|
During the two years
examined in this audit, Pilsen paid over $57,000 in property taxes for which it was
exempt.
Pilsen overcharged
State funded programs $108,000 becuase all sources of program funds were not consistently
allocated administrative overhead.
Pilsen providee 97
employee bonuses totaling $20,951 which were not reported on the employees' W-2 forms.
Political contributions
made by Pilsen during Fiscal Year 1997 could jeopardize its tax-exempt status as a
not-for-profit.
The Chief Executive
Officer (CEO) and the Chief Financial Oficer (CFO) recieved reimbursement for expense
without adequate documentation to support the necessity of the expenditure.
We could not find
evidence that Pilsen had reported usage of the van in tac year 1997 as additional income
for the CEO.
Pilsen issued the CEO a
$15,000 interest free lean in December 1996 that was processed as a pay advance.
Over a two year period,
we identified $11,383 in questionable travel expenditures.
We identified a
potential related party transaction between Pilsen and the Alliance for the Development of
Latino Communites - an organization that leased and sold properties to Pilsen.
Pilsen's Chief
Executive Officer conducts business on behalf of the Alliance.
The Office of the
Attorney General will be reviewing the real estate transactions of the Alliance. |
REPORT
CONCLUSIONS
Pilsen-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 Pilsen’s 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
Pilsen’s 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:
- Over $57,000 in property taxes paid on Pilsen-owned buildings were charged primarily to
State-funded programs in Fiscal Years 1997 and 1998. Pilsen has been exempt from paying
property taxes since 1995.
- Pilsen’s inconsistent allocation of indirect costs resulted in overcharges to
State-funded programs totaling almost $108,000 during Fiscal Years 1997 and 1998.
- Pilsen made $800 in political contributions and failed to disclose the contributions on
its federal Internal Revenue Service (IRS) return. As a 501(c)(3) not-for-profit
organization, IRS regulations prohibit such organizations from making political
contributions.
- Pilsen’s payroll administration was the subject of numerous findings. The
allocation of salaries was not consistently applied to both State and non-State-funded
programs resulting in State-funded programs being overcharged payroll expenses. Pilsen
paid over $16,000 in wages to an employee who was apparently on unauthorized absence. An
undetected error in processing the payroll resulted in a contractual psychiatrist
receiving both a payroll check and a contractual services check. Further, 31 percent of
our sample of instances where employees were away from work on agency business lacked
proper support. Finally, we found that Pilsen classified nearly $21,000 in bonuses as
Office Expense and did not report it on employee W-2 forms as income.
- Almost $31,000 in business expense reimbursements to Pilsen administrators were
questioned due to a misclassification of expenses or a lack of documentation to support
the expenditure.
- Nearly $11,400 in travel expenditures were questioned due to unsubstantiated necessity
of the travel or payments made for unallowable costs. Additionally, we questioned the
appropriateness of expenditures for a cellular telephone account ($8,232) and recreation
and crafts ($4,063.50).
- Cash management practices need to be strengthened. Pilsen regularly made payments to
employees who then paid vendors for goods and services, which is contrary to State
guidelines. Lack of support, including receipts dated ten months after a check was issued
to an employee, caused us to question $12,532. Also, the agency granted a $15,000 interest
free loan to an employee. The employee repaid the loan and then issued himself a $17,500
bonus four days after repayment.
- Pilsen has not performed a physical inventory of all its property and equipment, some
purchased with State funds. Without maintaining an accurate inventory of all its property
and equipment, Pilsen is not in a position to exercise adequate control over its equipment
to prevent its loss from abuse or misappropriation.
- Pilsen purchased and leased buildings from an entity with which Pilsen’s Chief
Executive Officer served as President or Trustee. If such relationships constitute related
party transactions, they need to be disclosed in Pilsen’s financial statements, as
required by auditing standards. The Office of Attorney General will be reviewing these
real estate transactions.
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.
BACKGROUND
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 Pilsen’s total grant and fee for service
funding in Fiscal Year 1998.
State agencies have conducted reviews of Pilsen’s 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
Pilsen’s 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.
PROPERTY TAXES
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 Pilsen’s
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)
BONUSES
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.
