Veterans First, Santa Ana, CA Supportive Housing Program Office of Audit, Region 9 Audit Report Number: 2015-LA-1002 Los Angeles, CA April 16, 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: Veterans First, Santa Ana, CA, Did Not Administer and Spend Its HUD Funding in Accordance With HUD Requirements Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General’s (OIG) final results of our review of Veterans First’s Supportive Housing 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-1002 Date: April 16, 2015 Veterans First, Santa Ana, CA, Did Not Administer and Spend Its HUD Funding in Accordance With HUD Requirements Highlights What We Audited and Why We audited Veterans First’s Supportive Housing Program (SHP) based on a referral from the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General’s Office of Investigation and a hotline complaint, alleging that Veterans First employees were directed to prepare false accounting documents. Our objective was to determine whether expenditures Veterans First charged to its SHP grants and program fees it charged to its SHP clients were eligible and supported. What We Found Some of the complaint allegations had merit. Veterans First charged its SHP grants $530,808 in unsupported payroll and other costs. We also identified $3,245 in ineligible costs. In addition, Veterans First’s accounting system data were unreliable and unauditable. Further, Veterans First continued charging clients a 19 percent program fee after a change in regulations disallowed the practice and did not adequately maintain documentation in its client files. What We Recommend We recommend that the Director of HUD’s Los Angeles Office of Community Planning and Development require Veterans First to provide adequate supporting documentation for $530,808 in unsupported costs or repay its program from non-Federal funds and repay its program $3,245 in ineligible costs. Additionally, we recommend that Veterans First implement accounting system procedures and controls and that HUD suspend its funding until such controls are in place. We also recommend that Veterans First repay the applicable clients the overcharged program fees, which combined totaled $15,435, and implement additional policies and procedures for the review and maintenance of client income documentation and rent determinations. Table of Contents Background and Objective......................................................................................3 Results of Audit ........................................................................................................5 Finding 1: Veterans First Did Not Adequately Support the Eligibility of Its SHP Expenses ............................................................................................................................. 5 Finding 2: Veterans First’s Accounting System Was Unauditable ........................... 10 Finding 3: Veterans First Charged Clients a Disallowed Program Fee ................... 13 Finding 4: Veterans First Lacked Sufficient Documentation in Its Client Files ...... 15 Scope and Methodology .........................................................................................17 Internal Controls ....................................................................................................19 Appendixes ..............................................................................................................21 A. Schedule of Questioned Costs .................................................................................. 21 B. Auditee Comments and OIG’s Evaluation ............................................................. 22 C. Criteria ....................................................................................................................... 34 D. Summary of Ineligible and Unsupported Costs Tables ......................................... 37 E. Program Fees Table .................................................................................................. 38 F. Missing Client File Documents Table ..................................................................... 39 2 Background and Objective Veterans First has provided services to Orange County, CA’s veterans since 1971. It is the only 501c(3) agency in Orange County that provides services exclusively to the region’s homeless and at-risk veterans. Veterans First provides a multitude of services, including housing, meals, life coaching-counseling, life skills, access to mental health counseling, benefit counseling, and transportation as well as job training and employment placement assistance. Veterans First has four U.S. Department of Housing and Urban Development (HUD)-funded housing locations: • Veterans Village (Josephine House) permanent housing, • Veteran Self-Determination (Anaheim House) temporary housing, • Veterans Housing Project (Benton House) temporary housing, and • Veteran Family Housing (Susan House) permanent housing. Josephine House is pictured below. Veterans First is supported primarily through its four HUD grants and grant funding from the U.S. Department of Veterans Affairs (VA). It also receives donations. Supportive Housing Program The Supportive Housing Program (SHP) is authorized by Title IV of the Stewart B. McKinney Homeless Assistance Act (42 U.S.C. (United States Code) 11381-11389). SHP is designed to promote the development of supportive housing and supportive services, including innovative approaches to assist homeless persons in the transition from homelessness, and to promote the 3 provision of supportive housing to homeless persons to enable them to live as independently as possible. Veterans First received the following SHP funding: Name Grant number Amount Address Type Veterans Village CA0810L9D021204 $215,696 12781 Josephine Street Permanent 8/1/13 -7/31/14 Garden Grove, CA housing Veteran Self- CA0564L9D021205 $162,745 (1) 1135 W. North Street Temporary Determination 9/1/13 – 8/31/14 Anaheim, CA housing (2) 1130 W. North Street Anaheim, CA Veterans CA0565L9D021205 $259,661 13231 Benton Street Temporary Housing Project 11/1/13 – 10/31/14 Garden Grove, CA housing Veteran Family CA1122B9D021100 $213,187 121 Susan Street Permanent Housing 2/1/13 – 1/31/14 Santa Ana, CA housing Grand total $851,289 Our objective was to determine whether expenditures Veterans First charged to its SHP grants and program fees it charged to its SHP clients were eligible and supported. 