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We audited Neighborhood Housing Services of Los Angeles County’s (NHSLA) Neighborhood Stabilization Program 2 (NSP2).  The audit was based on a complaint alleging questionable NSP2 financial activity, double payments to contractors, and payments to contractors for incomplete work.  Our Office of Audit received the referred complaint in late 2018.  However, because the complaint included concerns regarding activities and auditee actions from at least 5 years before, we did not address the specific complaint issues but instead reviewed more recent program activities.  The objective of the audit was to determine whether NHSLA administered its NSP2 in accordance with program requirements, focusing on procurement and contracting, expenditures of program income, and tracking and accounting of program income.

NHSLA did not always follow program requirements in administering its NSP2.  Specifically, it (1) could not support NSP2 activities in its interfund account and revolving loan fund, (2) borrowed NSP2 program income and deposited those funds into its non-NSP2 accounts, (3) could not support administrative and project delivery costs, and (4) did not have proper documentation to support the procurement of its construction contract.  As a result, the U.S. Department of Housing and Urban Development (HUD) did not have assurance that more than $5.1 million in program income was used for its NSP2, $1.7 million in salary expenditures was in accordance with program requirements, and $856,692 in construction costs was reasonable.

We recommend that the Director of the Los Angeles Office of Community Planning and Development require NHSLA to (1) support the eligibility of interfund activities or repay the program $3.4 million from non-Federal funds, (2) return $529,745 in program income funds to its NSP2 account, (3) support the use of its loan proceeds or repay the program $658,261 from non-Federal funds, (4) support transfers of NSP2 funds or repay the program $500,000 from non-Federal funds, (5) support its administrative and project delivery costs or repay the program more than $1,388,545 from non-Federal funds and not reimburse another $324,478, (6) support the reasonableness of the construction contract or repay the program $856,692 from non-Federal funds, and (7) develop and implement procedures and controls for its procurement.