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Audit of Hermandad Finds $500,000 Unaccounted For; Nonprofit: Auditor cites misspent or missing federal grants and taxes. The agency says it is correcting problems.;

Los Angeles Times
Thursday, May 22, 1997

An independent audit of Hermandad Mexicana Nacional has found that the nonprofit social services organization misspent or cannot account for more than $500,000 in federal grants and taxes.

The audit revealed that the U.S. Department of Health and Human Services has demanded the return of a $404,248 grant, if Hermandad cannot demonstrate that the money was spent for the intended purposes.

The audit also found that the cash-strapped agency improperly spent $107,184 withheld from its employees' wages to satisfy federal income taxes, and an additional $130,711 withheld for state and local taxes--in apparent violation of federal and state tax laws.

Bert Corona, Hermandad's executive director, said that the withholding taxes had been misappropriated, but insisted the HHS grant money could be accounted for.

"Of course, [the withholding money] was spent," Corona acknowledged in an interview. "Yes, yes, I know it's against the law, but the auditors we had then, and the accountant in Santa Ana, did it this way. Either they were ignorant, or they didn't give a damn. . . . But the auditors we had then, they were permissive of that."

As for the grant money, Corona said, "we won't need to repay it. It wasn't stolen, it wasn't misspent. It was used properly."

The audit said Hermandad used "the payroll tax funds for other purposes . . . [because of] cash flow problems." Hermandad, as it is commonly known, is a 50-year-old organization with branches in two states that has provided English and citizenship classes and a wide range of other services to immigrants and elderly people. Hermandad means brotherhood in Spanish.

On Tuesday, Corona was confident that documentation could be provided to show that the federal grant money had been properly spent. On Wednesday, he provided The Times with copies of two "financial status report[s]" dated the day before and purporting to show that all but $15,670 of the money had been spent on the project.

Apart from noting that $175,218 was spent in 1995 and $213,360 the following year, there was no breakdown of the disbursements, and no supporting documentation, such as canceled checks, showing how the money had been spent.

Similarly, Jim Balbin, the certified public accountant hired by Hermandad to complete a long overdue audit required by federal law, said in his report that Hermandad was not forthcoming when he sought documentation on how the grant money had been spent.

In the audit, Balbin said one document he was given showed that Hermandad had invested $300,000 of the grant money in an agricultural cooperative, and was to receive preferred stock in return.

But Balbin said that he found no canceled checks or other evidence of the money having been paid to the growers cooperative, or any evidence that any stock in the co-op had been turned over to Hermandad.

The auditor concluded that as a result, Hermandad was "out of compliance with its grant, and with laws and regulations related to federal financial reports and cash management."

Health and Human Services spokesman Michael Kharfen said repeated attempts had been made to contact Hermandad, and to obtain proof that the money had been spent properly.

"Our calls have not been returned, letters have not been answered," said Kharfen. "As far as we are concerned, the grant is closed, and we have informed the grantee numerous times that they are out of compliance."

With regard to the misspent withholding taxes, IRS spokeswoman Dorsey Kozarovich said employers are forbidden to make use of such funds. "It's not their money, it's the employees' money," she said.

Corona said the withholding taxes were used to pay bills after Hermandad lost major sources of funding. The audit report said Hermandad was currently attempting to negotiate a compromise settlement with the IRS.

Co-director Nativo Lopez, who oversees the Santa Ana office, declined to comment on any of the issues raised, and instead inquired: "Where did you get the audit from?"

By law, audits of publicly funded nonprofits must be made available to the public on request, and every nonprofit agency that receives public funds is required to have independent audits performed. Hermandad failed to respond to repeated requests by federal and state agencies for audits for 1994 and 1995, which Balbin finally completed for both years this April.

Quite apart from its financial problems, Hermandad is the subject of voting fraud investigations being directed by California Secretary of State Bill Jones and Orange County Dist. Atty. Michael R. Capizzi. According to Jones, between 721 and 890 people unlawfully registered to vote on registration cards provided to Hermandad, and more than 442 of those people voted in last November's general election.

The Internal Revenue Service is also conducting an audit of Hermandad's books for 1994 and 1995, according to the audit report.

The audit also listed more than two dozen problems with bookkeeping, internal financial controls, debt accounting, payment of salaries and other financial matters.

"The effect of [these lapses] is to cause [Hermandad] to operate without a budget or road map . . . thus creating an even more difficult time in controlling costs and cash flow," Balbin said in one of the audit's findings.

In a joint telephone interview with The Times, Corona and Balbin said that since the audit was given to Hermandad's board last month, the nonprofit's directors had been working to correct many of the problems highlighted in the report.

"To be fair to this organization, they are trying very hard to correct these things," said Balbin. "I've seen an aggressive change in the way they are behaving."

Corona said of Balbin's findings that they were "proof he does a good job. That's why we hired him, because we knew he would get in there and dig up things and tell us what was wrong. . . . Things happen, they are wrong, so you fix them."

Corona blamed past auditors, past accountants and the current he rantors: Start asking 'Where's our money?' I would expect any granting agency would be storming the door to figure out what's going on here."

"Yeah, big deal," said Corona in response to Larsen. "I don't think he is competent to comment. He has not been over here to see how we work. I was a professor for years. I know how they work."

Corona formerly taught at Cal State Los Angeles.

Larsen said nonprofits and donors both had a "deep responsibility" that could not be ignored.

"You want any nonprofit who gets your hard-earned money, or the public's hard-earned money, to spend it properly, and to have proper internal controls."