Sunday, March 6, 2016

5th Issue: HUD Liability – $1.2 Million Should Not Separate Friends

5th Issue: HUD Liability – $1.2 Million Should Not Separate Friends

Because compliance violations often result from an organization’s efforts to increase its power and wealth at the expense of others, many present as financial conflicts.  The first four issues reflected natural corporate instincts to enhance corporate wealth by increasing revenue (the County over-billing and the bid collusion issues) and avoiding unnecessary costs (the residential licensing and master leasing issues).  The next three issues deal with liabilities created years earlier that threatened HomeFirst’s current operations.

During the 2006 audit, the company’s overbilling of some HUD contracts – HUD is the U.S. Department of Housing and Urban Development, which supports homeless services – came to light, identified by the company or the auditors, depending on whom you asked.  HUD demanded an audit of 29 contract-years during the period 2003-2006.  In July 2008 our internal audit concluded that the company had overbilled HUD by $1.2 million on the contracts, and I sent the information, in the form of about 30 Excel files, to HUD’s San Francisco office.

Over the next five years, HomeFirst and HUD discussed the audit in general terms at a couple of meetings and in a few telephone conversations and email exchanges.  But nothing was resolved.  HUD had not received additional information it requested, or HomeFirst gave HUD everything they asked for, depending on whom you asked.

HomeFirst’s audit reports included the entire $1.2 million among its current liabilities.  As the company continued to lose money, its working capital – one important standard of liquidity measured as current assets (such as cash and receivables) less current liabilities (such as accounts payable and other debts payable within a year) – turned negative.  Negative working capital was a cause of concern for some potential donors.  The partner in charge of our audit at Burr Pilger & Mayer suggested we reclassify the liability to long-term since its payment was unlikely to be demanded in the coming year, or maybe ever.  The reclassification would dramatically improve our working capital, making us more attractive to donors.

In July 2013, CEO Jenny and I pitched the accounting treatment to the Finance and Audit Committee members.  The Audit Chair was adamant that the liability should be classified as short-term unless HUD agreed not to demand repayment within the year.  HUD would never do such a thing, so we were locked into reporting negative working capital in the 2013 financials.  The Chair and other Committee members also directed us to negotiate a resolution of the situation with HUD in 2014.  I warned that we could not afford even a partial repayment based on the budget the Board had approved, but Jenny declared that she would not pay HUD back.

As we – Jenny, the Chief Program Officer, the Board Treasurer, and I – walked to the meeting room, the director of the San Francisco HUD team that dealt with HomeFirst, confided to Jenny that she had directed some of her workplace charitable deductions to HomeFirst.  During the meeting she and the other HUD staff present made clear that HUD did not intend to force HomeFirst into a financial crisis over the issue.  The first step, they said, was to get a clear understanding of the liability, which could even be more than $1.2 million because of payments HomeFirst had made to another nonprofit that had demonstrated its own sloppy accounting.

We left the meeting pleased by their apparent intent to work with us and not to force HomeFirst into bankruptcy because of the prior CEO’s mistakes, which we had fixed.  I sent my finance contact the information he had requested.  Then nothing happened.

Most federal agencies have Offices of the Inspector General (OIG) that investigate fraud and waste in their areas.  In February 2014, I filed a complaint on the HUD-OIG whistleblower site concerning HUD’s failure to take any action to collect the money.  Ignoring the confidentiality problem, OIG forwarded it to the director with whom we had met.  My finance contact sent me an email saying he would work on it; he assured me that they were used to dealing with confidentiality matters.  By May nothing had been done, and I filed another complaint on the OIG site.  Again my contact replied that he would work on it and try to have it resolved by the end of June for inclusion in the 2014 audit report.  At the end of June, I emailed him that I had been fired and asked where he stood on the issue.  His work had been delayed by another project for a couple of weeks, he said.  Then his boss stepped in and shut down our communications.

In early 2014, the Los Angeles office of OIG reported that the Los Angeles and San Francisco HUD offices, including the team we met with, had not properly monitored the use of $99 million of HUD assets transferred by former city redevelopment agencies.  In July, I reported HUD’s inaction to the Los Angeles office of OIG; I never received a reply.  In August I reported again through the HUD-OIG website, but I received no response there either.

After one more unanswered report to the OIG, I complained to Senator Dianne Feinstein in February 2015.  HUD replied to her inquiry, saying that it “recognizes the critical role that Home First [sic] plays in the Santa Clara County Continuum of Care for the homeless.  HUD is not interested in creating homelessness by forcing Home First into bankruptcy by demanding immediate repayment.  Nonetheless HUD will contact Home First about the liability and pursue corrective action.” 

Echoing the DOJ’s comment on the bid collusion issue, HUD let HomeFirst’s reputation for good work crowd out its investigation into an alleged wrongdoing.  Although the letter seemed to promise action, I expressed my doubts to Feinstein that they were being forthright.  I pointed out that the letter was incorrect in saying HomeFirst had not violated any recent contracts.  Feinstein replied that there was nothing more she could do.

In November 2015, I made a public records request for copies of communications between HUD and HomeFirst concerning the liability.  They did not respond until after I wrote Feinstein again in January 2016.  Then they said they had not found an attachment describing the request.  I sent it again.  A month later they reported that no pertinent records were located. 

Like Santa Clara County, HUD, which had suffered far more, demonstrated an impressive lack of interest in recovering its money.  HUD’s failure was one of omission, rather than commission, as are most government failures[i].   Omission may be the more difficult to correct, and this failure continues after more than a dozen years.

More lessons for the whistleblower:

1.       Anonymity may not be protected even when a sophisticated hotline system is used and even in cases where anonymity must be penetrated in order to investigate the wrong.
2.       Elected politicians have little sway over the government agencies they oversee.




[i] Light, Paul C.  “A Cascade of Failures: Why Government Fails, and How to Stop It.”  Center for Effective Public Management at Brookings.  July 2014.

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