Inadequate fraud-prevention policies at California’s housing department put millions of dollars in federal funding at risk, the U.S. Department of Housing and Urban Development’s Office of Inspector General (HUD OIG) said in an Aug. 2 audit report.
“[The department’s] internal control system was vulnerable with respect to fraud,” the inspector general wrote in the report on California’s Housing and Community Development Department (HCD).
“HCD was not adequately prepared to prevent, detect, and respond to fraud due to the lack of focus it placed on fraud risks and establishing a robust fraud risk management framework,” according to the report.
Because of department policies, more than $319 million in federal funding—allocated following the pandemic in 2020—was put at increased risk. It’s unclear how much, if any, of the federal funding was fraudulently taken.
The department’s fraud cases usually involve a breach of contract by developers provided with grant funds. Its fraud risk management processes were ranked at the lowest level, known as “ad hoc,” with auditors noting the department’s protocols as “disorganized” and “uncontrolled.”
In response, a department spokesperson told The Epoch Times the agency is working to improve, based on recommendations made in the audit.
“We appreciate the feedback from HUD through this audit, which focuses on process recommendations and alignments to prevent fraud from occurring. The audit concluded with no findings,” HCD said in an emailed statement.
“Since the audit, HCD has worked with HUD to address all OIG audit recommendations to ensure that the framework strengthens fraud risk detection and reflects leading industry standards and best practices to bring HCD into a higher goal state (and out of ad hoc) for the organization’s antifraud initiatives.”
The department said the OIG acknowledged that HCD established a departmentwide enterprise risk management framework. However, the system wasn’t robust enough to identify fraud and didn’t use leading industry standards, according to the report.
An “ad hoc” rating was given because the department didn’t have a strategy to counter fraud attempts, failed to assess fraud risks, and missed opportunities to improve processes after suspected fraud was identified on March 2, 2022, according to the report.
Suspected fraud wasn’t registered because of a potential “publicity risk” and a belief that further risks had been dealt with, administrators said in the report. The audit said the incident should have been reported so that leaders could use the information to strengthen protocols.
Department officials didn’t disclose details of the occurrence, but believed it was a “one-off situation,” the risk of loss was minuscule, and that lost funds could be recaptured through payment requests to those who defrauded the agency, according to the report.
Top HCD administrators are ultimately responsible for setting the standard for managing such fraud risk, according to the audit.
“Although a well-designed fraud risk management framework is not infallible regarding fraud and risks of fraud, it is a powerful tool that can enhance management decision making, strengthen HCD’s reputation, and reinforce its commitment to safeguard HUD funding with regulators and the public,” the inspector general wrote in the report.
State and federal regulations require all departments that receive such funds to establish anti-fraud processes and to report instances of fraud.
Housing department officials told auditors that a separate fraud risk management framework was never developed because no events occurred that caused them to believe it was necessary, and they were never advised by federal regulators that it was a requirement.
Officials in the Division of Federal Financial Assistance, operating within the housing department and responsible for managing the funding program, cited a lack of capacity, the quick deployment of funds that occurred due to the pandemic, and the division’s newness as additional factors that kept it from adequately developing fraud management processes, according to the report.
The audit concluded with recommendations to the director of HUD’s San Francisco Office of Community Planning and Development to instruct HCD to establish robust fraud risk management practices and obtain training or technical assistance as necessary.
“HCD generally concurs with the recommendations OIG is making to the HUD San Francisco Office ... and will take appropriate steps,” Gustavo Velasquez, the department’s director, said in a letter to the inspector general that was included in the report.
The audit, which was conducted between April and October 2023 in Los Angeles, covered the timeframe between April 1, 2020, and March 31, 2023.
