oversight

Institute for Urban Research and Development, El Monte, California, Did Not Properly Administer Its Supportive Housing Program Grants

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-07-20.

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

                                                                    Issue Date
                                                                       July 19, 2006
                                                                    Audit Report Number
                                                                       2006-LA-1015




TO:        William Vasquez, Director, Los Angeles Office of Community Planning and
           Development, 9DD




FROM:      Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT:   Institute for Urban Research and Development, El Monte, California, Did Not
             Properly Administer Its Supportive Housing Program Grants


                                   HIGHLIGHTS

 What We Audited and Why

            We audited the Institute for Urban Research and Development (Institute) in
            response to a referral from our Office of Investigations, which was prompted by a
            citizen’s complaint. The complainant generally alleged that the Institute was
            misspending grant funds for unallowable or ineligible expenses.

            The Institute received U.S. Department of Housing and Urban Development
            (HUD) Supportive Housing Program grant funds that were passed through the
            Los Angeles Homeless Services Authority and the City of Glendale and
            administered grant activities on behalf of these entities. Our audit objectives were
            to determine whether the complainant’s allegations had merit and whether the
            Institute administered its Supportive Housing Program grants in accordance with
            HUD requirements, Office of Management and Budget requirements, and the
            grant agreements. More specifically, our objectives were to determine whether
            (1) grant expenditures were eligible and supported with adequate documentation
            and (2) the Institute complied with grant matching funds requirements.
What We Found


           The complainant’s allegations had merit, and the Institute did not adequately
           administer its Supportive Housing Program grants. We reviewed grant funds
           provided for four grants totaling nearly $1.5 million and found that the Institute
           claimed to have spent $108,853 in grant funds for allocated supportive housing
           and corporate office expenses that were not documented. In addition, the Institute
           could not provide support for $181,020 in required matching funds for three of the
           grants.

What We Recommend


           HUD awarded Supportive Housing Program grant funds to the Los Angeles
           Homeless Services Authority and City of Glendale. As pass-through entities,
           both provided Supportive Housing Program grant funds to the Institute to carry
           out eligible grant activities. The two grantees are responsible for compliance with
           the grant agreement and HUD requirements. Therefore, we recommend that
           HUD require the two grantees, Los Angeles Homeless Services Authority and the
           City of Glendale, to provide adequate supporting documentation or repay HUD
           the $108,853 in unsupported expenses from nonfederal funds. We also
           recommend that HUD require the Los Angeles Homeless Services Authority and
           the City of Glendale to provide adequate documentation that $181,020 in required
           matching funds was provided or repay the $1,159,580 balance of grant funds
           expended from nonfederal funds.

           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


           We provided the Institute and the two grantees (Los Angeles Homeless Services
           Authority and the City of Glendale) the draft report on June 5, 2006, and held an
           exit conference with officials from these entities on June 14, 2006. The Institute
           and the grantees generally agreed with our report.

           The complete text of the response from the Institute and the two grantees, along
           with our evaluation of that response, can be found in appendix B of this report.




                                            2
                              TABLE OF CONTENTS

Background and Objectives                                                            4

Results of Audit
        Finding 1: The Institute Could Not Support the Eligible Use of $108,853 in   6
        Grant Funding It Received
        Finding 2: The Institute Could Not Document That It Provided $181,020 in     10
        Required Matching Funds

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                                                                     28
   D.   Summary of Unsupported Allocated Expenses                                    30
   E.    Schedule of Unsupported Allocations and Disbursements                       31
   F.   Schedule of Unsupported Matching Funds                                       32
   G.   Schedule of Net Unsupported Cash Match Expense                               33




                                               3
                         BACKGROUND AND OBJECTIVES

The Supportive Housing Program is authorized under Title IV of the McKinney-Vento Homeless
Assistance Act (United States Code 11381-11389). The program is designed to promote the
development of supportive housing and services, including innovative approaches to assist
homeless persons in the transition from homelessness, and to promote the provision of
supportive housing for homeless persons to enable them to live as independently as possible.
Eligible activities include transitional housing, permanent housing for homeless persons with
disabilities, innovative housing that meets the intermediate and long-term needs of homeless
persons, and supportive services for homeless persons not provided in conjunction with
supportive housing.

