their interpretation of cash match. U.S. Veterans Initiative Failed to Ensure It Understood and Complied U.S. Veterans Initiative disagreed with OIG’s conclusion that they failed to ensure they understood and complied with pertinent cash match funding requirements, and that Page 9 2004-LA-1008 Finding 1 their financial management system was not in compliance with federal requirements. U.S. Veterans Initiative Program Not Maximized U.S. Veterans Initiative disagreed with OIG’s conclusion that their Supportive Housing Program was not maximized, and contended the grants’ 31 Annual Progress Reports represented an excellent reflection of their success and achievement of the goals of the Supportive Housing Program. Further, U.S Veterans Initiative stated that OIG’s analysis of their program accomplishments was mischaracterized through a deceptive representation of the facts. Los Angeles Homeless Services Authority: Cash Match Requirements Not Met Los Angeles Homeless Services Authority disagreed with OIG’s conclusion that cash match requirements were not met, and contended that they complied with HUD requirements for cash match, which was based on appropriation law requirements beginning in 1999 for all Supportive Housing Program grants. Further, they state that the Technical Submission Budget cash match requirements for the Supportive Housing Program grants should not be considered in determining cash match requirements and they are only required to abide by the appropriation law requirements beginning with 1999 grant awards. Los Angeles Homeless Services Authority said their review of U.S. Veterans Initiatives’ Annual Progress Reports and accounting records for their grants showed that U.S. Veterans Initiative met the appropriation law requirements for cash match. City of Long Beach: Cash Match Requirements Not Met The City of Long Beach disagreed with OIG’s conclusion that cash match requirements for grants issued prior to 1999 were not met, and contended that cash match requirements began with the Supportive Housing Program grant awards in 1999, when appropriation law and HUD regulations cited this requirement. Therefore, their 1996 and 1998 grants were not subject to a cash match requirement. The City of Long Beach also stated that the 2004-LA-1008 Page 10 Finding 1 grant agreements for their two grants, and contracts with U.S. Veterans Initiative did not include any cash match requirements. OIG Evaluation of U.S. Veterans Initiative: Auditee Comments Cash Match Requirements Not Met We disagree with U.S. Veterans Initiative’s interpretation that the cash match requirement is to satisfy a “big picture” concept of supportive housing services, which in their eyes, only requires the use of the funds to fall under the umbrella of providing supportive services to veterans. In a meeting with OIG, U.S. Veterans Initiative’s Executive Director, stated that cash match funds are a means to pay for all the services not included in HUD’s Supportive Housing Program grants’ budgets, or expenses not allowed to be paid by HUD Supportive Housing Program grant funds. We interpreted the requirements for cash match as the portion of the total budget included in the Grant Agreement Technical Submission, not paid for out of the HUD Supportive Housing Program funding. Further, the cash match funds are required to be used for the budgeted activities contained in the Technical Submission budget. The HUD Community Planning and Development Offices, contacted during this audit, all verbally agreed with the OIG’s interpretation of cash match requirements. We reviewed the documentation provided by U.S. Veterans Initiative, but it did not sufficiently support the cash match requirements. The documentation for 11 of the 15 grants included general ledger statements of funds from other federal agencies. The documentation for the other four grants included general ledger statements that commingled funds from various federal agencies and the accounting records did not substantiate what agency paid for the program, who provided cash match, and/or if the expenses paid were required by the HUD Supportive Housing Program grants. We found, however, that the documentation was insufficient to support that cash matching funds requirements were met because we could not be assured that the cash match was: Page 11 2004-LA-1008 Finding 1 Verifiable, since there was no way to associate, or link, these costs to the Supportive Housing Program grants; Not already included as contributions, or cash match, for other Federally assisted projects or programs; and Necessary and reasonable for proper and efficient accomplishment of HUD Supportive Housing Program objectives. U.S. Veterans Initiative Failed to Ensure It Understood and Complied We disagree with U.S. Veterans Initiative that its financial management system ensured accurate, current and complete disclosure of the financial results of each federally sponsored program. In fact, U.S. Veterans Initiative stated in July 2004 they implemented a revised financial management system. As discussed in the finding, the system did not Verify cash match in Supportive Housing Program grants’ records; Ensure contributions were specific to Supportive Housing Program grants; Determine if cash match was necessary and reasonable for proper and efficient accomplishment of project or program objectives (see Finding 3). U.S. Veterans Initiative Program Not Maximized We disagree with U.S. Veterans Initiative’s contention that we mischaracterized the achievement of program goals and requirements. We used the Annual Progress Reports for the 15 grants, prepared by U.S. Veterans Initiative, and submitted to HUD, and disclosed the scope and methodology of our analysis in the audit report. We reviewed the most current Annual Progress Reports for the 10 grants that had been operational long enough to require Annual Progress Reports. We found that for the seven grants that reported on program goals and progress, none had fully met the Supportive Housing Programs goals relating to residential stability, increased skills and income, and greater self-determination. 2004-LA-1008 Page 12 Finding 1 Los Angeles Homeless Services Authority: We disagree with Los Angeles Homeless Services Authority’s contention that the Technical Submission of the grant agreement is not a binding contractual requirement for the HUD Supportive Housing Program grants. The grant agreement between Los Angeles Homeless Services Authority and HUD specifically states, “The term “Application” means the application submissions on the basis of which a grant was approved by HUD, including the certifications and assurances and any information required to meet any of the grant conditions. The Application is incorporated herein as a part of this Agreement…” Since the Technical Submission is part of the application submission to HUD, in which HUD reviews and approves before executing the grant agreement, it is a binding condition of the grant agreement. We agree that grants executed prior to 1999 were not subject to appropriation law requirements for cash match. However, when the corresponding grant agreements included cash match requirements, as a condition of the agreement, then the grantee must fulfill these agreed-to requirements. Further, for grant awards after 1999, appropriation law requires a minimum of 20 percent cash match for Supportive Housing Program grants, however, when the grant agreements reflect cash match requirements greater than the minimum requirements, the grantee is required to abide by the higher cash match funding requirements agreed-to in the grant agreement. We also noted that U.S. Veterans Initiative’s comments conflicted with Los Angeles Homeless Services Authority on cash match requirements for grants issued prior to 1999. As discussed above, U.S. Veterans Initiative acknowledged the cash match requirements and provided documentation to support their interpretation of cash match requirements. City of Long Beach: We disagree with the City of Long Beach’s contention that cash match requirements were non-existent prior to 1999. As discussed above in Los Angeles Homeless Services Authority’s comments, the cash match requirements were a part of a binding grant agreement with HUD, and Page 13 2004-LA-1008 Finding 1 additionally included in their contracts with U.S. Veterans Initiative, Inc. In addition, we noted that U.S. Veterans Initiative’s comments on the cash match requirements conflict with the City of Long Beach. U.S. Veterans Initiative acknowledged these grants have cash match requirements, and provided the documentation to purportedly support the cash match. Further, in an e-mail to OIG, the U.S. Veterans Initiative Executive Director stated that the legal counsel for the City of Long Beach had advised the Manager for the City’s Bureau of Human and Social Services that the OIG’s interpretation of cash match requirements was correct. We also disagree with the City of Long Beach that federal regulations for cash match do not apply to their grants because both the superceded, and the current OMB Circular A-110 (Revised 11/19/93 further Amended 8/29/97), and the current version dated 9/30/99, have the same cash match requirements. Recommendations We recommend that the Office of Community Planning and Development require: 1A. U.S. Veterans Initiative to provide documentation supporting that the required cash matching funds were provided for the $3,151,576 expended for their grants (see Appendix G), or repay it from non-federal funds. 1B. Los Angeles Homeless Services Authority to provide documentation supporting that the required cash matching funds were provided for the $2,252,705 expended for their grants (see Appendix G), or repay it from non- federal funds. 1C. City of Long Beach to provide documentation supporting that the required cash matching funds were provided for the $1,184,961 expended for their grants (see Appendix G), or repay it from non-federal funds. 