oversight

Morris County, NJ's Community Development Block Grant Program Had Weaknesses in Its Financial and Administrative Controls

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-01-23.

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

OFFICE OF AUDIT
  D
REGION 2
NEW YORK-NEW JERSEY




                      Morris County, NJ

   Community Development Block Grant Program




2013-NY-1003                              JANUARY 23, 2013
OVEMBER xx, 2012
                                                  Issue Date: January 23, 2013

                                                  Audit Report Number: 2013-NY-1003




TO:            Anne Marie Uebbing
               Director, Office of Community Planning and Development, Newark Field Office,
                                     2FD



FROM:          Edgar Moore
               Regional Inspector General for Audit, New York-New Jersey, Region, 2AGA


SUBJECT:       Morris County, NJ’s Community Development Block Grant Program Had
               Weaknesses in Its Financial and Administrative Controls


Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of the Morris County, NJ officials’
administration of their Community Development Block Grant (CDBG) Program to determine
whether Authority officials administered the CDBG Program in accordance with HUD
requirements.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

If you have any questions or comments about this report, please do not hesitate to call me at 212-
264-4174.
                                            January 23, 2013

                                            Morris County, NJ’s Community Development Block
                                            Grant Program Had Weaknesses in Its Financial and
                                            Administrative Controls



Highlights
Audit Report 2013-NY-1003


 What We Audited and Why                       What We Found

We audited Morris County, NJ’s              County officials generally expended CDBG funds for
Community Development Block Grant           eligible activities, but weaknesses in financial and
(CDBG) program based on a risk              administrative controls lessened assurance that program
assessment, which considered the size       administration always complied with HUD regulations and
of the program, the U.S. Department of      HUD’s interest was protected. Specifically, (1) CDBG
Housing and Urban Development’s             funds were obligated or expended for ineligible or
(HUD) risk analysis, and prior audit        unsupported activities, (2) the County’s action plan was not
coverage. The objectives of the audit       properly amended, (3) financial information was not always
were to determine whether County            accurate (4) subrecipients were not always monitored in
officials established adequate controls     compliance with HUD regulations and the County’s policies,
to ensure that CDBG funds were              and (5) liens were not imposed on assisted properties.
expended for eligible activities and that   Consequently, (1) $140,705 was obligated and expended for
the program was administered in             unsupported activities, and $19,500 was expended for
accordance with HUD regulations.            ineligible activities; (2) neither the public nor HUD was
                                            aware of the change in the use of more than $400,000 for
  What We Recommend                         previously approved activities; (3) County officials lacked
                                            assurance that the financial data submitted by the County
                                            accurately reflected its performance; (4) subrecipients were
We recommend that the Director of           not effectively monitored to ensure that the activites had
HUD’s New Jersey Office of                  been accomplished according to program requirements; and
Community Planning and Development (5) HUD’s interest in a property assisted with $71,729 in
instruct County officials to (1) provide CDBG funds was not protected. These conditions existed
documentation to support the obligation due to County officials’ unfamiliarity with CDBG
and expenditure of $140,705 or              regulations and implementation of inadequate financial and
reimburse the County’s CDBG line of         administrative controls.
credit, (2) reimburse the County’s
CDBG line of credit for the $19,500 in
ineligible assistance, (3) record a lien or
other notice of record on the real
property acquired with CDBG funds,
and (4) strengthen financial and
administrative controls to ensure that
CDBG funds are used in accordance
with applicable regulations.
                            TABLE OF CONTENTS

Background and Objectives                                                     3

Results of Audit
      Finding 1: Funds Were Generally Expended for Eligible Activities        4
      Finding 2: There Were Instances of Noncompliance with HUD Regulations   8

Scope and Methodology                                                         12

Internal Controls                                                             14

Appendixes
A.    Schedule of Questioned Costs and Funds to Be Put to Better Use          16
B.    Auditee Comments and OIG’s Evaluation                                   17




                                            2
                     BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) program was authorized by Title 1 of the
Housing and Community Development Act of 1974 (Public Law 93-383) to provide
communities with resources to address a wide range of unique community development needs.
The program provides grants on a formula basis to entitled States, cities, and counties to develop
viable urban communities by providing decent housing, suitable living environments, and
expanding economic opportunities, principally for low- and moderate-income persons. Grantees
have the flexibility to develop their own programs and funding priorities. However, to be
eligible for CDBG funding, a grantee’s activity (other than program administration and planning)
must meet one of the CDBG program’s three national objectives: (1) benefit low- and moderate-
income persons, (2) aid in preventing or eliminating slums or blight, or (3) address a need with a
particular urgency that poses a serious and immediate threat to the health and welfare of the
community for which other financial resources are not available to meet such needs.

