oversight

ACORN Associates, Inc., New Orleans, LA, Materially Failed To Use Its Lead Elimination Action Program Grant Funds Appropriately

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-11-08.

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

                                                                 
                                                                 
                                                                Issue Date
                                                                        November 8, 2010
                                                                 
                                                                Audit Report Number
                                                                        2011-CH-1002
                                    
                                    
                                    

TO:         Jon L. Gant, Director of Healthy Homes and Lead Hazard Control, L
            Craig T. Clemmensen, Director of Departmental Enforcement Center, CACB


FROM:       Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: ACORN Associates, Inc., New Orleans, LA, Materially Failed To Use Its Lead
           Elimination Action Program Grant Funds Appropriately

                                   HIGHLIGHTS

 What We Audited and Why

             We audited ACORN Associates, Inc.’s (Associates) use of its fiscal years 2004
             and 2005 Lead Elimination Action Program (program) grant funds. Associates
             was selected for audit based upon a request from the U.S. Department of Housing
             and Urban Development’s (HUD) Office of Healthy Homes and Lead Hazard
             Control and multiple congressional requests. Our objective was to determine
             whether Associates expended program funds in accordance with HUD’s
             requirements.

 What We Found

             Associates inappropriately expended more than $3.2 million from its fiscal years
             2004 and 2005 grants for the elimination of lead poisoning in its housing
             program. It paid program funds of more than $3 million to affiliate and
             nonaffiliate organizations without properly procuring their services and did not
             include the funds in a HUD-approved grant budget. For its 2004 and 2005 grants,
             Associates failed to (1) properly procure the services of 19 affiliate and 20
             nonaffiliate organizations through free and open competition, (2) retain records
             and files documenting the basis for contractor selection, (3) justify the lack of
             competition and basis for the award cost, (4) ensure that it obtained the lowest,
           most reasonable cost, and (5) enter into a contract with each organization that
           performed an activity to accomplish grant goals. Additionally, it did not have
           adequate supporting documentation for nearly $218,000 in disbursements to 11
           affiliate and 4 nonaffiliate organizations.

           Also, program funds were not used for approved purposes. Associates used
           nearly $1.2 million in program funds for purposes not identified in its grant
           applications’ detailed budgets. The unapproved uses included campaign services,
           grant fund-raising activities, lead-based paint remediation work, payroll taxes and
           workmen’s compensation insurance, communication services, and financial- and
           audit-related expenditures for services performed by affiliate organizations and
           more than $16,000 disbursed to its nonaffiliate organizations. Further, more than
           $600 in improper expenses for bank service fees was disbursed from program
           funds. The nearly $1.2 million of program funds used for unapproved purposes
           are associated with and included in the $3.2 million expended without being
           properly procured. The repayment of total questioned costs will not exceed the
           amount of the funds drawn from Associates’ 2004 and 2005 grants.


What We Recommend

           We recommend that the Director of HUD’s Office of Healthy Homes and Lead
           Hazard Control require Associates to (1) provide procurement documentation or
           reimburse HUD from non-Federal funds more than $3.2 million in program funds,
           (2) provide documentation or reimburse HUD from non-Federal funds for nearly
           $218,000 in program funds, and (3) reimburse HUD from non-Federal funds for
           nearly $1.2 million for the unapproved and improper use of program funds. We
           also recommend that the Director withdraw Associates’ ability to draw down the
           more than $750,000 in program funds remaining in its grants.

           Further, we recommend that the Director of HUD’s Departmental Enforcement
           Center pursue the appropriate administrative sanctions against Associates’ officers
           for their failure to adequately manage the program grants.

           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 our review results to the Director of HUD’s Office of Healthy
           Homes and Lead Hazard Control and Associates’ acting legal counsel during the
           audit. We provided our discussion draft audit report to Associates’ acting legal




                                             2
counsel and HUD’s staff during the audit. We held an exit conference with
Associates’ acting legal counsel on September 30, 2010.

We asked Associates’ acting legal counsel to provide written comments on our
discussion draft audit report by October 22, 2010. Associates provided its written
response, dated October 22, 2010, and disagreed with our findings. The complete
text of the written comments, except for 332 pages of documentation that were not
necessary to understand Associates’ comments, along with our evaluation of that
response, can be found in appendix B of this report. We redacted the names of
employees cited in Associates’ comments before including them in this audit report.
We provided the Director of HUD’s Office of Healthy Homes and Lead Hazard
Control with a complete copy of Associates’ written comments plus the 332 pages of
documentation.




                                 3
                             TABLE OF CONTENTS

Background and Objective                                                        5
 
Results of Audit
       Finding 1: Associates Inappropriately Used Its Program Funds            8

       Finding 2: Associates Used Funds for Unapproved and Improper Purposes   13

Scope and Methodology                                                          16
 
Internal Controls                                                              17

Appendixes
    A. Schedule of Questioned Costs and Funds To Be Put to Better Use          19
    B. Auditee Comments and OIG’s Evaluation                                   20
    C. Grant Agreements and HUD’s Requirements                                 36




                                             4
                       BACKGROUND AND OBJECTIVE

The Program. The Lead Elimination Action Program’s (program) purpose is to provide grants
to private-sector and nonprofit organizations to conduct activities that leverage additional
funding for addressing lead hazards in privately owned housing units and eliminating lead
poisoning as a major public health threat to young children. The program assists States, Native
American tribes, and local governments in undertaking programs for the identification and
control of lead-based paint hazards in eligible privately owned rental and owner-occupied
housing units. The U.S. Department of Housing and Urban Development (HUD) is interested in
promoting lead hazard control approaches that result in the reduction of elevated blood lead
levels in children for the maximum number of low-income families with children under 6 years
of age for the longest period of time and demonstrate techniques which are cost effective,
efficient, and replicable elsewhere.

