oversight

Lower Manhattan 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 2005-03-23.

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

                                                                Issue Date
                                                                         March 23, 2005
                                                                 Audit Report Number
                                                                             2005-NY-1003




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

FROM:
           Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: Lower Manhattan Development Corporation, New York, NY
         Community Development Block Grant Disaster Assistance Funds


                                   HIGHLIGHTS

 What We Audited and Why

            We performed the fourth of our on-going audits of the Lower Manhattan
            Development Corporation’s (the Auditee) administration of the Community
            Development Block Grant (CDBG) Disaster Assistance funds, which were
            provided to the State of New York following the September 11, 2001, terrorist
            attacks on the World Trade Center in New York City. The auditee received
            $2.783 billion in CDBG Disaster Assistance funds from the U.S. Department of
            Housing and Urban Development (HUD), and during our audit period April 1,
            2004 through September 30, 2004, it disbursed $276.7 million of these funds for
            activities related to the rebuilding of lower Manhattan.

            Our audit objectives were to determine whether the auditee: (1) disbursed CDBG
            Disaster Assistance Funds to eligible grant applicants in accordance with the
            guidelines established under the HUD-approved Action Plans, (2) has an adequate
            procurement system in place for soliciting and awarding contracts and/or sub-
            recipient agreements, (3) expended CDBG funds for eligible planning and
            administrative costs under the applicable laws and regulations, (4) has a financial
            management system in place that adequately safeguards funds, and (5)
            implemented adequate procedures for monitoring the programs financed with
            CDBG funds.
What We Found


           Our review disclosed that the auditee generally disbursed CDBG Disaster Assistance
           funds to eligible grant applicants in accordance with the HUD-approved Action
           Plans, and has an adequate procurement system for soliciting and awarding contracts
           and/or subrecipient agreements. However, the auditee did not always expend
           CDBG funds for eligible planning and administrative expenses and its financial
           management system did not adequately safeguard funds. The auditee implemented
           procedures for monitoring programs financed with CDBG funds; however, its
           Project Managers did not always maintain written documentation of their monitoring
           efforts.

           The auditee disbursed $141,347 of its CDBG Disaster Assistance funds for
           ineligible administrative expenses under the Utility Restoration and Infrastructure
           Rebuilding Program. The Auditee’s Subrecipient (its parent company) drew
           down CDBG Disaster Assistance funds from HUD, without first submitting its
           invoices to the auditee for review of the accuracy and eligibility of the costs being
           billed. In addition, the auditee’s Project Managers did not always maintain
           written documentation demonstrating the monitoring of their respective programs.

What We Recommend
           We recommend that HUD’s General Deputy Assistant Secretary for Community
           Planning and Development instruct the auditee and/or its Subrecipient to
           reimburse to the Utility Restoration and Infrastructure Rebuilding Program, the
           $141,347 in CDBG Disaster Assistance funds that was drawn down for ineligible
           salary and fringe benefits costs. This reimbursement should be made from non-
           federal sources.

           In addition, the auditee should be required to maintain written documentation
           detailing the monitoring efforts performed by its Project Managers.

           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 directives issued because of the
           audit.

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




                                             2
                           TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
      Finding 1 CDBG Disaster Assistance Funds Were Disbursed for Ineligible
                Administrative Costs Under The Utility Restoration and
                Infrastructure Rebuilding Program
                                                                                 6
      Finding 2 The Auditee Did Not Maintain Written Documentation
                Demonstrating the Monitoring Performed by Its Project Managers   10

Scope and Methodology                                                            12

Internal Controls                                                                13
Follow-up on Prior Audits                                                        15
Appendixes
   A. Schedule of Questioned Costs                                               16
   B. Schedule of Programs Funded and Disbursements as of September 30, 2004     17
   C. Auditee Comments and OIG’s Evaluation                                      18