The Institute for Urban Research and Development (Institute) was established in 1996 as a
nonprofit institution of the Episcopal Diocese of Los Angeles, primarily dedicated to assisting
public and private organizations in responding to economic, social and housing needs of
communities. The Institute has received more than $3.5 million in funding from federal, state,
county, and city sources since 2003. More than $1.7 million of that came from U.S. Department
of Housing and Urban Development (HUD) supportive housing funds, primarily through the
City of Glendale and the Los Angeles Homeless Services Authority. These entities received
funding from HUD and then contracted with the Institute to administer grant program activities.
We reviewed the following grants administered by the Institute between 2003 and 2005:

       Grantee           Grant name                     Grant number             Grant term              Award
Los Angeles Homeless Outreach                          CA16B200031           September 1, 2003          $400,709
Services Authority                                                           – August 31, 2005
Los Angeles Homeless Pathways                          CA16B300024           December 1, 2004           $248,824
Services Authority                                                           – November 30,
                                                                             2005
Los Angeles Homeless Access              CA16B300091                         January 1 –                $333,929
Services Authority                                                           December 31, 2005
City of Glendale     Glendale            CA16B312010                         September 1, 2004          $752,285
                     Consolidated                                            – August 31, 2005
                     Supportive Services
Total                                                                                                  $1,735,7471

When we started our audit in November 2005, the Institute stated that it planned to downsize its
organization and spin off its supportive housing programs into a new organization. Later, it advised
us that due to cash flow problems, it planned to cease its supportive housing program activities by
March 31, 2006, and was in the process of returning the programs to its respective grantees. The
Institute’s chief operating officer extended the closure date to June 30, 2006, because the Institute
had identified new nonprofit organizations to take over the grant programs. The new organizations
will be able to begin administering the programs on July 1, 2006. Our audit objective was to

1
 HUD disbursed $1,596,505 of the total funds ($1,735,747) awarded to the two grantees. The Institute received
$1,492,956 of the $1,735,747.


                                                       4
determine whether the Institute administered its Supportive Housing Program grants in accordance
with HUD requirements, Office of Management and Budget requirements, and the grant
agreements. More specifically, our objectives were to determine whether (1) grant expenditures
were eligible and supported with adequate documentation and (2) the Institute complied with grant
matching funds requirements.




                                                5
                                           RESULTS OF AUDIT

Finding 1: The Institute Could Not Support the Eligible Use of
$108,853 in Grant Funding It Received
The Institute was unable to provide documentation to support the eligible use of $108,853 of the
nearly $1.5 million in grant funds it received from the Los Angeles Homeless Services Authority
and the City of Glendale. This amount included undocumented cost allocations made to the
grants without valid supporting documentation. We attribute this unsupported use of grant funds
to the Institute’s failure to establish adequate financial record-keeping and implement an
adequate internal control system that would ensure costs charged to the grants were appropriate,
documented and properly accounted for. This was compounded by the failure of the Los
Angeles Homeless Services Authority and the City of Glendale to provide adequate
monitoring/oversight of the Institute’s grant activities. The improper expenditures negatively
impacted the Institute’s ability to effectively manage its supportive housing program grants.


    The Institute Paid $108,853 for
    Unsupported Expenses



                     We reviewed claimed grant expenses totaling nearly $1.5 million for the four
                     grants in our audit scope and found that the Institute charged $108,853 for
                     supportive housing and corporate expenses that were allocated to the grants using
                     rates with no documented basis or an approved indirect cost allocation rate
                     ($94,525) as required by Office of Management and Budget Circular A-122,
                     attachment A, paragraphs A.2.g. and E.2.b2 and for other expenses that were not
                     adequately supported with invoices or documentation ($14,328). Details are
                     discussed separately below.

                     Allocated Expenses with Unsupported Allocation Rates $94,525

                     The Institute charged $94,525 in expenses to the four grants using various cost
                     allocation rates but was unable to demonstrate the basis or the origin of the rates
                     used. This amount was entirely composed of non-salary expenses such as
                     utilities, telephone and maintenance expenses that were allocated to the grants
                     using rates that were not documented and explained in the Institute’s grant
                     documentation. Allocation rates are normally associated with the indirect costs of
                     an organization and require negotiation and approval by a cognizant federal
                     agency as required by Office of Management and Budget Circular A-122,
                     Attachment A, Paragraph E . Costs identified specifically to awards are direct


2
    A detailed listing of the criteria relevant to this audit is shown in appendix C.


                                                               6
costs and should be assigned directly thereto in accordance with Office of
Management and Budget Circular A-122, attachment A, Paragraph B.1.
Therefore, if costs are directly assigned to awards, no allocation rates should be
necessary to distribute costs. A summary of these expenses is shown in the table
below. A detailed expense breakdown is contained in appendix D.