2004-LA-1008 Page 14 Finding 2 U.S. Veterans Initiative Spent At Least $633,348 in Supportive Housing Program Funds for Ineligible and Unsupported Expenses U.S. Veterans Initiative spent at least $633,348 in Supportive Housing Program funds for ineligible ($498,248) and unsupported ($135,100) salaries and other expenses. We attribute the deficiencies to U.S. Veterans Initiative officials’ insufficient emphasis on its Supportive Housing Program responsibilities and requirements, including its failure to establish and implement an adequate financial management system to record and track grant expenditures. As a result, these improper expenditures prevented U.S. Veterans Initiative from carrying out other eligible activities to enable them to fully meet program goals and requirements. OMB Circular A-110, Uniform Administrative Criteria Requirements for Grants and Agreements, Amended September 30, 1999, and 24 CFR 84 generally provide that: The budget plan is a financial expression of the project or program as approved during the award process. Recipients are required to report deviations from budget and program plans, and request prior approvals for budget and program plans, for the following circumstances: • Change in the scope or objective of the project or program. • Change in key personnel specified in the application of award document. • The transfer of amounts budgeted for indirect costs to absorb increases in direct costs, or vice versa. The grantee’s financial management system must provide: (1) effective control over and accountability for all funds, property and assets (2) adequate safeguards for all such assets and assures that they are Page 15 2004-LA-1008 Finding 2 used solely for authorized purposes, and (3) accounting records that are supported by source documentation; The grantee shall liquidate all obligations incurred under the award not later than 90 calendar days after the funding period or the date of completion; and Only costs directly related to providing supportive services to the program’s recipients are eligible. In addition, OMB Circular A-122 establishes the criteria for determination of direct and indirect costs for federal awards and once determined these costs must be consistently applied. We reviewed Supportive Housing Program grant Supportive Housing expenditures of $7,222,590 and found that U.S. Veterans Program Funds Used for Initiative used at least $633,348 in Supportive Housing Ineligible and Program grant funds for ineligible ($498,248) and Unsupported Expenses unsupported ($135,100) salaries and other expenses. The breakdown of the ineligible and unsupported expenses we identified is as follows: Category Salary Expenses1 Other Expenses2 Total Ineligible Non-budgeted items $71,034 $276,403 $347,437 Indirect costs charged as direct costs 80,353 80,353 Unallowable grant expenses 11,252 11,252 Paid after grants expired 58,085 58,085 Duplicate payments 1,121 1,121 Total Ineligible $151,387 $346,861 $498,248 Unsupported Consulting services3 134,560 134,560 Not recorded in accounting system 540 540 Total Unsupported $135,100 $135,100 Total $151,387 $481,961 $633,348 1 Salary expenses included salaries, fringe benefits (25.76%), overhead (23.84%) and administrative costs (5.0%). 2 The scope of our review was the cumulative draws for the 15 active Supportive Housing Program grants, between July 1, 2001 and December 31, 2003. 3 Total consulting expenses was $165,000, however $30,440 related to three grants not included in our audit (see Appendix F). 2004-LA-1008 Page 16 Finding 2 A breakdown of the ineligible and unsupported expenses, by grant, is shown in Appendices D and E. Details of the deficiencies are discussed separately below. U.S. Veterans Initiative improperly used $151,387 in Ineligible Salaries and Supportive Housing Program funds for ineligible salaries Related Expenses and related expenses. We reviewed the budget in the technical submission and identified the 24 unauthorized positions. We then reviewed the timesheets and corresponding pay stubs for the 24 employees that incurred salary expenses during calendar year 2003 for the 14 active grants4 to determine if the duties performed by these 24 employees could be considered eligible as Supportive Housing Program grant expenses. We found that in four of the grants, U.S. Veterans Initiative improperly used Supportive Housing Program funds totaling $71,034 for salaries relating to positions that were not approved by HUD in the grants’ technical submissions. In addition, we found that U.S. Veterans Initiative improperly used $80,353 in Supportive Housing Program funds for salaries as direct costs, instead of including these expenses as indirect (administrative) costs. Details of the ineligible salaries and related expenses, for each of the four grants is as shown: Grant No. Of Salary Fringe & Admin Number Employees Amount Overhead Costs Total HI08B001002 8 $77,522 $38,451 $5,799 $121,772 CA16B100025 1 12,551 6,225 939 19,715 CA16B909003 1 1,662 824 124 2,610 TX01B209025 2 4,641 2,302 347 7,290 Total 12 $96,376 $47,802 $7,209 $151,387 Changes to key personnel requires HUD’s prior approval however, U.S. Veterans Initiative did not obtain the needed approval for the above costs. Non-budgeted items Our review disclosed that $71,034 of the $151,387 in salary expenses was ineligible because they were for salaries incurred for positions that were not included in the 4 The scope of our review for the salary expenses paid during calendar year 2003 was 14 of the 15 active Supportive Housing Program grants. The remaining grant did not have salary expenses in 2003, thus, was not included in our review of salaries. Page 17 2004-LA-1008 Finding 2 corresponding Supportive Housing Program grant budget in the technical submission approved by HUD. Below are the specific positions for the two grants: Grant/Position Salary Fringe Overhead Admin Total HI08B001002 V.A. Staff/ Lead Resident Assistant $4,846 $1,248 $1,155 $362 $7,611 Resident Assistant 3,960 1,020 944 296 6,220 AmeriCorps Director 22,053 5,681 5,257 1,650 34,641 Resident Assistant 4,176 1,076 996 312 6,560 Resident Assistant 4,176 1,076 996 312 6,560 Clinical Director 1,370 353 327 102 2,152 Subtotal $40,581 $10,454 $9,675 $3,034 $63,744 TX01B209025 Outreach Specialist 2,501 644 597 187 3,928 Clinical Director 2,140 551 510 160 3,362 Subtotal 4,641 1,195 1,107 347 7,290 Total $45,222 $11,649 $10,782 $3,381 $71,034 Indirect costs charged as direct costs Our review also disclosed that $80,353 of the $151,387 in salary expenses was ineligible because U.S. Veterans Initiative charged these expenses as direct costs, instead of including these expenses as indirect costs. As an illustration, the Hawaii grant incurred most of these expenses ($58,028 of the $80,353), because U.S. Veterans Initiative charged the salaries for the two former site directors as direct costs. While the site director is an approved supportive services cost, it was not included in the budget with the technical submission that HUD approved. Therefore, the salary expenses for this position were not eligible as a direct expense to the grant, and instead should have been included as an indirect cost. If the duties performed by the employee were eligible duties, we allowed the costs. For example, if the site director was performing case management work, we considered the costs as eligible. A breakdown of the improper charges for the three grants we identified is as shown: 2004-LA-1008 Page 18 Finding 2 Grant/ Position Salary Fringe Overhead Admin Total HI08B001002 Site Director $16,636 $4,285 $3,966 $1,244 $26,131 Site Director 20,306 5,231 4,841 1,519 31,897 Subtotal $36,942 $9,516 $8,807 $2,763 $58,028 CA16B100025 Receptionist 12,551 3,233 2,992 939 19,715 Subtotal $12,551 $3,233 $2,992 $939 $19,715 CA16B909003 Site Director 1,662 428 396 124 2,610 Subtotal $1,662 $428 $396 $124 $2,610 Total $51,155 $13,177 $12,195 $3,826 $80,353 U.S. Veterans Initiative improperly used $481,961 Other Ineligible and in grant funds for other ineligible ($346,861) and Unsupported Expenses unsupported ($135,100) expenses. The ineligible expenses related to: Non-budgeted items ($276,403); Unallowable grant expenses ($11,252); Expenses paid after grants expired ($58,085); and Duplicate payments ($1,121). The unsupported expenses related to $134,560 in Supportive Housing Program grant expenses for consulting services in conjunction with the Business Services Agreement that was not supported with source documentation (see Finding 3), and $540 in expenses that were paid with Supportive Housing Program funds, but not recorded in the accounting system. Details are discussed separately below. Non-budgeted items Our review showed that in 12 of 15 grants reviewed, U.S. Veterans Initiative improperly used $276,403 in Supportive Housing Program funds for ineligible expenses because they were for items not included in the budgets approved by HUD in the Page 19 2004-LA-1008 Finding 2 grants’ technical submissions. Specifically, the non-budgeted items included: Indirect Costs $139,795 Equipment, Furniture and Fixtures 51,408 Telephones 41,275 Other Miscellaneous 43,925 Costs incurred for budget line items not approved in the technical submission budget, and the transfer of amounts budgeted for indirect costs to absorb increases in direct costs, or vice versa requires HUD’s prior approval for these changes. However, U.S. Veterans Initiative did not obtain the needed approval for the above costs. Unallowable expenses U.S. Veterans Initiative improperly used $11,252 for unallowable Supportive Housing Program grant expenses for promotional expenses ($5,776); travel ($3,914); special events ($1,150); and training staff ($412). These expenses were not allowable Supportive Housing Program expenses because they were not directly related to carrying out the Supportive Housing Program grant activities, and also not included in the approved budgets. Expenses paid after grant expired U.S. Veterans Initiative improperly used $58,085 in Supportive Housing Program funds after the two grants expired as shown: Grant Billing Billing Payment Grant Terminated Cutoff Date Submitted Received CA16B900005 8/31/2002 11/29/2002 3/29/2003 $45,513 CA16R151121 4/30/2003 7/29/2003 9/30/2003 12,572 Total $58,085 As shown above, U.S. Veterans Initiative submitted billings and was paid on two grants after the payment period for these grants expired. 