Report 99136 Summary - June 2000

Kern County Economic Opportunity Corporation:

Poor Communication, Certain Lax Controls, and Deficiencies in Board Practices Hinder Effectiveness and Could Jeopardize Program Funding

RESULTS IN BRIEF

Lax internal controls in certain areas at the Kern County Economic Opportunity Corporation (KCEOC) may jeopardize its continued receipt of program funds, cause financial difficulties, and hinder its mission of helping Kern County's low-income population. Weaknesses in KCEOC's operations include poor communication between the agency and its oversight board of directors (board), some fiscal and administrative problems with grants, and deficiencies in board practices. The poor communication led to a serious disagreement between KCEOC's board and some members of management. Certain lax controls also have allowed KCEOC to incur questionable costs, inappropriately lend funds between programs, and mismanage billings at its health center. Monitoring of KCEOC operations by the board and some managers is limited, resulting in an overreliance on the director of finance and on reviews by external entities. In addition, the board does not always have effective participation by its members, adequate compliance with its bylaws and open meeting laws, and training in specific areas to enable board members to provide more effective oversight.

KCEOC is a nonprofit community action agency that administers numerous health, education, and child development programs to Kern County's low-income, elderly, and disadvantaged residents. It is governed by a 15-member volunteer board with representatives from the county's public, private, and low-income sectors. Individual staff prepare or present information to the board; however, KCEOC's executive director is the principal link between the board and agency staff and is responsible for the agency's day-to-day operations and for the quality of information given to the board.

The board and some members of management, including the former executive director, have disagreed on the policy for compensating management staff for overtime. In late 1998, the board became concerned that management staff were receiving compensatory time off (CTO) for overtime worked and, further, that they could choose to receive cash payouts in lieu of CTO, practices that the board should have been aware of, although it indicated it was not. Certain members of management stated that the practices were long-standing and believed that the board had approved the practices. This issue has disrupted the leadership of KCEOC and has resulted in a legal dispute with a former employee. In addition, because the board believes that it did not authorize the practice of paying for CTO for management staff, the federal government could disallow the $581,000 spent for payments and leave time.

The controversy over CTO arose because of poor communication between the board and some members of management, including the former executive director. Most of the blame for this poor communication rests with these members of management, who had numerous opportunities to clearly inform the board about compensation practices and policy but failed to do so. The board must share the blame, however, primarily because its members failed to communicate effectively among themselves. Former board presidents were aware of payments for CTO, but there is no evidence they told current board members of the practice.

Administrative weaknesses, including poor oversight over grant requirements, have resulted in questionable expenditures and practices. For example, we found almost $90,000 in unallowable costs, primarily for professional fees related to the dispute over CTO, that were paid with grant funds that were restricted in use and not available to cover these costs. These grant funds were originally used to subsidize KCEOC's health center and then transferred to cover the unallowable costs. Another problem is that mismanagement of billings at the health center has resulted in a backlog that its records show total $642,000 that are old and possibly uncollectible. Because the billings are old and the records are in poor condition, KCEOC has limited confidence in the accuracy of this amount and does not know how much is related to unbilled amounts, denied billings, or errors. Thus, KCEOC is researching if it can pursue collection of these accounts. Although the board was concerned about the health center's finances, neither management nor KCEOC's independent auditor disclosed the billing problem to the board. These uncollected claims have aggravated KCEOC's cash-flow problems-problems that have led to frequent improper uses of restricted funds as short-term loans to other grants.

We observed many minor weaknesses in internal controls that were not individually significant but, taken together, create an environment that unnecessarily exposes assets to risk of loss or misuse. These other weaknesses include breakdowns in the approval of expenditures, security lapses, and weaknesses in personnel practices.

Monitoring of KCEOC operations by some members of its management is limited, resulting in an undue reliance on the director of finance. The board also has relied on outside reviews to identify problems; however, these reviews are not meant to provide comprehensive information about the agency's programs and may not cover all areas of concern to the board. In a future audit, we intend to follow up on the issue of comprehensive grant management reviews and grant oversight of nonprofits throughout the State. Based on that audit, we will, if necessary, suggest changes to management practices and existing laws to improve oversight.

The board does not always comply with KCEOC bylaws and open meeting laws. For example, it often has vacant seats and it has been slow to fill them because it relied too heavily on the former executive director to recruit new members. In addition, some members have neglected to attend meetings consistently, but until recently, the board has not taken steps to remove and replace them. These vacancies and absences have limited the board's effectiveness in providing oversight. The board has also violated open meeting laws. According to the board president, the board believed that it did not need to comply with these laws based on the advice of a former attorney and the former executive director. Further, until a few months ago, the board was violating its bylaws because it was not keeping minutes for closed meetings. Additionally, the board has not received training in subjects that could improve the quality of its oversight, such as allowable costs, financial statement review, and open meeting laws. Finally, a new bylaw change that allows officers to act on the board's behalf between meetings exposes the agency to the risk that the officers could act inappropriately. The board president indicated that the change was intended to allow the officers to be more involved with the agency and was approved by their attorney.

RECOMMENDATIONS

To improve the relationship between the KCEOC board and management, both parties, particularly management, must communicate more openly. Management, in particular the executive director, should ensure full disclosure of crucial issues. Both parties should clarify their understanding of issues so they know each other's position. Finally, the board should systematically identify key issues it wants to know about and require management to provide regular and detailed reports on those issues.

To ensure that it follows federal and state grant requirements, KCEOC should improve its internal controls over expenditures and approvals, cash management practices, and security of assets, including food donated to its food bank. Further, KCEOC should contact federal and state grant agencies to determine whether it will have to repay the $581,000 spent for CTO and the $90,000 spent for professional fees and to repay bonuses. Additionally, KCEOC needs ways to avoid future billing problems at the health center.

The board and management should provide better oversight of the agency and its programs and reduce their reliance on the director of finance and outside reviews. Management should regularly receive more informative financial reports. To provide a fresh perspective on operations and internal controls, the board should ensure that KCEOC periodically change its independent auditor. In addition, KCEOC should provide better training to its management and board members to enable them to provide more effective control, oversight, and management of the agency and its programs.

Finally, to improve its effectiveness as an oversight body, the board should actively recruit new members to minimize vacancies and should take steps to eliminate the absenteeism that has plagued the board. The board also should ensure that it complies with open meeting laws and its bylaws by providing proper public notice and keeping minutes for all meetings. To minimize risk, the board should clearly define the actions that officers may take between meetings.

AGENCY COMMENTS

The Kern County Economic Opportunity Corporation generally agrees with our findings and plans to, or has begun to take steps to, implement our recommendations.


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