oversight

New Image Emergency Shelter, Long Beach, CA, Did Not Adequately Support HOPWA Salary and Operating Expenses

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-01-30.

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

         New Image Emergency Shelter,
               Long Beach, CA
        Housing Opportunities for Persons With AIDS




Office of Audit, Region 9      Audit Report Number: 2015-LA-1001
Los Angeles, CA                                  January 30, 2015
To:            William Vasquez, Director, Los Angeles Office of Community Planning and
               Development, 9DD

               //SIGNED//
From:          Tanya E. Schulze, Regional Inspector General for Audit, 9DGA
Subject:       New Image Emergency Shelter, Long Beach, CA, Did Not Adequately Support
               HOPWA Salary and Operating Expenses


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of New Image Emergency Shelter’s Housing
Opportunity for Persons With AIDS (HOPWA) program.
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 8M, 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
213-534-2471.
                    Audit Report Number: 2015-LA-1001
                    Date: January 30, 2015

                    New Image Emergency Shelter, Long Beach, CA, Did Not Adequately
                    Support HOPWA Salary and Operating Expenses




Highlights

What We Audited and Why
We audited New Image Emergency Shelter’s Housing Opportunities for Persons With AIDS
(HOPWA) program based on a referral from the U.S. Department of Housing and Urban
Development, Office of Inspector General’s (HUD OIG) Office of Investigation and a citizen
complaint, alleging that New Image lacked adequate documentation to support program
expenditures and employee salaries. Our objective was to determine whether New Image
administered and expended HOPWA grant funds in accordance with HUD regulations.

What We Found
Some of the allegations in the complaint had merit. New Image did not adequately support its
cost allocations to its HOPWA program activities in accordance with applicable HUD
requirements. It was also unable to properly support $183,642 in operating expenditures and
lease costs and $82,563 in employee salaries allocated to its HOPWA program activities.

What We Recommend
We recommend that the Director of HUD’s Los Angeles Office of Community Planning and
Development require New Image and the City of Los Angeles Housing and Community
Investment Department to provide adequate supporting documentation for (1) the $82,563 in
unsupported salary costs and (2) the $183,642 in operating expenditures and lease costs or repay
the HOPWA program from non-Federal funds.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: New Image Did Not Adequately Support HOPWA Salary and Operating
         Expenses ............................................................................................................................. 4

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................9

Appendixes ..............................................................................................................10
         A. Schedule of Questioned Costs .................................................................................. 10
         B. Auditee Comments and OIG’s Evaluation ............................................................. 11
         C. Criteria ....................................................................................................................... 14
         D. Summary of Questioned Costs Tables .................................................................... 16




                                                                      2
Background and Objective
New Image Emergency Shelter for the Homeless, Inc. was incorporated in 1990 as a California not-
for-profit organization. New Image is a tax-exempt organization under section 501C(3) of the
Internal Revenue Code. New Image operates exclusively as a charitable organization providing
homeless clients in Los Angeles County with a fresh start and the support needed to acquire services
through the following programs:

       •   Comprehensive case management services;
       •   Emergency food and shelter services;
       •   Emergency hotel, motel, and restaurant vouchering;
       •   Job referral and placement assistance; and
       •   Rental assistance and affordable housing assistance.
The homeless population served by New Image includes individuals, married couples, families with
children, HIV-infected persons and their families, and persons with disabilities. The organization is
supported primarily through grants from the Los Angeles Homeless Services Authority and the City
of Los Angeles Housing and Community Investment Department as well as donor contributions.
HOPWA Program
The Housing Opportunities for Persons With AIDS (HOPWA) program is the only Federal program
dedicated to the housing needs of people living with HIV-AIDS. Under the HOPWA program,
HUD makes grants to local communities, States, and nonprofit organizations for projects that
benefit low-income persons living with HIV-AIDS and their families.
New Image received its HOPWA funds from the City in accordance with a subgrantee agreement.
The City was, therefore, responsible for monitoring New Image’s activity, drawing down the
HOPWA funds, and allocating them to New Image. Program year 2012 was the final year that the
City provided HOPWA funds to New Image. The table below summarizes the funding awarded to
New Image’s HOPWA program throughout our audit period.