               Allocated Expenses by Grant
        CA16B300091 Access            $             34,609
        CA16B200031 Outreach                        38,698
        CA16B300024 Pathways                         1,802
        CA16B312010 Glendale                        19,416
            Total                     $             94,525


We asked the Los Angeles Homeless Services Authority to determine the origin
of the allocation rates used by the Institute. The staff told us that since the
Institute had no approved indirect costs under their grant agreements, it was not
necessary for them to have a cost allocation plan or allocation rates. However, the
Authority’s grant agreement with the Institute stated that a cost allocation plan
must be provided prior to execution of the grant agreement. The City of Glendale
also did not have documentation to support the rates. After our inquiries, the
Institute prepared a draft allocation plan and submitted it to the City of Glendale
for review. Since completion of our fieldwork, the City of Glendale also
submitted cost allocation plans for our review. However, as previously stated, the
plans did not exist when the grant expenses were initially charged. Since the
Institute was not able to provide documentation to support the basis for the rates
that were used to allocate costs to the grants, these expenses were unsupported.

Expenses without Adequate Invoices or Other Documentation ($14,328)

The Los Angeles Homeless Services Authority and the City of Glendale disbursed
$1,492,956 in grant funding to the Institute. During audit fieldwork, we located
Institute support totaling $1,182,999. Later, the City of Glendale provided
additional support totaling $295,629. Therefore, $1,478,628 of the $1,492,956
disbursed to the Institute was supported. However, we could not locate support
for the remaining $14,328. The $14,328 in unsupported expenses is associated
with Los Angeles Homeless Services Authority grants (appendix E). Office of
Management and Budget Circular A-122, attachment A, paragraph A, requires
allowable costs to be adequately documented. A breakdown of the unsupported
disbursements and unsupported allocations is shown in appendix E.

Lack of Monitoring and Internal Controls

The Los Angeles Homeless Services Authority and the City of Glendale did not
provide adequate monitoring and oversight of the Institute’s grant activities. The


                                 7
             Los Angeles Homeless Services Authority stated that it had not performed any
             recent financial monitoring of the Institute. The City of Glendale performed
             financial monitoring and issued a finding in November 2005, stating that there
             was no documented basis for the Institute’s cost allocation method. The city
             recommended that the Institute provide an explanation for its cost allocation
             procedures. However, the finding was made after the grant had expired and,
             although the Institute recently prepared a cost allocation plan, it was not
             established at the time costs were allocated to the grants. During our review, we
             found that many of the Institute’s records were incomplete and that supporting
             invoice documentation was not always available when requested. OMB Circular
             A-110, Subpart C, requires that a grant recipient’s financial management system
             adequately identify the source and application of funds for federally-sponsored
             activities.

             The Institute’s internal controls were also inadequate. Institute management
             stated that there was a period when the Institute did not have a chief financial
             officer, and as a result, the Institute’s senior accountant became responsible for
             many of the Institute’s accounting functions. Institute management
             acknowledged that the senior accountant had too many responsibilities and made
             numerous mistakes. Although not independently verified, we were also told by
             Institute management officials that their automated accounting system did not
             have controls to prevent prior months’ accounting results from being altered.
             These internal control problems significantly impaired the Institute’s ability to
             maintain an adequately functioning accounting system.

             In addition, a management letter issued by the Institute’s independent auditor
             stated that account reconciliations were not regularly performed, which should
             have prompted the Institute or the grantees to ensure that corrective action was
             taken.

Conclusion

             The Institute could not support $108,853 in claimed grant expenses due to poor
             financial recordkeeping and failure to implement an adequate internal control
             system to ensure appropriate charging of grant costs, accurate financial results,
             and that it maintained adequate records. In addition, the Los Angeles Homeless
             Services Authority and the City of Glendale did not provide adequate financial
             monitoring and oversight of the Institute’s grant activities to ensure adequate
             financial records and strong internal controls. Consequently, these problems
             negatively impacted the Institute’s ability to effectively manage nearly $1.5
             million in grant funds that it received.




