oversight

The County of Riverside, CA, Did Not Always Support the Eligibility of Its Community Development Block Grant Program Expenses

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-02-18.

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

                County of Riverside, CA
        Community Development Block Grant Program




Office of Audit, Region 9     Audit Report Number: 2016-LA-1002
Los Angeles, CA                                February 18, 2016
To:            William G. Vasquez, Director, Office of Community Planning and Development,
               Los Angeles, 9DD

               //SIGNED//
From:          Tanya E. Schulze, Regional Inspector General for Audit, 9DGA
Subject:       The County of Riverside, CA, Did Not Always Support the Eligibility of Its
               Community Development Block Grant Program Expenses

Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of the County of Riverside’s Community
Development Block Grant 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: 2016-LA-1002
                   Date: February 18, 2016

                   The County of Riverside, CA, Did Not Always Support the Eligibility of Its
                   Community Development Block Grant Program Expenses




Highlights

What We Audited and Why
We audited the County of Riverside’s Community Development Block Grant program due to the
delayed expenditure of funds for fiscal year 2014 and previous audit findings regarding policies
and procedures. The Office of Inspector General had conducted a review of the County and
identified issues with its program-specific policies and procedures, which were addressed (audit
report number 2010-LA-1004). Our objective was to determine whether the County
administered its program in accordance with U.S. Department of Housing and Urban
Development (HUD) rules and requirements.

What We Found
The County did not always administer its program in accordance with HUD rules and
requirements. It incurred $761,744 in program expenses without supporting that these expenses
met program eligibility requirements. This condition occurred because the County did not
always follow its own policies and procedures in managing its program funds and source
documentation to ensure compliance with HUD rules and requirements. As a result, it spent
$761,744 in program funds on unsupported costs and placed its projects at risk of not meeting
HUD’s national objectives for the program. After we completed our fieldwork, the County
provided additional documentation to support $717,439 of the questioned program expenses.
However, it was not able to provide documentation for the remaining $44,305 in questioned
costs.

What We Recommend
We recommend that the Director of HUD’s Los Angeles Office of Community Planning and
Development require the County to (1) support the $44,305 in questioned costs and (2) fully
implement its program internal policies and procedures to comply with HUD rules and
requirements.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The County Did Not Always Support the Eligibility of Its Program
         Expenses ............................................................................................................................. 4

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

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

Appendixes ..............................................................................................................10
         A. Schedule of Questioned Costs .................................................................................. 10
         B. Auditee Comments and OIG’s Evaluation ............................................................. 11
         C. Criteria ....................................................................................................................... 13




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Background and Objective
The Community Development Block Grant (CDBG) entitlement program is authorized under
Title 1 of the Housing and Community Development Act of 1974, Public Law 93-383, as
amended, 42 U.S.C.(United States Code) 530.1 et seq. The program allocates annual grants to
larger cities and counties to develop viable communities by providing decent housing, a suitable
living environment, and opportunities to expand economic opportunities, principally for low- and
moderate-income persons. To achieve these goals, program-funded projects must satisfy one of
three U.S. Department of Housing and Urban Development (HUD) national program objectives
required in 24 CFR (Code of Federal Regulations) 570.208: provide a benefit to low- and
moderate-income persons, prevent or eliminate slums or blight, or meet other urgent community
development needs due to disasters or other emergencies.

HUD provides the County of Riverside, CA, an annual allocation of funds to meet the goal of
developing viable communities. The County’s Economic Development Agency administers the
program for low- and moderate-income residents of Riverside County. The County uses
program funds for many activities, including senior programs, after-school activities, food
pantries, youth programs, public facilities, street improvements, parks and playgrounds,
community centers, libraries, and homeless shelters. The County received the following
program funds from fiscal years 2011 to 2014.


                               Fiscal year    Allocated amount

                                  2011             $8,044,912
                                  2012             $6,836,580
                                  2013             $7,562,655
                                  2014             $7,442,595
                                  Total            $29,886,742

Our objective was to determine whether the County administered its program in accordance with
applicable HUD rules and requirements.




                                               3
Results of Audit

Finding: The County Did Not Always Support the Eligibility of Its
Program Expenses
The County did not always administer program funds according to HUD rules and requirements.
It used $761,744 in program funds for expenses without supporting that these expenses met
program eligibility requirements and placed its program at risk of not meeting HUD’s national
objectives for the program. This condition occurred because the County did not always follow
its own policies and procedures in managing its program funds and did not ensure that source
documentation was used to support program expenses as required by HUD rules and
requirements. After we completed our fieldwork, the County provided additional documentation
to support $717,439 of the questioned expenses. As a result, we reduced the questioned
expenses to $44,305 in unsupported costs.

The County Did Not Support Program Expenses
We reviewed more than $5.1 million in total project expenditures for 16 projects. The County
spent $761,744 in program funds, which was not supported in accordance with 24 CFR
85.20(b)(6), 24 CFR 570.506, and HUD Office of Community Planning and Development
publication, HUD-2005-05-CPD (appendix C).