2004-LA-1008 Page 20 Finding 2 Duplicate payments U.S. Veterans Initiative used $1,121 in duplicate payments to the Hawaii grant based on three instances; 1) two invoices were paid twice for the same billing; this occurred because the same invoice was entered into the Accounts Payable system as different invoice numbers; 2) duplicate general journal entries resulted in duplicate charges to the grant; and 3) the responsible program staff approved the same billing twice, once as a prepaid item and then again when the invoice was received. U.S. Veterans Initiative improperly used $135,100 U.S. Veterans Initiative in Supportive Housing Program funds for expenses Used Supportive Housing that were not adequately supported. Specifically, Program Funds For U.S. Veterans Initiative paid $134,560 in Unsupported Expenses Supportive Housing Program grant expenses for consulting services in conjunction with the Business Services Agreement that was not supported with source documentation (see Finding 3), and $540 in expenses for three grants that were paid with Supportive Housing Program funds, but not recorded in the accounting records. Consulting Services As discussed in Finding 3, U.S. Veterans Initiative executed a Business Services Agreement that provided for consulting services by Cantwell– Anderson, Inc.’s President, in which the costs are included with the overhead costs that are charged to the Supportive Housing Program grants. We estimated the active Supportive Housing Program grants paid a total of $134,560 for consulting services, however, U.S. Veterans Initiative could not provide adequate any documentation supporting the consulting services were actually rendered, if any. Therefore, we were unable to validate the eligibility of these expenses. The allocation of the consulting expenses to each grant is shown in Appendix F. We also identified an additional $30,440 paid by three Supportive Housing Program grants not included in our audit. Therefore, in total we identified $165,000 in unsupported consulting services costs ($134,560 + $30,440). Page 21 2004-LA-1008 Finding 2 Expenses not recorded in accounting system U.S. Veterans Initiative improperly used $540 in Supportive Housing Program funds from one grant for expenditures that were not recorded in the accounting system because of billing errors. Collectively, we attribute the deficiencies to U.S. U.S. Veterans Initiative’s Veterans Initiative officials’ insufficient emphasis Lack of Emphasis On on its Supportive Housing Program responsibilities Requirements and requirements, including its failure to establish and implement an adequate financial management system to record and track grant expenditures, and provide a comparison of outlays with approved budgets (see Finding 3). U.S. Veterans Initiative officials claimed that they were unaware of the requirement to file a budget modification request. However, we noted that U.S. Veterans Initiative had filed several budget modification requests in other situations. Therefore, in our opinion, U.S. Veterans Initiative was aware of the requirement but did not abide by it. As a result, these improper expenditures prevented Other Eligible Activities U.S. Veterans Initiative from carrying out other Not Carried Out eligible activities to enable them to fully meet program goals and requirements. Auditee Comments U.S. Veterans Initiative: U.S. Veterans Initiative disagreed with the finding and contended that it spent all awarded Supportive Housing Program funds for eligible activities. Details of their comments are as follows: Non-budgeted items (Salaries) U.S. Veterans Initiative acknowledged that the non- budgeted salaries were not included in the budget because they failed to submit the required budget modifications; however, U.S. Veterans Initiative claimed that the salaries are eligible because the duties performed by these personnel were related to carrying out the Supportive Housing Program. 2004-LA-1008 Page 22 Finding 2 Indirect costs charged as direct costs U.S. Veterans Initiative contended that the services provided by these personnel were actually in direct support of the grant programs. U.S. Veterans Initiative also attributed the problem to a misrepresentation on the timesheets of the personnel in question as to their actual duties. Non-budgeted items (Other Expenses) U.S. Veterans Initiative stated that OIG inappropriately concluded that these expenses were non-budgeted items, when in fact they were included in the budget under a generalized line item, and thus, should have been eligible. Unallowable expenses U.S. Veterans Initiative contended that the expenses that OIG concluded were unallowable, were actually eligible, but were charged to the wrong general ledger expense account. U.S. Veterans Initiative provided documentation supporting these expenses. Expenses paid after the grant expired U.S. Veterans Initiative claimed that the expenses should be eligible because they were for eligible program expenses incurred during the grant period. Consulting Services U.S. Veterans Initiative contended that the consulting expenses were eligible and provided supporting documentation as an attachment to its written response. Duplicate payments U.S. Veterans Initiative agreed that there were duplicate payments and provided documentation showing it took corrective action. Los Angeles Homeless Services Authority: Los Angeles Homeless Services Authority disagreed with some issues in this finding, but agreed with others. Details of their comments are as follows: Page 23 2004-LA-1008 Finding 2 Indirect costs charged as direct costs Los Angeles Homeless Services Authority disagreed that the salary expenses of $19,715 charged to grant CA16B100025 were ineligible and attributed the problem to disallowing the expenses based on the staff person’s title, instead of the actual job function of that person. Non-budget items (Other Expenses) Los Angeles Homeless Services Authority stated that even though charges were for unauthorized budget line items, they should be deemed eligible because they were for eligible supportive service activities. Los Angeles Homeless Services Authority stated that it appeared that OIG applied an extremely narrow definition to their consideration of what was approved under the budget. Los Angeles Homeless Services Authority acknowledged, however that these items need to be further reviewed and justified by the U.S. Veterans Initiative. Unallowable expenses Los Angeles Homeless Services Authority stated that U.S. Veterans Initiative has agreed that the $5,470 charged to the CA16R151121 was ineligible. The $6 noted as unallowable as “travel” charged to CA16B200052 was incurred for parking of a direct staff position; this could be better classified as “mileage”, an allowable item. Expenses paid after the grant expired Los Angeles Homeless Services Authority acknowledged the funds were drawn at a late date; however, Los Angeles Homeless Services Authority stated it approved final invoices for the programs based on expenditures incurred during the program period, close-outs and final budget and invoice adjustments notwithstanding. Therefore, the amounts should be considered eligible. Consulting Services Los Angeles Homeless Services Authority agreed that better documentation including monthly invoices with tasks and/or hours of work performed, should have been provided by the consultant to support the consulting fees paid to Cantwell Anderson, Inc., on 2004-LA-1008 Page 24 Finding 2 behalf of U.S. Veterans Initiative. Los Angeles Homeless Services Authority stated that U.S. Veterans Initiative provided documentation attesting to the significant work performed by Mr. Cantwell, which indicated an annual average of 1,660 hours spent on U.S. Veterans Initiative programs. Expenses not recorded in the accounting system Los Angeles Homeless Services Authority stated that if the $540 is for valid and program-eligible items, the expenses can be rectified through an accounting adjustment. City of Long Beach: The City of Long Beach did not provide any comments on this finding. OIG Evaluation of U.S. Veterans Initiative: Auditee Comments Non-budgeted items (Salaries) We disagree. Since U.S. Veterans Initiative did not submit the required budget modifications for these expenses, HUD has no assurance that the salary expenses for the staff members were for eligible Supportive Housing Program expenses, and would not affect U.S. Veterans Initiative’s ability to accomplish its grant program activities. Therefore, we still categorized these as ineligible expenses. Indirect costs charged as direct costs We disagree with U.S. Veterans Initiative. We evaluated the Honolulu Site Director’s timesheets and found that when she prepared and signed her timesheets, she did not include eligible program activities in the description on how she spent her time. Further, we noted that these timesheets were reviewed and approved by either U.S. Veterans Initiative Executive Director, or were processed without any approval. Therefore, we believe the timesheet was accurately completed when it was first prepared. With regard to the Westside Residence receptionist, we determined the Page 25 2004-LA-1008 Finding 2 eligibility of the salary expenses based on the work activities stated in the employee’s timesheet, not the job title. Since these timesheets were prepared by the employee, and approved by the employee’s supervisor, we believe these were an accurate description of the duties performed. Non-budgeted items (Other Expenses) We disagree with U.S. Veterans Initiative that the non-budgeted items were eligible expenses and have the following specific comments: We disagree with U.S. Veterans interpretation that eligibility of grant costs should be approved based on the eligibility that these costs fall under the umbrella of supportive services. Specific budgeted line items are approved in the Technical Submission to meet the technical requirements of each particular Supportive Housing Program grant. When U.S. Veterans Initiative uses approved funding for non- budgeted, and unapproved, items, then this may impact U.S. Veterans Initiative’s ability to meet required program requirements. For example, in the case of the U.S. Veterans Initiative’s Texas grants, the Community Planning and Development Office in Fort Worth advised us they did not allow overhead costs to be included in their budgets since the U.S. Veterans Initiative could not provide adequate substantiation for these costs. The U.S. Veterans Initiative charged $72,343 in Texas grants overhead costs even though the Community Planning and Development Office disallowed these costs. U.S. Veterans Initiative used Evaluation and Monitoring and Bus Passes/Tokens budget categories to pay for these overhead costs, which in our opinion, directly impacts the ability to adequately support homeless veterans. We disagree that the expenses were approved under a generalized budget line item. In the case of telephones, these costs are included in the overhead rate charged to Supportive Housing Program grants. Therefore, when telephones are 2004-LA-1008 Page 26 Finding 2 also charged as a direct cost to the grant, this requires the Technical Submission budget to specifically identify these costs. Further, charges such as Furniture and Fixtures bought without prior approval from HUD are not eligible expenses against the Equipment and Maintenance budget line item because, in our opinion these are two completely different categories. We acknowledge