Management Audit of
PILSEN-LITTLE VILLAGE COMMUNITY MENTAL HEALTH CENTER, INC.
Released: August 1999
State of Illinois
WILLIAM G. HOLLAND
To obtain a copy of the report contact:
Office of the Auditor General
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Finally, we found that Pilsen purchased and leased buildings from an entity for which Pilsens Chief Executive Officer performed business functions, which may constitute related party transactions. The Office of Attorney General will be reviewing these real estate transactions.
REPORT CONCLUSIONSPilsen-Little Village Community Mental Health Center, Inc. (Pilsen) provides social and mental health services to the primarily Hispanic community of Pilsen-Little Village and to the Chicago Metropolitan area at large. Pilsen received 91 percent of its grant funding from the State in Fiscal Year 1998, primarily from the Department of Human Services. Pilsen also received funding from the Departments of Children and Family Services and Public Aid.
State agencies have conducted reviews of Pilsens operations over the past three years, including reviews of audited financial statements and on-site visits to examine case files. However, none of the agencies have conducted a detailed review of Pilsens expenditures, as we were directed to do pursuant to House Resolution Number 385.
Our audit identified expenditures which were inappropriately charged to State programs. We also found that documentation to support many of the expenditures sampled was lacking information on the amount, date, place, and essential character of the expense.
Specific findings noted in this audit were:
In light of the above findings, we recommended that the Departments of Human Services, Public Aid, and Children and Family Services follow up on these findings and determine whether State funds should be recovered.
Pilsen-Little Village Community Mental Health Center (Pilsen), located in Chicago, Illinois, is incorporated as a not-for-profit organization. The primary purpose of Pilsen is to facilitate comprehensive social and mental health services to the primarily Hispanic community of Pilsen-Little Village and the Chicago Metropolitan area at large.
Pilsen is organized as a not-for-profit organization under Section 501(c)(3) of the Internal Revenue Code. Pilsen is overseen by a Board of Directors and managed by three executive officers: the Chief Executive Officer, who has been with Pilsen since 1969; the Chief Program Officer; and the Chief Fiscal Officer, who left the agency toward the end of Fiscal Year 1998.
During Fiscal Year 1998 Pilsen received over $4 million from various sources, including almost $3 million in grants, $676,000 in fees for services rendered, and $402,000 from other sources, including contributed goods and services. Funding from State agencies (the Departments of Human Services, Children and Family Services, and Public Aid), totaling $3.1 million, comprised 85 percent of Pilsens total grant and fee for service funding in Fiscal Year 1998.
State agencies have conducted reviews of Pilsens operations over the past three years, including reviews of audited financial statements and on-site visits to examine case files. However, none of the agencies have conducted a detailed review of Pilsens expenditures, as we were directed to do pursuant to House Resolution Number 385. (See report pages 2-9)
QUESTIONABLE EXPENDITURE OF FUNDS
Our audit identified expenditures which appeared to be inappropriately charged to State programs. We also found that documentation to support many of the expenditures sampled was lacking information on the amount, date, place, and essential character of the expense.
During the two years examined in this audit, Pilsen paid over $57,000 in property taxes for which it was exempt. The $57,000 was charged primarily to State-funded programs either as a direct cost of occupancy or as administrative overhead through the cost allocation plan.
Illinois Department of Revenue documentation confirmed that Pilsen has had an exemption for property taxes. Pilsen management was not timely in filing for their exemption and ended up paying taxes for which they were not responsible. Pilsen has filed for a refund. However, they have continued to pay property taxes during the legal process. (See report pages 12-13)
COST ALLOCATION PLAN FOR INDIRECT COSTS
Pilsen overcharged State-funded programs $108,000 because all sources of program funds were not consistently allocated administrative overhead. Rather, some of Pilsens contracts limited the amount of indirect costs which could be charged to them; consequently, Pilsen shifted to other programs, including State-funded programs, the costs which exceeded the contracts maximum amount. This cost allocation method was not consistent or in compliance with State and federal regulations.
State rules allow for the allocation of expenses that are not readily identifiable to a specific program. However, the expenses must be allocated to all program services, both State-funded and non-State funded. During Fiscal Years 1997 and 1998 Pilsen had 15 programs over which to spread the indirect costs (also known as Management and General Expenses). The State funded 11 of these 15 programs. (See report pages 13-14)
In calendar years 1996 and 1997, Pilsen provided bonuses to employees totaling $78,733.29: $38,451 in 1997 and $40,282.29 in 1996. The 1997 bonuses are detailed in Digest Exhibit 1. As the Exhibit shows,
the Chief Executive Officer (CEO) received a $17,500 bonus, which was the largest granted in 1997.
In December 1997, Pilsen provided 97 employee bonuses totaling $20,951 which were misclassified as Office Expense and not reported on the employees W-2 forms. Not reporting this income on the employees W-2 forms places the employees at risk for their personal taxes. The bonuses ranged from $25 up to $1,000 with an average bonus of $216.
