oversight

City of Brockton, MA, Did Not Implement an Adequate Cost Allocation Plan for Administrative Expenses and Paid Unreasonable Costs for Its Fiscal Year 2010 Community Development Block Grant Audit

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-07.

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

                                                                 Issue Date
                                                                          September 7, 2011
                                                                  
                                                                 Audit Report Number
                                                                              2011-BO-1010




TO:         Robert D. Shumeyko, Director, Community Planning and Development, 1ADM1


FROM:
            John A. Dvorak, Regional Inspector General for Audit, Region 1, 1AGA

SUBJECT: City of Brockton, MA, Did Not Implement an Adequate Cost Allocation Plan for
         Administrative Expenses and Paid Unreasonable Costs for Its Fiscal Year 2010
         Community Development Block Grant Audit

                                   HIGHLIGHTS

 What We Audited and Why

             We reviewed the administration expenses charged to the City of Brockton’s
             Community Development Block Grant in response to a complaint alleging that
             the City was charging the Community Development Block Grant program for
             City expenses.

             The objectives of our review were to determine whether the City (1) properly
             accounted for and reported its planning and administrative expenses for its
             Community Development Block Grant and (2) prepared accurate consolidated
             annual performance and evaluation reports that were adequately supported by
             operational results.

 What We Found


             The City generally accounted for expenses and did not charge the Community
             Development Block Grant program for nonprogram expenses. However, the
             City’s subcontractors did not establish and implement an adequate cost allocation
             plan for salaries and administrative expenses, and one of its subcontractors paid
             unreasonable costs for its fiscal year 2010 audit. The City and its subcontractors
           prepared consolidated annual performance and evaluation reports that were
           supported by operational results.


What We Recommend


           For finding 1, we recommend that HUD require the City and its subcontractor, the
           Brockton Redevelopment Authority, to develop a formal policy to address the
           allocation of salaries and all other administrative costs, obtain HUD approval of
           its allocation plan, adapt its financial policies to provide for regular updates of the
           allocation plan and train key staff.

           For finding 2, we recommend that HUD (1) ensure that the City and its
           administrator, Building a Better Brockton honor their commitment not to charge
           the $32,500 paid to the auditor for the 2010 annual financial statements to the
           Community Development Block Grant program and (2) require the City and the
           Brockton Redevelopment Authority to obtain a minimum of three price or rate
           quotations for the procurement of an independent public auditor for the
           subcontractor’s annual audit for the fiscal year ending June 30, 2011; perform a
           price comparison of all price or rate quotations obtained; and select the best
           applicant to conduct the annual audit of the fiscal year ending June 30, 2011.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We provided the City a draft report on August 9, 2011, and held an exit
           conference with officials on August 18, 2011. The City provided written
           comments to finding 2 on August 17, 2011 and August 24, 2011; generally agreed
           with our findings, but disagreed with our conclusion that the cost paid was
           unreasonable. However, the City has agreed to take corrective actions that should
           eliminate the conditions noted in this report. The Brockton Redevelopment
           Authority provided written comments to finding 1 on August 21, 2011; agreed
           with our findings and our recommendations, and has initiated corrective action
           that should eliminate the conditions noted in this report.

           The complete text of the both entities’ responses, along with our evaluation of
           those responses, can be found in appendix B of this report.




                                              2
                            TABLE OF CONTENTS

Background and Objectives                                                            4

Results of Audit
      Finding 1: The City’s Subcontractors Did Not Establish Adequate Cost            6
      Allocation Plans for Salaries and Administrative Expenses
      Finding 2: The City’s Subcontractor Paid Unreasonable Costs for Its Fiscal Year 11
      2010 Audit

Scope and Methodology                                                                14

Internal Controls                                                                    16

Appendixes
   A. Schedule of Questioned Costs                                                   18
   B. Auditee Comments and OIG’s Evaluation                                          19
   C. Criteria                                                                       25




                                            3
                              BACKGROUND AND OBJECTIVES

Congress provides funding through the Community Development Block Grant1 on a formula
basis to cities, States, and counties to develop viable urban communities by providing decent
housing and a suitable living environment and by expanding economic opportunities, principally
for low- and moderate-income persons. The U.S. Department of Housing and Urban
Development (HUD) awards grants to cities, States, and counties to carry out a wide range of
community development activities directed toward revitalizing neighborhoods, economic
development, and providing improved community facilities and services. Each community
develops its own programs and funding priorities. However, communities must prioritize
activities which benefit low- and moderate income persons. A community may also carry out
activities which aid in the prevention or elimination of slums or blight. Community
Development Block Grant funds may not be used for activities which do not meet these broad
national objectives.

Community Development Block Grant funds may be used for activities which include but are not
limited to

              Acquisition of real property;
              Relocation and demolition;
              Rehabilitation of residential and nonresidential structures;
              Construction of public facilities and improvements, such as water and sewer facilities,
               streets, neighborhood centers, and the conversion of school buildings for eligible
               purposes;
              Public services within certain limits;
              Activities relating to energy conservation and renewable energy resources;
              Provision of assistance to profit-motivated businesses to carry out economic
               development and job creation or retention activities; and
              Planning and administration within certain limits.

In addition to receiving Community Development Block Grants, the City of Brockton received
funds under the Community Development Block Grant-R2 program, with reporting requirements in
addition to and separate from those of the Community Development Block Grant program.

