Veterans First Did Not Administer or Spend Its Supportive Housing Program Grants in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-25.

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

                                                 U.S. DEPARTMENT OF
                                 HOUSING AND URBAN DEVELOPMENT
                                          OFFICE OF INSPECTOR GENERAL

                                                      September 24, 2015
                                                                                                MEMORANDUM NO:

TO:            William Vasquez
               Director, Los Angeles Office of Community Planning and Development, 9DD

               Dane M. Narode
               Associate General Counsel for Program Enforcement, CACC

FROM:          Tanya E. Schulze
               Regional Inspector General for Audit, Los Angeles Region, 9DGA

SUBJECT:       Veterans First Did Not Administer or Spend Its Supportive Housing Program
               Grants in Accordance With HUD Requirements

Due to concerns identified by the U.S. Department of Housing and Urban Development’s (HUD)
Office of Community Planning and Development (CPD), we completed a limited scope, spinoff
audit of Veterans First 1 and reviewed additional grants not covered in our original audit. CPD
was concerned that HUD funds for two additional grants not reviewed in the first audit were used
to cover shortfalls in Veterans First’s U.S. Department of Veterans Affairs (VA)-funded program
activities. The purpose of the spinoff audit was to determine whether Veterans First
administered and spent its Supportive Housing Program (SHP) grants in accordance with HUD
HUD Handbook 2000.06, REV-4, provides specific timeframes for management decision on
recommended corrective actions. For each recommendation with 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 the Office of
Inspector General (OIG) post is publicly available reports on the OIG Web site. Accordingly,
this report will be posted at http://www.hudoig.gov.

        We previously audited Veterans First (audit report number 2015-LA-1002, Veterans First, Santa Ana, CA,
       Did Not Administer and Spend Its HUD Funding in Accordance With HUD Requirements, issued April 16,
                                                 Office of Audit (Region 9)
                                611 West Sixth Street, Suite 1160, Los Angeles CA 90017
                                        Phone (213) 894-8016, Fax (213) 894-8115
                            Visit the Office of Inspector General Web site at www.hudoig.gov.
                               METHODOLOGY AND SCOPE
We conducted the audit fieldwork from our Los Angeles, CA, office between March and July
2015. Our audit generally covered the period June 1, 2014, to February 28, 2015, and was
expanded as necessary.
Veterans First imposed a scope limitation that significantly impaired our review. It provided
incomplete and inaccurate general ledgers that may not have reflected all of its financial
activities. Further, it had dismissed its outside bookkeeper, who was tasked with correcting the
books and converting data from its old QuickBooks to a new QuickBooks accounting system, so
its records remained incomplete and inaccurate. Veterans First also had not issued an audited
financial statement since June 30, 2010, and its last independent public accounting firm resigned
from its engagement, stating that it was uncomfortable issuing an audited report when Veterans
First’s accounting figures kept changing. In our April 16, 2015, audit report, we determined that
Veterans First’s accounting system was unauditable. Although the information in its accounting
system was unauditable, we had to partially rely on the information in its general ledgers since it
was the only way to identify Veterans First’s financial health and track how it used its HUD,
VA, donation, and loan funds.
To achieve our audit objective, we conducted interviews or exchanged emails with

   •   HUD’s CPD staff located in its Los Angeles, CA, office,
   •   Veterans First’s president,
   •   Veterans First’s former bookkeeper,
   •   VA officials, and
   •   The Susan Street landlord and property manager.
We also reviewed the following documents:

   •   Federal regulations and HUD requirements (see appendix C of the report);
   •   Backup documentation of two drawdowns referred by HUD;

                        Grant number           Voucher number Amount

                        CA0565L9D021306 501-093879                 $64,908

                        CA1122L9D021301 501-074280                 $36,426

   •   Grant applications, grant agreements, and revised budgets as of March 1, 2015, for
       Veterans First’s current HUD grants;
   •   General ledgers for its HUD and VA grants and corporate account generated from its old
       QuickBooks and new QuickBooks accounting software;
   •   Bank statements for its main account and HUD and VA accounts. We expanded our
       scope and also reviewed the October 2013 to May 2014 bank statements for its main
       account; and

   •     Line of Credit Control System (LOCCS) 2 drawdown information for its four current
         HUD grants.
We did not conduct our work in accordance with generally accepted government auditing
standards since this was a limited scope review and we had recently performed a more detailed
audit (audit report 2015-LA-1002). However, this fact had no effect on the significance of the
conditions identified in this memorandum report. We designed the review to focus on
determining whether Veterans First used HUD funds for its VA expenses. We believe that the
evidence obtained provides a reasonable basis for our findings based on our objective.

