oversight

Arizona Department of Housing's Administration of its Recovery Act Grant Homelessness Prevention and Rapid Re-Housing Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-05-07.

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

                                                                 Issue Date
                                                                              May 07, 2010
                                                                 Audit Report Number
                                                                          2010-LA-1010




TO:         Maria F. Cremer, Acting Director, San Francisco Office of Community Planning
            and Development, 9AD



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


SUBJECT: Arizona Department of Housing’s Administration of Its Recovery Act Grant:
         Homelessness Prevention and Rapid Re-Housing Program

                                    HIGHLIGHTS

 What We Audited and Why


      We audited the Homelessness Prevention and Rapid Re-Housing Program at the State of
      Arizona Housing Department (Department) because it was the largest single
      Homelessness Prevention and Rapid Re-Housing Program grant awarded within Arizona
      under the American Recovery and Reinvestment Act of 2009 (Recovery Act). In
      addition, the State Office of the Auditor General excluded the State’s homeless programs
      from its planned reviews of Recovery Act programs. Our audit is part of the U.S.
      Department of Housing and Urban Development (HUD), Office of Inspector General’s
      (OIG) national mandate to monitor grant activities funded by the Recovery Act.

      Our objective was to determine whether the Department administered the grant in
      compliance with Recovery Act and other applicable regulations. Specifically, we wanted
      to determine whether the Department had adequate policies and procedures in place to
      ensure that (1) Recovery Act funds were accounted for separately and reporting
      requirements were met, (2) program participants and activities were eligible, (3) Federal
      accounting documentation requirements were met, and (4) subrecipients were adequately
      trained and monitored for compliance.
What We Found


     The Department had adequate policies and procedures to ensure that Recovery Act funds
     were accounted for separately and reporting requirements were met. However, it did not
     have adequate policies and procedures to ensure that its subrecipients properly
     established eligibility for program participants and activities and maintained source
     documents for program expenditures in accordance with the applicable documentation
     requirements for Federal grants. Further, the Department’s policies and procedures were
     not adequate to ensure that subrecipients received adequate training and monitoring to
     ensure compliance with the specific Homelessness Prevention and Rapid Re-Housing
     Program regulations.


What We Recommend

     We recommend that HUD require the Department to provide supporting documentation
     or repay unsupported amounts for $75,543 in program expenditures. We also
     recommend that HUD require the Department to provide adequate training and
     monitoring to its subrecipients to ensure that they have implemented policies and
     procedures to comply with Homelessness Prevention and Rapid Re-Housing Program
     requirements and to maintain appropriate source documentation for program
     expenditures. By ensuring that its subrecipients properly establish and document that
     program participants and activities are eligible, the Department will reduce the risk of
     waste, fraud, and abuse for its remaining Recovery Act funds under the program.

     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 a draft report to the Department on April 21, 2010, and held an exit
     conference with Department officials on May 3, 2010. The Department provided written
     comments on April 29, 2010. The Department generally agreed with our report
     recommendations.

     The complete text of the auditee’s 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 Department Did Not Ensure That Its Homelessness Prevention and   6
              Rapid Re-Housing Program Was Administered in Accordance With
              Recovery Act Regulations

Scope and Methodology                                                              14

Internal Controls                                                                  15

Appendixes

    A.   Schedule of Questioned Costs                                              17
    B.   Auditee Comments and OIG’s Evaluation                                     19
    C.   Criteria                                                                  23
    D.   Schedule of Deficiencies                                                  27




                                            3
                       BACKGROUND AND OBJECTIVE

The American Recovery and Reinvestment Act
The American Recovery and Reinvestment Act of 2009 (Recovery Act) became Public Law 111-
5 on February 17, 2009. The purpose of the Recovery Act is to (1) preserve and create jobs and
promote economic recovery, (2) assist those most impacted by the recession, (3) provide
investments needed to increase economic efficiency by spurring technological advances in
science and health, (4) invest in transportation, environmental protection, and other infrastructure
that will provide long-term economic benefits, and (5) stabilize State and local government
budgets to minimize and avoid reductions in essential services and counterproductive State and
local tax increases. The Recovery Act established the Homelessness Prevention and Rapid Re-
Housing Program, which is regulated by the U.S. Department of Housing and Urban
Development (HUD) and administered by HUD’s Office of Community Planning and
Development.

The Homelessness Prevention and Rapid Re-Housing Program
The purpose of the Homelessness Prevention and Rapid Re-Housing Program is to provide
homelessness prevention assistance to households that would otherwise become homeless, many
due to the economic crisis, and to provide assistance to rapidly rehouse persons who are
homeless as defined by section 103 of the McKinney-Vento Homeless Assistance Act (42 U.S.C.
(United States Code) 11302). The program provides temporary financial assistance and housing
relocation and stabilization services to individuals and families that are homeless or would be
homeless but for this assistance. Accordingly, eligible program activities are intended to target
the following two populations of persons facing housing instability:

        Homelessness prevention activities assist individuals and families that are currently in
        housing but are at risk of becoming homeless and needing temporary rent or utility
        assistance to prevent them from becoming homeless or assistance to move to another
        unit.
        Rapid rehousing activities assist individuals and families that are experiencing
        homelessness (residing in emergency or transitional shelters or on the street) and need
        temporary assistance to obtain housing and retain it.