4 Results of Audit Finding 1: Veterans First Did Not Adequately Support the Eligibility of Its SHP Expenses Veterans First did not adequately support the eligibility of its SHP expenses. Specifically, it was unable to fully support expenditures for supportive services, operating, and administrative costs in accordance with 2 CFR (Code of Federal Regulations) Part 230 and charged ineligible costs to its HUD grants. Specifically, Veterans First did not adequately support most of its employee salaries, including its employee salary allocations. This condition occurred because Veterans First did not have sufficient procedures and controls for its accounting system, payroll, and Line of Credit Control System (LOCCS) 1 drawdowns and the data in its accounting system were unreliable and unauditable (see finding 2). As a result, HUD had no assurance that $530,808 in program funds was used for reasonable program costs, and $3,245 in funds was not available for eligible program expenses. Veterans First Did Not Support Expenses Charged to Its SHP Grants Veterans First did not maintain adequate documentation to support $530,808 in expenses charged to the HUD grants sampled, including projected salary expenses ($457,357), 2 expense allocations ($27,472), and other costs included in LOCCS draws ($45,979) (see appendix D). Veterans First Did Not Properly Support Its Salary Expenses Our nonstatistical sample of drawdowns for each of the four HUD grants identified unsupported payroll costs totaling $22,643. Veterans First did not have timesheets to support the time of most of the employees whose time was charged to the four HUD grants reviewed. Also, Veterans First was unable to provide sufficient documentation for employees’ time, showing actual time spent working on specific HUD grants as required by 2 CFR 230, appendix A, section A.2.g, Basic Considerations (see appendix C). Additionally, when timesheets were provided, they lacked sufficient information to clearly determine which house the employee worked at or whether the employee worked for a HUD- or VA-funded house. As a result, HUD had no assurance that salaries charged to its four HUD grants were correct. Based on the results of our review, we 1 LOCCS is HUD’s primary grant disbursement system for most of its programs. 2 Due to problems with Veterans First’s accounting system (see finding 2), we had to estimate salaries charged to the grants. Veterans First’s payroll averaged $80,000 monthly, and more than half of this payroll expense was allocated to the four HUD grants, resulting in an estimate of $480,000 for calendar year 2013. Since this amount would include the unsupported $22,643 questioned as part of our draw reviews below, we excluded the latter from the estimate to avoid duplicating the amount. 5 questioned the eligibility of all additional salary costs charged to the four HUD grants totaling an estimated $457,357 for calendar year 2013. During our audit, Veterans First provided us with two different payroll allocations, which were different from each other and did not match what was charged to the general ledger. Additionally, the written basis for the first salary allocation methodology received, titled Employee Allocation for Payroll, did not correspond to the costs in the general ledger. Veterans First prepared a second salary allocation in November 2014, which was supposed to be applicable to the audit period; however, it also did not match the expenditures in the general ledger. The president stated that this latter allocation should have been in place but was not used by the accounting staff. The original payroll allocations provided included the employee’s name, position, and percentage of time allocated to the following six categories: 1. HUD – Anaheim, 2. HUD – Benton, 3. VA – Broadway-Manor, 4. HUD – Josephine, 5. HUD – Susan, and 6. Corporate. Many of the HUD grant-related employees had a 20 percent split across all categories, excluding corporate, while others had either a 50-50 split between grants or 100 percent charged to one grant. However, the basis for the salary allocations did not consistently match. For example, at Benton House, • One employee’s salary was allocated as a 20 percent split, but his salary should have been allocated 100 percent to the VA. • Another employee’s salary that was allocated as a 50-50 split between two of the HUD grants should have had 50 percent reallocated from one HUD grant to the VA grant. • A third employee’s salary was supposed to be split among three HUD grants, and the rest of his salary was to be charged to the VA. However, it appeared that his salary was not split accordingly. In each of these cases, although the allocation made in the general ledger did not match the basis for the allocation, Veterans First had not made the necessary corrections. There were similar problems found with the timesheets for all four HUD grants. Veterans First Did Not Have Adequate General Expense Allocations Veterans First did not adequately document other general expenses totaling $27,472 to show that the amounts allocated to the HUD grants were reasonable, including 6 • Maintenance costs of $12,875, • Payroll of $9,605 (as discussed in the section above), 3 • Consulting of $4,187, • Auto insurance of $649, and • Utilities of $156. For example, we reviewed 100 percent of the invoices paid to R&S Maintenance Services for the period July 2012 through June 2013 and identified two additional invoices as part of our nonstatistical review of LOCCS drawdowns. The invoices did not itemize the type of work performed at each house, the amount of time spent at a house, or at which unit the work was performed as required by 2 CFR Part 230, appendix A, section A.2.g, Basic Considerations. In some instances, Veterans First provided R&S Maintenance Services invoices, but in other cases, it could provide only invoices generated from its own QuickBooks system. Our comparison of the invoices generated from both sources for the same period did not match, which made the reliability of the documentation questionable. We identified $12,875 in maintenance expenditures recorded in the general ledger and allocated to the four HUD properties; however, the controller admitted that he had reallocated expenditures in QuickBooks without reviewing invoices, based on instructions received from Veterans First’s president. As a result, we questioned the reliability and the validity of the data in the general ledger. Another example identified as part of our nonstatistical sample review of Veterans First’s LOCCS drawdowns was questionable invoices for auto insurance from IPFS Corporation totaling $649. Veterans First provided nothing to show how these expenses were attributed to the HUD properties, such as what vehicle or how often the vehicle was used for HUD clients. Basically, the invoices were split among the five properties without an explanation of how the expenses were allocated. As a result, the costs were unsupported. Veterans First Had No Support for LOCCS Draw Expenses Our sample of LOCCS drawdowns for the four HUD grants found $45,979 in expenditures with no supporting documentation, including • Unknown expenses of $20,309, • Payroll costs of $13,038 (as discussed above), 4 • Supplies and utilities of $5,666, • Consulting costs of $1,106, and • Other operating costs of $5,860. 