The City received more than $1.5 million in 2009 Community Development Block Grant funds,
more than $1.6 million in 2010 Community Development Block Grant funds, and $398,596 in
Community Development Block Grant-R funds. Unlike the Community Development Block



1
  Title 1 of the Housing and Community Development Act of 1974, Public Law 93-383, as amended, 42 U.S.C. (United States Code)-5301 et seq,
provides authorization for the Community Development Block Grant.
2 Public Law 111 - 5 - American Recovery and Reinvestment Act of 2009 provides authorization for the Community Development Block Grant-
R program.



                                                                    4
Grant program, the Community Development Block Grant-R program is a one-time award. The
City outsources the administration of its community development programs. For the fiscal year
ending June 30, 2009, the City hired Building a Better Brockton, a nonprofit, to administer its
Community Development Block Grant, Homelessness Prevention and Rapid Re-Housing
Program, Neighborhood Stabilization Program, and Supportive Housing Program. In November
2009, the City elected a new mayor. After evaluating Building a Better Brockton, the mayor
decided to create the Brockton Redevelopment Authority, a governmental agency, which began
operations in the fiscal year July 1, 2010, to June 30, 2011, and administered the City’s Community
Development Block Grant, Homelessness Prevention and Rapid Re-Housing Program, and
Neighborhood Stabilization Program.

In 2009, OIG conducted a capacity review of the operations of the City’s subcontractor, Building
a Better Brockton, Inc., which had responsibility for administering the City’s Neighborhood
Stabilization Program. The objective of the audit was to determine whether the City and its
recipient had the capacity to effectively and efficiently administer its Neighborhood Stabilization
Program under the provisions of the Housing and Economic Recovery Act of 2008 and the
American Recovery and Reinvestment Act of 2009. That audit, published September 29, 2009,
determined that the subcontractor did not have the capacity to effectively and efficiently
administer its Neighborhood Stabilization Program. Specifically, the subcontractor lacked
adequate internal controls over the areas of financial reporting and procurement and adequate
staffing to administer the program effectively. In addition, the report found potential conflict-of-
interest issues among the recipient, its board members, and several of the subrecipients that
would receive Neighborhood Stabilization Program funding. The report identified concerns
about the subcontractor’s ability to administer potential Neighborhood Stabilization Program-2
funding until it could satisfactorily address and demonstrate adequate controls over the areas of
financial reporting, procurement, and staffing and the conflicts of interest. After that audit, HUD
decided not to award Neighborhood Stabilization Program-2 funds to the City, a new mayor was
elected, and the new mayor hired a different subcontractor, the Brockton Redevelopment
Authority, to administer its community development funds. HUD, the City, and the City’s
current subcontractor, the Brockton Redevelopment Authority, have worked together to close
most of the recommendations. In addition, HUD continues to providing technical assistance to
the City and its subcontractor.

The objectives of our review were to determine whether the City (1) properly accounted for and
reported its planning and administrative expenses for its Community Development Block Grant
and (2) prepared accurate consolidated annual performance and evaluation reports that were
adequately supported by operational results.




                                                 5
                                      RESULTS OF AUDIT

Finding 1: The City’s Subcontractors Did Not Establish Adequate Cost
Allocation Plans for Salaries and Administrative Expenses
The City’s subcontractors, Building a Better Brockton and the Brockton Redevelopment
Authority, had established separate cost allocation plans to address administrative salaries.
However, neither plan addressed administrative expenses other than salaries. This condition
occurred because neither entity was fully aware of the requirements for cost allocations. As a
result, the cost allocation plans did not properly address both salaries and administrative
expenses.



    Regulations Require a Cost
    Allocation Plan


                 The regulations governing the Community Development Block Grant require
                 grantees and subcontractors to develop a cost allocation plan for all Federal
                 programs administered. Regulations governing the Community Development
                 Block Grant are in 24 CFR (Code of Federal Regulations) Part 570, Community
                 Development Block Grant.3 There are separate regulations for units of
                 government and nonprofit entities. These regulations are written in a generalized
                 style because they apply to many government grants.

                 The regulations for nonprofits at 2 CFR Part 230 define allocable cost and explain
                 how to allocate indirect costs. Any cost allocable to a particular program may not
                 be shifted to other Federal programs to overcome funding deficiencies or to avoid
                 restrictions imposed by law or by the terms of the award.

                 The regulations for governmental entities at 2 CFR Part 225 identify the factors
                 affecting the allowability and allocabilty of costs. Under basic guidelines, any
                 cost allocable to a particular Federal award or cost objective under these
                 regulations may not be charged to other Federal awards to overcome funding
                 deficiencies, to avoid restrictions imposed by law or terms of the Federal awards,
                 or for other reasons.



3
 In 24 CFR 570.502, Applicability of Uniform Administrative Requirements, HUD requires nonprofits to follow
Office of Management and Budget (OMB) Circular No A-122, “Cost Principles for Nonprofit Organizations,”
codified at 2 CFR Part 230, while requiring government agencies to follow Circular No. A–87, “Cost Principles for
State, Local, and Indian Tribal Governments,” codified at 2 CFR Part 225. Building a Better Brockton is a
nonprofit, while the Brockton Redevelopment Authority is a governmental entity.