                                              8
Recommendations



          We recommend that the director of the Los Angeles Office of Community
          Planning and Development

          1A.     Require the Los Angeles Homeless Services Authority to provide
                  adequate supporting documentation for the $89,437 in unsupported
                  expenses (see appendix E), or repay it to HUD from nonfederal funds.

          1B.     Require the City of Glendale to provide adequate supporting
                  documentation for the $19,416 in unsupported expenses (see appendix E),
                  or repay it to HUD from nonfederal funds.

          1C.     Require the Institute (or its replacement nonprofit organization(s)) to
                  establish and implement cost allocation plans and approved indirect cost
                  rates.

          1D.     Require the Institute (or its replacement nonprofit organization(s)) to
                  establish and implement adequate controls over its financial operations
                  and recordkeeping.

          1E.     Instruct the Los Angeles Homeless Services Authority and the City of
                  Glendale to ensure that they have adequate monitoring procedures in place
                  to ensure monitoring of their grant activities to identify problems in a
                  more timely manner.




                                           9
Finding 2: The Institute Could Not Document That It Provided
$181,020 in Required Matching Funds

The Institute’s accounting records failed to support that it obtained $181,020 in required
matching funds for its Access, Outreach, and Glendale Consolidated Supportive Services grants3.
This occurred because the Institute did not adequately consider the Office of Management and
Budget requirements governing maintenance of accounting records and financial management
systems to document its match funding. In addition, the Institute did not have adequate internal
controls to ensure appropriate accounting for matching funds and disclosure of financial results.
This negatively impacted the Institute’s ability to properly manage the grant income for its
supportive housing programs.



    The Institute’s Records Did Not
    Properly Identify Matching
    Funds


                    Office of Management and Budget Circular A-110, subpart C, requires that
                    matching funds must be verifiable from the grant recipient's accounting records.

                    The Institute’s accounting records did not always segregate match funding from
                    other sources of income. For example, the annual progress report for the Glendale
                    Consolidated Supportive Services grant stated that the Institute expended $111,287
                    in matching funds during the grant period September 2004 to August 2005.
                    However, only $54,345 of this amount was identified in the Institute’s accounting
                    ledgers’ match cost center. The remaining amount of $56,942 could not be
                    accounted for because it was commingled in cost centers that also contained
                    ordinary grant income.

                    In the case of the Access and Outreach grants, the annual progress reports stated that
                    the Institute expended $56,513 and $47,703 (second year of grant) in match funding,
                    respectively. However, these amounts were not supported in the accounting ledgers
                    because the match cost center, for which documentation was provided, commingled
                    the funds for both grants.




3
    The required matching funds were provided for its Pathways grant.


                                                         10
The Institute Did Not Provide
Adequate Source
Documentation for the
Matching Funds

             Office of Management and Budget Circular A-110, subpart C, requires a grant
             recipient’s financial records to identify the source and application of funds for
             federally sponsored activities and that accounting records be supported by source
             documentation.

             The Institute’s source documentation did not support match funding amounts
             identifed in annual progress reports and accounting ledgers. The Institute provided
             copies of checks received as reimbursement from the City of El Monte in support of
             its claim that it had obtained the required match funding for the Access and Outreach
             grants. However, the checks were not identifiable to either the Access or Outreach
             grants and, more importantly, it was not clear which grants the checks applied to
             based on information from the accounting ledgers. Therefore, the match for these
             grants was not verifiable.

             In addition, not all of the $111,287 identified in the annual progress report as cash
             match for the Glendale Consolidated Supportive Services grant was supported by
             source documentation. The Institute provided $34,483 in checks and provided
             copies of its contract with the Glendale Unified School District and a Glendale
             redevelopment contract to demonstrate that it met the remaining match amount of
             $76,804. However, this documentation does not specify whether match funding was
             actually received for the Glendale Consolidated Supportive Services grant nor does
             it specify the amount. A breakdown of the unsupported cash matching funds by
             grant is shown in appendix F.

Conclusion

             The Institute did not adequately consider the Office of Management and Budget
             requirements governing maintenance of accounting records and financial
             management systems to document its match funding and did not have adequate
             internal controls to ensure appropriate accounting of matching funds. In addition,
             as discussed in finding 1, insufficient financial monitoring by Los Angeles
             Homeless Services Authority and the City of Glendale failed to identify this
             problem with the Institute’s matching funds in a timely manner. The failure to
             properly account for the required matching funds negatively impacted the
             Institute’s ability to manage its grant income. Therefore, we question the balance
             of grant funds expended for the three grants, and recommend that they be repaid
             unless adequate supporting documentation can be provided.