Arizona Department of Housing
The Arizona Department of Housing (Department) was established in 2001 to allow for greater
coordination and innovation of housing-related services at the State level. The Department
serves as the grantee and responsible administrative agency for many of HUD’s community
planning and development programs, including the Community Development Block Grant,
HOME Investment Partnerships, and Housing Opportunities for Persons With AIDS programs.
The Department also administers the Section 8 Housing Choice Voucher Program for Yavapai
County and several State-funded homeless programs. HUD allocated more than $7 million in
Homelessness Prevention and Rapid Re-Housing Program funds to the Department for the period
October 1, 2009, through September 30, 2012. The Department retained $211,006 in




                                                 4
administrative funds and allocated the rest to 10 subrecipients,1 which are administering the
program as follows:

                 Town of Springerville                                                                          $203,200
                 New Hope Ranch                                                                                  $203,200
                 SouthEastern Arizona Community Action Programs, Inc.                                           $947,339
                 Coconino County Community Services                                                             $576,751
                 Gila County Community Services                                                                 $243,590
                 Western Arizona Council of Governments                                                        $1,042,095
                 Mohave City Community & Economic Development                                                   $892,651
                 White Mountains Catholic Charities                                                             $590,850
                 Community Action Human Resources Agency                                                       $1,179,759
                 Catholic Charities Yavapai Region                                                              $943,079
                 Subtotal                                                                                      $6,822,514
                 Arizona Department of Housing Administrative Funds                                              $211,006
                 Total                                                                                         $7,033,520

Audit Objective

The objective of our audit was to determine whether the Department administered the grant in
compliance with Recovery Act and other applicable regulations. Specifically, we wanted to
determine whether the Department had adequate policies and procedures in place to ensure that
(1) Recovery Act funds were accounted for separately and reporting requirements were met, (2)
program participants and activities were eligible, (3) Federal accounting documentation
requirements were met, and (4) subrecipients were adequately trained and monitored for
compliance.




1
  These agencies serve cities, counties, towns, townships, etc., that do not qualify to receive Community Development Block Grant entitlement
funds.



                                                                      5
                                      RESULTS OF AUDIT

Finding 1: The Department Did Not Ensure That Its Homelessness
           Prevention and Rapid Re-Housing Program Was
           Administered in Accordance With Recovery Act
           Regulations
The Department did not ensure its Homelessness Prevention and Rapid Re-Housing Program
was administered in accordance with Recovery Act and other applicable Federal regulations.
Although the Department had adequate policies and procedures to account separately for
Recovery Act funds and meet reporting requirements, it did not ensure that its subrecipients

         Established that program participants and activities were eligible,
         Maintained adequate accounting documentation, and
         Received adequate training and monitoring for compliance with Federal requirements.

These conditions occurred because the Department did not follow the State of Arizona’s General
Accounting Office guidance specific to Recovery Act risk assessment and subrecipient
monitoring. Instead, the Department followed its usual procedures for monitoring the
subrecipients’ administration of another State (non-Federal) program that provided homelessness
prevention services. Because all of the subrecipients successfully administered the State
program, officials believed these same agencies were capable of administering the Homelessness
Prevention and Rapid Re-Housing Program with minimal guidance. However, the Department’s
inadequate oversight of its Homelessness Prevention and Rapid Re-Housing Program did not
ensure that participants and activities were eligible or that HUD’s reimbursements to the State
for $75 thousand in grant expenditures were adequately supported.2 Until the Department
requires its subrecipients to follow the Federal program’s requirements, the remaining program
grant funds could be at risk.



    The Department Did Not
    Ensure That Its Subrecipients
    Properly Established Eligibility


         The Department did not ensure that its subrecipients determined, verified, and
         documented participant and/or activity eligibility in accordance with Recovery Act and
         other applicable Federal regulations (see criteria in appendix C). It contracted with 10
         subrecipients throughout Arizona to administer its Homelessness Prevention and Rapid
         Re-Housing Program. However, none of the 10 subrecipients had adequate written

2
  At the time of this audit the Department had administered the program for six months of the 3-year term, and had
been reimbursed by HUD for $75 thousand, or about 1 percent of the total grant amount.


                                                        6
policies and procedures. Specifically, the policies and procedures were not sufficient to
address the Federal program’s regulations and did not provide a step-by-step process or
other guidance with enough detail to enable a caseworker to properly establish participant
eligibility. Further, the subrecipients we visited had not established participant eligibility
in accordance with HUD’s requirements (see criteria F through U, appendix C).

During our review of 15 client files from 3 of the subrecipients, we were unable to
determine if program participants/activities were eligible or ineligible by using the
documents contained within the files. For example, we were unable to establish (1) how
annual income was calculated or compared to the area median income levels and (2)
homelessness or risk of homelessness. Every file reviewed contained similar
deficiencies. Several client files also lacked adequate documentation to support activity
funding, or third-party verification when required. The consistently high rate of
deficiencies in all files reviewed demonstrated that the problem was systemic. The
specific deficiencies are summarized below and presented by case in appendix D:

           15 of 15 files did not contain the required documentation to determine the area
           median income level for the household;
           15 of 15 files did not contain the required income/asset supporting
           documentation needed to determine income eligibility for the household;
           15 of 15 files did not contain third-party verification of income and/or asset
           documentation or failed to provide the required explanation for its absence;
           14 of 15 files did not contain the required documentation to support
           homelessness or risk of homelessness; and
           9 of 15 files did not contain required documentation to show that the
           assistance (activity) funded had been paid (for example, receipts, vouchers,
           etc.)

