oversight

Utica Community Action, Inc., Utica, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-11-20.

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

                                                                  Issue Date
                                                                          November 20, 1998
                                                                  Audit Case Number
                                                                          99-NY-241-1002




TO:


FROM: Alexander C. Malloy, District Inspector General for Audit, 2AGA


SUBJECT:
              Community Planning and Development Programs



We reviewed the system of financial and management controls in use at Utica Community Action,
Inc. (UCAI), a not-for-profit corporation, that has been the recipient of a substantial amount of

Housing and Urban Development (HUD). Our review was initiated by complaints provided to the
Office of Inspector General (OIG). These complaints included allegations of mismanagement
                                              UCAI’s operations. Accordingly, our examination
was designed to evaluate the system of controls and the organizational environment in which the

administered its activities in an economical manner and in compliance with applicable Federal
requirements. The review period was from January 1, 1997 through December 31, 1997, and

between January 26, 1998 and October 9, 1998.

This report contains two findings that show that UCAI did not always comply with applicable

management controls over its operations. Furthermore, we found questionable practices involving
UCAI’s operation of its for-profit corporation.


report on: (1) the corrective action taken, (2) the proposed corrective action and the date to be
completed, or (3) why action is not considered necessary. Also, please furnish us copies of any
Management Memorandum


Should you or your staff have any questions, please contact William H. Rooney, Assistant District
Inspector General for Audit, at 212-264-8000, Extension 3976.




                       (THIS PAGE LEFT BLANK INTENTIONALLY)




                                       Page ii                           99-NY-241-1002
Executive Summary
We reviewed the system of financial and management controls in use at UCAI, a not-for-profit
corporation, regarding the various Federal, State, and Locally funded programs that UCAI
administers. UCAI receives a substantial amount of funds from HUD to administer Community
Planning and Development programs, such as, HOME, Youthbuild and Housing Opportunities
for Persons with AIDS. The purpose of the examination was to evaluate allegations of
mismanagement caused by management control weaknesses in UCAI’s operations. In addition,
our review was designed to determine whether UCAI administered its activities in an economical
manner and in compliance with applicable Federal requirements.

Our review showed significant weaknesses in the system of controls and in the environment in
which the system of controls functioned. We were unable to rely upon UCAI’s financial and
program records because they were not complete, current, and accurate. Additionally, we found
certain inappropriate transactions indicating an inability of management to safeguard assets in an
effective manner. Also, the length of our review was inordinately extended because UCAI’s was
unable to provide us with documents or information in a timely manner. Under the circumstances,
other inappropriate transactions may have occurred and remained undetected during our audit
tests of UCAI’s operations.


                                     Appropriate controls have not been implemented or
 Deficiencies Found                  enforced because the UCAI Board of Directors have not
                                     exercised oversight and control over the operations of the
                                     agency. Weaknesses exist in UCAI’s accounting controls
                                     including cash receipts, cash disbursements, budgetary
                                     controls, and support for expenditures and transactions. In
                                     addition, we found management control weaknesses
                                     regarding UCAI equipment, agency credit cards, cellular
                                     telephones, gasoline charges and the use of bank lines of
                                     credit.

                                     UCAI has been improperly subsidizing the operations of
                                     ANKH Construction, Inc., a for-profit subsidiary of UCAI.
                                     We found questionable transactions involving conflict of
                                     interests and improper use of UCAI’s State tax exemption
                                     status. As a result, public funds have been uneconomically
                                     used to benefit ANKH business activities and may have
                                     inappropriately benefited certain UCAI employees.

                                     We are recommending actions that will strengthen UCAI’s
   Recommendations to                future administration of HUD programs, as well as other
   Mitigate Problems                 government programs. These actions include the
                                     establishment of clear lines of authority to provide for
                                     effective Board oversight and specific actions to remedy the


                                              Page iii                             99-NY-241-1002
                  identified controls weaknesses. In connection with UCAI’s
                  subsidizing of ANKH’s operations, we have recommended
                  that UCAI adopt the necessary controls to ensure that all
                  funding received from HUD and others be used
                  appropriately to administer approved activities. Finally, we
                  recommend that ANKH immediately reimburse UCAI for
                  all funds and services provided for non-programmatic
                  work.

                  The results of the audit were discussed with officials during
Exit Conference   the course of the audit, and an at an exit conference held on
                  October 9, 1998 attended by:

                  UCAI Officials

                  Michael Suppa, UCAI Board Member
                  Michael Parker, UCAI Board Member
                  Fred Lomonto, UCAI Board Member
                  John Furman, UCAI Program Planner
                  Paul Martini, UCAI Controller

                  HUD - Office of Inspector General

                  William H. Rooney, Assistant District Inspector
                                         General for Audit
                  Larry Magiera, Senior Auditor
                  John Cameron, Auditor
                  Richard Roseboom, Auditor

                  UCAI’s Board of Directors agreed with our recom-
                  mendations and provided written comments which are
                  included as Appendix B to this report.