We performed an audit of Veterans First’s SHP and issued audit report 2015-LA-1002 on April
16, 2015. That audit was based on a referral from CPD, OIG’s Office of Investigation, and a
hotline complaint, alleging that Veterans First employees were directed to prepare false
accounting documents. We reviewed Veterans First’s SHP grants for 2013 and 2014 (see table

                    Table 1: Veterans First’s HUD SHP grants for 2013 and 2014

             Name                 Grant number                   Grant period                 Amount

       Self-Determination                                    September 1, 2013, to
                                CA0564L9D021205                                               $ 162,745
             Center                                            August 31, 2014

          Veterans                                            November 1, 2013, to
                                CA0565L9D021205                                               $ 259,661
        Housing Project                                        October 31, 2014

                                                               August 1, 2013, to
        Veterans Village        CA0810L9D021204                                               $ 216,696
                                                                 July 31, 2014
           Veterans                                       February 1, 2013, to January
                                CA1122B9D021100                                               $ 213,187
        Family Housing                                             31, 2014
                                                                  Grand total                 $ 851,289

In this limited scope audit, we reviewed Veterans First’s four SHP grants for 2014 and 2015,
each applicable to a different property, for a total of $857,244 (see table 2).

          The Line of Credit Control System is HUD’s primary grant disbursement system, handling disbursements
         for the majority of HUD programs.

                 Table 2: Veterans First’s HUD SHP grants for 2014 and 2015

        Name           Grant number             Grant period           Amount                Address

                                            September 1, 2014, to                     1135 West North Street
    Determination     CA0564L9D021306                                  $ 162,745
                                              August 31, 2015                             Anaheim, CA
                                                                                      (1) 13231 Benton Street
                                                                                         Garden Grove, CA
                                                                                           (2) 1611 North
     Veterans                               November 1, 2014, to                             Broadway
                      CA0565L9D021306                                  $ 259,661
   Housing Project                           October 31, 2015                             Santa Ana, CA 3
                                                                                           (3) 2025 North
                                                                                           Santa Ana, CA
                                              August 1, 2014, to                       12781 Josephine Street
   Veterans Village   CA0810L9D021305                                  $ 216,259
                                                July 31, 2015                            Garden Grove, CA
      Veterans                                 June 1, 2014, to                          121 Susan Street
                      CA1122B9D021301                                  $ 218,579
   Family Housing                               May 31, 2015                              Santa Ana, CA
                                                 Grand total           $ 857,244

For the fiscal year ending June 30, 2014, the general ledger showed that Veterans First received
$55,393 from the VA for its service center and $401,719 for its Broadway-Manor house. The
VA suspended Veterans First’s funding on June 20, 2014, pending the outcome of a corrective
action review. Veterans First continued providing services and incurring VA-related costs under
the assumption that the funding would be reinstated and reimbursed for services rendered.
However, in December 2014, the VA terminated the grant without providing the anticipated
reimbursement. Veterans First stopped operating its VA component in December 2014.
However, according to its general ledger, it incurred about $306,000 4 in expenses during those 6
Due to concerns with the VA activity and two recent HUD draws that appeared questionable,
CPD referred the draws to OIG and suspended funding in November 2014. Shortly after CPD
suspended its funding, Veterans First contacted CPD and asked for permission to draw down
HUD funds to cover rents and salaries. It stated that it did not have enough cash to meet its
current obligations and as a result, got behind on some of its payments. It assured CPD that once
the VA reimbursed it for the expenses incurred, it would be able to operate until the end of
December, indicating that the HUD funds would be used for VA expenses. CPD denied the
request and stated that HUD funds could be used only for specific HUD-funded project
activities, sites, and budgets identified in the grant application. CPD also stated that it could not
allow its funds to be used for another project funded from a different agency, nor could it
approve “advances” unless there were extenuating circumstances related to the HUD grants.

