oversight

Empire State Development Corporation, Community Development Block Grant Disaster Assistance Funds New York, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-03-25.

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                  AUDIT REPORT




          Empire State Development Corporation
Community Development Block Grant Disaster Assistance Funds
                  New York, New York
                         2004-NY-1001

                       MARCH 25, 2004


                       OFFICE OF AUDIT
                    New York/New Jersey Region




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                                                                  Issue Date
                                                                          March 25, 2004
                                                                 Audit Case Number
                                                                          2004-NY-1001




TO:   Nelson R. Bregon, General Deputy Assistant Secretary for Community Planning and
                        Development, D


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

SUBJECT: Community Development Block Grant Disaster Assistance Funds
         Empire State Development Corporation
         New York, New York

We have completed an audit of the operations of the Empire State Development Corporation
(ESDC) pertaining to its administration of the Community Development Block Grant Disaster
Assistance Funds, which were provided to the State of New York as a result of the September 11,
2001 terrorist attacks on the World Trade Center in New York City. The objectives of the current
review were to determine whether the ESDC: (1) disbursed the CDBG Disaster Assistance Funds to
eligible Small Firm Attraction and Retention Grant (SFARG) and Business Recovery Loan Fund
(BRLF) Program applicants in accordance with HUD Approved Action Plans; (2) developed and
implemented adequate procedures for monitoring the programs funded with CDBG Disaster
Assistance Funds; and (3) has a financial management system that adequately safeguards the funds.
The current review covered the period from April 1, 2003 to September 30, 2003. This report
contains two findings with recommendations for corrective actions.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each
recommendation without management decisions, a status report on: (1) the corrective action taken,
(2) the proposed corrective action and the date to be completed, or (3) why action is considered
unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for
any recommendation without a management decision. Also, please furnish us copies of any
correspondence or directives issued because of this audit.

Should you or your staff have any questions, please contact Garry Clugston, Assistant Regional
Inspector General for Audit, at (716) 551-5755, extension 5901.




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2004-NY-1001              Page ii        TOC
 Executive Summary
We have completed an audit of the operations of the Empire State Development Corporation
(ESDC) pertaining to its administration of the Community Development Block Grant (CDBG)
Disaster Assistance Funds, which were provided to the State of New York as a result of the terrorist
attacks on the World Trade Center in New York City. The objectives of the current review were to
determine whether the ESDC: (1) disbursed the CDBG Disaster Assistance Funds to eligible
Small Firm Attraction and Retention Grant (SFARG) and Business Recovery Loan Fund (BRLF)
Program applicants in accordance with HUD Approved Action Plans; (2) developed and
implemented adequate procedures for monitoring the programs funded with CDBG Disaster
Assistance Funds; and (3) has a financial management system that adequately safeguards the
funds. This is the third and final report that the Office of Inspector General (OIG) will issue on the
CDBG Disaster Assistance Funds directly appropriated to ESDC. We have issued an audit report
every six months and included a summary of each report’s findings in the Inspector General’s Semi-
Annual Reports to Congress. The prior audit reports on the ESDC were issued on March 25, 2003
and September 30, 2003, and are discussed in the Follow Up On Prior Audits section of this report.

The results of our review disclosed that the ESDC generally disbursed the CDBG Disaster
Assistance Funds to eligible applicants in accordance with HUD Approved Action Plans, and has a
financial management system that is capable of adequately safeguarding the funds. However, we
noted processing deficiencies in its grant programs that need to be resolved to enhance the efficiency
of ESDC’s administration of the funds. Also, we noted monitoring controls that need to be
strengthened so HUD can readily make compliance determinations regarding ESDC’s programs.
These issues are summarized below and discussed in detail in the two findings in this report.



                                        The ESDC has continued to make substantial progress in
 ESDC disbursements                     developing and implementing programs that address the
                                        immediate economic needs of numerous businesses that
                                        suffered economic losses and property damages during the
                                        September 11, 2001 terrorist attacks. At September 30,
                                        2003, the ESDC had disbursed over $796 million of the
                                        $1.124 billion in CDBG Disaster Assistance Funds it is
                                        administering. The ESDC had disbursed $36 million in
                                        Small Firm Attraction and Retention Grants (SFARG) to
                                        1,095 businesses representing over 19,000 employees, $173
                                        million in Large Firm Job Creation and Retention Grant
                                        Program (JCRP) to 44 large Businesses, and $543 million
                                        in Business Recovery Grants (BRG) to over 14,000
                                        applicants. In addition, the ESDC has implemented several
                                        other programs to address the economic needs of the Lower
                                        Manhattan area resulting from the terrorist attacks. The
                                        ESDC’s grant and loan programs have contributed
                                        significantly to the revitalization of Lower Manhattan.



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Executive Summary


                           The ESDC has made significant progress in improving its
                           management controls and internal audit procedures over the
                           disbursement of the disaster assistance funds. As a result of
                           actions taken by ESDC, including actions to resolve
                           recommendations in prior OIG audit reports, the ESDC
                           identified and recovered $1.48 million of improper BRG
                           and SFARG grants disbursements.

                           Although the Empire State Development Corporation
 ESDC Needs to Improve     (ESDC) has developed and begun implementation of
 its Procedures for        procedures for monitoring the CDBG Disaster Assistance
 Documenting its           programs, we noted that the ESDC needs to improve
 Monitoring of CDBG        procedures for documenting its monitoring reviews of the
 Disaster Assistance       Business Recovery Loan Fund (BRLF) Program and the
 Programs                  Job Creation and Retention Program (JCRP). Specifically,
                           we found that the ESDC is not adequately documenting its
                           on-site monitoring of the BRLF lenders; nor maintaining
                           written or computerized documentation detailing their
                           monitoring of the JCRP. Without adequate documentation
                           of the ESDC's monitoring of these programs, HUD’s ability
                           to make compliance determinations regarding these
                           programs as required by the alternative procedures
                           published in the Federal Register will be limited. We
                           believe these deficiencies occurred because the ESDC did
                           not follow procedures that required formal written
                           documentation of on-site monitoring visits of BRLF
                           lenders, and because its written monitoring procedures for
                           the JCRP do not require that monitoring reviews be fully
                           documented.

