Testimony of Department of Testimony of Department of Finance – Office of State Finance – Office of State Audits and EvaluationsAudits and Evaluations

Audit of Used Oil Nonprofit Audit of Used Oil Nonprofit Grants to Sports Car Club of Grants to Sports Car Club of

AmericaAmerica

IntroductionIntroduction

Marc Dermenjian, CFEMarc Dermenjian, CFE Department of Finance (DOF) – Office of Department of Finance (DOF) – Office of

State Audits and Evaluations (OSAE)State Audits and Evaluations (OSAE) Lead DOF Auditor for audit of CIWMB Lead DOF Auditor for audit of CIWMB

Used Oil Nonprofit Grants UNP4 and Used Oil Nonprofit Grants UNP4 and UNP5UNP5

CIWMB Audit RequestCIWMB Audit Request

March 23, 2005March 23, 2005 CIWMB requested that OSAE perform an CIWMB requested that OSAE perform an

audit on two Used Oil Nonprofit Grants audit on two Used Oil Nonprofit Grants issued to the Sports Car Club of America issued to the Sports Car Club of America (SCCA)(SCCA)

CIWMB requested the audit based on a CIWMB requested the audit based on a report from member of public regarding report from member of public regarding alleged misuse of grant fundsalleged misuse of grant funds

Used Oil Nonprofit GrantsUsed Oil Nonprofit Grants

Two Used Oil Nonprofit Grants issued by CIWMB:Two Used Oil Nonprofit Grants issued by CIWMB:

UNP4 – 00 – 3310UNP4 – 00 – 3310 $199,860$199,860 11/00 – 04/0311/00 – 04/03

UNP5 – 02 – 0013 UNP5 – 02 – 0013 $275,777$275,777 05/03 – 04/0505/03 – 04/05

One additional grant, UNP3, was past the three-year One additional grant, UNP3, was past the three-year document retention requirement and thus not subject to the document retention requirement and thus not subject to the audit. audit.

Audit FindingsAudit Findings Costs were not reflected in accounting records. Reimbursements Costs were not reflected in accounting records. Reimbursements

were thus reflected as profit. were thus reflected as profit.

SCCA was unable to provide required supporting documentation for SCCA was unable to provide required supporting documentation for certain reimbursements.certain reimbursements.

SCCA distributed grant funds approximating $31,600 to the CEO of SCCA distributed grant funds approximating $31,600 to the CEO of SCCA for commissions that were not disclosed to the grant SCCA for commissions that were not disclosed to the grant manager or authorized in the grant budgets or work plans. manager or authorized in the grant budgets or work plans.

DOF questioned $262,455 in costs billed to the Grants ($105,245 DOF questioned $262,455 in costs billed to the Grants ($105,245 from UNP 4 and $157,210 from UNP 5). Of this amount, $234,928 from UNP 4 and $157,210 from UNP 5). Of this amount, $234,928 should be remitted to the CIWMB as ineligible costs and the should be remitted to the CIWMB as ineligible costs and the $27,527 retained under UNP 5 should not be paid to the grantee. $27,527 retained under UNP 5 should not be paid to the grantee.

Audit ProcedureAudit Procedure

Audits performed according to Audits performed according to Generally Generally AcceptedAccepted Government Auditing StandardsGovernment Auditing Standards issued by the Comptroller General of the issued by the Comptroller General of the United States.United States.

Intended to determine whether state funds Intended to determine whether state funds are expended as specified and are are expended as specified and are supported.supported.

To verify compliance with the terms of the grants, DOF audited expenditures at the transactional level:

•Reviewed source documentation of expense claims (invoices, payroll registers, timesheets, etc.).

•Reviewed general ledger to ensure that expenses are recorded and properly accounted for within the correct project account.

•Evaluated payment of invoices by reviewing cancelled checks, bank statements and/or check ledgers.

•Determined whether reimbursed costs were incurred for services consistent with the terms of the grant agreement.

Audit Audit ProcedureProcedure (cont.) (cont.)

Profit Not Eligible For Profit Not Eligible For ReimbursementReimbursement

CIWMB’s Used Oil Nonprofit Grant Procedures and CIWMB’s Used Oil Nonprofit Grant Procedures and Requirements (P&R) limit eligible costs to Requirements (P&R) limit eligible costs to “activities, products and costs included in the “activities, products and costs included in the work plan and expenditure itemization summary, work plan and expenditure itemization summary, and must be incurred within the grant term.” and must be incurred within the grant term.”

““Profit or Markup by the Grantee” is an ineligible Profit or Markup by the Grantee” is an ineligible cost under the P&R.cost under the P&R.

