MINN@SOTA FADD econcic Sevetonmens mn.gov/deed Financial and Compliance Review and Investigation Phase One Preliminary Report November 22, 2017 Felton Financial Forensics, LLC 5200 Tifton Drive, Minneapolis, MN 55439 Phone: 612.490.1940 www-feltonforensics.com‘Phase One Financial and Compliance Review and investigation Phase One Report ~ November 22, 2017 Table of Contents bxecUTIVe SUMMARY. 4 FINANCIAL REVIEW BACKGROUND. 5 REVIEW OMECTIVE 5 RESULTS SUMMARY. 5 REPORT ORGANIZATION 6 WHAT Is THE UNITY OPPORTUNITY COLLABORATIVE (UOC)? 6 voc senvices: : 6 Project Speci Pla 6 VOC Budget. 7 ‘Allowable Cost per Grant Agreement 7 ewence, = 8 BACKGROUND AND OVERVIEW. 8 FINDING 1: BOUBLE-BOOKED UOC INCOME. ns ° FINDING 2: CIRCUMVENTION OF CHECK SIGNING LIMITS, 9 FINDING 3: LACK OF ADEQUATE SUPPORT/NONADHERENCE TO CONTRACTS, a FINDING 4: MAY FXCEED UOC ADMINISTRATIVE RUDGE. 2 MINNEAPOLIS URBAN LEAGUE. 2B [BACKGROUND AND OVERVIEW 3 SABATHAN ne = 14 [BACKGROUND AND OVERVIEW. 14 FINDINGS 1, 2,3: LACK OF SUPPORT/DISALLOWED EXPENSES/NON-IOC EXPENSES. 15 STAIRSTEP 16 BACKGROUND AND OVERVIEW... 16 ‘OVERALL SUMMARY AND CONCLUSION v7 [EXHIBIT | ~ CHECK 15735 - $42,000. 18 [EXHIBIT LB ~ CHECK 15736 - $40,000, 19 XII HA ~CHECK 26018 - $35,000, 20 EXHIBIT 1.8 ~ CHECK 16019 -$35,000. 2 ‘EXHIBIT ILC ~ CHECK 16020 - $34,414.99, 2 [EXHIBIT ILA ~ BERTELSON ~ FLOOR CLEANER - $372.60 ~ 100% TO UOC 23 EXHIBIT 6 ~ BERTELSON ~ TONER - $103.99 100% TO UOC 2 EXHIBIT IILC- SAM'S CLUB ~ BACK TO SCHOOL SUPPLIES - $1,628.31 ~ NON-UOC 2 Page 20130hase One Financial and Compliance Review and investigation Phase One Report = November 22, 2017 [EXHIBIT ILD - SAM'S CLUB PROGRAM SUPPLIES - $1,612.42 ~ NON-UOC. 26 [APPENDIX | FINANCIAL REVIEW PLAN 2 [APPENDIK Il REQUESTED INFORMATION 29 ‘Appendi- SIZE COMPARISONS OF UOC PARTNERS. 30 Page 3.0f30Phase One Financial and Compliance Review and investigation ‘Phase One Report ~ November 22, 2017, EXECUTIVE SUMMARY ‘The state of Minnesota's Department of Employment and Economic Development (DEED) has contracted with elton Financial Forensics to plan and perform a financial compllance review ofthe ‘Master Grant contract between DEED's Workforce Development Division and EMERGE Community Development and its sub-grantees. Phase One included reviewing transactions that ocurred from July 2, 2046 through December 31,2016. ‘The results of Phase One would determine if Phase Two was needed, Phase Two would cover January 3, 2017 through tune 30,2017. EMERGE and sub grantees are also known asthe Unity Opportunity Collaborative (UOC). The UOC ‘members comprise Minnespols Publ Schools, Aineapois Urban League, Sabathani Community Center, Staistep Foundation, and EMERGE. EMERGE serves as the lead grant recipient and is responsible for the fiscal management and reporting on behalf ofthe UOC. ‘All LOC members except Minneapolis Publi Schools were part of Phase One, Since the Minneapolis Public Schools di not request funding for the period under ths eview, they were not included inthe ‘Te purpose of Phase One was to ensure that evidence of payments and financial reconciliation back to ‘the General Ledgers forall granted funds was satisfactory. My Phase One findings were as follows: For EMERGE 1. Double booked $365,822 in UOC grants 2. Circumwented check signing authority levels by splitting the amount of UOC check disbursements to the sub-grantees. Spit UOC check dsbursements totaled $267,415 3. Lacked adequate support for UOC expenses. 4 May exceed UOC administrative budget by lune 30, 2017, based on the current eun ate For Sabathani Community Center 41. tacked adequate support for UOC expenses. 2. Incurred disallowed UOC expenditures 3. Used UOC funds for non- UOC purposes Phase One of the review dé nat find concrete evidence of malfeasance during the period under review However, do consider some ofthese fndings emblematic of poor internal controls, undisciplined recordkeeping, por understanding of adequate expense documentation, and poor understanding of “allowable” expense under the terms ofthis grant agreement ‘Additional information on these violations is provided inthe boy ofthis report. Page 4 of 30Phase One Financial and Compliance Review and Investigation hase One Report ~ November 22, 2017 FINANCIAL REVIEW BACKGROUND ‘The state of Minnesota's Department of Employment and Economic Development (OEED) has contracted with Felton Financial Forensics to plan and perform financial compliance review ofthe ‘Master Grant contract between DEED's Workforce Development Division and EMERGE Community Development and its sub grantees. Before contacting Felton Financial Forensics, DEED attempted to resolve the issues with EMERGE directly. On September 1, 2017, DEED sent letter to Mike Wynne, President and CEO of EMERGE, ‘expressing concerns about EMERGE’s abt to comply withthe contract's Project Specific Pan. The letter demanded that EMERGE cease all services and incur no further costs under the contract terms nti" ful financial reconciliation ofall expenses expended under ths grant” and other noncompllance Issues were resolved ‘The letter gave notice to EMERGE that “DEED may conduct a formal audit review ofthis grant and recoup any payments made by DEED that are not substantiated by records showing that the funds were used as required” if EMERGE and its sub grantees did not cooperate fll with this letter. EMERGE was ‘ven ten (20) days, unt September 11, 2017, to resolve these issues. The letter documented that these concerns had alzo been communicate orally to Mr. Wynne ‘one month after the deadline, the issues were stil unresolved. At this pint, BED engaged Felton Financial Forensics to perform a Financial and Compliance Review and investigation of EMERGE and its subvgrantees, The purpose ofthis review was to ensure that evidence of payments and financial, reconciliation back to the General Ledgers