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We completed a review of the State of New York Governor’s Office of Storm Recovery’s administration of the Small Business Grants and Loans program funded with Community Development Block Grant Disaster Recovery (CDBG-DR) funds provided by the U.S. Department of Housing and Urban Development (HUD).  The objectives of the audit were to determine whether State officials (1) approved and disbursed CDBG-DR funds for the Small Business Grants and Loans program to assist eligible businesses in accordance with the guidelines established under the HUD-approved action plan and amendments and applicable Federal requirements and (2) established and maintained a financial management system that adequately safeguarded the funds and prevented misuse.

Our review determined that State officials (1) did not always adequately verify the eligibility of award recipients and their awarded funds and (2) did not recapture preliminary award funds disbursed to ineligible businesses in a timely manner.  These deficiencies resulted from weaknesses in the State’s administrative controls and State officials’ desire to quickly disburse funds to the businesses.  As a result, State officials could not assure HUD that CDBG-DR funds were adequately safeguarded and disbursed for eligible, reasonable, and necessary expenses and that the funds assisted qualified businesses in compliance with program requirements.

We recommend that HUD instruct State officials to (1) reimburse the State’s line of credit for the $272,459 in CDBG-DR funds disbursed to 4 businesses for ineligible costs from non-Federal funds, (2) provide documentation to support the $152,703 in CDBG-DR funds disbursed to 4 businesses, (3) strengthen controls over program operations to ensure that costs charged to the CDBG-DR program are for eligible activities and supported by all required documentation at the time of the disbursement, (4) strengthen administrative controls to ensure that ineligibility determinations are reviewed and approved and recapture procedures are carried out in a timely manner, (5) incorporate and implement a recapture policy and procedures, and (6) recapture more than $300,000 in CDBG-DR funds disbursed to 35 businesses.