Office of Healthy Homes and Lead Hazard Control. On October 30, 2009, the Director of
HUD’s Office of Healthy Homes and Lead Hazard Control (Healthy Homes) requested an audit
of ACORN Associates, Inc. (Associates). The request was for assistance in reviewing the
documentation for two program grants for fiscal years 2004 and 2005 totaling nearly $4 million.
Healthy Homes repeatedly conveyed its concerns to Associates regarding its grant performance.
Technical assistance was provided during a June 2006 site visit and an onsite monitoring visit
was conducted in January 2010. Issues noted during the visit included policies and procedures
that did not detail the overall grant processes and that Associates’ financial database did not
include enough information to track costs and leveraged resources. As of September 2010, an
independent financial audit could not be completed, and no audit report could be prepared due to
the lack of sufficient information. Associates failed to submit complete contracts, work
specifications, inspections and risk assessments, and clearance reports for a number of units with
grant funds when requested by HUD. Also, some work was performed in homes for which
Associates did not provide adequate documentation of property ownership. In addition, risk
assessment reports and clearance reports were unsigned, and the original budget for Associates’
fiscal year 2005 grant included direct costs for staff outside the jurisdiction of New Orleans that
did not achieve any outcomes for the grants.

Healthy Homes prepared its March 12, 2010, draft report from an onsite visit performed on
January 21 and 22, 2010, which disclosed that Associates did not (1) carry out its obligations in
completing lead hazard assessments, interventions, and leveraging activities; (2) accurately
describe its production results; (3) maintain a separation of its grants’ activities and finances; (4)
provide the materials necessary for the grant officer(s) to complete a formal modification, and
(5) provide documentation for a number of paid and unpaid invoices. As of November 4, 2010,
the draft report had not been issued to Associates.

Association of Community Organization for Reform Now (ACORN). ACORN was established
in 1970 as a grassroots organization to advocate for low-income families. By 2009, ACORN
reportedly had 500,000 members and had expanded into a national network of organizations
involved in the development of affordable housing, foreclosure counseling, voter registration,




                                                  5
and political mobilization, among other things. ACORN organizations relied on membership
dues and Federal and private foundation funding to support various activities.

Voter registration fraud allegations in a number of States and widely distributed videotapes
depicting what appeared to be inappropriate behavior by employees of several local ACORN
chapters spurred calls to identify Federal funding provided to ACORN and ACORN-related
organizations and for legislation to restrict or eliminate funding.

Congress passed provisions restricting the funding of ACORN and its affiliates, subsidiaries, or
allied organizations in the fiscal year 2010 continuing resolutions, which were followed by
several fiscal year 2010 appropriations acts that prohibited any appropriated funds from being
awarded to various ACORN or ACORN-related organizations. ACORN officials reported
similar cuts in private foundation funding. In March 2010, ACORN officials stated that the
national ACORN organization would terminate its field operations and close all of its field
offices because of the loss of Federal and other funding, although some of its affiliate
organizations were to remain open.

In September 2009, we received four separate congressional requests to review ACORN’s
activities. We received additional requests in June and August 2010. Our disposition of those
requests will be addressed in a separate report.

ACORN Associates, Inc. Associates was incorporated as an Arkansas nonprofit corporation on
July 23, 1975, for the purpose of establishing and developing a fund to provide training,
assistance, consultation, and other services to aid in the development and maintenance of
community, rural, and neighborhood organizations. Associates received three grants from
HUD’s Healthy Homes. According to Associates’ articles of incorporation, its principle sources
of revenue are contractual fees, gifts, and grants. The grants from the program are reimbursable
grants to eliminate lead poisoning as a major public threat to children.

The following table shows the amount of funds that HUD awarded Associates for the 2004 and
2005 program grants and the amount of funds that Associates had expended as of October 31,
2010. Healthy Homes amended the grant agreements on October 20, 2010, suspending any
further payments to Associates. This measure was taken to comply with section 163 of the
Continuing Appropriations Resolution for the fiscal year 2010 Federal budget1.

                           Program                  Program funds   Program funds   Program funds
                             year                      awarded         expended       Remaining
                             2004                     $2,000,000      $1,841,376       $158,624
                             2005                      1,999,920       1,405,702        594,218
                            Totals                    $3,999,920      $3,247,078       $752,842

According to Associates’ grant agreements with HUD, HUD emphasized the need for a
competitive bidding process for the full implementation of program activities. In its approved
applications, Associates was to contract with community-based organizations and ACORN to
                                                            
1
 Section 163 required that none of the funds made available by the resolution or any prior Act may be provided to
ACORN, or any of its affiliates, subsidiaries, or allied organizations.