                                                        6
            The requirements under both regulations are similar. Essentially, an entity (a
            nonprofit or a unit of government) must develop an allocation plan that

                  Defines a basis for allocating costs. This basis is the unit of measure used
                   to allocate expenses to a particular program and must be reasonable for all
                   of the entities’ programs.
                  Allocates costs to the program benefitting from the costs.
                  Provides consistent treatment between Federal and non-Federal programs
                   and provides consistent treatment among Federal programs from different
                   departments or agencies.
                  Does not include costs unallowed under the funding program or grant.
                  Does not include capital expenditures.
                  Provides opportunities to update the allocation plan when the occasion
                   warrants. Occasions that warrant an update are the addition of new grants,
                   the termination of existing grants, the reorganization of the entity, the
                   addition of new staff, the departure of existing staff, or other matters that
                   affect the basis or the beneficial relationship.


Building a Better Brockton’s
Cost Allocation Plan


            Building a Better Brockton established an elaborate cost allocation plan to address
            salaries only. It directly charged salaries to the programs that benefitted from
            those salaries. However, Building a Better Brockton did not charge payroll
            consistently across programs. The inconsistency was noticed by auditors during
            the annual financial audit and brought to the attention of the Brockton
            Redevelopment Authority and HUD. Building a Better Brockton charged the date
            billed rather than the date incurred for both payroll costs and program costs. The
            annual financial audit report was completed on January 28, 2011, but HUD and
            the Brockton Redevelopment Authority began working on the issue when the
            auditors first brought it to their attention in October 2010. In October 2010,
            Building a Better Brockton no longer worked with HUD funding. The scope of
            the error was not limited to the Community Development Block Grant but also
            systemically affected all programs administered by Building a Better Brockton.




                                             7
Brockton Redevelopment
Authority’s Cost Allocation
Plan


            The Brockton Redevelopment Authority used a daily charge method. All staff
            maintained time sheets daily to ensure accuracy and timeliness of record keeping.
            For payroll draws, the director of finance and compliance requested salary
            advances from the City at the end of the month. Salary and benefits for the
            executive director and director of finance and the Community Development Block
            Grant program manager were drawn from Community Development Block Grant
            administration. Salary and benefits for the director of housing were drawn from
            Neighborhood Stabilization Program administration. All payroll expenses
            (processing fees and employer share of taxes) were drawn from Community
            Development Block Grant administration.

            At the end of each quarter, the director of finance and compliance reconciled
            completed time sheets and made appropriate adjustments for time spent on other
            programs, such as the Homelessness Prevention and Rapid Re-Housing Program,
            etc., or time spent on program delivery rather than administration. The
            reconciliation was submitted to the City auditor, and a request for a reconciliation
            adjustment was made when appropriate. This plan was created to ensure ease of
            administration and periodic reconciliation to properly allocate staff salaries and
            payroll expense. The Brockton Redevelopment Authority consistently used its
            plan.


The Cost Allocation Plans
Addressed Only Salaries


            While both plans addressed the administrative expenses of salaries, neither plan
            addressed administrative expenses other than salaries such as rent, photocopying,
            annual financial audit, advertising, telephone services, consulting services, and
            professional fees. These expenditures were charged completely to the
            Community Development Block Grant, although they benefitted all of the
            programs.

Brockton Redevelopment
Authority Inherited Programs
from Building a Better
Brockton



            The Brockton Redevelopment Authority inherited programs from Building a
            Better Brockton, including the Community Development Block Grant,


                                              8
                  Community Development Block Grant-R, Homelessness Prevention and Rapid
                  Re-Housing Program, and Neighborhood Stabilization Program. Some of these
                  programs had exhausted their planning and administrative funding before the
                  change in management, while other programs had not charged any funds to
                  planning and administration. The Brockton Redevelopment Authority tried to
                  correct this situation using a journal entry to exhaust the remaining planning and
                  administrative expense in the programs that were not charged previously. The
                  journal entry did not reallocate expenditures or restate prior years’ financial data;
                  instead, it acted as a lump-sum withdrawal of funds not previously expended.
                  The Brockton Redevelopment Authority shared the journal entry documentation
                  with HUD when it made the adjustment, and no further action was taken by HUD.
                  The Brockton Redevelopment Authority managed four programs—the
                  Community Development Block Grant, Community Development Block Grant-R,
                  Homelessness Prevention and Rapid Re-Housing Program, and Neighborhood
                  Stabilization Program—all of which were funded by HUD. It had no programs
                  that were not funded by HUD. Additionally, Community Development Block
                  Grant-R is a one-time award, and Congress is not renewing the Homelessness
                  Prevention and Rapid Re-Housing Program or the Neighborhood Stabilization
                  Program.


    Neither Entity Complied Fully
    with Cost Regulations

                  Neither entity complied fully with the cost allocation regulations or addressed the
                  allocation of nonsalary expenses. Building a Better Brockton developed its cost
                  allocation plan to address a prior Office of Inspector General (OIG) audit4 of the
                  City’s Neighborhood Stabilization Program, which pointed out the need for
                  stronger financial controls. At the time of this audit in September 2010, it had not
                  yet completed 1 year of operations, and the cost allocation plan developed directly
                  charged salaries to the programs that benefitted from those salaries. With the
                  change in City administration in November 2009, the Brockton Redevelopment
                  Authority5 was created in 2010 to handle the City’s community development
                  programs, replacing Building a Better Brockton. The Brockton Redevelopment
                  Authority’s allocation plan was created to allocate staff salaries and payroll
                  expense to the program benefited.