for al granted funds was satisfactory. REVIEW OBJECTIVE ‘The objective ofthis review sto Investigate whether there Is satisfactory evidence of payments and financial reconilations back tothe General Ledger forthe UOC partners under review (EMERGE, Minneapolis Urban League, Sabathani Community Center, and Staistep] forthe peri of lly 2, 2086, ‘through December 31,2016, Please see Appendi| forthe review plan. ‘The review plan was shared with representatives from EMERGE, Hylden Law Fim (counsel for EMERGE), Metropolitan lance of Connected Communities (MACC) (accounting, IT, and MR service provider to EMERGE), and Sabathani Community Center prior tothe stat ofthe fldwork. See Append Il fr sts ‘of documentation requested and reviewed. | conducted my review in accordance with lawful financial compliance and examination techniques, \which included an examination af books and records voluntary interviews of appropriate personnel, and additional evidence-gathering procedures as deemed necessary under the circumstances RESULTS SUMMARY Phase One of the review didnot find concrete evidence of malfeasance during the period under review, but uncovered issues emblematic of poor internal controls, undiscipined record keeping, poor understanding of adequate expense documentation, and poor understanding of “allowable” expense under the terms ofthis grant agreement. ge 507 30Phase One Financial and Compliance Review and investigation ‘Phase One Report ~ November 22,2017 REPORT ORGANIZATION | provide brief description ofthe Unity Opportunity Collaborative (UOC) ad its goals. Next, | provide a bref background on each organization, then report on and provide evidence of my ancial findings. WHAT IS THE UNITY OPPORTUNITY COLLABORATIVE (UOC)? The Unity Opportunity Collaborative (UOC) isa partnership of ive Twin Cities community-based organizations: EMERGE, Minneapolis Public Schools, Minneapolis Urban League, Sabathani Community Center, andthe Startep Foundation, The callaborative's tated purpose ito develop programs "to ‘overcome economic dlspartes that Afican-Americans and African immigrants face” in the Twin Cites ‘metropolitan area by developing and deploying “new and innovative approaches to education and workforce development.” EMERGE isthe ead grant recipient and is responsible forthe fiscal management and reporting on behalf ofthe collaborative. Pease see Appendix Il for additional information such as graphical side-by-side comparisons of each partner's total expenditures and number of full-time equivalent employees. UOC SERVICES The UOC offers series ats different ses in North and South Minneapols. The Master Grant ‘Agreement between DEED and EMERGE awarded $4,037,500 to EMERGE and is fellow UOC partners to ‘develop education and career training programs to help prepare African-Americans and Afians to achieve workplace success and assist them as they transition into the workforce Project Specific Plan The Project Specific Pan inthe grant agreement detailed sx key objectives tobe accomplished bythe {UOC from July 1, 2016 though une 30,2018 GED Preparation Employment Readiness Talning Dightal Readiness Career Credentialing Job Placement Transitional Employment Page 6 of30Phase One Financial and Compliance Review and investigation ase One Report = Novernber 22, 2017 vos Budget Tora mes | mes AL pupuc | URBAN tnowvioua expense careconies | ewense | scHoors | veacue_|sasaraani| srainsrer | euDcers [administration 12006 | 7saos|sosaa| 74250] saga] 203.750 (contracted Sevices 7 zi Participant wage/tinge | 225263 = | [rect Services ‘io32.e33 | e7as8| —sis70| —sas79| a5a300 | 3315,960 Support Services 19956 = [23571 [ —_sep00[ 15000" 92.527 [Total Expenses $ia20058]§ 754031 | 599.379 |$ 742.588 |$ 521.494 [54037500] Allowable Cost per Grant Agreement ‘+ Administration —Up to ten percent (10%) of available program funds may be budgeted for administration costs, which shall consist of ll direct and indirect costs associated with the program ‘management. Administrative costs include staff costs for program direction, coordination, and ‘management; program evaluation and data collection; an office support staf. Staff travel costs not specifically relate to direct services are also considered administrative costs. 1 Contracted Services ~ This expenciture category i used fr funds subcontracted to anther ‘organization to carry out activities described in the work pla. + Parcipant Wages and Fringe Denchits Wages and benefit paid sirectly to participants while engaged in program actives, as wellas stipends provided for educational activities, should be included in this cost category. ‘+ Direct Services ~This category covers costs assocated with providing rect services to participants, EXCLUDING costs of participant wages an fringe benefits and suppor services. Wages and fringe benefits fr staff providing direct services to participants should be included in this cost category. + Support Services ~ Support Services funds are used for tems that are necessary for participant to Participate in the program, suchas transportation, clothing, tools, childcare, housing/ental assistance, schoo! related expenses, et. These expenses may be paid directly to te participant or toa third-party vendor. + Please note: Workforce Investment Act (WIA) funded grants also prohibits certain activites, Al costs associated with an unallowable activity ae considered unallowable cost, regardless oftheir allowability under ther ccumstances, The prohibited activites are ‘© Employment-generating activites An exception is made only for those employer outreach and job development activites evecty relate to participants. ©The wages of incumbent employees participating in Statewide economic development activities. Page 7 of30Phase one Financial and Compliance Review and investigation Phase One Report November 22, 2017 EMERGE BACKGROUND