                                                                     6
implement the program. Program funds were to be used for training community-based
organizations to use community-based strategies to leverage resources for lead hazard education,
identification, and control activities in low-income neighborhoods.

Associates contracted with Citizens Consulting, Inc., for the maintenance of its fiscal
responsibilities and to furnish administrative and other services and contracts for the annual
audits and tax return preparation. Citizens Consulting, Inc., was to manage project contracts,
funds, and financial management activities according to Federal guidelines. Managing activities
included drawing down funding based on timesheets, invoices, and allocations and completion of
program goals.

Our objective was to determine whether Associates expended program funds according to
HUD’s requirements.




                                               7
                                                               RESULTS OF AUDIT

Finding 1: Associates Inappropriately Used Its Program Funds
Associates administered its program contrary to HUD’s requirements for its fiscal years 2004
and 2005 program grants. It failed to (1) properly procure the services of 19 affiliate2 and 20
nonaffiliate organizations through free and open competition, (2) retain records and files
documenting the basis for contractor selection, (3) justify the lack of competition and basis for
the award cost, (4) ensure that it obtained the lowest, most reasonable cost, and (5) enter into a
contract with each organization that performed an activity to accomplish grant goals. Associates
lacked written procurement policies to ensure that the grant requirements were followed. As a
result, more than $3.2 million in program funds was not used in accordance with the grant
agreements and HUD requirements.


    Associates Failed To Properly
    Procure Affiliate and
    Nonaffiliate Organizations’
    Services


                             Associates used more than $3.2 million in program funds for 19 affiliate and 20
                             nonaffiliate organizations to accomplish program goals without properly
                             procuring their services through free and open competition. It failed to retain
                             records and files documenting the basis for the selection and justify the lack of
                             competition and basis for the award cost, ensuring that the lowest, most
                             reasonable cost was obtained (see appendix C of this audit report for the program
                             requirements). Contracts were not entered into with each organization. In
                             addition, Associates did not establish its own procurement policies or follow
                             Federal requirements for the procurement of services from its affiliate and
                             nonaffiliate organizations as its grant agreements required.

                             According to Associates’ HUD-approved applications, Associates agreed to
                             contract with community-based organizations and ACORN to implement the
                             program. Instead, Associates chose affiliate and nonaffiliate organizations to
                             provide services to accomplish program goals without properly procuring their
                             services and did not provide a cost analysis for its procurement action or enter
                             into a contract with each organization.

                             According to Associates’ records, it disbursed more than $3.264,675, $17,597
                             more than it received in program funds. Contrary to its grant agreements,

                                                            
2
 Congress and Federal agencies, in defining “affiliate” in other substantive areas of law, similarly provide that an
“affiliate” is an entity (a) controlled by another entity, (b) in control of another entity, or (c) under common control
with another entity by a third party.


                                                                      8
Associates commingled other funds with its program funds. We were unable to
identify the nongrant funds due to the lack of sufficient accounting records.

Associates disbursed nearly $2.8 million in program funds to 19 affiliate
organizations without following HUD’s procurement requirements. The
following table shows the affiliate organizations that were not properly procured
and the amount of program funds disbursed.

                                                         Program
            Affiliate organizations not properly          funds
                          procured                      disbursed
         ACORN Services, Inc.                           $1,033,374
         ACORN Maryland                                    695,568
         ACORN Louisiana                                   692,007
         ACORN Associates (New Orleans)                    102,088
         ACORN New Jersey                                   46,370
         ACORN Texas                                        41,543
         ACORN Ohio                                         38,293
         AGAPE                                              24,926
         ACORN Arkansas                                     22,072
         ACORN Pennsylvania                                 22,072
         ACORN Delaware                                     22,071
         ACORN Georgia                                      19,472
         ACORN Kentucky                                     16,195
         ACORN Institute - communications                    8,419
         ACORN Associates - audit reserve                    7,018
         ACORN Institute                                     3,200
         ACORN Chief Organizer Fund                          1,937
         ACORN Services, Inc.’s -
         secretary/treasurer                          1,013
         ACORN Services, Inc.’s – representative        912
                            Total                $2,798,550

Associates also disbursed $466,125 in program funds to 20 nonaffiliate
organizations without following HUD’s procurement requirements.




                                 9
Disbursements to Affiliate and
Nonaffiliate Organizations Lacked
Supporting Documentation

           Associates failed to maintain documentation to support its disbursement of
           $217,995 in program funds to 11 affiliate ($212,840) and 4 nonaffiliate ($5,115)
           organizations. HUD requires financial records, supporting documents, and all
           other records pertinent to an award to be retained for a period of 3 years from the
           date of submission of the final expenditure report. Since Associates had not
           submitted acceptable final expenditure reports for the grants as of November 4,
           2010, it was required to maintain supporting documentation for the
           disbursements. As previously mentioned, we were unable to identify the nongrant
           funds due to the lack of sufficient accounting records and Associates’
           commingling of Federal and non-Federal funds.