         Effective January 1, 2015, CPD allowed Veterans First to change its Veterans Housing Project grant to
       support the expenses of its former VA property, the Broadway-Manor house, since its Benton property’s
       lease ended in December of 2014.
         In our first audit (report number 2015-LA-1002), we stated that Veterans First’s accounting system was
       unauditable and concluded that the data in the accounting system were unreliable. We did not test the VA
       amounts in the general ledger for accuracy.

At a May 22, 2015, meeting between CPD and Veterans First, CPD suspended its Veterans
Family Housing-Susan Street property grant indefinitely because it failed to meet the agreed-
upon terms as the lease holder for client housing. Veterans First notified CPD that it had chosen
not to reapply for the fiscal year 2015 renewal funding for its four active grants, which would
end its relationship with HUD at the expiration of its fiscal year 2014 grants, the last of which
would expire on October 31, 2016.
The objective of our review was to determine whether Veterans First administered and spent its
SHP grants in accordance with HUD requirements.

                                    RESULTS OF REVIEW
Contrary to 2 CFR (Code of Federal Regulations) Part 225, appendix A (c), Veterans First drew
down HUD grant funds in advance and inappropriately diverted those funds, as well as rental
revenue specific to each HUD house, to pay off its current VA- and corporate-related expenses.
Our review of two LOCCS draws showed that Veterans First did not incur enough expenses to
warrant drawing down so much of its HUD funds, nor did it have enough supporting
documentation to show that it incurred costs related to those HUD houses. As a result, CPD
could not be assured that Veterans First used its HUD grants appropriately. Further, because it
did not have sufficient funds for its HUD property obligations, it was unable to make the lease
payments for its Veterans Family Housing-Susan Street property and caused the landlord to
begin the eviction process. We also recently learned that Veterans First was 1 month late in
paying its Self-Determination Center-Anaheim property.
Aggressive Drawdown of Grant Funds
According to 24 CFR 215.22, payment methods shall minimize the time elapsing between the
transfer of funds from the United States Treasury and the issuance or redemption of checks,
warrants, or payment by other means by the recipients. Grantees are encouraged to make
LOCCS draws monthly at a minimum of once a month or as funds are spent. Further, CPD does
not approve cash advances unless there are extenuating circumstances that relate to the HUD
grants. We reviewed Veterans First’s drawdown activity for its four direct SHP HUD grants and
noted that it drew down funds in advance.
During the period when Veterans First continued VA-related services without reimbursement, it
aggressively accessed its SHP grant funds by making several draws per month and drawing more
than 1/12th of its total grant. In one instance, it drew down 25 percent of its total grant funds for
its Benton grant only 3 days after the program term began, leaving 75 percent to be available for
the next 11 months (see Tables 3 and 4 for a more detailed analysis of the $64,908 Benton draw
below). In another instance, it drew down 50 percent of its total grant in 3 months, leaving only
50 percent to cover the 9 months remaining in the program year. In a final instance, it drew
down 92 percent of its total grant, with only 8 percent left to cover the 7 months remaining in the
program year. We attributed these actions to the organization’s need for immediate cash to cover
expenditures for its corporate- and VA-related services.
Main Bank Account and General Ledger Balances
When Veterans First drew down HUD funds from LOCCS, they were deposited into a HUD-
designated bank account and immediately transferred into Veterans First’s main bank account.
All revenues and expenses of the organization were pooled and lost their identity since Veterans

First did not keep detailed and accurate general ledger records. The untracked pooling of funds
resulted in excess expenses from one source (VA) being paid with excess revenues from another
source (HUD). In addition, Veterans First did not use the traditional “due to-due from” line
items in its general ledger, showing that one source was borrowing funds from another;
therefore, it was not clear what portion of its HUD grant funds was used for non-HUD purposes
at any time. Veterans First did not maintain controls over how it used its pooled funds.
However, the cumulative balances in the HUD accounts in the general ledgers showed that it had
excess revenues over expenses (see the cash surplus or deficit column in table 3), while the VA
and corporate general ledgers showed that it had excess expenses over revenues (see the cash
surplus or deficit column in table 4).