For example, one client file reviewed had multiple deficiencies. The file contained a
rental agreement for the client but not an eviction letter. Both documents are required to
establish a risk of homelessness. Accordingly, we were unable to determine the risk of
homelessness because the client was only $12 in rental arrears and documentation of an
eviction notice was missing. Additionally, regulations state that if utility bills are to be
paid under the program, the utility notice must show that shut-off is imminent. However,
the utility bill in the file showed a past-due amount of zero; therefore, we were unable to
establish whether utility payments were an eligible activity. Documentation of current
employment for the client and one additional household member consisted of only one
pay stub for a 2-week period. There was no other supporting documentation or third-
party verification for the two employed household members. Therefore, we were unable
to determine that the household’s gross income met program requirements. Further, the
subrecipient did not have eligibility determination procedures that we could follow.
Therefore, we could not locate documentation to show what income the caseworker used
or how the subrecipient calculated, annualized, and compared the income to the area
median income limits. Finally, the file did not contain adequate proof that rent and
utility payments had been forwarded to responsible third parties in care of the client.



                                          7
    Another client file illustrated that multiple deficiencies were typical. File documentation
    showed that the client had been living in a friend’s room, apartment, or house. In this
    circumstance, HUD requirements state that a copy of an eviction letter from the friend
    who owns or rents the housing and a copy of the lease naming the friend as the
    leaseholder must be included in the participant file. However, the file did not contain a
    lease or an eviction notice, which caused us to question the risk of homelessness. In
    addition, although payments for utility service deposits are allowed under the
    Homelessness Prevention and Rapid Re-Housing Program, because the risk of
    homelessness was not fully substantiated, we questioned the eligibility of the rent and
    utility payments. The preliminary tracking form showed a 13-month employment period
    for the client; however, no pay stubs or employer verification documentation was in the
    file. On December 22, 2009, we contacted the employer listed on the documentation and
    were informed that the client currently worked for the company. The documentation
    showed that the client was working, but the income from employment was not included
    in the file. Accordingly, we were not able to determine income eligibility for the client.
    As in the case described above, the subrecipient did not have eligibility determination
    procedures that we could follow. Therefore, we could not locate documentation to show
    what income the caseworker used or how the subrecipient calculated, annualized, and
    compared the income to the area median income limits. Finally, the file did not contain
    adequate proof that rent and utility payments had been forwarded to responsible third
    parties in care of the client.


The Department Did Not
Require Adequate Accounting
Documentation


    The Department did not request or review supporting documentation from any of its 10
    subrecipients to ensure that amounts disbursed for Recovery Act activities were properly
    supported. Specifically, the Department did not examine source documentation for
    reimbursement requests submitted by its subrecipients for Homelessness Prevention and
    Rapid Re-Housing Program activities. A Department official stated that subrecipients
    maintained appropriate supporting documentation because the same 10 subrecipients
    administered the State’s own program to prevent homelessness and the Department’s prior
    monitoring of the State program had consistently found satisfactory compliance with the
    program requirements. However, we determined that the State program--Eviction
    Prevention Emergency Housing--had fewer requirements than the Federal Homelessness
    Prevention and Rapid Re-Housing Program and did not incorporate the Federal
    requirements for financial management systems.

    All of the subrecipient files we reviewed contained instances of inadequate source
    documentation. As discussed above, case files typically failed to include documents to
    establish risk of homelessness (eligibility), such as complete leases, eviction notices and
    utility shut-off notices. These same documents were necessary to support the amount of
    program assistance that could be paid to the appropriate third party, such as the landlord or



                                              8
         utility company. For example, a valid lease was necessary to establish the amount of rent in
         arrears or the amount of late fees due. Otherwise, a landlord could simply claim an arbitrary
         amount for overdue rent and late fees. Without the appropriate source document (the valid
         lease combined with the eviction notice), program officials could not be certain the
         Homelessness Prevention and Rapid Re-Housing Program was not overcharged.

         Federal grant requirements for financial management systems are set forth in 24 CFR (Code
         of Federal Regulations) 85.20 (see criterion D in appendix C). Paragraph (a) of this
         regulation provides that a State (and its subgrantees) must account for [Federal] grant funds
         in accordance with State laws and procedures for expending and accounting for its own
         funds. Accordingly, we determined that Arizona generally expected State agencies either to
         examine source documents submitted by subrecipients with requests for grant
         reimbursement or to examine source documents during onsite monitoring.3 The Department
         did neither. In May 2009, the State of Arizona General Accounting Office issued a
         technical bulletin entitled Recovery Act Risk Assessment and Subrecipient Monitoring.4
         The monitoring procedures referred to under the technical bulletin include, among other
         things, determining whether the subrecipient’s accounting records are supported by source
         documentation (e.g., canceled checks, paid bills, payrolls, contract and subgrant award
         documents, etc.) (see criterion V in appendix C).

         Department officials stated that they reviewed the subrecipients’ documentation during
         onsite monitoring. However, as of December 8, 2009, the Department had not conducted
         monitoring specifically for its Homelessness Prevention and Rapid Re-Housing Program.
         As a result, it had not examined supporting documentation or reviewed subrecipient policies
         and procedures for eligibility determinations and expenditure reimbursements under the
         Federal program.