                           Our review of statistically selected samples of Small Firm
  ESDC Needs to Continue   Attraction and Retention Grant (SFARG) applications
  Improvements in the      disclosed that the ESDC disbursed two grants totaling
  SFARG Program            $49,000 to applicants who were mistakenly determined to
  Processing               be eligible. This occurred because ESDC did not properly
                           apply certain program guidelines during the processing of
                           the applications. Specifically, we found that one applicant
                           was ineligible because the program’s lease requirement was
                           not met while the other applicant did not meet the
                           program’s full time permanent employee requirement. In
                           this regard, we believe that ESDC officials should resolve
                           the deficiencies in this finding along with similar issues
                           discussed in a finding in our prior audit report.




2004-NY-1001                   Page iv                                        TOC
                                                         Executive Summary



                  The results of our audit were discussed with ESDC officials
Exit conference   during the audit and at an exit conference held on March
                  10, 2004 at the ESDC’s office. The ESDC provided written
                  comments to our draft report on March 18, 2004. We
                  included excerpts of the comments with the findings, and
                  provided the complete text of the comments in Appendix B
                  of this report.




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2004-NY-1001        Page vi          TOC
Table of Contents
Management Memorandum                                                      i


Executive Summary                                                      iii


Introduction                                                            1


Findings

1.     Monitoring Reviews of CDBG Disaster Assistance
       Programs Should be Fully Documented                             5

2.     Processing Deficiencies of The Small Firm Attraction
       and Retention Grant Program Should be Resolved                  11



Management Controls                                                   17


Follow Up On Prior Audits                                             19



Appendices
     A Schedule of Questioned Costs                                   25

     B Auditee Comments                                               27




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Table of Contents


Abbreviations

BRG            Business Recovery Grant
BRG2           Compensation for Economic Losses to Other Businesses
BRLF           Business Recovery Loan Fund
CDBG           Community Development Block Grant
ESDC           Empire State Development Corporation
HUD            U.S Department of Housing and Urban Development
JCRP           Large Firm Job Creation and Retention Program
LMDC           Lower Manhattan Development Corporation
OIG            Office of the Inspector General




2004-NY-1001                       Page viii
Introduction
The negative economic impact of the September 11, 2001 terrorist attacks on the World Trade
Center in lower Manhattan took a devastating toll on New York City affecting a much broader
area than just lower Manhattan. Numerous New York City businesses were destroyed, displaced
or could not operate because certain infrastructures were destroyed or seriously damaged. In the
aftermath of the terrorist attacks, Congress authorized HUD to provide the State of New York
with $3.483 billion of Community Development Block Grant (CDBG) Disaster Assistance
Funds. Specifically, on November 5, 2001, the Office of Management and Budget designated
$700 million for CDBG funding for New York City out of the Emergency Response Fund that
Congress appropriated.1 On January 10, 2002, Congress appropriated an additional $2 billion for
CDBG funding, earmarking at least $500 million to compensate small businesses, nonprofit
organizations, and individuals for their economic losses.2 Finally, on August 2, 2002, Congress
appropriated an additional $783 million for CDBG funding.3 The Office of the Inspector General
(OIG) has been performing an on-going audit of the operations of the Empire State Development
Corporation (ESDC) pertaining to its administration of a portion of the CDBG Disaster Assistance
Funds. The OIG previously issued audit reports covering the periods from program inception
(February 2002) to March 31, 2003. This is the third audit and it covers the period from April 1,
2003 to September 30, 2003.




                                             HUD awarded the first congressional appropriation, in the
     Congressional funding to                amount of $700 million, to the State of New York on
     the State of New York                   February 13, 2002 through the Empire State Development
     for New York City                       Corporation (ESDC) for the properties and businesses
                                             damaged by the September 11, 2001 terrorist attacks on the
                                             World Trade Center in New York City. The ESDC was
                                             designated by the Governor to administer the first CDBG
                                             appropriation of $700 million. The ESDC is governed by a
                                             Board of Directors, whose Chairman is Charles A. Gargano
                                             and its Executive Vice President and Chief Operating
                                             Officer is Kevin S. Corbett. The ESDC’s offices are
                                             located at 633 Third Avenue, New York, New York. To
                                             carry out large-scale economic development activities,
                                             ESDC creates various consolidated subsidiaries. In this


1
    2001 Emergency supplemental Appropriations act for Recovery from and Response to Terrorist Attacks on the
    United States, Pub. L. 107-38, 115 Stat. 220, (2001).
2
    The Department of Defense and Emergency Supplemental Appropriations for Recovery From and Response to
    Terrorist Attacks on the United States Act 2002(Emergency Supplemental Act 2002), Pub. L. 107-117, 115 Stat.
    2336 (2002).
3
    The 2002 Supplemental Appropriations Act for Recovery From and Response to Terrorist Attacks on the United
    States, Pub. L. 107-206.

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Introduction


                        regard, the ESDC’s Board of Directors authorized the
                        creation of the Lower Manhattan Development Corporation
                        (LMDC) on November 2001 to assist in the economic
                        recovery and revitalization of Lower Manhattan, with
                        special emphasis on the redevelopment of the areas
                        damaged during the terrorist attacks. LMDC has been
                        designated by the State of New York as the entity to
                        develop programs and distribute the $2.8 billion
                        appropriated by Congress in the 2002 Emergency
                        Supplemental and the 2002 Supplemental acts previously
                        stated.

                        The OIG has issued semi-annual reports on the disaster
                        assistance activities carried out by the ESDC since the
                        inception (February 2002) of the disaster assistance
                        programs. This is the third report and it covers the period
                        April 1, 2003 to September 30, 2003. Our audit reports
                        covered all major programs administered with CDBG funds
                        allocated to the ESDC. A separate series of audits of the
                        activities being administrated by the LMDC is currently
                        being conducted. The results of our current audit of LMDC
                        will be provided in a separate audit report.