Morris County, located in northern New Jersey, has 492,276 residents spread among 39
municipalities. The County is governed by a seven-member Board of Chosen Freeholders,
elected to 3-year terms. The Freeholder Board sets policies that are carried out by the county
administrator working through six umbrella departments, which form a “cabinet” to conduct day-
to-day operations.

The U.S. Department of Housing and Urban Development (HUD) awarded Morris County more
than $2.4 and $2 million in CDBG funds for program years 2010 and 2011, respectively. The
County designated the Division of Community Development under the Department of Planning
and Development to administer its CDBG program. In addition to administrative costs, the
County’s CDBG funds are mainly allocated to four major activities: housing, public services,
public facilities and improvements, and homeowner rehabilitation. County officials implement
these activities through various agencies, as well as with municipalities and nonprofit
organizations.

The objectives of the audit were to determine whether County officials established adequate
controls to ensure that CDBG funds were expended for eligible activities and that the program
was administered in accordance with HUD regulations.




                                                3
                                  RESULTS OF AUDIT


Finding 1: Funds Were Generally Expended for Eligible Activities
While County officials generally expended CDBG funds for eligible activities, disbursements
were made for ineligible and unsupported activities, and financial data were not always
accurately maintained. Specifically, County officials disbursed $19,500 for an ineligible loan,
$209,735 for costs that were inadequately supported, and $10,970 for unreasonable or
unnecessary costs, and officials inaccurately reported financial data to HUD. These conditions
occurred because of officials’ unfamiliarity with HUD regulations and implementation of
inadequate financial and administrative controls. As a result, funds were not available for other
eligible activities, and County officials lacked assurance that all costs incurred were for eligible
activities and that financial data submitted to HUD accurately reflected its performance.


 Rehabilitation Loan to
 Ineligible Homeowner

               County officials disbursed $19,500 to a homeowner who was ineligible for a
               housing rehabilitation loan. The County’s housing rehabilitation loan program
               disbursed funds to provide decent housing for low- and moderate-income
               homeowners who reside within the participating municipalities of the Morris
               County Consortium, and the County’s policy requires that assisted homeowners
               not own more than one property. However, the County’s application form did not
               advise applicant homeowners that they were required to disclose ownership of
               additional properties or to certify that the information provided was truthful. As a
               result, one homeowner received a $19,500 loan for septic system rehabilitation
               while owning another property in the County, thus preventing $19,500 from being
               available for eligible CDBG rehabilitation loans.

 Inadequately Supported
 Drawdown and Disbursements

               County officials lacked documentation that $49,735 was drawn down for an
               eligible activity. Regulations at 24 CFR (Code of Federal Regulations) 85.21
               specify that Federal funds must be administered on a reimbursement basis, and
               regulations at 2 CFR Part 225 require that allowable costs be adequately
               documented. However, County officials drew down funds for the housing
               rehabilitation program based on estimated costs rather than reimbursement of
               actual costs. As a result, they drew down $49,735 more than the actual
               disbursements recorded in the general ledger for program years 2009 and 2010.
               This deficiency occurred because County officials lacked controls to ensure that


                                                  4
                  the use of funds was adequately supported and drawdowns were made as close as
                  possible to the time of making disbursements.

