oversight

Corporaci�n para el Fomento Econ�mico de la Ciudad Capital, San Juan, Puerto Rico

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-15.

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

                                                           Issue Date
                                                                 September 15, 2005
                                                          Audit Case Number
                                                                 2005-AT-1013




TO:        Jose R. Rivera, Director, Community Planning and Development, San Juan Field
             Office, 4ND



FROM:      James D. McKay
           Regional Inspector General for Audit, 4AGA


SUBJECT:   Corporación para el Fomento Económico de la Ciudad Capital,
           San Juan, Puerto Rico, Did Not Administer Its Independent Capital Fund in
           Accordance with HUD Requirements


                                 HIGHLIGHTS

 What We Audited and Why

           We completed an audit of the Corporación para el Fomento Económico de la
           Ciudad Capital (Corporation) independent capital fund. The review was initiated
           in response to a request from the Department of Housing and Urban
           Development’s (HUD) San Juan Office of Community Planning and
           Development, which was not satisfied with the Corporation’s overall performance
           in administering its independent capital fund. HUD’s concerns stemmed from the
           results of a monitoring review conducted by the Municipality of San Juan
           (Municipality) and included concern over the Corporation’s use of program
           income funds for ineligible purposes. The objective of our audit was to determine
           whether the Corporation administered the independent capital fund in accordance
           with HUD requirements.




  Table of Contents
What We Found


           The Corporation did not follow HUD requirements in the administration of its
           independent capital fund. Contrary to HUD requirements, the Corporation
           retained more than $1.48 million in interest earned from its Community
           Development Block Grant (Block Grant) revolving fund account.

           The Corporation’s financial management system did not fully comply with
           applicable HUD requirements. The system did not properly identify the
           application of more than $1 million in administrative fees charged, allowed the
           use of $463,618 for ineligible expenditures, did not account for all program
           income, and maintained a high balance in its Block Grant fund account.

           In four loans reviewed, the Corporation did not maintain adequate records to
           demonstrate that activities met at least one of the three Block Grant national
           objectives. Therefore, the related expenditures of four loans totaling $631,195 are
           considered unsupported pending an eligibility determination by HUD.

What We Recommend


           We recommend the director of the San Juan Office of Community Planning and
           Development require the Municipality to repay $1.48 million in interest earned
           from the Block Grant revolving fund and repay $463,618 in ineligible
           expenditures. The director should also require the Municipality to provide all
           supporting documentation and determine the appropriateness and eligibility of
           $1.64 million in Block Grant disbursements. We also recommend that the
           director require the Municipality to develop and implement an internal control
           plan to ensure the independent capital fund has a financial management system
           that complies with HUD requirements and that funds are used in a timely manner.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directive issued because of the
           audit.

Auditee’s Response


           We discussed the findings with the Municipality and the Corporation during the
           audit and with the Municipality at the exit conference on August 11, 2005. The
           Municipality provided its written comments to our draft report on August 26,
           2005. In its response, the Municipality generally agreed with the findings.

           The complete text of the Municipality’s response, along with our evaluation of
           that response, can be found in appendix B of this report.

Table of Contents                           2
                            TABLE OF CONTENTS

Background and Objectives                                                       4

Results of Audit
      Finding 1: The Corporation Did Not Remit HUD Interest Earned from         5
      Revolving Fund
      Finding 2: The Corporation’s Financial Management System Did Not Fully    7
      Comply with HUD Requirements
      Finding 3: The Corporation Did Not Demonstrate Compliance with National   11
      Objectives

Scope and Methodology                                                           13

Internal Controls                                                               14

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use            15
   B. Auditee Comments and OIG’s Evaluation                                     16
   C. Criteria                                                                  21