AND OVERV' Based in North Minneapolis and Cedar Riverside, EMERGE helps people facing significant obstacles redefine themselves, Their mission i to help adits and youth access jobs, financial coaching, supportive housing, and other key services along pathways to brighter futures, Mike Wynne ste President and CEO. Mr. Wynne has led the organization since its launch in 2006, Before that, he serve ina succession of positions with Pillsbury Urited Communities, EMERGE'S heritage organization. He was fist hired az direct service staf person in 1988 and then served as Center Director, Program Director, and Vice President before launching EMERGE init curcent Form, Mr. Wynne earned his 8A in Sociology and Urban Studes from Hamline Univesity. He has completed ‘graduate certifiations in Nonprofit Management and Finance at the Unversity of St. Thomas, The James Shannon Insitute fr Renewing Community Leadership, The Executive Leadership Institute atthe University of Michigan Schools of Socal Work & Business, and the Stanford Graduate School of Business Executive Program in Social Entrepreneurship EMERGE operates with 69 FTEs (Full-Time Employees) and in 2016 had expenses of $8,902,157, ‘Asummary ofthe findings pertaining to EMERGE Is below, 4. Double-tooked $365,822 in UOC grants 2. Circunwented check signing authority levels by splitting the amount of UOC check isbursements tothe sub-grantees. Spit UOC check disbursements totaled $267,415, 3. Lacked adequate support for UOC expenses. 4. May exceed UOC administrative budget by June 30, 2017, based on the current run rate "information sourced rom EMERGES webite Page 8 0f30Phase One Financial and Compliance Review and investigation hase One Report~ November 22,2017 FINDING 1: DOUBLE-BOOKED UOC INCOME EMERGE and the sub-grantees both recorded significant portions of the same UOC income (se below for amount}. In other words, EMERGE recorded in ts financial books revenue belonging tothe subgrantees. In addition, the sub-grantees also recorded the same amaunt of revenues in thelr financial books. This is treet violation of Generally Accepted Accounting Principles (GAAP) per rules promulgated by the Financlal Accounting Standards Board (FASB). ASB's accounting rules are recognized as authoritative by the Securities and Exchange Commission (SC), the American institute of CPAs (AICPA), andthe state Boards of Accountancy, including the state of Minnesota's Board of Accountancy fazed on consultation with thelr external auditors, EMERGE believes double booking of income Is allowed in this circumstance because the grant agreement s between DEED and Emerge rather than DEED, Emerge and four sub-grantees, Emerge cits the following to support thelr postion: 1. EMERGE controls the revenue being passed through them tothe sub-grantees 2. EMERGE has the right and responsibly to change, modify or cancelits agreement with the sub grantees for any number of reasons per the contract terms with each sub-grantee, ‘Therefore, in summation, EMERGE believes the aforementioned elements of control are the litinguishing factors which led them to record the activity the way they did EMERGE'S management asked me to make clear tothe reader that this inding pertains to its financial statement presentation only. This is separate from the financial status reports (FSA) filed by EMERGE {vith DEED. The scope ofthis review did not include reviewing FSHs for complance withthe contract. ‘Amounts Recorded in both EMERGE’s and Sub-grantees' Financial Statements Double ‘Account Name Revenue/Cost center __| Booked [Grants and Contracts income - State of Minnesota [0701 Minneapolis Urban League [$ 005 [Grams and Contracts income state of Minnesota_[0703- Sabathani Comm Ct. 76753 [rants and Contracts income State of Minnesota [0704- Stairstep Foundation 190,658 [Total Grant income Recordedin Both Grantee's and Sub-Grantees' General Ledger | $365,822, FINDING 2: CIRCUMVENTION OF CHECK SIGNING LIMITS EMERGE’ check signing policy states that checks over $50,000 requir the handwritten signatures of the President/CEO and ether the Boacd Char, Goard Vice Chair, or Board Secretary. The Vice President of Finance & Budget Development and the President/CEO both violated ths policy by making several {VOC payments under the $50,000 limit to pay a single requested amount. See below for examples, end Exhibits LA L.A 1.8, LC for actual canceled checks. Page 9 of 30: Phase One Financial and Compliance Review and investigation Phase One Report = November 2, 2017 EXAMPLE ONE ‘Check Details ‘GheckWwade ] Check | Check ] check Payableta: | Number| pate _| Amount starstep Foundation 15735 [09/206 | 42000 [starstep Foundation 15736 [oa/20ns|s 40.000, TotalDollarAmountof checks $82,000, f AMPLE TWO ‘Check Details Gheckwiade | Check | check [Check Payableto: | Number| Date _| Amount [sbathanicomcer | 16018 [11/30/16 | $ 35,000.00 [sbathanicomew | 16019 [11/30/36 | $ 3500000 [sbathanicomew | 16020 [an/sovi6 | $ 34414 99 Total Dollar Amount of Checks | $104,414 99 EMERGE Signing Authority Matrix vaue | signing aumnortty Levets 7a athorned Tar agency puraasng reauess, or puraaina Cras s9t0$3,000 | + Manager(s) + Died) {Vice Presents ‘Rpprovel this level requires ane (1 handwaten Sonate sroovtorasany 1 Ys pate of Sma ees rm ace ecm’ ~ Trove! ts eve egies two (2) hand ween wana snes: ic President of Finance & Business Development es Prien of Conny are servers $25,000 0 + President/CEO and; must als incude an of he flowing authorized 1 Rove aE TT PES Two (2) Fan WN TRIES ae san authorized sone: + Board chair or: Board Secretary 1+ Presden/CE0 and must also incude one of he Following Board of rectors Page 10 0f30hase One Financial and Compliance Review and Investigation Phase One Report ~ November 22, 2017 FINDING 3: LACK OF ADEQUATE SUPPORT/NONADHERENCE TO CONTRACTS In most cases of disallowed costs, the cause is