    Subcontractor is Developing
    New Cost Allocation Plan
                  The Brockton Redevelopment Authority is working with HUD to develop and
                  implement a cost allocation plan to address both salaries and other administrative
                  expenses. The implementation of a proper cost allocation plan will assign costs to

4
 The prior audit is discussed in the section Background of this report.
5
 From its inception in July 2010 to March 2011, one person fulfilled both the role of executive director and director
of financial and regulatory compliance.


                                                          9
             the correct program benefitting from those costs and will help Brockton
             Redevelopment Authority to better operate its programs.


Conclusion


             Building a Better Brockton and the Brockton Redevelopment Authority
             established separate cost allocation plans to address administrative salaries
             without addressing administrative expenses other than salaries. This situation is
             attributable to a lack of knowledge about proper cost allocation plans. As a result,
             the cost allocation plan did not properly address both salaries and administrative
             expenses. Federal regulations specifically state that any cost allocable to a
             particular program may not be shifted to other Federal programs to overcome
             funding deficiencies or to avoid restrictions imposed by law or by the terms of the
             award. Like many other non profits, the Brockton Redevelopment Authority used
             all of its available funds. Adoption and use of a formal policy can help Brockton
             Redevelopment Authority prevent cost overruns by planning for all administrative
             expenditures. Without a formal allocation plan, any entity may shift costs from
             one program to another to overcome funding deficiencies.

Recommendations



             We recommend that the City and the Brockton Redevelopment Authority

             1A.    Develop and adopt a formal policy to address both the allocation of
                    salaries and all other administrative costs. This policy needs a defined
                    basis to allocate costs among all of the benefitting programs.

             1B.    Obtain specific approval from HUD’s Office of Community Planning and
                    Development for its allocation plan.

             1C.    Adapt its financial policies to provide for regular updates of the allocation
                    plan concurrent with the awarding of new funding or the closure of current
                    grants or programs.

             1D.    Train key staff in cost allocation principles required by Federal
                    regulations.




                                              10
                                    RESULTS OF AUDIT

Finding 2: The City’s Subcontractor Paid Unreasonable Costs for Its
Fiscal Year 2010 Audit
The City’s subcontractor could not provide evidence that it conducted a cost or price comparison
for its annual financial audit. A cost and price comparison helps entities ensure that they get the
best price available. The subcontractor used the same auditor as its affiliate. The affiliate paid
$9,000 for its audit, while the subcontractor paid the same audit firm $32,500 for the same fiscal
year. As a result, HUD funds were used to pay $23,500 in unreasonable expenses.



    Nonprofits Must Conduct a
    Cost or Price Analysis for
    Every Procurement


                The Community Development Block Grant program is governed by 24 CFR Part
                570, which has different regulations for governmental agencies and nonprofits.
                As a nonprofit, Building a Better Brockton must comply with 2 CFR Part 215.6
                In 2 CFR 215.45, Cost and Price Analysis, the standards for nonprofits require
                that some form of cost or price analysis be made and documented in the
                procurement files in connection with every procurement action. Price analysis
                may be accomplished in various ways, including the comparison of price
                quotations submitted and market prices, together with discounts. Cost analysis is
                the review and evaluation of each element of cost to determine reasonableness,
                allocability, and allowability. Building a Better Brockton did not provide
                evidence that it conducted a price analysis and obtained the best price for its audit.

    Building a Better Brockton
    Used an Affiliate’s Auditor


                The nonprofit, Building a Better Brockton, procured its independent public
                auditor through its affiliate, Brockton 21st Century. Brockton 21st Century had
                an established relationship with an independent public auditor, having hired it to
                audit Brockton 21st Century for several years. Building a Better Brockton and
                Brockton 21st Century were affiliates due to common boards, shared office space,

6
 In 24 CFR 570 .502, Applicability of Uniform Administrative Requirements, HUD requires nonprofits to follow
OMB Circular No A-110 “Uniform Administrative Requirements for Grants and Other Agreements with Institutions
of Higher Education, Hospitals, and Other Non-Profit Organizations,” codified at 2 CFR 215. Building a Better
Brockton is a nonprofit.



                                                     11
                    and shared employees. When its management determined that Building a Better
                    Brockton also needed an audit, it contacted audit firms including the independent
                    public auditor used by Brockton 21st Century. According to our interviews, there
                    were no longer records identifying which board members contacted which entities
                    or how the price comparison was conducted. This matter came to our attention
                    during our survey due to the high cost of the independent pubic auditor contract.

    The Community Development
    Block Grant Paid $32,500 for
    an Audit while the Affiliate
    Paid $9,000

                    The Community Development Block Grant program paid $34,000, consisting of
                    $32,500 for the annual financial audit and $1,500 for annual taxes, to a local audit
                    firm. Building a Better Brockton provided the bills and contracts showing the
                    amount of the contract. These documents also identified how much the affiliate,
                    Brockton 21st Century, paid to the same audit firm for the affiliates’ audited
                    financial statements for the same year. While Building a Better Brockton paid its
                    auditor $32,500, Brockton 21st Century only paid $9,000 to the same entity for
                    audited financial statements for the same fiscal year. Building a Better Brockton
                    attributed the higher price to exposure from the previous OIG audit of the
                    Neighborhood Stabilization Program.7

    City disagrees; but will not
    charge the Block Grant
                    The city and its subcontractor, Building a Better Brockton agreed that they did not
                    have supporting documentation showing multiple sources were solicited and a
                    cost/price analysis was performed for the audit services. However, they disagreed
                    that the cost of the audit was unreasonable. In addition, they agreed not to charge
                    the Community Development Block Grant for these expenses. Based on this
                    commitment not to charge the program, we have amended our recommendations
    Conclusion


                    The absence of a cost and price comparison does not help any entity ensure the
                    best price available. The subcontractor used the same audit firm as its affiliate.
                    The affiliate paid only $9,000 for its audit, while the subcontractor paid the same
                    audit firm $32,500 for the same fiscal year. As a result, the City overpaid for the
                    annual financial audit.