                    Page iv                            99-NY-241-1002
Table of Contents

Management Memorandum                                                     i


Executive Summary                                                        iii


Introduction                                                             1


Findings

1    UCAI Has Not Implemented Effective Financial and
     Management Controls Over Its Operations                             3



2    Questionable Practices Involving UCAI’s Operation of a
     For-Profit Corporation                                              11



Management Controls
15

Follow Up On Prior Audits
17

Appendices
      A Schedule of UCAI Funding Sources
19

      B UCAI Comments
21

      C Distribution
25



                                  Page v                      99-NY-241-1002
Table of Contents


Abbreviations
ANKH          ANKH Construction, Inc. (For-Profit subsidiary of UCAI)
CDBG          Community Development Block Grant
CEO           Chief Executive Officer
HUD           U.S. Department of Housing and Urban Development
IPA           Independent Public Accountant
OIG           Office of Inspector General
OMB           Office of Management and Budget
UCAI          Utica Community Action, Inc.




                                     Page vi                            99-NY-241-1002
Introduction
In 1966, Utica Community Action, Inc. (UCAI), a not-for-profit corporation, was incorporated in
the State of New York. The corporation was established for the purpose of, among other things,
surveying community needs and developing and administrating anti-poverty programs for the City
of Utica, New York.

UCAI is governed by a Board of Directors that consists of seventeen members. UCAI Board
members represent local neighborhoods, private enterprise, and the public sector. The
implementation of policies and the administration of UCAI is the responsibility of Raymond
Shanley, Chief Executive Officer (CEO). The books and records of UCAI are located at 253
Genesee Street, Utica, New York 13501.

During the audit period, UCAI administered numerous grants and awards provided by various
public and private sources. HUD provided about 59 percent of all UCAI resources for
Community Planning and Development programs, such as, Youthbuild, HOME and Housing
Opportunities for Person with AIDS. In addition, during our audit period UCAI administered a
HUD Section 8, Low-Income Rental Assistance Program. Included in Appendix A of this
report is a schedule of funding sources that provided funding to UCAI during the audit period.




                                    The audit objectives were to: (1) evaluate UCAI’s system of
 Audit Objectives, Scope            controls and the organizational environment in which the
 and Methodology                    controls functioned; and          (2) determine if UCAI
                                    administered its activities in an economical manner; and if
                                    UCAI complied with applicable Federal requirements.

                                    The audit covered the period from January 1, 1997 through
                                    December 31, 1997. However, we reviewed activity prior
                                    and subsequent to the audit period as necessary. Based on
                                    our survey, the audit focused primarily on UCAI’s
                                    management and accounting controls and the affect that
                                    UCAI’s control environment had on conducting its
                                    operations and management practices. The field work was
                                    performed between January 26, 1998 and October 9, 1998.

                                    In order to accomplish the audit objectives the following
                                    audit procedures were performed:

                                    iExamined elements of UCAI’s control environment.

                                    iExamined UCAI records and files and interviewed staff.



                                             Page 1                             99-NY-241-1002
Introduction


               iConducted site visits to verify property and equipment.

               iTested selected transactions.

               The audit was conducted in accordance with generally
               accepted government audit standards.

               A copy of this report was provided to UCAI.




                           Page 2                            99-NY-241-1002
                                                                                         Finding 1


UCAI Has Not Implemented Effective Financial
and Management Controls Over Its Operations
UCAI’s financial and management controls cannot be relied upon to provide current and accurate
information necessary to effectively account for and administer grant programs. The
implementation of adequate controls is required by various grant agreements, as well as HUD
regulations and Office of Management and Budget (OMB) Circulars. Appropriate controls have
not been implemented or enforced because the UCAI Board of Directors have not exercised
oversight and control over the operations of the agency. Consequently, there is little assurance
that program assets are adequately safeguarded and used for appropriate purposes. Moreover,
there is little assurance that disbursements are reasonable and necessary, and that such costs are
equitably allocated between funding sources. We believe that management control weaknesses
have permitted questionable transactions to remain undetected and has allowed a gradual
deterioration of UCAI’s financial condition to remain unaddressed.




                              OMB Circular A-110, “Uniform Administrative Requirements for
      Criteria                Grants and Agreements with Institutions of Higher Education,
                              Hospitals, and other Non-Profit Organizations” establishes the
                              standards for financial management systems necessary to administer
                              Federal grants. The standards require financial systems to provide:

                              •   Records that adequately identify the source and application of
                                  funds.
                              •   Effective control over and accountability for all funds, property
                                  and other assets.
                              •   Comparison of outlays with budget amounts for each award.
                              •   Written procedures to minimize the time elapsing between the
                                  transfer of funds to the recipient from the U.S. Treasury.
                              •   Written procedures for determining the reasonableness and
                                  allowability of costs in accordance with the provisions of
                                  applicable Federal cost principles and the terms and conditions
                                  of the award.
                              •   Accounting records including cost accounting records that are
                                  supported by source documentation.