                                    Project                       Unsupported

                 Home Gardens Elementary School park and
                                                                     $600,000
                         playground improvement
                James Venable Community Services Program                $363
                          Home improvement - A                         $6,297
                          Home improvement - B                        $19,539
                  Good Hope Elementary School sidewalk               $114,232
                   Mountain Community Library project                 $21,313
                                     Total                           $761,744

The County used $600,000 in program funds for the construction of playground and park
improvements for the Home Gardens Elementary school. These costs included construction and
material expenses. Further, it reimbursed the James Venable Community Services Program $363
in program funds for incurred utility expenses. The County did not obtain canceled checks or
bank statements as support for these expenditures, as required by 24 CFR 85.20.b(6), 24 CFR
570.506(h), and HUD-2005-05-CPD, to support these program costs. The County’s own CDBG
subrecipient training presentation stated that files must include original source documentation for
all financial records, including canceled checks or bank statements. Instead, the County obtained



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only invoices as supporting evidence and did not ensure that the subrecipients had incurred the
claimed expenditures.

The County spent $25,836 in program funds for home improvement repair projects. Of this
amount, it spent $6,297 and $19,539 on home improvement repair projects that benefited two
low- and moderate-income households, respectively. Regulations at 24 CFR 570.506(b)(4)(iii)
require that the size and income of the household be obtained for the use of program funds used
for home improvement repairs. In addition, the County’s own internal procedures require proof
of income from the participants to meet program eligibility. However, the County did not obtain
proof of income from the participants to ensure eligibility for all residents in the households.
The first household was required to submit all household income and copies of recent bank
statements, yet the County did not obtain these required documents for all household members.
The second household was required to submit completed, signed, and dated Federal tax returns
that included schedules and Internal Revenue Service Forms W-2. The tax documents in the file,
used to determine eligibility, were incomplete. As a result, the County did not obtain the
required supporting documentation to show that the participants for both households were
eligible for the program.

The County incurred $114,232 in labor expenses during the construction of sidewalks and curbs
at the Good Hope Elementary School. It also incurred $21,313 in labor expenses during the
construction of the Mountain Community Library. These expenses were not supported by
employee time and attendance records as required by 24 CFR 85.20(b)(6), 24 CFR 570.506, and
HUD-2005-05-CPD. Instead, the County maintained only invoices and general journal entries as
support for these labor expenses. As a result, it incurred a total of $135,545 in unsupported labor
expenses under the program.

The County Provided Support for Questioned Expenses
In January 2016, the County provided documentation to support the questioned expenses
identified in this report. It provided this documentation after we had completed our fieldwork
and issued the finding outline in December 2015. Specifically, the County provided
documentation that supported $717,439 of the $761,744 in questioned expenses. As a result, we
revised the questioned expenses to $44,305 that the County could not support in accordance with
24 CFR 85.20(b)(6), 24 CFR 570.506, and HUD-2005-05-CPD.


                                    Project                        Unsupported

                         Home improvement - B                         $19,539
                   Good Hope Elementary School sidewalk               $24,766
                                     Total                            $44,305

Of the $44,305, the County spent $19,539 in program funds for a home improvement repair
project that benefited a low- and moderate-income household. It incurred $24,766 in labor
expenses during the construction of sidewalks and curbs at the Good Hope Elementary School.




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The County did not have the required documentation for either project to ensure program
eligibility.

Conclusion
The County did not always administer program funds according to HUD rules and requirements
and its own policies and procedures because it did not follow its own internal procedures for
managing program funds and source documentation. As a result, it spent $44,305 in program
funds for expenses that it could not support and placed its projects at risk of not meeting HUD’s
national objectives for the program.

Recommendations
We recommend that the Director of HUD’s Los Angeles Office of Community Planning and
Development require the County to

       1A.     Support the eligibility of the $44,305 in questioned costs or repay the U.S.
               Treasury using non-Federal funds.
       1B.     Fully implement its program internal policies and procedures to comply with
               HUD rules and requirements.




                                                 6
Scope and Methodology
We performed our audit work at the County’s offices in Riverside, CA, from September 8 to
December 23, 2015. Our review covered the period October 1, 2010, to September 30, 2014,
and was expanded as necessary.

To accomplish our objective, we

    •   Reviewed relevant background information, including prior Office of Inspector General
        (OIG) audit reports;

    •   Reviewed and analyzed the County’s policies, procedures, and internal controls relating
        to its program;

    •   Reviewed applicable HUD regulations and requirements;

    •   Reviewed HUD monitoring reports, annual progress reports, the County’s action plan,
        and program funding agreements;

    •   Reviewed the County’s audited financial statements for fiscal years 2012, 2013, and
        2014; and

    •   Reviewed project files for sampled program expenses.

We relied on data maintained by the County. Specifically, we relied on the accuracy of data
extracted from HUD’s Integrated Disbursement and Information System 1 for the period July 1,
2011, through June 30, 2015. We performed a data reliability assessment and determined that
the data were sufficiently reliable for our audit objective. Specifically, we compared the total
spent program funds in the data with the County’s audited single audit reports and Consolidated
Annual Performance and Evaluation Reports.
The audit universe consisted of 429 projects totaling nearly $30.3 million in expenditures for the
period July 1, 2011, through June 30, 2015, and more than $45.5 million in project expenditures.
For our review, using ACL2 software’s random generator, we selected 16 transactions totaling
more than $4.6 million in project expenditures for the period and more than $5.1 million in total
project expenditures. Overall, our sample represented 15 percent of the expenditures for the
period and 11 percent of the total expenditures. Although this approach did not allow us to make
a projection to the population, it was sufficient to meet the audit objective.