lack of proper documentation. Alcosts require an invoice, origina ecept, purchase order, contractor ether form of documentation All cost ‘documentation requires authorized signatures and evidence of receipt ofthe goods or services purchased. Below is sample of the expenditures tested that were found to either lack adequate documentation for payments or nonadherence to contract terms or both. event : Tetarions [oa ore] min ao anos | [sac att Aw asp : nal esa | eenco| sae fest petom tenet embses aman 350% faa [tess ces here 0 sce omnes” ot lawman osnsne] ass | s2s0000| 546 perms s20eftsi1s00wstorSmomaot tga ete in astro o aa| lcwnecomanisons ss | ezncn) sas [earn mts aren neni Jawoonsnesson finan so | rac] 5 lsmtenontontenrmttertnntins louronencors —|anaare| ase | arnon] sores orn juucwassee —|onnanc| ass) secon] 6 frsmingtonintiyaunonse econ Page 11 of 301a One Financial and Compliance Review and investigation Phase One Report November 22, 2017 FINDING 4; MAY EXCEED UOC ADMINISTRATIVE BUDGE} EMERGE'S administrative budget i $142,006. =MERGE'S net actual administrative cost forthe last four ‘manths (September, October, November and December of 2016 is $103,668. This averages $25,900 per ‘month, Based ona run rate of $25,900, EMERGES total administrative cost forthe remaining sixmenths of fiscal year 2017 is projected to be $185,400; and when added tothe actual administrative expenses Incuted in 2016, EMERGE'S total administrative cost are projected tobe $258,068. This represents a projected overage of $117,062 or 82% over budget. Page 12 of 30Phase One Financial and Compliance Review and Investigation Phase One Report = November 22, 2017 MINNEAPOLIS URBAN LEAGUE? BACKGROUND AND OVERVIEW ‘The Minneapolis Urban League (MUL isa community-based nonproft organization that was founded in 1926, The mission ofthe Minneapols Urban League isto link African descendants and other people of color to opportunities that result in economic success and prosperity, and to effectively advocate for policies that eradicate racial disparities. Steven Belton isthe President and CEO, Mr. Belton isan experienced executive, attorney, and community leader with over thirty years tenure In high-level positions in state government, public Sehools and the nonprofit and private sectors. He has worked as Chie of Staff, Execute Director of Employee Relations, and Director of Diversity and Equal Opportunity forthe Minneapolis Public Schools; was a partner and litigator at Leonard, Stret and Deinard where he specialized in employment, product labilty, an family aw; served as President and CEO of the Urban Coalition of Minneapolis; and was txecutve Director of the State Council on Black Minnesotans, Currently he serves asa youth minister and is on the preaching staff at Park Avenue United Methodist Church in south Minneapolis. Me. Betton earned a An political science from Washington Universit in St.Louis and a Juris Doctorate {com the Univesity of Michigan Law Schoo! in Ann Arbor. He has completed two-thirds ofthe requirements ofa Master of Divinity degree at Luther Theological Seminary in St. Paul [MUL operates with 20.875 FTEs (Full-Time Employees) and had expenses of $2,073,231 In 2016. ‘There were no reportable findings forthe Minneapolis Urban League. Pnformation sourced rm the Minneapolis Urban League's website Page 13 0f301 One Financial and Compliance Review and Investigation Phase One Report ~ November 22,2017 SABATHANI ACKGROUND AND OVERVIEW “The Sabathani Community Center was established in 1966 with the purpose of enriching the community ‘nd proving a safe space for its youth, Sabathani continues to offer that safe place for community Youth, butts primary mission has grown. The Center now aso serves asa resource to familes and Seniors ‘indy Booker is the Executive Director. Ms. Booker has served inthis ole for the past fur years and is responsible fr providing leadership to nine direct reports inal areas of operations, including human resources, payrall, finance, rogram supervision, development, IT, and landlord relationships. ‘Sabthani operates with 18.5 FTEs (Ful-Time Employees) and had expenses of $2,386,652 in 2016, ‘Asummary ofthe Sabathani Community Center's ings is below 1. lacked adequate support for UOC expenses. 2. Incured disallowed UOC expenaitures 3. Used UOC funds for non-UOC purposes. ® information source rom the Satathani Community Center's website and Unked in Page 14 of 30Phase One Financial and Compliance Review and Investigation Phase One Report= November 22, 2017 FINDINGS 1, 2, 3: LACK OF SUPPORT/DISALLOWED EXPENSES/NON: IOC EXPENSES Presented inthe chart below is a sample ofthe expenditures with Findings 2,2, or3. Names with "+*" signifies a copy ofthe expenditure ean be found io EXHIBIT IA, LB, I, and I. in the back ofthis report (CONTRACT COMPUANCE REVIEW - SAMPLE RESULTSOF BXPENDITURE TESTING | oa as aT RR] —— co Tone ern sts ee etooteneneoceres ersleansen- | aren SESE | gas] aa [eran ad ieee: |actualchack amount was, tsussenzesacy nnuaelaveen, | aa raanzrerournencen | 2oenco] 1.2 |ftalteceamontos 7 ea “? |s360 not $2.088. vase 88 | anf suomies rsa] 2a. [menvoceene ore ama na | ea fr-rane wen] 2 Raeeen eenansfiescus | gis arccrosoroosumuts | agar] 22 |ronvocessene oe oppor prover oyavacloccunncr | — frye seen] 1 [toe Toe OTTER rssfearason | arms rooncnen nso] a2. |itmersoetocpopane fe im ouang srt eo co aveeenrason | arm fomee sas] 12 [itowroeuoe povane lets etd Page 15 of 30Phase One Financial and Compliance Review and vestigation hase One Report= November 22, 2017 STAIRSTEP, BACKGROUND AND OVERVIEW: The Staistep Foundation was formed in 1982 as God inspired response toa set of challenges confronting society at large and Afrcan-Amerlcansin particular. The founders ofthe Staistep Foundation believed the lack of community was the cause The founders belleved thatthe palo