                   Table 3: Veterans First’s cash balances for its HUD properties
              June 2014 to February    June 2014 to February    June 2014 to February    June 2014 to February       Sum of
   Date        2015 general ledger -    2015 general ledger -    2015 general ledger -    2015 general ledger -   balance each
                     Anaheim                  Benton                  Josephine                  Susan               month

06/30/2014           (19,005)                 $23,956                 ($35,874)                 $30,091              ($832)
07/31/2014           (22,247)                 $40,998                 ($54,021)                 $18,949            ($16,321)
08/31/2014           (39,252)                 $27,487                 ($53,758)                 $98,471             $32,948
09/30/2014           (31,907)                 $9,195                  ($33,458)                $102,701             $46,531
10/31/2014           40,290                    $615                    $9,269                  $129,814            $179,988
11/30/2014           21,062                   $62,915                  ($3,115)                $114,135            $194,998
12/31/2014           15,761                   $60,731                 ($18,531)                $108,560            $166,521
01/31/2015            8,893                   $48,104                 ($31,149)                $103,868            $129,716
02/28/2015            2,952                   $36,846                 ($38,880)                 $99,939            $100,857

             Table 4: Veterans First’s cash balances for its VA and corporate accounts

               June to December 2014       June 2014 to February     June 2014 to February      Donations &
                                                                                                                  Cash surplus
   Date          general ledger - VA      2015 general ledger - VA    2015 general ledger –   loans to Veterans
                                                                                                                   or deficit
                  Broadway-Manor               service center              corporate                 First

06/30/2014            ($49,960)                    ($627)                   ($33,675)              $26,436          ($57,826)
07/31/2014            ($52,305)                   ($3,453)                  ($56,833)              $13,685          ($98,906)
08/31/2014            ($98,747)                  ($14,995)                  ($79,684)              $69,724         ($123,702)
09/30/2014           ($151,144)                  ($26,824)                 ($103,920)              $17,717         ($264,171)
10/31/2014           ($175,633)                  ($41,028)                 ($125,291)               $4,481         ($337,471)
11/30/2014           ($215,787)                  ($51,040)                 ($143,684)               $5,786         ($404,725)
12/31/2014           ($234,804)                  ($51,935)                 ($172,765)              $29,664         ($429,840)
01/31/2015           ($236,847)                  ($53,286)                 ($176,234)              $16,281         ($450,086)
02/28/2015               $0                           $0                   ($176,427)               $6,808         ($619,705)

Risk That Corporate Expenses May Have Been Paid With HUD Funds
In addition to the VA expenses, Veterans First had corporate-type charges that were paid with its
main bank account’s commingled revenues, including donations, VA grant funds, personal loans
from the president, and HUD grant funds. Although it is not a violation of HUD requirements

for Veterans First to maintain a centralized account, due to its unauthorized practice of drawing
HUD funds in advance and its poorly maintained general ledger it created the risk that HUD
funds may have paid for corporate costs that were ineligible under the program.
We reviewed Veterans First’s main bank statements from October 2013 and May 2014 and
identified food (Cowgirls Café, Citrus Café, Chipotle, McDonalds, etc.), cable (DirecTV),
membership dues (the Lincoln Club of Orange County), miscellaneous (Enterprise Rent-A-Car,
the Wine Club, Edible Arrangements, and Party City), and motel charges for the president’s
son’s stay at the Red Roof Inn. These types of expenses would not be eligible for reimbursement
based on HUD requirements since they were not previously approved on the HUD grant budget.
According to 2 CFR 215.25, recipients are required to report deviations from budget and
program plans, and request prior approvals for budget and program plan revisions. However,
because all expenses were commingled in Veterans First’s main bank account and the general
ledger was unreliable, there is a risk that HUD funds may have been used to pay for these
expenses, although they were not recorded in the HUD accounts in the general ledger. After
May 2014, the use of the debit card decreased significantly; however, these types of ineligible
charges did not stop. In the June 2014 bank statement, we identified a motel stay charge at Red
Roof Inn for the president’s son’s girlfriend. We also identified DirecTV and Lincoln Club of
Orange County membership dues during the period when Veterans First experienced cash
shortages 5.
According to the president, this methodology of transferring revenues to Veterans First’s main
bank account was instituted by one of Veterans First’s former controllers. She stated that
Veterans First planned to change the methodology so that expenses would be segregated by grant
to prevent this type of commingling of funds.
Questionable LOCCS Draws
We reviewed the two LOCCS draws referred by CPD totaling $101,334 Overall, we determined
that $49,307 was unsupported and $8,083 was ineligible. 6
   1. Voucher 501-093879 – Veterans Housing Project-Benton House ($64,908)
      Veterans First inappropriately drew down $64,908 3 months in advance and provided
      only $21,512 in backup documentation to support its expenses, indicating that its Benton
      property did not incur enough eligible expenses to warrant drawing down the full amount.
      As a result, $43,396 was drawn down and transferred to Veterans First’s main account
      and appears to have been used to pay for current non-HUD obligations, which were
      primarily VA and corporate expenses. We could not be more specific regarding these
      payments because of the commingled funds.
   2. Voucher 501-074280 – Veterans Family Housing-Susan House ($36,426)
      Of the $36,426 drawn down by Veterans First, a total of $13,994 was questionable.
      Veterans First provided only $35,044 in backup documentation; therefore, the difference
      of $1,382 was unsupported (see table 5). In addition, $4,529 in salaries was unsupported
      because the timesheets did not show how the employee’s time was allocated as required

