A federal audit has concluded that the Indiana State Department of Health owes the US government nearly $800,000 in funds that were inappropriately distributed to about a dozen groups by AIDServe Indiana. In addition, the auditors say they could not find proper documentation for an additional $5.3 million and recommended that the state and the US Department of Health and Human Services continue trying to find or rebuild the paperwork to show if the money was spent correctly.

The state has until July 1 to respond to the findings, which involve a recommendation for better fiscal oversight, but it will likely take months to resolve the situation. In their initial response filed with the audit, state officials disputed the $784,499 that auditors say is owed and requested that the entire amount be forgiven, saying all the money was spent on services for people with HIV/AIDS. As an alternative, they requested that the state's obligation be reduced to about $339,000 and collected from other leftover grants or by reducing future grants.

The Department of Health severed its contract with AIDServe in November 2000 because of mismanagement, and the agency filed for bankruptcy in June 2001. But the situation triggered the federal audit. The agency received money for specific AIDS-related services and programs but distributed it for other purposes, said Michael A. Hurst, deputy health commissioner at the Department of Health. In some cases, drugs that should have been paid for out of one fund were paid for from another. There never has been any suggestion of anything illegal, and no criminal charges have ever been filed. The state decided AIDServe's actions amounted to a breach of contract and ended its contract, Hurst said. Still, the federal government concluded that the state was ultimately responsible for the money and should be held accountable.

Mark St. John, AIDServe's last executive director, has acknowledged "robbing Peter to pay Paul" as the agency's cash flow problems mounted. But programs were kept going, he said, in the belief that the state would eventually forward the money.

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