                                            3
                     BACKGROUND AND OBJECTIVES

The Municipality of San Juan (Municipality) implemented an economic development program
that was carried out through its subgrantee, the Corporación para el Fomento Económico de la
Ciudad Capital (Corporation). The Corporation, a nonprofit subgrantee, was incorporated in
June 1982 and was established to promote economic development and housing activities within
San Juan, Puerto Rico. Between 1983 and 1992, the Municipality assigned more than $5.9
million in Community Development Block Grant (Block Grant) funds and delegated the
administration of $20.4 million in Urban Development Action Grant (Action Grant) loans to the
Corporation. Proceeds from Block Grant and Action Grant funds were used to establish the
independent capital fund, a revolving fund program to promote economic development loans.
The Corporation used the proceeds from loan repayments to generate new economic
development loans, and to pay for administrative expenditures of the program. The Municipality
has not approved new funding to the Corporation since 1992.

The Municipality is responsible for monitoring the Corporation’s performance and to ensure that
all aspects of HUD funded activities are carried out in accordance with applicable laws and
regulations. During 2002, the Municipality completed a monitoring review of the Corporation’s
independent capital fund. The Municipality concluded the Corporation did not comply with
Department of Housing and Urban Development (HUD) requirements and decided to regain
control over all assets associated with the independent capital fund. In April 2002, the
Municipality notified the Corporation of its decision to discontinue approving the use of Block
Grant funds. Therefore, the use of Block Grant funds for economic development loans was
halted. No new loans have been approved since then.

In a letter, dated May 30, 2003, the Municipality requested the Corporation to transfer all assets
associated with the independent capital fund to the Municipality. The Corporation did not agree
with the Municipality’s determination and retained control of the independent capital fund. As a
result, the Municipality took the matter to federal court to regain control of the independent
capital fund. The matter remains unresolved.

The objective of our audit was to determine whether the Corporation administered the
independent capital fund in accordance with HUD requirements. The compliance requirements
include the expenditure of HUD funds for eligible, necessary, and reasonable project costs,
maintaining adequate financial controls over funded activities, and maintaining adequate
documentation showing compliance with national objectives.




  Table of Contents
                                                4
                                 RESULTS OF AUDIT

Finding 1: The Corporation Did Not Remit HUD Interest Earned from
           Revolving Fund
The Corporation did not follow HUD requirements in the administration of its independent
capital fund. Contrary to HUD requirements, the Corporation retained more than $1.48 million
in interest earned from its Block Grant revolving fund account. The deficiencies occurred
because Corporation officials believed they were entitled to the earnings. In addition, the
Municipality had not established and implemented adequate controls to ensure the Corporation
complied with applicable requirements. Thus, the Corporation improperly retained and used
monies belonging to the federal government to finance its operations.



 Interest Earned on Revolving
 Fund


              Our review disclosed the Block Grant revolving fund accounts generated more
              than $1.48 million in interest income. For example, the Corporation placed more
              than $2.31 million in eight certificates of deposit with a local financial institution
              between September 2001 and February 2003. As of April 2005, the certificates
              had accumulated at least $341,756 in interest.

                                                                   Interest   Certificate    Interest
                                Issue date        Maturity date      rate     face value     accrued
               Certificate A   Sept. 11, 2001     Sept. 11, 2006    5.50%      $ 300,000    $ 65,193
               Certificate B   Sept. 11, 2001     Sept. 11, 2006   5.50%         300,000      65,193
               Certificate C   Aug. 20, 2002      Aug. 20, 2007    4.75%         316,922      42,735
               Certificate D   Aug. 20, 2002      Aug. 20, 2007    4.75%         316,922      42,735
               Certificate E   Aug. 20, 2002      Aug. 20, 2007    4.75%         264,102      35,613
               Certificate F   Aug. 20, 2002      Aug. 20, 2007    4.75%         316,922      42,735
               Certificate G   Feb. 25, 2003      Feb. 25, 2008    4.25%         250,000      23,776
               Certificate H   Feb. 25, 2003      Feb. 25, 2008    4.25%         250,000      23,776
                                          Total                               $2,314,868    $ 341,756

              The Corporation also placed additional monies from the Block Grant revolving
              fund in certificates of deposit that generated a substantial amount of interest
              income in prior years. According to Corporation records, the income generated
              from these additional certificates exceeded $1 million.



