Testimony of Department of Finance – Office of State Audits and EvaluationsAudit of Used Oil Nonprofit Grants to Sports Car Club of America
Introduction • Marc Dermenjian, CFE • Department of Finance (DOF) – Office of State Audits and Evaluations (OSAE) • Lead DOF Auditor for audit of CIWMB Used Oil Nonprofit Grants UNP4 and UNP5
CIWMB Audit Request • March 23, 2005 • CIWMB requested that OSAE perform an audit on two Used Oil Nonprofit Grants issued to the Sports Car Club of America (SCCA) • CIWMB requested the audit based on a report from member of public regarding alleged misuse of grant funds
Used Oil Nonprofit Grants Two Used Oil Nonprofit Grants issued by CIWMB: UNP4 – 00 – 3310 $199,860 11/00 – 04/03 UNP5 – 02 – 0013 $275,777 05/03 – 04/05 One additional grant, UNP3, was past the three-year document retention requirement and thus not subject to the audit.
Audit Findings • Costs were not reflected in accounting records. Reimbursements were thus reflected as profit. • SCCA was unable to provide required supporting documentation for certain reimbursements. • SCCA distributed grant funds approximating $31,600 to the CEO of SCCA for commissions that were not disclosed to the grant manager or authorized in the grant budgets or work plans. • DOF questioned $262,455 in costs billed to the Grants ($105,245 from UNP 4 and $157,210 from UNP 5). Of this amount, $234,928 should be remitted to the CIWMB as ineligible costs and the $27,527 retained under UNP 5 should not be paid to the grantee.
Audit Procedure • Audits performed according to Generally AcceptedGovernment Auditing Standards issued by the Comptroller General of the United States. • Intended to determine whether state funds are expended as specified and are supported.
Audit Procedure (cont.) • To verify compliance with the terms of the grants, DOF audited expenditures at the transactional level: • Reviewed source documentation of expense claims (invoices, payroll registers, timesheets, etc.). • Reviewed general ledger to ensure that expenses are recorded and properly accounted for within the correct project account. • Evaluated payment of invoices by reviewing cancelled checks, bank statements and/or check ledgers. • Determined whether reimbursed costs were incurred for services consistent with the terms of the grant agreement.
Profit Not Eligible For Reimbursement CIWMB’s Used Oil Nonprofit Grant Procedures and Requirements (P&R) limit eligible costs to “activities, products and costs included in the work plan and expenditure itemization summary, and must be incurred within the grant term.” “Profit or Markup by the Grantee” is an ineligible cost under the P&R.
Documentation of Claims Required • P&R’s for both grants require supporting documentation for all expenditures where grant payments are being claimed.
Audit Findings • SCCA reimbursed for expenditures that were not reflected in its general ledger account. • Therefore, the reimbursements were registered as profit and thus ineligible under the grant P&R’s.
Audit Findings – Sponsorship Fees • Sponsorship fees claimed in the amounts of $54,000 (UNP4) and $112,000 (UNP5) not reflected in the accounting records. • In addition, SCCA was unable to substantiate that these amounts were related to goods or services that were paid for and received within the grant periods.
Audit Findings – Salary Expenditures • Salary expenditures claimed for grant-related work in the amounts of $38,745 (UNP4) and $45,210 (UNP5) were not supported by SCCA’s accounting records or by evidence of payment. • No timesheets for services of SCCA personnel. • Salary amounts billed to CIWMB on a per-event basis, but SCCA unable to substantiate attendance at these events. • SCCA personnel were salaried employees of Thunderhill Park (the for-profit subsidiary of SCCA), and per SCCA’s Project Director, the incremental duties associated with the management of the grant were absorbed by their existing employee duties.
Audit Findings - Kiosk • Equipment (portable kiosk) purchased under UNP4 for $12,500 not supported by SCCA accounting records. • Purchased by SCCA’s for-profit subsidiary, Thunderhill Park, prior to being approved for funding under the UNP4 grant. SCCA internal meeting minutes indicate that funds received from the UNP4 grant were “banked.” • Purpose of kiosk was to distribute Used Oil Recycling literature and giveaways, but it was principally used to generate revenue by selling merchandise. • Per interview with Thunderhill employee, kiosk was “in the vicinity” of a cardboard display that housed Used Oil Recycling literature.
Audit Findings – Contract Deliverables • Unable to corroborate the number of used oil recycling events represented by SCCA. These events formed the basis for the sponsorship fee and salary expense claims (see prior section), and were the principle deliverable in the grant agreements. • UNP4 required 55 event days • UNP5 required 56 event days, of which 12 event days were to occur in Southern California. • The UNP5 contract increased the per event sponsorship amount from $1,000 to $2,000 per event day because SCCA was to provide statewide exposure. • SCCA unable to substantiate that the Southern California events occurred or provide credible evidence of performance of the UNP5 work plan.