                        The ESDC developed an Action Plan dated January 30,
 Approved action plan   2002, which described how the $700 million was to be
                        allocated among various categories. On November 22,
                        2002, HUD approved the LMDC’s Action Plan, which
                        included an additional $350 million that the LMDC
                        provided to the ESDC’s business recovery programs. In
                        March 2003, the ESDC reallocated funds to meet program
                        objectives. On August 6, 2003, HUD approved LMDC’s
                        fourth Action Plan that included an additional $74,500,000
                        from LMDC to the ESDC’s BRG program. The additional
                        funding brought the amount that is being administrated by
                        the ESDC to $1.124 billion.




2004-NY-1001                Page 2                                       TOC
                                                                                 Introduction



                                    The budget and disbursement amounts on September 30,
                                    2003, were as follows:


      Program                      Budget as of      Disbursements as of      Balance as of
                                September 30, 2003   September 30, 2003    September 30, 2003
      Bridge Loan Program               6,760,000            $0                   $6,760,000
      Business Recovery Loan          $41,140,000           $16,285,298          $24,854,702
      Fund
      Business Recovery              $564,360,000         $543,993,383           $20,366,617
      Grant Program
      Small Firm Attraction &        $155,000,000           $36,798,430         $118,201,570
      Retention Grants
      Grants To Technical              $5,000,000            $2,636,584           $2,363,416
      Assistance Providers
      Large Firm Job Creation        $320,000,000         $173,693,270          $146,306,730
      & Retention
      Compensation For                $13,240,000           $13,240,000                    $0
      Economic Losses To
      Other Businesses
      Business Information             $5,000,000           $3,647,153            $1,352,847
      Administration                  $14,000,000           $6,215,775            $7,784,225
             TOTALS                $1,124,500,000         $796,509,893          $327,990,107

                                  As of September 30, 2003, the ESDC had disbursed funds to
                                  recipients primarily in four major programs: Small Firm
                                  Attraction and Retention Grants (SFARG); Job Creation and
                                  Retention Program (JCRP); Business Recovery Grants
                                  (BRG); and Compensation for Economic Losses to Other
                                  Businesses (BRG2). During our previous audits, we
                                  performed extensive reviews of the JCRP, BRG, and BRG2
                                  Programs. For the current audit period, we concentrated our
                                  audit efforts on the SFARG and Business Recovery Loan
                                  Fund (BRLF) programs. In addition, we reviewed the
                                  ESDC’s procedures for the monitoring of the CDBG disaster
                                  assistance programs.

                                  Our audit objectives were to determine whether the ESDC:
Audit Objectives                  (1) disbursed the CDBG funds to eligible Small Firm
                                  Attraction and Retention Grant (SFARG) and Business
                                  Recovery Loan Fund (BRLF) Program applicants in
                                  accordance with HUD Approved Action Plans; (2) developed
                                  and implemented adequate procedures for monitoring the

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Introduction


                  programs funded with CDBG Disaster Assistance Funds; and
                  (3) has a financial management system that adequately
                  safeguards the funds.

                   To achieve our audit objectives, we:
Audit scope and
methodology        •   Interviewed ESDC and HUD Officials;
                   •   Analyzed ESDC’s computerized data systems;
                   •   Reviewed ESDC program guidelines, polices and
                       monitoring procedures;
                   •   We reviewed 93 SFARG cases which were selected
                       using Statistical Sampling;
                   •   Compared ESDC data to New York State Department of
                       Labor data;
                   •   Confirmed SFARG occupancy data with landlords;
                   •   Performed an analysis of all 270 BRLF cases using
                       Audit Command Language (ACL);
                   •   Reviewed a sample of BRLF case files;
                   •   Observed ESDC monitoring of a community-based
                       lender.

                   As part of our review of the data within ESDC’s grants
                   management system and disbursement database, we
                   analyzed the systems to identify potential control
                   weaknesses. Although, we did not perform a detailed
                   assessment of the reliability of the data within these
                   systems, we did perform a minimal level of testing to
                   determine whether the data was reliable for our purposes.

                   We performed our on-site work between August 2003 and
                   March 2004. The current review covered the period
                   between April 1, 2003 and September 30, 2003. The audit
                   was conducted in accordance with Generally Accepted
                   Government Auditing Standards.

                   We provided a copy of this report to the Auditee.




2004-NY-1001            Page 4                                         TOC
                                                                                       Finding 1


           Monitoring Reviews of CDBG Disaster
            Assistance Programs Should be Fully
                        Documented
 Although the Empire State Development Corporation (ESDC) has developed and begun
 implementation of procedures for monitoring the CDBG Disaster Assistance programs, we noted
 that the ESDC needs to improve procedures for documenting its monitoring reviews of the
 Business Recovery Loan Fund (BRLF) Program and the Job Creation and Retention Program
 (JCRP). Specifically, we found that the ESDC is not adequately documenting its on-site
 monitoring of the BRLF lenders; nor maintaining written or computerized documentation
 detailing their monitoring of the JCRP. Without adequate documentation of the ESDC's
 monitoring of these programs, HUD’s ability to make compliance determinations regarding these
 programs as required by the alternative procedures published in the Federal Register will be
 limited. We believe these deficiencies occurred because the ESDC did not follow procedures
 that required formal written documentation of on-site monitoring visits of BRLF lenders, and
 because its written monitoring procedures for the JCRP do not require that monitoring reviews be
 fully documented.



Scope                                We reviewed the ESDC’s monitoring procedures for the
                                     following programs: Business Recovery Grant (BRG),
                                     Compensation for Economic Losses to Other Businesses
                                     (BRG2), Small Firm Attraction and Retention Grant
                                     (SFARG), Job Creation and Retention (JCRP), Business
                                     Recovery Loan Fund (BRLF), and the Technical Services
                                     Assistance Grant. The review included determining
                                     whether the ESDC has developed and implemented
                                     adequate procedures for monitoring the above-mentioned
                                     CDBG disaster assistance programs.

