oversight

Cullman Housing Authority, Public Housing Programs, Cullman, Alabama

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-08-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                            Issue Date
                                                                    August 31, 2000
                                                            Audit Case Number
                                                                    00-AT-202-1008




TO:            Mack R. Heaton, Director, Office of Public Housing, 4CPH


FROM:          Nancy H. Cooper
               District Inspector General for Audit-Southeast/Caribbean, 4AGA


SUBJECT:       Cullman Housing Authority
               Public Housing Programs
               Cullman, Alabama

We have completed a limited review of selected operations of the Cullman Housing Authority
(CHA). The review was initiated in response to a citizen’s complaint. We conducted our review
to determine whether CHA administered its activities in an efficient, effective, and economical
manner, and in compliance with the Department of Housing and Urban Development (HUD)
requirements. Our report presents two findings that detail the Authority’s need for improvement
with recommendations for corrective action.

Within 60 days, please give us a status report for each recommendation in the report on: (1) the
corrective action taken; (2) the proposed corrective action and a planned implementation date;
or (3) why action is not considered necessary. Also, please furnish us copies of any
correspondence or directives issued as a result of the audit.

Should you or your staff have any questions, please contact me or Sonya D. Lucas, Assistant
District Inspector General for Audit, at (404) 331-3369. We are providing a copy of this report to
the Cullman Housing Authority.
Management Memorandum




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00-AT-202-1008                      Page ii
Executive Summary
Our review disclosed significant weaknesses in CHA’s ability to follow proper procurement and
contracting procedures and to maintain an adequate system of internal controls.

    •   The Cullman Housing Authority’s procurement practices did not comply with Federal
        procurement and contracting requirements or its own procurement policy. CHA spent
        $126,560 for goods and services without adequately documenting the eligibility of the
        costs. CHA had inadequate controls over its purchase orders; awarded contracts for
        professional services without documenting the competitive process; and allowed a low
        bidder to withdraw its bid without proper justification or retaining the $18,700 bid
        guarantee. This occurred because CHA’s management disregarded requirements. Also,
        the Board of Commissioners did not adequately monitor the Authority to ensure operations
        were carried out in an efficient and economical manner. As a result, HUD lacked
        assurance that CHA obtained goods and services at terms that were most advantageous.

    •   The Cullman Housing Authority failed to maintain an adequate system of internal controls
        to safeguard its assets. The Authority did not adequately segregate duties over its assets.
        The Executive Director commingled business and personal affairs that resulted in CHA
        making payments of $4,572 for cellular telephone charges which included charges
        incurred by the Executive Director’s son and for the Executive Director’s personal
        cellular phone. The Authority also made monthly payments for a storage building without
        a written contract which the Executive Director’s son used. In addition, CHA did not: (1)
        properly select applicants for its housing units and paid ineligible housing assistance
        payments totaling $4,115; (2) safeguard its equipment; (3) ensure controls were adequate
        to properly dispose of its surplus assets; (4) support cost allocations; and (5) obtain
        adequate fidelity bond coverage. This occurred because CHA officials lacked knowledge
        of certain requirements, and the Board of Commissioners did not effectively carry out its
        responsibilities. Also, the Executive Director was excessively involved in the
        Authority’s decision making. As a result, HUD lacked assurance that CHA’s resources
        were used to the maximum extent to benefit its residents.

We presented our findings to CHA and HUD’s Alabama State Office officials during the course of
the audit. We held an exit conference on April 12, 2000. CHA generally agreed with the findings
in this report.

CHA provided written comments on August 1, 2000. We considered the comments in finalizing
the report. CHA’s comments are summarized within each finding and included in their entirety as
Appendix B.




                                                 Page iii                          00-AT-202-1008
Executive Summary

We recommend HUD require CHA to repay all ineligible costs and resolve unsupported costs;
implement policies and procedures to ensure compliance with procurement practices; and develop
and implement policies and procedures to ensure a system of internal controls to properly select
applicants for housing assistance, safeguard its equipment, properly account for and safeguard its
inventory, adequately dispose of surplus assets, document cost allocations, and obtain adequate
fidelity bond coverage.