                              Moreover, OMB Circular A-122, “Cost Principles for Non-Profit
                              Organizations” provides that costs must be reasonable and
                              adequately documented. In addition, costs must be applied
                              consistently through the application of generally accepted
                              accounting principles.


                                               Page 3                               99-NY-241-1002
                                                                                   Finding 1



                         UCAI’s official accounting records are maintained by UCAI’s
  Background and Scope
                         Controller. The Controller is responsible for maintaining general
                         ledgers, journals, cash receipts and disbursement records for all
                         Federal, State, and other programs. In addition, the Comptroller
                         maintains the financial records for ANKH (a for-profit corporation)
                         of UCAI.

                         We reviewed UCAI’s financial management system including
                         internal controls, accounting procedures, and purchasing policies
                         to determine whether UCAI was in compliance with the
                         aforementioned criteria.    We tested selected transactions to
                         determine whether they were accurately recorded, properly
                         documented, and reasonable.

                         Material errors and deficiencies were found in the financial records
Results of Review        maintained by UCAI. The errors and deficiencies have affected the
                         accuracy of program reports and the assurance that grant funds
                         were properly being used and safeguarded. In addition, we found
                         flaws in management’s oversight of the organization that has
                         resulted in an environment that has allowed UCAI’s system of
                         internal controls to be circumvented.

                         UCAI Operations Lack Effective Board of Directors Oversight and
                         Control

                         A recently released New York State Department of State
                         monitoring report was critical of the Board of Directors and
                         identified instances where the Board did not comply with New
                         York State laws. Namely, the report contains findings that address
                         violations of laws pertaining to the Board’s membership
                         composition and its failure to conduct meetings in accordance with
                         UCAI’s by-laws, and State laws including Open Meeting Laws and
                         Roberts Rules of Order. Other deficiencies included poorly
                         documented minutes, questionable removal and selection of Board
                         members, and failure to properly approve certain financial
                         transactions.

                         Apart from the above, the OIG has received written complaints
                         from prior UCAI employees and Board members. These complaints
                         alleged that UCAI’s management has been instrumental in
                         improperly structuring the Board to personally benefit management.
                         In addition, allegations involved the alteration of Board meeting
                         minutes, and improper voting on significant matters and
                         transactions.

                                             Page 4                           99-NY-241-1002
                                                                                    Finding 1



                       The results of our review substantiated the matters identified in the
                       State report and some of the complaints that were forwarded to us.
                       In particular, we found that UCAI could not produce all of the
                       minutes supporting Board meetings, the minutes provided were not
                       always signed, and in many instances copies of the Board minutes
                       were given to us rather than the originals.

                       We believe that the Board’s failure to exercise its responsibilities to
                       ensure that the UCAI is properly administering programs has
                       contributed to an environment that weakens the organization’s
                       system of controls. Some of the more significant deficiencies and
                       errors are discussed in detail below and in the other finding in this
                       report.

Deficient Accounting   1. UCAI General Ledger is not being posted in a timely manner.
Controls                  Many transactions occurring in 1997 were not posted to the
                          ledger through March 1998. For example, the November
                          1997, $850,000 purchase of the Ropewalk Apartments was
                          not fully recorded in the books and records.

                       2. Receipts and expenditures for Federal, State, and other
                          programs are commingled in cash accounts that can not be
                          readily reconciled by grant activity or grant program year.

                       3. Year end amounts in UCAI’s Balance Sheet accounts do not
                          agree with amounts shown in the Independent Public
                          Accountant’s (IPA) report for the year ended 1996. The
                          differences remain unresolved and appear to have resulted from
                          UCAI’s failure to post adjusting entries provided by the IPA.

                          Examples include:

                          Account           UCAI General Ledger                  IPA Report
                          Cash               $ 117,059.00                       $127,642.00
                          Grants Receivable   416,990.00                         522,239.00
                          Property/Equipment 370,328.00                          535,061.00

                       4. Budgetary controls over program funds are not effectively
                          employed. There is no assurance that expenditures are
                          compared to budgeted amounts at the time they are incurred
                          and paid.

                       5. Payments are processed without review of source
                          documentation. Purchase orders are not always signed, issued in

                                            Page 5                            99-NY-241-1002
                                                                            Finding 1


                    numerical order, and are prepared subsequent to vendor
                    invoices. Vendor invoices are not stamped or canceled after
                    payment.

                 6. Accounts Receivable and Accounts Payable are not reconciled
                    on a periodic basis. UCAI’s accounting personnel are unable
                    to readily identify the make up of the accounts.