Audit Findings – Commissions • Grant funds were used to pay approximately $31,600 in commissions to the CEO of SCCA. • CEO of SCCA was concurrently CEO of Thunderhill Park, and a paid consultant to SCCA. • Commission payments not reflected on payment requests submitted to CIWMB. • Commission payments not authorized under either grant agreement. • Review of commission amounts indicate they were based on the “profit” that SCCA made from the grants.
Audit Findings – Commissions (cont.) The following illustrates the calculation of the CEO’s commission: Gross request on disbursement request # 3 $83,500.93 Less 10% withhold $ 8,350.09 Net Disbursement by CIWMB $75,150.84 Less Ross Campbell Invoice $14,515.00 Less Rio Media Invoice $12,125.93 Residual Balance $48,509.91 10% of residual balance $ 4,850.99 Check to Mr. Vodden for consulting fees $ 4,851.00 Difference $ .01
Audit Findings – Commissions (cont.) The following commission amounts paid to the CEO of SCCA by the grants are evidenced by SCCA’s general ledger: 4/26/05 D.B. Vodden – Commissions $4,851.00 6/30/04 D.B. Vodden – Commissions $3,090.56 8/09/04 D.B. Vodden – Commissions $4,441.92 1/19/03 D.B. Vodden – Commissions $4,416.43 11/03/03 D.B. Vodden – Commissions $6,132.99 1/26/01 D.B. Vodden – Commissions $8,665.00 Total $31,597.90
Audit Findings – Commissions (cont.) The SCCA Board’s response to the audit report states, “We have maintained a longstanding program that provides David Vodden a bonus for developing additional sources of revenue. The sponsorship portion of the CIWMB grants is such an item and he was paid from our general operating fund the indicated bonuses.” • The SCCA G/L indicates that $31,600 in commissions paid to Mr. Vodden were from the Oil Recycling Grant account.
SCCA Response SCCA argued that costs incurred by Thunderhill Park, its for-profit subsidiary, were eligible for reimbursement from the grant, likening the relationship to a contractor relationship. Because this was a reimbursable grant and a not for profit contract (which would have been subject to bidding) we found this argument unsupported. Specifically: • $54,000 and $112,000 claimed as sponsorship fees under UNP4 and UNP5, respectively, are not supported by the grantee’s accounting records. • $38,745 and $45,210 claimed as hourly wage expenses incurred were not supported by the grantee’s accounting records. In addition, the grantee was unable to provide documentary evidence that would substantiate the hours and location of work performed.
SCCA’s Response (cont.) • SCCA’s accounting records reflect the payment of approximately $31,600 in commissions not authorized by the grant agreements. • $12,500 reimbursed to the grantee for the purchase of a trailer are not supported by SCCA’s accounting records. • SCCA’s general ledger indicates that the grantee’s actual expenditures for each year under review were less that what they claimed for reimbursement. The result being the grantee realized $256,586 in profit from the grants as follows: • 2001 $14,050 • 2002 $37,709 • 2003 $50,780 • 2004 $67,183 • 2005 $86,864 • The Used Oil Nonprofit Grant Procedures and Requirements explicitly state that profit or markups are prohibited.
SCCA’s Response (cont.) • SCCA also stated in their response to the DOF audit report that the average costs to fund a racing event can exceed $30,000 per day. SCCA then states “data supporting the cost of each racing event were readily available to the auditors for all the events covered by these two grants”. Finally, SCCA asserts that the entry fees for the racing events cover approximately 75 percent of the event costs. • Examination of SCCA’s 2004 and 2005 accounting records contradict the assertion above, in fact we noted that almost all of the road racing events turned a profit, and that overall, SCCA posted a profit from these events. See sample of 2005 events in exhibits.
Conclusions DOF questioned $262,455 in costs billed to the Grants ($105,245 from UNP 4 and $157,210 from UNP 5). Of this amount, $234,928 should be remitted to the CIWMB as ineligible costs and the $27,527 retained under UNP 5 should not be paid to the grantee. Costs did not exist in the accounting records. SCCA was unable to provide required supporting documentation. SCCA distributed grant funds totaling approximately $31,600 to the CEO for commissions that were not disclosed to the grant manager or authorized in the budgets or work plans of these grants. SCCA’s assertion that they were in compliance with the terms of the grant agreements and expended the grant funds in accordance with the agreements is directly contradicted by their documentation and actions.
EXHIBITS • SCCA general ledger – Oil Recycling Champions (grant account): • May 31, 2005 • December 31, 2004 • December 31, 2003 • December 31, 2002 • December 31, 2001 • SCCA response to Department of Finance Audit Report.