    The Department Did Not
    Provide Adequate Oversight of
    Its Subrecipients


         The Department did not provide its subrecipients with adequate training or monitoring
         that specifically addressed the Federal requirements for the Homelessness Prevention and
         Rapid Re-Housing Program. This condition occurred because the Department had
         confidence in the capacity of its subrecipients to administer the new program and did not
         follow the State’s guidance for Recovery Act risk assessment and subrecipient
         monitoring.




3
  Before May 2009, the State’s guidance to its agencies regarding reimbursement of subrecipient grant expenditures
was general in nature. We relied upon statements from the State Auditor General’s office to determine what would
be expected during its audits of grant payments.
4
  The State of Arizona General Accounting Office issued Technical Bulletin 10-05 on April 16, 2010, which
superceded the initial Recovery Act guidance in the May 2009 bulletin.


                                                        9
           Initial Training Was Not Provided

           The Department did not provide its subrecipients with initial training to ensure
           compliance with all applicable regulations. Our interviews with all 10 subrecipients,
           along with later reviews of requested documents, disclosed that none of them had
           adequate written policies and procedures for establishing, documenting, or verifying
           client/activity eligibility. Officials at all subrecipients also thought that the Department
           had not provided adequate training for the Homelessness Prevention and Rapid Re-
           Housing Program. The subrecipients stated that the Department had merely supplied
           them with a copy of the Federal Register notice (see criterion C, appendix C). Further,
           one subrecipient official stated that the Department informed the subrecipient that the
           notice was flexible and as new regulations were posted, the Department would inform the
           subrecipient. The grant contracts between the Department and its subrecipients included
           a copy of the notice as a standard part of each contract, but no other regulations or
           guidelines for the program were present.

           Department officials explained that they had not provided additional guidelines because
           the program regulations kept evolving and were not complete. Nevertheless, the HUD
           Homeless Resource Exchange Web site had posted the complete program requirements
           (see criteria F through U, appendix C) on October 16, 2009, and the regulations had not
           changed.5 The grant contracts also specified that the Department would provide enough
           assistance to ensure that the subrecipients complied with program requirements. The
           Department did not fulfill this part of its own contract because it only supplied the notice
           and relied on the subrecipients to administer the program in compliance with all
           applicable regulations and requirements.

           Department officials further stated that initial training for the Federal program would be a
           waste of administrative funds because the Department believed that the agencies were
           low risk and all of them had successfully administered the State’s Eviction Prevention
           Emergency Housing program. Yet, a Department official stated that the State program’s
           only real requirements were that the beneficiary be at or below 80 percent of area median
           income. We obtained a document that proclaimed the purpose and intent of the State’s
           program and a checklist used by the subrecipients to determine eligibility. According to
           both documents, the State program required far less documentation for eligibility
           determination than the Federal Homelessness Prevention and Rapid Re-Housing
           Program.

           During the audit we informed Department officials of the documentation deficiencies,
           and they immediately took steps to remedy the problem. The Department held a training
           conference call with the subrecipients to establish documentation requirements for the
           program. At least six6 of the subrecipients responded to the new guidance by going back
           through the client files to determine whether all documents were in accordance with the
           requirements and to gather missing documentation. One subrecipient stated that
           caseworkers were unable to locate a few of the clients that had received assistance.

5
    The Web site information had not changed at the time of our review.
6
    Some of the subrecipients had not yet submitted requests for reimbursement.


                                                          10
        Specific Monitoring Was Not Performed

        The Department’s past subrecipient monitoring did not effectively ensure compliance
        with all applicable regulations for the new program. The subrecipients informed us that
        the Department had been on site within the last 6 months to review other programs but
        not the Federal Homelessness Prevention and Rapid Re-Housing Program. The
        subrecipients also stated that the Department’s program specialists were always available
        for questions and that there was constant contact. According to the Department, it had
        not conducted monitoring specific to the Federal program because policy was to conduct
        onsite visits every 2 years and several of the subrecipients had not started administering
        the program when their scheduled monitoring visit occurred. Again, the Department
        officials stated that they felt confident that the subrecipients would be able to administer
        the Federal program with little or no assistance. If the Department had conducted early
        onsite monitoring of the new program, it would have found that subrecipient policies and
        procedures did not ensure compliance with the Federal requirements.

        The Department Failed To Follow State Guidance for Oversight of Recovery Act
        Subrecipients

        In May 2009, the State’s General Accounting Office issued the Recovery Act technical
        bulletin requiring that its agencies use two monitoring tools to ensure compliance with
        the Recovery Act: (1) the Financial and Administrative Monitoring Tool and (2) the Risk
        Assessment Monitoring Tool, both published by the Association of Government
        Accountant’s Partnership for Intergovernmental Management and Accountability (a
        partnership effort with the U.S. Office of Management and Budget). (Agencies could use
        their own tool as long as all of the same topics were addressed and were substantially the
        same.)7 However, the Department did not use the Financial and Administrative
        Monitoring Tool (or an equivalent) and allowed its subrecipients to complete the Risk
        Assessment Monitoring Tool themselves.