                                           3
                        BACKGROUND AND OBJECTIVES

The September 11, 2001, terrorist attacks on the World Trade Center in Lower Manhattan took a
devastating toll on New York City. The attacks inflicted widespread destruction upon the energy
and telecommunications utility infrastructure, resulting in extensive disruptions in services to the
business and residential communities of lower Manhattan. In addition, the attacks destroyed the
North Bridge, which connected the World Trade Center to the World Financial Center.
Following the recovery efforts and round-the-clock clean up at the World Trade Center site since
the attacks, there has been a need to enhance the streetscape neighboring the World Trade Center
site. In the aftermath of the terrorist attacks, Congress authorized the U.S. Department of
Housing and Urban Development (HUD), to provide the State of New York with $3.483 billion
of Community Development Block Grant (CDBG) Disaster Assistance. On November 5, 2001,
the Office of Management and Budget designated $700 million in CDBG funding for New York
City out of the Emergency Response Fund that Congress had 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 On August 2, 2002, Congress appropriated an additional $783 million of
CDBG funding.3

The Lower Manhattan Development Corporation (the Auditee) was created in December 2001,
as a subsidiary of the Empire State Development Corporation to function as a joint city-state
development corporation. The Auditee has been designated by the State of New York to develop
programs and distribute $2.783 billion of the $3.483 billion appropriated by Congress in the
January and August 2002 Emergency Supplemental Acts. The Empire State Development
Corporation, the parent company of the Auditee, is administering the remaining $700 million.

The Empire State Development Corporation performs all of the Auditee’s accounting functions;
including payroll, making wire transfer payments to the Auditee’s vendors and drawing down
funds from HUD. However, prior to drawing down funds from HUD, the Empire State
Development Corporation is supposed to obtain written approval from the Auditee.

A 16-member board of directors, appointed equally by the Governor of New York, and the
Mayor of New York City, manages the affairs of the Auditee. The Auditee’s Chairman of the
Board is Mr. John C. Whitehead, and its President is Mr. Kevin Rampe.

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.




                                                       4
As of September 30, 2004, HUD had approved eight of the Auditee’s Partial Action Plans, which
contained funding of approximately $1.8 billion (see Appendix B for programs and amounts).
For the current audit period between April 1, 2004 and September 30, 2004, we concentrated our
audit efforts on funds disbursed for the following programs: the Design and Installation of
Interim Memorial, the Downtown Alliance Streetscape, the West Street Pedestrian Connections,
the World Trade Center Memorial and Cultural, and the Utility Restoration and Infrastructure
Rebuilding. We reviewed the Auditee’s policies and procedures for monitoring the above-
mentioned CDBG Disaster Assistance programs. We also reviewed funds disbursed for
administrative expenses related to the Utility Restoration and Infrastructure Rebuilding Program.
We did not review funds for any other programs or for general administrative expenses.

For the items tested, related to the above programs, our review disclosed exceptions only under
the Utility Restoration and Infrastructure Rebuilding Program.

Utility Restoration and Infrastructure Rebuilding Program

Under Partial Action Plan S-2, approved by HUD on September 15, 2003, the Auditee proposed
to provide up to $750 million for the Utility Restoration and Infrastructure Rebuilding (URIR)
Program. The URIR Program is to be administered by the Empire State Development
Corporation in conjunction with the New York City Economic Development Corporation. The
program was developed to provide financial assistance directly to energy and
telecommunications service providers for the reimbursement of qualified emergency and
temporary restoration costs, as well as, for costs associated with the permanent restoration of the
utility infrastructure damaged in the aftermath of the September 11, 2001, terrorist attacks.
Additionally, the program seeks to prevent costs borne by the utility service providers from
being passed on to the customers. Funding for this program is from the supplemental $783
million appropriation, which Congress authorized on August 2, 2002, under the 2002
Supplemental Appropriations Act for Recovery From and Response to Terrorist Attacks on the
United States, Public Law 107-206.