           Associates failed to retain cancelled checks and invoices supporting the
           expenditure of $212,840 as noted in the following table.

                Program funds disbursed to affiliate organizations       Unsupported
                   without adequate supporting documentation               amount
               ACORN Maryland                   Contractual services          $80,617
               ACORN Associates (New
               Orleans)                         Contractual services           60,755
               AGAPE                            Communications                 14,959
               ACORN Delaware                   Contractual services           11,682
               ACORN Pennsylvania               Contractual services            9,621
               ACORN Texas                      Contractual services            9,587
               ACORN New Jersey                 Contractual services            9,413
               ACORN Arkansas                   Contractual services            9,100
               ACORN Georgia                    Contractual services            5,795
               Citizens Consulting, Inc.        Accounting                      1,302
               ACORN Chief Organizer Fund       Campaign services                   9
                                        Total                                $212,840

           Associates disbursed another $5,115 to nonaffiliate organizations without
           adequate documentation to support the expenses. It failed to maintain invoices
           and cancelled checks in support of the expenditures as described in the following
           table.




                                           10
                    Program funds disbursed to nonaffiliate organizations          Unsupported
                        without adequate supporting documentation                    amount

                Community Resources                        Consultant                      $2,500
                BTS Laboratories, Inc.                     Lead risk assessment               984
                Oden Environmental Service, Inc.           Lead risk assessment               981
                New Hampshire Department of Health         Technical training                 650
                                             Total                                         $5,115


Associates Had More Than
$750,000 in Program Funds
Remaining in Its Current
Grants

             As of November 4, 2010, Associates had $752,842 in program funds remaining
             for its two current authorized grants (LALHO0017-04 and LALHO0020-05).
             Given Associates’ material failure to manage its current authorized program
             grants (see this finding and finding 2 in this audit report), HUD should terminate
             Associates’ ability to draw down the remaining program funds to ensure that they
             are not improperly used. This measure would prevent unnecessary program
             expenditures for the remaining program grants.

Conclusion


             Associates lacked adequate procedures and controls to ensure that it complied
             with Federal requirements. It selected affiliate and nonaffiliate organizations
             without obtaining their services through free and open competition and did not
             retain records and/or files to document the basis for their selection, justify the lack
             of competition, and document the basis for the award cost. Also, Associates
             failed to show that it obtained the lowest, most reasonable cost for these services.
             In addition, it failed to maintain documentation supporting its disbursement of
             program funds. Therefore, there was no assurance that program funds were used
             solely for approved purposes and at the lowest, most reasonable costs. 

Recommendations

             We recommend that the Director of HUD’s Office of Healthy Homes and Lead
             Hazard Control require Associates to

             1A.    Provide documentation to support that it followed the grants’ procurement
                    requirements or reimburse HUD $3,247,078 (actual amount drawn from
                    its 2004 and 2005 grants) from non-Federal funds for the procurement
                    transactions cited in this finding.


                                               11
    1B.   Provide documentation to support its disbursement of program funds to
          the 11 affiliate ($212,840) and 4 nonaffiliate ($5,115) organizations or
          reimburse HUD $217,955 from non-Federal funds.

    We also recommend that the Director of HUD’s Office of Healthy Homes and
    Lead Hazard Control

    1C.   Terminate Associates’ ability to draw down the $752,842 in program
          funds remaining in its grants.

                  




                                   12
Finding 2: Associates Used Funds for Unapproved and Improper
                              Purposes
Associates provided program grant funds to affiliate and nonaffiliate organizations for
unapproved purposes and to a nonaffiliate organization for ineligible purposes. It lacked
adequate procedures and controls to ensure that it complied with Federal requirements. As a
result, nearly $1.2 million in program funds was not used effectively and efficiently or in
accordance with the grant agreements and HUD requirements.


 Program Funds Were Not Used
 Properly

              Associates failed to use nearly $1.2 million in program funds for approved
              purposes when it expended program funds for organizational services not
              included in its HUD-approved program detailed budgets. According to the
              Director of the Grants Services Division of HUD’s Healthy Homes, an
              organization must be identified in the applicant’s approved budget before
              receiving funds from a grant (see appendix C of this audit report for the program
              requirements). In this case, Associates’ fiscal years 2004 and 2005 detailed
              budgets did not include the use of funds for campaign services, grant fund-raising
              activities, lead-based paint remediation work, payroll taxes and workmen’s
              compensation insurance, communication services, and financial- and audit-related
              expenditures for services performed by affiliate organizations and more than
              $16,000 disbursed to its nonaffiliate organizations. The unapproved use of funds
              was contrary to Associates’ contract with HUD. Therefore, the costs were
              ineligible.

              Associates disbursed more than $1.18 million to affiliate organizations for
              services not identified in its program’s detailed budgets. The following table
              shows the program funds used for unapproved services provided by affiliate
              organizations and the amount of program funds disbursed.




