oversight

Grace Hill Used Neighborhood Initiative Grant Funds to Pay Unsupported Payroll Expenses and Duplicated Computer Support Costs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-07-24.

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

                                                                  Issue Date
                                                                         July 24, 2009
                                                                  Audit Report Number
                                                                         2009-KC-1008




TO:        Francis P. McNally, Director - Congressional Grants Division, DECC

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA


SUBJECT:   Grace Hill Used Neighborhood Initiative Grant Funds to Pay Unsupported
           Payroll Expenses and Duplicated Computer Support Costs


                                   HIGHLIGHTS

 What We Audited and Why

            We audited Grace Hill Neighborhood Health Centers (Grace Hill) because it
            received nearly $15 million in neighborhood initiative grants through fiscal year
            2004, 2005, and 2006 appropriations. Our audit objective was to determine
            whether Grace Hill properly charged payroll and support expenses to the grants.

 What We Found

            Grace Hill charged unsupported salary and benefit costs to the grants because it did
            not require grant staff to accurately track their time. Additionally, Grace Hill
            improperly charged computer support expenses as direct costs to its grants. As a
            result, it charged more than $3.2 million in unsupported payroll expenses to the
            grants and received $196,690 more than allowable from the grants.


 What We Recommend

            We recommend that the U. S. Department of Housing and Urban Development
            (HUD) require Grace Hill to design and implement a process to track actual staff


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           hours, base future drawdown requests on actual activity, and provide
           documentation to support salary and benefits charged to the grants or reimburse
           the grants from nonfederal sources for costs that it cannot adequately support.

           Additionally, we recommended that HUD require Grace Hill to review the direct
           and indirect costs and certify that no other duplications have occurred and
           strengthen the review process by training the reviewer on what is included in the
           indirect cost rate.

           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 Grace Hill with our draft report on June 26, 2009. We received its
           written response on July 14, 2009. Grace Hill generally agreed with our findings.

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




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                           TABLE OF CONTENTS

Background and Objective                                           4

Results of Audit
      Finding 1: Grace Hill Used Improper Payroll Allocation       5
      Finding 2: Grace Hill Duplicated Computer Support Expenses   7


Scope and Methodology                                              9

Internal Controls                                                  10

Appendixes
   A. Schedule of Questioned Costs                                 11
   B. Auditee Comments and OIG’s Evaluation                        12




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                      BACKGROUND AND OBJECTIVE

Grace Hill Neighborhood Health Centers (Grace Hill) is a nonprofit corporation. It provides
primary and preventive health care at five community health center locations, primarily to
uninsured and underserved residents of St. Louis, Missouri.

Grace Hill received almost $15 million in neighborhood initiative grants funded through fiscal
year 2004, 2005, and 2006 appropriations administered through the U. S. Department of Housing
and Urban Development (HUD). These grants were for primary prevention activities, including
lead remediation and abatement of housing in St. Louis. Grace Hill has completed the first two
grants and is currently administering the third.

Grace Hill uses the funds to focus on primary prevention activities through the identification of
pregnant women and their children who are “at risk” of lead poisoning. This project’s
prevention goal was to serve 6,000 families of pregnant women over the three grant years. In
addition, the project’s remediation goal was to remediate 900 homes of pregnant women in three
years. Grace Hill reports that it is well on the way to meeting and possibly exceeding these
goals.

Our audit objective was to determine whether Grace Hill properly charged payroll and support
expenses to the grants.




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                                  RESULTS OF AUDIT

Finding 1: Grace Hill Used Improper Payroll Allocation
Grace Hill improperly charged payroll expenses to its grants. This condition occurred because
Grace Hill did not require grant staff to properly track their time. As a result, it charged more than
$3.2 million in unsupported payroll expenses to the grants.