                                              11
Recommendations



          We recommend that the director of the Los Angeles Office of Community Planning
          and Development require the

          2A. City of Glendale to provide adequate documentation that the $76,804 in
              required matching funds was provided (see appendix F), or repay the
              $574,038 balance of the grant funds expended for the Glendale Consolidated
              Supportive Services grant from nonfederal funds.

          2B. Los Angeles Homeless Services Authority to provide adequate
              documentation that the $104,216 in required matching funds was provided
              (see appendix F), or repay the $585,542 for the balance of grant funds
              expended for the Outreach and Access grants from nonfederal funds.

          2C. Institute (or its replacement nonprofit organizations(s)) to establish and
              implement adequate controls to ensure that grant matching funds are
              appropriately tracked in the accounting system and that adequate supporting
              source documentation is maintained.




                                         12
                        SCOPE AND METHODOLOGY

We performed audit work from November 2005 through March 2006. The audit generally
covered the period September 2003 through December 2005. We reviewed guidance applicable
to Supportive Housing Program grants and interviewed staff from the City of Glendale, Los
Angeles Homeless Services Authority, and the Institute. We also consulted with staff from the
Los Angeles Office of Community Planning and Development.

To accomplish our audit objectives, we

    •   Reviewed and obtained an understanding of the referral and complaint allegations
        contained in a letter forwarded by the Office of Investigations. We audited the
        complaint allegations to determine whether they had merit.

    •   Reviewed applicable HUD regulations, including 24 CFR [Code of Federal
        Regulations] Parts 84 and 583 and Office of Management and Budget Circulars A-110
        and A-122.

    •   Interviewed personnel from the HUD Office of Community Planning and Development
        to obtain grant files for the City of Glendale and the Los Angeles Homeless Services
        Authority.

    •   Interviewed personnel from the City of Glendale and the Los Angeles Homeless
        Services Authority.

    •   Reviewed the grant recipient’s policies, procedures and practices and interviewed key
        personnel from the Institute.

    •   Reviewed independent public accountant reports and available monitoring reports from
        the cities.

    •   Reviewed accounting ledgers, vendor files, grant agreements and technical submissions.
        We also reviewed $1,492,956 in grant expenditures to determine whether there was
        adequate documentation to support the Institute’s billings to the cities. The
        documentation reviewed included invoices, timesheets and cost allocations.

    •   Nonstatistically selected the one City of Glendale Consolidated Supportive Services
        grant and three Los Angeles Homeless Services Authority grants because we noted that
        the largest amount of questionable expenses reviewed during our survey came from
        grants administered by those cities.

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




                                              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:

              •       Policies and procedures that management has implemented to ensure
                      accurate, current, and complete disclosure of financial results.
              •       Policies and procedures that management has implemented to reasonably
                      ensure that its Supportive Housing Program grants are carried out in
                      accordance with applicable laws and regulations.

              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 Institute did not have

              •       Policies and procedures to ensure accurate, current and complete disclosure
                      of financial results (findings 1 and 2).
              •       Policies and procedures to ensure that Supportive Housing Program grants
                      were carried out in accordance with applicable laws and regulations
                      (findings 1 and 2).




                                               14
                                   APPENDIXES

Appendix A

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

                          Recommendation              Unsupported 1/
                                 number
                                         1A                   $89,437
                                         1B                    19,416
                                         2A                   574,038
                                         2B                   585,542
                                       Total               $1,268,433


1/   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.




                                               15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1


Comment 1

Comment 2


Comment 3




                         16
Comment 4




            17
18
Comment 5




            19
Comment 2


Comment 6




Comment 7




            20
Comment 8




            21
Comment 9




Comment 10




             22
23
24
                         OIG Evaluation of Auditee Comments

Comment 1   The reasonableness of the Institute’s cost allocations to the Access and Outreach
            grants that were effective between September 2003 and December 2005 was not
            an issue that was addressed in our audit. Rather, at the time of our audit, there
            was no documentation showing the basis for the allocations made to the grants.
            We performed extensive fieldwork and made numerous contacts with staff from
            the Institute, the City of Glendale and the Los Angeles Homeless Services
            Authority. We were told either that no allocation plans existed or were given
            documentation that did not support the allocation rates used by the Institute to
            allocate costs to the grants. Therefore, we disagree that the allocation basis
            recently provided have been utilized consistently by the Institute in its monthly
            invoicing.