                                              13
        Program funds disbursed to affiliate                                      Amount
                  organizations                     Unapproved service type      disbursed
                                                   Lead remediation work
                                                   ($642,080),
                                                   payroll taxes ($354,406),
                                                   and workmen’s
                                                   compensation insurance
        ACORN Services, Inc.                       ($36,888)                     $1,033,374
        ACORN Associates (New Orleans)             Unknown                          102,088
        AGAPE                                      Communications                    24,926
        ACORN Institute-communications             Communications                      8,419
        ACORN Associates, Inc.                     Audit reserve                       7,018
        ACORN Institute                            Grant fund raising                  3,200
        ACORN Chief Organizer Fund                 Campaign services                   1,937
        ACORN Services, Inc.’s                     Non-employee
        secretary/treasurer                        reimbursement                      1,013
        ACORN Services, Inc. representative        Waste disposal                       912
                                    Total                                        $1,182,887

             Another $16,395 was disbursed to three nonaffiliate organizations and individuals
             for services that were not identified in the detailed budgets for Associates’ 2004
             and 2005 grants. These services included financial accounting, training, and other
             unknown expenses. In addition, program funds were used for $633 in ineligible
             bank service fees and overdraft charges.

Conclusion

             Associates lacked adequate procedures and controls to ensure that it complied
             with Federal requirements and that program funds were used for approved and
             eligible purposes. The acting legal counsel retained by Associates did not know
             why the program funds were not used properly since he was not involved with the
             expenditure of the funds. Associates’ acting legal counsel was hired after the
             funds were expended.

Recommendations

             We recommend that the Director of HUD’s Office of Healthy Homes and Lead
             Hazard Control require Associates to




                                             14
2A.   Reimburse HUD $1,199,282 ($1,182,887 to affiliates plus $16,395 to
      nonaffiliates) from non-Federal funds for the unapproved use of program
      funds cited in this finding.

2B.   Reimburse HUD $633 from non-Federal funds for the ineligible use of
      program funds for the bank fees/charges cited in this finding.

We recommend that the Director of HUD’s Departmental Enforcement Center

2C.   Pursue appropriate administrative sanctions against Associates’ officers for
      their failure to adequately manage the program grants.




                                15
                         SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

              Applicable laws; Federal Registers Volume 69, No. 94, dated May 14, 2004, and
               Volume 70, No. 53, dated March 21, 2005; 24 CFR (Code of Federal
               Regulations) Parts 2, 24, 84, and 85; Office of Management and Budget Circulars
               A-110 and A-133, and Government Accountability Office (GAO) publications
               GAO-10-648R, dated June 14, 2010, and B-320329, dated September 29, 2010.

              HUD’s files for the grants.

              Associates’ application procedures, lead remediation procedures, policy and
               procedural manual and personnel policies, chart of accounts, board members
               listing, service contracts with Citizens Consulting, Inc., and ACORN Services,
               Inc., incorporation documentation, Line of Credit Control System voucher
               payment requests, quarterly reports, employee listing for affiliate and nonaffiliate
               organizations, lead elimination action program grant applications/agreements and
               detailed budgets, check registers, bank statements, cancelled checks, and invoices
               for grant years 2004 and 2005.

We also interviewed current and former employees of Associates and Citizens Consulting, Inc.,
the acting legal counsel for Associates, its public accounting firm, and HUD’s staff.

We reviewed 100 percent of the available hardcopy documentation for Associates’
disbursements for its fiscal years 2004 and 2005 grants. We verified the accuracy of Associates’
documentation by reviewing its bank statements, canceled checks, and check registers.

We performed our onsite audit work from January through April 2010 at Associates’ offices
located at 2609 Canal Street, New Orleans, LA. The audit covered the period October 1, 2004,
through November 30, 2009, and was expanded as determined necessary.

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.




                                                16
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about 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
               objective:

                     Effectiveness and efficiency of operations - Policies and procedures that
                      management has implemented to reasonably ensure that a program meets
                      its objectives.

                     Reliability of financial reporting - Policies and procedures that
                      management has implemented to reasonably ensure that valid and reliable
                      data are obtained, maintained, and fairly disclosed in reports.

                     Compliance with applicable laws and regulations - Policies and
                      procedures that management has implemented to reasonably ensure that
                      resource use is consistent with laws and regulations.

               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 and efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws or regulations on a
               timely basis.




                                                 17
    Significant Deficiencies

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

                    Associates lacked adequate procedures and controls to ensure that it complied
                     with Federal requirements. It failed to (1) properly procure affiliate and
                     nonaffiliate organizations through free and open competition, (2) retain
                     records and files documenting the basis for contractor selection, (3) justify the
                     lack of competition and basis for the award cost, (4) prepare an analysis
                     ensuring that the costs were the lowest and most reasonable, (5) enter into
                     contracts with each organization, and (6) retain supporting documentation for
                     its disbursement of program funds (see finding 1).

                    Associates failed to use program funds solely for approved and eligible
                     purposes. It drew down funds for services not identified in its 2004 and 2005
                     detailed budgets and used funds for ineligible purposes (see finding 2).
                                 




                                                  18
                                    APPENDIXES

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

          Recommendation                                              Funds to be put
              number            Ineligible 1/        Unsupported 2/   to better use 3/
                 1A                                      $1,829,168
                 1B                                         217,995
                 1C                                                          $752,842
                 2A               $1,199,282
                 2B                      633
                Totals            $1,199,915             $2,047,163          $752,842


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

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures. Actual unsupported costs for recommendation
     1A totaled $3,247,078. For reporting purposes, this amount was reduced by $1,417,910
     because the associated costs were questioned for other reasons and are reflected in totals
     for recommendations 1B, 2A, and 2B. The repayment of total questioned costs should
     not exceed the amount of the funds drawn from Associates’ 2004 and 2005 grants.