                                     The Federal Register Docket No. 4732-N-04, dated
Criteria
                                     May 22, 2002, states that 24 CFR 570.490 (b) is waived
                                     and the following provision applies: “The state shall
                                     maintain such records as may be necessary to facilitate
                                     review and audit by HUD of the State’s administration of
                                     CDBG funds under Section 570.493. Consistent with
                                     applicable statutes, regulations, waivers, alternative
                                     requirements, and other Federal requirements, the content
                                     of records maintained by the State shall be sufficient to:
                                     enable HUD to make the applicable determinations
                                     described at Section 570.493; make compliance

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Finding 1


                            determinations for activities carried out directly by the
                            state; and show how activities funded are consistent with
                            the descriptions of activities proposed for funding in the
                            action plan”.

                            The determinations under 24 CFR Section 570.493 are as
                            follows: (1) whether the state has distributed CDBG funds
                            to units of general local government in a timely manner in
                            conformance to the method of distribution described in its
                            action plan under part 91 of this title; (2) whether the state
                            has carried out its certifications in compliance with the
                            requirements of the Act and this subpart and other
                            applicable laws; and (3) whether the state has made reviews
                            and audits of the units of general local government required
                            by § 570.492.

                            BRLF Program

                            The purpose of the WTC Business Recovery Loan Fund
 Background
                            (BRLF) Program is to fund participating lenders in order
                            for them to provide low-cost working capital loans on
                            flexible terms to small businesses that currently lack access
                            to suitable credit, particularly those that do not meet SBA
                            credit criteria for disaster loans; and that have been
                            adversely affected by the September 11, 2001 attacks.

                            Our review of the BRLF Program disclosed that the ESDC
 Written/Computerized       has written monitoring procedures for this program and has
 Documentation of on-site   implemented those procedures. However, we found that
 monitoring is needed       the ESDC does not adequately document its on-site
                            monitoring of the Business Recovery Loan Fund (BRLF)
                            Program lenders. Specifically, we found that the ESDC
                            conducted periodic on-site monitoring visits at the BRLF
                            Program lenders to ensure compliance with the BRLF
                            Program regulations. However, the ESDC did not
                            adequately document the results of its monitoring reviews.
                            The ESDC only documents its on-sites visits in a schedule,
                            which only shows the dates of the on-site visits, the
                            organizations visited, the ESDC participants, the Lender
                            participants, and comments on any exceptions noted.

                            According to ESDC officials, besides the schedule, written
                            notes of the ESDC officials and emails/letters to the BRLF
                            Lenders are the only documentation of the ESDC's on-site
                            monitoring visits. The handwritten notes do not provide

2004-NY-1001                    Page 6                                          TOC
                                                                           Finding 1


                          details on each of the individual files reviewed by the
                          ESDC during its on-site monitoring reviews. We believe
                          the handwritten notes should be formalized to facilitate a
                          review by HUD. Additionally, the results of the on-site
                          monitoring reviews should be provided in a report that
                          describes what was reviewed, the results of the review, and
                          the conclusions reached. This information is needed for
                          HUD to determine whether funds were awarded and
                          disbursed in accordance with approved action plans.
                          Without adequate documentation of the ESDC's on-site
                          monitoring reviews, HUD’s ability to make compliance
                          determinations regarding these programs as required by the
                          alternative procedures published in the Federal Register
                          will be limited. Therefore, we are recommending that
                          HUD require the ESDC to maintain written and/or
                          computerized documentation detailing on-site monitoring
                          of BRLF Program lenders to facilitate reviews and audits
                          by HUD.

                          JCRP

Background                The Large Firm Job Creation and Retention Grant Program
                          (JCRP) targets businesses in the area of Lower Manhattan
                          south of Canal Street with over 200 full-time employees
                          that require assistance in maintaining, establishing or
                          resuming a presence in Lower Manhattan or elsewhere in
                          New York City. The program also aims to attract
                          companies willing to commit to relocating and/or creating
                          200 or more jobs in Lower Manhattan.

                          Our review of the JCRP disclosed that ESDC has
Adequate Documentation    monitoring procedures for this program; however, at the
of Monitoring is needed   time of our review the procedures were not in writing.
                          According to ESDC officials, they monitor the JCRP
                          grantees via the Report of Employment, which is submitted
                          annually to the ESDC. ESDC officials further stated that
                          the employment data from the Report of Employment is
                          tracked in a database and that this monitoring includes
                          comparing employment data submitted in the annual Report
                          of Employment to the employment data required by the
                          JCRP contract.

                          Our review disclosed that the ESDC received the Report of
                          Employment from the ten JCRP grantees that were required
                          to submit the report by February 1, 2003. We noted that the

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Finding 1


                   ESDC entered the employment data from the Report of
                   Employment into a database; however, the database
                   documentation provided to us did not indicate whether JCRP
                   grantees were in compliance with the JCRP contracts. ESDC
                   Officials advised us that a new database is being developed,
                   which will be used to monitor only JCRP grantees. It should
                   be noted that, if sufficient and adequate information is not
                   maintained in ESDC’s database, a determination cannot be
                   made as to whether JCRP grantees are in compliance with
                   the program’s requirements. Our review also disclosed that
                   the ESDC contacted the New York State (NYS) Department
                   of Labor (DOL) to verify the employment data submitted in
                   the Report of Employment for the ten JCRP grantees
                   reviewed. However, the contact was not made until after we
                   made inquiries regarding data comparisons. Furthermore,
                   ESDC does not have any documentation showing the results
                   of its comparison of the employment data in the Report of
                   Employment to data filed with the NYS DOL. Documented
                   reports of ESDC's monitoring reviews of JCRP grantees,
                   would enhance HUD’s ability to make compliance
                   determinations regarding the JCRP as required by alternative
                   procedures published in the applicable Federal Register.
                   Therefore, we are recommending that HUD require the
                   ESDC to establish adequate monitoring procedures for the
                   JCRP and maintain written and/or computerized
                   documentation detailing the monitoring of this program to
                   facilitate reviews and audits by HUD.



Auditee Comments   The ESDC stated that it understands that the OIG believes
                   that ESDC’s documentation of its monitoring of the BRLF
                   Program should be more formal and should include greater
                   detail. ESDC staff has already begun to use checklists and
                   more formal procedures that will achieve this goal and
                   enable HUD to more easily review the extent and outcomes
                   of BRLF monitoring efforts.