Comment 2   At the time of our audit there was no documentation to support the $14,328. If
            there is now supporting documentation, it can be provided to HUD during the
            audit resolution process.

Comment 3   We acknowledge that the Los Angeles Homeless Services Authority is taking
            action to ensure that it conducts timely and effective monitoring of its nonprofit
            providers in the future. The HUD office can review the adequacy of the new
            procedures during the audit resolution process to ensure that the non-profit
            sponsors comply with the Supportive Housing Program requirements.

Comment 4   Grantees are responsible for compliance with the Supportive Housing Program
            grant requirements, regardless of whether the grantee administers the grant
            program directly, or passes the grant funds through to a non-profit organization.
            During our audit, the Los Angeles Homeless Services Authority told us it had
            conducted program monitoring of the Institute; however, no recent financial
            monitoring had been performed. The Los Angeles Homeless Services Authority’s
            inadequate financial monitoring significantly contributed to the Institute’s failure
            to maintain its accounting records in accordance with the requirements of Office
            of Management and Budget Circular A-110. If the Institute now has records to
            document that the matching funds requirements were met, it can provide them to
            HUD during the audit resolution process.

Comment 5   The Institute acknowledged at the exit conference and in its written response that
            at the time of the audit it was unable to locate the supporting documentation for
            the basis used to distribute costs to the various programs. We want to point out
            that our conclusion that the $94,525 in allocated costs were unsupported was not
            based solely on audit fieldwork performed at the Institute. During our audit we
            also spoke with staff members at the Los Angeles Homeless Services Authority in
            an attempt to determine the basis for the various percentages that were used to
            allocate costs to the grants. In more than one instance, no explanation was given
            for the percentages and we were told that it was not necessary for the Institute to



                                             25
             have cost allocation plans because they had no approved indirect cost items and
             that all costs were charged directly to the grants. We also spoke with staff
             members at the City of Glendale to determine the basis for the Institute’s
             allocations to the Glendale Consolidated grant, but the city did not have
             documentation to support the various rates. Based on the results of all fieldwork
             performed in this area, we concluded that the Institute did not have a documented
             basis (as required by Office of Management and Budget Circular A-122) to
             support the grant costs. We acknowledge the cost allocation plans have recently
             been provided; however, this was subsequent to our audit fieldwork. Further,
             based on the foregoing, we must conclude that the plans were only recently
             prepared, in response to our audit, and that the costs allocated to the grants during
             their effective terms were not supported as required. The new cost allocation
             plans may be implemented after receiving the necessary reviews and approvals by
             the cognizant federal agency (HUD).

 Comment 6   We agree that changes to the Institute’s finance/accounting staff have been made
             since December 2004. However, the Institute’s accounting and financial record
             keeping for the grants periods that we reviewed was inadequate and grant
             documentation was incomplete. Further, if invoices were accurately processed,
             we attribute this to the City of Glendale’s and the Los Angeles Homeless Service
             Authority’s controls over invoice review, not the Institute’s. Initially, we could
             not obtain invoice documentation for review because the invoices and related
             back-up was not adequately maintained. We attribute this to a lack of controls
             over financial recordkeeping. This resulted in additional audit fieldwork at the
             City of Glendale and the Los Angeles Homeless Services Authority in an attempt
             to obtain the information.

 Comment 7   We applaud the Institute for taking action to implement corrective actions based
             on our findings to strengthen its internal controls and accounting procedures.
             Since these actions took place after our audit fieldwork, we have not reviewed the
             adequacy of these actions, and thus, have no further comment. The revised
             procedures and practices can be reviewed by HUD during the audit resolution
             process.

Comment 8    Our finding stated that the Institute was not in compliance with the requirements
             of Office and Management and Budget Circular A-110, not A-133. Circular A-
             110 states that match contributions must be verifiable from the recipient’s records
             and that accounting records must be supported with source documentation. Since
             the Institute agreed with the finding and is now taking action to correct the
             problem, we have no further comment.