        The Financial and Administrative Monitoring Tool is a questionnaire intended to be used
        by State agencies as a guide in establishing subrecipient monitoring programs. Its use
        should assist with the following:

                  Determining that the Federal grant purposes are being met,
                  Identifying and remedying problems before an audit, and
                  Ensuring that recipients and subrecipients understand program requirements and
                  have policies and procedures in place to meet them.




7
  The State of Arizona General Accounting Office issued Technical Bulletin 10-05 on April 16, 2010, which
superceded the initial Recovery Act guidance in its May 2009 bulletin. The new guidance consolidated policies and
procedures issued under several previous technical bulletins, and was intended to assist agencies meet Federal
accounting and reporting obligations. The guidance replaced the monitoring and risk assessment tools that were the
guidance effective at the time of the audit.


                                                       11
     As noted above, if the Department had used this tool, it could have determined, among
     other things, that the source documentation supporting grant expenditures was
     insufficient.

     The Risk Assessment Monitoring Tool is designed to be used in conjunction with the
     Financial and Administrative Monitoring Tool to evaluate which subrecipients may
     require further, more intensive monitoring. It is a comprehensive questionnaire with
     general questions to assess risk in the areas such as legal matters, financial systems and
     stability, and program requirements. The introduction states that offices using the
     programmatic assessment questions should develop specific program risk assessment
     questions based upon the governing compliance statutes, rules, and supplements for the
     program. The Department did not develop questions specific to the Homelessness
     Prevention and Rapid Re-Housing Program but directed its subgrantees to complete the
     risk assessment tool, keeping in mind that ―although HPRP [Homelessness Prevention
     and Rapid Re-Housing Program] is a new program, it is similar to EPEH [the State’s
     Eviction Prevention Emergency Housing program].‖ Subrecipients were to fax or e-mail
     the completed questionnaire to the Department.

     Department officials allowed each subrecipient to fill out its own risk assessment report
     before administering the program because it was confident the subrecipients would be
     able to administer the Federal program with little or no assistance. Although the
     Department had good intentions, it should have conducted its own initial assessment of
     the subrecipients’ capabilities to administer the Federal program and provided necessary
     training and/or monitoring to ensure compliance with applicable regulations. Had it
     done so, the extreme number of deficiencies might have been avoided.

Conclusion


    The Department did not ensure that it’s Homelessness Prevention and Rapid Re-Housing
    Program was administered in accordance with Recovery Act and other applicable
    regulations. Because it failed to conduct initial risk assessments and monitoring of
    subrecipients as required by the State of Arizona for its Recovery Act grants, it was not
    aware that subrecipients (1) had inadequate policies and procedures to establish
    participant or activity eligibility and (2) maintained inadequate source documentation to
    support program reimbursements. Accordingly, HUD reimbursed the State for $75,543
    in unsupported expenditures at the time of our review (see appendix A-1). By ensuring
    that its subrecipients properly establish and document that program participants and
    activities are eligible, the Department will reduce the risk of waste, fraud, and abuse for
    its remaining Recovery Act funds under the program.

Recommendations

    We recommend that the Director of the San Francisco Office of Community Planning
    and Development require the Department to



                                            12
1A.   Provide supporting documentation for $75,543 in unsupported program
      expenditures or reimburse the Recovery Act Homelessness Prevention Fund for
      any unsupported amounts.

1B.   Provide adequate training and monitoring to its subrecipients to ensure that they
      implement policies and procedures which include (1) retention of adequate source
      documentation for program expenditures and (2) compliance with Homelessness
      Prevention and Rapid Re-Housing Program requirements, including requirements
      to properly establish the eligibility of participants and activities for assistance
      under the program.




                                      13
                         SCOPE AND METHODOLOGY

We performed our onsite audit work from November 23, 2009, through February 5, 2010, at the
Department’s office in Phoenix, AZ. The audit generally covered the period October through
December 2009. We expanded our audit period as needed to accomplish our objective. We
reviewed both the Department and its subrecipients for compliance with applicable laws and
HUD regulations. Our methodology included

        Interviews with pertinent personnel at HUD, the Department, other State offices, and the
        subrecipients;
        Review of the Homelessness Prevention and Rapid Re-Housing Program grant
        agreement between HUD and the Department;
        Review of the contract between the Department and its subrecipients;
        Review of accounting policies and procedures and accounting records of the Department
        and the State to ensure compliance with Recovery Act regulations;
        Review of policies and procedures for eligibility, verification, and monitoring of the
        program for both the Department and its subrecipients;
        Review of the Department’s policies and procedures for reimbursement requests and
        drawdowns;
        Review of the subrecipient’s client files to determine whether determination of
        eligibility and/or activity was in compliance with applicable regulations; and
        Review of applicable laws and regulations, including guidance issued by HUD and
        Office of Management and Budget circulars.

We conducted telephone interviews and requested policies and procedures from all 10
subrecipients. Because the subrecipients were all located in rural parts of Arizona and a short
time was allowed to complete Recovery Act audits, we were unable to review files from all 10
subrecipients. Therefore, we selected and visited the three subrecipient agencies that received
the most funding and were relatively centrally located. The three subrecipients had not yet
assisted many clients under the Homelessness Prevention and Rapid Re-Housing Program;
therefore, we selected 15 nonrepresentative files, which represented more than half of the three
subrecipients’ program activities to date.

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.