  Program year            IDIS* number                  Grant number                Funding
      2010           12753, 12756 & 12757                CAH10F005                      $368,718
      2011           12753, 12756 &12757                 CAH11F005                      $569,454
      2012           12753, 12756, 12757,                CAH12F005                      $184,792
                     13338, 13339 & 13340
                                                            Total funds                $1,122,964
* IDIS = HUD’s Integrated Disbursement and Information System. This system allows grantees to
request grant funding from HUD and report on what is accomplished with these funds.

The objective of our audit was to determine whether New Image administered and expended
HOPWA grant funds in accordance with HUD regulations.




                                                  3
Results of Audit

Finding 1: New Image Did Not Adequately Support HOPWA
Salary and Operating Expenses
New Image did not provide adequate support for employee salary expenses and operating
expenses in accordance with applicable HUD requirements under 2 CFR (Code of Federal
Regulations) Part 230 (see appendix C). Specifically, New Image did not provide written
documentation to adequately support its employee salary allocation and did not provide adequate
documentation or properly allocate program operating expenses and lease costs to its HOPWA
program. This condition occurred because New Image did not appear sufficiently
knowledgeable of HUD requirements, maintain written HOPWA policies, or provide a sufficient
basis for the allocations. As a result, $266,205 in program funds was expended for unsupported
costs that would have been available for eligible HOPWA program activities.
New Image Did Not Properly Support Its Salary Expenses
New Image did not have a sufficient basis to allocate employee salaries to its HOPWA program.
We reviewed a nonstatistical sample of employee timesheets and the cost allocation plan related
to salaries for New Image’s HOPWA activities for fiscal years 2011 and 2012. New Image
could not provide reasonable documentation to support that the charges for indirect employee
salaries were for actual time spent on HOPWA activities or in accordance with a reasonable
allocation methodology. Although New Image’s indirect staff members (executive director,
former chief financial officer, human resources director, and accountant) recorded hours
attributed to each of its programs on their timesheets, they used predetermined estimates to
record their time rather than actual hours worked, as would be required by 2 CFR 230, Appendix
B Section 8.m, Compensation for Personal Services.
Since these staff members were indirect, New Image was allowed to allocate the salary costs;
however, New Image could not explain how these hourly distributions were determined. It did
not have a written methodology supporting how it derived the salary allocation percentages to
show they were reasonable as required by 2 CFR Part 230, appendix A. For example, the salary
allocation percentage New Image charged to the program for its accountant varied throughout
our audit period, from 34.74 percent at the beginning of 2011 to 15 percent by the end of 2012
(see appendix D, table 2). Different allocation percentages were used for other indirect staff
members, with no written explanation of how these percentages were derived for their salaries.
As a result, New Image charged $82,563 in questionable salary costs to the HOPWA program
(see appendix D, table 1).




                                               4
New Image Lacked Support for Operating and Lease Allocations
New Image’s operating expenditures from January 2011 to November 2012 were not adequately
supported, as required by 2 CFR Part 230, Appendix A, part D, Allocation of Indirect Costs -
1.b. We reviewed a nonstatistical sample of expenditures and the supporting documentation,
which consisted of payments for both the housing-meal and case management portions of the
HOPWA contracts. New Image allocated its lease costs and other operating expenditures, such
as cell phones, office supplies, and insurance, to different contracts and funding source (for
example, the Authority, HOPWA, etc.).

For example, New Image’s main office rent for June 2012 totaled $6,180. New Image allocated
50 percent ($3,090) of the cost to the HOPWA housing and meal program. The remaining
amount was allocated to its Authority contract (15 percent) and general and administrative
expenses (35 percent). Similarly, New Image’s intake facility rent for June 2012 allocated 15
percent ($3,623) of the cost to the HOPWA case management program. The remaining amount
was allocated to its Authority contract (85 percent). Overall, the combined lease cost allocated
to HOPWA for the month was 22 percent (see appendix D, table 4).

Also, New Image used different allocation rates for various office supply vendors in 2011 and
2012. For instance, it applied a rate of 12 percent for Office Max, 30 percent for Staples, and 20
percent for Xerox.