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                                                    5
                                 Fiscal          Interest
                                  year            earned
                               1995-1996        $107,787
                               1996-1997        $149,128
                               1997-1998        $179,702
                               1998-1999        $185,646
                               1999-2000        $230,241
                               2000-2001        $190,977
                                 Total         $1,043,481

          Corporation officials informed us that it has been their policy to invest funds and
          use the income generated to finance their operations. None of the interest earned
          from the revolving fund accounts was remitted to HUD or the Municipality
          because the Corporation believed it was entitled to the earnings. This policy is in
          violation of HUD requirements contained in 24 CFR [Code of Federal
          Regulations] 570.500(b). Grantees and subgrantees are required to remit interest
          earned on revolving fund accounts to HUD for transmittal to the U.S. Department
          of the Treasury.

          The Block Grant revolving fund earned an additional $96,497 from its checking
          account and other investments. Therefore, the Block Grant revolving fund
          account generated at least $1.48 million that was not remitted to HUD for
          transmittal to the U.S. Department of the Treasury. The Municipality raised
          concern about this practice in the March 2002 monitoring review. In September
          2003, the San Juan Office of Community Planning and Development informed the
          Municipality that any interest earned on the revolving fund accounts must be
          returned to the U.S. Department of the Treasury.

Recommendations

          We recommend the director of the San Juan Office of Community Planning and
          Development

          1A.     Require the Municipality to remit to HUD from nonfederal funds
                  $1,481,734 in interest earned on Block Grant revolving fund accounts
                  improperly retained by the Corporation.

          1B.     Take appropriate monitoring measures to ensure the Municipality remits
                  future interest earned on revolving fund accounts to HUD in a timely
                  manner for transmittal to the U.S. Department of the Treasury.




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                                           6
Finding 2: The Corporation’s Financial Management System
           Did Not Fully Comply with HUD Requirements

The Corporation’s financial management system did not fully comply with applicable HUD
requirements. The system did not properly identify the application of more than $1 million in
administrative fees charged, allowed the use of $463,618 for ineligible expenditures, did not
account for all program income, and maintained a high balance in its Block Grant fund account.
Consequently, the Corporation’s internal controls were not sufficient to safeguard assets or
assure their use for authorized purposes and in accordance with HUD requirements. This
occurred because the Corporation did not develop and implement policies and procedures to
ensure compliance with financial requirements of HUD programs.




 Unsupported Administrative
 Fees

              The Block Grant program allows disbursements for reasonable expenditures
              associated with the planning and execution of community development activities
              provided these are supported by source documentation. Our review disclosed the
              Corporation charged the Block Grant revolving fund more than $1 million in
              administrative fees between July 1997 and April 2005.

                           Fiscal             Fees          Approved Block
                            Year            charged          Grant loans
                          1997-1998        $ 131,540              0
                          1998-1999           137,311             0
                          1999-2000           127,228             0
                          2000-2001            58,236            13
                          2001-2002           141,754            10
                          2002-2003           191,740             0
                          2003-2004           125,024             0
                          2004-2005            98,968             0
                            Total          $1,011,801            23

              Corporation officials could not provide us documentation to support the $1
              million in administrative expenses. A Corporation official explained the
              administrative fees charged correspond to 20 percent of loan repayments received
              that were periodically transferred to the Corporation’s administrative account and
              used for administrative expenses of the Corporation. The official added that the
              administrative fees transferred could not be associated with a specific expenditure
              or invoice. Therefore, the accounting records do not reflect accurate, current, and
              complete disclosure of program expenditures. HUD has no assurance of the
              reasonableness, allowability, and allocability of the expenditures.