7
    The prior audit is discussed in the section Background of this report.


                                                            12
Recommendations

          We recommend that HUD ensure that the City and its administrator, Building a
          Better Brockton

          2A.     Honor their commitment not to charge the $32,500 paid to the auditor for
                  the 2010 annual financial statements to the Community Development
                  Block Grant program resulting in funds put to better use (costs not
                  incurred).

          We recommend that HUD require the City and its administrator, Brockton
          Redevelopment Authority to

          2B.     Obtain a minimum of three price or rate quotations for its future
                  procurement of an independent public auditor for its annual audit of the
                  fiscal year ending June 30, 2011, perform a cost and price analysis, and
                  select the best applicant.




                                           13
                        SCOPE AND METHODOLOGY

We conducted the audit from April to June 2011. Our fieldwork was conducted at the Brockton
Redevelopment Authority’s office located at 45 School Street, Brockton, MA, and City Hall
located at 60 School Street Brockton, MA. Our audit covered the period July 2009 to June 2011
and was extended when necessary to meet our objectives. To accomplish our audit objectives,
we

      Reviewed the legislation, regulations, handbooks, and notices on the Community
       Development Block Grant program and the Community Development Block Grant-R
       program.
      Identified the awards of HUD funds to the City.
      Interviewed the responsible HUD staff members to determine what concerns they had
       about the City’s program.
      Reviewed HUD reports on the City, focusing on its goals and expenditures.
      Obtained and reviewed annual financial audits for the previous 2 years to identify
       problem areas and any corrective actions taken.
      Reviewed the organizational structure of the City and its key staff.
      Identified the organizational structure of the City’s subcontractors, the Brockton
       Redevelopment Authority and Building a Better Brockton.
      Reviewed media articles about the City and the Brockton Redevelopment Authority.
      Reviewed the 5-year plan and the goals of the plan.
      Reviewed the operational controls, the financial controls and the controls over the
       computers systems used for planning and administrative expenses for its Community
       Development Block Grant and preparing accurate reports that were adequately supported
       by operational results. To assess the data, we examined access to systems, back up of
       data and controls over the relevance and reliability of information. We did not rely solely
       on the computer systems; instead we traced all data to third party documentation.
      Examined the nature, timing, and extent of accomplishments as identified in the
       consolidated annual performance and evaluation reports and annual updates and traced a
       random sample of accomplishments from the reports to third-party supporting
       documentation. We used a nonstatistical sample because we wished to focus on
       Community Development Block Grant program accomplishments and the consolidated
       annual performance and evaluation report includes all programs. We examined 3
       accomplishments from a universe of 15 accomplishments for the program. The sample
       was drawn randomly without bias for any program accomplishment.
      Obtained a listing of all expenditures categorized by type of expenditure. We then
       selected a sample of expenditures and tested expenditures for eligibility, proper
       evaluation, allocation (if applicable), and propriety. We used a nonstatistical, random
       sample of 7 of 20 categories. We selected our sample without conscious bias, that is,
       without any special reason for including or excluding items. This type of selection does
       not allow projection to the universe. We then traced all expenditures within these
       categories to third party-supporting documentation.
      Obtained and examined the cost allocation plan for the City.


                                               14
      Selected a sample of payroll costs and traced payroll expenditures to job descriptions and
       the cost allocation plan. We used a nonstatistical sample of 3 timesheets from a universe
       of 52. We selected our sample without conscious bias, that is, without any special reason
       for including or excluding items. This type of selection does not allow projection to the
       universe. We then examined the connection between the job duties and work under the
       Community Development Block Grant program and traced reports forward to annual
       reports to the U.S. Department of Labor and Internal Revenue Service. We evaluated the
       reasonableness of salaries using data compiled by the U.S. Department of Labor on salary
       expenditures in the State of Massachusetts.
      Selected a sample of nonpayroll administrative costs and traced to supporting
       documentation and the cost allocation plan. We used a nonstatistical, of 7 of 20
       categories. We selected our sample without conscious bias, that is, without any special
       reason for including or excluding items. This type of selection does not allow projection
       to the universe. For each expense in these categories, we examined the connection
       between the work performed and the work planned, evaluated whether the scope of work
       related to the Community Development Block Grant programs and the services
       performed would benefit the programs, and evaluated whether the prices paid for the
       services were reasonable and whether the City and its subcontractors maintained
       appropriate third-party documentation.
      Interviewed the City’s chief financial officer about the transition from Building a Better
       Brockton to the Brockton Redevelopment Authority.
      Interviewed Brockton Redevelopment Authority staff about the status of the Brockton
       Redevelopment Authority as a legal entity and determined whether the Brockton
       Redevelopment Authority was a nonprofit or a governmental entity.
      Determined how Building a Better Brockton procured its annual financial audit and
       whether this procurement met applicable requirements.
      Obtained the engagement letter, determined staffing, and obtained billings and payments
       related to the audited financial statements and determined whether there were payments
       from both Building a Better Brockton and Brockton 21st Century.
      Determined how the Brockton Redevelopment Authority procured its independent public
       auditor and whether this procurement met applicable regulations.
      Determined the amount of overpayment and unreasonable cost.