                                               14
                              INTERNAL CONTROLS

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


                 Policies and procedures for tracking and reporting Recovery Act funds,
                 Policies and procedures for compliance with program eligibility requirements,
                 Policies and procedures for the review and/or retention of source
                 documentation for program expenditures, and
                 Policies and procedures for subrecipient training and monitoring.

       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:

       The Department did not have adequate policies and procedures to ensure that

                  Its subrecipients adequately established, verified, and documented participant
                  and/or activity eligibility;
                  Its subrecipients submitted or retained adequate source documentation for
                  expenditures; and


                                               15
It trained and monitored is subrecipients to enable them to administer the
Federal program in accordance with all regulations.




                             16
                                    APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                    Recommendation number          Unsupported 1/

                               1A                      $75,543


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 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.




                                             17
        Appendix A-1
                                   Table of Questioned Costs by Subgrantee

                                                                                                            Remaining
                                              Amount                                   Unsupported
                                                                                                          program funds
  Subgrantee/grantee        Award           allowed for           Amount for         amount disbursed
                                                                                                             available
        name                amount         administrative         program use           by HUD for
                                                use                                  program activities
Town of Springerville      $    203,200        $     4,190           $    199,010            $                 $ 199,010
New Hope Ranch                  203,200              4,190                199,010                 6,511          192,499
SouthEastern Arizona            947,339             19,533                927,806                 8,044          919,762
Community Action
Programs, Inc.
Coconino County                 576,751             11,892                564,859                                 564,859
Community Services

Gila County Community           243,590              5,021                238,569                                 238,569
Services
Western Arizona Council        1,042,095            21,487               1,020,608                              1,020,608
of Governments
Mohave City Community           892,651             18,405                874,246                37,065           837,181
& Economic
Development
White Mountains                 590,850             12,182                578,668                                 578,668
Catholic Charities
Community Action               1,179,759            24,324               1,155,435               22,350         1,133,085
Human Resources
Agency
Catholic Charities              943,079             19,445                923,634                 1,573           922,061
Yavapai Region
Arizona Department of           211,006            211,006
Housing (administrative
funds)
Total                     $7,033,520           $ 351,675             $ 6,681,845             $   75,543       $ 6,606,302




                                                             18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1

Comment 2




                         19
Comment 3



Comment 4


Comment 5



Comment 6




            20
                        OIG Evaluation of Auditee Comments

Comment 1   We agree that the Department followed its usual procedures with its subrecipient
            partners because it believed that the Recovery Act program was substantially
            similar to a State funded program. However, we disagree that the State’s
            program provided identical services to the Recovery Act program. A document
            provided by the Department showed the State program’s purpose included a
            statement that said, ―The intention is to allow qualified local agencies to propose
            a menu of eligible services that EPEH [the State funded program] funds can be
            used for…based on local needs and experience.‖ Further, we reviewed the
            requirements for both programs and found that only two of seven requirements
            for the State program were the same as the Homelessness Prevention and Rapid
            Re-Housing Program requirements.

Comment 2   We agree that the subrecipients did not adequately establish written policies and
            procedures to ensure compliance with the program. However, according to
            Federal regulations, it was the responsibility of the grant recipient to manage
            day-to-day activities of its subrecipients. Additionally, the Department’s
            contract with its subrecipients stated that it would provide reasonable technical
            assistance to assist the subrecipient to comply with program requirements. The
            Department did not supply initial training in regard to program eligibility and
            documentation requirements because it thought its subrecipients were low risk.
            Nevertheless, because the Federal program was new and expired after three
            years, prudent oversight should include a close review of the program
            requirements and provision of early training or monitoring specific to the Federal
            requirements.

Comment 3   We agree that the Recovery Act’s rapid timelines for program implementation
            are challenging, however, we disagree that HUD’s guidance for the
            Homelessness Prevention and Rapid Re-Housing Program was delayed until
            March of 2010. The HUD Homeless Resource Exchange web site had posted the
            full guidance for determining and documenting eligibility for program
            participants on October 16, 2009. The March 2010 guidance referred to in the
            Department’s response is a revised version that clarified some of the October 16,
            2009 guidance and made minor changes.

Comment 4   We stand by our conclusion that the State was reimbursed by HUD for
            unsupported program expenses of $75,543. Drawdown reports from HUD’s grant
            disbursement information system confirmed this amount. The timing of the
            Departments’ reimbursements to its subrecipients is not relevant because the
            Department had already approved the payment requests for submission to HUD.
            Further, some of the reimbursed funds were requested to make program advances
            (which were allowable under certain circumstances). The report recognized that,
            upon notice of the deficiencies we identified during the audit, the Department
            immediately sought the appropriate back up documentation. However, it is the
            responsibility of the HUD Office of Community Planning and Development to



                                            21
            evaluate the sufficiency of any back up documentation provided in response to
            our finding.

Comment 5   We stand by our conclusion that unless the Department provides adequate training
            and monitoring to its subrecipients, the remaining Recovery Act funds available
            through its Homelessness Prevention and Rapid Re-Housing Program would be at
            risk. In 100 percent of the file reviews we conducted, documentation was
            insufficient to establish either the eligibility or ineligibility of the participant
            and/or activity. Further, the Department’s procedures were to request HUD’s
            reimbursement for these expenditures without examining the supporting
            documentation. The fact that the State could compel its subrecipients to repay
            any unallowable expenses did not mitigate this risk. We modified the report
            language to reflect that our review was performed in the early phase of the three
            year program and, therefore, if our recommendations are adopted, the remaining
            Recovery Act funds under this program will be expended in compliance with the
            program purpose.