3 The $9,605 in unsupported payroll costs was offset against the questioned $480,000 payroll estimate to avoid duplication. 4 The $13,308 in unsupported payroll costs was offset against the questioned $480,000 payroll estimate to avoid duplication. 7 Veterans First’s draws generally exceeded the costs listed in the general ledger for most budget categories in our sample of LOCCS drawdowns. In other cases, Veterans First could not provide documentation to support expenses listed in the general ledger. For example, Josephine House’s general ledger showed that $11,523 was spent on operations; however, Veterans First could not support more than $10,000 of these expenses. In another example, Veterans First drew down $11,664 for supportive services from the Susan House grant but provided supporting documentation for only $2,025, leaving $9,639 unsupported as unknown costs. Therefore, HUD could not be reasonably assured that this funding was spent on eligible grant expenses. Overall, Veterans First failed to provide supporting documentation for $45,979 in expenses (see appendix D). Veterans First Charged Its HUD Grants for Ineligible Expenditures We reviewed random LOCCS 2013 drawdowns for all four HUD grants and identified a total of $3,245 in ineligible expenditures charged to the HUD grants (see appendix D). • Marketing – Veterans First allocated $426 to the 3 HUD grants for 61 t-shirts with the Veterans First logo. This cost is considered a marketing or promotion expense, which is unallowable according to 2 CFR Part 230, appendix B, section 45. • Cable television – Although HUD’s onsite monitoring report, dated September 30, 2013, had previously informed Veterans First that cable television was “ineligible per the SHP Desk Guide and at 24 CFR 583.125(b) Grants for operating costs,” Veterans First charged four Time Warner Cable invoices totaling $353 to the grants. • Case management – Veterans First charged the program $2,135 in salary and $252 in payroll taxes for an employee funded through a VA grant. • Supplies – Veterans First charged the program for $78 in supplies for an employee funded by a VA grant. Conclusion Veterans First did not adequately support the eligibility of its SHP expenses in accordance with applicable HUD requirements. This condition occurred because Veterans First did not have sufficient procedures and controls for its accounting system, payroll, and LOCCS drawdowns and due to turnover of key staff. Also, the data in its accounting system were unreliable and unauditable (see finding 2). As a result, $530,808 was spent for unsupported costs, and $3,245 in program funds was spent for ineligible costs. Therefore, these funds may not have been available for eligible SHP activities. 8 Recommendations We recommend that the Director of HUD’s Los Angeles Office of Community Planning and Development require Veterans First to 1A. Support or repay $73,451 in unsupported costs to the program from non-Federal funds. 1B. Support or repay the payroll allocation, estimated at $457,357, to its SHP grants for 2013. 1C. Repay $3,245 in ineligible costs to the program from non-Federal funds. 1D. Establish and implement a written methodology for its salary allocation. 1E. Establish and implement a written methodology for its general allocations. 1F. Establish and implement written policies and procedures to maintain adequate employee timesheet records for each employee charging time to its SHP grants. 1G. Establish and implement procedures and controls for accounting, including entries and tracking corrections in its accounting system and approval of all checks including payroll. 1H. Establish and implement written policies and procedures to require necessary supporting documentation for all expenditures charged to its HUD grants. 9 Finding 2: Veterans First’s Accounting System Was Unauditable Veterans First’s accounting system data were unreliable and unauditable, and Veterans First did not obtain HUD approval for significant budget deviations. This condition occurred because of constant turnover of the accounting staff between 2011 and 2014 and a lack of accounting system controls. As a result, Veterans First’s accounting system was unable to accurately show which expenses belonged to each of its four HUD grants, and expenses were not aligned with the HUD-approved budgets, which also led to its inability to provide financial statements for fiscal years 2011, 2012, and 2013. Data in the Accounting System Were Unreliable Veterans First’s accounting system data were unreliable and unauditable. Regulations at 24 CFR 84.21, Standards for financial management systems, require grantees’ financial management systems to provide accurate, current, and complete disclosure of each federally sponsored project (see appendix C). In 2013, Veterans First’s certified public accountant ended its engagement with Veterans First for its 2011 and 2012 financial statements and single audit reports required by HUD. The accountant informed us that its key issue with Veterans First was a lack of supporting documentation for entries in its QuickBooks accounting system. Additionally, Veterans First was constantly changing its accounting figures, payroll allocations, revenues, and expenses. In one submission to the accountant, the expenses exceeded the revenues, and in a later submission, the revenues exceeded the expenses. Although it was not a violation, the certified public accountant also noted the commingling of funds in the main account. Veterans First initially deposited revenues from HUD and the VA into separate accounts, but then all funds were moved to the main commingled account from which all expenses were paid. Therefore, the general ledger entries were the only way to track the use of the funds, making accurate accounting entries particularly important to ensure compliance with HUD requirements. The president stated during the entrance conference that items had not been charged to the correct grants and that the audits for 2011, 2012, and 2013 needed to be completed. Based on this constant adjustment of accounting transactions, we deemed the accounting system data to be unreliable and unauditable. Veterans First Deviated From Its Budget Without Amending Its Agreement With HUD Veterans First’s grant agreement stated that it was prohibited from moving more than 10 percent of its funding from one budget line item in a project’s approved budget to another without a written amendment to the agreement. This requirement is further supported by 24 CFR 578.105(b) (see appendix C). A review of the LOCCS draws for each of the four HUD grants revealed that Veterans First violated this requirement for its operating and supportive services budget line items. For example, Susan House was approved for a case manager, a child care coordinator, and bus passes under supportive services. However, funds were instead spent on employment-education and client services salaries, and there were no expenditures for the approved budget line items. 