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Unrelated Program
Disbursements

          We found the Corporation used more than $449,000 in Block Grant monies for
          expenditures not related to the independent capital fund. The funds were used to
          meet requirements imposed by the Small Business Administration in the
          implementation of its micro-loan program. This included $423,440 to cover loan
          loss reserves and $25,773 in matching funds for loans awarded outside the city of
          San Juan. The Corporation had reimbursed some costs, and its accounting records
          reflected a remaining account receivable from the Corporation for $393,104 as of
          February 2005.

          The Corporation’s accounting records reflected another account receivable from
          the micro-loan program for $70,514. Corporation officials informed us the
          account receivable was also associated with the matching requirements imposed
          by the Small Business Administration and that corresponding support would be
          provided for our review. However, no support was provided showing the nature
          of the receivable.

          The Block Grant program only allows disbursements for reasonable expenditures
          associated with the planning and execution of community development activities
          provided these are supported by source documentation.

Program Income Not Recorded

          HUD requires that receipt and expenditures of program income shall be recorded
          as part of the financial transactions of the grant program and are subject to all
          applicable requirements governing the use of Block Grant funds. Our review
          found the Corporation charged late fees to participants that did not repay loans in
          a timely manner. However, the Corporation did not record the late fees as part of
          the financial transactions of the independent capital fund. Instead, it has been the
          Corporation’s practice to use late fee proceeds to finance its operations.
          Therefore, the Corporation cannot ensure that program income generated was
          used in accordance with HUD requirements. The Corporation’s records showed
          that between July 1999 and April 2005, the proceeds from late fees amounted to
          $60,016.




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                                            8
 High Block Grant Fund
 Balance

            The Corporation was passive in its use of Block Grant funds, allowing the
            accumulation of a significant amount of cash in the revolving fund accounts. As a
            result, funds were not used in a timely manner, diminishing the objectives and
            accomplishments of the Block Grant program. Our review found that between
            July 1997 and April 2005, the Corporation only approved 23 loans. However, the
            balance of the Block Grant revolving fund accounts remained consistently high
            during the same period. The Block Grant revolving fund maintained a year-end
            average balance of $3.58 million.


                               Block Grant account balance and loans awarded

                         $4.50

                         $4.00

                         $3.50

                         $3.00

                         $2.50
               Million




                         $2.00                                                    10
                                                                                  loans
                                                                     13
                         $1.50                                       loans


                         $1.00

                         $0.50

                          $-
                                 Jun-98    Jun-99   Jun-00     Jun-01        Jun-02       Jun-03   Jun-04   Apr-05
                                                             Fiscal year end


                                          CDBG account balance       Approved loans value



            A Corporation official attributed the slow progress or use of the Block Grant
            funds to the Municipality’s advice. The official explained that a former
            consultant of the Municipality recommended that the Corporation use Action
            Grant funds instead of Block Grant funds to award loans because there were
            fewer program restrictions. Therefore, the Corporation awarded loans only using
            Action Grant funds until the monies were almost depleted. This was not an
            acceptable explanation for not performing an integral component of its Block
            Grant loan program responsibilities. Also, the Corporation improperly invested
            the unused funds and retained the interest proceeds to finance its operations (see

Table of Contents                                      9
                  finding 1). Further, the related benefits to low- and moderate-income persons
                  were unduly delayed or not realized for more than three years, when no Block
                  Grant loans were awarded.

                  In April 2002, the Municipality notified the Corporation of its decision to
                  discontinue approving the release of Block Grant funds. 1 Therefore, the use of
                  Block Grant funds for economic development loans was halted. No new loans
                  have been approved since then. As a result, the balance of the Block Grant
                  revolving fund continued to increase. As of April 2005, the revolving fund
                  balance exceeded $4.47 million, but the funds are not being used for their
                  intended purpose.