                  In addition, County officials reimbursed $80,000 to a subrecipient for a street
                  improvement project without adequate support that the project had been
                  completed and the associated costs were incurred for the benefit of the low- and
                  moderate-income area specified in the subrecipient agreement. The project was
                  multisource funded, and reimbursement was made without adequate
                  documentation that the $80,000 in CDBG funds was for the CDBG-assisted
                  portion. As a result, County officials lacked assurance that the $80,000 was used
                  for the CDBG-funded portion and benefited only the low- and moderate-income
                  area. This deficiency occurred because weaknesses in financial controls allowed
                  officials to disburse funds without assurance that the program requirements were
                  met and the use of CDBG funds was properly supported. County officials agreed
                  that the supporting documentation was not adequate and during our audit,
                  obtained additional documents from the subrecipient that adequately supported
                  the $80,000 disbursement, thus ensuring that these funds were used for their
                  intended purpose.

                  County officials awarded another $80,000 for a public improvement project
                  without adequate documentation showing that it would primarily benefit low- and
                  moderate-income residents. While County officials conducted a survey to
                  identify low- and moderate-income residents, the survey was not conducted in
                  accordance with 24 CFR 570.208. These regulations require that the survey be
                  conducted in a manner that meets standards of statistical reliability that are
                  comparable to those of the decennial census1 data and be approved by HUD.
                  However, while the survey was designed to be conducted for 61 households, the
                  results were based upon 51 responses; therefore, the survey did not meet the
                  standards of statistical reliability. In addition, the survey was not reviewed by
                  HUD to determine its reasonableness and accuracy. This deficiency occurred
                  because County officials were not aware of CDBG program requirements related
                  to conducting a survey to determine a low- and moderate-income service area.
                  Therefore, County officials lacked assurance that the $80,000 awarded for the
                  public improvement was an eligible use of CDBG funds.

    Unreasonable or Unnecessary
    Cost

                  County officials awarded a subrecipient $10,970 more in CDBG funds than
                  requested for a public facility improvement activity to replace carpet at a health
                  facility. Subpart C of 2 CFR Part 225 states that costs must be necessary and
                  reasonable to be allowable under Federal awards. However, in this instance, the

1
 A decennial census is conducted every 10 years, as required by the U.S. Constitution, and is used to make
decisions affecting legislation and Federal spending on projects and programs that are vital to the health and welfare
of the U.S. population and economy.

                                                          5
             total cost of the project was estimated to be $21,000, and the subrecipient
             requested $9,030 to supplement the $11,970 it was going to receive from another
             source. However, County officials awarded $20,000 because the County’s policy
             provides that the minimum grant for a public facility improvement is $20,000. As
             a result, County officials could not assure HUD that the $10,970 was incurred for
             reasonable or necessary costs.

Inaccurate Financial Reporting

             Regulations at 24 CFR 85.20 require that CDBG recipients maintain a financial
             management system that provides accurate, current, and complete records of
             financial results. However, the County’s records did not always reflect the results
             of actual operations or reconcile with what was reported to HUD. For example,
             County records for program year 2009 reported $3,500 more in program income
             than was earned. Additionally the County’s action plan for 2010 did not include
             $100,000 for rehabilitation delivery costs. The summary of the County’s
             consolidated annual performance and evaluation report for program year 2010
             stated that total expenditures would be less than $1.2 million, while the
             supplemental report indicated that the expenditures were more than $2.5 million.
             As a result, HUD was not provided with accurate data to adequately evaluate the
             performance of the County’s CDBG program. These inaccuracies resulted from
             insufficient controls over financial reporting and human error. Upon being
             informed of these issues during our audit, County officials agreed to correct them.

Conclusion

             County officials generally expended CDBG funds for eligible activities; however,
             officials’ unfamiliarity with HUD regulations and implementation of inadequate
             financial and administrtaive controls resulted in some ineligible, unreasonable,
             and unsupported costs, as well as inaccurate reporting. As a result, County
             officials could not assure HUD that all disbursements were for eligible activities
             and the financial data submitted to HUD accurately reflected the County’s
             performance.

Recommendations

             We recommend that the Director of HUD’s Newark, NJ, Office of Community
             Planning and Development instruct County Officials to

             1A. Reimburse the County’s CDBG line of credit from non-Federal funds for the
                 $19,500 disbursed for an ineligible rehabilitation loan.

             1B. Strengthen controls over the County’s homeowner rehabilitation loan
                 application procedures by revising the application to inform applicants of the
                 prohibition against ownership of another property and include a reference to

                                              6
    possible imposition of civil monetary penalties under the False Claims Act
    for anyone providing false information.