1
  The Integrated Disbursement and Information System provides HUD with current information regarding the
   program activities underway across the Nation, including funding data.
2
  ACL software provides data analytics and sampling of computerized information.



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We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                8
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

•   Effectiveness and efficiency of operations,
•   Reliability of financial reporting, and
•   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

•   Effectiveness and efficiency of program operations – Implementation of policies and
    procedures to ensure that program funds are used for eligible purposes.

•   Reliability of financial information – Implementation of policies and procedures to
    reasonably ensure that relevant and reliable information is obtained to support eligible
    program expenditures.

•   Compliance with applicable laws and regulations – Implementation of policies and
    procedures to ensure that the monitoring of and expenditures for program activities comply
    with applicable HUD rules and requirements.

We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.

Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   The County did not follow its own policies and procedures to ensure that program funds were
    used in compliance with HUD rules and requirements (finding).




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Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 1/
                               number
                                   1A              $44,305
                                 Totals            $44,305


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




                                              10
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               11
                        OIG Evaluation of Auditee Comments


Comment 1   We appreciate and commend the County for taking action to ensure that CDBG
            funds are used for eligible program expenses. In addition, we appreciate the
            County’s initiative to take corrective actions to strengthen its recordkeeping
            system and ensure that all program expenses are eligible and supported.




                                            12
Appendix C
                                             Criteria

The following sections of 24 CFR Part 85, 2 CFR Part 225, 24 CFR Part 570, and HUD-2005-
05-CPD were relevant to our audit of the County’s administration of program funds.
24 CFR Part 85, Administrative Requirements for Grants and Cooperative Agreements to State,
Local, and Federally Recognized Indian Tribal Governments
.20. Standards for financial management systems
       (b) The financial management systems of other grantees and subgrantees must meet the
       following standards:
       (3) Internal control. Effective control and accountability must be maintained for all grant
       and subgrant cash, real and personal property, and other assets. Grantees and subgrantees
       must adequately safeguard all such property and must assure that is used solely for
       authorized purposes.
       (6) Source documentation. Accounting records must be supported by such source
       documentation as cancelled checks, paid bills, payrolls, time and attendance records,
       contract and subgrant award documents, etc.
2 CFR Part 225, Cost Principles for State, Local, and Indian Tribal Governments (Office of
Management and Budget Circular A-87)
Appendix A to Part 225 – General Principles for Determining Allowable Costs
C. Basic Guidelines
       1. Factors affecting allowability of costs. To be allowable under Federal awards, costs
          must meet the following general criteria:
           j. Be adequately documented.
24 CFR Part 570, Community Development Block Grants
Subpart J - Grant Administration
570.506. Records to be maintained
Each recipient shall establish and maintain sufficient records to enable the Secretary to determine
whether the recipient has met the requirements of this part. At a minimum, the following records
are needed:
       (b)(4)(iii) For each unit occupied by a low and moderate income household, the size and
       income of the household.
       (h) Financial records, in accordance with the applicable requirements listed in section
       570.502, including source documentation for entities not subject to parts 84 and 85 of this
       title. Grantees shall maintain evidence to support how the CDBG funds provided to such


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       entities are expended. Such documentation must include, to the extent applicable,
       invoices, schedules containing comparisons of budgeted amounts and actual
       expenditures, construction progress schedules signed by appropriate parties (e.g., general
       contractor and/or a project architect), and/or other documentation appropriate to the
       nature of the activity.
HUD-2005-05-CPD, Playing by the Rules – A Handbook for CDBG Subrecipients on
Administrative Systems, March 2005
2.5. Source Documentation
The general standard is that all accounting records must be supported by source documentation
(see 24 CFR 85.20(b)(6) and 84.21(b)(7)). Supporting documentation is necessary to show that
the costs charged against CDBG funds were incurred during the effective period of the
subrecipient’s agreement with the grantee, were actually paid out (or properly accrued), were
expended on allowable items, and had been approved by the responsible official(s) in the
subrecipient organization.
The source documentation must explain the basis of the costs incurred as well as show the actual
date and amount of expenditures. For example:

•   With respect to payrolls, source documentation should include employment letters and all
    authorizations for rates of pay, benefits, and employee withholdings. Such documentation
    might include union agreements or minutes from board of directors’ meetings where salary
    schedules and benefit packages are established, copies of written personnel policies, [Internal
    Revenue Service] W-4 forms, etc. For staff time charged to the CDBG program activity,
    time and attendance records should be available. If an employee’s time is split between
    CDBG and another funding source, there must be time distribution records supporting the
    allocation of charges among the sources. Canceled checks from the employees, insurance
    provider, etc., or evidence of direct deposits will document the actual outlay of funds.




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