Comment 9    We identified only two findings in the finding outlines and discussion draft report.
             However, after additional documentation was provided by the City of Glendale
             subsequent to audit fieldwork, we did eliminate one portion of Finding 1, which
             originally stated that we could not locate adequate invoice support at the Institute
             for the Glendale Consolidated invoices.



                                              26
Comment 10   The City of Glendale agreed with the finding and acknowledged that at the time
             of the audit, there was inadequate documentation provided to support allocation
             rates used for indirect costs. Since the City of Glendale is now working with the
             Institute to address the deficiencies and attempt to determine the basis for the
             costs charged, we have no further comment on the issue.




                                             27
Appendix C

                                 CRITERIA

 A.   Regulations at 24 CFR [Code of Federal Regulations] Part 583, Subpart B, state
      that HUD will provide grants to pay for the actual costs of supportive housing or
      supportive services. HUD will also pay for the actual costs of supportive services for
      homeless persons and a portion of actual operating expenses for supportive housing.
      All expenses will be paid up to a period of five years.

 B.   Office of Management and Budget Circular A-122, Purpose, states that the circular
      establishes principles for determining costs of grants, contracts, and other agreements
      with nonprofit organizations.

 C.   Office of Management and Budget Circular A-122, Applicability, paragraph A,
      states that circular principles shall be used by all federal agencies in determining the
      costs of work performed by nonprofit organizations under grants, cooperative
      agreements, cost reimbursement contracts, and other contracts in which costs are used
      in pricing, administration, or settlement.

 D.   Office of Management and Budget Circular A-122, Applicability, paragraph B,
      states that all cost reimbursement subawards (subgrants, subcontracts, etc.) are subject
      to those federal cost principles applicable to the particular organization concerned.
      Thus, if a subaward is made to nonprofit organization, the circular principles shall
      apply.

 E.   Office of Management and Budget Circular A-122, attachment A, paragraph A,
      subparagraph A2g, requires that allowable costs be adequately documented.

 F.   Office of Management and Budget Circular A-122, attachment A, paragraph E,
      subparagraph 2b, states that a nonprofit organization that has not previously
      established an indirect cost rate with a federal agency shall submit its initial indirect
      cost proposal immediately after the organization is advised that an award will be made
      and in no event later than three months after the effective date of the award.

 G.   Office of Management and Budget Circular A-122, attachment A, paragraph B,
      subparagraph 1, states that direct costs are those that can be identified specifically
      with a particular award, project, service, or other direct activity of an organization.
      Costs identified specifically with awards are direct costs of the awards and are to be
      assigned directly thereto.

 H.   Office of Management and Budget Circular A-122, attachment A, paragraph C,
      subparagraph 1, states that indirect costs are those that have been incurred for
      common or joint objectives and cannot be readily identified with a particular final cost
      objective.



                                             28
I.   Office of Management and Budget Circular A-122, attachment A, paragraph E,
     subparagraph 2a, requires that the Federal agency with the largest dollar value of
     awards with an organization be designated as the cognizant agency for the negotiation
     and approval of indirect cost rates.

J.   Office of Management and Budget Circular A-122, attachment A, paragraph E,
     Subparagraph 2g, requires the results of each negotiation to be formalized in a written
     agreement between the cognizant agency and the non-profit organization.




                                          29
Appendix D
          SUMMARY OF UNSUPPORTED ALLOCATED EXPENSES
                                                                                               Glendale
                                         Access          Outreach          Pathways           Consolidated
                                                                                           Supportive Services
            Expense Type               CA16B300091      CA16B200031       CA16B300024        CA16B312010         Total
 Utilities (gas, water and electric)         10,577               6,965                2                 1,753     19,297
 Telephone                                    8,692               9,780               74                 2,426     20,972
 Maintenance and repairs                      8,641               5,230                                  1,355     15,226
 Insurance                                    2,897               7,586                                  4,798     15,281
 Leasing                                                                                                 7,589      7,589
 Office supplies                                  631             3,120               60                   285      4,096
 Copier rental, services, supplies                742               610                2                   980      2,334
 Client website, computer
                                              1,597                657             124                     147      2,525
 maintenance, etcetera
 Printing/postage                                 511               719               12                            1,242
 Security                                          28             3,242            358                      15      3,643
 Resource directory                                                                860                               860
 Vehicle gas and mileage                                           203                                               203
 Cell phones                                                        82                80                             161
 Business loans                                                    108                33                             141
 Equipment and furnishings                        126                                                                126
 Job announcement                                                                  110                               110
 Food, water, etcetera…                                            102                                               102
 Wells Fargo card charges                                            9                87                                 96
 Periodical                                        87                                                                    87
 Property taxes                                    41               33                                                   74
 Cell phones                                                                                                68           68
 Employee screening services                                        60                                                   60
 Food, water, etcetera                                              53                                                   53
 Checks                                                             50                                                   50
 Express mail                                                       47                                                   47
 Equipment and furnishings                         36                                                                    36
 Advertising/marketing                                              17                                                   17
 Business license fees                                              13                 0                                 13
 Petty cash                                                          8                                                    8
 Delivery service                                                    4                                                    4
 Mileage                                            3                                                                     3
     Total allocated expenses                34,609           38,698             1,802                  19,416     94,525