1C. Provide documentation to support that the $49,735 drawdown was expended
    for eligible CDBG costs and if such support cannot be provided, repay the
    amount from non-Federal funds.

1D. Strengthen controls over reimbursement procedures to ensure that
    disbursement of CDBG funds, such as the $80,000 that was disbursed for the
    street improvement project without adequate support, is made based upon
    documentation adequate to ensure that the funds were used for eligible
    purposes and the costs incurred were reasonable and properly supported, thus
    ensuring that these funds were used for their intended purpose.

1E. Provide documentation to support that the $80,000 obligated for the public
    improvement project is an eligible expense. If it is not deemed eligible, the
    funds should be deobligated.

1F. Strengthen the County’s internal controls to ensure that the County
    documents support that CDBG funds will be used to assist projects in a low-
    and moderate-income service area in accordance with the CDBG program
    requirements before obligating and disbursing the funds.

1G. Provide documentation showing that the $10,970 disbursed in excess of a
    subrecipient’s request was reasonable and necessary. If it is deemed
    unreasonable or unnecessary, the funds should be repaid to the County’s
    CDBG line of credit from non-Federal funds.

1H. Strengthen internal controls over the County’s financial reporting to ensure
    that financial information submitted to HUD is accurate, current, and
    complete.

1I. Request CDBG financial management training from the HUD Office of
    Community Planning and Development’s field office staff.




                                 7
Finding 2: There Were Instances of Noncompliance with HUD
           Regulations
County officials did not always administer the CDBG program in accordance with HUD
regulations. Specifically, they did not (1) include quantifiable performance indicators in
subrecipient agreements or adequately track subrecipient performance, (2) adequately monitor
subrecipients as required by HUD regulations and the County’s monitoring policy, and (3) seek
HUD approval or request public comment before canceling or modifying HUD-approved
activities. We attribute these deficiencies to County officials’ unfamiliarity with CDBG
regulations and inadequate implementation of policies and procedures. In addition, procedures
were not in place to impose a lien on a CDBG-assisted real property. Consequently (1) the
subrecipient agreements were insufficient to provide a sound basis for the County to effectively
monitor performance of subrecipients, (2) neither HUD nor County officials were assured that
activities were accomplished according to program requirements, (3) neither the public nor HUD
was made aware of the change in the use of more than $400,000 for previously approved
activities, and (4) neither HUD nor the County’s interest was protected against future disposition
of the property assisted with $71,729 in CDBG funds,.


 Inadequate Subrecipient
 Agreements

               County officials executed inadequate agreements with subrecipients contrary to
               HUD regulations and the County’s own policy. Regulations at 24 CFR
               570.503(b)(1) specify that the subrecipient agreement must include a description
               of the work to be performed, a schedule for completing the work, and a budget.
               These items must be in sufficient detail to provide a sound basis for the recipient
               to effectively monitor performance under the agreement. However, while a 2009
               monitoring review by HUD reported that the scope of services written into the
               County’s subrecipient agreements lacked quantifiable performance indicators and
               the County agreed to include indicators corresponding to the nature of the activity
               and the national objective, 6 of the 14 subrecipient agreements reviewed lacked
               such information. In addition, while the County had amended its procedures to
               extend the time of performance for the subrecipients that were not able to
               complete projects within the timeframe specified in the agreements a few years
               earlier, County officials executed subrecipient agreements that referenced the
               prior procedures. Therefore, the subrecipient agreements did not provide a sound
               basis for the County to effectively monitor subrecipient performance as required
               by 24 CFR 570.503(b)(1). We attribute these deficiencies to County officials’
               failure to implement adequate financial and administrtaive controls that would
               provide a sound basis for monitoring subrecipients.




