Laurel Place West Hollywood, Inc.Non-Profit

Condition: On August 29, 2019, fraud and embezzlement was detected at the Project?s management company, HDSI Management, Inc. (?HDSI?). An HDSI employee (the ?Employee?) was fraudulently preparing false invoices to a certain vendor (the ?Vendor?) and forging HDSI company checks payable to the Vendor. HDSI's insurance company reimbursed the affected projects. The amount embezzled by this HDSI employee approximated $191,000 in total from multiple projects, of which $6,265 was embezzled from the Project and, accordingly, HDSI reimbursed the Project for $6,265. Criteria: HDSI is required to have internal controls in place to prevent and detect fraudulent activity and provide for the protection of project assets. Effect of Condition: An HDSI employee was able to falsify records and embezzle project assets, and the fraudulent activity went undetected for three years. Cause of Condition: The Employee was an accounts payable clerk, had access to check stock, was able to prepare fraudulent invoices to the Vendor, and able to forge the signatures of on site managers and forge the signature of an authorized check signer. Management believes there might have been collusion between the Employee and the Vendor. In addition, the Vendor was not included on HDSI?s master vendor list, although HDSI had the Vendor?s documents; such as certificate of insurance, business license, and W 9. Recommendation: Laurel Place West Hollywood, Inc. management should ensure that HDSI implement processes and controls that provide for the proper segregation of duties between the authorization, execution, and review of transactions; such as, approval of all new vendors, regular review of its master vendor list, controls for processing of vendor invoices and the review and authorization of disbursements by someone independent of the processing function, reviewing bank statements for unusual activity, and the on site manager?s review of monthly expenditures. Questioned Costs: $6,265 Management?s response: The management company, HDSI, is in process of implementing additional internal controls that would ensure that such fraud and embezzlement will less likely occur. These controls include reviewing monthly bank statements for unusual vendors and reviewing copies of all checks for all disbursements to ensure that they were made out to the appropriate vendor, sending each on site manager a list of monthly disbursements related to the Organization for review and to ensure that each disbursement is related to work performed on the building.

U.S. Department of Housing and Urban Development Section 202 Capital Advance Program, CFDA No. 14.157 Finding No. 2019-001: Fraud and embezzlement Condition: On August 29, 2019, fraud and embezzlement was detected internally at the Project?s management company, HDSI Management, Inc. (?HDSI?). An HDSI employee was fraudulently preparing false vendor invoices and forging HDSI company checks made out to this vendor. There is currently an on-going investigation of this fraud activity by the Los Angeles Police Department. The amount embezzled by this HDSI employee approximated $191,000 in total from multiple projects, of which $6,265 was embezzled from this Project. It is believed that there was collusion between the vendor and the HDSI employee. Criteria: Per regulatory agreement, the Project?s management company is required to have internal controls in place in order to prevent such fraudulent activity as noted above. Effect of Condition: The Project?s management company has adequate controls in place to prevent such fraudulent activity, but collusion is difficult to detect. Cause of Condition: The HDSI employee was an accounts payable clerk and had access to check stock and was able to prepare fraudulent invoices to a particular vendor, able to forge checks to the vendor, forge signature of on-site managers and signature of check signer. This is currently an on-going investigation and it is believed that collusion between the accounts payable clerk and the vendor occurred. The fraud was detected when an auditor asked for a particular invoice for a check and the invoice could not be found. HDSI then began to look for all invoices for this particular vendor noting that many of the invoices could not be found. HDSI contacted the on-site managers for several of the projects managed by HDSI for which services were performed by this vendor, noting that the on-site managers had never had these services performed by this vendor. We also noted that this particular vendor was not included on HDSI?s master vendor list, although HDSI had the vendor documents on file for this vendor such as certificate of insurance, business license, and W-9. Recommendation: The Project?s management company shall review and scrutinize their master vendor list closer, implement additional internal controls such as reviewing bank statements for unusual vendors, reviewing all checks disbursed to ensure that they are written to the appropriate vendor, and ensuring with the on-site manager that the work was performed. This will help detect such fraud through collusion.