00-AT-202-1008                          Page iv
Table of Contents

Management Memorandum                                                          i


Executive Summary                                                       iii


Introduction                                                               1


Findings

1     CHA Did Not Follow Proper Procurement Requirements                   3

2     Internal Control Procedures Were Inadequate                      13



Management Controls                                                   25


Follow-Up on Prior Audits                                             27

Appendices

     A       Schedule of Questioned Costs                             29

     B       Auditee Comments                                         31

     C       Distribution                                             35

Abbreviations:

      ACC         Annual Contributions Contract
      CFR         Code of Federal Regulations
      CHA         Cullman Housing Authority
      HQS         Housing Quality Standards
      HUD         Department of Housing and Urban Development




                                          Page v                00-AT-202-1008
Table of Contents




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00-AT-202-1008              Page vi
Introduction
The Housing Authority of the City of Cullman, Alabama, is a public corporation organized under
the laws of the State of Alabama. Its primary mission is to provide low-income housing for
qualified individuals. CHA is governed by a five-member Board of Commissioners (Board)
whose members are appointed by the Mayor of Cullman, Alabama. The Board is responsible for
setting Authority policy, approving an annual operating budget, and hiring an Executive Director.
CHA’s Board Chairman is Mr. Ronald Dunn. The Executive Director of CHA is Mr. Larry
Entrekin.

HUD’s Alabama State Office in Birmingham, Alabama, is responsible for overseeing CHA.

CHA maintains its records at 408 Cleveland Avenue, S.W., Cullman, Alabama. CHA owns and
manages four public housing developments consisting of 326 units. Additionally, CHA
administers about 72 Section 8 Existing Certificates totaling $406,652 and 100 Vouchers totaling
$299,150. The Authority received $353,626 of HUD operating subsidy for fiscal year 1999.



                                     Our audit objectives were to determine whether CHA
 Audit objectives, scope             administered its activities in an efficient, effective, and
 and methodology                     economical manner, and in compliance with the Department
                                     of Housing and Urban Development requirements.

                                     To accomplish the objectives, we tested for compliance
                                     with program requirements. We interviewed Alabama State
                                     Office of Public Housing program officials, current and
                                     former CHA Board of Commissioners, and CHA’s staff.
                                     We reviewed related CHA files and records. We reviewed
                                     the controls and procedures over the contracts awarded for
                                     fiscal years 1996 through 1999; reviewed controls and
                                     procedures used to account for equipment inventory and for
                                     disposing of surplus property; and reviewed and tested
                                     tenant selection and Section 8 assistance award procedures.
                                     We judgmentally selected the items tested.

                                     Our review generally covered the period January 1996
                                     through May 31, 1999. We extended the periods as
                                     necessary. We performed our on-site work from October to
                                     December 1999. We conducted our audit in accordance
                                     with generally accepted government auditing standards.




                                                 Page 1                           00-AT-202-1008
Introduction




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00-AT-202-1008         Page 2
                                                                                      Finding 1


      CHA Did Not Follow Proper Procurement
                 Requirements
The Cullman Housing Authority’s procurement practices did not comply with Federal procurement
and contracting requirements or its own procurement policy. CHA spent $126,560 for goods and
services without adequately documenting the eligibility of the costs. CHA had inadequate controls
over its purchase orders; awarded contracts for professional services without documenting the
competitive process; and allowed a low bidder to withdraw its bid without proper justification or
retaining the $18,700 bid guarantee. This occurred because CHA’s management disregarded
requirements. Also, the Board of Commissioners did not adequately monitor the Authority to
ensure operations were carried out in an efficient and economical manner. As a result, HUD
lacked assurance that CHA obtained goods and services at terms that were most advantageous.



                                     The procurement requirements are included in Title 24 Code
 Procurement                         of Federal Regulations (CFR) 85.36; HUD Handbook
 requirements                        7460.8 REV-1, Procurement Handbook for Public Housing
                                     Agencies; and CHA’s procurement policy.

                                     Title 24 CFR, part 85.36 (c) (1) requires that all
                                     procurement transactions be conducted in a manner
                                     providing full and open competition. Part 85.36 (b) (9)
                                     requires the grantees to maintain sufficient records to show
                                     the significant history of a procurement. The records shall
                                     document the rationale for the method of procurement,
                                     selection of contract type, contractor selection or rejection,
                                     and the basis for the cost or price. Part 85.36 (f) (1)
                                     requires that grantees and subgrantees must perform a cost or
                                     price analysis in connection with every procurement action.
                                     Paragraph (i) of the section requires that the grantees’ and
                                     subgrantees’ contracts must contain provisions to require
                                     changes, remedies, changed conditions, access and records
                                     retention, suspension of work, and other clauses approved
                                     by the Office of Procurement Policy.