                                                8
Inadequate Subrecipient
Monitoring

            County officials did not monitor subrecipient performance or take action when
            performance was inadequate as required by HUD regulations and the County’s
            own policy. Regulations at 24 CFR 85.40 require that grantees monitor
            subgrantee-supported activities to ensure compliance with applicable Federal
            requirements and that performance goals are achieved, and the monitoring must
            be over each program, function, or activity. Further, the County’s policy provides
            detailed monitoring procedures for its specific CDBG projects, including annual
            reviews. However, County officials did not conduct an annual monitoring review
            of their social services subrecipients or perform onsite inspections of their public
            improvement projects. Further, they did not obtain detailed accomplishment data
            from 9 of 14 subrecipients to aid in evaluating subrecipient performance and
            failed to take action when 5 of the subrecipients did not complete their projects
            within the timeframe specified in the subrecipient agreements. County officials
            stated that they were under the impression that CDBG activities needed to be
            monitored only every other year. As a result, they could not assure HUD that
            their activities were accomplished according to program requirements. We
            attribute these deficiencies to County officials’ unfamiliarity with HUD and
            County regulations.

Approved Projects Changed
Without Proper Notification

            County officials canceled and modified their planned CDBG activities without
            notifying HUD and the public as required. Regulations at 24 CFR 570.302 and
            91.505 and the County’s policy require that HUD approval be obtained and the
            public be notified of any substantial amendment to the CDBG action plan. HUD
            allows grantees to define what would be a substantial amendment, and County
            officials defined it as being when a project is canceled or a new project is added.
            However, County officials transferred approximately $214,000 and $235,000 to
            the homeowner rehabilitation activity, which was originally allocated $300,000
            and $77,940, in program years 2010 and 2009, thus increasing the budgets to
            $514,000 and $312,940, respectively, without notifying HUD or the public. As a
            result, multiple activities were either canceled or had a significant funding
            decrease after HUD had already approved the action plans. Therefore, more than
            $400,000 in CDBG funds may not have been used for the activities previously
            reported to the public and approved by HUD. This deficiency existed because
            County officials were not familiar with HUD regulations and did not establish and
            enforce adequate procedures for processing program amendments.




                                             9
Lien Not Recorded on Property
Acquired With CDBG Funds

             County officials disbursed $71,729 in CDBG funds to a nonprofit organization for
             the acquisition of real property to construct affordable housing without imposing
             a lien or a deed restriction on the property. Regulations at 24 CFR 84.37 provide
             that HUD may require recipients to record liens or other appropriate notices of
             record to indicate that the real property has been acquired with Federal funds and
             that use and disposition conditions apply to the property. Further, the County’s
             housing rehabilitation policy requires that assisted property have a lien or deed
             restriction. This deficiency occurred because County officials believed that
             Regulations at 24 CFR 84.37 only suggest that a lien may be imposed. Therefore,
             neither HUD nor the County’s interest of $71,729 was protected against any
             future disposition of the property.

Conclusion

             County officials did not always administer the CDBG program in accordance with
             HUD regulations or the County’s own policy. Consequently, County officials
             lacked assurance that their CDBG-funded activities were accomplished according
             to program requirements, and the public and HUD were not aware of significant
             amendments to the County’s action plan. In addition, controls were not
             established to ensure that HUD’s or the County’s interest in real property
             purchased with CDBG funds was protected. We attribute these deficiencies to
             County officials’ unfamiliarity with CDBG regulations and implementation of
             inadequate financial and administrative controls.

Recommendations

             We recommend that the Director of HUD’s Newark, NJ, Office of Community
             Planning and Development instruct County Officials to

             2A. Record a lien or other appropriate notice of record on the real property
                 acquired with CDBG funds to ensure that HUD’s and the County’s interest in
                 the property is adequately protected and that the $71,729 in CDBG funds
                 used to purchase the property would be reimbursed to the program upon
                 disposition of the property. If a lien or other appropriate notice of record is
                 not recorded, County officials should reimburse the County’s CDBG line of
                 credit for this amount from non-Federal funds, thus putting these funds to
                 better use.

             2B. Strengthen the County’s internal controls to ensure that liens or other
                 appropriate notices of record are imposed on properties acquired with CDBG
                 funds to ensure that HUD’s interest is properly protected.


                                             10
2C. Strengthen controls to ensure that quantifiable performance measurement
    indicators are developed and included in all subrecipient agreements as a
    basis for evaluating subrecipient performance against the specific activity
    and applicable CDBG national objectives.