                 7. Transactions have been misclassified in UCAI’s books and
                    records. The misclassifications materially affect the accuracy
                    and reliability of the books and records. For example, we found
                    that UCAI had misclassified security deposits as an Accounts
                    Payment/Maintenance.

                 8. Journal entries do not always contain adequate explanations or
                    support to document their purposes and propriety. Journal
                    entries are not always reviewed and approved by supervisory
                    personnel. This is a significant deficiency because UCAI
                    prepares and posts hundreds of journal entries each year.

                 9. Documentation maintained by UCAI to support bank deposits
                    did not always agree with the actual deposit tickets maintained
                    by the bank. This indicates that the make up of the deposits
                    are being improperly manipulated.

                 10. Accounting controls over rents collected on UCAI owned units
                     are poor. We found differences between rents purportedly
                     collected and supported by receipts and tenant rent cards. We
                     found that the UCAI does not use pre-numbered receipts and
                     does not use receipts in chronological order. In addition, we
                     found significant weaknesses in accounting controls over tenant
                     security deposits.

                 Controls over the location and use of UCAI’s assets need to be
Assets are not   improved. Significant weaknesses exist in inventory controls over
Safeguarded      equipment and in the controls over the use of credit cards, gasoline,
                 and cellular telephones.


                 Deficiencies Noted During Review of Equipment Inventory
                 Controls

                 1. Prior to November 1997, UCAI did not maintain a documented
                    inventory of equipment or perform periodic inventory
                    inspections.

                                     Page 6                            99-NY-241-1002
                                                          Finding 1



2. Serial numbers, or tag numbers were not always included on
   inventory control logs.

3. Equipment located during inspections by OIG could not be
   traced to the inventory control logs.

Controls Over Credit Cards, Gasoline, and Cellular Telephones are
Weak

Controls over the use of UCAI issued credit cards, cellular
telephones and gasoline purchases are not sufficient to ensure that
expenses incurred are reasonable and necessary for the economical
operation of UCAI activities. Moreover, the poor controls provide
little protection from employee abuse of UCAI assets.

Credit Cards

Our review of UCAI’s credit cards showed the following:

a. During 1997, the CEO used UCAI’s credit card to charge
   $30,735 in expenses. Of the amount, over $8,282 was incurred
   for personal expenses and another $4,499 was incurred for
   charges related to a for-profit entity of UCAI. Despite the
   extensive use of the card for personal or other non-related
   charges, UCAI did not record the amounts as due from the
   CEO on its books and records. Timely repayments have not
   been made by the CEO and fees and finance charges related to
   $2,000 in cash advances paid to the CEO have not been
   assessed or paid.

b. Most of the expenses charged on UCAI’s credit cards were not
   adequately supported with documentation including bills,
   invoices and credit card receipts. Therefore, we were unable to
   determine the reasonableness and propriety of the charges. This
   is significant because many of the charges were for meetings
   held at local restaurants.

c. UCAI has not paid its credit card debt in a timely manner,
   incurring interest and fees on unpaid balances.

UCAI Gas Charges

During our three month test period, UCAI was charged $3,573 for
2,981 gallons of gasoline for six agency owned vehicles. Of that

                    Page 7                          99-NY-241-1002
                                                             Finding 1


amount, the CEO received approximately 307 gallons for use in the
CEO’s UCAI leased automobile. Our review found nconsistencies
between vehicles and their odometer readings and gallons
purchased.     More significantly, we found multiple gasoline
purchases for the same vehicles within minutes. For
example, on August 1, 1997, Vehicle No. 00001 was refueled at
8:22 a.m. with 22.852 gallons, again at 8:53 a.m. with 29.156
gallons, and a third time at 9:06 a.m. with 49.645 gallons. It is clear
that controls over the purchase of gasoline are ineffective and that
the likelihood of abuse related to the purchases is significant.

UCAI Cellular Telephones
During a randomly selected three month period, we found that the
seven UCAI cellular telephones were used for incoming and
outgoing calls 7,520 times at a cost of $3,232 We also note that
several calls were made on Saturdays and Sundays and during non-
working hours. The extensive use of the cellular phones coupled
with an elaborate in house system that incurred an additional
$28,920 in costs in 1997, seems to be an uneconomical use of
UCAI assets.
UCAI Line of Credit
Since February 1997, UCAI has increased the amount of funds
drawn against its two lines of credit by 288 percent, from $115,600
to $488,436. The line of credit usage has dramatically increased the
interest cost borne by UCAI because only minimal amounts of
principal have been repaid. See chart as follows:
OUTSTANDING BALANCE - UCAI LINES OF CREDIT
 DATE      TOTAL          ADIRANDACK         UTICA
                          BANK               SAVINGS
                                             BANK
 Mar-97    $115,600       $65,600            $50,000
 Jun-97    $115,600       $65,600            $50,000
 Sept-97   $210,000       $160,000           $50,000
 Dec-97    $272,000       $222,000           $50,000
 Mar-98    $448,436       $398,436           $50,000