Documentation of Claims Documentation of Claims RequiredRequired

P&R’s for both grants require P&R’s for both grants require supporting documentation for all supporting documentation for all expendituresexpenditures where grant payments where grant payments are being claimed. are being claimed.

Audit FindingsAudit Findings

SCCA reimbursed for expenditures SCCA reimbursed for expenditures that were not reflected in its general that were not reflected in its general ledger account.ledger account.

Therefore, the reimbursements were Therefore, the reimbursements were registered as profit and thus registered as profit and thus ineligibleineligible under the grant P&R’s. under the grant P&R’s.

Audit Findings – Audit Findings – Sponsorship FeesSponsorship Fees

- Sponsorship fees claimed in the Sponsorship fees claimed in the amounts of $54,000 (UNP4) and amounts of $54,000 (UNP4) and $112,000 (UNP5) not reflected in the $112,000 (UNP5) not reflected in the accounting records. accounting records.

- In addition, SCCA was unable to In addition, SCCA was unable to substantiate that these amounts were substantiate that these amounts were related to goods or services that were related to goods or services that were paid for and received within the grant paid for and received within the grant periods.periods.

Audit Findings – Audit Findings – Salary ExpendituresSalary Expenditures

Salary expenditures claimed for grant-related Salary expenditures claimed for grant-related work in the amounts of $38,745 (UNP4) and work in the amounts of $38,745 (UNP4) and $45,210 (UNP5) were not supported by SCCA’s $45,210 (UNP5) were not supported by SCCA’s

accounting records or by evidence of payment.accounting records or by evidence of payment. • No timesheets for services of SCCA personnel.No timesheets for services of SCCA personnel.• Salary amounts billed to CIWMB on a per-event Salary amounts billed to CIWMB on a per-event

basis, but SCCA unable to substantiate attendance basis, but SCCA unable to substantiate attendance at these events.at these events.

• SCCA personnel were salaried employees of SCCA personnel were salaried employees of Thunderhill Park (the for-profit subsidiary of Thunderhill Park (the for-profit subsidiary of SCCA), and per SCCA’s Project Director, the SCCA), and per SCCA’s Project Director, the incremental duties associated with the incremental duties associated with the management of the grant were absorbed by their management of the grant were absorbed by their existing employee duties.existing employee duties.

Audit Findings - KioskAudit Findings - Kiosk Equipment (portable kiosk) purchased under Equipment (portable kiosk) purchased under

UNP4 for $12,500 not supported by SCCA UNP4 for $12,500 not supported by SCCA accounting records. accounting records. • Purchased by SCCA’s for-profit subsidiary, Purchased by SCCA’s for-profit subsidiary,

Thunderhill Park, prior to being approved for Thunderhill Park, prior to being approved for funding under the UNP4 grant. SCCA internal funding under the UNP4 grant. SCCA internal meeting minutes indicate that funds received meeting minutes indicate that funds received from the UNP4 grant were “banked.” from the UNP4 grant were “banked.”

• Purpose of kiosk was to distribute Used Oil Purpose of kiosk was to distribute Used Oil Recycling literature and giveaways, but it was Recycling literature and giveaways, but it was principally used to generate revenue by selling principally used to generate revenue by selling merchandise.merchandise.

• Per interview with Thunderhill employee, kiosk Per interview with Thunderhill employee, kiosk was “in the vicinity” of a cardboard display that was “in the vicinity” of a cardboard display that housed Used Oil Recycling literature.housed Used Oil Recycling literature.

Audit Findings – Audit Findings – Contract DeliverablesContract Deliverables

Unable to corroborate the number of used oil recycling Unable to corroborate the number of used oil recycling events represented by SCCA. These events formed the events represented by SCCA. These events formed the basis for the sponsorship fee and salary expense basis for the sponsorship fee and salary expense claims (see prior section), and were the principle claims (see prior section), and were the principle deliverable in the grant agreements. deliverable in the grant agreements.

UNP4 required 55 event daysUNP4 required 55 event days UNP5 required 56 event days, of which 12 event days UNP5 required 56 event days, of which 12 event days

were to occur in Southern California.were to occur in Southern California.

The UNP5 contract increased the per event The UNP5 contract increased the per event sponsorship amount from $1,000 to $2,000 per event sponsorship amount from $1,000 to $2,000 per event day because SCCA was to provide statewide exposure.day because SCCA was to provide statewide exposure.

SCCA unable to substantiate that the Southern SCCA unable to substantiate that the Southern California events occurred or provide credible California events occurred or provide credible evidence of performance of the UNP5 work plan.evidence of performance of the UNP5 work plan.