         Due to the unreliability of the general ledger we have not been able to specifically identify if HUD funds
       drawn in advance were used to pay for these corporate costs.
         A detailed breakdown of the specific amounts in question was provided separately to Veterans First.

       by 2 CFR Part 230 (m). There were also instances in which the employee worked only
       on VA activities, yet the time was charged to HUD. For example, the former
       receptionist’s time was charged to the HUD grant when her entire salary should have
       been paid by the VA since the service center was VA funded. Finally, an additional
       $8,083 was ineligible since these funds were used on items not approved in the grant
       budget. For example, Veterans First spent $1,388 for operations services, such as
       maintenance, utilities, and insurance; however, operating costs were not approved in the
       budget. Veterans First did not request a budget revision for this grant to allow operation-
       type costs to be charged as required by 2 CFR 215.25.

                 Table 5: Breakdown of questioned costs for $36,426 draw
                                 Description                 Amount
                  Amount drawn from LOCCS                  $     36,426
                  Unsupported due to allocation issue      $       4,529
                  Supported eligible expense               $     22,432
                  Unsupported due to lack of documentation $       1,382
                  Total ineligible                         $       8,083

Draws HUD Did Not Review Were Also Questionable
HUD suspended and began manually reviewing Veterans First’s drawdown requests as of
November 2014. However, due to the problems noted above, there was no assurance that
Veterans First’s other drawdowns between June and November 2014 were spent only on HUD-
eligible expenses. As a result, these additional draws totaling $340,581 were also questionable
(see table 6).

                        Table 6: Breakdown of unsupported expenses
                                                    Unsupported draws
                                 House                not reviewed by
                  Self-Determination Center-Anaheim        $68,544
                   Veterans Housing Project-Benton           $0
                       Veterans Village-Josephine         $108,120
                    Veterans Family Housing-Susan         $163,917
                                 Total                    $340,581

Inability To Make Lease Payments
Veterans First was unable to make its lease payments for one of its HUD-grant-awarded
properties, Veterans Family Housing-Susan Street, during the 4-month period from February to
May 2015, resulting in the landlord’s beginning the eviction process to get the program
participants out of the units. The president of Veterans First attributed this inability to make
payments to the organization’s lack of funds, although the HUD grant specifically earmarked a
portion of the budget to cover the entire leasing costs during the year.

In July 2014, shortly after the VA cut off its funding, Veterans First drew down $33,594 in
advance from its leasing budget line item in LOCCS for the Veterans Family Housing-Susan
Street grant. This amount represented the 3 months of lease payments for its Susan property that
could have later been used to pay its February to April 2015 rents. However, the president stated
that the funds were drawn down, transferred to Veterans First’s pooled main bank account, and
used for bills and payroll during that time. Veterans First, therefore, used the $33,594 7 in HUD
program funds, in violation of grant requirements, on expenses including VA or corporate related
costs that were recorded in its main bank account.

In June 2015, HUD allowed Veterans First to draw down $11,198, which would cover 1 month’s
lease payment. This amount was the last of the leasing funds available under the Veterans
Family Housing-Susan Street grant. CPD advised Veterans First to use the funds to pay the past-
due leasing cost for the Veterans Family Housing-Susan Street property. Although Veterans
First remitted the payment to the landlord, the landlord returned the payment since it had started
the eviction process. Those funds should be returned to HUD until the landlord agrees to accept

In addition to the Susan Street property, we learned that Veterans First was 1 month behind on
paying its Anaheim property rent and had an additional month remaining on the grant. However,
based on LOCCS, it would not have enough funds to make up the 1 month it was behind.