                     Page 8                            99-NY-241-1002
                                                                                      Finding 1



                                    UCAI Lines of Credit Balance



Mar-98

 Dec-97

 Sep-97

 Jun-97

Mar-97

     $0   50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 $450,000




                           The UCAI Controller advised that the credit lines were used as a
                           financing bridge while waiting for funds due from governmental
                           agencies. In addition, the Controller advised that the line of credit
                           amounts were UCAI discretionary funds and therefore not bound
                           by Federal guidelines or oversight. We disagree on both
                           contentions. First, our review showed that UCAI has not been
                           routinely repaying the outstanding credit line with grant funds when
                           they are received, instead, UCAI has deposited the grant funds into
                           the general fund and in turn used them for operating costs.
                           Secondly, since the credit line amounts were used to pay
                           commingled costs including Federal program expenses and since
                           Federal funds were certainly used to pay interest on the outstanding
                           credit line amounts, Federal guidelines do apply. We are concerned
                           that the dramatic increase in the use of the lines of credit may
                           indicate that UCAI has cash flow problems that could jeopardize its
                           ability to continue as a viable entity.

                           The absence of the UCAI Board of Directors oversight and control
                           over the operations of the agency and the ineffective system of
                           financial and management controls are the underlying cause for the
                           significant deficiencies included in the findings in this report.
                           Unless effective corrective actions are taken to resolve the
                           problems, it is unlikely that UCAI will have the capacity to
                           adequately administer its grants and programs in the future.



Recommendations            We recommend that you require UCAI to:


                                                Page 9                           99-NY-241-1002
                                                         Finding 1


1A.   Submit a plan for your review that meets the requirements
      of the various program regulations and OMB Circulars.

      The plan should establish clear lines of authority to provide
      effective Board oversight of UCAI operations. In addition,
      specific correctives actions should be taken to remedy the
      deficient accounting controls and to enhance UCAI’s ability
      to safeguard its assets. Procedures should be implemented
      to stop uneconomical and inappropriate use of credit and
      gasoline cards, as well as excessive use of cellular
      telephones.

Also, we recommend that you:

1B.   Review the plan and direct its implementation.

1C.   Advise UCAI that unless the plan is effectively implemented
      in a timely manner, that remedial actions including the
      suspension of HUD funding will be instituted.




                 Page 10                            99-NY-241-1002
Finding 2


       Questionable Practices Involving UCAI’s
        Operation of a For-Profit Corporation
Our review found that UCAI has been improperly subsidizing the operations of ANKH
Construction, Inc., a for-profit subsidiary of UCAI. In addition, we found questionable
transactions involving conflict of interests and improper use of UCAI’s State tax exemption
status. As a result, public funds have been uneconomically used to fund ANKH business activities
that are operating at a loss, and for activities that may have inappropriately benefited certain
UCAI employees. We believe that the questionable practices have occurred because the UCAI
Board has not exercised effective oversight of its employees and has not implemented and
enforced an effective control system to safeguard UCAI assets.




                             In 1996, UCAI created ANKH Construction, Inc., as a for-profit
 Background
                             subsidiary. The stated purpose of the corporation was to generate
                             profits on construction work in the City of Utica, New York. The
                             corporation is controlled by UCAI’s Chief Executive Officer(CEO)
                             and Controller and does not have any employees. All of the
                             corporation’s work is performed by UCAI employees. Although
                             formed in 1996, most of ANKH’s business activity occurred in
                             1997.

                             We reviewed ANKH’s books and records for 1997, and conducted
 Scope of Review             interviews with pertinent UCAI personnel to determine whether
                             ANKH’s activities were separate and distinct from those of the
                             UCAI. In addition, the review was performed to ensure that
                             ANKH was being used for the intended purpose and that its
                             activities were free of potential conflicts of interest.

                             Our review found that the UCAI control weaknesses discussed in
Review Results               Finding 1 of this report have negatively affected ANKH and
                             UCAI’s ability to appropriately account for related transactions. As
                             a result, funds and services provided by UCAI to subsidize
                             ANKH’s operations may not be fully accounted for and
                             transactions involving possible conflicts of interests have occurred
                             and remained undetected. Particular weaknesses are discussed
                             below.




                                             Page 11                              99-NY-241-1002
                                                            Finding 2




UCAI Improperly Funding ANKH

Despite being a not-for-profit agency receiving the majority of its
funds from governmental sources, UCAI has subsidized the
activities of ANKH. At December 31, 1997, UCAI’s had booked
receivables due from ANKH in the amount of $44,619 dollars. We
were unable to verify whether the amount was accurate and
included all of the costs due to UCAI, because of the poor
condition of UCAI and ANKH’s books and records. However, we
believe that the use of UCAI’s resources to subsidize the for profit
operation at ANKH does not comply with UCAI’s not-for-profit
status or with the intent of its funding agencies.