 Grace Hill Improperly Charged
 Payroll Expenses


                Grace Hill improperly charged payroll expenses to its grants. Office of
                Management and Budget (OMB) Circular A-122, attachment B, paragraph 8-m,
                requires grantees to maintain reports reflecting the distribution of activity for all
                staff members whose compensation is charged, in whole or in part, directly to
                awards. Reports maintained to satisfy these requirements must reflect an after-
                the-fact determination of the actual activity of each employee. Budget estimates
                (i.e., estimates determined before the services are performed) do not qualify as
                support for charges to awards.

                Grace Hill used budget percentages to charge salary, including benefits, to the
                grants. These charges were determined before the services were performed. As a
                result, Grace Hill’s payroll charges were not based on actual time spent on grant
                activities.

 Grace Hill Did Not Require
 Staff to Track Time by Activity


                Grace Hill did not require staff to properly track their time spent on grant
                activities. We found through interviews that only two of Grace Hill’s staff were
                tracking their time, but the time they recorded was not used to calculate the
                charges to the grant. The remaining staff did not track their time by activity.

                In several cases, the amount of time staff estimated that they spent on grant
                activity differed from the budgeted percentages charged to the grants. Some staff
                worked on multiple grants, and they estimated that they spent more or less time
                on the lead grant than their budgeted percentage. In some instances, staff who
                were charged at 100 percent to the lead grant reported that they also worked on
                nongrant activities. Since Grace Hill did not require staff to track time by
                activity, there was no way to know with certainty how much time each staff
                member spent on grant activities.



                                                   5
Grace Hill Had Unsupported
Payroll Charges

           Grace Hill charged more than $3.2 million in unsupported payroll expenses to the
           grants. This amount was comprised of direct salary and fringe benefits charged to
           the two completed grants and the open grant. Grace Hill will charge additional
           unsupported payroll expenses to the grant if its method of charging these expenses is
           not corrected.

Recommendations

           We recommend that the Director of Congressional Grants require Grace Hill to

           1A.    Cease using estimated payroll costs on its drawdown requests.

           1B.    Design and implement a process to ensure that actual staff hours are
                  accurately tracked.

           1C.    Use the resulting actual payroll costs on all future drawdown requests.

           1D.    Provide documentation to support salary and fringe benefits charged to the
                  grants or reimburse the grants from nonfederal sources for costs that it
                  cannot support. These costs should include $3,228,243 charged to the
                  grants through December 31, 2008.




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Finding 2: Grace Hill Duplicated Computer Support Expenses
Grace Hill improperly charged computer support expenses as direct costs to its grants. This
condition occurred because the staff reviewing the drawdown requests did not understand that
the indirect cost rate already included computer support. As a result, Grace Hill received
$196,690 more than allowable from the grants.


 Grace Hill Duplicated
 Computer Support Costs

              Grace Hill improperly charged computer support expenses to the grants. OMB
              Circular A-122, attachment A, paragraph B, provides that direct costs are those
              that can be identified specifically with a particular activity of an organization.
              However, a cost may not be assigned to an award as a direct cost if it has also
              been allocated to an award as an indirect cost.

              Grace Hill charged computer support expenses as both direct and indirect costs. It
              charged $167,253 in computer support costs as direct costs as follows:

                          Grant number              Direct costs charged
                    Grant B-04-NI-MO-0025                 $42,427
                    Grant B-05-NI-MO-0019                 $60,249
                    Grant B-06-NI-MO-0024                 $64,577

              Grace Hill also included these costs in the indirect cost percentage applied to the
              grant, thus duplicating the direct costs.

 Grace Hill Performed
 Ineffective Drawdown Reviews

              Grace Hill’s reviewer did not understand that the indirect cost rate included
              computer support expenses. Grace Hill staff indicated that the duplication of
              computer support expense was a mistake caused by an inconsistent allocation of
              these expenses. The mistake was not noticed because the reviewer did not
              understand that the indirect cost percentage included the same costs that were
              shown again as a direct cost.