10 Our nonstatistical sample of the four HUD grant expenses identified a total of $13,258 in expenses over the 10 percent restriction (see appendix D). Although the funds were apparently used for costs allowable under SHP, it was unclear whether HUD would have approved these substantial amendments. It also illustrated a lack of proper controls to ensure that expenditures were aligned with the approved budget and grant agreement. Staff Problems and Turnover Contributed to Accounting Issues Veterans First’s accounting staff problems contributed to unreliable accounting data and budget issues. In July 2012, Veterans First hired a consultant as a certified financial officer to do its accounting. However, the consultant had no nonprofit experience or education in accounting. After the consultant left in August 2013, Veterans First hired a new certified financial officer. The president alleged that this individual embezzled from the company. However, we were unable to confirm this allegation as a result of the unreliable data in the accounting system. Veterans First then hired a bookkeeper, who did not know how to properly use Veterans First’s QuickBooks accounting system. The bookkeeper hired two staff members who knew QuickBooks, and the certified financial officer was eventually fired. In May 2014, the president hired a replacement controller, who allegedly gave himself an unauthorized pay raise. Soon thereafter, the president hired an outside bookkeeper to do the accounting on a part-time basis. Veterans First’s full-time accounting clerk quit before the end of our audit fieldwork, which left only the part-time bookkeeper. Overall, the staffing issues contributed to the inconsistent accounting, poor controls, and a general lack of knowledge of the financial and accounting transactions that transpired during the audit period. Veterans First Lacked Controls Although Veterans First had financial policies and procedures, they were incomplete, and it did not follow them. For example, it did not have sufficient controls over its accounting system. There were no policies or procedures regarding making correcting entries in the QuickBooks accounting system. The controller made changes to the general ledger in the system without making a journal entry. Additionally, each new accounting team entered correcting entries into QuickBooks without journal entries to support the adjusted entries. As a result, there was no documentation to explain or support why various changes were made in the system from 2011 to the end of the audit period. These changes were also made to the accounting system without supporting documentation, often based on the president’s direction; thus, there were no supporting documents, such as invoices, for costs entered into the accounting system. Further, there was no way to identify the changes made because the accounting system did not have an audit trail. We were able to identify some changes by comparing two sets of documents, such as general ledgers received at different times. In many instances, there were no invoices so staff would create a third-party invoice in the accounting system and pay it without a signature from management. In other cases, there was an invoice but no supporting documentation stating what service was performed. 11 Conclusion Veterans First’s accounting system was unreliable and unauditable due to the turnover of its accounting staff and its lack of accounting system controls. The lack of controls and staffing issues also contributed to deviations from the HUD-approved budget. As a result, Veterans First’s accounting system was unable to accurately show which expenses belonged to each of its four HUD grants. In addition, expenses were not aligned with activities and amounts approved by HUD. Also, Veterans First had been unable to complete financial statements for fiscal years 2011, 2012, and 2013 as the result of inadequate accounting records. Collectively, the poor control environment created a high risk for the misspending of SHP funds (as discussed in finding 1). Recommendations We recommend that the Director of HUD’s Los Angeles Office of Community Planning and Development 2A. Require Veterans First to implement additional procedures and controls for its accounting system. 2B. Require Veterans First to hire qualified staff with an appropriate level of accounting and system expertise. 2C. Require Veterans First to implement procedures and controls to ensure that significant budget amendments are submitted to HUD for approval. 2D. Suspend funding to Veterans First until adequate controls are in place, along with knowledgeable accounting personnel. 12 Finding 3: Veterans First Charged Clients a Disallowed Program Fee Veterans First continued charging clients a program fee after it was disallowed by HUD on July 31, 2012. This condition occurred because Veterans First’s president was not aware of the change in rules regarding program fees until she attended training in September 2013. As a result, Veterans First overcharged clients 19 percent of their income for program fees for up to 14 months totaling $15,435. Veterans First Was Unaware of Changes Regarding Program Fees Veterans First continued charging a 19 percent program fee to its SHP clients living in its Josephine House, a permanent housing HUD home, after July 31, 2012. The Homeless Emergency Assistance and Rapid Transition to Housing (HEARTH) Act ended program fees as of July 31, 2012 5 (see appendix C); however, Veterans First’s president stated that she was unaware of this change until she attended a seminar on the HEARTH Act in September 2013. Our review of 22 client files found that Veterans First continued to use outdated rent calculation forms that included the 19 percent fees as recently as our review in 2014. As a result, 8 of the 22 clients living in Josephine House continued to be charged a 19 percent program fee totaling $15,435 in overcharges (see appendix E). Veterans First Did Not Support Prior Program Fee Rates Before July 31, 2012, when program fees were allowed, HUD had five specific requirements for charging program fees, which required grantees to maintain written supporting documentation showing 1. That the fee was for a supportive service, 2. That SHP funds were not used to pay for that portion of the service, 3. How the fee was determined, 4. That the fee was reasonable, and 5. That the participants were aware of how the fee was used. Veterans First did not meet four of the five requirements for program fees charged before July 31, 2012. 