that U.S. Veterans Initiative submitted extensive documentation on September 15, 2004 for expense items it believes are eligible. This documentation will be provided to HUD for its review and determination during the audit resolution process. Unallowable expenses We acknowledge that U.S. Veterans Initiative submitted documentation on September 15, 2004 for some non-budgeted items they believe are eligible. This documentation will be provided to HUD for its review and determination during the audit resolution process. Expenses paid after the grant expired We disagree with U.S. Veterans Initiative. HUD regulations require that all eligible program expenses must be paid within 90 days after the grant termination date, or the date can be extended based on the grantee requesting and getting approval for this extension. Further the Los Angeles Homeless Services Authority’s contract with the U.S. Veterans Initiative specifically requires the payment cutoff date or the request for an extension within 60 days after the grant termination date. Since U.S. Veterans Initiative fulfilled neither of these requirements, these expenses are not eligible for reimbursement. Consulting Services We disagree that the unsupported consultant costs are eligible for reimbursement. During the audit, U.S. Veterans Initiative could not provide any documentation, such as invoices, supporting the Page 27 2004-LA-1008 Finding 2 consulting services. Later, on September 1, 2004, they provided a spreadsheet prepared based on records in the consultant’s palm pilot that listed meetings held and number of hours spent in these meetings to substantiate the services provided between January 2001 and December 2003. However, these records did not provide any information detailing the nature of the consulting services provided and how it related to the Supportive Housing Program activities. Therefore, we could not determine the eligibility of the consulting services. We also noted that the Business Services Agreement between U.S. Veterans Initiative and Cantwell-Anderson Inc., expired on June 30, 2000; therefore, all the documentation provided by U.S. Veterans Initiative was for consulting services rendered under an expired agreement, and therefore, should not be eligible program expenses. In addition, we also noted that the purported supporting documentation conflicts with other correspondence between U.S. Veterans Initiative and HUD’s Office of General Counsel in April and May 2003, in which the Executive Director specifically attested to the fact that the President of Cantwell-Anderson Inc. was not an employee, agent, or a paid consultant of U.S. Veterans Initiative. Duplicate payments We acknowledge U.S. Veterans Initiative provided some additional documentation on September 15, 2004 relating to the duplicate payments. This documentation can be evaluated by HUD during the audit resolution process to determine whether appropriate action has been taken. Los Angeles Homeless Services Authority: Indirect costs charged as direct We disagree. The salary expenses of $19,715 charged to grant CA16B100025 were disallowed based on the employee’s timesheets stating she was performing work activities that were not approved in the grant Technical Submission budget. 2004-LA-1008 Page 28 Finding 2 Non-budget items (Other Expenses) We disagree that the non-budgeted expenses are eligible. Since the required budget modification was not submitted to HUD for review and approval, there is no assurance that these expenses were eligible Supportive Housing Program activities, and approval of these items would not adversely impact meeting the grant program goals. We did however, agree with Los Angeles Homeless Services Authority’s issue on the administrative fee, and have revised the report accordingly. Unallowable expenses Since Los Angeles Homeless Services Authority agreed that the $5,470 charged to the CA 16R151121 is ineligible, we have no further comment. HUD can determine the eligibility of the remaining $6 during the audit resolution process. Expenses paid after the grant expired We disagree with Los Angeles Homeless Services Authority that these are eligible expenses since these were not billed within the required time period. Consulting Services We disagree that the expenses for consulting services were eligible. The documentation we obtained not only conflicted as to whether consulting services were actually rendered, but was also insufficient to determine the nature of the services rendered in relation to U.S. Veterans Initiative’s Supportive Housing Program activities. Expenses not recorded in the accounting system We disagree that these costs could be easily supported. Based on earlier documentation provided by the U.S. Veterans Initiative, these costs are billing errors. The audit report reflects a change in the cause for these unsupported costs as billing errors. City of Long Beach: The City of Long Beach provided no comments on this finding; thus, we have no further comments. Page 29 2004-LA-1008 Finding 2 Recommendations We recommend that the Office of Community Planning and Development: 2A. Instruct U.S. Veterans Initiative, Los Angeles Homeless Services Authority, and City of Long Beach to comply with the pertinent federal requirements in carrying out its Supportive Housing Program grant activities. 2B. Require U.S. Veterans Initiative to reimburse the Supportive Housing Program grants, and/or repay HUD from non-federal funds for the $347,408 in ineligible expenses (see Appendices D and G). 2C. Require Los Angeles Homeless Services Authority to reimburse the Supportive Housing Program grants, and/or repay HUD from non-federal funds for the $151,290 in ineligible expenses (see Appendices D and G). 2D. Require U.S. Veterans Initiative to reimburse the Supportive Housing Program grants, and/or repay HUD from non-federal funds for the $66,424 in unsupported expenses, unless it can provide adequate supporting documentation (see Appendices E and G). Additionally, any consulting service charges since December 31, 2003, should be prorated and paid back to each grant. 2E. Require Los Angeles Homeless Services Authority to reimburse the Supportive Housing Program grants, and/or repay HUD from non-federal funds for the $46,189 in unsupported expenses, unless it can provide adequate supporting documentation (see Appendices E and G). Additionally, any consulting service charges since December 31, 2003, should be prorated and paid back to each grant. 2F. Require City of Long Beach to reimburse the Supportive Housing Program grants, and/or repay HUD from non-federal funds, for the $22,037 in unsupported expenses, unless it can provide adequate supporting documentation (see Appendices E and G). Additionally, any consulting service charges since December 31, 2003, should additionally be prorated and paid back to each grant. 2004-LA-1008 Page 30 Finding 2 2G. Require U.S. Veterans Initiative to reimburse the Supportive Housing Program grants, and/or repay HUD from non-federal funds for the $30,440 in unsupported consulting expenses, unless it can provide adequate supporting documentation (see Appendices F and G). Page 31 2004-LA-1008 Finding 2 THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 32 Finding 3 U.S. Veterans Initiative Did Not Administer its Supportive Housing Program Grants in Accordance with Program Requirements U.S. Veterans Initiative did not administer its Supportive Housing Program grants in accordance with Program requirements. More specifically, we found that U.S. Veterans Initiative failed to: Develop an adequate financial management system; Comply with procurement and contract administration requirements; Establish and implement indirect cost rates as required; and Close out expired grants. We attribute the deficiencies to U.S. Veterans Initiative officials’ insufficient emphasis on its Supportive Housing Program responsibilities and requirements. Collectively, these conditions precluded U.S. Veterans Initiative from conducting its Supportive Housing Program activities more efficiently and effectively, as well as prevented U.S. Veterans Initiative from fully meeting its program goals and requirements. In addition, these deficiencies may have contributed to Supportive Housing Program grant funds being spent for ineligible and unsupported expenses. Title 24, CFR, § 84.21(b)(1), (2), and (4) of the Code of U.S. Veterans Initiative Federal Regulations (CFR), requires the grant recipient to Failed to Develop an maintain a financial management system that provides (1) Adequate Financial accurate, current, and complete disclosure of the financial Management System results for each federally sponsored project or activity; and (2) records that adequately identify the sources and application of funds for each HUD sponsored activity; and (3) a comparison of outlays with budget amounts. Contrary to HUD regulations, U.S. Veterans Initiative’s financial management system was inadequate because it did not (1) differentiate the source and application of funds for each HUD sponsored activity, (2) identify required cash matching funds, and (3) provide a comparison of outlays with budget amounts for each award. Details of each deficiency are discussed below. Page 33 2004-LA-1008 Finding 3 System did not track source and application of funds U.S. Veterans Initiative’s financial management system was not sufficiently developed and did not identify the sources and application of funds for each HUD sponsored project. U.S. Veterans Initiative’s system tracked funds by U.S. Veterans Initiative program, instead of funding source, therefore any program that had multiple funding sources were co-mingled under one account. Consequently, U.S. Veterans Initiative had to develop a separate spreadsheet system to record the grant draw amounts and expenditures. As a result, expenses incurred for U.S. Veterans Initiative program activities that were funded by multiple sources could be arbitrarily allocated amongst the available funding sources, instead of directly to the appropriate grant. The problems that HUD’s Honolulu Community Planning and Development Office found during its monitoring review of Supportive Housing Program grant HI108B001002 clearly illustrates the problem with U.S. Veterans Initiative’s financial management system. U.S. Veterans Initiative’s Veterans In Progress program was funded by the Supportive Housing Program grant (starting in August 2002) and Department of Veterans Affairs (VA) grants (starting in October 2003). Since the HUD Supportive Housing Program grant funds were available before the VA grant funds, U.S. Veterans Initiative charged the VA portion of the program costs to the HUD Supportive Housing Program grant. As a result, U.S. Veterans Initiative charged ineligible and unauthorized expenses to the Supportive Housing Program grant. Based on the monitoring review, the Community Planning and Development Office required U.S. Veterans Initiative to reverse and reclassify $37,251 in ineligible and unauthorized expenses. However, had HUD’s Community Planning and Development Office not conducted the monitoring review, these expenses would have inappropriately remained as Supportive Housing Program grant expenses. We also noted that, because of the inadequate accounting system, $32,936 of the $37,251 in accounting adjustments made are not properly recorded in the accounting system. The adjustments are only reflected on the separate grant spreadsheet, and as a reduction on the next grant drawdown. 