Pilsens policies do not require the Board to review and approve bonuses. Consistent with its fiduciary responsibilities, Board review and approval of bonuses would help ensure that bonuses complied with legal requirements and were properly expensed. (See report pages 14-16)
Political contributions made by Pilsen during Fiscal Year 1997 could jeopardize its tax-exempt status as a not-for-profit. Two payments totaling $800, were made to a political campaign fund and not reported on Pilsens federal tax return.
Pilsen is organized as a not-for-profit under Section 501(c)(3) of the Internal Revenue Code. As such, Internal Revenue Service regulations prohibit such organizations from making political contributions. These political contributions were paid from an expense classification which was not allocated to State-funded programs. (See report page 16)
We noted several concerns regarding Pilsens payroll administration. These included:
REIMBURSEMENT OF ADMINISTRATORS EXPENSES
The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) received reimbursement for expenses without adequate documentation to support the necessity of the expenditure. During Fiscal Years 1997 and 1998, these reimbursements totaled almost $31,000.
During the audit period, Pilsens CEO was reimbursed $26,632 for 690 business expenditures. The expenses were combined into three categories: Food and Beverage, Automobile, and Other. Digest Exhibit 2 summarizes the groupings.
Food and Beverage is not an allocated expense under the Pilsen indirect cost allocation plan. Consequently, it is not charged as an expenditure to State-funded programs. However, during Fiscal Years 1997-1998, 25 percent (68 of 271) of food and beverage purchases reviewed totaling $3,302 were charged as Office Expense and allocated among the various costs centers, including State-funded programs. Non-client meals are generally not reimbursable expenses per the Illinois Administrative Code (77 Ill. Adm. Code 2030.360 (k)). Documentation on food and beverage purchases generally lacked business purpose to evaluate the expense as allowable.
Automobile expense is an indirect expense for the administration division at Pilsen that is allocated among the various cost centers, including State-funded programs. The Pilsen Board of Directors provided the CEO a conversion van for business and personal use. Logs were not maintained for the expenditures incurred by the CEO for this vehicle. However, 308 expenditures totaling over $4,800 were reimbursed to the CEO during the audit period.
Gasoline and parking receipts were submitted without documentation specifying the vehicle that incurred the expense. Auditors could not determine whether expenses reimbursed to the CEO were for the agency provided vehicle or other vehicles. For example, it was noted that:
Also, when an employer-provided vehicle is used for personal purposes, the employer is required to report this use to the Internal Revenue Service as additional income on the employees W-2. Personal use includes commuting to and from ones work and any other use that is non-business related. We could not find evidence that Pilsen had reported usage of the van in tax year 1997 as additional income for the CEO.
Pilsen reimbursed the CEO for $8,920 in Other expenditures during the audit period that also lacked adequate documentation as to the business purpose/necessity of the expense. Similarly, $4,157 in reimbursements made to the former CFO lacked necessary documentation to support reimbursement as an allowable expense. These indirect expenses for the administration division at Pilsen were then allocated among the various cost centers, including State-funded programs. (See report pages 22-24)
Pilsen issued the CEO a $15,000 interest free loan in December 1996 that was processed as a pay advance. Documentation to support the payment consisted of a memo from the CEO to the Pilsen Board Chairperson requesting the loan. The memo makes no mention of an interest rate on loaned funds but does indicate that it would be paid back by the end of the fiscal year. Pilsen could not provide documentation to show that the Board had approved this loan.
The CEO repaid $15,500 (the extra $500 at the time of the payback was denoted as additional federal taxes) on June 26, 1997, and then issued himself a $17,500 bonus on June 30, 1997. The $17,500 bonus was a payroll expense that was allocated as an indirect cost to all programs, including State-funded programs. Pilsen Board of Directors meeting minutes include no indication of an approval for the bonus. Financial management requirements imposed on Pilsen as a recipient of grant funding does not allow award funds or program income to be used for employee salary advances or employee loans (77 Ill. Adm. Code 2030.610 (j)). Pilsens own Financial Procedures Manual for Expenditure and Management of Funds states that "the organization is not a financial institution like a bank or credit union and, as a result, cannot loan money over an extended period of time." (See report page 26)
QUESTIONABLE TRAVEL EXPENDITURES
Over a two year period, we identified $11,383 in questionable travel expenditures. While Pilsen had a travel policy in place, it was not always followed. Instances such as not documenting conference attendance, not including the business necessity of a trip, or obtaining reimbursement for unallowable expenses demonstrates a lack of control and violation of State and federal rules and Pilsens own Financial Procedures Manual.