ingicators leading to societal distress (teen pregnancy, youth crime, drug abuse, et.) were not new, but had become more intense and widespread than in other historical time periods because the critical Connections of people one to another were replaced by isolation and alienation The sense of ‘community had been broken. Stairstep's goal was to rebuild community among African-American people ‘Alfred Babington-Johnson i the President and CEO. Mr. Babington-Johnson Is 8 founding member ofthe Stirstep Foundation and has served ais president and CEO since te organization's inception. M. Babington-Johnson has a Bachelor of Arts fom Howard University and a Masters in Divinity from Bethel Seminary. Mr. Babington-Johnson is aso an ordained minster. ‘The Stastep Foundation operates wit 3 FTES (Full-Time Employees) and had expenses of $644,471 in 2016. ‘There were no reportable findings forthe Starstep Foundation "formation soured trom the Starstep Foundation’s webste, Page 16 0f 30Phase One Financial and Compliance Review and Investigation ase One Report = November 22, 2017 OVERALL SUMMARY AND CONCLUSION ‘The final decision as to whether a Phase Two Is warranted rests with DEED's executive ‘management, In my opinion, there seems to be enough evidence of poor internal controls, Lundsciplined record keeping, poor understanding of adequate expense documentation, and poor Understanding of “allowable” expense under the terms of this grant agreement to warrant a Phase Two review. Page 17 of 30,‘Phase One Financial and Compliance Review and investigation Phase One Report= November 22, 2017 EXHIBIT L.A ~ CHECK 15735 - $42,000 Commercial Electronic Office - Transaction Search Date Printed:11/14/2017 12:57 PM PT SERRA on aac, ‘STAIRSTEPFOUNOKTION woustasr ossoo00 4943570191 264" Page 18 of 30,Phase One Financial and Compliance Review and Investigation hase One Report = November 2, 2017 EXHIBIT LB — CHECK 15736 - $40,000 Commercial Electronic Office - Transaction Search Date Printed:11/14/2017 12:57 PM PT Check 15736 - 40000.00 USD Aton [STAINSTE? FOUNDATION woas?a6e 8090000 49r39 70494 2640 ner Page 19 0f30hase One Financial and Compliance Review and investigation ‘Phase One Report ~ November 22,2017, EXHIBIT IA ~ CHECK 16018 - $35,000 Commercial Electronic Office - Transaction Search Date Printed:11/14/2017 01:08 PM PT Check 16018 - 35000.00 USD a a NER anoint woweo.er "20940000 193970194 2640" Page 20 0f 30One Financial and Compliance Review and Investigation hase One Report - November 22, 2017 EXHIBIT 1.8 ~ CHECK 16019 - $35,000 |Commercial Electronic Office - Transaction Search Date Printed:11/14/2017 01:09 PM PT wossosae "209 4000049H39 70454 2510 Page21 of 30Phase One Financial and Compliance Review and investigation ‘Phase One Report Nover 7 EXHIBIT 1. ~ CHECK 16020 - $34,414.99 Commercial Electronic Office - Transaction Search Date Printed:11/15/2017 10:16 PM PT. saan conn cons Bein a wossoz0" oainono1eHsE7ONaN ete Page 22 0f 30hase One Financial and Compliance Review and investigation Phase One Report = November 22, 2017 EXHIBIT IIA ~ BERTELSON ~ FLOOR CLEANER - $372.60 ~ 100% TO UOC ee Secs et teh wets i a SS es ee ee ee ae rae i Page 23 of 30Phase One Financial and Compliance Review and Investigation ‘Phase One Report ~ Novernber 22, 2017 EXHIBIT IIL8 ~BERTELSON — TONER - $103.99 ~ 100% TO UOC Involoe Paap tot + ber alson | StL n20%6 oe-42001e4 ee ee ae ae — esse = ae z — Page 24 of 30hase One Financial and Compliance Review and investigation ‘Phase One Report = November 22, 2017 EXHIBIT ILC - SAM'S CLUB ~ BACK TO SCHOOL SUPPLIES - $1,628.31 ~ NON-UOC Sons Cub MCSYNCE ame PO Box 960016, Se een | ys” — Expenses aoa ae — fre aI joensen freee van eget fen ua akan Se Ee er ag lesson, frase ra ro en looters |rmt tren The al eestor. am 2 3 sects if Bill Total: $4,186.75 Page 25 of 30Phase One Report = November 22,2017 EXHIBIT IILD - SAM'S CLUB ~ PROGRAM SUPPLIES - $1,612.42 ~ NON-UOC Bill Shenae ee =, = Ssnscia oS = rand P6016 aw? Jno sent Expenses rT Page 26 0f 3016 One Financial and Compliance Review and investigation = Phase One Report~ November 22, 2017 APPENDIX | ~ FINANCIAL REVIEW PLAN. Financial and Compliance Review and investigation Contract Compliance Examination - Phase One october 18,2017 ‘Objective - Phase One: “Investigate that evidence of payments and financial reconciation back to the General Ledger’ was satisfactory a stated inthe last bullat point on Page S of Deputy Commissioner Hanson Will's letter dated September 1, 2017, to Mr. Wynne, Initial Examination Scope - Phase One: Covered the six-month period of lly 1, 2026 December 3, 2016, during which $651X in cash advances and $386K in expenditure payments were made to EMERGE from DEED (per SWIFT, the State's accounting and procurement system), Initial Requested Documents - Phase One: EMERGE operates on a calendar year with 212/31 yearend, ‘which means that their2016 annual financial auit should have been completed by May 15,2017; therefore, DEED is requesting: ‘+ EMERGE's 2016 financial audit report, management summary, and findings ‘EMERGE's summary and the detalles General Ledger tha les tothe 2016 audlted fnancial (© Obtain EMERGE's approval to contact external auditor(s} for mapping/crosswalk of summary General Ledger to financial statements} Reconcile 2016 cash advances and expenditures (made by DEED to EMERGE) to the 2016 detaled General Ledger + Examine documentation supporting the 2016 cash advances and expenditures (made by DEED to EMERGE) to ensure the expenditures are allowable per the Master Contract, workplan (PSP Projet Speci Plan), budget, and legislation, nd that supporting documentation is satisfactory ‘+ Bxamine the books and records ofthe sub grantees and sub-ecpients from the same time period, when necessary, to show satisfactory evidence of payments, ensure expenditures are allowable per the