2004-LA-1008 Page 34 Finding 3 System did not identify required cash matching funds U.S. Veterans Initiative’s financial management system was not sufficiently developed and did not: Verify cash matching funds for Supportive Housing Program grants; Ensure contributions were specific to Supportive Housing Program grants; and Support that cash matching funds were necessary and reasonable for proper and efficient accomplishments of project or program objectives. Consequently, as detailed in Finding 1, U.S. Veterans Initiative was unable to support that it met cash matching funds requirements for any of the $7,222,590 in Supportive Housing Program grant funds expended during the audit period. System did not compare outlays with budgets. U.S. Veterans Initiative’s financial management system did not provide for a comparison of Supportive Housing Program grant outlays with budgeted amounts. Additionally, the commingling of funds with multi-funded programs precluded this comparison. This inability for budget comparison to outlays resulted in $287,655 in ineligible expense payments. This included $276,403 in non-budgeted items and $11,252 in unauthorized grant expenditures (see Finding 2). If the financial management system had been properly developed, this should have precluded the payments for these unauthorized expenditures. U.S. Veterans Initiative officials explained that the problem U.S. Veterans Initiative occurred because the financial management system was Did Not Modify Financial developed when U.S. Veterans Initiative was a small System organization. U.S. Veterans Initiative did not modify the system as they grew and their funding increased, so that the system would record and track funds by grant instead of by program. In our opinion, U.S. Veterans Initiative officials did not provide sufficient emphasis on its responsibilities to ensure that their system complied with federal requirements. During our audit, in February 2004, U.S. Veterans Initiative advised us they had initiated corrective action to resolve this problem, and planned to implement the new system in July 2004. Page 35 2004-LA-1008 Finding 3 As a result of the inadequate system, the financial reports do HUD Has No Assurance not reflect the actual grant expenses and do not provide a That Supportive Housing comparison of expenses with the budgeted amounts. Program Funds Were Spent Therefore, HUD has no assurance that the Supportive As Approved Housing Program funds are being used only for authorized and allowable expenses. In addition, the inadequate financial management system has increased audit costs because the Independent Public Accountant must prepare additional financial reports in order to prepare the annual audited financial statements. OMB Circular A-110, Uniform Administrative U.S. Veterans Initiative Requirements for Grants and other Agreements with Failed to Comply With Institutions of Higher Education, Hospitals, and Other Non- Procurement and Contract Profit Organizations, Amended September 30, 1999, Administration Procurement Standards, and 24 CFR 84, generally require: Requirements Competitive procurement for purchases exceeding the threshold fixed at 41 U.S.C. § 403 (11) (currently $25,000) or $100,000 whichever is greater requires proper documentation. This supporting documentation includes pre-award review and procurement documents, such as requests for proposals, invitations for bids, independent cost estimates, etc. and procurement records for contractor selection or justification for lack of competition; Ensure that small businesses, minority owned firms, and women’s business enterprises are used to the fullest extent practicable. Contract administration to ensure contractor conformance with the terms, conditions, and specifications of the contract; and Contractual provisions that allow for administrative, contractual, or legal remedies for contracts exceeding the $100,000 threshold. Further, all contracts must include provisions for Equal Employment Opportunity (EEO) as required by Executive Orders 11246 and 11375. Contrary to the OMB and CFR requirements, U.S. Veterans Initiative failed to comply with procurement requirements. Specifically, U.S. Veterans Initiative did not: 2004-LA-1008 Page 36 Finding 3 Competitively procure the Business Services Agreement between U.S. Veterans Initiative and Cantwell-Anderson, Inc., or justify the lack of competition; Ensure that small businesses, minority owned firms, and women’s business enterprises are used to the fullest extent practicable. Ensure contractor performance with the contract terms, conditions, and specifications; and Include contract provisions that allow for administrative, contractual, and legal remedies or EEO requirements for contracts. Details of the deficiencies are discussed below. U.S. Veterans Initiative did not competitively procure the Business Services Agreement U.S. Veterans Initiative executed the Business Services Agreement with Cantwell-Anderson, Inc., dated August 3, 1998, which provided for accounting and consulting services, but did not competitively procure the services nor did it justify the lack of competition. The Business Services Agreement showed that annual accounting fees would be the greater of $114,000 or 4 percent of expenses processed, and consulting fees would be $75,000. The Business Services Agreement expired on June 30, 2000. We also noted that U.S. Veterans Initiative did not competitively procure the accounting services rendered by the Independent Public Accountant even though these costs exceeded the $100,000 threshold. Since the Supportive Housing Program grant funds paid a portion of the Independent Public Accountant expenses, these services should have also been competitively procured. However, Cantwell-Anderson, Inc. has continued to provide the services using the expired Business Services Agreement. Between July 1, 1998, and December 31, 2003, U.S. Veterans Initiative paid Cantwell-Anderson, Inc., an estimated $2,177, 894 for services rendered as shown: Page 37 2004-LA-1008 Finding 3 HUD Supportive HUD Supportive Service Agreement Total Estimated Housing Program Housing Program Provided Terms Payments Payments Future Payments Accounting 4% of expenses $1,765,394 $321,697 $457,413 Consulting $6,250 monthly 412,500 165,000 30,000 per yr Totals $2,177,894 $486,697 U.S. Veterans Initiative officials claimed they were knowledgeable of, and adhered to, the procurement requirements for all purchases over $1,000; however, they were unable to explain why they did not follow them for the Business Services Agreement or for the Independent Public Accountant services. U.S. Veterans Initiative officials did not abide by procurement requirements, possibly to give preferential treatment to Cantwell-Anderson, Inc. in the issuance of this Agreement, since U.S. Veterans Initiative has close ties with its former Acting Executive Director, who is currently the President of Cantwell-Anderson, Inc. With regard to the expiration of the Business Services Agreement, U.S. Veterans Initiative officials initially stated that it had not been extended past the June 30, 2000 termination date. But later, officials stated that it had been extended, but were unable to locate any supporting documentation. U.S. Veterans Initiative did not ensure contractor performance with the Business Services Agreement U.S. Veterans Initiative did not ensure Cantwell-Anderson, Inc. complied with the Business Services Agreement. The Business Services Agreement required that accounting and consulting services be performed in a manner, which will result in services being delivered within approved budgets and in conformance with governmental funding requirements5. Specifically, we found that while U.S. Veterans Initiative paid $6,250 per month to Cantwell- Anderson, Inc. for its president to be on 24-hour call for consulting services, it did not obtain any documentation supporting the actual consulting services rendered, if any. The Business Services Agreement based the monthly fee on the basis that the president would provide 113 consulting hours at a rate of $55.37 per hour. However, U.S. Veterans 5 The accounting requirements are established in the Super Notice of Funding Availability by requiring compliance with the federal requirements and regulations Supportive Housing Program grants, which included the OMB Circulars and 24 CFR 84. The budget requirements are established in OMB Circular A-110 and 24 CFR 84 and the grant agreements. 