Digest
Exhibit 1
BONUSES BY PROGRAM AREA
Calendar Year 1997 |
Program Area |
Number
of Staff Paid Bonuses |
Total
Bonuses Paid |
Average
Bonus |
| Executive Staff-CEO |
1 |
$17,500.00 |
$17,500.00 |
| Executive Staff-CFO |
0 |
$0.00 |
$0.00 |
| Executive Staff-CPO |
0 |
$0.00 |
$0.00 |
| Administration |
7 |
*$4,360.00 |
$622.86 |
| Emergency Psychiatric |
1 |
*$540.00 |
$540.00 |
| Comprehensive Prevention |
1 |
*$520.00 |
$520.00 |
| Outpatient Mental Health |
14 |
*$4,271.00 |
$305.07 |
| Family Systems Program |
3 |
*$845.00 |
$281.67 |
| HIV/AIDS |
8 |
*$1,900.00 |
$237.50 |
| Vocational Rehab Center |
5 |
*$1,050.00 |
$210.00 |
| CILA |
21 |
*$3,275.00 |
$155.95 |
| DUI |
2 |
*$305.00 |
$152.50 |
| Pilsen Inn |
9 |
*$1,200.00 |
$133.33 |
| Door-to-Door (SLIAG) |
2 |
*$225.00 |
$112.50 |
| Methadone Treatment |
19 |
*$1,965.00 |
$103.42 |
| Alcoholism Outpatient |
2 |
*$205.00 |
$102.50 |
| MI/SA |
3 |
*$290.00 |
$96.67 |
Total |
98 |
$38,451.00 |
$392.36 |
| * These were December
1997 bonuses totaling $20,951 that were not reported on employee W-2 forms. Source: OAG
Summary of Pilsen documentation |
Pilsen’s 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
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 Pilsen’s 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)
PAYROLL
We noted several concerns regarding Pilsen’s payroll administration. These
included:
- $176,000 in salaries for the Chief Program Officer and four maintenance positions which
were charged primarily to State-funded programs when they provided services to all Pilsen
programs;
- $24,000 in a specially developed retirement plan for one former employee which was
allocated to all programs, including State-funded programs. Since this employee was not
currently working for Pilsen and, therefore, the State derived no benefit from these
payments, charging this expense to State-funded programs was questionable; and
- $16,000 in salary to a full-time maintenance employee who had inconclusive documentation
to support the wages paid. (See report pages 17-20)
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, Pilsen’s 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.
Digest Exhibit
2
CEO REIMBURSEMENTS
Fiscal Years 1997-1998 |
| Type of Expense |
Number of
Occurrences |
Amount |
| Food and Beverage |
271 |
$12,876 |
| Automobile |
308 |
$4,836 |
| Other |
111 |
$8,920 |
Total |
690 |
$26,632 |
| Source: OAG Summary of Pilsen
documentation |
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:
- Gasoline was purchased within 2 or fewer days on 43 occasions.
- In 28 of those 43 purchases the duration was 1 calendar day or less.
- In 7 instances, multiple gasoline purchases were made on the same day. In one such
occurrence, gas was purchased from the same station within a five-minute period.
- The same gasoline receipt dated October 11, 1996, was submitted for reimbursement on 2
different occasions.
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
employee’s W-2. Personal use includes commuting to and from one’s 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)
EMPLOYEE LOAN
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)). Pilsen’s 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 Pilsen’s 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 agency’s expenditures, we identified a potential related
party transaction between Pilsen and the Alliance for the Development of Latino
Communities—an 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.
Pilsen’s 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 CEO’s 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 Pilsen’s administrative facilities.
We requested federal informational return filings from the Attorney General’s
Office for all companies from which Pilsen leased property during the audit period,
including the Alliance. Officials from the Attorney General’s Charitable Trust
Division reported that the Alliance had not filed required reports since 1996. The
Attorney General’s 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
Pilsen’s CEO’s involvement in Alliance transactions, disclosure of such
relationships may be required in Pilsen’s 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 Pilsen’s 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 Pilsen’s 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 Pilsen’s 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)
RECOMMENDATIONS
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.
________________________
WILLIAM G. HOLLAND
Auditor General
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