Group Misspent Payroll Taxes, Audit Says

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 also 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 found that the cash-strapped Latino civil rights agency improperly spent $107,184 withheld from its employees’ wages for federal payroll 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 the withholding taxes had been misappropriated, but insisted the Health and Human Services grant money could be accounted for.

“Of course, [the withholding money] was spent,” Corona said 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.”

He added: “We won’t need to repay [the grant money]. 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 Health and Human Services 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, which was to invest in either a small business or in another way that would help reduce poverty and create jobs.

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 that Hermandad was not forthcoming when he sought documentation on how the grant money had been spent.

In his audit report, 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 he found no canceled checks or other evidence of the money having been paid to the growers cooperative, or any evidence that co-op stock 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,” Kharfen said. “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 these 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 funding sources, and the audit report said Hermandad was negotiating a settlement with the IRS.

Co-director Nativo Lopez, who oversees the Santa Ana office, declined to comment.

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 voted in 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 organization’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,” Balbin said. “I’ve seen an aggressive change in the way they are behaving.”

Corona said Balbin’s findings prove “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 said the money had been used to help a group of sharecroppers in Santa Maria. He explained that the co-op’s members were not schooled in business matters, and for that reason they did not provide the normal documentation and stock certificates to Hermandad.

He said some of the money had been spent for training the co-op’s members in good business practices, English, and citizenship requirements. He said Hermandad staff had also helped the co-operative acquire $3 million in bank loans.