workplan, PSP, budget, and legislation, and that supporting documentation is satisfactory ‘© Examine the books and records related to consultants and independent contractors from the same time period, when necessary o show satisfactory evidence of payments, ensure expenditures are allowable per the workplan, PSP, budget and legislation, and that supporting documentation is satisfactory. Phase Il-The Phase One results will determine the next steps related tothe objective and scope of Phase'l if determined necessary. Records Examination - DEED has aright to examine EMERGE’s and its sub-grantees' books and record Per Paragraph 9 of Master Grant Contract EMERGE2O16M, DEED or a designated representative has the Page27 of 30hase One Financial and Compliance Review and Investigation ase One Report ~ November 22, 2017 “right to examine, for audit purposes or otherwise, any books, documents, papers or records of (GRANTEE" and "GRANTEE grees to fully cooperate in any such examination and/or aul.” Felton Financial Forensics isa designated representative of DEED fo purposes of ths contract compliance examination Expectations - EMERGE wil ensue the designated representative will have onsite space to work, that the MACC fiscal agent assigned to work on this grant is available, and thatthe third-party reviewer has {ull access ta financial system(s) data and the General Ledger forthe duration of the review. DEED ‘expects fll cooperation and responsiveness to ensure the timely completion of the onsite financial and compliance review and investigation. To ensure the integrity ofthe review, any communication during ‘this financial and compliance review and investigation must be dected tothe thira-pary eviewer. Page 28 of 30Phase One Financial nd Compa ase One Report ce Review and investigation ber 22, 2017 APPENDIX iI~ REQUESTED INFORMATION. Financial and Compliance Review and investigation Contract Compliance Examination - Phase One Requested Information, Documentation, or Items [2016 External Audit Report ‘Summary General Ledger for Fiscal Calendar Year 2016 Mapping of Summary General Ledger to the External Audit Report Detailed General Ledger for Fiscal Calendar Year 2016 ‘Supporting Documentation for UOC Expenditures Bank Reconciliations Read-only Access to Checking and Savings Accounts Budgets [Operating Statistics Page29 of 30‘Appendix lll- SIZE COMPARISONS OF UOC PARTNERS. ‘Site comparison by ‘total 2016 expenses Sie comparison by total fulltime equivalent ‘employees. ‘Size comparison by ‘average productivity by full-time equivalent employee “Thiseffcieney Indicator is caleulated by dividing total expenses by total FTEs, Higher numbers Isan indicator of high efficiency. 2016 Total Organization-Wide Expenses seonuisy ‘0.00000 8.000000 6.000000 a ‘009000 P36 sie, Saseen 2.009000 wo 5 2016 Full-Time Equivalent (FTE) Employees .00 tm zoars | OL coe q wr ssaistep, 1000 Average Output per FTE (Expenses/FTE) Higher is. Best sean 0000 $9017 sem Mut, so0.36 ‘tam y “ ‘7 som . Page 30 of 30November 27, 2017 Subject: EMERGE responds to Felton’s findings Sender: Mike Wynne, EMERGE CEO Recipient: Shawntera Hardy, DEED CommissionerEmerge Community Development Unity Opportunity Collaborative Response to: Financial and Compliance Review and Investigation, Phase One, dated November 22,2017 November 27,2017 This is memo represents Emerge’scesponse tothe Financial and Compliance Review and investigation [PReview") conducted by Felton Finane'al Consultants, LLC on behalf of DEED and provided in draft form dated November 2, 2017. ‘We belive itis important to restate the environment in which the activities being reviewed were being conducted, The state legistator appropriated, in 2016, $4.25 milion to create new communityled effort to provide workforce services to people of primarily Aican descent by a. unique collaborative of seorganizations. This old new approach combined the unique strengths of exch organization in@ way that would overcome borsers that existed with traditional workforce practices and programs, The ‘collaborative stated on July 1" 2016 with lot af discussion and leaning amongst the gr0up. ‘Concurrenty, DEED was given the responsility to manage the appropriation which was outside of their normal way of doing business. Under these circumstances - ramping up 2 completely new program, tis ‘not suprising thatthe actual contract between DEED and Emerge was not signed until September SUT was retroactive to July 1", an acknowledgment by DEED that work providing direct services had started July 1. This initiative was new tll partes and there were challenges and learnings experienced by the collaborative and DEED alike. Again -thisis not unexpected, and more importanty through tala high level service has been provided wih eau tha, EMERGE ands partners ands Independent autor conclude thatthe Review shows no malfeasance, no major accounting flaws, and highlights only minor recordkeeping deals that have been corrected Detals or each finding are itemized below. “Most importantly, EMERGE ands subgrantees request that al activites and funding should be resumed immediately DETAILED RESPONSE TO THE REVIEW REPORT AND FINDINGS 1. financial Review background carfiation ‘The background described in the report provides a description and timeline of events and activities that occurred that gves an incomplete picture of the efforts put forth by Emerge to comply with the directives of DEED. Emerge did meet with DEED on September 1, 2017 where DEED described ther concerns and outined its expectations. This was followed up witha formal letter. Emerge did provide 2 robust response on September 11” as requested. In adton, Emerge reached out to DEED for claniflation and guidance on several issues bu dd na receive a response. On September 29" DEED senta list of 28 issues where further response was required, Emerge responded as