2D. Strengthen subrecipient monitoring procedures to provide assurance that
    subrecipients will comply with HUD regulations and subrecipient agreements
    and that appropriate action is taken when subrecipients do not comply with
    subrecipient agreements.

2E. Strengthen procedures to ensure that HUD and County residents will be
    properly informed of any significant amendments to the County’s CDBG
    action plans.

2F. Establish the dollar amount of funds that represents a substantial change in
    funding and include it in the County’s citizen participation plan.

2G. Request training on CDBG administrative requirements from the HUD
    Office of Community Planning and Development’s field office staff.




                                11
                             SCOPE AND METHODOLOGY

The audit focused on whether County officials established and implemented adequate controls to
ensure that the CDBG program was administered in accordance with program requirements. We
performed the audit fieldwork from July to September 2012 at the County’s offices at 30
Schuyler Place, Morristown, NJ.

To accomplish our objectives, we

       Reviewed relevant CDBG program requirements and applicable Federal regulations to
        gain an understanding of CDBG administration requirements.

       Interviewed staff from the HUD Newark, NJ, Office of Community Planning and
        Development and the County’s Division of Community Development.

       Obtained an understanding of the County’s management controls and procedures through
        analysis of its responses to management control questionnaires.

       Reviewed the County’s consolidated annual performance and evaluation reports, action
        plans, and County Board of Chosen Freeholders’ resolution of CDBG activities for
        program years 2010 and 2011 to gather data on the County’s expenditures.

       Reviewed the County’s audited financial statements for the fiscal years ending December
        31, 2010 and 2011, to further our understanding of the County’s programs and identify
        any issues for follow-up.

       Analyzed reports from HUD’s computer systems, including the Integrated Disbursement
        and Information System,2 to document County disbursements and activities. Our
        assessment of the reliability of the data in these systems was limited to the data sampled,
        which were reconciled to the County’s records.

       Reviewed the County’s organizational chart; citizen participation plan; and monitoring,
        procurement, and accounting policies.

       Reviewed 14 of 98 subrecipient agreements and the County’s monitoring reports of its
        subrecipients during program years 2010 and 2011.

       Selected a nonstatistical sample of 15 CDBG activities with an authorized amount of
        more than $1.34 million to test for compliance with HUD and County regulations and
        policy. This represented 30 percent of the $4.5 million received by the County and
        used to fund 66 activities during program years 2010 and 2011. The sample was

2
  The Integrated Disbursement and Information System is a nationwide database of current information regarding
CDBG activities underway across the nation, including funding and accomplishment data. HUD uses this
information to report to Congress and to monitor grantees.

                                                       12
       designed to select a cross section of various activities based upon spending,
       performance status, and the nature of the activities.

The audit generally covered the period July 1, 2010, through June 30, 2012, and was extended as
needed to accomplish the objectives.

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




                                               13
                              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:

                     Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

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

                     Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

                     Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

               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.


                                                 14
Significant Deficiencies

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

                   The County did not establish or implement adequate internal controls to
                    ensure that its program met its objectives (see findings 1 and 2).

                   The County did not establish or implement adequate internal controls to
                    ensure that resource use was consistent with laws and regulations (see
                    findings 1 and 2).

                   The County did not establish or implement adequate internal controls to
                    ensure that resources were safeguarded against waste, loss, and misuse (see
                    findings 1 and 2).

                   The County did not establish or implement adequate internal controls to
                    ensure that valid and reliable data were obtained, maintained, and fairly
                    disclosed in reports (see finding 2).




                                              15
                                     APPENDIXES

Appendix A

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

                                                               Unreasonable
     Recommendation                           Unsupported                       Funds to be put
                           Ineligible 1/                            or
         number                                   2/                            to better use 4/
                                                              unnecessary 3/
           1A                $19,500
           1C                                   $49,735
           1D                                                                            $80,000
           1E                                      80,000
           1G                                                    $10,970
           2A                                                                            71,729
                             $19,500           $129,735          $10,970               $151,729

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.

3/    Unreasonable or unnecessary costs are those costs not generally recognized as ordinary,
      prudent, relevant, or necessary within established practices. Unreasonable costs exceed
      the costs that would be incurred by a prudent person in conducting a competitive
      business.