6 Although the fees were used for supportive services, it was not clear whether the fees were used for SHP expenses. Additionally, there was no written documentation to show how the fee percentage was determined to show that the 19 percent fee was reasonable for the services provided. Finally, based on the Josephine House rules, clients were told that the 19 percent fee was for “additional services” but were given no specific details. 5 The citation was codified under 24 CFR 578.87(d). 6 Since the charges occurred more than 2 years ago, we did not perform additional analysis to determine additional questioned costs. 13 Conclusion Veterans First continued charging eight clients a 19 percent program fee after program requirements suspended the use of the fee. In addition, it did not properly document the reasonableness of the fee during the period when it was allowed. As a result, Veterans First overcharged its clients to participate in the program. Recommendations We recommend that the Director of HUD’s Los Angeles Office of Community Planning and Development require Veterans First to 3A. Repay the applicable clients the overcharged program fees, which combined totaled $15,435 (see appendix E). 3B. Update its resident rent calculation worksheet used for its Josephine House clients and remove program fees. 14 Finding 4: Veterans First Lacked Sufficient Documentation in Its Client Files Veterans First’s client files lacked sufficient documentation to support clients’ incomes. This condition occurred because Veterans First did not have specific policies regarding income information and collection as part of its case manager manual (policies and procedures) for its clients. Although there was no issue with client eligibility, the accuracy of the 30 percent of income that clients paid for rent was questionable, and clients may have paid incorrect rents. Veterans First’s Client Files Were Incomplete Veterans First’s client files lacked sufficient documentation to support clients’ incomes. Of 80 client files reviewed, 25 (31 percent) were missing income documents to support the income reported on the rent calculation sheet (see appendix F). For example, one client did not have documentation to back up the income amounts listed on his rent calculation sheet, although the rent calculation sheet claimed that his income was from Supplemental Security Income. Additionally, general ledger information indicated that another client may have been overcharged between $134 and $148 per month based on the income amount identified. However, without the supporting income documentation, there was no way to determine whether the client was overcharged. In addition, we found several instances in which a client’s recorded rent amount changed with no explanation in the client file for the adjustment in rent amount. There were also instances in which a minimum rent was charged without explanation, client payments did not match or were not posted to the general ledger, or it appeared that overstated income was used to calculate rent. Overall, the following deficiencies were identified in 40 of the 80 client files 7 reviewed (50 percent) (see appendix F): • Missing income documents for 25 clients, • Missing rental agreements for 8 clients, • Changes to rent amount without explanation for 5 clients, • Minimum rent of $450 charged without explanation for 5 clients, • General ledger not matching what the client paid for 3 clients, • Rental payment(s) not posted in the general ledger for 2 clients, and • Overstated income used to calculate monthly rental payments for 2 clients. The SHP Self-Help Monitoring Tool states, “…a regular review of income (at least annually) must be conducted for all residents being charged rent so appropriate adjustments may be made. If there is a change in family composition, or a decrease in resident income, the resident may request an interim review of income and the rent may be adjusted accordingly” (see appendix C). Based on our review of the files, this process was not consistently followed with Veterans First’s clients. 7 Individual client files may have had more than one deficiency. 15 Conclusion Overall, there were significant problems and missing information from 40 of the client files (50 percent) reviewed. These inconsistencies occurred because Veterans First had inadequate policies and procedures. As a result, it was unclear whether SHP clients were charged appropriate rent amounts. Recommendations We recommend that the Director of HUD’s Los Angeles Office of Community Planning and Development require Veterans First to 4A. Establish and implement written policies and procedures on the review and maintenance of client income documentation and rent determinations. 4B. Review all files for the 40 clients with file inconsistencies, obtain applicable missing documentation, recalculate the rent amounts, and make any necessary adjustments to rent. 16 Scope and Methodology We performed our onsite audit work at the Veterans First office in Santa Ana, CA, from June 17 to December 18, 2014. Our review generally covered the period July 1, 2011, to June 30, 2014, and was expanded as necessary. To accomplish our objective, we performed the following: • Held discussions with key Veterans First employees and HUD Office of Community Planning and Development staff involved with the administration of SHP; • Interviewed the complainants from the hotline complaint; • Interviewed the certified public accountant personnel who conducted Veterans First’s audit engagement; • Reviewed Veterans First’s payroll documents and available timesheets; • Reviewed Veterans First’s LOCCS drawdowns, bank statements, and available supporting documentation for SHP expenditures; • Reviewed grant applications, agreements, and annual performance reports from HUD; • Reviewed relevant financial and accounting procedures and records; • Reviewed Veterans First’s organizational charts; • Reviewed Veterans First’s client files for each of its four HUD properties; and • Reviewed applicable SHP regulations, including guidebook and CFR requirements. We reviewed a sample of SHP LOCCS drawdowns for fiscal year 2014 for all four HUD grants to determine whether expenses were adequately supported. We