The Auditee executed a subrecipient agreement with its parent company, the Empire State
Development Corporation, (referred to as the “Subrecipient”), on October 24, 2003, detailing that
the Subrecipient will administer the URIR Program for the Auditee. This includes reviewing the
eligibility of Category One costs submitted by program participants.

Our audit objectives were to determine whether the Auditee: (1) disbursed CDBG Disaster
Assistance Funds to eligible grant applicants in accordance with the guidelines established under
the HUD-approved Action Plans, (2) has an adequate procurement system in place for soliciting
and awarding contracts and/or sub-recipient agreements, (3) expended CDBG funds for eligible
planning and administrative costs under the applicable laws and regulations, (4) has a financial
management system in place that adequately safeguards funds, and (5) implemented adequate
procedures for monitoring the programs financed with CDBG funds.




                                                 5
                                           RESULTS OF AUDIT

     Finding 1: CDBG Disaster Assistance Funds Were Disbursed for
                Ineligible Administrative Costs Under the Utility Restoration
                and Infrastructure Rebuilding Program
     Our review disclosed that CDBG Disaster Assistance funds were disbursed for ineligible
     administrative costs under the Utility Restoration and Infrastructure Rebuilding (URIR)
     Program. Funds were disbursed for salaries and/or fringe benefits costs that were: (a) in excess
     of what should have been charged for employees who are retirees from a New York State
     agency, (b) unrelated to the URIR Program, (c) billed twice for the same pay period, and (d)
     charged but not incurred by the Subrecipient. These deficiencies occurred because the Auditee’s
     Subrecipient circumvented the procedures by drawing down funds from HUD without
     submitting its invoices to the Auditee for review and approval, as required by the Subrecipient
     Agreement. As a result, $141,347 was disbursed for ineligible costs and should be repaid to the
     program.


     The Auditee Disbursed $141,347 for Ineligible Salary and/or Fringe Benefits Costs

     We reviewed the $746,163 in CDBG Disaster Assistance Funds drawn down to reimburse the
     Auditee’s Subrecipient for administrative costs related to the URIR Program and identified
     ineligible costs of $141,347. Our review disclosed that the New York City staff of the Auditee’s
     Subrecipient is responsible for preparing the administrative expense billings and drawing down
     funds from HUD and that no employee benefited from the ineligible expenses included in the
     billings. The funds were drawn down for ineligible salary and/or fringe benefits costs as follows:

Fringe Benefits Costs of $78,591 In
Excess of What Should Have Been
Charged for Retirees from a New
York State Agency

             Our review disclosed that the Auditee’s Subrecipient responsible for administering the
             URIR Program charged ineligible fringe benefits costs totaling $78,591 to the program.
             The subrecipient hired recent retirees from the New York State Public Service
             Commission, to perform an audit or cost validation review of claims submitted by the
             utility companies applying for assistance under the program. As retirees from a New
             York State agency, these employees are not entitled to receive all of the fringe benefits
             included in the Subrecipient’s 30 percent fringe benefits rate. Based on discussions with
             officials of the Subrecipient, we learned that the employer’s 7.65 percent share of FICA 4

     4
      FICA stands for “Federal Insurance Contribution Act,” the Federal legislation that established the Social Security
     Payroll Tax. The current FICA rate is 15.3 percent, half of which is paid by the employer and half by the employee.


                                                              6
            was the only fringe benefit applicable to these employees. Nevertheless, the Subrecipient
            applied its 30 percent fringe benefits rate to all salary costs charged to the URIR
            Program. As a result, we questioned the difference between the fringe benefits costs
            charged using the 30 percent fringe benefits rate and the allowable fringe benefits costs
            computed using the 7.65 percent FICA rate. We computed the ineligible fringe benefits
            costs as follows:


                                                 Charged      Allowable Questioned

            Applicable retirees’ salaries (a)    $351,636     $351,636

            Fringe benefits rate (b)                30.0%        7.65%       22.35%
            Fringe benefits costs
            (a) x (b)                            $105,491     $26,900      $78,591

            The Auditee should recover the $78,591 from the Subrecipient and reimburse the URIR
            Program.