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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               15
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls 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 establishing and implementing the cost allocation plan,
                     Controls over cost and price analysis for the audited financial statements,
                     Controls over the payroll function, and
                     Controls for reporting accomplishments.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiencies


               Based on our review, we believe that the following items are significant deficiencies:


                     The City’s subcontractors did not establish and implement cost allocation
                      plans for expenses other than salaries (see finding 1).



                                                 16
   Building a Better Brockton, subcontractor to the City, did not provide
    evidence that it conducted a cost and price analysis to obtain the best value
    for its annual financial audit (see finding 2).




                              17
                                    APPENDIXES

Appendix A

                          SCHEDULE OF
                  FUNDS TO BE PUT TO BETTER USE

                      Recommendation        Funds to be put
                          number             to better use 1/
                             2A                     $32,500



1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. For this audit, this amount represents costs that will not
     be incurred by not charging the CDBG program $32,500 paid from City funds for the
     2010 audit. The City has agreed not to charge CDBG for the audit. (see appendix B)




                                              18
 Appendix B

         AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation          Auditee Comments


             From: Marc Resnick
             [mailto:MResnick@brocktonredevelopmentauthority.com]
             Sent: Sunday, August 21, 2011 1:15 PM
             To: Schwartzberg, Cristine
             Cc: Condon John; Anne Marie Belrose
             Subject: Cost Allocation Plan

          Hi Christine,
Comment 1 Attached you will find the Cost Allocation Plan which was approved by the
          BRA Board and then submitted to HUD. We have received comments from
          HUD and we will make adjustments to the Plan and resubmit for approval
          once I return from vacation.
          Have a good week,
          Marc



             Marc Resnick, AICP
             Director of Community Development
             Brockton Redevelopment Authority
             50 School Street
             Brockton, MA 02301

             508-586-3887 - Office
             508-559-7582 - Fax




                                           19
Ref to OIG Evaluation               Auditee Comments



             August 17, 2011



             TO:      Robert D. Shumeyko
                      Director, Community Planning and Development, IADM1

                      John A. Dvorak
                      Regional Inspector General for Audit, Region 1 IAGA

             FROM: John A. Condon,
                   Chief Financial Officer, City of Brockton, and
                   Chairman of the Board of Directors, Building a Better Brockton, Inc.

             RE: Audit of City of Brockton, MA Administrative Expenses for FY2010 CDBG Grant
                          (Audit Report Number 2011-BO – 10XX)

             This memorandum will respond to the second of two findings of the subject audit, the report for which
             was issued in draft form on August 10, 2011. The CDBG program for the City of Brockton during
             almost all of the audit year of FY2010 was administered by Building a Better Brockton, Inc. (BBB). At
             the very end of the FY2010, that responsibility was transferred to the Brockton Redevelopment Authority
             (BRA). Subsequently, BBB has not administered any federal funds for the city; in fact, BBB is no longer
             active.

             As the first audit finding involves the establishment and implementation of an adequate cost allocation
             plan, the BRA, which continues to serve as the administrative agent for the city for CDBG funding, will
             respond separately to that finding. I believe that the BRA’s response will concur with the finding and
             that the BRA has actively worked with the local HUD officials to develop an acceptable plan.

             With respect to the second finding, which involves the method by which the city and BBB procured the
Comment 2    FY10 audit and the price paid for that audit, the city and BBB:

                      (1.) Do not dispute that records do not exist to document that a formal competitive
                           procurement occurred.
                      (2.) Dispute that the price paid for the audit was unreasonable or that BBB overpaid for the
                           audit.
                      (3.) Dispute the recommendation that a portion of the audit fee paid be returned to the CDBG
                           program from non-federal funds.




                                                      20
Ref to OIG Evaluation                Auditee Comments

                                                                  -2-

             With respect to the procurement methodology, I and other current BBB officers and board members
             cannot comment on the specific nature of the procurement of the services of the Sharkansky CPA firm.
             The former BBB Treasurer/member of the Board of Directors, who initially procured Sharkansky’s
             services, and negotiated their continuation, is no longer with the BBB. I do not dispute that
             documentation of the procurement cannot be located in the files. However, I can offer the following
             background comments. The Sharkansky firm had served as auditor to the Brockton 21st Century
             Corporation (B21), a 501 C-6 entity and affiliate of BBB, with a shared board of directors, for many
             years. Sharkansky has a local practice with offices in Brockton. Sharkansky’s staff members have
             familiarity and experience with Federal funding audits. When the former mayor determined to
             administer the city’s Federal HUD funding through BBB, discussions were held with the city’s outside
             auditors, KPMG Peat Marwick (KPMG), about the advisability of expanding KPMG’s audit contract
             with the city to include BBB’s activities, or to engage Sharkansky. After meetings between officials of
             BBB, city officials, and partners and staff of both KPMG and Sharkansky, it was decided that engaging
             the Sharkansky firm with billing rates which were lower than KPMG’s, would be a cheaper and
             acceptable approach. In addition, the caliber of the Sharkansky firm’s work in serving B21 was high and
             known to BBB, and it would continue to serve as auditor to B21.