nonstatistically selected 1 draw for each grant to include expenditures for all 4 HUD properties from a universe of 31 draws. We were unable to review additional draws beyond these four due to the significant delays in obtaining the backup documentation from Veterans First. We reviewed 100 percent of the 80 client files for current clients living in the 4 HUD properties. The list of current clients was as of June 30, 2014, our cutoff date for this audit. We reviewed the house agreement, rental calculation worksheet, and supporting documentation for the clients’ reported incomes. We found that data contained in Veterans First’s QuickBooks accounting system were unreliable and did not always match source documentation provided. We, therefore, determined the data to be unreliable 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 17 objective(s). We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 18 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 objective: • Validity and reliability of data – Policies and procedures that management has implemented to reasonably ensure that relevant and reliable information is obtained to adequately support program expenditures and that clients pay appropriate rent amounts. • 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 Deficiencies Based on our review, we believe that the following items are significant deficiencies: • Veterans First did not follow policies and procedures to ensure that costs allocated to its SHP were adequately supported and in accordance with HUD requirements (see findings 1 and 2). • Veterans First did not have adequate controls over the validity and reliability of data when it made correcting and adjusting entries in its accounting system (see finding 2). • Veterans First did not have adequate controls over compliance with laws and regulations when it failed to update its policies in accordance with new regulations regarding program fees (see finding 3). 19 • Veterans First did not have adequate controls over the validity and reliability of data when it did not have income support in client files to ensure that rent calculations were correct (see finding 4). 20 Appendixes Appendix A Schedule of Questioned Costs Recommendation Ineligible 1/ Unsupported 2/ number 1A $73,451 1B $457,357 1C $3,245 3A $15,435 Totals $18,680 $530,808 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. 21 Appendix B Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 22 Comment 1 Comment 2 Comment 3 Comment 4 Comment 5 Comment 6 23 Comment 7 Comment 8 Comment 9 Comment 10 Comment 3 * Names redacted for privacy reasons. 24 Comment 3 Comment 3 Comment 3 Comment 11 Comment 6 25 Comment 12 Comment 13 Comment 14 Comment 15 26 Comment 16 Comment 17 Comment 18 * Names redacted for privacy reasons. 27 Comment 19 Comment 20 Comment 21 Comment 22 Comment 3 28 Comment 3 Comment 23 Comment 18 29 OIG Evaluation of Auditee Comments Comment 1 The questioned amount of $530,808 is shown in detail in table 2, which can be found in appendix D of the report. We also provided Veterans First with schedules that break down the $60,576. The $12, 875 in R&S Maintenance Services represents invoices reviewed for the period July 2012 through June 2013, August 2013, and November 2013. How we derived $457,357 in estimated payroll costs is explained in footnote 2 of the audit report. Veterans First may clarify the actual payroll with HUD as part of the audit resolution process. Comment 2 We did not state that Veterans First overcharged its clients with malicious intent. We simply indicated that Veterans First continued charging its clients a program fee after the HEARTH Act was enacted on July 31, 2012, disallowing the fee. Comment 3 We provided Veterans First with draft finding outlines, along with detailed schedules supporting our questioned cost amounts, in January 2015. We also provided updated schedules in March 2015. We verbally discussed the outlines and schedules with the president-chief executive officer. At no point did Veterans First indicate that it had insufficient information to identify the questioned expenses back to its general ledger and draw requests. However, we will forward additional documentation so it can address the questioned amounts with HUD. Comment 4 The report stated that OIG received a complaint alleging Veterans First prepared false accounting documents. However, it did not state that Veterans First prepared false accounting documents. Comment 5 In general, the role of management in an organization is to oversee and supervise its activities and employees. This responsibility includes ensuring that staff follows policies and procedures in line with the organization’s mission or in the case of Veterans First, to meet Federal requirements for grant funding. According to the Committee of Sponsoring Organizations model, one component of internal controls is the control environment, which refers to the attitude of the company, management, and staff regarding internal controls. Another element of internal controls is control activities, which are policies and procedures that help ensure that management directives are carried out. A third component of internal controls is monitoring, which is the review of an organization’s activities and transactions to assess the quality of performance over time and to determine whether controls are effective. Therefore, we stand by our initial assertion that Veterans First lacked controls and procedures to ensure that its staff met HUD requirements. Comment 6 In addition to the supportive services budget line item, there are salary expenses that are also embedded in the other budget line items that Veterans First failed to account for. For instance, the operating budget shows that $20,800, or one full- time employee (FTE), was allocated for a building security salary at the Josephine property. In another instance, the homeless management information system 30 (HMIS) 8 budget allocated $22,080, or one FTE, for HMIS personnel, also at the Josephine property. Our derived $457,357 in questioned salary cost was an estimate for calendar year 2013. Because Veterans First lacked a payroll allocation methodology that was correctly and consistently applied, we could not determine the exact payroll amount during our fieldwork and had to estimate that amount based on the payroll average of $80,000 per month. Veterans First may clarify the actual payroll with HUD and address the other recommendations as part of the audit resolution process. Comment 7 HUD’s Office of Inspector General (OIG) is a separate and independent department from the HUD program office, and no documentation has been provided to substantiate this statement; therefore, we cannot speak