However, New Image did not provide a written explanation or basis for its allocation of these
costs to the HOPWA program to show that the allocations were reasonable. As a result, the
operating and lease costs totaling $183,642, which New Image charged to the HOPWA program
and were approved by the City between January 2011 and November 2012, were unsupported
(see appendix D, table 3).

Conclusion
New Image did not adequately support its cost allocations to its HOPWA program activities in
accordance with applicable HUD requirements. This condition occurred because New Image did
not appear sufficiently knowledgeable of HUD requirements or maintain adequate written
policies and procedures for salary and operating expenditure allocations. As a result, $266,205
in program costs ($82,563 + $183,642) was expended for unsupported costs that would have
been available for eligible HOPWA program activity. Since the City terminated its HOPWA
contract with New Image in November 2012, we excluded a recommendation to develop
sufficient allocation policies and procedures for the HOPWA program.
Recommendations
We recommend that the Director of HUD’s Los Angeles Office of Community Planning and
Development require New Image and the City of Los Angeles Housing and Community
Investment Department to
       1A.     Provide adequate supporting documentation for the $82,563 in unsupported salary
               costs or repay the HOPWA program from non-Federal funds.




                                                 5
1B.   Provide adequate supporting documentation for the $183,642 in unsupported
      operating expenses and lease costs or repay the HOPWA program from non-
      Federal funds.




                                     6
Scope and Methodology
We performed our onsite audit work at the City of Los Angeles Housing and Community
Investment Department in Los Angeles, CA, and New Image’s main office in Long Beach, CA,
from May 16 to November 12, 2014. Our review generally covered the period January 1, 2011,
to November 30, 2012, and was expanded as necessary.
To accomplish our objective, we performed the following:
•   Interviewed pertinent New Image employees, City personnel, and HUD Office of
    Community Planning and Development staff involved with the administration of the
    HOPWA program;
•   Reviewed New Image’s payroll registers and related timesheets;
•   Reviewed New Image’s cash requests and supporting documentation for HOPWA
    expenditures;
•   Reviewed Integrated Disbursement and Information System performance reports provided by
    HUD;
•   Reviewed relevant financial and accounting procedures and records;
•   Reviewed New Image’s organizational charts;
•   Reviewed New Image’s audited financial statement for fiscal year 2011; and
•   Reviewed applicable HOPWA regulations, including CFR requirements.
We tested New Image’s salaries and benefits for management and administration staff to
determine whether they were properly charged to the HOPWA program. New Image billed a
total of $82,563 in salaries and benefits to the HOPWA program. We nonstatistically sampled 6
months of management and administration salaries and benefits that were billed to the City in
2011 (March, April, May, August, November, and December) and 8 months of salaries and
benefits in 2012 (January, February, March, April, May June, August, and October). The total
salaries and benefits sampled for fiscal year 2011 amounted to $21,053 and for fiscal year 2012
amounted to $33,642, for a total of $54,695 ($21,053 + $33,642) in salaries and benefits tested.
In total, we nonstatistically sampled 66 percent ($54,695 / $82,563) of the salaries for
management and administrative staff.
Also, the total amount of HOPWA funds awarded to New Image for operating expenditures and
lease costs for fiscal years 2012 and 2011 were $64,068 and $119,574, respectively, or $183,642
($64,068 + $119,574) in total operating expenditures. To determine whether the total operating
expenditures were eligible and adequately supported, we tested a nonstatistical sample of months
(June 2012 and April, July, and August 2011) and reviewed the supporting documentation for
operating expenses and lease costs. The percentage of expenditures sampled amounted to 19
percent ($12,315 / $64,068) for fiscal year 2012 and 24 percent ($28,547 / $119,574) for fiscal
year 2011, or $40,862 ($12,315 + $28,547) of the expenditures tested. In total, we sampled 22


                                                7
percent ($40,862 / $183,642) of the total population of HOPWA operating expenditures and
lease costs.
We found that data contained in source documentation provided by New Image related to and
agreed with data contained in the City’s automated system reports and to HUD’s Integrated
Disbursement and Information System data. We, therefore, assessed the data to be sufficiently
reliable for our use during the audit.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                8
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:

•   Reliability of financial information – Policies and procedures that management has
    implemented to reasonably ensure that relevant and reliable information is obtained to
    adequately support program expenditures.
•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that program charges are supported and comply with
    program funding guidelines and restrictions.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   New Image did not maintain sufficient policies and procedures to ensure that costs allocated
    to the HOPWA program were adequately supported and in accordance with HUD
    requirements (finding).




