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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