3/   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. In these instances, if HUD implements our
     recommendation, it will cease providing program funds to an entity that does not
     adequately manage its program grants. This recommendation includes a deobligation of
     program funds from current authorized program grants.




                                                19
Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1


Comment 2


Comment 3




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 5



Comment 6
Comment 2




                         21
Ref to OIG Evaluation   Auditee Comments




Comment 7

Comment 8

Comment 9




Comment 10




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 11




Comment 12




Comment 1


Comment 8




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 13

Comment 12
Comment 14
Comment 2



Comment 1


Comment 15




Comment 1

Comment 3
Comment 2




                         24
Ref to OIG Evaluation   Auditee Comments




Comment 3



Comment 16


Comment 17

Comment 18




                         25
Ref to OIG Evaluation   Auditee Comments




Comment 19



Comment 18

Comment 3
Comment 20

Comment 21

Comment 22




                         26
Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 23




                         27
Ref to OIG Evaluation   Auditee Comments




Comment 15




Comment 24
Comment 25




Comment 10



Comment 19




                         28
Ref to OIG Evaluation   Auditee Comments




Comment 22

Comment 12



Comment 3




Comment 12




                         29
Ref to OIG Evaluation   Auditee Comments




Comment 26




Comment 22




Comment 27

Comment 21




Comment 18




                         30
Ref to OIG Evaluation   Auditee Comments




Comment 28



Comment 3

Comment 3




Comment 17
Comment 12

Comment 3

Comment 13
Comment 29




                         31
Ref to OIG Evaluation   Auditee Comments




                         32
                          OIG Evaluation of Auditee Comments

Comment 1    The audit objective was to determine whether Associates expended program funds
             in accordance with HUD’s requirements. We did not assess the use of the
             program funds for lead remediation because it was not an approved use of the
             program funds. According to the notice of funding availability and Associates’
             grant application for both grants, only leveraged funds were to be used for lead
             remediation.

Comment 2    We audited Associates’ use of program funds and not HUD’s Office of Healthy
             Homes and Lead Hazard Control.

Comment 3    Healthy Homes never approved an official budget workplan for the grants
             because it never received them from Associates.

Comment 4    We requested but Associates did not provide documentation to support that it
             followed the grants’ requirements for procurement. Healthy Homes awarded
             grants to six separate entities in six States. The services were not unique to
             Associates and its affiliates.

Comment 5    The only contract provided during the audit was in Associates’ records and was
             between Associates and Citizens Consulting, Inc., for accounting, bookkeeping,
             corporate, and administrative services.

Comment 6    Associates’ acting legal counsel stated in an April 14, 2010, electronic message
             that he was sure that the OIG auditors were going to find bad record keeping. He
             also stated that the person administering that grant was horrible about her record
             keeping and was eventually fired because of it.

Comment 7    No documents were provided to support any contractual relationship between
             Associates and ACORN.

Comment 8    The grants emphasize the need for a competitive bidding process for the full
             implementation of program activities as described in the work plan/statement of
             work. The procurement standards at 24 CFR 84.40 were required by the grants.

Comment 9    Healthy Homes awarded grants to six separate entities in six States. The services
             were not unique to Associates and its affiliates.

Comment 10 No documentation was contained in HUD’s files or provided by Associates to
           support that Associates notified HUD that it would not draw down additional
           funds.

Comment 11 Associates was selected for audit based upon a request from Healthy Homes and
           multiple congressional requests.




                                             33
Comment 12 We interviewed the former project director for Associates that Associates’ acting
           legal counsel makes reference to as “at no time did the auditors speak with”. The
           former project director contended that all records were maintained during her
           employment. After her employment was terminated, she said that Associates and
           Citizens Consulting, Inc. staff destroyed the records. We also spoke with the
           director of Citizens Consulting, Inc., a staff attorney for Advocates for Justice,
           P.C., and Associates’ acting legal counsel. We did not have contact information
           for any other staff that may have administered the grants. The contact
           information was requested, but never provided by the director of Citizens
           Consulting, Inc., a staff attorney for Advocates for Justice, P.C., or Associates’
           acting legal counsel.

Comment 13 According to document retrieval experts, damaged documents should be retrieved
           as soon as it is safe to enter the damaged area. An experienced archive restoration
           company should have been contacted immediately to retrieve these fragile
           documents. With HUD’s permission, Associates could have revised the grants to
           incorporate these retrieval costs into the grants.

Comment 14 The conclusion was based upon the documentation provided by Associates and
           the grants’ requirements.

Comment 15 No documentation to support these statements were contained in Associates or
           Healthy Homes files, or provided with the auditee comments. Additionally, these
           statements could not be verified in interviews with Healthy Homes’ staff.

Comment 16 Healthy Homes’ staff had discussed the matter and indicated its willingness to
           modify the grant agreements in light of Hurricane Katrina’s impact on the target
           area.