Veterans First used HUD funds to pay for its VA and corporate expenses by commingling
revenues and expenses in its main bank account and redirecting any excess and unused HUD
funds to its outstanding expenses. These conditions occurred because Veterans First ignored
HUD requirements, lacked controls over its pooled funds, and failed to maintain a reliable
accounting system that could adequately track the source of its expenses and revenues. Another
contributing factor was that Veterans First continued to incur VA and corporate expenses
without having funding to pay for those costs. As a result, HUD could not reasonably be assured
that the funds drawn down of $340,581 were used for their intended purpose. Based on the
available documentation for the two draws reviewed, Veterans First may have overdrawn
$44,778 from its HUD grants and used it for non-HUD-related expenses. We also determined
$4,529 in salary charges to be unsupported and an additional $8,083 in expenditures to be
ineligible. Because Veterans First used its HUD funds for VA and corporate expenses, it could
not meet its HUD obligations at its Susan Street and Anaheim properties and caused the landlord
at Susan Street to begin the eviction process. Further, it should return $11,198 in grant funds that
CPD allowed it to draw until the landlord agrees to accept payment.

        The unsupported cost of $33,594 is included in the total questioned costs of draws not reviewed by CPD.

We recommend that the Director of the HUD Los Angeles Office of Community Planning and
Development require Veterans First to
1A.   Support or repay $49,307 in unsupported costs to the program from non-Federal funds.
1B.   Repay $8,083 in ineligible costs to the program from non-Federal funds
1C.   Support or repay the program for grant funds of $340,581 that were drawn without being
      reviewed by HUD.
1D.   Support or repay the June 2015 drawdown of $11,198, which Veterans First was advised
      to use for its Susan Street past-due rent.
1E.   Require Veterans First to implement additional procedures and controls for its accounting
      system to ensure that it spends grant funds only on HUD projects.
We also recommend that HUD’s Office of Program Enforcement
1F.   Pursue civil remedies or administrative sanctions against Veterans First and responsible
      parties for the misuse of HUD funds.

Appendix A

                                  Schedule of Questioned Costs

                                            Ineligible 1/     Unsupported 2/

                           1A                                    $49,307
                           1B                $8,083
                           1C                                    $340,581
                           1D                                     $11,198
                         Totals              $8,083              $401,086

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
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

Appendix B

             Auditee Comments and OIG’s Evaluation

Ref to OIG
              Auditee Comments

Comment 1

Comment 2

Comment 3

Comment 4

               * Names redacted for privacy reasons

Ref to OIG
Evaluation   Auditee Comments

Comment 5

Comment 6

Comment 7

Comment 8

Comment 9

Comment 10

Comment 11

Ref to OIG
Evaluation   Auditee Comments

             * Names redacted for privacy reasons

                           OIG Evaluation of Auditee Comments

Comment 1   We performed the second audit due to additional concerns CPD brought to our
            attention outside the scope of our original review. We did not initiate the second
            audit until several months after Veterans First had made the latter of the two grant
            draws in question. Veterans First was also already aware its accounting records
            were inaccurate at the initiation of the first audit, back in June 2014; however, it
            has still not corrected its records over a year later. In addition, this second audit
            was not solely based on Veterans First’s general ledgers. We also reviewed
            additional information as documented in the Methodology and Scope section
            above, including the backup documentation of two grant draws, bank statements,
            and LOCCs information.
Comment 2   The scope limitation refers to the incomplete and inaccurate general ledgers that
            Veterans First provided.
Comment 3   We disagree. We did not assure Veterans First that we had no problems with the
            former bookkeeper. In fact, we informed the president/CEO about not receiving
            items requested in a timely manner. The president/CEO was copied on emails
            asking for documentation and was included in a teleconference call regarding the
            status of documents requested. Due to the delays in receiving the requested
            information from the bookkeeper, we issued two subpoenas to enforce
Comment 4   We included information regarding the former audit for background purposes. It
            was meant to differentiate the scope of review of both audits. We did identify that
            some of the complaint allegations had merit in the first audit. Details of those
            allegations are discussed in audit report number 2015-LA-1002.
Comment 5   We did not state that corporate expenses such as food, DirecTV, the Lincoln Club,
            and miscellaneous were paid with HUD funds. We stated that because these
            expenses were recorded in the main bank account, there is a risk that HUD funds
            were used to pay for them. According to the HUD Supportive Housing Program
            desk guide, costs associated with the organization including fundraising efforts
            are ineligible to be paid under the Supportive Housing Program. We have made
            adjustments to the applicable section of the report to clarify that this was a risk
            rather than it having definitely occurred.
Comment 6   The schedule provided showed an accounting of the funds owed to the
            president/CEO for loans of her personal funds to Veterans First. We agree that
            the schedule shows that the stays for the president/CEO’s son during the period
            March 15 - 21, 2013, March 29, 2013 to April 5, 2013, and April 5 - 12, 2013 at
            Red Roof Inn were deducted from the loans she provided to Veterans First.
            However, subsequent stays at Red Roof Inn were not deducted from the loans