Conflicts of Interest and Related Party Transactions

Our review of ANKH’s operations disclosed at least two less than
arms length transactions involving UCAI’s CEO were, in our
opinion, inappropriate and represented conflicts of interest. Also,
we found that ANKH performed contract work on a property
owned by a relative of a UCAI management employee. These
situations are explained as follows.

Unpaid Home Improvements on CEO’s Residence

During 1997, ANKH performed free repairs to the CEO’s
residence totaling at least $5,990. Our review of ANKH’s books
and records showed that an account receivable due from the CEO
was not recorded in the books and records and that the CEO has
not been billed nor did the CEO pay for the improvements. This is
noteworthy since the majority of ANKH’s costs attributed to the
repairs were subsidized by UCAI.

We consider the transaction to be a conflict of interest and contrary
to HUD regulations. Specifically, Section 570.611 provides that no
person who exercise or have exercised any functions or
responsibilities with respect to the Community Development Block
Grant (CDBG) activities or who are in a position to participate in a
decision making process or gain inside information with regard to
such activities, may obtain a personal or financial interest or benefit
from a CDBG assisted activity, or have an interest in any contract,
subcontract or agreement with respect thereto, or the proceeds
there-under, either for themselves or those with whom they have


                    Page 12                            99-NY-241-1002
                                                          Finding 2


family or business ties, during their tenure or for one year
thereafter.

ANKH Used as an Conduit for a Questionable UCAI Advance to
the CEO

On August 7, 1997, the UCAI Board approved a $10,000 salary
advance to the CEO, payable in 60 days at one percent above the
prime interest rate. Subsequent       to the advance, certain
questionable actions were taken that relieved the CEO of the
responsibility to repay the advance. A brief discussion of these
questionable actions are as follows:

a. No actions to withhold or garnish the CEO’s salary          was
   attempted after the advance became delinquent.

b. Without UCAI Board approval, the Controller reclassified the
   advance to a note receivable. The Controller’s justification for
   the reclassification was that the CEO was unable to repay the
   advance.

c. Instead of reclassifying the advance as a note receivable, the
   Controller transferred the advance to an account titled
   “Disposable Inventory”.

d. On October 5, 1997, ANKH approved an arrangement that
   provided the CEO with $250 a month for the use of the CEO’s
   personal garage to store ANKH equipment. The monthly fee
   was to be used to repay the salary advance/receivable. Our
   review found that the arrangement did not result in any
   repayments. More importantly, our review of ANKH records,
   inspections, and interviews show that ANKH did not store any
   of its equipment at the CEO’s personal garage.

We believe the above transactions benefited the CEO by permitting
him to receive the $10,000 advance without repaying it. The
sequence of events occurred without scrutiny because of the poor
control environment at UCAI.

Identity of Interest Contract for Building Improvements

During the review period, ANKH performed building
improvements totaling at least $20,216.74 on property owned by
the brother of UCAI’s Director of Construction Services. Due to
the poor condition of ANKH’s records we were unable to

                   Page 13                          99-NY-241-1002
                                                                            Finding 2


                  determine the propriety and reasonableness of the cost. Also, we
                  were unable to ascertain the scope of work performed. This is
                  significant since UCAI advanced the majority of the money for the
                  work performed. We believe that transactions of this nature
                  involving related parties should not be financed by UCAI funds that
                  are earmarked for other not-for-profit activities.

                  State Tax Exempt Status

                  Our review of ANKH vendor invoices disclosed many instances
                  where goods and services were provided without the appropriate
                  State tax being paid. Instead, the invoices were identified as UCAI
                  purchases and therefor considered to be tax exempt. While the
                  amount of unpaid taxes were relatively small in dollar amount,
                  the problem is yet another questionable practice involving UCAI’s
                  inability to account for its transactions appropriately.

                  The matters discussed in this finding constitute non-compliances
                  with HUD regulations and OMB Circulars. Specifically, the
                  provisions of OMB Circular A-110, requiring effective control over
                  and accountability for all funds, property, and other assets. In
                  addition, provisions of A-122, requiring costs to be necessary and
                  reasonable have not been met. Unless immediate corrective actions
                  are taken to ensure that the activities of UCAI and ANKH are
                  separate, the inefficient and inappropriate use of program funds will
                  continue.



Recommendations   We recommend that you require the UCAI to:

                  2A.    Direct the Board of Directors to adopt and implement the
                         necessary controls and safeguards to ensure that all funding
                         received by UCAI from HUD and other governmental
                         agencies are only used to appropriately administer approved
                         UCAI not-for-profit activities.

                  2B.    Immediately reimburse UCAI for all funds and services
                         provided to ANKH for non-programmatic work activities.

                  2C.    Implement procedures that ensure that conflicts of interest
                               do not occur and that employees and officials of
UCAI,
                                 cannot use their positions for improper gain.