    Recommendations

                  We recommend the director of the San Juan Office of Community Planning and
                  Development

                  2A. Require the Municipality to obtain and submit all supporting documentation
                      and HUD determine the eligibility and propriety of $1,011,801 in
                      administrative costs the Corporation charged to the Block Grant revolving
                      fund. Any amounts determined ineligible must be reimbursed to the Block
                      Grant program from nonfederal funds.

                  2B. Require the Municipality to reimburse the Block Grant program from
                      nonfederal funds $463,618 for ineligible expenditures pertaining to the
                      Corporation’s Small Business Administration micro-loan program.

                  2C. Take appropriate monitoring measures to ensure the Block Grant revolving
                      fund has in place a financial management system that complies with HUD
                      requirements and the Municipality develops and implements a control plan
                      so that Block Grant funds of $4,099,501 are put to better use. 2 At a
                      minimum, the system should ensure that fiscal controls and accounting
                      procedures are sufficient to permit the tracing of funds, including program
                      income, to a level that ensures such funds have not been used in violation of
                      the restrictions and prohibitions of applicable statutes.




1
     This action was as a result of the March 2002 monitoring review performed by the Municipality that found
     deficiencies in the administration of the Block Grant revolving loan fund.
2
     The revolving fund balance of $4.47 million was adjusted to consider interest income disallowed in finding 1.


    Table of Contents                                    10
Finding 3: The Corporation Did Not Demonstrate Compliance with
           National Objectives
In four loans reviewed, the Corporation did not maintain adequate records to demonstrate that
activities met at least one of the three Block Grant national objectives. This occurred because
the Corporation had inadequate management controls and was not familiar with applicable Block
Grant regulations. Therefore, the related expenditures of four loans totaling $631,195 are
considered unsupported pending an eligibility determination by HUD.




    Inadequate Documents


                 Our examination of 4 out of 11 outstanding Block Grant loans disclosed the
                 Corporation did not take steps to ensure they met at least one of the three Block
                 Grant national objectives required by 24 CFR [Code of Federal Regulations]
                 570.200(a). 3 Grantees and subgrantees must carry out activities that benefit low-
                 and moderate-income persons, aid in the prevention or elimination of slum and
                 blight, or meet community development needs having a particular urgency.

                 Corporation officials informed us the majority of the loans approved met the
                 national objective of benefiting low- and moderate-income persons based on the
                 creation of jobs. Further, some loans may address other national objectives, such
                 as the prevention or elimination of slum and blight. Although Corporation
                 officials stated they properly evaluated each loan to ensure compliance with
                 HUD’s national objectives, we did not find adequate support in the four loan files.

                                                            Number of low/medium-
                          Loan          Loan closing           income jobs to be               Loan
                         number             date             created per agreement            amount
                        9-0099-01       Nov. 16, 2001                  5                      $ 185,000
                        9-0102-01        Jan. 4, 2002                  5                        180,000
                        9-0089-01       July 24, 2001                  5                        161,195
                        9-0088-01        Dec. 6, 2000                  3                        105,000
                                                   Total                                      $ 631,195

                 Specific examples of poor efforts to support national objectives compliance
                 include

                 ‰    Benefit to low- and moderate-income persons job creation. In all four
                      loans, the Corporation executed written agreements with loan recipients,

3
       The Corporation approved 23 Block Grant loans during fiscal years 2001 and 2002. Eleven of the loans were
       outstanding as of May 2005. These eleven loans had a total value of $1,060,695.


     Table of Contents                                 11
                 which specified the number of permanent jobs to be created for low-and
                 moderate-income persons. However, the Corporation did not

                 o Maintain documentation showing the income limits applied,
                 o Maintain documentation showing the size and annual income of the
                   person’s family before the low- or moderate-income person was hired for
                   the job, or
                 o Ensure the written agreement with the loan recipient included a listing by
                   job title of the permanent jobs to be created.