Comment 17 We did not assess the use of the program funds for lead remediation because it
           was not an approved use of the program funds. According to the notice of
           funding availability and Associates’ grant application for both grants, only
           leveraged funds were to be used for lead remediation.

Comment 18 According to the notice of funding availability and Associates’ grant application
           for both grants, only leveraged funds were to be used for lead remediation.

Comment 19 We determined whether Associates expended program funds in accordance with
           HUD’s requirements. The grant agreements included the procurement standards
           at 24 CFR 84.40.

Comment 20 The $1.2 million is a subset of the $3.2 million. However, more than $3 million
           was paid to affiliate and nonaffiliate organizations without properly procuring
           their services and did not include the funds in a HUD-approved grant budget.
           Actual unsupported costs for recommendation 1A totaled $3,247,078. For
           reporting purposes, this amount was reduced by $1,417,910 because the



                                             34
              associated costs were questioned for other reasons and are reflected in totals for
              recommendations 1B, 2A, and 2B. The repayment of total questioned costs
              should not exceed the amount of the funds drawn from Associates’ 2004 and 2005
              grants.

Comment 21 Associates’ acting legal counsel stated in a September 3, 2010, interview that the
           Chief Organizer Fund was a corporation created for ACORN’s former chief
           organizer’s use only. Associates’ check register showed a number of checks with
           the purpose of “Chief Organizer Fund’s organizer/campaign services.”

Comment 22 No documentation was provided with Associates’ comments to support
           Associates’ contention that there were chapters within ACORN. Therefore, we
           did not change our reference regarding affiliates.

Comment 23 We gathered relevant information from a number of sources during our audit.
           Associates’ acting legal counsel is correct that we used an unissued draft report
           from Healthy Homes from its January 2010 onsite review.

Comment 24 We did not subpoena any records for this audit.

Comment 25 We initiated our audit on December 10, 2009, after receiving an October 30,
           2009, request from Healthy Homes.

Comment 26 We provided supporting schedules that included the respective date, check
           number, amount, and payee. These documents included copies of Associates’
           check registers.

Comment 27 We removed the sentence from the charge paragraph for finding 2.

Comment 28 The entity name was corrected in this audit report.

Comment 29 In May 2010, Associates’ acting legal counsel stated that Associates was
           discontinuing its operations because of our audit. At the September 30, 2010, exit
           conference with Associates’ acting legal counsel, he stated that Associates only
           existed on paper and would be filing for bankruptcy. On November 2, 2010,
           Associates’ acting legal counsel filed the petition for bankruptcy.
                              




                                              35
Appendix C

      GRANT AGREEMENTS AND HUD’S REQUIREMENTS

Finding 1

HUD agreement HUD 1044, paragraph 8, cites a special consideration in which HUD
emphasizes the need for a competitive bidding process for the full implementation of program
activities as described in the work plan/statement of work. In this regard, full compliance with
procurement standards set forth at 24 CFR 84.40 is applicable.

Page 2 of the fiscal year 2005 program grant agreement states that the grantee shall not
commingle any fund computed under this grant with any other existing or future operating
accounts held by the grantee.

HUD’s regulations at 24 CFR 84.40 state: “Sections 84.41 through 84.48 set forth standards for
use by recipients in establishing procedures for the procurement of supplies and other
expendable property, equipment, real property, and other services with Federal funds. These
standards are furnished to ensure that such materials and services are obtained in an effective
manner and in compliance with the provisions of applicable Federal statutes and executive
orders.”

HUD’s regulations at 24 CFR 84.43 state: “All procurement transactions shall be conducted in a
manner to provide, to the maximum extent practical, open and free competition. The recipient
shall be alert to organizational conflicts of interest as well as noncompetitive practices among
contractors that may restrict or eliminate competition or otherwise restrain trade. In order to
ensure objective contractor performance and eliminate unfair competitive advantage, contractors
that develop or draft specifications, requirements, statements of work, invitations for bids, and/or
requests for proposals shall be excluded from competing for such procurements. Awards shall
be made to the bidder or offeror whose bid or offer is responsive to the solicitation and is most
advantageous to the recipient, price, quality and other factors considered.”

HUD’s regulations at 24 CFR 84.44 state: “All recipients shall establish written procurement
procedures. These procedures shall provide at a minimum: (1) recipients avoid purchasing
unnecessary items, (2) where appropriate, an analysis is made of lease and purchase alternatives
to determine which would be the most economical and practical procurement for the Federal
Government, and (3) solicitations for goods and services will have a clear and accurate
description of the technical requirements for the material, product or service to be procured,
requirements which the bidder/offeror must fulfill, a description of technical requirements in
terms of functions to be performed or performance required, specific features of “brand name or
equal” descriptions that bidders are required to meet when such items are included in the
solicitation. (d) Contracts shall be made only with responsible contractors who possess the
potential ability to perform successfully under the terms and conditions of the proposed
procurement.”



                                                36
HUD’s regulations at 24 CFR 84.45 require the recipient to perform some form of cost or price
analysis in connection with every procurement action.