                                     Page 14                            99-NY-241-1002
                                                     Finding 2


2D.   Comply with all State tax laws and to implement
      procedures to ensure that UCAI’s tax exemption privileges
      are not improperly used by others.




                 Page 15                         99-NY-241-1002
Management Controls
In planning and performing our audit, we considered the management controls of UCAI in order to
determine our audit procedures, not to provide assurance on the controls. Management controls
include the plan of organization, methods and procedures adopted by management to ensure that its
goals are met. Management controls include the processes for planning, organizing, directing, and
controlling program operations. They include the systems for measuring, reporting, and monitoring
program performance.



                                     We determined that the following management control
 Relevant Internal Controls
                                     were relevant to our audit objectives:

                                     iProgram Operations - Policies and procedures that
                                      management has implemented to reasonably ensure that a
                                      program meets its objectives.

                                     iValidity and Reliability of Data - Policies and procedures
                                      that management has implemented to reasonably ensure
                                      that valid and reliable data are obtained, maintained, and
                                      fairly disclosed in reports.

                                     iCompliance with Laws and Regulations - Policies and
                                      procedures that management has implemented to
                                      reasonably ensure that resource use is consistent with
                                      laws and regulations.

                                     iSafeguarding Resources - Policies and procedures that
                                      management has implemented to reasonably ensure that
                                      resources are safeguarded against waste, loss, and
                                      misuse.

                                     We assessed the relevant controls identified above.

                                     It is a significant weakness if management controls do not
                                     provide reasonable assurance that the process for planning,
                                     organizing, directing, and controlling program operations
                                     will meet an organization’s objectives.


                                     Based on our review, we believe that significant weaknesses
                                     exist in the following areas:




                                             Page 17                              99-NY-241-1002
                                                      Appendix
A

    iProgram Operations - The UCAI did not use all of its
     funds to benefit the residents of the City Utica, New
     York (Finding 1).

    iValidity and Reliability of Data - Receipts and
     expenditures of Federal, State and Local funds are
     commingled in cash accounts and can not be readily
     reconciled by activity (Finding 1).

    iCompliance with Laws and Regulations - The UCAI did
     not follow the requirements in OMB Circular A-110,
     Uniform Administrative Requirements for Grants and
     agreements of Higher Education, Hospitals and Other
     Not-for-profit organizations. Also, UCAI did not follow
     OMB Circular A-122, Cost Principals for Non-Profit
     Organizations (Finding 1).

    iSafeguarding Resources - UCAI has been improperly
     subsidizing the operations of its for-profit entity (Finding
     2).




               Page 18                            99-NY-241-1002
Follow Up On Prior Audits
An audit of UCAI was performed by an Independent Public Accountant (IPA) for the period
ending December 31, 1996. The report contained two findings of non-compliance that cited
documentation for verification of income status was not available for review.

No audits subsequent to the aforementioned were completed as of July 1998.




                                            Page 19                          99-NY-241-1002
                                                                                            Appendix A


Schedule of UCAI Funding Sources
                                                          Contract   Contract        Percentage
                   Funding Source                          Date      Amount           of Total

US Dept. of Health and Human Services                     Jan-97     $322,624           3.8%
Private Donations                                         Jan-97       7,000            0.1%
NYS Office of Children & Family                           Jan-97      28,000            0.3%
NYS Dept. of Health & Social Services                     Jul-96      45,000            0.5%
NYS Dept. of Health & Social Services                     Jul-97      45,000            0.5%
Central New York Development Services Office              Jan-97      45,000            0.5%
Central New York Development Services Office              Jan-97      10,000            0.1%
US Dept. of Health and Human Services                     Jan-97      40,000            0.5%
US Dept. of Energy                                        Aug-96      296,640           3.5%
US Dept. of Energy                                        Apr-97      307,000           3.6%
NYS Dept. of Social Services                              Apr-97      500,000           5.9%
US Dept. of Housing and Urban Development                 Jan-97      240,218           2.8%
US Dept. of Housing and Urban Development                 Apr-97      100,000           1.2%
US Dept. of Housing and Urban Development                 Jun-97      200,000           2.3%
US Dept. of Housing and Urban Development                 Apr-97      400,000           4.7%
US Dept. of Housing and Urban Development                 Apr-97      498,750           5.9%
NYS Dept. of Parks and Recreation                         Apr-97      61,515            0.7%
National Office of Community and National Service         Oct-96      104,000           1.2%
National Office of Community and National Service         Oct-97      147,481           1.7%
NYS Dept. of Labor                                        Mar-97      286,128           3.4%
US Dept. of Housing and Urban Development                 Jan-97      348,720           4.1%
US Dept. of Housing and Urban Development                 Apr-96      190,000           2.2%
US Dept. of Housing and Urban Development                 Apr-97      190,000           2.2%
US Dept. of Housing and Urban Development                 Nov-96      46,620            0.5%
US Dept. of Housing and Urban Development                 Nov-97      66,400            0.8%
US Dept. of Housing and Urban Development                 Jan-97      103,392           1.2%
US Dept. of Housing and Urban Development                 May-97      118,548           1.4%
US Dept. of Housing and Urban Development                 Jan-97      45,800            0.5%
US Dept. of Housing and Urban Development                 Apr-97     2,477,868         29.1%
Tenants - Rent Receipts                                   Jan-97      240,000           2.8%
NYS Dept. of Social Services                              Jan-97      25,600            0.3%
NYS Dept. of Social Services                              Jan-97      30,000            0.4%
Oneida County Department of Health                        Mar-97      30,750            0.4%
Oneida County Department of Health                        Oct-97      46,000            0.5%
NYS Dept. of Labor                                        Sep-96      143,166           1.7%
NYS Dept. of Labor                                        Sep-97      143,166           1.7%
NYS Dept. of Health                                       Jul-96      150,000           1.8%
NYS Dept. of Health                                       Jul-97      150,000           1.8%
NYS Dept. of Health                                       Jan-97      12,000            0.1%
NYS Dept. of Health                                       Jul-97      13,200            0.2%
NYS Dept. of Education                                    Jul-96      22,261            0.3%
NYS Dept. of Education                                    Jul-97      38,098            0.4%
NYS Dept. of Education                                    Jul-96      22,950            0.3%
NYS Dept. of Education                                    Jul-97      18,000            0.2%
Mohawk Valley Perinatal/Prenatal Network                  Dec-96       6,000            0.1%
NYS Office of Children & Family                           Jan-97      75,000            0.9%
NYS Office of Children & Family                           Oct-97      75,000            0.9%