                   Furthermore, the ESDC indicated that it believes that
                   adequate documentation of JCRP monitoring exists.
                   Compliance can easily be determined from viewing the
                   current ESDC employment database. All material and
                   relevant data is captured in the database. ESDC will work
                   to develop a separate JCRP database that may address some
                   of your office’s (OIG’s) concerns.

2004-NY-1001           Page 8                                        TOC
                                                                     Finding 1




OIG Evaluation of
                    We believe that written and/or computerized
Auditee Comments    documentation detailing the monitoring of the JCRP will
                    facilitate reviews and audits by HUD.




Recommendations     We recommend that HUD, the General Deputy Assistant
                    Secretary for Community Planning and Development:


                    1A.     Require the ESDC to maintain written or
                            computerized documentation detailing on-site
                            monitoring reviews of BRLF Program lenders to
                            facilitate reviews and audits by HUD.

                    1B.     Require the ESDC to maintain written or
                            computerized      documentation      detailing  the
                            monitoring of the JCRP and other CDBG Disaster
                            programs to facilitate reviews and audits by HUD.




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                                                                                       Finding 2



   Processing Deficiencies of The Small Firm
 Attraction and Retention Grant Program Should
                  be Resolved
Our review of statistically selected samples of Small Firm Attraction and Retention Grant
(SFARG) applications disclosed that the ESDC disbursed two grants totaling $49,000 to
applicants who were mistakenly determined to be eligible. This occurred because ESDC did not
properly apply certain program guidelines during the processing of the applicants’ applications.
Specifically, we found that one applicant was ineligible because the program’s lease requirement
was not met, while the other applicant did not meet the program’s full time permanent employee
requirement. As a consequence, two applicants received grants, totaling $49,000, from the
SFARG Program that they were not entitled to receive. In this regard, we believe that ESDC
officials should resolve these deficiencies in conjunction with resolving similar issues discussed
in a finding in our prior audit report.



 Background                          The purposes of the Small Firm Attraction and Retention
                                     Grant (SFARG) Program is to retain small businesses at
                                     risk of leaving downtown Manhattan, to attract new ones,
                                     and to assist those businesses located in or close to the
                                     World Trade Center on September 11, 2001 that maintained
                                     a business in New York City.

                                     The SFARG Program provides grants to qualified
                                     businesses, with 200 or fewer employees, that are located or
                                     plan to locate in the area of Manhattan south of Canal
                                     Street, and commit to remaining in the area for at least five
                                     years beyond their current commitment. The grant amount
                                     awarded to each business is determined by the number of
                                     employees located at the “eligible premises” and the
                                     location of the business within the City of New York. Grant
                                     payments are made in two installments, the first at the time
                                     the application is approved, and the second 18 months after
                                     the application date. Total payments are $3,500 per
                                     employee, except for businesses that were in the
                                     “Restricted Zone” and remained downtown. Those
                                     businesses receive two payments totaling $5,000 per
                                     employee.

                                     The ESDC’s amended Action Plan of June 7, 2002
                                     allocated $105 million for the SFARG Program from the

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  Finding 2


                 HUD appropriation of $700 million. The LMDC Action
                 Plan increased the allocation for the SFARG Program by
                 $50 million to $155 million. At September 30, 2003, per
                 the ESDC’s Grants Management System, $36,798,430 of
                 SFARG funds had been expended.

Scope            From the 324 SFARGs with disbursements totaling
                 $9,514,250 between April 1, 2003 and September 30, 2003,
                 we selected two statistical samples of SFARGs. Our
                 samples were selected using a Stratified Variable Sample
                 method. The sample parameters called for a 95 percent
                 confidence level and a precision range of 5 percent. The
                 first statistical sample consisted of 47 SFARGs,
                 representing disbursements of $2,874,500 that were
                 disbursed between April 1, 2003 and June 30, 2003. The
                 second statistical sample consisted of 46 SFARGs
                 representing disbursements of $3,299,000 that were
                 disbursed between July 1, 2003 and September 30, 2003. In
                 total, we selected and tested 93 SFARGs, representing
                 disbursements of $6,173,500. We reviewed the 93 grants in
                 our sample to determine whether the ESDC followed its
                 processing criteria and SFARG guidelines. We sent
                 confirmations to the landlords to verify the applicants’
                 leases. We independently obtained the data on all 93
                 SFARGs from the New York State Department of Labor to
                 verify the information to the ESDC grant management
                 system. We interviewed ESDC officials to determine how
                 the ESDC is verifying and monitoring program activity.
Criteria         The SFARG Program guidelines state: “a business shall be
                 eligible for funding under the program if it was operating
                 its business pursuant to a lease for its then current business
                 premises within the Eligible Area and that the lease was to
                 expire, by its terms, on or prior to December 31, 2004, or
                 such lease was to expire after December 31, 2004 and it is
                 relocating its business to another location within the
                 Eligible Area or it was operating its business outside the
                 Eligible Area, or it had not yet commenced its business
                 operations.”

                 OMB Circular A-87 states that governmental units are
                 responsible for the efficient and effective administration of
                 Federal awards through the application of sound
                 management practices. It further provides that to be
                 allowable under a grant program, costs must be necessary

  2004-NY-1001       Page 12                                         TOC
                                                                              Finding 2


                           and reasonable for proper and efficient administration of
                           the program and be adequately documented.

                           Ineligible grant

 Ineligible SFARG          For Grant Number 31044, the ESDC disbursed $24,500 in
                           SFARG funds to an applicant who was not eligible for
                           SFARG assistance. Our review disclosed that the
                           applicant’s original lease was cancelled prematurely on
                           April 25, 2003 and a new lease was executed. The new
                           lease term is May 1, 2003 to April 30, 2013. The SFARG
                           program guidelines require that applicants located in the
                           eligible area must have had an existing lease expiring
                           before December 31, 2004. Because the original lease
                           expired after December 31, 2004, the applicant was not
                           eligible for the SFARG program. As a result, the applicant
                           received $24,500 in SFARG funds for which it was not
                           eligible to receive.