to any HUD review of Veterans First’s timesheets. Veterans First seemed to be aware of the correct methodology in documenting its employees’ time. According to its January 2012 Financial Policy & Procedures manual, it stated, “…all employees are required to provide timesheets that are coded to identify the prorated allocation of their time. All employees that work under more than one funding source will code their timesheets according to the time spent on each program. Payroll allocation to the general ledger will be recorded in accordance to coded timesheets (i.e. if an employee works 50 percent of their time for HUD and 50 percent to another program, the timesheet needs to reflect the breakdown of their time).” However, as stated in finding 1, we determined that the timesheets were insufficient to reflect how each employee’s time was allocated to the HUD and VA grants. Comment 8 Veterans First should have an allocation plan in place that consistently ties each of its staff members’ use of time to the proper house. We found that neither of Veterans First’s allocation plans was accurate and explained the salary split on the employee timesheets. One of the allocation plans was based on the number of beds in each grant. We saw instances in which time was split 20 percent across all categories, while others had either a 50-50 split between grants or 100 percent charged to one grant. There was no consistency in how the time was allocated. Further, in January 2015, we provided Veterans First with schedules, showing the names of employees, expense type, amount, pay period end, and house for the questioned amounts. We provided an updated schedule in March 2015. Between January and March of 2015, Veterans First failed to request additional 8 An HMIS is a computerized data collection application designed to capture client-level information over time. Eligible HMIS costs include staffing associating with operating the HMIS. 31 clarification on the questioned cost. However, we will forward additional documentation so it can address the questioned amounts with HUD. Comment 9 Veterans First did not maintain all of its R&S Maintenance Services invoices. It provided only 12 R&S Maintenance Services invoices for the period reviewed. As an alternative, the former controller provided copies of the Quickbooks- generated invoices. Comment 10 We can report only on the information we were given. The former controller told us that he reallocated expenditures in Quickbooks based on the president’s direction and often without supporting documentation. While we cannot determine whether the controller was truthful, we do know that Veterans First’s general ledger and accounting records were not auditable. In its written response to our draft audit report, Veterans First agreed with our assertion and attributed its poor books and records to unqualified staff. However, management is responsible for supervising its staff and ensuring that the information in its general ledger and books is accurate and supported. Comment 11 We also discussed those employees during the exit conference. We will provide Veterans First with additional information. Comment 12 We spoke with Veterans First’s former certified public accountant personnel. They stated that they had ended their engagement with Veterans First for its 2011 and 2012 financial statements and single audit reports required by HUD. They also stated that they met with Veterans First’s president-chief executive officer and told her of the allegations at Veterans First as well as other issues they encountered while they were auditing the books. Specifically, they stated that the payroll allocations kept changing. They also stated that Veterans First provided them with one set of numbers in which expenses exceeded revenues but later provided another set of numbers, which showed that revenues exceeded expenses. Comment 13 We changed the word “admitted” to “stated.” Comment 14 Any confusion with grant funding requirements may be discussed with HUD staff. Veterans First’s lack of familiarity with the activities allocated in the general ledger is of great concern. Without adequate books and records, it would be difficult for Veterans First to support which employees performed which activities. Comment 15 It is management’s responsibility to ensure that its staff follows its policies and procedures. When the staff failed to follow policies and procedures, management should have taken steps to correct those errors. Comment 16 We spoke to the former chief financial officer, who stated that he worked at Veterans First as a consultant for just under a year (between July 2012 and August 2013). He also stated that he had no nonprofit and accounting experience, although he had an extensive background in business. 32 Comment 17 We are reporting the information that we were given by Veterans First staff members. Even if the president-chief executive officer did not direct the bookkeeper to make changes in the system without documentation, this information showed that miscommunication and the lack of internal controls led to Veterans First’s unauditable accounting system. Comment 18 Veterans First will have the opportunity to address and resolve the recommendations with HUD as part of the audit resolution process. Comment 19 Based on the documents we reviewed, Veterans First continued charging a 19 percent program fee to its SHP clients living in its Josephine House, a permanent housing HUD home, after July 31, 2012, when the HEARTH Act ended program fees. Comment 20 The details on the HEARTH Act and the five requirements for charging program fees can be found online, where management can easily access and apply them. Comment 21 We revised the sentence: “Our review of 22 client files found that Veterans First continued to use outdated rent calculation forms that included the 19 percent fees as recently as 2014.” We meant that the outdated rent calculation forms had not been revised when we reviewed them in 2014 and not that the rent calculation forms still showed the 19 percent in 2014. Veterans First will have the opportunity to address the recommendations with HUD as part of the audit resolution process. Comment 22 These documents were not maintained in the applicable files when they were reviewed during our onsite fieldwork and were not provided to OIG afterward. However, Veterans First may provide the missing income documents and rental agreements to HUD as part of the audit resolution process. Comment 23 After further review, we reduced the number of rental payments not posted to the general ledger from three clients to two clients. 