oversight

Baton Rouge, Louisiana Road Home Program Did Not Ensure that Road HOME Employees Were Eligible to Receive Additional Compensation Grants

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-05-05.

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

                                                                    Issue Date
                                                                            May 5, 2009
                                                                    Audit Report Number:
                                                                             2009-AO-1001




TO:        Nelson Bregon, General Deputy Assistant Secretary, D


FROM:      Rose Capalungan, Regional Inspector General for Audit, Gulf Coast Region,
             GAH

SUBJECT: State of Louisiana, Baton Rouge, Louisiana, Road Home Program, Did Not
         Ensure That Road Home Employees Were Eligible to Receive Additional
         Compensation Grants

                                     HIGHLIGHTS

 What We Audited and Why

             Due to a citizen’s complaint, we audited the State of Louisiana’s (State)
             additional compensation grant (grant) component of the Road Home homeowner
             assistance program, managed by the State’s contractor, ICF Emergency
             Management Services, LLC. The complaint raised a potential issue with Road
             Home employees improperly obtaining grants. Our audit objective was to
             determine whether the State ensured that Road Home employees were eligible to
             receive the grant. This report is the third of three reports issued regarding the
             State’s additional compensation grant component under the Road Home program.



 What We Found

             The State did not ensure that all Road Home employees were eligible to receive
             their additional compensation grant. Of 34 grants, the State funded five (15
             percent) that were ineligible. This condition occurred because the State did not
             ensure that its contractor’s controls were sufficient to identify errors and that its
             policies and procedures were followed when determining eligibility. As a result,
             the State misspent $228,930 in federal funds for five ineligible grants.

                                               1
What We Recommend

           We recommend that The U.S. Department of Housing and Urban Development’s
           (HUD) General Deputy Assistant Secretary for Community Planning and
           Development require the State to repay amounts disbursed for ineligible grants to
           its Road Home program, conduct monitoring to ensure that its contractor has
           implemented adequate controls, and report the recapture/recovery for all grants
           deemed ineligible.

           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

           During the audit, we provided the results of our review to the State’s management
           staff and HUD. We conducted an exit conference with the State on April 3, 2009.

           We asked the State to provide comments on our draft audit report by April 1,
           2009. We gave the State an extension until April 16, 2009, to respond, and it
           provided written comments on that day. The State generally agreed with the
           report but disagreed with some of the conclusions and recommendations. The
           complete text of the written response, along with our evaluation of that response,
           can be found in appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                    4

Results of Audit

   Finding 1: The State Did Not Ensure That All Road Home Employees Were    5
              Eligible to Receive Additional Compensation Grants


Scope and Methodology                                                       8

Internal Controls                                                           9

Follow-up on Prior Audits                                                  11

Appendixes
   A. Schedule of Questioned Costs                                         13
   B. Auditee Comments and OIG’s Evaluation                                14




                                          3
                           BACKGROUND AND OBJECTIVE

Between December 2005 and December 2007, Congress approved a total of $19.7 billion in
supplemental Community Development Block Grant (CDBG) Disaster Recovery Assistance
funds for Gulf Coast hurricane relief. Of that amount, the U.S. Department of Housing and
Urban Development (HUD) awarded $13.4 billion to the State of Louisiana (State) for its
recovery efforts.

The Disaster Recovery Unit within the State’s Division of Administration’s Office of
Community Development administers the use of the supplemental CDBG funds. The Louisiana
Recovery Authority (Authority) plans and coordinates for the recovery and rebuilding of the
State. The Disaster Recovery Unit, in conjunction with the Authority, develops action plans
outlining the programs and methods used to administer the supplemental CDBG funds.