                           Ineligible SFARG Payment

                           For grant number 30686, the ESDC disbursed $24,500 in
Ineligible SFARG Payment
                           SFARG funds to an applicant that was not eligible for
to an Applicant with
                           assistance because the applicant’s business employees only
Seasonal Employees
                           have a temporary work status. The applicant, a tax
                           preparation company, employs temporary seasonal
                           employees during tax season.

                           The ESDC approved and disbursed a $24,500 SFARG to
                           the applicant based on information showing that the
                           applicant had a total of fourteen employees. We noted that
                           the applicant’s employees are stationed at three different
                           locations within the Borough of Manhattan. However,
                           documentation in the application file and site visits showed
                           that two of the locations were rented on a seasonal basis. In
                           addition, employee data, which we independently obtained
                           from the New York State Department Labor for the first
                           quarter of 2003, showed that the applicant reported only
                           eight employees for the first month, six employees for the
                           second month, and zero employees for the third month. The
                           data for the second quarter of 2003 showed zero employees
                           for all three months.




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 Finding 2


Criteria                 The SFARG Program guidelines state that a full time
                         permanent employee shall mean (i) a full time, permanent
                         employee on the eligible Business’ payroll that has worked
                         for a minimum of 35 hours per week for not less than four
                         consecutive weeks. Based on the results of our review the
                         applicant’s employees were not permanent employees since
                         they were hired to work on a temporary basis. Inasmuch as
                         the purpose of the SFARG Program is to assist businesses
                         with permanent employees, the grant amount awarded to
                         the applicant is ineligible. As a result, the applicant
                         received $24,500 in SFARG funds for which it was not
                         eligible to receive.



 Auditee Comments        ESDC agrees that the grant recipient for grant Number
                         31044 is not eligible for assistance under the SFARG
                         Program, and has sent the recipient a letter requesting
                         reimbursement.

                         Concerning the applicant under Grant Number 30686,
                         ESDC maintains that this applicant remains in compliance
                         with the program's guidelines and is eligible for the SFARG
                         payment. At the time of application, the employees were
                         working full time on the payroll, and were therefore
                         eligible. While additional NYS-45 forms for the 3
                         subsequent quarters found that the company had 0
                         employees during those quarters, additional reviews of the
                         application and contact with the applicant confirmed that
                         the company is a tax preparation service and hires full time
                         employees on a seasonal basis. This issue was brought to
                         the SFARG Review Committee and it was confirmed that
                         the guidelines do not preclude employees like this from
                         being eligible. Furthermore, we believe that denying this
                         applicant the SFARG payment would be inconsistent with
                         the program’s guidelines. The seasonality of the
                         employment numbers is irrelevant to the company's
                         eligibility.




     OIG Evaluation of
     Auditee Comments    Regarding the applicant under Grant Number 30686, our
                         review indicated that the applicant’s employees were not

 2004-NY-1001                Page 14                                       TOC
                                                                  Finding 2


                  permanent employees since they were hired to work on a
                  temporary basis. Inasmuch as the purpose of the SFARG
                  Program is to assist businesses with permanent employees,
                  we believe that the award of this grant did not meet the
                  purpose of the program.




Recommendations   We recommend that HUD, the General Deputy Assistant
                  Secretary for Community Planning and Development:

                  2A. Ensure that the ESDC reimburses the SFARG
                      Program the amount of $49,000 from non-federal
                      funds to correct the improper payments made to
                      ineligible applicants for SFARG numbers 31044 and
                      30686.

                  2B. Instruct the ESDC to improve procedures for verifying
                      the eligibility of the SFARG applicants to ensure that
                      SFARGs are only awarded to eligible applicants.




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2004-NY-1001        Page 16     TOC
Management Controls
In planning and performing our audit, we considered the management controls of the Empire
State Development Corporation to determine our auditing procedures, not to provide assurance
on the controls. Management controls include the plan of organization, methods and procedures
adopted by management to ensure that its goals are met. Management controls include the
processes for planning, organizing, directing, and controlling program operations. Management
controls include the systems for measuring, reporting, and monitoring program performance.



                                   We determined the following management controls were
 Relevant Management               relevant to our audit objectives:

                                   •   Program Operations – Policies and procedures that
                                       management has implemented to reasonably ensure that a
                                       program meets its objectives.

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

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

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

                                   We assessed all the relevant controls identified above.

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

Significant Weaknesses             Although the review did not disclose any major significant
                                   weaknesses in ESDC's management controls, we found
                                   deficiencies in its grant processing and monitoring
                                   procedures that warrant corrective actions to improve the
                                   efficiency of the grant programs being administered by
                                   ESDC. The deficiencies are discussed in the finding section
                                   of this report.


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2004-NY-1001             Page 18       TOC
Follow Up On Prior Audits
We issued two prior audit reports on the ESDC, under Report Number 2003-NY-1003 on March
25, 2003, and Report Number 2003-NY-1005 on September 30, 2003.

Audit Report 2003-NY-1003 contains four findings. The recommendations and status of each
recommendation are as follows:

Finding 1- Recommendations and Resolution Actions Taken

1A    Instruct the ESDC on whether unresolved overpayments of $303,700, which we have
      determined to be technically ineligible, is to be reimbursed to the BRG Program by the
      ESDC from non-Federal funds.

      HUD sustained the recommendation and advised the ESDC to reimburse the BRG
      Program $303,700 from non-Federal funds. Of the sustained amount, a total of $156,333
      has been reimbursed and $50,000 remains due on a repayment agreement for grant
      number 11363 with a target date for completion of the repayment of September 15, 2004.
      HUD has established a target date of October 31, 2004 to recapture the remaining
      $97,367 in ineligible costs.

1B    Instruct the ESDC that post reviews of disbursed BRGs should be performed to identify
      and correct errors with appropriate corrective actions.

      HUD agreed with the recommendation. Final Action has been completed.