Comment 6   In accordance with HUD’s audit resolution procedures, officials in the HUD
            Office of Community Planning and Development will evaluate the auditee’s
            proposed plan.




                                             22
Appendix C

                                          CRITERIA
   A. American Recovery and Reinvestment Act of 2009 – Public Law 111-5 establishes the
      Homelessness Prevention Fund. The homelessness prevention portion of the Recovery
      Act falls under Title XII, Transportation, Housing and Urban Development, and
      Related Agencies.

   B. In accordance with Title IV of the Personal Responsibility and Work Opportunity
      Reconciliation Act of 1996, an alien (a person who is not a U.S. citizen or national)
      may be eligible for assistance under the Homelessness Prevention and Rapid Re-
      Housing Program only if he or she is a ―qualified alien‖ (defined in 8 U.S.C.1641).
      Nonprofit organizations that administer HPRP [Homelessness Prevention and Rapid
      Re-Housing Program] assistance are not required to but may verify that an alien is a
      qualified alien in order to provide him or her with HPRP assistance. However, if a
      nonprofit organization pursues verification, it must follow the requirements set forth in
      the interim guidance published by the Department of Justice.

   C. HUD Federal Register Notice FR-5307-N-01 advised the public of the allocation
      formula and allocation amounts, the list of grantees, and requirements for the
      Homelessness Prevention Fund, hereafter referred to as the ―Homelessness Prevention
      and Rapid Re-Housing Program,‖ under Title XII of the Recovery Act. Congress has
      designated $1.5 billion for communities to provide financial assistance and services to
      either prevent individuals and families from becoming homeless or help those who are
      experiencing homelessness to be quickly rehoused and stabilized.

   D. Regulations at 24 CFR 85.20(a) state, ―A State must expend and account for grant
      funds in accordance with State laws and procedures for expending and accounting for
      its own funds. Fiscal control and accounting procedures of the State, as well as its
      subgrantees and cost-type contractors must be sufficient to—(2) Permit the tracing of
      funds to a level of expenditures adequate to establish that such funds have not been
      used in violation of the restrictions and prohibitions of applicable statutes.‖

   E. Regulations at 24 CFR 85.40(a) state, ―Grantees are responsible for managing the day-
      to-day operations of grant and subgrant supported activities. Grantees must monitor
      grant and subgrant supported activities to assure compliance with applicable Federal
      requirements and that performance goals are being achieved. Grantee monitoring must
      cover each program, function or activity.‖

   F. HUD eligibility and documentation guidance states that grantees and subgrantees are
      responsible for verifying and documenting the eligibility of all HPRP applicants before
      providing HPRP assistance. They are also responsible for maintaining this
      documentation in the HPRP participant case file once approved for assistance.
      Grantees with insufficient case file documentation may be found out of compliance
      with HPRP program regulations during a HUD monitoring.


                                             23
G. HUD Homelessness Prevention and Rapid Re-Housing Program eligibility and
   documentation requirements state that the household must be either homeless (for
   rapid rehousing assistance) or at risk of losing its housing (for homelessness
   prevention assistance) and meet both of the following circumstances: (1) no
   appropriate subsequent housing options have been identified and (2) the household
   lacks the financial resources and support networks needed to obtain immediate housing
   or remain in its existing housing.

H. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that documentation standards, in order of preference,
   are written third-party verification, oral third-party verification, and applicant self-
   declaration.

I.   HUD Homelessness Prevention and Rapid Re-Housing Program eligibility and
     documentation requirements for persons at risk of homelessness state that a copy of an
     eviction notice from the landlord/property manager of the unit or a court order based
     on eviction action that notifies the applicant that he or she must leave and a copy of the
     lease naming the applicant as the leaseholder must be in the client file.

J.   HUD Homelessness Prevention and Rapid Re-Housing Program eligibility and
     documentation requirements for persons at risk of homelessness state that a copy of an
     eviction letter from the host family or friend who owns or rents the housing that
     notifies the applicant that he or she must leave and a copy of the lease naming the host
     family/friend as the leaseholder must be in the client file.

K. HUD Homelessness Prevention and Rapid Re-Housing Program eligibility and
   documentation requirements for persons at risk of homelessness state that a copy of a
   utility shut-off notice from utility company must be included in the participant file.

L. HUD Homelessness Prevention and Rapid Re-Housing Program eligibility and
   documentation requirements for persons at-risk of homelessness state that a self-
   declaration of housing status is acceptable if no other documentation can be obtained.

M. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that income from employment must be documented
   by the most recent pay stub(s) and the signed and dated verification of income from
   employer(s) must be in the client file.

N. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that income from employment may be documented
   by self-declaration only if written documentation or oral third-party verification cannot
   be obtained.

O. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that business income must be verified by obtaining a



                                           24
    copy of the most recent Federal or State tax return showing net business income and
    must be included in the client file.

P. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that interest and dividend income must be
   documented by obtaining a copy of the most recent interest or dividend income
   statement and must be included in the client file.

Q. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that unemployment and disability income must be
   verified by obtaining a copy of most recent unemployment, worker’s compensation,
   SSI [Supplemantal Security Income], SSDI [Social Security Disability Insurance], or
   severance payment statement or benefit notice and must be included in the client file.

R. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that TANF [Temporary Assistance for Needy
   Families]/public assistance income must be documented by obtaining a copy of the
   most recent welfare payment or benefit notice and must be included in the client file.

S. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that alimony, child support, or foster care payments
   must be documented by obtaining a copy of the most recent alimony, foster care, child
   support, or other contributions or gift payment statements, notice, or order and must be
   included in the client file.

T. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that to be eligible to receive rental assistance or
   other Homelessness Prevention and Rapid Re-Housing Program assistance, an
   applicant household must have a gross annual income that is at or below 50 percent of
   the area median income, which is determined by the State and by the local jurisdiction
   in which a household resides and is dependent on the size of the household (i.e.,
   number of household members).

U. HUD Homelessness Prevention and Rapid Re-Housing Program income eligibility
   documentation requirements state that the household’s income must be annualized and
   documentation of a household’s annual income relative to area median income and
   indicating HPRP eligibility (50 percent of area median income or less) should be
   maintained in the participant file.

V. Technical Bulletin Arizona Department of Administration General Accounting Office
   for Recovery Act Risk Assessment and Subrecipient Monitoring, effective May 27,
   2009, states, ―The Financial and Administrative Monitoring Tool, and Risk
   Assessment Monitoring Tool, or their equivalent must be utilized for all Recovery Act
   dollars. Agencies should review these tools to ensure compliance with the Recovery
   Act. Agencies may utilize their own tools as long as all areas in the attached
   documents are addressed and are substantially the same. Agencies should consider



                                         25
    utilizing these tools to ensure compliance with risk assessment and subrecipient
    monitoring requirements for all Federal funds.‖

W. Financial and Administrative Monitoring Tool states, ―This Financial and
   Administrative Monitoring Tool is the result of an intergovernmental partnership
   established by AGA [Association of Government Accountants] in cooperation with the
   US Office of Management and Budget. The purpose of this tool is to provide uniform
   guidance for subrecipient monitoring. It is designed to be applicable across federal
   granting authorities as well as across state entities. It is intended to be used by state
   agencies as a guide in establishing subrecipient monitoring programs and should be
   used in conjunction with the Risk Assessment Monitoring Tool.‖

X. Risk Assessment Monitoring Tool states, ―This risk assessment monitoring tool is the
   result of an intergovernmental partnership established by AGA in cooperation with the
   US Office of Management and Budget. It is intended to provide states with a method
   for assessing subrecipient risk and to be applicable across federal granting authorities,
   as well as across monitoring authorities.‖ And, ―This tool is designed to be used in
   conjunction with the Financial and Administrative Monitoring Tool to evaluate which
   subrecipients may require further, more intensive monitoring.‖




                                          26
Appendix D

                                SCHEDULE OF DEFICIENCIES

            Homelessness Prevention and Rapid Re-Housing Program documentation requirements not met
                                                                Area median                                   Activity
                   Type of      Assistance   Homeless or                       Income/       Income/
  Client file                                                   income at or                                  funded
                  assistance     amount        at risk                           asset   asset verification
   number                                                        below 50%                                    eligible
                   provided        (A)          (B)                               (D)           (E)
                                                                     (C)                                         (F)
                Rental
                                                 X                   X           X               X
      1         assistance          $1,288
                Rental
                                                 X                   X           X               X
      2         assistance          $2,800
                Rental
                                                 X                   X           X               X
      3         assistance            $420
                Rental
                                                 X                   X           X               X
      4         assistance          $1,575
                Rental
                assistance            $936
                                                 X                   X           X               X
                Utility
      5         assistance         $256.32
                Rental
                assistance         $650.00
                                                 X                   X           X               X
                Utility
      6         assistance         $119.06
                Rental
                                                 X                   X           X               X               X
      7         assistance          $2,008
                Rental
                assistance         $999.00
                                                 X                   X           X               X               X
                Utility
      8         assistance            $140
                Rental
                assistance            $750
                Utility                          X                   X           X               X               X
                assistance         $842.17
      9         Hotel voucher      $130.26
                Rental
                assistance         $738.10
                                                 X                   X           X               X               X
                Utility
      10        assistance             $33
                Rental
                assistance            $650
                                                                     X           X               X               X
                Utility
      11        assistance         $159.07
                Rental
                assistance          $1,250
                                                 X                   X           X               X               X
                Utility
      12        assistance         $541.86
                Rental
                                                 X                   X           X               X               X
      13        assistance            $500
                Rental
                assistance          $1,370
                                                 X                   X           X               X               X
                Utility
      14        assistance          $67.95
                Rental
                assistance          $1,650
                                                 X                   X           X               X               X
                Utility
      15        assistance         $167.74
                     Totals                      14                 15           15             15               9




                                                           27
Legend
 Column                                                                 Description
   A      Amount provided to third party in care of program participant.
   B      Documentation must support the risk of homelessness or that the participant is currently homeless.

   C      Documentation must support that the total annual household income is at or below 50 percent of the area median income levels
          established by HUD.
   D      Documentation must support that all income and assets were used during the calculation of annual household income.

   E      Documentation must show that all income was verified through third-party verification as established by program regulations, or the
          reason why third-party verification was not conducted must be documented.

   F      Accounting records must support that the funding was paid to a third party in care of a program participant and that the activity paid
          was an eligible activity.




                                                                   28