requested by (October 6", again in a robust manner and believing ithad satisfied 22 ofthe 28 issues. The remaining Issues were either in progress or awaiting lscussion/larifieation From OFED. Emerge received no response to any of ts cequess for clafeation and discussion. In addition tothe two detailed memos, ‘urmuativey 35 exhibits were also provided in support of ts responses. Emerge then received notice on ‘October 16" thatthe present compliance review and investigation would begin on October 18%.2 Results We would ike to highlight some important findings inthe report and also some important facts that dd not find their way inte the report. “+The review found NO evidence of malfeasance - Included ‘+ The autor was able to tie the detailed financial records back tothe audited financial, statements - Not Included ‘+ There were no findings fr Minneapolis Urban League - Included + There were no findings for Stairtep Foundation Included + Cash advanced from DEED was managed appropriately - Not Included ‘© Total cash advanced from DEED was S652K (© Total expense for the cllaboratve was S899 © Advanced cash was LESS than expense by $248 ‘+ Emerge distributed cash advances t its subs very quickly following the receipt from DEED. in ‘two instances Emerge actualy disbursed funds prior tits receipt from DEED ~ Not Included Ernerge Receipt Date from D&D Emerge Disbursement Date to Subs ("september 19,2016 ‘September 20,2016 (October 15,2016 ‘October 13,2016 November 15,2016 | November 16,2016 December 2, 2016 November 30, 2016 December, 2016 December 8, 2016 43. Emerge strongly disagrees withthe contention that there are poor internal controls, unlscoines record keeping, poor understanding of adequate expense documentation and poor understanding of allowable expenses under the terms of this agreement. ‘+ Many structures ae in place at Emerge that contradict the statement made above 1 Emerge engages MACC (Metropolitan Allance of Connected Communities) for much if Its back offic operations including secounting services. MACC serves 50 plus non-profit ‘organizations and sable to provide capacity, experts, robust financial ystems, segregation of duties and procesces ata much higher level than smal organizations ould pravde on their own. The controle and recordkeeping in pace are VERY strong 2. Emerge’s long standing external auditors Carpenter Ever, a well-respected frm that specialize in non-profit organizations. They conduct both a financial audit anda single audit each year and have always issued a clean opinion 3. Emerge has consistently met all standards of non-profit accountability fo the Minnesota Charities Review Council and was recently reconfirmed 4 Emerge succesfull manages over 20 separate contracts valued in excess of $7 millon per year ‘+The list of items identified as having inadequate documentation was small and never was there an instanceof no dacumentation. feshould be noted that where inadequate documentation only was cited there was nat a contention that the expenses were invalid they simply could havehad better support. A small number of instances of inadequate documentation does not equate to poor understanding of adequate documentation The list of items deemed not allowable is even smaller and in many cases a good reason exists that invalidates the conclusion derived from a cursory review. We would strongly isagre that Emerge or its subs have @ poor understanding of allowable expenses, Emerge had fourfindings. Each is addvessed in detal below. 1 Emerge double-booked $365,822 in UOC grants ‘© First of all the term “double-booked" mischaractrizes the situation. Emerge recorded revenve and expense on its books for activity performed by itself and by its subcontractors. The independent third-party subcontractors recorded revenue and ‘expense on their books for ther activity. Each organization independently recorded ‘ther activity appropriately which snot “double-booking” © Asnoted in the report, Emerge consulted with ts external auditor as to the proper ‘method to record he activity. it wae determined that Emerge contracted with the subs to perform certain aspects of the programing fr which Emerge was ultimately responsible for and, therefor, it was tobe accounted for as an exchange transaction (revenue earned when expenses occur) rather than asa grant/contribuion. Ths method dictates recording the revenue earned {from DEED) and expenses incurred {from subs) on its P&L 10 DEED had structured the contract where the subs were specified as secondary recipients then the accounting may be diferent. As itis structured, the subs are only ‘mentioned as Emerges explanation ofthe budget/workplan forthe project and not secondary recipients. Emerge has the responsiblity and authority to change, modify or Cancel it agreement with the subs, This distnetion dictated the accounting treatment (exhibit ~ extemal Auditor memo} ‘© Emerge does not benefit from one accounting method or another and therefore is motivations only to record the activity properly 12 Emerge believes this @ non-issue as ithas no bearing the work performed or the requested reimbursement from DEED. 2. Greumvention of eheck signing limits ‘© Emerge acknowledges this situation occured and it was a violation of our internal policy (© Pleate nate the attached memo from aur Hoard Vice-Chair and Finance and Operations Committee Chair (exhibit 2} noting their awareness that the pass-through payments ‘would occur they would have approved the payments and that we should have tity adhered tothe policy. ‘© Thiswas done in god faith to expedite the payments to keep the collaborative ‘operational and does nat represent any typeof pattern within the organization. 