Unrelated Costs Totaling $28,196
Were charged to the URIR
Program

            Our review disclosed that $28,196 in salary and fringe benefits costs related to the
            administration of a program other than the URIR Program, was incorrectly charged as
            administrative expenses to the URIR Program. The Partial Action Plan for the
            Disproportionate Loss of Workforce (DLW) Program and the Subrecipient Agreement
            between the Auditee and its Subrecipient for the administration of the DLW Program did
            not allow any expenses to be charged for program administration activities. However,
            the Subrecipient established a single assignment in its electronic timekeeping system for
            both the URIR and DLW Programs. Accordingly, the employees who worked on the
            DLW Program were included in the Subrecipient’s billings to the Auditee for
            administrative expenses related to the URIR Program. This resulted in the URIR
            Program being charged a total of $28,196 in unrelated program costs consisting of
            $21,689 in salaries and $6,507 in associated fringe benefits costs. As a result, the total
            $28,196 charged for unrelated costs should be returned to the URIR Program.

Funds Were Disbursed To Pay
Duplicate Billings Totaling $25,529

            Our review disclosed that CDBG Disaster Assistance funds were used to pay $25,529 in
            duplicate billings of salaries and fringe benefits costs. As of September 30, 2004, the
            Auditee had made two disbursements to its Subrecipient for administrative expenses
            related to the URIR Program. In both the first and second disbursements, the
            Subrecipient billed salaries and fringe benefits costs for the pay period ending




                                                     7
           March 31, 2004. The Subrecipient did not submit these billings to the Auditee for
           review; accordingly, the Auditee was not afforded the opportunity to review the billings
           and possibly detect the duplication. The total ineligible amount of $25,529, which
           consisted of $19,638 in salaries and $5,891 in fringe benefits costs, should be returned to
           the URIR Program.

$9,031 Was Disbursed for Costs
Charged but Not Incurred by the
Subrecipient
           Our review disclosed that CDBG Disaster Assistance funds in the amount of $9,031 were
           disbursed to the Auditee’s Subrecpient for salary and fringe benefits costs in excess of
           what an employee actually received. We learned that salaried employees on the
           Subrecipient’s staff do not receive compensation for hours worked in excess of the
           standard 75-hour bi-weekly pay period. However, although one employee worked in
           excess of 75 hours each bi-weekly pay period and was not compensated for the excess
           hours, the Subrecipient billed for and was reimbursed for the extra hours worked by the
           employee. This occurred because the Subrecpient, in calculating the billings for this
           employee multiplied the employee’s standard hourly rate by the number of hours worked
           on the URIR Program (including the excess hours), when it should have used the
           employee’s effective hourly rate. Accordingly, for each pay period billed, we calculated
           this employee’s effective hourly rate, which is the actual salary received divided by the
           actual hours worked for the period. We then multiplied the effective hourly rate by the
           hours charged to the URIR Program for the period to arrive at the billable costs and
           questioned the difference. We determined $9,031, consisting of $6,947 in salaries and
           $2,084 in fringe benefits, to be ineligible costs that should not have been billed, and
           therefore, should be reimbursed to the URIR Program.

           The following table summarizes the total ineligible salary and fringe benefits costs
           charged to the URIR Program.


