We audited the Los Angeles Neighborhood Housing Services’ Neighborhood Stabilization Program 2 (NSP2). We performed the audit because American Recovery and Reinvestment Act of 2009 reviews are part of the Office of Inspector General’s (OIG) annual plan and Neighborhood Housing Services was awarded $60 million in Recovery Act NSP2 funds in a consortium agreement with 12 other organizations on February 11, 2010. Our audit objective was to determine whether Neighborhood Housing Services monitored its consortium members and ensured that its NSP2 expenditures were eligible and supported.

Neighborhood Housing Services did not implement internal controls to monitor its consortium members or ensure that its NSP2 expenditures were eligible and supported. Its policies and procedures for property acquisition and rehabilitation were effective; however, its policies for disbursements and expenditures, as well as its monitoring of consortium members, were ineffective. Neighborhood Housing Services’ inadequate internal controls resulted in no reconciliation of its NSP2 drawdowns to its expenditures, instances of improper payments to a consortium member and other vendors, an ineffective internal audit function, and no assurance that consortium members performed the NSP2-funded activities.

Therefore, we recommend that the Director of the Los Angeles Office of Community Planning and Development require Neighborhood Housing Services to (1) reconcile all NSP2 drawdowns to the expenses funded and repay any funds drawn for duplicate or non-NSP2-eligible expenses from non-Federal funds; (2) implement written procedures to ensure that its finance department follows all Federal regulations, including but not limited to ensuring that all drawndowns are tracked to the related expenditures and the U.S. Department of Housing and Urban Development’s (HUD) Disaster Recovery Grant Reporting system accurately reflects the amounts expended for each NSP2 activity; (3) implement written procedures to establish an effective internal audit function; (4) support the $30,000 paid to its consortium member or repay the amount from non-Federal funds; (5) repay the duplicate payment of $15,625 from non-Federal funds; and (6) revise and implement its monitoring policies and procedures to include monitoring all consortium members.