                                                  9
Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 1/
                               number
                                   1A              $82,563
                                   1B              $183,642

                                 Totals            $266,205



1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                              10
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1


Comment 2


Comment 3




                               11
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 5




                               12
                          OIG Evaluation of Auditee Comments


Comment 1:   We acknowledge that the City did disallow some costs that were submitted by
             New Image, and this was taken into account in OIG’s unsupported questioned
             cost amount. However, subsequent to the exit conference, the City provided a
             spreadsheet listing additional amounts. The City claimed that $1,983 of the
             cumulative administrative salary costs questioned by the OIG had not actually
             been reimbursed to New Image. However, there was no further information or
             documents provided to support this assertion. As a result, we did not adjust the
             questioned costs in the report. This issue can be further addressed during the
             audit resolution process.
Comment 2:   The OIG requested all relevant documentation pertaining to the sample items
             tested, and the OIG reviewed the documentation provided by New Image during
             the course of audit field work. The amount of unsupported questioned costs
             resonated from the lack of a reasonable allocation plan or basis to justify
             disbursement for expenditures.
             The OIG provided the draft report to New Image on December 15, 2014 and
             provided New Image an extension to provide its response to the report due to the
             holidays, so it had nearly a month to review the report and provide its written
             response by January 12, 2015. As explained at the exit conference, New Image
             will have further opportunity to resolve the questioned costs with HUD after the
             report is issued.
Comment 3:   The OIG took New Image’s July 2012 allocation plan into account during our
             audit testing. However, this plan was not in place during our audit scope. New
             Image will have further opportunity to resolve the questioned costs with HUD
             after the report is issued.
Comment 4:   Although there were changes in staffing and funding levels, a reasonable basis for
             expense allocations should be in place and documented to support costs attributed
             to the program. There was no allocation plan or reasonable basis in effect during
             the audit scope. We acknowledge that New Image has since engaged a consultant
             to help improve its procedures and controls.
Comment 5:   Whether or not the matter had previously been brought to New Image’s attention,
             it was still required to maintain support showing the reasonableness of its cost
             allocations.




                                              13
Appendix C
                                              Criteria


The following sections of 2 CFR Part 230, Cost Principles for Non-Profit Organizations, and
2 CFR Part 230, Compensation for Personal Services, were relevant to our audit of New Image’s
HOPWA program.

2 CFR Part 230, Appendix A – C. Indirect Costs
   1. “…After direct costs have been determined and assigned directly to awards or other work
      as appropriate, indirect costs are those remaining to be allocated to benefiting cost
      objectives. A cost may not be allocated to an award as an indirect cost of any other cost
      incurred for the same purpose, in like circumstances, has been assigned to an award as a
      direct cost.”
   2. “…it is not possible to specify the types of cost which may be classified as indirect cost
      in all situations. However, typical examples of indirect cost for many non-profit
      organizations may include depreciation or use allowances on buildings and equipment,
      the costs of operating and maintaining facilities, and general administration and general
      expenses, such as the salaries and expenses of executive officers, personnel
      administration, and accounting.”


2 CFR Part 230, Appendix A – D. Allocation of Indirect Costs - 1.b.

“Where an organization has several major functions which benefit from its indirect costs in
varying degrees, allocation of indirect costs may require the accumulation of such costs into
separate cost groupings which then are allocated individually to benefiting functions by means of
a base which best measures the relative degree of benefit. The indirect costs allocated to each
function are then distributed to individual awards and other activities included in that function by
means of an indirect cost rates.”


2 CFR Part 230 Appendix B, Section 8. Compensation for Personal Services, m. Support of
salaries and wages

(1) Charges to awards for salaries and wages, whether treated as direct costs or indirect costs,
    will be based on documented payrolls approved by a responsible official(s) of the
    organization. The distribution of salaries and wages to awards must be supported by
    personnel activity reports, as prescribed in subparagraph (2), except when a substitute system
    has been approved in writing by the cognizant agency.