             ‰   Prevention or elimination of slum and blight. In January 2005, the
                 Corporation certified that loan number 9-0102-01 was an eligible activity and
                 that it met the national objective of preventing or eliminating slum and blight
                 because of its location on Ponce de Leon Avenue. However, the loan file did
                 not contain a description of the conditions that qualified the activity as one to
                 aid in the prevention or elimination of slum or blight. Further, the
                 Corporation did not provide information showing the activity was in an area
                 that met a definition of a slum, blighted, deteriorated, or deteriorating area
                 under state or local law.

             The file deficiencies demonstrate the Corporation lacked adequate management
             controls and unfamiliarity with Block Grant regulations. Therefore, the intended
             benefits of the four loans and compliance with the Block Grant national objectives
             were not supported.

  Recommendations

             We recommend the director of the San Juan Office of Community Planning and
             Development

             3A. Require the Municipality to obtain and submit all supporting documentation
                 and HUD determine the eligibility and compliance with national objectives
                 of the $631,195 the Corporation disbursed for the four loans. Any amounts
                 determined ineligible must be reimbursed to the Block Grant program from
                 nonfederal funds.

             3B. Take appropriate monitoring measures and require the Municipality to
                 establish and implement policies and procedures to ensure future loans meet
                 a Block Grant national objective.




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                                               12
                         SCOPE AND METHODOLOGY


Our audit objective was to determine whether the Corporation administered the independent
capital fund in accordance with HUD requirements. To accomplish our objectives, we

‰     Obtained and reviewed relevant HUD regulations and Corporation guidelines.
‰     Interviewed HUD, Municipality, and Corporation officials and reviewed monitoring
      reports.
‰     Reviewed the Corporation’s files and records, including financial statements, and general
      ledgers.
‰     Reviewed a sample of four Block Grant loan files.
‰     Reviewed the Corporation’s controls related to the administration of its independent capital
      fund.

We obtained a list of Block Grant loans the Corporation awarded during fiscal years 2001 and
2002. The Corporation awarded 23 loans, of which 11 totaling $1.06 million were outstanding
as of May 2005. We selected and reviewed a sample of four outstanding Block Grant loans
totaling $631,195. The loans reviewed were those approved by the Corporation with a value
greater than $100,000. We reviewed each loan file to determine whether the activity met one of
the three national objectives of the Block Grant program.

To achieve our audit objectives, we relied in part on computer-processes data contained in the
Corporation’s database. Although we did not perform a detailed assessment of the reliability of
the data, we did perform a minimal level of testing and found it to be adequate for our purposes.

The audit generally covered the period of July 2003 through March 2005, and we extended the
period as needed to accomplish our objectives. Due to the nature of some of the deficiencies, we
extended the period back to July 1995. We conducted our fieldwork from March through June
2005 at the Corporation’s offices in San Juan, Puerto Rico.

We conducted the audit in accordance with generally accepted government auditing standards.




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                                                13
                               INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


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

   •   Compliance with laws, regulations, policies, and procedures that management has
       implemented to reasonably assure that resource use is consistent with laws and
       regulations.
   •   Policies and procedures that management has implemented to reasonably assure that
       resources are safeguarded against waste, loss, and misuse.

We assessed the relevant controls identified above.

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

 Significant Weaknesses


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

   •   The Corporation did not remit to HUD more than $1.48 million on interest earned from
       the Block Grant revolving fund (see finding 1).
   •   The Corporation’s financial management system did not fully comply with HUD
       requirements (see finding 2).
   •   The Corporation did not demonstrate loans complied with national objectives of the
       Block Grant program (see finding 3).


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                                                14
                                        APPENDIXES

Appendix A

                  SCHEDULE OF QUESTIONED COSTS
                 AND FUNDS TO BE PUT TO BETTER USE

             Recommendation         Ineligible 1/        Unsupported 2/    Funds to be put
                 number                                                     to better use 3/
                    1A               $1,481,734
                    2A                                      $1,011,801
                    2B                  463,618
                    2C                                                        $4,099,501
                    3A                                         631,195
                   Total             $1,945,352             $1,642,996        $4,099,501

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
        polices or regulations.