With approval from the Louisiana legislature, the governor, the Authority, and the Disaster
Recovery Unit created the Louisiana Road Home program. The State allocated more than $9.9
billion of the $13.4 billion to the homeowner assistance program,1 which provides grants to
eligible homeowners. ICF Emergency Management Services, LLC (ICF), the State’s contractor,
manages the Road Home program. The State required ICF to verify applicants’ eligibility and
develop a management information system2 meeting State specifications and internal control
requirements. ICF’s contract term ends on June 11, 2009, and the homeowner assistance
program is in its final stages.3

The homeowner assistance program includes four forms of available funding assistance,
dependent upon the option selected, and provides compensation to applicants who select one of
the following options:
     • Option 1 - retain their homes;
     • Option 2 - sell the home, occupied as of the date of the storms, but remain a homeowner
         in Louisiana; or
     • Option 3 - sell the home, occupied as of the date of the storms, and either move from
         Louisiana or remain in Louisiana as a renter.

The four forms of available funding assistance include the (1) compensation grant, (2) elevation
grant, (3) additional compensation grant (grant), and (4) additional mitigation grant. The grant is
additional funding, up to $50,000, that applicants can receive if they meet certain eligibility
requirements, including whether the applicants’ household income is equal to or less than 80
percent of the area median income, adjusted for household size.

Our audit objective was to determine whether the State ensured that Road Home employees were
eligible to receive the grant.
1
  The homeowner assistance program is one of four Road Home programs.
2
  The management information system principally supports the Road Home program.
3
  As of February 22, 2009, the State had determined that the final number of applicants eligible for assistance totaled
152,060. Of that number, 144,187 applicants had chosen an option, and 140,083 applications had been completed,
with 4,104 remaining.

                                                          4
                                     RESULTS OF AUDIT

Finding 1: The State Did Not Ensure That All Road Home Employees
           Were Eligible to Receive Additional Compensation Grants

The State did not ensure that all Road Home employees were eligible to receive additional
compensation grants. Of 34 grants, the State funded five (15 percent) that were ineligible. This
condition occurred because the State did not ensure that its contractor’s controls were sufficient
to identify errors and that its policies and procedures were followed when determining eligibility.
As a result, the State misspent $228,930 in federal funds for five ineligible grants.



    State’s Eligibility Requirements

                 To be eligible for the grant, which cannot exceed $50,000, the State required
                 lower income applicants,4 including Road Home employees, to

                     •   Document their total current household income,5
                     •   Choose options 1 or 2,6 and
                     •   Have a gap between the estimated cost of damage and the calculated
                         compensation amount.

$228,930 Paid for Ineligible
Grants

                 A review of 34 grants disbursed to Road Home employees determined that five
                 (15 percent) were ineligible because household income exceeded HUD’s income
                 limits. As a result, between October 15, 2007, and September 18, 2008, the State
                 misspent $228,930 in federal funds for the five ineligible grants. The remaining
                 29 grants, totaling more than $965,000, were eligible.

    Employee Application Review
    Procedures Developed by State


                 The State developed a policy for reviewing Road Home employee applications
                 and initiated reviews of both closed and pending employee applications. The
                 documented review procedures identified the State’s contractor’s Audits and

4
  Includes homeowners with household income less than or equal to 80 percent of the area median income, adjusted
   for household size.
5
  Current income is defined as income from within the past six months.
6
  The amount of the grant is based upon the option selected.

                                                       5
                    Monitoring Division as the responsible division for reviewing employee
                    applications to ensure compliance with applicable program eligibility
                    requirements, including requirements for the grant. However, according to the
                    State’s contractor, this additional review procedure was not used until around July
                    30, 2008, after all of the grants were disbursed. In addition, this policy was not
                    documented until October 2008.

                    Further, the State’s contractor performed postclosing reviews of all 34 grants. As
                    related to the five grants determined ineligible, the contractor’s grant review
                    component of its postclosing review procedures agreed with our determinations in
                    four of five instances. After receiving the results of our review, the State again
                    reviewed the grants and agreed7 that all five grants were ineligible. The State
                    must conduct monitoring to ensure that its contractor has implemented adequate
                    controls.