(2) Reports reflecting the distribution of activity of each employee must be maintained for all
    staff members (professionals and nonprofessionals) whose compensation is charged, in
    whole or in part, directly to awards. In addition, in order to support the allocation of indirect
    costs, such reports must also be maintained for other employees whose work involves two or


                                                  14
   more functions or activities if a distribution of their compensation between such functions or
   activities is needed in the determination of the organization's indirect cost rate(s) (e.g., an
   employee engaged part-time in indirect cost activities and part-time in a direct function).
   Reports maintained by non-profit organizations to satisfy these requirements must meet the
   following standards:

       (a) The reports must reflect an after-the-fact determination of the actual activity of each
       employee. Budget estimates (i.e., estimates determined before the services are
       performed) do not qualify as support for charges to awards.
       (b) Each report must account for the total activity for which employees are compensated
       and which is required in fulfillment of their obligations to the organization.
       (c) The reports must be signed by the individual employee, or by a responsible
       supervisory official having first hand knowledge of the activities performed by the
       employee, that the distribution of activity represents a reasonable estimate of the actual
       work performed by the employee during the periods covered by the reports.
       (d) The reports must be prepared at least monthly and must coincide with one or more
       pay periods.
(3) Charges for the salaries and wages of nonprofessional employees, in addition to the
   supporting documentation described in subparagraphs (1) and (2), must also be supported by
   records indicating the total number of hours worked each day maintained in conformance
   with Department of Labor regulations implementing the Fair Labor Standards Act (FLSA)
   (29 CFR Part 516). For this purpose, the term “nonprofessional employee” shall have the
   same meaning as “nonexempt employee,” under FLSA.




                                                 15
Appendix D

                                  Summary of Questioned Costs Tables

Table 1
Administration salaries cost                                  2011           2012                 Total
Program director                                            $ 23,510       $ 16,174       $          39,684
   Fringe benefits                                          $    719       $      0       $             719
Chief financial officer                                     $    534       $ 6,497        $           7,031
   Fringe benefits                                          $ 1,384        $      0       $           1,384
Human resources director                                    $    195       $ 5,797        $           5,992
   Fringe benefits                                          $    441       $      0       $             441
Accountant                                                  $ 12,540       $ 8,422        $          20,962
   Fringe benefits                                          $ 1,430        $ 1,225        $           2,655
Accounting assistant                                        $      0       $    189       $             189
   Fringe benefits                                          $    756       $ 2,750        $           3,506
Total unsupported salary costs                                                            $          82,563

Table 2
 Administration cost allocation percentages
                                                       2011                    2012
                                              January to October to January to      April to
             Months:                            August      December  March       November
 Program director                                 12.66%       21.88%  21.88%            8.00%
   Fringe benefits                                12.66%                                 5.00%
 Chief financial officer                                        9.38%   9.38%            8.00%
 Human resources director                                       9.38%   9.38%          15.00%
 Accountant                                       34.74%       21.88%  21.88%          15.00%
   Fringe benefits                                24.04%               15.13%
 Accounting assistant                                                                  15.00%
   Fringe benefits                                  10.70                              33.00%


Table 3
Operating expenses                                           2011              2012                  Total
Lease costs – account 4000                             $       90,564      $    48,280        $         138,844
Other operating expenses- account 5000*                $       29,010      $    15,788        $          44,798
Total unsupported questioned costs                     $      119,574      $    64,068        $         183,642
* Other operating includes allocations of office supplies, computer supplies, insurance, and telephones.




                                                           16
Table 4
Operating expense allocation percentages
                                                         2011                                 2012
                                      Jan. to    Apr. to    July to         Oct. to     Jan. to Apr to
                                       Mar.       June       Sept.           Dec.        Mar.      June
Lease costs*                            23%         25%         24%            28%        28%        22%

Operating expenses                                         2011                                2012
 Office supplies – Office Max                              12%                                 12%
 Office supplies – Staples                                 30%                                 30%
 Office supplies – Xerox                                   20%                                 20%
 Insurance – Philadelphia Ins.                            12.5%                               12.5%
 Phone – AT&T                                              50%                                 50%
 Phone – Verizon #961106247                                50%                                 50%
 Phone – Verizon #960854727                                50%                                 50%
* Represents the combined average allocation percentage rate between the monthly HOPWA housing and meals
program and case management program lease costs.




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