For example, nearly $4,600 in travel expenses were charged to State-funded programs through the allocation of administrative costs for a conference in Puerto Rico from June 10th through the 13th of 1998. DHS rules require that the agencies receive prior approval for staff to attend meetings or conferences 250 miles outside of Illinois - Pilsen did not receive an approval from the State for the conference in Puerto Rico (77 Ill. Adm. Code 2030.350 (d)). Questionable expenditures found for the trip included alcohol, gratuities, and a banquet. (See report pages 28-29)
RELATED PARTY TRANSACTIONS
In our review of the agencys expenditures, we identified a potential related party transaction between Pilsen and the Alliance for the Development of Latino Communitiesan organization that leased and sold properties to Pilsen. Statements on Auditing Standards (SAS No. 45) define a related party to include:
Affiliates of the enterprise. . .its management. . .and other parties with which the enterprise may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests....
Financial statements should include disclosures of material related party transactions. The disclosure should include the nature of the relationship along with a description and dollar amount of the transaction. We noted that Pilsen financial statements and their management representation letter to the external auditor did not disclose any related party transactions.
Within the past four years, Pilsen has leased or purchased numerous buildings from the Alliance for the Development of Latino Communities (Alliance). In Fiscal Year 1996, Pilsen leased 7 of the 10 properties they used from the Alliance. As of June 30, 1998, Pilsen continued to lease one building from the Alliance. Pilsen has also purchased three of the leased facilities from the Alliance.
In November 1995, Pilsen purchased three properties from the Alliance for a total purchase price of $470,000. Financing for the purchase was provided from two sources: a $350,000 mortgage loan from a local bank and an additional mortgage with the Alliance for $125,360.26. Documentation showed that the Alliance had taken out mortgages in July 1995 to purchase the buildings sold to Pilsen four months later. Loan documentation shows the Pilsen CEO signing all the mortgage documents as either the Executive Director for the Alliance or Pilsen-Little Village Community Mental Health Center.
Pilsens Chief Executive Officer conducts business on behalf of the Alliance. The CEO stated he provides property management services free of charge to the Alliance. He added that these activities are conducted from his home. The CEO has check signing authority for the Alliance, with Alliance checks being co-signed by the CEOs former office manager at Pilsen. The FY97 Alliance Charitable Organization Supplement filing has the Pilsen CEO signing as the President or Trustee of the Alliance with another Pilsen employee listed as the registered agent. Also, on some documents, the Alliance address is the same as Pilsens administrative facilities.
We requested federal informational return filings from the Attorney Generals Office for all companies from which Pilsen leased property during the audit period, including the Alliance. Officials from the Attorney Generals Charitable Trust Division reported that the Alliance had not filed required reports since 1996. The Attorney Generals Office has since requested that the Alliance complete the required filings (the Alliance had submitted additional filings during our fieldwork). Further, since the Alliance had sold property during the non-filing period, officials from the Charitable Trust Division stated they would be reviewing the sales transactions.
Given the extent of the real estate transactions between Pilsen and the Alliance, and Pilsens CEOs involvement in Alliance transactions, disclosure of such relationships may be required in Pilsens audited financial statements. Furthermore, given that the Office of the Attorney General will be reviewing the real estate transactions of the Alliance, we will share with the Attorney General documentation collected during this audit. (See report pages 32-34)
BOARD OF DIRECTORS
Corporate by-laws state that the Board of Directors is the governing body of the organization and is empowered to apply for and receive funds and is accountable for and assures the effective discharge of the planning and management functions of the agency.
The findings contained in this audit indicate that the Board needs to increase its oversight of Pilsen operations. To ensure that the members of the Board are fulfilling their mission and fiduciary responsibilities, the Board should improve formal systems for obtaining regular information on Pilsens operations, including approving expenditures over a pre-determined amount and approving expenditures to executive level employees. (See report pages 34-35)
FOLLOW UP ON AUDIT FINDINGS
Pilsen received 91 percent of its grant funding from the State in Fiscal Year 1998. These grants come primarily from the Department of Human Services for Pilsens two major programs (mental health and substance abuse) with an additional amount from the Department of Children and Family Services. The Department of Public Aid provides funds to Pilsen on a fee-for-service basis.
While State agencies have conducted reviews of Pilsen activities, none of the agencies have conducted a detailed review of Pilsens expenditures, as we were directed pursuant to House Resolution Number 385. Given the findings in this audit, the State agencies that provide funding to Pilsen should follow-up on the findings and seek recovery of any inappropriately expended State funds. (See report pages 35-36)
The audit report contained 16 recommendations to Pilsen; Pilsen concurred with all of the recommendations. The report also contained a recommendation to the Departments of Human Services, Children and Family Services, and Public Aid to undertake an evaluation of Pilsen financial practices to determine if funds received from the State have been appropriately expended and to follow-up on and seek recovery of any inappropriately expended State funds. The State agencies concurred with the recommendation. Agency responses are included after each recommendation and complete written responses are included in Appendix E of the audit report.