                                     HUD Handbook 7460.8 REV-1, paragraph 4-3 (B),
                                     Procurement Handbook for Public Housing Agencies and
                                     Indian Housing Authorities, requires that for small purchases
                                     below $1,000 only one quotation needs to be solicited if
                                     the price received is considered reasonable.

                                     Small purchases must be distributed equitably among
                                     qualified sources. If practical, a quotation shall be solicited
                                     from other than the previous source before placing a repeat
                                                 Page 3                             00-AT-202-1008
Finding 1
                           order. Paragraph 2-6 of the HUD Handbook requires a
                           housing agency to conduct all procurements using full and
                           open competition. An agency must allow responsible
                           sources to compete.

                           The Authority’s procurement policy authorizes the Executive
                           Director to make purchases below $1,000 by whatever
                           method he deems most advantageous to the Authority. Only
                           one quotation is required, provided the quotation is
                           reasonable. However, CHA’s policy did not require that
                           small purchases must be distributed equitably among
                           qualified sources, or if practical, quotations solicited from
                           other than the previous source before placing a repeat order.

                           HUD’s Program Integrity Bulletin, dated November 1990,
 Board of Commissioners’   outlines the Commissioners’ responsibilities.            Public
 responsibilities          Housing Authority Commissioners have responsibilities to
                           HUD to ensure national housing policies are carried out, and
                           to the Executive Director and staff to provide sound and
                           manageable directives. The Commissioners are accountable
                           to their locality and best serve it by monitoring operations to
                           be certain that housing programs are carried out in an
                           efficient and economical manner.

                           The Authority’s procurement policy states that purchase
 Controls over purchase    orders, invoices, check vouchers, or other proof of payment
 order numbers were not    should be used for all purchases and be maintained in an
 adequate                  orderly fashion. CHA did not have an effective system to
                           control its purchase orders. CHA did not: (1) properly
                           separate the duties and responsibilities for the purchase
                           orders (the same employee prepared and signed purchase
                           orders for less than $100); (2) use pre-numbered purchase
                           orders; or (3) verify proper authorization of purchases prior
                           to payment.

                           CHA’s Executive Director created purchase order numbers
                           to make purchases when purchase orders were not obtained
                           for the purchases. For example, we determined that
                           purchases made from Lowe’s Home Center (Lowe’s) for
                           two security lights using purchase order numbers “408”




00-AT-202-1008             Page 4
                                                                        Finding 1

                         and “6737”, identified on the invoices, did not exist. CHA’s
                         Executive Director confirmed that the purchase orders never
                         existed and said that the numbers were used to make after
                         hour purchases requiring purchase orders. He further stated
                         that the numbers were not purchase order numbers, instead
                         the number “408” was the address for CHA’s
                         Administrative Office Building and “6737” may have been
                         part of a CHA’s telephone number. According to the
                         Executive Director, he used the numbers on several
                         occasions. However, because of the weaknesses in the
                         system, we could not identify all purchases made with the
                         created numbers.      During the course of review, the
                         Executive Director ordered pre-numbered purchase orders
                         for future use.

                         As required by Title 24 CFR 85.36, all procurement
Competitive procedures   transactions must be conducted in a manner providing full
were not followed or     and open competition; proposals must be solicited from an
documented               adequate number of qualified sources; and grantees and
                         subgrantees must perform a cost or price analysis in
                         connection with every procurement action.

                         CHA contracted services totaling $126,560, which included
                         architectural ($65,847), consulting ($18,085), legal
                         ($36,688) and accounting ($5,940), without performing or
                         documenting a cost or price analysis for the contracts.
                         Further, the consulting, legal and accounting services
                         procurements were sole source procurements. CHA did not
                         seek competitive prices or proposals. CHA obtained its
                         architectural and legal services from the same two firms and
                         its consulting services from the same individual from 1996
                         to 1999.

                         The result was that CHA routinely purchased goods and
                         services without full and open competition.