    State’s Policy Not Followed

                    The State’s contractor did not follow the State’s policy for grants when
                    determining eligibility. The State’s policy outlined specific income criteria for
                    determining grant eligibility. However, for the five files determined ineligible,
                    household income exceeded HUD’s income limits, ranging between $60 and
                    $16,050 over the income limits. Although the remaining 29 grants were
                    determined eligible, the State must ensure that its contractor follows the
                    established policies and procedures to avoid funding additional ineligible grants.


    State Taking Action


                    The State stated that it planned to pursue recovery of grant funds for all grants
                    determined ineligible. In addition, the State had developed a recapture policy and
                    was working in conjunction with the Louisiana Attorney General’s Office to
                    develop the recapture procedures and processes. The State further stated that
                    grants determined ineligible, for which the recapture of funds was warranted,
                    would be turned over to the Louisiana Attorney General’s Office for recapture.
                    We acknowledge the State’s actions toward grant recovery.


    Conclusion


                    Of 34 grants, the State made disbursements totaling more than $228,000 for five
                    (15 percent) ineligible disbursements between October 15, 2007, and September

7
    The State agreed with our results during the February 12, 2009, update meeting.

                                                           6
                   18, 2008. The ineligible disbursements occurred because the State did not ensure
                   that its contractor’s controls were sufficient to identify errors and that its policies
                   and procedures were followed when determining eligibility. Specifically, the five
                   grants were determined to be ineligible due to the applicant’s income having
                   exceeded HUD’s established income limits.

                   The State must repay funds disbursed for ineligible grant amounts. In our
                   previous audit report,8 we recommended that the State ensure that its contractor
                   implements adequate controls to ensure that it follows the established policies and
                   procedures when determining eligibility and ensure that postclosing reviews
                   detect and correct errors. However, we determined that the contractor’s grant
                   review component of its postclosing review procedures did not always detect
                   errors; therefore, we recommend that the State conduct monitoring to ensure that
                   its contractor has implemented adequate controls and report the
                   recapture/recovery of funds for all grants deemed ineligible.


    Recommendations

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

                   1A. Repay $228,930 disbursed for five ineligible grants to its Road Home
                       program.

                   1B. Conduct monitoring to ensure that its contractor has implemented
                       adequate controls.

                   1C. Report the recapture and/or recovery of funds for all grants deemed
                       ineligible.




8
    HUD OIG (Office of Inspector General) Audit Report 2008-AO-1005.

                                                       7
                         SCOPE AND METHODOLOGY

We conducted our audit at the State’s Office of Community Development, Disaster Recovery
Unit; ICF’s offices in Baton Rouge, Louisiana; and the HUD Office of Inspector General (OIG)
office in New Orleans, Louisiana. We performed our audit work between July 2008 and
February 2009.

To accomplish our objective, we used the electronic data received from the State’s contractor’s
management information system. Comprised of different databases combined into a central data
warehouse, the management information system, developed and maintained by the State’s
contractor, principally supports the Road Home homeowner assistance program. Based on the
data, a total universe of 36 additional compensation grants, totaling more than $ 1.2 million,
were funded between October 15, 2007, and September 18, 2008, for Road Home employees.
Considering the relatively small number of grants in the universe, we chose the 100 percent
selection method for detailed testing. However, 2 of the 36 grants were removed from our
review because one applicant was under examination and review of the other applicant’s file
determined that a grant had not been disbursed for the Road Home employee. Therefore, our
review was comprised of the remaining 34 grants. We reviewed the scanned documentation, via
the management information system, for each of the 34 grant files to determine whether the grant
applicant met the eligibility requirements as established in prevailing policies. Through our file
review, we determined that the grant data were generally reliable. However, we relied upon the
total universe to determine questioned costs.

In addition to data analyses and file reviews, we

•   Interviewed State officials as well as key personnel of ICF;

•   Reviewed the grant agreements between HUD and the State, the Road Home written policies
    and procedures, the contract executed between the State and ICF and amendments, the Code
    of Federal Regulations, waivers, and other applicable legal authorities relevant to the CDBG
    Disaster Recovery Assistance grants; and

•   Reviewed reports issued by the Louisiana legislative auditor’s office.