4/    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. If the recommendation to evaluate the eligibility of the
      public improvement project is implemented, HUD would be assured that the $80,000 was
      used for its intended purpose, and if a lien is recorded on the assisted property as
      recommended, HUD’s $71,729 interest would be protected, thus ensuring that funds
      would be available for other CDBG-eligible activities.


                                              16
    Appendix B

            AUDITEE COMMENTS AND OIG’S EVALUATION

            Ref to OIG Evaluation        Auditee Comments




Comment 1




                                    17
Comment 1




Comment 2




Comment 1




Comment 3




            18
Comment 3




            19
Comment 4




Comment 5




            20
Comment 5




Comment 4




            21
Comment 6




Comment 4




Comment 4




            22
Comment 7




Comment 4




Comment 4




Comment 4




            23
Comment 4




Comment 4




Comment 4




            24
                         OIG Evaluation of Auditee Comments

Comment 1   County officials acknowledged that the $19,500 rehabilitation loan was provided
            to a homeowner who owned a second residence, which the County’s rehabilitation
            program policy prohibited. However, County officials maintain that the loan was
            eligible since the owner was income eligible and the assistance was provided for
            his primary residence as required by the program regulations. Nevertheless,
            County officials stated that the residence for which the loan was provided is for
            sale, and they propose to either recoup the $19,500 for the CDBG program from
            the sale proceeds or allow the lien to expire on 12/17/2020. This issue will be
            addressed during the audit resolution process with HUD officials.

Comment 2   OIG acknowledges that it may not be feasible for the County to identify all
            potential applicant misrepresentations, and as such has recommended that
            applicants be informed of possible imposition of civil monetary penalties under
            the False Claims Act for falsification of applicant information. County officials
            agreed to revise their current rehabilitation application form to disclose this
            possible liability to applicants, thus putting the onus on potential applicants.
            County officials’ comments are responsive to our recommendation.

Comment 3   County officials stated that reconciliation of the Division’s files, IDIS reports and
            the Treasurer’s grant reports is one of the accounting safeguards in place, and
            described their current rehabilitation program drawdown and disbursement
            procedures. County officials did agree to tighten their internal controls to keep
            rehabilitation program cash balances to a minimum and disburse reimbursements
            promptly. However, County officials did not provide documentation to address
            the $49,735 found to have been drawndown based upon estimated as opposed to
            actual costs, and thus regarded as an unsupported expense. This issue will be
            addressed during the audit resolution process with HUD officials.

Comment 4   County officials described planned corrective actions which are responsive to our
            recommendation.

Comment 5   County officials maintain that the $80,000 obligation for a public improvement
            project is an eligible CDBG program expense. While the nature of the obligation
            is an eligible CDBG program expense, County officials did not comply with HUD
            procedures prescribed in 24 CFR 570.208 that require any surveys to meet the
            statistical reliability of the decennial census and be approved by HUD. This issue
            will be addressed during the audit resolution process with HUD officials. County
            officials agreed to improve its internal controls by communicating with HUD
            field office in the future as to the survey vehicle used and outcome of the survey.

Comment 6   County officials explained that the subrecipient had experienced financial
            hardship and therefore the $10,970 disbursed in excess of the subrecipient’s initial
            request was reasonable and necessary. However, County officials could not
            locate any additional documentation to support their explanation. County

                                             25
            officials are attempting to obtain such documentation from the subrecipient;
            therefore, this issue will be resolved during the audit resolution process with
            HUD.

Comment 7   We acknowledge that HUD regulations at 24 CFR 84.37 use the word “may”,
            which allows grantees the option to record a lien or other appropriate notice of
            record to indicate that personal or real property has been acquired or improved
            with federal funds and that use and disposition conditions apply to the property;
            therefore, we have revised the report to not cite this as an instance of
            noncompliance, but as a need to strengthen controls to better protect HUD’s
            interest. Since grantees have a fiduciary responsibility to safeguard federal funds
            and ensure that HUD’s interest is properly protected, we believe that an
            appropriate notice of record should have been executed, as is done for the
            County’s housing rehabilitation program. Further, County officials stated that
            they have taken action to record a lien as suggested.




                                             26