             With respect to the recommendation that the FY11 audit be procured after solicitation of price
Comment 2    quotations, I believe that the BRA will comply with the recommendation that the best applicant will be
             selected. The best applicant will be evaluated after a comparison of both price and qualifications,
             including experience.

             With respect to whether the price paid for the audit was reasonable or not and whether the city overpaid,
             I strongly disagree with the audit’s conclusions. The city can document that the hours spent by the
             Sharkansky staff for the BBB audit far exceeded its budget. (See Attachment). Sharkansky expended
             more than $61,000 for the BBB portion of the audit, but the amount charged was $32,500. An additional
             $1,500 was paid for tax filings. The costs of the portion of the audit of the Brockton 21st Century
             Corporation were consistent with both the billed amount to B21 and with the costs of prior audits of B21.
             That the BBB audit would be far more complex than that of the B21 was known in advance, but the
             Sharkansky firm certainly did not anticipate that it would write off nearly $30 thousand of unbilled costs.
             The reason that the audit work was known in advance to be more difficult for BBB than B21 was that the
             nature of the B21 funding sources and activities to be accounted for were very straightforward and
             consistent from one year to the next. On the other hand BBB was a new entity. It had untaken
             responsibility not only for CDBG funding, but also NSP, NSP2, and CDBG R. Its staff was new, and
             many were untrained in accounting. Moreover, in 2009, OIG had performed a capacity review which
             found that the BBB lacked adequate capacity, especially with respect to financial reporting, controls,
             procurement, and staffing. It also found potential conflicts of interest among board members. This
             rendered the FY10 audit more risky.

             During the FY10 year, the BBB Executive Director resigned, as did a number of board members,
             including one who was a CPA who served as Treasurer. A Director of Finance and Compliance (DFC)
             was hired, but because of the resignation of the Executive Director, the new DFC also served as Acting
             Executive Director. Accordingly, the staffing, capacity, and financial expertise issues were not resolved,
             and the Sharkansky
                             OIG staffEvaluation
                                       encountered a great  deal of difficulty
                                                       of Auditee      Commentsin completing the audit. That is the reason
             that $27,647 was unbilled, but the payment of $10,500 for B21 versus $34,000 in total for BBB was
             hardly disproportionate to effort. I believe the opposite was true.




                                                        21
Ref to OIG Evaluation               Auditee Comments

                                                               -3-

             Therefore, the recommendation that the city repay funds to the CDBG program is not consistent with a
             conclusion that $34,000 was a reasonable price to pay for the hours expended on the BBB audit and tax
             assistance. In addition, when the audit fee was subsequently paid in early 2011, no CDBG or
             Federal funds were drawn for the payment. Accordingly, even if HUD staff members reach the
             conclusion that the fee was unreasonable, a conclusion which I believe to be unwarranted, it does
             not follow that any funds should be repaid as no Federal Funds were used to pay the fee.


             JAC/amw

             Attachments

             XC: Linda M. Balzotti, Mayor
                 Heidi Chuckran, City Auditor
                 Mark Resnick, Executive Director, BRA
                 Ray Leduc, Board member, BBB
                 Pat Ciarmarelli, Board Member, BBB
                 Chris Cooney, Board Member, BBB




                                                      22
Ref to OIG Evaluation               Auditee Comments


                                                                         August 24, 2011


             Ms. Cristine O’Rourke Schwartzberg
             U.S. Dept of HUD/OIG/Audit
             Thomas P. O’Neill Jr. Federal Building
             10 Causeway Street – Room 370
             Boston, MA 02222

             Dear Cristine:

Comment 2    I am writing as promised to confirm the commitment which I made in the exit conference on August 18,
             29011. The city has not drawn and will not draw on CDBG or any other federal funding in order to
             recover the FY 10 audit fee paid by Building A Better Brockton, Inc. Moreover, Building A Better
             Brockton, Inc. has not drawn, nor will the city permit it to draw, on CDBG or any other federal funding
             in order to recover its FY10 audit fee. As you know, I continue to maintain that the fee paid to the audit
             firm was reasonable and supported by the work performed, but I make this commitment in the interest of
             resolving the issue.

                                                                         Best regards,



                                                                         John A. Condon
                                                                         Chief Financial Officer, City of Brockton

             JAC/amw

             XC: Linda M. Balzotti, Mayor
                 Heidi Chuckran, City Auditor
                 Marc Resnick, BRA




                                                       23
                           OIG Evaluation of Auditee Comments

Comment 1     We appreciate that the Brockton Redevelopment Authority is working with HUD
              to develop a proper cost allocation plan. The implementation of a proper cost
              allocation plan will assign costs to the correct program benefitting from those
              costs and will help Brockton Redevelopment Authority to better operate its
              programs. While the Brockton Redevelopment Authority provided its draft cost
              allocation, we did not include the plan in our report because the plan contains
              personal identification information.

Comment 2: The city and its subcontractor, Building a Better Brockton disagree that the cost of
           the audit was unreasonable. However, the City agreed not to charge the
           Community Development Block Grant for these expenses. Based on this
           commitment not to charge the program, we amended recommendation 2A.