2004-LA-1008 Page 38 Finding 3 Initiative could not support how many hours of consulting, if any, that the president actually provided. Therefore, we questioned the entire $134,560 paid by the Supportive Housing Program grants for consulting services as unsupported expenses (see Finding 2). U.S. Veterans Initiative did not include required provisions in the Business Services Agreement U.S. Veterans Initiative did not include any contractual provisions that allow for administrative, contractual, and legal remedies or EEO requirements for contracts. U.S. Veterans Initiative omitted contractual provisions that provide for administrative, contractual and legal remedies from the Business Services Agreement, which adversely affects the ability of the grantee to effectively resolve these issues on this agreement as well as other contracts where these provisions are omitted. Further, omitting these required provisions could jeopardize current and future grant awards. U.S. Veterans Initiative’s controller6 was recently hired and was unable to provide any reason for the omission of these requirements; however, she advised us that the required contract provisions would be included in all future contracts. OMB Circular A-122, Cost Principles for Non-Profit U.S. Veterans Initiative Organizations, revised November 1993, Amended Failed to Establish and September 30, 1999, requires: Implement Indirect Cost Organizations with previously established indirect cost rate, submit a new indirect cost proposal to the cognizant agency within six months after the close of the fiscal year. The methods for cost allocation be consistent for indirect costs to be allowable. Indirect costs be accumulated into separate cost groupings, where an organization’s indirect costs benefit major functions in varying degrees. Further, OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements Amended September 30, 1999, Financial and Program Management, requires written procedures for determining the 6 The controller is actually a contract employee of Cantwell-Anderson, Inc. U.S. Veterans Initiative contracted with Cantwell-Anderson, Inc. for its accounting services in the Business Services Agreement. Page 39 2004-LA-1008 Finding 3 reasonableness, allocability and allowability of costs in accordance with the provisions of the applicable Federal cost principles and the terms of the award. Contrary to OMB Circular requirements, U.S. Veterans Initiative did not: Update indirect cost rates for the Los Angeles facility; Establish indirect cost rates for facilities outside Los Angeles; Consistently charge general and administrative and overhead costs; Segregate indirect cost pools; and Prepare written procedures for determining the reasonableness, allocability, and allowability of costs. Indirect costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective. U.S. Veterans Initiative uses indirect cost rates for fringe benefits, overhead and general and administrative costs. The information below provides the details for each of the above conditions: U.S. Veterans Initiative did not update indirect cost rates as required U.S. Veterans Initiative indirect cost rate proposal was prepared and approved in 1999, and these rates have not been updated since that time. At the time these rates were approved, U.S. Veterans Initiative only had one site in Los Angeles and these rates were exclusive to Los Angeles County and not approved for other locations. These rates have continued to be used for the indirect cost allocations through the time of this audit. During the period from July 7, 1999, through June 30, 2003, grant revenues (involving indirect cost allocations) have increased 227 percent where as, indirect cost rates have increased 406 percent as shown: 2004-LA-1008 Page 40 Finding 3 1999 Cost July 1, 2002 – Percent Indirect Cost Proposal June 30, 2003 Increase General and Administrative $207,114 $830,233 401% Overhead 249,937 1,095,395 438% Fringe Benefits 383,675 1,490,196 388% Total $840,726 $3,415,824 406% Grant Revenues $4,447,421 $10,107,667 227% In July 1999, indirect costs represented about 19 percent of Supportive Housing Program grant expenses; but currently they exceed about 34 percent. Since indirect costs for overhead and fringe benefits are based on direct salary expenses, then this increase is attributed to higher salary expenses, which directly impacts the program. If the indirect costs increase, then there is less available for direct expenses to support the program and ensure goals and requirements are met. U.S. Veterans Initiative did not establish rates for facilities outside Los Angeles U.S. Veterans Initiative did not establish indirect rates for new facilities, which should have been established and approved by the cognizant agency within six months after the initiation of the grant. U.S. Veterans Initiative currently has facilities in several California counties, as well as Arizona, Hawaii, Nevada, and Texas. Even though indirect cost rates were only approved for the Los Angeles County facility, they were inappropriately being used as indirect cost rates on all U.S. Veterans Initiative facilities. U.S. Veterans Initiative officials stated they were unaware of the requirements to establish or update the rates. U.S. Veterans Initiative did not consistently charge General and Administrative and overhead costs U.S. Veterans Initiative did not consistently include General and Administrative and overhead in its indirect cost rates. In 2001, U.S. Veterans Initiative adjusted General and Administrative and overhead rates for Arizona and Nevada using the 1999 data by taking out General and Administrative salaries and depreciation costs, but did not obtain approval by the cognizant agency as required. The San Francisco Community Planning and Development Office required U.S. Veterans Initiative to make these adjustments before issuing the Supportive Housing Program grants in Arizona and Page 41 2004-LA-1008 Finding 3 Nevada. However, U.S. Veterans Initiative did not make these same changes to other Supportive Housing Program grants. Additionally, U.S. Veterans Initiative officials stated they were unaware of the requirement to obtain approval for revised indirect cost rates. U.S. Veterans Initiative did not segregate indirect cost pools U.S. Veterans Initiative did not segregate indirect cost pools as required. As discussed above, U.S. Veterans Initiative inappropriately used the indirect cost rates established for the Los Angeles County facility for all its other locations, except for Arizona and Nevada where they arbitrarily adjusted Los Angeles County rates. The indirect cost rates for the Los Angeles County facility were exclusive to that facility since those costs would be different than those in other facilities; therefore, the costs should have been accumulated and allocated as such. U.S. Veterans Initiative’s current controller stated she was aware this was required, however, she was unaware why the previous Controller did not adhere to this requirement. U.S. Veterans Initiative did not establish written procedures for determining costs U.S. Veterans Initiative did not establish written procedures for determining the reasonableness, allocability, and allowability of costs as required. The lack of such procedures created confusion at U.S. Veterans Initiative on how to account for expenditures, such as telephones, office expenses and mileage. Written procedures are needed to provide clear guidance on how to determine whether an expenditure was a direct, or indirect grant expense, and how to properly record it, so that all grant expenditures are consistently accounted for. This lack of guidance has created confusion with grant administrators on what costs are included in indirect and direct costs. If U.S. Veterans Initiative had written procedures, it would have established the proper methodology to account for such expenses. U.S. Veterans Initiative officials advised us they had initiated corrective action to resolve these problems. They are in the process of developing indirect cost pools and rates for each location in accordance with HUD and OMB requirements and are planning on implementing these new rates by location early in fiscal year 2005. 2004-LA-1008 Page 42 Finding 3 Under the provisions of 24 CFR § 84.71, Closeout Failed to Closeout Procedures: Expired Grants Recipients shall submit, within 90 calendar days after the date of completion of the award, all financial, performance, and other reports as required by the terms and conditions of the award. HUD may approve extensions when requested by the recipient. Unless HUD authorizes an extension, a recipient shall liquidate all obligations incurred under the award not later than 90 calendar days after the funding period or the date of completion as specified in the terms and conditions of the award or in HUD instructions. Between July 1, 2001, through December 31, 2003, 5 of the 15 Supportive Housing Program grants we reviewed expired. However, U.S. Veterans Initiative did not close out the grants as required. The expired grants included: Grant Grant Number Grant Period Amount Drawn Down Balance CA16B900005 09/01/00 - 08/31/02 $895,496 $832,293 $63,203 CA16R151121 05/01//00 - 04/30/03 1,051,189 997,315 53,874 CA16B960302 05/01/00 - 04/30/03 840,000 840,000 0 AZ01B002030 12/01/01 - 03/31/03 525,000 477,458 47,542 TX01B910018 08/01/00 - 07/31/03 575,902 575,902 0 Total $3,887,587 $3,722,968 $164,619 As shown above, the total grant funds awarded was $3,887,587, of which U.S. Veterans Initiative had drawn down $3,722,968, which left a balance of $164,619, which should have been de-obligated and made available for other uses. U.S. Veterans Initiative officials stated they were not aware of the requirements to close out the expired grants. Collectively, we attribute the deficiencies to U.S. Veterans U.S. Veterans Initiative Initiative officials’ insufficient emphasis on its Supportive Did Not Place Emphasis Housing Program responsibilities and requirements. U.S. On Responsibilities And Veterans Initiative officials generally informed us they Requirements were unaware of the requirements associated with the deficiencies we identified. However, we noted that U.S. Veterans Initiative claimed extensive knowledge and Page 43 2004-LA-1008 Finding 3 experience in administering HUD grants in the grant technical submissions that it submitted to HUD. Therefore, in our opinion, U.S. Veterans Initiative officials either did not ensure they were sufficiently knowledgeable of, or chose to ignore the requirements. Collectively, these conditions precluded U.S. Veterans Supportive Housing Initiative from conducting its Supportive Housing Program Program Grant Funds activities more efficiently and effectively, as well as May Not Have Been Used precluded U.S. Veterans Initiative from fully meeting its Properly program goals and requirements. We reviewed the most current Annual Performance Reports for the 10 grants that had been operational long enough to require Annual Performance Reports. We found that for seven grants that reported on program goals and progress, none had fully met the Supportive Housing Program goals relating to residential stability, increased skills and income, and greater self-determination. For example, for the Hawaii grant, U.S. Veterans Initiative planned to have 100 percent of the program participants complete skills assessments and/or vocational assessments before completing the program, in order to accomplish the goal relating to increased skills or income. The Annual Performance Report reported, however, that only three percent of the participants actually completed the assessments. In addition, as discussed in Finding 2, these deficiencies may have contributed to Supportive Housing Program grant funds being spent for ineligible and unsupported expenses. Auditee Comments U.S. Veterans Initiative: U.S. Veterans Initiative failed to develop an adequate financial management system U.S. Veterans Initiative disagrees and claims they have an adequate financial management system. They contend their system is a combination of the general ledgers from the financial management system used in conjunction with spreadsheets that meets federal requirements for financial management systems. U.S. Veterans Initiative failed to comply with procurement and contract administration requirements U.S. Veterans Initiative disagrees and contends that it has two contracts, which they consider as “sole source”. They 2004-LA-1008 Page 44 Finding 3 stated that documentation supporting these services as sole source has been provided to the OIG for both the Business Services Agreement with Cantwell-Anderson, Inc. and the contract with Montgomery & Neimeyer, CPAs, LLC. U.S Veterans Initiative also contends the Board Resolutions renewed the Business Services Agreement and they have provided us this documentation. Further, they stated that the personnel interviewed by the OIG were not appropriate for procurement issues. U.S. Veterans Initiative failed to establish indirect cost rates as required U.S. Veterans Initiative disagrees and stated the Indirect Cost Rates approved in 1999 still remain in effect. In addition, the rates approved for the Los Angeles facility have the same requirements as their other California, Nevada, Arizona, Texas and Hawaii grants, and therefore, all indirect charges should use the same cost rates. U.S. Veterans Initiative also stated OIG misrepresented the facts since we never identified that the Honolulu grant refused to pay any overhead costs. Further, they state they have written procedures for implementing the Indirect Cost Rates and have a simplified version in their documentation. U.S. Veterans Initiative failed to closeout expired grants The U.S. Veterans Initiative generally agrees and has now taken appropriate required action to close out the expired grants. Los Angeles Homeless Services Authority: Los Angeles Homeless Services Authority agreed with the finding and recommendations. City of Long Beach: The City of Long Beach did not comment on this finding. Page 45 2004-LA-1008 Finding 3 OIG Evaluation of U.S. Veterans Initiative: Auditee Comments U.S. Veterans Initiative failed to develop an adequate financial management system We disagree with the U.S. Veterans Initiative’s contention that their financial management system meets federal requirements because of the following reasons: U.S. Veterans Initiative’s financial management system cost code structure was developed to track expenses by program instead of by grant. This has resulted in the general ledger cost codes for several grants commingled in one cost code account for all expenses incurred. On four of HUD’s Supportive Housing Program grants, U.S. Veterans Initiative commingled several federal agencies’ funding and costs into one general ledger cost code. For all the Supportive Housing Program grants, there is no differentiation between the expiring grant and the renewal grant when expenses are incurred. Accounting adjustments are made through withdrawals versus adjustments to the accounting records, which violates the internal control system of an organization and the federal requirements for a financial management system. Federal requirements for financial management systems require that records adequately identify the source and application of funds for federally sponsored activities. These records shall contain information pertaining to Federal awards, authorizations, obligations, unobligated balances, assets, outlays, income and interest. U.S. Veterans Initiative’s financial management system does not meet this requirement. The documentation provided by U.S. Veterans Initiative to meet system requirements for a comparison of outlays to budgets is provided on their net operating statement prepared by Cantwell- Anderson, Inc. on September 14, 2004 for their fiscal year ending June 30, 2003. This document was 2004-LA-1008 Page 46 Finding 3 provided to the OIG on September 15, 2004. The basic premise for having a financial management system that compares outlays with budget is to ensure only valid expenses are charged and to provide an up to date comparison of what funds have been spent and are currently available against the grant. The U.S. Veterans Initiative’s system does not meet these requirements. Further, the comparison of budgets to outlays requires including the total budget, which additionally includes cash match requirements. U.S. Veterans Initiative has stated they are not and will not show cash match requirements on Supportive Housing Program grants accounting records. In addition, the Community Planning and Development Offices in Honolulu and Los Angeles, as well as the Los Angeles Homeless Services Authority have documented in monitoring reports, and/or in response to this audit report, that the financial management system used by the U.S. Veterans Initiative is inadequate and/or is not in compliance with federal regulations. We also noted that U.S. Veterans Initiative provided a document on their revised financial management system to the OIG on September 15, 2004. This document has several pages reflecting the fact that they are correcting everything (except cash match requirements) in the revised financial management system that OIG identified as a deficiency. U.S. Veterans Initiative failed to comply with procurement and contract administration requirements We disagree that U.S. Veterans Initiative provided adequate documentation to support a “sole source” justification for the Business Services Agreement with the Cantwell-Anderson, Inc. and Montgomery & Neimeyer, CPAs, LLC. The “sole source” justification for these contracts was provided to the OIG on August 31, 2004 and the “sole source” justification was dated August 2004. However, during the audit, no documentation was provided to support any attempt for competitive procurement or sole source justification for this contract. Contracts exceeding $100,000 or more require adequate supporting documentation. This supporting documentation includes pre- award review and procurement documents, such as requests Page 47 2004-LA-1008 Finding 3 for proposals, invitations for bids, independent cost estimates, etc. and procurement records for contractor selection or justification for lack of competition. Based on the document provided to the OIG, “sole source” justification requirements were not met because the document was simply a letter explaining what had transpired. Additionally, the OIG disputes “sole source” justification for providing accounting or auditing services since these are common services and do not fall under the purview of what would qualify as sole source procurement. We disagree that the Board Resolutions extended the Business Services Agreement with Cantwell-Anderson, Inc. U.S. Veterans Initiative provided documentation to the OIG on September 15, 2004; however, the documentation provided by the U.S. Veterans Initiative is the Business Services Agreement with Cloud Break, LLC. Cloud Break, LLC provides leases and building management to the U.S. Veterans Initiative. The Business Service Agreement with Cantwell-Anderson, Inc. grant expired on June 30, 2000, however, payments to Cantwell Anderson, Inc have continued after the expiration date through the period of this audit. We disagree that appropriate personnel were not interviewed during the audit. During the entrance conference, the Executive Director of U.S. Veterans Initiative designated the Cantwell-Anderson, Inc. Controller as our point of contact for all audit issues. Whenever the Controller was unfamiliar with any issue, she addressed these issues with upper management and Montgomery & Neimeyer, CPAs, and then conveyed their responses on these issues. Further, the other person interviewed on these issues was the Program Director/Officer for U.S. Veterans Initiative. Consulting services documentation was provided by U.S. Veterans Initiative to OIG on September 15, 2004, for the President of Cantwell-Anderson, Inc.’s calendar, phone bills, expense reports, and daily work activities, which purportedly supports his consulting services rendered. We had requested this documentation several times during the audit and no documentation was provided, until after the draft audit report was transmitted. However, the documentation provided does not show how the 2004-LA-1008 Page 48 Finding 3 consultant’s daily activities relate to the supportive housing program. U.S. Veterans Initiative failed to establish indirect cost rates as required We disagree. The U.S. Veterans Initiative indirect cost rate proposal was prepared and approved in 1999, and these rates have not been updated since that time. At the time these rates were approved, U.S. Veterans Initiative only had one site in Los Angeles and these rates were prepared exclusively for Los Angeles County and not approved for other locations. These rates have continued to be used for the indirect cost allocations through the time of this audit and for facilities located in five states. During the audit no documentation was available indicating any communication between U.S. Veterans Initiative and the Corporation of National Service, who approved the 1999 indirect cost rates. U.S. Veterans Initiative did not establish rates for facilities outside Los Angeles We disagree, U.S. Veterans Initiative did not establish indirect rates for new facilities, which should have been established and approved by the cognizant agency within six months after the award of the grant. U.S. Veterans Initiative currently has other facilities in California, Arizona, Hawaii, Nevada, and Texas. Even though indirect cost rates were only approved for the Los Angeles County facility, they were inappropriately used as indirect cost rates on all U.S. Veterans Initiative’s facilities. The San Francisco Community Planning and Development Office would not approve the awards of the Nevada and Arizona grants without reductions in the overhead and General and Administrative rates. Because no substantiation could be provided to Fort Worth, Community Planning and Development Office, they refused to include overhead costs in their grants’ Technical Submission budgets. U.S. Veterans Initiative charged the Texas grants for overhead costs of $72,343 anyway. The Honolulu Community Planning and Development Office refused to approve overhead costs until U.S. Veterans Initiative could provide substantiation for their overhead cost rate and the Los Angeles Homeless Services Authority is