33 Appendix C Criteria The following are sections of 2 CFR Part 230, appendixes A and B: 2 CFR Part 230, Appendix A, General Principles A. Basic Considerations 2. Factors affecting allowability of costs. To be allowable under an award, costs must meet the following general criteria g. Be adequately documented. 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 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. 34 (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. 2 CFR Part 230, Appendix B, Section 45. Selling and Marketing 45. Selling and marketing. Costs of selling and marketing any products or services of the non-profit organization are unallowable (unless allowed under paragraph 1. of this appendix as allowable public relations cost). 24 CFR 84.21, Standards for financial management systems (b) Recipients’ financial management systems shall provide for the following: (1) Accurate, current and complete disclosure of the financial results of each federally-sponsored project or program in accordance with the reporting requirements set forth in §84.52. If a recipient maintains its records on other than an accrual basis, the recipient shall not be required to establish an accrual accounting system. These recipients may develop such accrual data for their reports on the basis of an analysis of the documentation on hand. (2) Records that identify adequately the source and application of funds for federally-sponsored activities. These records shall contain information pertaining to Federal awards, authorizations, obligations, unobligated balances, assets, outlays, income and interest. (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. (4) Comparison of outlays with budget amounts for each award. Whenever appropriate, financial information should be related to performance and unit cost data. (7) Accounting records including cost accounting records that are supported by source documentation. 24 CFR 583.120, Grants for supportive services costs (b) Supportive services costs. Costs associated with providing supportive services include salaries paid to providers of supportive services and any other costs directly associated with providing such services. For a transitional housing project, supportive services costs also include the costs of services provided to former residents of transitional housing to assist their adjustment to independent living. Such services may be provided for up to six months after they leave the transitional housing facility. 35 Homeless Emergency Assistance and Rapid Transition to Housing (HEARTH) Act of 2009 The HEARTH Act amended and reauthorized the McKinney-Vento Homeless Assistance Act. The amended HEARTH Act states that SHP may no longer charge program fees. This amendment-interim rule went into effect on July 31, 2012. Specifically, it states, “The interim rule establishes that projects for leasing may require that program participants pay an occupancy charge (or in the case of a sublease, rent) of no more than 30 percent of their income. Income must be calculated in accordance with HUD’s regulations in 24 CFR 5.609 and 24 CFR 5.611 (a) However, the interim rule clarifies that projects may not charge program fees.” 24 CFR 578.87, Continuum of Care program, Subpart F, Program Requirements, Limitation on use of funds. (d) Program fees. Recipients and subrecipients may not charge program participants program fees. 24 CFR 578.105, Grants and project changes, b. For Continuums having more than one recipient. (1) The recipients or subrecipients may not make any significant changes to a project without prior HUD approval, evidenced by a grant amendment signed by HUD and the recipient. Significant changes include a change of recipient, a change of project site, additions or deletions in the types of eligible activities approved for a project, a shift of more than 10 percent from one approved eligible activity to another, a reduction in the number of units, and a change in the subpopulation served. SHP Toolkit – Tool 5 Calculating Resident Rent A regular review of income (at least annually) must be conducted for all residents being charged rent so appropriate adjustments may be made. If there is a change in family composition, or a decrease in resident income, the resident may request an interim review of income and the rent may be adjusted accordingly. 36 Appendix D Summary of Ineligible and Unsupported Costs Tables Table 1 Grant House Ineligible amount CA0564L9D021205 Anaheim $220 CA0565L9D021205 Benton $2,631 CA1122B9D021100 Susan $252 CA0810L9D021204 Josephine $142 Grand total $3,245 Table 2 Unsupported Unsupported Total House (allocation) (no documentation) unsupported Anaheim $156 $10,691 $ 10,847 Benton $578 $5,505 $6,083 Josephine $12,461 $19,857 $32,318 Susan $1,402 $9,926 $11,328 Subtotal $14,597 $45,979 $60,576 R&S Maintenance $12,875 $12,875 Payroll $457,357 $457,357 Grand total $484,829 $45,979 $530,808 37 Appendix E Program Fees Table Clients Overcharged 19 Percent Program Fees Amount Client* overpaid in Period overpaid program fees 1 2012 - $2,809 2012 – 10 months 2013 - $553 2013 – 2 months 2 2012 - $2,010 2012 – 10 months 2013 - $316 2013 – 2 months 3 2012 - $2,050 2012 – 10 months 2013 - $232 2013 – 2 months 4 2012 - $313 2012 – 1 month 2013 - $626 2013 – 2 months 5 2012 - $1,120 2012 – 5 months 2013 - $296 2013 – 2 months 6 2012 - $2,013 2012 – 9 months 2013 - $322 2013 – 2 months 7 2012 - $2,352 2102 – 12 months 2013 - $324 2013 – 2 months 8 2013 - $99 2013 - 1 month Total $15,435 * A list with client names was provided separately to Veterans First. 38 Appendix F Missing Client File Documents Table Minimum Rental Overstated income Client Missing Missing General ledger Changes in rent rent charged payment(s) not used to number House income rental does not match amount charged without posted on the calculate monthly * document agreement what client paid without an explanation general ledger rent payments explanation 1 Susan X X 2 Susan X 3 Susan X 4 Susan X 5 Anaheim X 6 Anaheim X 7 Anaheim X X 8 Anaheim X 9 Anaheim X X 10 Anaheim X 11 Anaheim X 12 Anaheim X 13 Anaheim X 14 Anaheim X 15 Anaheim X 16 Josephine X 17 Josephine X X X X 18 Josephine X X X 19 Josephine X 20 Josephine X 21 Josephine X X 22 Josephine X 23 Josephine X 24 Josephine X 25 Josephine X 26 Josephine X 27 Josephine X 28 Josephine X 29 Josephine X 30 Josephine X X 31 Josephine X 32 Josephine X 33 Josephine X 34 Benton X 35 Benton X 36 Benton X 37 Benton X 38 Benton X 39 Benton X 40 Benton X Total 25 8 5 5 3 2 2 * A list with client names was provided separately to Veterans First. 39
Veterans First, Santa Ana, CA, Did Not Administer and Spend Its HUD Funding in Accordance With HUD Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-04-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)