                                             Salary           Fringe Benefits
              Description                    Costs            Costs             Total Costs

              Excess fringe benefits
              charged for retirees            $           0   $ 78,591          $ 78,591
              Salaries and fringe benefits
              unrelated to the URIR
              Program                         $ 21,689        $ 6,507           $ 28,196
              Duplicate billing               $ 19,638        $ 5,891           $ 25,529

              Salary and fringe benefits
              charged but not incurred        $   6,947       $ 2,084           $ 9,031
              Total                           $ 48,274        $ 93,073          $141,347


                                                      8
Lack of Compliance with the
Subrecipient Agreement Resulted
in the Disbursements for Ineligible
Costs

              Our review disclosed that the above deficiencies occurred because the Auditee’s
              Subrecipient did not submit its invoices to the Auditee for review and approval before
              drawing down the funds from HUD as required by the Subrecipient Agreement. Section
              D, paragraph c, of the Subrecipient Agreement, provides that the Subrecipient will submit
              to the Auditee, its invoices for administrative expenses related to the URIR Program, and
              the Auditee will review these invoices and provide approval before funds are drawn
              down from HUD for reimbursement.

  Recommendations


           We recommend that HUD’s General Deputy Assistant Secretary for Community Planning
           and Development require the Auditee to:

           1A.       Instruct its Subrecipient to reimburse to the URIR Program, from non-federal
                     sources, the $141,347 in CDBG Disaster Assistance Funds that was drawn down
                     for the ineligible salary and fringe benefits costs.

           1B.       Develop procedures that will ensure that all of its Subrecipient’s requests for
                     reimbursements are submitted to the Auditee for review, and approval as required
                     by the Subrecipient Agreement.

           1C.       Establish and implement policies and procedures to ensure that funds are not
                     withdrawn from HUD without the knowledge and approval of Auditee officials.

           In addition, HUD should:

           1D.       Instruct the Auditee’s Subrecipient (its parent company) to comply with the draw
                     down procedure of obtaining the Auditee’s approval prior to withdrawing funds
                     from HUD.




                                                      9
Finding 2: The Auditee Did Not Maintain Written Documentation
           Demonstrating the Monitoring Performed by Its Project
           Managers
Although the Auditee has developed and begun implementation of procedures for monitoring the
CDBG Disaster Assistance programs, we found that the Auditee did not maintain sufficient
documentation to demonstrate the monitoring that is being performed by its Project Managers.
For the Downtown Alliance Streetscape and the West Street Pedestrian Connections Programs,
we noted that there was little written evidence documenting the monitoring performed by the
Project Managers. This occurred because the Auditee’s procedures do not require Project
Managers to prepare written documentation to evidence their monitoring of the respective
programs. The lack of written documentation of its first level of monitoring may impair HUD’s
ability to make the required compliance determinations that funded activities are consistent with
the approved action plans.


 The Auditee’s Monitoring
 Procedures


              The Auditee’s monitoring procedures consist of three levels of monitoring.
              Project Managers perform the first level, the Compliance Department performs
              the second level, and the Internal Audit Department performs the third level. Our
              review determined that the Auditee’s second and third levels of monitoring appear
              to be supported; however, its first level of monitoring needs to be documented.
              The Auditee requires each Project Manager to monitor his or her respective
              program(s) and subrecipient(s); however, the Auditee’s General Administration
              Manual does not require the Project Managers to maintain written evidence to
              demonstrate the monitoring performed.


   Written Documentation Not
   Maintained in Program Files

              We interviewed the Project Managers and reviewed the Auditee’s files for the
              Downtown Alliance Streetscape and West Street Pedestrian Connections
              programs and determined that the Project Manager’s monitoring consisted of
              reviewing the monthly progress reports submitted by the subrecipients; however,
              there was insufficient evidence in the programs’ files to indicate the Project
              Managers’ review of these monthly progress reports. Accordingly, there was
              little written documentation in the files to demonstrate the first level of
              monitoring performed by the Project Managers. The Project Manager for the
              West Street Pedestrian Connections Program provided us with copies of various
              emails demonstrating monitoring of the subrecipient; however, these emails were
              only obtained upon our request. Since these emails were not maintained in the


                                               10
            files, the files do not document the full extent of the Project Manager’s
            monitoring efforts. Accordingly, we consider this an inadequate audit trail,
            because the documentation is not readily available for HUD to review when
            making the required compliance determinations regarding funds expended.
            Written documentation of the Project Managers’ monitoring of these programs is
            needed so that the Auditee will be in full compliance with the recordkeeping
            requirements as described in the alternative procedures published in the Federal
            Register.