questioning including overhead costs in their renewal grant with the U.S. Veterans Initiative. U.S. Veterans Initiative’s (Cantwell-Anderson, Inc.) current Controller stated she was aware these separate cost pools were required, however, she Page 49 2004-LA-1008 Finding 3 was unaware why the previous Controller did not adhere to this requirement. U.S. Veterans Initiative did not establish written procedures for determining costs We disagree with U.S. Veterans Initiative response, at the time of the audit, U.S. Veterans Initiative could not provide written procedures for determining the reasonableness, allocability, and allowability of costs as required. Documentation provided on September 15, 2004 is supposed to be the simplified version of these written procedures; however, documentation for these procedures was not available during the audit. OIG disagrees that we misrepresented the facts by not reflecting the non-payment of overhead costs to the Honolulu Supportive Housing Program grant. This information is reflected as footnote number 3 in Appendix D of the audit report. U.S. Veterans Initiative failed to closeout expired contracts We generally agree with the response based on the action being initiated by Los Angeles Homeless Services Authority’s response and the U.S. Veterans Initiative’s request to Phoenix on July 27, 2004, to close out the Arizona grant. Los Angeles Homeless Services Authority: Since the Los Angeles Homeless Services Authority agreed with the finding and recommendations, we have no further comment. City of Long Beach: The City of Long Beach provided no comments on the audit finding, thus we have no further comment. Recommendations We recommend that the Office of Community Planning and Development: 3A. Suspend Supportive Housing Program grant funding on grants administered by U.S. Veterans Initiative 2004-LA-1008 Page 50 Finding 3 until U.S. Veterans Initiative develops and implements appropriate management controls to ensure only eligible activities receive funding and required documentation for the expenditures complies with OMB Circular A-122. 3B. Require U.S. Veterans Initiative to revise its financial management system so it meets the requirements of 24 CFR 84.21 and OMB Circular A-110. 3C. Require U.S. Veterans Initiative to competitively procure the services included in the Business Service Agreement and the Independent Public Accountant contract, in accordance with OMB Circular A-110 and 24 CFR 84. 3D. Require U.S. Veterans Initiative establish and implement written procedures: (a) to ensure that Supportive Housing Program grant expenses are supported with documentation before being paid; (b) to ensure that contracts include provisions for administrative, contractual and legal remedies and EEO requirements; and (c) for determining the reasonableness, allocability, and allowability of indirect costs and to ensure cost allocations are consistently applied. 3E. Require U.S. Veterans Initiative develop, and/or update, and obtain approval on indirect cost rates for each U.S. Veterans Initiative facility as required. 3F. Require Los Angeles Homeless Services Authority to submit financial closeout reports for the expired grants (CA16B900005 and CA16R151121) so that $117,077 can be de-obligated and put to better use (see Table on Page 43). 3G. U.S. Veterans Initiative submit financial closeout reports for expired grant (AZ01B002030) so that $47,542 can be de-obligated and put to better use (see Table on Page 43). Page 51 2004-LA-1008 Finding 3 THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 52 Management Controls In planning and performing our audit, we considered the management controls of U.S. Veterans Initiative to determine our audit procedures, not to provide assurance on the controls. Management controls include the plan of the organization, methods and procedures adopted by management to ensure that its goals are met. Management controls include the processes for planning, organizing, directing, and controlling its business operations. They include the systems for measuring, reporting, and monitoring business performance. We determined the following management controls were Relevant Management relevant to our audit objectives: Controls Validity and Reliability of Data - Policies and procedures that management has implemented to reasonably assure accurate, current and complete disclosure of the financial results of each HUD sponsored project; and Compliance with Law and Regulations – Policies and procedures that management has implemented to reasonably assure its administration of Supportive Housing Program grants is carried out in accordance with applicable law and regulations. The following audit procedures were used to assess the relevant controls identified above: Reviewed grant expenditures for the 15 Supportive Housing Program grants that were active between July 1, 2001, and December 31, 2003; and Reviewed and obtained an understanding of U.S. Veterans Initiatives’ policies, procedures, and practices for administering Supportive Housing Program grants; A significant weakness exists if management controls do not Significant Weaknesses give reasonable assurance that resource use is consistent with laws, regulations, and policies; that resources are safeguarded against waste, loss and misuse; and that reliable data is obtained and maintained. Page 53 2004-LA-1008 Management Controls Our review disclosed significant weaknesses in the following areas: Insufficient emphasis on U.S. Veterans Initiative’s Supportive Housing Program responsibilities and requirements (Findings 1, 2 and 3). Inadequate financial management system to record and track grant expenditures, matching funds, and comparison of expenditures with budgeted amounts. (Findings 1, 2 and 3). 2004-LA-1008 Page 54 Follow Up On Prior Audits This is Office of Inspector General’s (OIG) first audit of U.S. Veterans Initiative. An independent public accountant expressed an unqualified audit opinion on U.S. Veterans Initiative’s financial statements for the fiscal year ending June 30, 2003. However, the audit identified: Two reportable conditions relating to the audit of the financial statements, one of which was reported as a material weakness. Two instances of noncompliance that were material to the financial statements of U.S. Veterans Initiative. Two reportable conditions relating to the audit of internal controls over the major federal award programs. At the time of our audit, U.S. Veterans Initiative informed us that it had initiated the necessary corrective actions to remedy the deficiencies. Page 55 2004-LA-1008 Follow Up On Prior Audits THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 56 Appendix A Schedule of Questionable Costs And Funds Put to Better Use Type of Questioned Cost Funds Put to Recommendation Number Ineligible 1/ Unsupported 2/ Better Use 3/ 1A $3,151,576a 1B $2,252,705b 1C $1,184,961c 2B $347,408d 2C $151,290 2D $66,424 2E $46,189 2F $22,037d 2G $30,440 3F $117,077 3G $47,542 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 charged to a HUD-financed or HUD-insured program or activity, and eligibility cannot be determined at the time of the 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 put to better use relates to costs that will not be expended in the future if our recommendations are implemented; for example, costs not incurred, de-obligation of funds, withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures, loans and guarantees not made and other savings. a Net match funds questioned is $3,151,576 (total expended $3,565,408 less ineligible and unsupported in Finding 2 ($413,832) for active grants. b Net match funds questioned match funds is $2,252,705 (total expended $2,450,184 less ineligible and unsupported in Finding 2 ($197,479) for active grants. c Net match funds questioned is $1,184,961 (total expended is $1,206,998 less ineligible and unsupported in Finding 2 ($22,037) for active grants. d The City of Long Beach was overcharged $450 for indirect costs. This $450 was reduced from the $22,487 of unsupported costs, and this resulted in unsupported costs of $22,037. Page 57 2004-LA-1008 Appendix A THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 58 Appendix B Schedule of Active Supportive Housing Program Grants Page 59 2004-LA-1008 Appendix B THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 60 Appendix C Schedule of Supportive Housing Program Grant Matching Funds Required and Provided Page 61 2004-LA-1008 Appendix C THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 62 Appendix D Schedule of Ineligible Expenses Page 63 2004-LA-1008 Appendix D THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 64 Appendix E Schedule of Unsupported Expenses Page 65 2004-LA-1008 Appendix E THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 66 Appendix F Schedule of Consulting Expenses Allocated By Grant Page 67 2004-LA-1008 Appendix F THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 68 Appendix G Schedule of Ineligible and Unsupported Expenses By Grant Page 69 2004-LA-1008 Appendix G THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1008 Page 70 Appendix H Auditee Comments – U.S. Veterans Initiative Page 71 2004-LA-1008 Appendix H 2004-LA-1008 Page 72 Appendix H Page 73 2004-LA-1008 Appendix H 2004-LA-1008 Page 74 Appendix H Page 75 2004-LA-1008 Appendix H 2004-LA-1008 Page 76 Appendix H Page 77 2004-LA-1008 Appendix H 2004-LA-1008 Page 78 Appendix H Page 79 2004-LA-1008 Appendix H 2004-LA-1008 Page 80 Appendix H Page 81 2004-LA-1008 Appendix H 2004-LA-1008 Page 82 Appendix H Page 83 2004-LA-1008 Appendix H 2004-LA-1008 Page 84 Appendix H Page 85 2004-LA-1008 Appendix H 2004-LA-1008 Page 86 Appendix H Page 87 2004-LA-1008 Appendix H 2004-LA-1008 Page 88 Appendix H Page 89 2004-LA-1008 Appendix H 2004-LA-1008 Page 90 Appendix H Page 91 2004-LA-1008 Appendix H 2004-LA-1008 Page 92 Appendix H Page 93 2004-LA-1008 Appendix H 2004-LA-1008 Page 94 Appendix H Page 95 2004-LA-1008 Appendix H 2004-LA-1008 Page 96 Appendix I Auditee Comments – Los Angeles Homeless Services Authority Page 97 2004-LA-1008 Appendix I 2004-LA-1008 Page 98 Appendix I Page 99 2004-LA-1008 Appendix I 2004-LA-1008 Page 100 Appendix I Page 101 2004-LA-1008 Appendix I 2004-LA-1008 Page 102 Appendix J Auditee Comments – City of Long Beach Page 103 2004-LA-1008 Appendix J 2004-LA-1008 Page 104 Appendix J Page 105 2004-LA-1008
United States Veterans Initiative, Inc., Supportive Housing Program Grantee, Inglewood, California
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-09-27.
Below is a raw (and likely hideous) rendition of the original report. (PDF)