1C    Ensure that the ESDC disburses the $8,173 approved under BRG 30058 to correct the
      underpayment.

      HUD agreed with the recommendation and the underpayment of $8,173 has been
      corrected.

1D    Require the ESDC to analyze tax information as part of its internal audit function,
      maintain its analysis for HUD review, and report results to HUD-OIG.

      HUD agreed with the recommendation. Final Action has been completed.

Finding 2- Recommendations and Resolution Actions Taken

2A    Obtain and review the results of the audit work that the ESDC’s internal audit division is
      performing on the economic loss documentation issue, and determine whether the audit
      work is adequate enough to ensure that reported economic loss amounts are supported by
      proper documentation.

      HUD agreed with the recommendation. HUD advised the ESDC to provide a schedule
      and description, including the results, of the audit work that the ESDC internal audit
      division is performing on the economic loss documentation issue, so that HUD can

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Follow Up On Prior Audits


       determine whether the audit work is adequate to ensure that reported economic loss
       amounts are supported by proper documentation. HUD has revised the target date for
       completion for this recommendation to October 31, 2004.

2B     Ensure that the ESDC has properly implemented the formulas and procedures that HUD
       recommended for determining duplication of benefits.

       HUD agreed with the recommendation. Final Action has been completed.

2C     Direct the ESDC to seek reimbursement in coordination with the SBA, of grant funds that
       were determined to be duplicate benefits.

       HUD agreed with the recommendation. Final Action has been completed.

Finding 3-Recommendations and Resolution Actions Taken

3A   Instruct the ESDC on whether the unresolved payment of $38,500 to an ineligible recipient,
     is to be reimbursed to the SFARG Program by the ESDC from non-Federal funds.

     HUD agreed with the recommendation. The incorrect payment has been partially resolved
     through a BRG supplemental grant. A repayment agreement for the remaining $12,228 has
     been executed. HUD has revised the target date for completion for this recommendation to
     February 28, 2005.

3B   Instruct the ESDC to revise procedures and guidelines for processing SFARG applications
     to include detailed procedures on how to handle special situations and require adequate
     documentation of the decision-making process.

     HUD believes that ESDC has an adequate procedure in place for addressing special cases in
     the SFARG Program. This recommendation is closed.

3C   Require the ESDC to establish procedures to ensure that its grants management system
     contains the same Employee Identification Number (EIN) that the SFARG recipient files
     with the New York State Department of Labor.

     HUD advised the ESDC to establish and document procedures to ensure that ESDC’s
     grants management system contains the same Employee Identification Number (EIN) as the
     form the SFARG recipient filed with the New York State Department of Labor. This
     recommendation is closed.

Finding 4-Recommendations and Resolution Actions Taken

4A   Instruct the ESDC to reimburse the program with non-Federal funds for the $12,491 of
     duplicate payments.


2004-NY-1001                            Page 20                                       TOC
                                                                     Follow Up On Prior Audits


      The ineligible amount was sustained. A total of $9,974.11 has been repaid and the
      remaining $2,696.89 will be repaid in accordance with an executed repayment agreement.
      This recommendation is closed. However, during the current audit, we found a duplicate
      payment of $17,302, of which $7,662 represents ineligible costs to the BRG program.
      The ESDC was aware of this duplicate payment and sent a letter to the recipient
      requesting repayment.

4B   Direct the ESDC to establish controls to ensure that payment records are reviewed prior to
     disbursement so that duplicate payments do not occur.

     HUD agreed with the recommendation. HUD advised ESDC to establish and document
     controls to ensure that payment records are reviewed prior to disbursement so that duplicate
     payments do not occur. This recommendation is closed.

4C   Instruct the ESDC to implement procedures to reconcile disbursements per the ESDC’s
     General Ledger to the grant management system and the disbursement database.

     HUD agreed with the recommendation. HUD advised ESDC to implement and document
     procedures to reconcile disbursements per the ESDC General Ledger to the grant
     management system and the disbursement database. The ESDC is continuing to work on
     reconciling its disbursement records.

4D   Direct the ESDC to ensure that procurements of goods and services are: (a) conducted in a
     manner that promotes full and open competition, (b) adequately justified, and (c) fully
     documented.

     HUD agreed with the recommendation. HUD advised ESDC to ensure that procurements of
     goods and services are: (a) conducted in a manner that promotes full and open competition,
     (b) adequately justified, and (c) fully documented. This recommendation is closed.

4E   Instruct the ESDC to provide assurance that costs incurred are adequately documented,
     reviewed and approved prior to payment.

     HUD agreed with the recommendation. HUD instructed the ESDC to provide assurance
     that costs incurred are adequately documented, reviewed and approved prior to payment.
     This recommendation is closed.

Audit Report 2003-NY-1005 contains three findings. The recommendations and status of each
recommendation are as follows.

Finding 1- Recommendations and Resolution Actions Taken

1A    Ensure that the ESDC has properly recorded and accounted for the reimbursement of the
      $27,750 in ineligible SFARG overpayments.



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Follow Up On Prior Audits

       HUD sustained the recommendation and the ineligible amount of $27,750 has been
       recovered. This recommendation is closed.

1B     Instruct the ESDC to improve procedures for verifying the location of the SFARG
       applicants to ensure that the proper grant amount is awarded.

       HUD agreed with the recommendation and stated that the ESDC has developed,
       distributed and implemented procedures for identifying the location of SFARG
       applicants. This recommendation is closed.

1C     Instruct the ESDC to include procedures to verify the accuracy of the information by
       SFARG applicants on their lease arrangements as part of its internal audit review.

       HUD agreed with the recommendation. ESDC has indicated verification of the lease
       information is now being performed by SFARG application processing personnel on new
       disbursement applications, in accordance with documented procedures. Lease verification
       has been subject to sampling by an outside audit firm and will be sampled as deemed
       appropriate by Internal Audit going forward. This recommendation is closed.

Finding 2- Recommendations and Resolution Actions Taken

2A     Instruct the ESDC on whether the $108,885, which we have determined to be ineligible,
       should be reimbursed to the BRG Program by the ESDC from non-Federal funds. It
       should be noted that the ESDC recaptured an overpayment of $100,000 prior to the
       completion of our audit fieldwork.