The Auditee’s Policies Do Not
Require Project Managers to
Maintain Written Documentation

            Auditee officials stated that the Project Managers have been advised that it is their
            responsibility to consistently monitor the programs’ subrecipients and they have
            received training from the Compliance Department on monitoring the program’s
            subrecipients. However, the Auditee’s General Administration Manual does not
            require Project Managers to maintain written evidence of their monitoring of their
            respective programs. Federal Register Docket Number 4732-N-04, dated May 22,
            2002, provides that the content of the records maintained by the State should be
            sufficient to enable HUD to make compliance determinations and show how
            activities funded are consistent with the action plans. Accordingly, the lack of
            written documentation of the Project Managers’ monitoring efforts, may impair
            HUD’s ability to make the required compliance determinations that funded
            activities are consistent with the approved action plans.


 Recommendations


            We recommend that HUD’s General Deputy Assistance Secretary for Community
            Planning and Development:

            2A.    Require the Auditee to maintain written documentation detailing the
                   monitoring that is performed by its Project Managers of the CDBG
                   Disaster Assistance Programs.




                                             11
         SCOPE AND METHODOLOGY

Lower Manhattan Development Corporation (the Auditee) received $2.783 billion
in CDBG Disaster Assistance Funds from HUD. During our audit period April 1,
2004 through September 30, 2004, the Auditee disbursed $276.7 million of these
funds for activities related to the rebuilding of lower Manhattan. We tested
$146.4 million representing approximately 53 percent of the amount disbursed for
the period.

To achieve our audit objectives we reviewed:

•   Applicable laws, regulations and program requirements,

•   The Auditee’s HUD-approved Partial Action Plans, and

•   The Auditee’s accounting books and records.

We examined and tested the documentation supporting disbursements related to
the following programs:

     - Design and Installation of the Interim Memorial
     - Downtown Alliance Streetscape
     - West Street Pedestrian Connections
     - World Trade Center Memorial and Cultural
     - Utility Restoration and Infrastructure Rebuilding

We reviewed the Auditee’s policies and procedures for monitoring the above
programs.

In addition, we reviewed the payroll records and timesheets of the Auditee’s
Subrecipient for the URIR Program. Where appropriate, we interviewed officials
of the Auditee and its Subrecipients in charge of administering the various
programs.

The audit covered the period from April 1, 2004 through September 30, 2004, and
was expanded where necessary to include periods prior and subsequent to these
dates. We performed our on-site work at the Auditee’s office and the office of its
parent company, the Empire State Development Corporation, from October 2004
through January 2005.

We performed our review in accordance with generally accepted government
auditing standards.




                                12
                             INTERNAL CONTROLS

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

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting,
   •   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:

              •       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 the relevant controls identified above.

              A 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.




                                               13
Weaknesses
             Based on our review, we believe that the following controls contain reportable
             weaknesses:

      •   Program Operations - By not maintaining written documentation of monitoring efforts,
          the Auditee cannot provide adequate assurance that programs are meeting their
          objectives (see Finding 2).

      •   Compliance with laws and regulations – Funds were drawn down for administrative
          expenses without following the requirements of the Subrecipient Agreement, and
          monitoring of programs are not in compliance with HUD regulations (see Finding 1
          and 2).

      •   Safeguarding Resources - The procedures for withdrawing CDBG Disaster Assistance
          funds were circumvented by the Auditee’s parent company, thereby allowing funds to
          be withdrawn for ineligible expenses (see Finding 1).