                                              24
Appendix C

                                     CRITERIA
24 CFR 570.502, Applicability of Uniform Administrative Requirements

      (a)    Recipients and subrecipients that are governmental entities (including public
             agencies) shall comply with the requirements and standards of OMB [Office of
             Management and Budget] Circular No. A–87, “Cost Principles for State, Local,
             and Indian Tribal Governments”; OMB Circular A–128, “Audits of State and
             Local Governments” (implemented at 24 CFR part 44); and with the following
             sections of 24 CFR part 85 “Uniform Administrative Requirements for Grants and
             Cooperative Agreements to State and Local Governments” or the related CDBG
             provision, as specified in this paragraph:

                    (1)    Section 85.3, “Definitions”;
                    (2)    Section 85.6, “Exceptions”;
                    (3)    Section 85.12, “Special grant or subgrant conditions for ‘high-risk’
                           grantees”;
                    (4)    Section 85.20, “Standards for financial management systems,”
                           except paragraph (a);
                    (5)    Section 85.21, “Payment,” except as modified by § 570.513;
                    (6)    Section 85.22, “Allowable costs”;
                    (7)    Section 85.26, “Non-federal audits;
                    (8)    Section 85.32, “Equipment,” except in all cases in which the
                           equipment is sold, the proceeds shall be program income;
                    (9)    Section 85.33, “Supplies”;
                    (10)   Section 85.34, “Copyrights”;
                    (11)   Section 85.35, “Subawards to debarred and suspended parties”;
                    (12)   Section 85.36, “Procurement,” except paragraph (a);
                    (13)   Section 85.37, “Subgrants”;
                    (14)   Section 85.40, “Monitoring and reporting program performance,”
                           except paragraphs (b) through (d) and paragraph (f);
                    (15)   Section 85.41, “Financial reporting,” except paragraphs (a), (b),
                           and (e);
                    (16)   Section 85.42, “Retention and access requirements for records,”
                           except that the period shall be four years;
                    (17)   Section 85.43, “Enforcement”;
                    (18)   Section 85.44, “Termination for convenience”;
                    (19)   Section 85.51 “Later disallowances and adjustments” and
                    (20)   Section 85.52, “Collection of amounts due.”




                                            25
(b)   Subrecipients, except subrecipients that are governmental entities, shall comply
      with the requirements and standards of OMB Circular No. A– 122, “Cost
      Principles for Non-profit Organizations,” or OMB Circular No. A– 21, “Cost
      Principles for Educational Institutions,” as applicable, and OMB Circular A–133,
      “Audits of Institutions of Higher Education and Other Nonprofit Institutions” (as
      set forth in 24 CFR part 45). Audits shall be conducted annually. Such
      subrecipients shall also comply with the following provisions of the Uniform
      Administrative requirements of OMB Circular A–110 (implemented at 24 CFR
      part 84, “Uniform Administrative Requirements for Grants and Agreements With
      Institutions of Higher Education, Hospitals and Other Non-Profit Organizations”)
      or the related CDBG provision, as specified in this paragraph:

      (1)    Subpart A—“General”;
      (2)    Subpart B—“Pre-Award Requirements,” except for § 84.12, “Forms for
             Applying for Federal Assistance”;
      (3)    Subpart C—“Post-Award Requirements,” except for:
             (i)    Section 84.22, “Payment Requirements.” Grantees shall follow the
                    standards of §§ 85.20(b)(7) and 85.21 in making payments to
                    subrecipients;
             (ii)   Section 84.23, “Cost Sharing and Matching”;
             (iii) Section 84.24, “Program Income.” In lieu of § 84.24, CDBG
                    subrecipients shall follow § 570.504; Section 84.25, “Revision of
                    Budget and Program Plans”;
             (iv)   Section 84.32, “Real Property.” In lieu of § 84.32, CDBG
                    subrecipients shall follow § 570.505;
             (v)    Section 84.34(g), “Equipment.” In lieu of the disposition
                    provisions of § 84.34(g), the following applies:
                    (A)    In all cases in which equipment is sold, the proceeds shall
                           be program income (prorated to reflect the extent to which
                           CDBG funds were used to acquire the equipment); and
                    (B)    Equipment not needed by the subrecipient for CDBG
                           activities shall be transferred to the recipient for the CDBG
                           program or shall be retained after compensating the
                           recipient;
             (vi)   Section 84.51 (b), (c), (d), (e), (f), (g), and (h), “Monitoring and
                    Reporting Program Performance”; (viii) Section 84.52, “Financial
                    Reporting”;
             (vii) Section 84.53(b), “Retention and access requirements for records.”
                    Section 84.53(b) applies with the following exceptions:
                    (A)    The retention period referenced in § 84.53(b) pertaining to
                           individual CDBG activities shall be four years; and




                                      26
                    (B)    The retention period starts from the date of submission of
                           the annual performance and evaluation report, as prescribed
                           in 24 CFR 91.520, in which the specific activity is reported
                           on for the final time rather than from the date of submission
                           of the final expenditure report for the award; (x) Section
                           84.61, “Termination.” In lieu of the provisions of § 84.61,
                           CDBG subrecipients shall comply with § 570.503(b)(7);
                           and (4) Subpart D—“After-the-Award Requirements,”
                           except for § 84.71, “Closeout Procedures.”
****************

After the establishment of the Community Development Block Grant, these OMB
circulars were added to the Code of Federal Regulations:

Circular                   Location in the Code of Federal Regulations
OMB Circular A–87          2 CFR Part 225
OMB Circular A– 122        2 CFR Part 230
OMB Circular A–110         2 CFR Part 215




                                     27