 Duplicate Charges Resulted in
 Unallowable Costs

              As a result of the duplicate charges, Grace Hill received $196,690 more than
              allowable from the grants. This amount included the $167,253 improperly
              charged as direct costs plus $29,437 in associated indirect costs.


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          Grace Hill, after being made aware of the duplicated charges, offset later
          drawdown requests.

Recommendations

          We recommend that the Director of Congressional Grants

          2A. Verify that Grace Hill appropriately reimbursed the $196,690 in duplicate
              expenses.

          2B. Require Grace Hill to review the direct and indirect costs and certify that no
              other duplications have occurred.

          2C. Strengthen the review process by training the reviewer on what is included
              in the indirect cost rate.




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                         SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed the grant agreements, the grant applications, Grace
Hill’s policies and procedures, the results of prior certified public accountant reviews, and OMB
Circular A-122. We also interviewed Grace Hill and HUD staff.

We obtained a spreadsheet from Grace Hill listing 801 addresses (361 projects) with contract
estimate amounts totaling approximately $5.2 million, which had lead remediation work done by
contractors selected by Grace Hill. From this list, we chose 19 projects with contract estimate
amounts totaling $565,793. We reviewed these projects’ files for evidence of approvals,
inspections, contracts, invoices, lien waivers, and payments. We tested whether the contractors
used were on Grace Hill’s approved contractors list and reviewed the payees, amounts, and
endorsements on the cancelled checks.

We also chose six drawdown requests totaling $1.8 million from a universe of 59 requests
totaling $10 million, which had been submitted to HUD by Grace Hill during the audit period of
January 1, 2006, through December 31, 2008. We reviewed the summary-level support for these
draws, added up the summaries, and traced some of the summary figures to general ledger
printouts to test for compliance with HUD policies and procedures.

We reviewed how Grace Hill charged the computer support, property support, and payroll
included in these draws. Additionally, we reviewed the indirect cost rate agreement approved by
the U.S. Department of Health and Human Services, which authorized an indirect cost rate of
17.7 percent.

We used printouts and reports generated by Grace Hill’s computerized accounting system and
supporting documentation to review the lead remediation activities relating to our objective. We
also reviewed drawdown requests and their supporting documentation to identify how Grace Hill
charged the computer support, property support, and payroll expenses. We assessed the
reliability of these data and determined that the data were sufficiently reliable for use in meeting
our objective.

We performed audit work from January through May 2009. The on-site audit work was
performed at Grace Hill’s office at 100 North 12th, St. Louis, Missouri.

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.




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                              INTERNAL CONTROLS

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

   •   Program operations,
   •   Relevance and reliability of information,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding of assets and 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
              objectives:

                         •   Controls over processing and allocating staff time charged to the
                             grants.
                         •   Controls over charging support expenses to the grants.

              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 that the following items are significant weaknesses:

              Grace Hill did not have adequate controls to

              •       Ensure that staff time was based on actual time devoted to the grants’
                      activities (finding 1).
              •       Avoid duplicating computer support costs, which were charged as direct
                      costs and then allocated again using the indirect rate (finding 2).



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                                     APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                 Recommendation             Ineligible 1/   Unsupported
                        number                                       2/
                                1D                            $3,228,243
                                2A             $196,690


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. In this instance, the duplicated computer expense costs totaling
     $196,690 were ineligible costs.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the 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. In this instance, the $3,228,243 in salary and
     benefits expenses that were improperly based on the budget rather than actual activity
     were unsupported costs.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         12
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         13
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         14
                         OIG Evaluation of Auditee Comments

Comment 1   We appreciate Grace Hill’s prompt action in response to our audit.

Comment 2   We appreciate Grace Hill’s position concerning our recommendation which
            retroactively penalizes it for not properly tracking hours worked by its staff.
            However, the grant agreements that Grace Hill signed in 2004, 2006, and 2007,
            notified it that it had to comply with the requirements of OMB Circular A-122.

Comment 3   We appreciate Grace Hill’s prompt action in response to our audit.




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