2/      Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
        or activity when we cannot determine eligibility at the time of audit. Unsupported costs
        require a decision by HUD program officials. This decision, in addition to obtaining
        supporting documentation, might involve a legal interpretation or clarification of
        departmental policies and procedures.

3/      “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
        Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
        expenditures at a later time for the activities in question. This includes costs not incurred,
        deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
        unnecessary expenditures, loans and guarantees not made, and other savings.




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                                                    15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




 Table of Contents
                         16
Comment 1




 Table of Contents
                     17
Comment 2




Comment 3




 Table of Contents
                     18
Comment 4




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                    19
                       OIG Evaluation of Auditee Comments



Comment 1      We agree with the Municipality on the seriousness and magnitude of the
               deficiency and that remedial action is required. However, the cited
               violation was not of a recent origin. Further, we are not aware the
               Municipality made attempts to prevent or remedy the situation prior to the
               2002 monitoring review. We attribute the deficiency to the inadequate
               controls of the Municipality and the Corporation’s incorrect belief that they
               could retain the interest. The Municipality is ultimately responsible for the
               actions and accomplishments of its subgrantee, and must ensure that HUD
               requirements are followed at all times. Therefore, the Municipality must
               reimburse HUD the interest improperly retained by the Corporation.

Comment 2      Our objective was to determine if the Corporation’s financial management
               system provides a complete disclosure of Block Grant receipts and
               expenditures as required by HUD. We found the financial management
               system for the Block Grant fund needs to be improved.

Comment 3      We are not suggesting that the Corporation is a new subgrantee or it has
               not been exposed to federal programs. Our conclusion and statements were
               based on the documents and responses we obtained from the Corporation’s
               staff responsible for the review and/or monitoring of Block Grant activities.

Comment 4      We acknowledge the efforts taken by the Municipality during its 2002
               monitoring review. However, the deficiencies included in the report are
               attributed to the inadequate controls of the Municipality and the
               Corporation. The Municipality is the direct recipient of Block Grant funds
               and must ensure that all the funds are used in accordance with applicable
               requirements. This includes Block Grant activities undertaken by its
               subgrantee. We are not suggesting that violations included in the audit
               report are all inclusive. We recommend discussing with HUD any other
               concerns the Municipality might have that were not addressed in the audit
               report.




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                                          20
APPENDIX C

                                        CRITERIA
24 CFR [Code of Federal Regulations] 84.21

Standards for financial management systems require recipients’ financial management systems to
provide for the following:

   ‰   Records that identify adequately 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.
   ‰   Effective control over and accountability for all funds, property, and other assets.
       Recipients shall adequately safeguard all such assets and assure they are used solely for
       authorized purposes.
   ‰   Accounting records, including cost accounting records, that are supported by source
       documentation.

24 CFR [Code of Federal Regulations] 570.200 (a) (2)

Each recipient under the Entitlement and HUD-administered Small Cities programs must ensure
and maintain evidence that each of its activities assisted with Block Grant funds meets one of the
three national objectives as contained in its certification.

24 CFR [Code of Federal Regulations] 570.500 (b)

Each revolving loan fund’s cash balance must be held in an interest-bearing account, and any
interest paid on Block Grant funds held in this account shall be considered interest earned on
grant advances and must be remitted to HUD for transmittal to the U.S. Department of the
Treasury no less frequently than annually.

24 CFR [Code of Federal Regulations] 570.504 (a)

The receipt and expenditure of program income as defined in § 570.500(a) shall be recorded as
part of the financial transactions of the grant program.

24 CFR [Code of Federal Regulations] 570.506 (b)

This subpart provides minimum records the recipient shall establish and maintain to demonstrate
that each Block Grant-assisted activity complies with one or more of the national objectives.




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