Internal Control Weaknesses Contributed to the Mismanagement and Misuse of Federal Funds at Selected Community Action Agencies

AFMD-81-54: Published: Jul 10, 1981. Publicly Released: Jul 10, 1981.

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In 1979 the Federal Government provided an estimated $1.5 billion to 897 community action agencies to develop and conduct programs aimed at eliminating poverty and aiding the poor.

At 12 community action agencies, GAO found that over $11 million of grant funds were being mismanaged or misused. The problems identified were indicative of weaknesses in the internal controls used to safeguard Federal grant funds provided to these agencies. Excess Federal cash had been used to earn interest income, had been diverted into unrecorded bank accounts, had been loaned to other grant programs, and had been used to subsidize non-Government activities. In addition, some excess funds were embezzled. Some of the community action agencies have used hundreds of thousands of dollars to buy services and rent property from closely related organizations called service corporations. These transactions result in the loss of control over Federal funds and the circumvention of restrictions on the use of grantee funds. Some agencies have charged expenses to more than one Federal grant. Some have not established property control systems to account for assets and have not safeguarded these assets. Assets have been lost, stolen, and improperly disposed of. Weaknesses in internal controls enabled the community action agencies that GAO reviewed to mismanage and misuse Federal grant funds. Agencies did not properly monitor cash balances. No policy instructions had been issued which specifically addressed the relationship of the agencies and their service corporations. Federal agencies responsible for administering similar programs have not coordinated their efforts, received reliable data on Federal reimbursements, nor enforced requirements for property and control systems.

Recommendations for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The heads of Federal departments and agencies that provide funds either directly or indirectly to community action agencies should follow current cash management policy and recover any excess funds being held by grantees.

    Agency Affected: Community Services Administration

  2. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The heads of Federal departments and agencies that provide funds either directly or indirectly to community action agencies should enforce the provisions of OMB Circulars A-102 and A-110 that deal with establishing a strong system of internal controls at the grantee level.

    Agency Affected: Community Services Administration

  3. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The heads of Federal departments and agencies providing funds either directly or indirectly to community action agencies should impose sanctions against grantees who repeatedly maintain excessively high balances of Federal cash. Such sanctions may include suspension of cash advances or the charging of interest on excess balances.

    Agency Affected: Community Services Administration

  4. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The heads of Federal departments and agencies that provide funds either directly or indirectly to community action agencies should ensure that grantees adhere to Federal standards relating to property management by periodically reviewing their property management systems.

    Agency Affected: Community Services Administration

  5. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The heads of Federal departments and agencies that provide funds either directly or indirectly to community action agencies should, where specific weaknesses exist, develop a system for ensuring that grantees' internal controls are adequate to protect Federal funds from mismanagement and misuse. Such systems should include sanctions which can be applied against grantees who are repeatedly found to have inadequate systems.

    Agency Affected: Community Services Administration

  6. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Director of the Community Service Administration should develop monitoring procedures for overseeing the implementation of this overall policy.

    Agency Affected: Community Services Administration

  7. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Director of the Office of Management and Budget (OMB) should followup on the community Service Administration's efforts to regulate service corporations as part of the OMB budget review process and Financial Priorities Program.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  8. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Director of the Community Service Administration should review service corporations established by community action agencies prior to this new overall policy to determine if an arm's length relationship exists between the two organizations. Where this is not the case, the Director should act to make the relationship conform to the new policy, and determine if the Government has a residual interest in any property acquired by these service corporations and establish how such interest will be protected.

    Agency Affected: Community Services Administration

  9. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The heads of Federal departments and agencies that provide funds directly or indirectly to community action agencies should develop systems to prevent grantees from claiming reimbursement for the same expense under more than one program.

    Agency Affected: Community Services Administration

  10. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Director of the Community Services Administration should develop an overall policy governing the establishment of service corporations or similar type organizations by community action agencies or their delegates and/or employees. This should, at a minimum, (1) require that Federal approval be obtained before any Federal funds are transferred to such an organization; and (2) include applicable provisions of Community Service Administration procurement standards, particularly those rules that promote the establishment of an arm's length relationship between a buyer and seller.

    Agency Affected: Community Services Administration

 

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