                      TOTAL                                          $8,512,895       100.0%

Total Funding - US Dept. of HUD                                      $5,026,316        59.0%

Total HUD Funding - (Excluding Section 8)                            $2,548,448        29.9%




                                                    Page 19                       99-NY-241-1002
                                              Appendix
A




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                 Appendix
B




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                 Appendix
B




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                 Appendix
B




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                 Appendix
B




    Page 26   99-NY-241-1002
                                                                         Appendix C


Distribution
Secretary’s Representative, 2AS, New York /New Jersey
Director, Community Planning and Development Division, 2CD (2)
Field Comptroller, Midwest Field Office, 5AF
CFO, Mid-Atlantic Field Office, 3AFI
Buffalo Area Coordinator, 2CS
Assistant to the Deputy Secretary for Field Policy and Management,
     SDF, (Room 7106)
Office of Deputy Assistant Secretary for Grant Programs, DG, (Attn:
       Audit Liaison Officer, Room 7214) (5)
Deputy Assistant to the Secretary for Labor Relations, SLD
        (Room 7118)
Director, Office of the Budget, FO (Room 3270)
Acquisition Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Officer for Finance, FF (Room 10164) (2)
Associate General , Office of Assisted Housing and Community
        Development, CD (Room 8162)
Executive Director, Utica Community Action, Inc., Utica, New York


Inspector General, G (Room 8256)
Public Affairs Officer, G (Room 8256)
Counsel to Inspector General, GC (Room 8260)
Internet Coordinator, GAA (Room 8172)
Assistant Inspector General for Audit, GA (Room 8286)
Deputy AIGA, GA (Room 8286)
Director, Research and Planning, GAP (Room 8180)
Director, Financial Audits Division, GAF (Room 8282)
Semi-Annual Coordinator, GA (Room 8254)
Central Files, GS (Attention: Mary E. Dickens) (Room 8266) (2)
SAC, Office of Investigation, 2GI (Room 3430B)
AIG, Office of Investigation, GI (Room 8274)
Deputy AIG, Office of Investigation, GI (Room 8274)

Director, Housing & Community Development Issue Area
US GAO, 441 G Street, NW (Room 2474)
Washington, DC 20548
Attention: Judy England-Joseph)




                                           Page 25                    99-NY-241-1002
                                                             Appendix
B


Director, HUD Enforcement Center
1240 Maryland Avenue, Suite 2000
Washington, DC 20024

Subcommittee on General Oversight & Investigations
O’Neill House Office Building - Room 212
Washington, DC 20515
(Attention: Cindy Sprunger)

Honorable John Glenn
Ranking Member
Committee on Governmental Affairs
United States Senate
Washington, DC 20515-4305

Honorable Fred Thompson
Chairman
Committee on Governmental Affairs
United States Senate
Washington, DC 205150-4305

Mr. Pete Sessions
Government Reform & Oversight Committee
Congress of the United States
House of Representatives
Washington, DC 20510-6250

Honorable Dan Burton
Chairman
Committee on Government Reform & Oversight
House of Representatives
Washington, DC 20515-6143




                                                Page 26   99-NY-241-1002