       HUD agreed with the recommendation. HUD advised the ESDC to obtain documentation
       from the applicant in order to make a determination as to the eligibility of the $108,885.
       The target date for completion for this recommendation is October 31, 2004.

2B     Ensure that the ESDC disburses the additional $14 to the underpaid applicant.

       HUD agreed with the recommendation and the ESDC has disbursed the $14
       underpayment. This recommendation is closed.

2C     Instruct the ESDC to reimburse the program with non-Federal funds for the $34,313
       duplicate payment.

       HUD agreed with the recommendation and stated that the ESDC has negotiated a
       repayment plan. The target date for completion for this finding recommendation is March
       31, 2007.

2D     Require the ESDC to continue corrective actions that address the issues identified in the
       findings of our prior audit, as well as those discussed in this finding.


2004-NY-1001                             Page 22                                       TOC
                                                                      Follow Up On Prior Audits


      HUD agreed with the recommendation and advised the ESDC to continue to take
      corrective actions. This recommendation is closed.

Finding 3-Recommendations and Resolution Actions Taken

3A   Instruct the ESDC to establish accounting procedures to ensure that costs are correctly
     classified on drawdown forms and that the $184,579.97 is correctly classified as Business
     Information expense.

     HUD agreed with the recommendation. The ESDC has correctly classified the costs as a
     Business Information expense. This recommendation is closed.

3B   Direct the ESDC to establish accounting procedures to ensure that indirect costs are based
     on actual cost data, and that all allocations of indirect costs are reviewed.

     HUD agreed with the recommendation. HUD confirmed that the $2,134.24 understatement
     of indirect costs was adjusted and additional testing did not disclose any other instances of
     this issue. This recommendation is closed.

3C   Instruct the ESDC to implement accounting procedures to ensure that all grant
     disbursements under the Technical Assistance Service Grant Program are adequately
     supported with documentation.

     HUD agreed with the recommendation. HUD reviewed the ESDC’s accounting procedures
     and is satisfied that the procedures and their implementation to date address the identified
     area of weakness. This recommendation is closed.




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2004-NY-1001         Page 24        TOC
                                                                                    Appendix A

Schedule of Questioned Costs
                                      Type of Questioned costs
Finding                                     Ineligible 1/

 2                                          $ 49,000

 Total                                      $ 49,000



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.




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     2004-NY-1001    Page 26         TOC
                                                                                   Appendix B

Auditee Comments




                                                                          March 18, 2004

Mr. Alexander C. Malloy
Regional Inspector General for Audit
U.S. Department of Housing and Urban Development
26 Federal Plaza – Room 3430
New York, NY 10278-0068


                      Re:    Draft Audit Report
                             Empire State Development Corporation (“ESDC”)
                             Community Development Block Grant Disaster Assistance Funds

Dear Mr. Malloy:

Thank you for the opportunity to respond to and comment on the latest Draft Audit Report issued
by your office.

Monitoring Reviews of CDBG Disaster Assistance Programs Should be Fully Documented

BRLF Program

Written Computerized Documentation of on-site monitoring is needed.
ESDC understands that the OIG believes that ESDC’s documentation of its monitoring of the
BRLF program should be more formal and should include greater detail. ESDC staff has already
begun to use checklists and more formal procedures that will achieve this goal and enable HUD
to more easily review the extent and outcomes of BRLF monitoring efforts.

JCRP Program

Adequate Documentation of Monitoring is Needed
ESDC believes that adequate documentation of monitoring exists. Compliance can easily be
determined from viewing the current ESDC employment database. All material and relevant data


                                     Page 27                                     2004-NY-1001

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Appendix B


is captured in the database. ESDC will work to develop a separate JCRP database that may
address some of your office’s concerns.

With regard to the contact with the Department of Labor (“DOL”), ESDC did not initially
include such a comparison primarily because DOL statistics include employment for companies
throughout New York State. Therefore for companies with multiple locations including ones
outside the eligible JCRP area, DOL will report numbers that are not meaningful in evaluating
this program.

However, as indicated in the report, at the suggestion of HUD, ESDC did obtain DOL data and
now documents the results of the inquiry to DOL in the project file.

Processing Deficiencies of the Small Firm Attraction and Retention Grant Program Should
be Resolved

Ineligible SFARG
ESDC agrees that this grant recipient was not eligible for the program and the grant was
disbursed due to human error. A recapture letter was sent to the client on 1/28/04 and the file is
currently being handled for recapture by Portfolio Management. ESDC believes that this is an
isolated incident and the current procedures for ensuring that grants are accurately disbursed to
eligible businesses are sufficient.

Ineligible SFARG Payment to an Applicant with Seasonal Employees
ESDC maintains that this applicant remains in compliance with the program's guidelines and is
eligible for the SFARG payment. At the time of application, the employees were working full
time on payroll, and were therefore eligible. While additional NYS-45 forms for the 3 subsequent
quarters found that the company had 0 employees during those quarters, additional review of the
application and contact with the applicant confirmed that the company is a tax preparation
service and hires full time employees on a seasonal basis. This issue was brought to the SFARG
Review Committee and it was confirmed that the guidelines do not preclude employees like this
from being eligible. Furthermore, we believe that denying this applicant the SFARG payment
would be inconsistent with the program’s guidelines. The seasonality of the employment
numbers is irrelevant to the company's eligibility. The company has an eligible five-year lease
commitment, pays rent throughout the year and is eligible for the program.

Follow up on Prior Audits

Finding 2 Recommendation and Resolution Actions Taken

2A Substantial audit work has been performed on the economic loss issue. We expect to be
able to comply with HUD's request to receive, by October 31, 2004, a schedule and description
of the audit work, including the results as to whether reported economic losses are supported by
proper documentation.




2003-NY-1001                              Page 28                                          TOC
                                                                                  Appendix B


Thank you for your continuing assistance in identifying areas for improvement. Our goal is to
administer the HUD Grant funds as expeditiously as possible within the mandate and guidelines
established.




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