                                              14
                   FOLLOW-UP ON PRIOR AUDITS


Prior Report Number and Date


           We issued Audit Report number 2004-NY-1004 on September 15, 2004. The report
           contained one audit finding with recommendations for corrective action. The
           finding involved deficiencies in the processing of businesses applications for grants
           under the Employment Training Assistance Program. The Lower Manhattan
           Development Corporation has commenced corrective actions to address our cited
           deficiencies, and HUD’s Office of Community Planning and Development
           established June 30, 2005 as the target date for the Auditee to complete its corrective
           actions.

           We issued Audit Report number 2004-NY-1002 on March 25, 2004. The report
           contained three audit findings with recommendations for corrective action. The
           findings involve processing deficiencies in the Residential Grant Program, duplicate
           payments made to grant recipients, and weakness in accounting controls over the
           recovery of funds. The Auditee has implemented corrective actions to resolve our
           recommendations, and a final action certification was approved by the program
           office on July 21, 2004.




                                             15
                                   APPENDIXES


Appendix A
                    SCHEDULE OF QUESTIONED COSTS

     Recommendation
        Number              Ineligible 1/
         1A                $141,347

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.




                                            16
Appendix B
            SCHEDULE OF PROGRAMS FUNDED AND
            DISBURSEMENTS AS OF SEPTEMBER 30, 2004


                                                       Cumulative
                                     Budget as of     Disbursements     Balance as of
             Programs                 9/30/2004       as of 9/30/2004    9/30/2004
  Residential Grant                   $280, 500,000      $219,715,298      $60,784,702
  Employment Training
  Assistance                              $500,000          $226,809         $273,191
  Interim Memorial                        $350,000          $299,969          $50,031
  Columbus Park Renovation                $428,571                $0         $428,571
  Marketing History/Heritage
  Museums                               $4,664,000          $459,396        $4,204,604
  Downtown Alliance Streetscape         $4,000,000        $2,635,871        $1,364,129
  New York Stock Exchange
  Area Improvements                    $10,000,000                $0       $10,000,000
  Parks and Open Space                 $26,149,189                $0       $26,149,189
  Hudson River Park
  Improvements                          $2,600,000                $0        $2,600,000
  Millennium High School                $3,000,000                $0        $3,000,000

  West Street Pedestrian Crossing      $21,155,811       $11,249,748        $9,906,063
  Damaged Building
  Beautification                        $1,500,000                $0        $1,500,000
  Lower Manhattan Community
  Outreach                              $1,000,000          $210,700         $789,300
  Chinatown Tourism and
  Marketing                             $1,000,000          $222,500         $777,500

  Lower Manhattan Information           $1,300,000          $237,611        $1,062,389

  Business Recovery Grant             $224,500,000      $214,173,039       $10,326,961

  Job Creation and Retention          $150,000,000       $50,577,020       $99,422,980
  Small Firm Attraction                $50,000,000                $0       $50,000,000
  World Trade Center Memorial
  and Cultural                        $164,077,400       $98,475,943       $65,601,457
  Lower Manhattan Tourism               $3,250,000                $0        $3,250,000
  Disproportionate Loss of
  Workforce                            $33,000,000       $32,999,997               $3
  Utility Restoration &
  Infrastructure Rebuilding           $735,000,000      $160,313,178     $574,686,822
  Administration & Planning            $79,624,838       $38,858,201      $40,766,637
                      TOTALS        $1,797,599,809     $830,655,280     $966,944,529




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        Appendix C
                 AUDITEE COMMENTS AND OIG'S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                                    18
Comment 1




            19
Comment 2




            20
                        OIG Evaluation of Auditee Comments

Comment 1   The auditee agreed with the finding and has implemented corrective action to
            correct the deficiencies identified in the finding. We recommend that HUD
            verify the corrective actions taken and ensure the implemented procedures are
            operating as intended.

Comment 2   The auditee agreed with the finding and will implement corrective action. We
            recommend that HUD verify the corrective action taken and ensure the
            implemented procedures are operating as intended.




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