              provided as reflected in the schedule. The president/CEO’s son stayed at Red
              Roof Inn during the period March 17 – 23, 2014 and March 24 - 30, 2014, yet the
              schedule does not show any deductions from the loan to Veterans First for those
              stays. Because all payments were made from the main account and all funds are
              commingled in the main account without accurate accounting records, there is a
              risk that HUD funds were used to pay for the son’s stay at Red Roof Inn in 2014.
Comment 7     We obtained a copy of the Red Roof Inn invoice made out to the president’s son’s
              girlfriend for the period May 28, 2014 to June 4, 2014. The payment was made
              out of the main account and is reflected in the June 1-30, 2014 bank statement.
Comment 8     We did not review the general ledgers after Veterans First made changes to its
              accounts as of July 1, 2015, as it was outside of our scope; therefore, we cannot
              comment on its accuracy or completeness.
Comment 9     After receiving our draft finding outline, Veterans First resubmitted source
              documents for its Susan and Benton grant draws that were altered and therefore,
              not acceptable. Information on the timesheets was inappropriately whited out and
              new information was replaced in order to incorrectly show that salaries of
              employees were allowable under the grant. We brought the altered timesheets for
              the Susan grant to Veterans First attention during the exit conference. Shortly
              thereafter, Veterans First sent us an e-mail stating that this had been a mistake.
Comment 10 Based on our audit results, we cannot reasonably be assured that the funds
           Veterans First drew down were used for its HUD projects. Therefore, we
           questioned the amount that HUD did not review and asked that Veterans First
           provide the support for the receipts to HUD during audit resolution.
Comment 11 HUD provided Veterans First over $1.7 million in SHP funds for grant years
           ending in 2014 and 2015, to provide services to veterans. Since these are
           taxpayer dollars, the funds must be used in accordance with the grant agreements
           and HUD’s other program requirements. However, Veterans First misused these
           funds, and as a result we have made recommendations to HUD for appropriate
           corrective action.

Appendix C

Regulations at 24 CFR 215.22, Payment, state that payment methods must minimize the time
elapsing between the transfer of funds from the United States Treasury and the issuance or
redemption of checks, warrants, or payment by other means by the recipients.
Regulations at 2 CFR 215.25, Revision of Budget and Program Plans, state that the budget
plan is the financial expression of the project or program as approved during the award process.
It may include either the Federal and non-Federal share or only the Federal share, depending
upon Federal awarding agency requirements. It must be related to performance for program
evaluation purposes whenever appropriate. The regulations also state that recipients are required
to report deviations from budget and program plans and request prior approvals for budget and
program plan revisions in accordance with this section.
Regulations at 2 CFR, Part 225, Appendix A, Allocable Costs (c), state that any cost allocable
to a particular Federal award or cost objective under the principles provided for in 2 CFR Part
225 may not be charged to other Federal awards to overcome fund deficiencies, to avoid
restrictions imposed by law or terms of the Federal awards, or for other reasons.
Regulations at 2 CFR Part 230, Appendix A, General Principles (A) Basic Considerations
2, state that to be allowable under an award, costs must be adequately documented.

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

Regulations at 24 CFR 583.315(b), Use of rent, state that resident rent may be used in the
operation of the project or may be reserved, in whole or in part, to assist residents of transitional
housing in moving to permanent housing.