                                                             30
Appendix E

            SCHEDULE OF UNSUPPORTED ALLOCATIONS AND DISBURSEMENTS
                                                                                           Amount
                        Amount        Less: City of                          Amount       supported
                      disbursed by      Glendale         Adjusted          supported by      by         Amount          Unsupported     Total
 Grant number             HUD          allocation     disbursements          Institute    Glendale    unsupported        allocations unsupported
 Los Angeles
 Homeless Services
 Authority
                                                                                                                                  $
 CA16B300091          $     272,449                    $   272,449          $   295,058               $    (22,609)          34,609   $     12,000
 CA16B200031                400,335                        400,335              363,791                $     36,544          38,698       $ 75,242
 CA16B300024                226,718                        226,718              226,325                $        393           1,802       $  2,195
 Subtotal - Los
 Angeles Homeless
 Services Authority   $     899,502               $    $   899,502          $   885,174                $     14,328      $   75,109       $    89,437

 City of Glendale
 CA16B312010                697,003        103,549         593,454              297,825     295,629                 0        19,416       $    19,416
 Subtotal -
 Glendale
 Consolidated
 Supportive
 Services             $     697,003     $ 103,549      $   593,454          $   297,825   $ 295,629                 0   $    19,416       $    19,416

   Totals             $   1,596,505     $ 103,549      $ 1,492,956          $ 1,182,999   $ 295,629        $ 14,328      $   94,525   $       108,853




                                                                      31
Appendix F

        SCHEDULE OF UNSUPPORTED MATCHING FUNDS

                                                             Match per
                                                              annual      Verifiable
                                           Grant             progress       match          Unverified
     Grant number         Grant name       period             report       amount           match
     Los Angeles
     Homeless Services
     Authority
                                          September
                                          1, 2003 –
                                          August
     CA16B200031          Outreach        31, 2005       $       56,513   $       -        $   56,513
                                          January 1
                                          -
                                          December
                                          31, 2005
     CA16B300091          Access                                 47,703           -        $   47,703
     Subtotal Los
     Angeles Homeless
     Services Authority                                         104,216                0       104,216

     City of Glendale
                                          September
                          Consolidated    1, 2004 –
                          Supportive      August
     CA16B312010          Services Only   31, 2005              111,287       34,483            76,804
       Subtotal
     Glendale
     Consolidated
     Supportive
     Services                                                   111,287       34,483            76,804
     Totals                                              $      215,503   $   34,483       $   181,020




                                                    32
Appendix G

SCHEDULE OF NET UNSUPPORTED CASH MATCH EXPENSE
                                                                                            Less:
                                                                   Less: unsupported    unsupported        Net
                                                    Grant amount      allocations      disbursements   unsupported
Grant number   Grant name         Grant period       disbursed       (appendix D)       (appendix E)   cash match
Los Angeles
Homeless
Services
Authority
                              September 1, 2003 –
CA16B200031    Outreach       August 31, 2005        $400,335         $ $38,698          $36,544       $325,093
                              January 1– December
CA16B300091    Access         31, 2005                272,449             34,609         (22,609)      $260,449

Subtotal                                             $ 672,784        $ 73,307           $13,935       $585,542

City of
Glendale
               Consolidated
               Supportive     September 1, 2004 –
CA16B312010    Services       August 31, 2005        $ 593,454        $     19,416          0          $574,038
Subtotal
Glendale
Consolidated                                                                                0
Supportive
Services                                             $ 593,454        $     19,416                     $574,038

Totals                                              $ 1,266,238           $ 92,723       $13,935       $1,159,580




                                                    33