Our audit period covered October 15, 2007, through September 18, 2008. We conducted the
audit in accordance with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objective. We believe that
the evidence obtained provides a reasonable basis for our findings and conclusions based on our
audit objective.




                                                    8
                              INTERNAL CONTROLS


Internal control is 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, and
   •   Safeguarding resources.

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



 Relevant Internal Controls

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

                  •   Program operations - Policies and procedures that management has
                      implemented to reasonably ensure that persons are eligible to participate in
                      the additional compensation grant program.

                  •   Validity and reliability of data - Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data within
                      the management information system are obtained, maintained, and fairly
                      disclosed in reports.

                  •   Compliance with laws and regulations - Policies and procedures that
                      management has implemented to reasonably ensure that CDBG disaster
                      fund use is consistent with HUD’s laws and regulations.

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

              We assessed the relevant controls identified above.




                                                9
           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 Weakness


          Based on our review, we did not identify any significant weaknesses.




                                            10
                      FOLLOW-UP ON PRIOR AUDITS


This audit report is the third OIG audit of the State’s additional compensation grant component
of the Road Home homeowner assistance program. Our first audit, issued on January 30, 2008,
is discussed below. Our second audit, issued August 7, 2008, is also discussed below.

 Report Number: 2008-AO-1002

              Our audit report (2008-AO-1002) disclosed that of 22,135 grants, the State funded
              418 (2 percent) grants coded ineligible or lacking an eligibility determination,
              totaling $15.8 million. This condition occurred because the State’s contractor,
              ICF, did not have system controls in place to prevent these improper
              disbursements. File reviews of 26 (6 percent) of the 418 grants determined that,
              as of October 13, 2007, the State had misspent federal funds for 17 ineligible
              grants and two unsupported grants. The remaining seven grants were eligible or
              had input or coding errors. As a result, the State needed to review the remaining
              392 grants, which totaled more than $14.6 million, as the disbursements were
              questionable. The State had a total of $15,528,378 in questioned costs. We
              recommended that HUD’s General Deputy Assistant Secretary for Community
              Planning and Development require the State to repay amounts disbursed for
              ineligible grants to its Road Home program, either support or repay amounts
              disbursed for unsupported grants, review all of the remaining 392 grants coded
              ineligible or lacking an eligibility determination and either support or repay the
              $14.6 million disbursed for them, and implement system controls to prevent
              future improper disbursements. The recommendations to support or repay
              unsupported grants and to implement system controls are closed, and the other
              recommendations are still open.

 Report Number: 2008-AO-1005



              Our audit report (2008-AO-1005) disclosed that of 45 grants sampled, the State
              funded nine (20 percent) grants, totaling $263,959, that were either ineligible or
              unsupported. In addition, the State did not ensure that its contractor followed its
              policies and procedures for another 24 grants (53 percent), but the errors did not
              impact the grants’ eligibility. These conditions occurred because the State did not
              ensure that its contractor’s controls were sufficient to catch errors and that its
              policies and procedures were followed when determining eligibility. Further,
              although the State’s contractor performed a review of all 45 grants sampled,
              issues remained undetected. As a result, based on a statistical projection, our best
              estimate is that the State spent $70 million on ineligible grants and $57.4 million
              on unsupported grants, disbursed between June 12, 2006, and October 13, 2007.

                                               11
We recommended that HUD’s General Deputy Assistant Secretary for
Community Planning and Development require the State to repay amounts
disbursed for ineligible grants to its Road Home program, either support or repay
amounts disbursed for unsupported grants, ensure that its contractor follows the
established policies and procedures, ensure that its contractor’s postclosing
reviews detect and correct errors, and review the remaining 21,672 grants
disbursed between June 12, 2006, and October 13, 2007, to ensure that grants
were eligible and supported. By reviewing the grants, we estimated that the value
of questioned costs would total more than $70 million for grant disbursements to
ineligible participants and more than $57.4 million for grant disbursements to
participants whose eligibility was not adequately supported. The recommendation
to support or repay unsupported grants is closed, and the other recommendations
are still open.