Audit Findings – Audit Findings – CommissionsCommissions

Grant funds were used to pay approximately $31,600 Grant funds were used to pay approximately $31,600 in commissions to the CEO of SCCA. in commissions to the CEO of SCCA. • CEO of SCCA was concurrently CEO of Thunderhill Park, CEO of SCCA was concurrently CEO of Thunderhill Park,

and a paid consultant to SCCA.and a paid consultant to SCCA.• Commission payments not reflected on payment Commission payments not reflected on payment

requests submitted to CIWMB.requests submitted to CIWMB.• Commission payments not authorized under either grant Commission payments not authorized under either grant

agreement.agreement.• Review of commission amounts indicate they were Review of commission amounts indicate they were

based on the “profit” that SCCA made from the grants. based on the “profit” that SCCA made from the grants.

Audit Findings – Audit Findings – Commissions (cont.)Commissions (cont.)

The following illustrates the calculation of the CEO’s The following illustrates the calculation of the CEO’s commission:commission:

Gross request on disbursement request # 3 Gross request on disbursement request # 3 $83,500.93$83,500.93Less 10% withholdLess 10% withhold $ 8,350.09$ 8,350.09Net Disbursement by CIWMBNet Disbursement by CIWMB $75,150.84$75,150.84Less Ross Campbell InvoiceLess Ross Campbell Invoice $14,515.00$14,515.00Less Rio Media InvoiceLess Rio Media Invoice $12,125.93$12,125.93

Residual BalanceResidual Balance $48,509.91$48,509.9110% of residual balance 10% of residual balance $ 4,850.99$ 4,850.99Check to Mr. Vodden for consulting fees Check to Mr. Vodden for consulting fees $ 4,851.00$ 4,851.00

DifferenceDifference $ .01$ .01

Audit Findings – Audit Findings – Commissions (cont.)Commissions (cont.)

The following commission amounts paid to the The following commission amounts paid to the CEO of SCCA by the grants are evidenced by CEO of SCCA by the grants are evidenced by SCCA’s general ledger:SCCA’s general ledger:

4/26/054/26/05 D.B. Vodden – CommissionsD.B. Vodden – Commissions $4,851.00$4,851.006/30/046/30/04 D.B. Vodden – CommissionsD.B. Vodden – Commissions $3,090.56$3,090.568/09/048/09/04 D.B. Vodden – CommissionsD.B. Vodden – Commissions $4,441.92$4,441.921/19/031/19/03 D.B. Vodden – CommissionsD.B. Vodden – Commissions $4,416.43$4,416.4311/03/0311/03/03 D.B. Vodden – CommissionsD.B. Vodden – Commissions $6,132.99$6,132.991/26/011/26/01 D.B. Vodden – CommissionsD.B. Vodden – Commissions $8,665.00$8,665.00

TotalTotal$31,597.90 $31,597.90

Audit Findings – Audit Findings – Commissions (cont.)Commissions (cont.)

The SCCA Board’s response to the audit The SCCA Board’s response to the audit report states, “We have maintained a report states, “We have maintained a longstanding program that provides David longstanding program that provides David Vodden a bonus for developing additional Vodden a bonus for developing additional sources of revenue. The sponsorship sources of revenue. The sponsorship portion of the CIWMB grants is such an portion of the CIWMB grants is such an item and he was paid from our general item and he was paid from our general operating fund the indicated bonuses.”operating fund the indicated bonuses.”

• The SCCA G/L indicates that $31,600 in The SCCA G/L indicates that $31,600 in commissions paid to Mr. Vodden were commissions paid to Mr. Vodden were from the Oil Recycling Grant account.from the Oil Recycling Grant account.

SCCA ResponseSCCA Response

SCCA argued that costs incurred by Thunderhill Park, its for-SCCA argued that costs incurred by Thunderhill Park, its for-profit subsidiary, were eligible for reimbursement from the profit subsidiary, were eligible for reimbursement from the grant, likening the relationship to a contractor relationship. grant, likening the relationship to a contractor relationship. Because this was a reimbursable grant and a not for profit Because this was a reimbursable grant and a not for profit contract (which would have been subject to bidding) we found contract (which would have been subject to bidding) we found this argument unsupported. Specifically:this argument unsupported. Specifically:

• $54,000 and $112,000 claimed as sponsorship fees $54,000 and $112,000 claimed as sponsorship fees under UNP4 and UNP5, respectively, are not supported under UNP4 and UNP5, respectively, are not supported by the grantee’s accounting records. by the grantee’s accounting records.

