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New York City Comptroller William C. Thompson, Jr. has issued an audit finding that the Department of Homeless Services must substantially improve controls over its payments to per diem homeless shelters.

The audit examined whether DHS adequately administered two of its three active bank accounts- a Billing System account and a DHS Miscellaneous Expense Account (MEA) - from July 1, 2005 to June 30, 2006. You can view the audit at www.comptroller.nyc.gov.

The Billing System account is the largest, and used to pay per diem shelter providers through electronic funds transfers. During FY 2006, $120,043,627 was paid to non-contractual providers through this account. Of the 99 family shelter providers paid through this account, 97 are per diem providers and two are both per diem and contractual providers.

DHS uses a Client Tracking System (CTS), the Shelter Care Information Management System (SCIMS), and the Housing Emergency Referral Operation (HERO) system to record and track services provided to clients.

“Overall, the audit determined that the Department of Homeless Services has adequate controls in terms of deposits in and withdrawals from the Billing System account and the Miscellaneous Expense Account,” Thompson said. “The Department also has established accounting systems to record, track, and store transactions made through its Billing System account, and the DHS Billing unit, which processes per diem family provider payments, compares shelter invoices to homeless family records stored in its Client Tracking System prior to initiating payments through this account.”

However, auditors detected a number of other problems, including several weaknesses in the payment process leading up to withdrawals. Those problems include:

• A lack of segregation of duties in the Billing unit. DHS does not adequately segregate duties in its Billing unit relative to its payments to per diem family shelter providers. As a result, several tasks have been performed by one individual and this may increase the risk of error or misappropriation.

• An absence of procedures to ensure that the payments made to per diem providers correspond to the amounts authorized by the Billing unit. Consequently, the Billing unit was unaware of certain payments to per diem providers.

• A lack of controls over the processing of payments to one per diem adult provider. Claims from the St. James Shelter at 47 Madison Street in Manhattan - the only per diem adult shelter – are paid from the Billing System account but are not processed through the Billing unit, which only processes family shelter claims.

While the Billing Unit has a system to review provider invoices and corresponding client information in CTS, DHS has no comparable system to review per diem adult provider invoices and corresponding client information in SCIMS.

Auditors performed a detailed review of the DHS processing of payments to the St. James Shelter, and uncovered a serious lack of internal controls over these payments. As a result, payments were made to the St. James Shelter without supporting documentation or a proper review of the amounts paid.

DHS, for instance, paid St. James Shelter for providing lodging to homeless adults without requesting supporting documentation to ensure that the correct amounts were paid, so St. James was consistently overpaid for services (amounting to $55,475).

• A lack of controls over disbursements made from the MEA account. DHS has inadequate controls over the transactions processed through its MEA account, which pays imprest funds at family and adult shelters that are directly operated by DHS. As a result, payments were made from this bank account for these funds to individuals who were not listed in DHS Custodian Directory as being the imprest fund custodians for these shelters.

• A failure to determine which entities require the issuance of 1099-MISC forms for income tax purposes, as required by the Internal Revenue Service. As a result, some per diem providers may not have reported the DHS payments as income on their tax returns.

Thompson recommended that DHS: ensure that the Director of the Billing unit approves the final payment file to be sent to the bank account custodian for the electronic transfer of funds to providers; intensify efforts to enter into contracts with per diem providers; and, establish a process to ensure that all electronic transfers of funds to per diem providers match the amounts authorized by the Director of the Billing unit.

Additionally, he recommended the agency: establish procedures and computer controls to ensure the proper processing of recoupments; ensure that the determination of overpayments is based on actual rather than allowable expenses and recalculate the closeout statement for FY 2006; ensure that its imprest fund Custodian Directory is regularly updated to reflect changes in authorized personnel; and, report payments to 1099-reportable per diem providers in a format acceptable to FISA.

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