                               12
                                   APPENDIXES
Appendix A

                SCHEDULE OF QUESTIONED COSTS

        Recommendation           Ineligible 1/
               number
                      1A           $228,930




1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     policies or regulations.




                                            13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         14
Comment 1




            15
Comment 2




Comment 3




Comment 4




            16
17
                        OIG’s Evaluation of Auditee Comments


Comment 1   The State concurred that at the time of our review, 5 of 34 grants were ineligible.
            However, the State did not concur with the conclusion that it did not ensure that
            its contractor’s controls were sufficient to identify errors and that policies and
            procedures were followed when determining eligibility. The State claimed that all
            five of the ineligible grants were identified by the program in the postclosing
            review process as ineligible and identified them for grant recovery. Further, the
            State did not agree with the conclusion that the contractor’s grant review
            component of its postclosing review procedures did not identify one of the five
            grants as ineligible. The State claimed that it reviewed this grant and found that
            the file was identified in the contractor’s postclosing review as ineligible. The
            State also noted that OIG based its conclusion on a note in the system that could
            be interpreted as meaning that the applicant was income eligible and, therefore,
            eligible for the additional compensation grant. However, the grant was identified
            in the contractor’s postclosing review process as ineligible for the grant and has
            remained in that status despite the note.

            We acknowledge the actions taken by the State on these grants. However, we did
            not base our conclusion on a note in the system for the one grant. At the time of
            our review, the State’s additional compensation grant review report, documented
            in its management information system, identified the grant as eligible. Thus, we
            disagree with the State’s assertion and stand by our original conclusion that the
            State did not ensure that its contractor’s controls were sufficient to identify errors
            and that policies and procedures were followed when determining eligibility.

Comment 2   In response to recommendation 1A, the State claimed that it was premature to
            require the State to repay the $228,930 at this point in the program. Further, the
            State noted that after OIG’s review, the State implemented Change Control Board
            Form No. 230 (CCB 230), Post Closing Income Verification Based on Louisiana
            Department of Labor (DOL) Quarterly Wage Data, dated February 10, 2009.
            According to the State, CCB 230 provides for the program to obtain wage data
            from DOL to determine the household income of certain applicants.

            Further, the State claimed that based on the income data provided by DOL, two of
            the five grants identified as ineligible by OIG were eligible, reducing the
            $228,930 amount determined ineligible by OIG to $150,000. Additionally, the
            State claimed that the ineligible grants had not been through the State’s recapture
            process, a process designed to recover overpayments from applicants.

            Since the policy was implemented and the documentation was obtained after our
            review, we were unable to confirm the State’s assertion that based on income data
            provided by DOL, two of the five grants were eligible. Further, the State initially
            agreed that all five grants were ineligible, based upon the documentation in the



                                              18
            file. Therefore, we did not change our recommendation that the State repay
            $228,930 for five ineligible grants.


Comment 3   In response to recommendation 1B, the State asserted that it believed that the
            report confirmed the adequacy of the postclosing review process, in that all five
            grants identified as ineligible by OIG were also identified as ineligible and
            identified for grant recovery in the contractor’s postclosing review. In addition,
            the State noted that it contracted with the Louisiana legislative auditor to
            statistically sample files that had been processed through the postclosing review
            to provide assurance on the effectiveness of the postclosing review process.

            We acknowledge the State’s implementation of a postclosing process to resolve
            eligibility and award calculation issues. We further acknowledge that the State’s
            postclosing process identified four of five grants, which we determined to be
            ineligible, as ineligible and recognized the need for grant recovery. In addition,
            we acknowledge the State’s efforts to provide assurance on the effectiveness of its
            postclosing process by working in conjunction with the Louisiana legislative
            auditor.

Comment 4   In response to recommendation 1C, the State affirmed that its recapture program
            would report on grants deemed ineligible as well as amounts recovered from
            applicants.

            We acknowledge the State’s willingness to report on grants deemed ineligible as
            well as amounts recovered from applicants.




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