HUD’s regulations at 24 CFR 84.46 state: “Procurement records and files for purchases in
excess of the small purchase threshold shall include the following at a minimum: (a) basis for
contractor selection; (b) justification for lack of competition when competitive bids or offers are
not obtained; and (c) basis for award cost or price.”

HUD’s regulations at 24 CFR 84.53(b) state: “Financial records, supporting documents,
statistical records, and all other records pertinent to an award shall be retained for a period of
three years from the date of submission of the final expenditure report or, for awards that are
renewed quarterly or annually, from the date of the submission of the quarterly or annual
financial report, as authorized by HUD. The only exceptions are the following. (1) If any
litigation, claim, or audit is started before the expiration of the 3-year period, the records shall be
retained until all litigation, claims or audit findings involving the records have been resolved and
final action taken.”

Office of Management and Budget Circular A-110 paragraph 21(b), states: “Recipients’
financial management systems shall provide for the following: (3) effective control over and
accountability for all funds, property and other assets. Recipients shall adequately safeguard all
such assets and assure they are used solely for authorized purposes. Paragraph 40 states these
standards are furnished to ensure that such materials and services are obtained in an effective
manner and in compliance with the provisions of applicable Federal statutes and executive
orders.”

Paragraph 42 of Circular A-110 states: “The recipient shall maintain written standards of
conduct governing the performance of its employees engaged in the award and administration of
contracts. No employee, officer, or agent shall participate in the selection, award, or
administration of a contract supported by Federal funds if a real or apparent conflict of interest
would be involved. Such a conflict would arise when the employee, officer, or agent, any
member of his or her immediate family, his or her partner, or an organization which employs or
is about to employ any of the parties indicated herein, has a financial or other interest in the firm
selected for an award. The officers, employees, and agents of the recipient shall neither solicit
nor accept gratuities, favors, or anything of monetary value from contractors, or parties to
subagreements. However, recipients may set standards for situations in which the financial
interest is not substantial or the gift is an unsolicited item of nominal value. The standards of
conduct shall provide for disciplinary actions to be applied for violations of such standards by
officers, employees, or agents of the recipient.”

Circular A-110, paragraph 43, states: “All procurement transactions shall be conducted in a
manner to provide, to the maximum extent practical, open and free competition. The recipient
shall be alert to organizational conflicts of interest as well as noncompetitive practices among
contractors that may restrict or eliminate competition or otherwise restrain trade. In order to
ensure objective contractor performance and eliminate unfair competitive advantage, contractors
that develop or draft specifications, requirements, statements of work, and invitations for bids
and/or requests for proposals shall be excluded from competing for such procurements. Awards



                                                  37
shall be made to the bidder or offeror whose bid or offer is responsive to the solicitation and is
most advantageous to the recipient, price, quality and other factors considered. Solicitations
shall clearly set forth all requirements that the bidder or offeror shall fulfill in order for the bid or
offer to be evaluated by the recipient. Any and all bids or offers may be rejected when it is in the
recipient’s interest to do so.”

Circular A-110, paragraph 61, states that awards may be terminated in whole or in part by the
Federal awarding agency if a recipient materially fails to comply with the terms and conditions
of an award.

The 2004 Lead Elimination Action Program grant application states that the selection process for
subgrantees and subcontracts will comply with all Federal regulations.

The 2004 and 2005 Lead Elimination Action Program grant applications state that Citizens
Consulting, Inc., will manage contracts and assist in any contracts with partners, funds, and
financial management activities in accordance with HUD regulations. A system was developed
to track and document activities and expenses. On a monthly basis, funds will be drawn based
on documentation to include timesheets, invoices, receipts, and allocations in support of the
draw.

Finding 2

Section V of the Federal Register Volume 70, No.53, dated March 21, 2005, states that in its
application, applicants are to identify the organizations or entities that will assist the applicant in
implementing the program.

HUD’s regulations at 2 CFR 2424.10 state that HUD adopted, as HUD’s policies, procedures,
and requirements for nonprocurement debarment and suspension, the Federal regulations at 2
CFR Part 180.

HUD’s regulations at 24 CFR 24.1 state that the policies, procedures, and requirements at 2 CFR
Part 2424 permit HUD to take administrative sanctions against employees of recipients under
HUD assistance agreements that violate HUD’s requirements. The sanctions include debarment,
suspension, or limited denial of participation and are authorized by 2 CFR 180.800, 2 CFR
180.700, or 2 CFR 2424.1110, respectively. HUD may impose administrative sanctions based
upon the following conditions:

       Failure to honor contractual obligations or to proceed in accordance with contract
        specifications or HUD regulations (limited denial of participation);
       Violation of any law, regulation, or procedure relating to the application for financial
        assistance, insurance, or guarantee or to the performance of obligations incurred pursuant
        to a grant of financial assistance or pursuant to a conditional or final commitment to
        insure or guarantee (limited denial of participation);
       Violation of the terms of a public agreement or transaction so serious as to affect the
        integrity of an agency program, such as a history of failure to perform or unsatisfactory
        performance of one or more public agreements or transactions (debarment); or



                                                   38
   Any other cause so serious or compelling in nature that it affects the present
    responsibility of a person (debarment).




                                             39