• $38,745 and $45,210 claimed as hourly wage expenses $38,745 and $45,210 claimed as hourly wage expenses incurred were not supported by the grantee’s incurred were not supported by the grantee’s accounting records. In addition, the grantee was unable accounting records. In addition, the grantee was unable to provide documentary evidence that would to provide documentary evidence that would substantiate the hours and location of work performed.substantiate the hours and location of work performed.

SCCA’s Response (cont.)SCCA’s Response (cont.)

• SCCA’s accounting records reflect the payment of SCCA’s accounting records reflect the payment of approximately $31,600 in commissions approximately $31,600 in commissions not authorized by the not authorized by the grant agreementsgrant agreements..

• $12,500 reimbursed to the grantee for the purchase of a trailer $12,500 reimbursed to the grantee for the purchase of a trailer are are not supported by SCCA’s accounting recordsnot supported by SCCA’s accounting records..

• SCCA’s general ledger indicates that the grantee’s SCCA’s general ledger indicates that the grantee’s actual actual expenditures for each year under review were less that what expenditures for each year under review were less that what they claimed for reimbursementthey claimed for reimbursement. The result being the grantee . The result being the grantee realized $256,586 in profit from the grants as follows:realized $256,586 in profit from the grants as follows:

20012001 $14,050$14,050 20022002 $37,709$37,709 20032003 $50,780$50,780 20042004 $67,183$67,183 20052005 $86,864$86,864

• The Used Oil Nonprofit Grant Procedures and Requirements The Used Oil Nonprofit Grant Procedures and Requirements explicitly state that explicitly state that profit or markups are prohibitedprofit or markups are prohibited..

SCCA’s Response (cont.)SCCA’s Response (cont.) SCCA also stated in their response to the DOF audit report SCCA also stated in their response to the DOF audit report

that the average costs to fund a racing event can exceed that the average costs to fund a racing event can exceed $30,000 per day. SCCA then states “data supporting the $30,000 per day. SCCA then states “data supporting the cost of each racing event were readily available to the cost of each racing event were readily available to the auditors for all the events covered by these two grants”. auditors for all the events covered by these two grants”. Finally, SCCA asserts that the entry fees for the racing Finally, SCCA asserts that the entry fees for the racing events cover approximately 75 percent of the event costs. events cover approximately 75 percent of the event costs.

Examination of SCCA’s 2004 and 2005 accounting records Examination of SCCA’s 2004 and 2005 accounting records contradict the assertion above, in fact we noted that contradict the assertion above, in fact we noted that almost all of the road racing events turned a profit, and almost all of the road racing events turned a profit, and that overall, SCCA posted a profit from these events. that overall, SCCA posted a profit from these events. See See sample of 2005 events in exhibits.sample of 2005 events in exhibits.

ConclusionsConclusionsDOF questioned $262,455 in costs billed to the Grants ($105,245 DOF questioned $262,455 in costs billed to the Grants ($105,245 from UNP 4 and $157,210 from UNP 5). Of this amount, $234,928 from UNP 4 and $157,210 from UNP 5). Of this amount, $234,928 should be remitted to the CIWMB as ineligible costs and the $27,527 should be remitted to the CIWMB as ineligible costs and the $27,527 retained under UNP 5 should not be paid to the grantee.retained under UNP 5 should not be paid to the grantee.

Costs did not exist in the accounting records. Costs did not exist in the accounting records.

SCCA was unable to provide required supporting documentation.SCCA was unable to provide required supporting documentation.

SCCA distributed grant funds totaling approximately $31,600 to the SCCA distributed grant funds totaling approximately $31,600 to the CEO for commissions that were not disclosed to the grant manager or CEO for commissions that were not disclosed to the grant manager or authorized in the budgets or work plans of these grants. authorized in the budgets or work plans of these grants.

SCCA’s assertion that they were in compliance with the terms of the SCCA’s assertion that they were in compliance with the terms of the grant agreements and expended the grant funds in accordance with grant agreements and expended the grant funds in accordance with the agreements is directly contradicted by their documentation and the agreements is directly contradicted by their documentation and actions.actions.

EXHIBITSEXHIBITS

SCCA general ledger – Oil Recycling SCCA general ledger – Oil Recycling Champions (grant account):Champions (grant account):• May 31, 2005May 31, 2005• December 31, 2004December 31, 2004• December 31, 2003December 31, 2003• December 31, 2002December 31, 2002• December 31, 2001December 31, 2001

SCCA response to Department of SCCA response to Department of Finance Audit Report.Finance Audit Report.