3. Lacked adequate support for UOC expenses © Inallinstances where lack of documentation was note, the invoice was present with the payment documentation but the support forthe invoice was noted as insufficient bythe autor. In all cases, addtional support existed but they were nt with the invoices asthey could have been. This has been corrected. © Capable Communities the bling didnot coincide with the striet language inthe contract. Ie lsimportant to note that the sues were minor and the bling dd align with the spnt of the agreement. ‘©The contract has already been revised to align the spin ofthe agreement with the actual contract language ‘+ Hours language was changed tobe an average of 30 hours per week ‘over the life ofthe contract. Thisallows some weeks tobe higher and some tobe lower *+ Language was changed to allow more flexbity as to when biling occurs rather that strictly eequiring bling every two weeks. + Language was added to allow invoicing of expences but not mileage + witie Wallace ~ The contract did not mention reimbursement f expenses. This again was 8 minor issue that has been corrected. The contract hasbeen revised twallow for expenses tobe bile, 4. May exceed UOC administrative budget ‘© Emerge dsagrees that this an isue a all asthe budget cat cannot be exceeded, if Emerge chooses to spend more inthis category it may do so but ‘tsimply wil not be reimbursed sry amount is iit that 6, Sabothani Findings + Lack of adequate support for expenses 1+ Disallowed expenses + Non-U0C expenses Sabathani had a total of eight expense items where one or more of the three findings was ite. Based ‘on comments inthe November 22" meeting it appears that there are valid explanations that would ‘make some ofthe expenses appropriate. Emerge will work with Sabathani to review each tem to ‘ensure the expenses are sufficiently substantiated. Inthe event that an expense is disallowed or non UOC then these expenses will be adjusted out from any further reimbursement request. 7. CONCLUSION This financial review has lasted more than a month, has put subgrantees in a highly vulnerable financial state as they provide services already started without payment. EMERGE cannot continue to serve a5 even a temporary funding source without assurances that DEED wil compensate it for ths activity. EMERGE anditssubgrantees welcome the opportunity to continue to improve al related processes, but funding must be reinstated immediately to avoid irreparable harm. We are confident that allremainng issues canbe succesfull resolved and look forward to engaging with your staff inthis processFrom: Tica frown Sent Wednesday, November 22,2017 3:41 PM To: Mike Wynne (Wynnem@emerge-mnorg) ce Colber Boyd (coktboyde@notmcom) Subject Additional etalon Finding #3 ~ please forward sake, Can you please forward the below ema to Mark Felton of Felton Forensics on behalf of Colbert and me? Pease copy us both when you sendit ‘Tank you, Tricia Dear Me, Feton, ‘The leadership of Emerge Community Development shared with me a finding in your review, finding (3) inthe Phase 1 Financial Compliance Review, indicating that Emerge leadership sta exceeded their check/expense approval authority ‘on two separate occasions in 2016. As Colbert Boyd (the board chair, copied here) andl are the Emerge Community Development board oficer that are authorized to approve and ign, we wanted to formally acknowledge that we have seen, reviewed and approve ofthese expenses. We further acknowledge thatthe issuing of multiple check forthe same invoice shouldbe teated as a single expense and that tis the level ofthis single expanse, nat the check amounts, that should dictate where we look in our financial polices for signing authority. This has bean confirmed and validated by staff and we are confident in our shared understanding ofthis policy and commitment to abide y it. Beyond the fact that we approve ofthe expenses referenced in finding #3, we want you to know that we would have signed off on these expenses atthe time and ae confident that this was done in good Fath The full hoard approved the subcontracts with UOC partners back in 2016 when they were originally executed and we were aware that UOC sub ‘contractor pass-through payments would occur. These payments were consistent with the start-up ofthe grant and ere atthe time expedited to keep the collaboration operational. We aso understand that all the funds have been accounted for in your review. ‘Thank you, Patricia Brown, EMERGE Board Vie Chair and Finance and Operations Committee CharCHIN Cede en 1 rae ae 0 Booman Het 88 Carpenter, Evert & Associates 952.891.0085 caspeteresect com ‘November 27,2037 ‘Mr. Kevin Enda Emerge Community Development 11834 Emerson Avenue North Minneapolis, Minnesota 55411 Dear Kevin "My understanding ofthe contrac arrangement i 2 flows: 4 DEED contracted with Emerge to perform certain programing, The contract as written isto be accounted for as an exchange transaction (revenve earned when expenses occur) and not as 8 ‘rant/contribution ‘2. tmerge s contracting withthe other service provers to pertorm certain aspects of the program for which Emerge is ultimately responsible under the contract. These transactions are also accounted for as exchange transactions. 3, Asa consequence of statement 3 and 2, the revenue and expense that is generate from the subs activity i tobe recorded on Emerge’s books. a. I would also expect the accounting forthe activity o be somewhat similar foreach organization 'b. Since Emerge is utimately responsible forthe project/program, then | believe the revenue ‘and expenses ofthe projet/program should be accounted fr by Emerge. 4. IFDEED had specified the sub grantees/contractorsas secondary recipients inthe contract then Emerge would be acting as an agent and then the secondary recipients’ activity would be ‘accounted for on the balance sheet rather than the P&L, This snot the case and therefore the recording ofthe activity on the Ls appropriate. Marc A. Colin, CPA Carpenter, Evert and Associates, Ltd