A nonprofit drug treatment foundation set up by freshman Rep. Frank Ballance has been “riddled with conflicts of interests” and financial improprieties, including payments to the North Carolina Democrat’s relatives and political supporters, according to an audit by state regulators released Wednesday.

The audit report examined more than $2.1 million in state grants given to the John A. Hyman Memorial Youth Foundation, a charity set up in 1985 to provide substance abuse counseling to residents of several North Carolina counties. The group, chaired by Ballance, ceased operations last month after state funding was cut off amid revelations about the foundation’s bookkeeping and alleged financial benefits to the lawmaker’s political supporters.

While noting that the foundation provided legitimate treatment services to nearly 300 individuals in the past three years, North Carolina Auditor Ralph Campbell said he would recommend that the foundation return more than $238,000 that was not used on substance abuse treatment and counseling. The foundation reported having more than $300,000 in cash earlier this year.

“I agree errors were made,” Ballance said in a statement that characterized the failure to file financial and tax reports as “administrative oversights.”

Ballance had refused for months to answer questions about the unfolding controversy, and his statement on the audit report did not address any of the specific allegations outlined in the report’s findings. But he has indicated to Congressional colleagues this week that he plans to seek a second term.

“My intent and the intent of the Foundation has always been to provide, sponsor and sustain programs directed at addressing and or preventing substance abuse, and lifestyle choices that put our youth at great risk. I believe the public monies have always been used for the public good for which they were authorized,” Ballance added.

The first-term lawmaker, who served for two decades in the North Carolina Legislature before taking the seat of longtime political ally Eva Clayton when she retired from the House last year, vowed to hold on to his office.

“The primary task before me now is to continue representing the people of the 1st Congressional District and I look forward to doing so for many years to come,” he said.

The highly critical report provides ample ammunition for Ballance’s opponents and came a day after news reports of an ongoing FBI investigation of the charity. Complaints have also been filed with the Federal Election Commission and the Internal Revenue Service.

“What this audit really shows is that Balance commanded a slush fund,” said Don Carrington, executive vice president of the John Locke Foundation, a conservative group that helped to initiate the inquiry.

As news broke about the audit on Capitol Hill, Democratic Members and aides remained unsure about how Ballance would withstand the controversy.

Ballance met with Minority Leader Nancy Pelosi (D-Calif.) last month about his political troubles, and assured her then that he had no plans to step down.

At the same time, however, Ballance was voicing concerns to fellow Members about the looming audit and what it could mean to his future. Any threat from a challenger would most likely come in a primary. The 1st district is overwhelmingly Democratic in nature.

While Pelosi hasn’t sat down with Ballance since September, her staff has spoken with him in recent weeks.

“He seems to think he can weather the storm,” a well-placed Democratic aide said.

Another senior Democratic aide said Wednesday that while the audit is “definitely not helpful” to Ballance’s political future it remains unclear whether it will result in ongoing legal problems for the new Member. More difficulties could lie ahead once the FBI concludes its criminal investigation of the organization.

“We will give him moral support because he’s a colleague and we’ll wait to see what happens,” said the aide. “There’s nothing Members or leaders can do because he’s in the midst of an investigation.”

Ballance could also potentially face an investigation by the House ethics committee. Although an unofficial truce between Democrats and Republicans has prevented the formal filing of complaints, the Committee on Standards of Official Conduct could take up the matter on its own. That scenario, however, may be less likely if there is an ongoing Justice Department probe.

But the committee has precedent for punishing Members associated with questionable tax-exempt organizations. In 1997, the House reprimanded former Speaker Newt Gingrich (R-Ga.) for failing to obtain proper legal advice during the operation of a tax-exempt group linked to his political operation.

The audit report focused on the period from July 1, 2000, to April 30, 2003, while noting that the foundation had received an average of $211,000 in state grants since 1994 at a time when Ballance was an influential member of the state Senate. The state grants, administered through the North Carolina Department of Corrections, were the major funding source for the foundation and Ballance, as the board chairman, controlled how the money was spent.

The report revealed a $5,000 check Ballance wrote to his daughter, Valerie Ballance, ostensibly for consulting services related to the installation of computer equipment. While Valerie Ballance provided testimony that she performed some of the work, statements by the technical computer vendor contended that she did no work while being paid twice as much as the person who actually installed the equipment.

Additionally, the audit found that two grants were provided by the foundation to an organization that employed Ballance’s mother. In 2001, a $20,000 grant was made to the Bertie County Rural Health Association, which operated an anti-drug program that employed Ballance’s mother as its director. She received $5,544 in salary. Ballance’s mother also serves on the board of the Hyman Foundation.

The auditors attempted to trace funds the foundation gave to nearly three dozen organizations and churches but found that financial records were often missing or nonexistent. In addition, required state and federal nonprofit tax returns were not filed.

Interviews with grant recipients indicated that some used the funds they received for drug and alcohol treatment and prevention projects, while others used the funds for projects that had no apparent connection to substance abuse, the audit said.

For example, one organization simply passed its funding along to another organization to fund a Habitat for Humanity project. Another organization used its funding to repair the roof of one of its buildings. Several organizations used their funds to purchase electronic equipment such as computers, DVD players, televisions and VCRs. One organization used the funding for its after-school and summer day camp programs. Several organizations used the funding for field trips to museums, ball games and amusement parks. Many organizations used the funding to provide food at social events. One organization initially said it had not used its funding, then later said it used its funding for college scholarships.

“In general, it appeared that many organizations used funding from the Foundation to meet various financial obligations. Although many of these organizations are oriented toward community service, it is not apparent that many of the funded activities and expenditures were directly related to substance abuse treatment and prevention,” the audit said.

Auditors also found a $35,000 foundation check signed by Ballance and given to the Greenwood Baptist Church, where the lawmaker serves as chairman of the board of deacons. Ballance told auditors that the money was for rent payments for space the church provided to the foundation, but auditors could not document the arrangement.