Comprehensive Audit at Council for Economic Opportunity in Greater Cleveland

GAO analyzed instances of diverted and embezzled funds, improper loans, dual and excessive travel costs, and improper credit card charges at the Council for Economic Opportunities in Greater Cleveland to determine whether breakdowns of internal controls permitted them to occur. An effective internal control system would have prevented the establishment of unrecorded bank accounts or, at least, would have disclosed their existence. The auditors reviewing Community Services Administration (CSA) funds did not discover the diversion because they did not confirm the amounts and dates of funds transferred to the Council. Nor did CSA adequately analyze the auditor's report which showed that CSA owed the Council $448,000. The Finance Director was able to embezzle funds because he had complete control over cash disbursements and he used funds from unaudited accounts. The Council freely loaned money between Federal programs, and agency officials did not act on several audit reports of unauthorized loans. In addition to internal control breakdowns and the lack of followup on deficiencies reported in audits, an excessive amount of Federal cash held by the Council significantly contributed to the three instances of abuse. The Council was able to amass large cash balances because it drew down cash before it was needed, the Federal agencies did not recoup funds in expired or terminated grant accounts, and the Council may have received dual reimbursement for certain costs. Failure of the Federal agencies to monitor cash balances contributed to the problem. The Justice Department determined not to prosecute the instances of credit card and travel abuses because of the small dollar amounts involved. Because of this, GAO believes that Federal agencies must insist on strong internal controls and take administrative actions to recover funds involved in minor cases of program abuse. The Federal agencies have taken actions, including a single audit of Council activities, which GAO believes will substantially improve conditions in Cleveland.