                            Architectural Services Contracts

                            CHA entered into architectural services contracts with
                            the same architect for each of its modernization projects.
                            It paid the architect $65,847 from January 1996 to
                            October 1999.        CHA used qualification based
                            procurement procedures to obtain the services of the




                                     Page 5                           00-AT-202-1008
Finding 1

                     architect, without considering price as a factor. CHA
                     did not provide any type of cost or pricing analysis for
                     the contracts to support whether the contract prices were
                     reasonable. The Executive Director said that he
                     determined that the contract prices were within HUD
                     guidelines, but he did not document his determinations.

                     Consulting Services Contracts

                     In July 1993, CHA entered into two professional
                     services contracts with a consultant. Both agreements
                     were still in effect during our audit. One contract dated
                     July 1, 1993, provided for the consultant to serve as the
                     Modernization Clerk/Secretary. The consultant was
                     responsible for maintaining the financial records and
                     performing all of the secretarial work for the
                     Modernization Programs, as well as any other duties
                     necessary at the discretion of the Executive Director.
                     The contract did not provide a rate or price for the
                     services.

                     A second contract, dated July 28, 1993, provided for
                     compensating the same consultant at a rate of $20 per
                     hour, for duties performed on behalf of CHA as set forth
                     by the Executive Director. The consultant agreed to
                     perform the work on an as needed basis. The consultant
                     agreed to substitute for the Executive Director or any
                     CHA employee when requested by the Executive
                     Director. CHA paid the consultant $18,085 from
                     January 1996 to October 1999.

                     The Executive Director said that CHA contracted with
                     the consultant because the Authority wanted someone
                     with experience and the consultant had the desired
                     experience. The consultant retired from another housing
                     authority. The Executive Director also said that the
                     consultant’s contracts were reviewed by its attorney.
                     The attorney did not identify any problems with the
                     contracts. A Board member said that the




00-AT-202-1008   Page 6
                                            Finding 1

Board did not approve of the consultant substituting for
the Executive Director. They were not aware of the
details regarding her agreement with CHA. As a result
of awarding the contracts non-competitively, without a
cost or price analysis and justification, $18,085 was
improperly paid.

Legal Services Contracts

CHA entered into legal services contracts with the same
private law firm on an annual basis. The Authority
awarded the contracts without seeking competitive
prices, proposals, or obtaining HUD’s approval as
required. The contracts provided for the firm to provide
services to CHA as requested, relating to its tenants,
contracts, leases, grants, and other general business of
the Authority. In addition, the contract provided for the
general representation of the Board of Commissioners
and the Executive Director regarding the day-to-day
operations of CHA. The law firm was paid a monthly
retainer of $150 per month plus $125 per hour for all
services performed from 1996 to 1999. In 1999, the
hourly fee increased from $125 to $135 per hour. The
Authority paid the $150 monthly retainer without any
indication of what, if any, services were performed for
the fee. Services billed at the respective hourly rates of
$125 and $135 were itemized. CHA made payments to
the law firm totaling $36,688 from January 1996 to
November 1999.

CHA’s Executive Director sent out proposals for legal
services after we discussed the situation with him. He
agreed that legal services should be obtained
competitively, or in the absence of competition obtain
HUD’s approval for the procurement of the services.

Accounting Services Contract

In September 1999, CHA executed a contract for
accounting services with the same accounting firm that
performed its annual financial statement audits. CHA
awarded the contract without seeking competitive prices
or proposals. The contract provided for the firm to
convert CHA’s accounting system to a Generally




         Page 7                           00-AT-202-1008
Finding 1

                                 Accepted Accounting Principles basis. Although the
                                 conversion was completed, the contract did not have a
                                 maximum price or amount for the services. The contract
                                 provided the firm $75 per hour for services plus actual
                                 travel expenses. CHA made one payment to the
                                 accounting firm for $5,940. The accounting firm’s
                                 billing was not in accordance with the contract. The
                                 billing only showed a lump sum amount of $5,940
                                 without itemizing the hours billed or travel expenses.

                             In addition, the contracts for the consulting, legal and
                             accounting services did not include the required provisions
                             pertaining to rights for record examination and record
                             retention. As a result, we have no assurance that the
                             services obtained were at terms most advantageous to the
                             Authority.

                             CHA allowed a low bidder to withdraw its bid and did not
 CHA allowed a low           retain the bid guarantee of $18,700. The contractor had the
 bidder to withdraw its      lowest bid of $374,000 for a Comprehensive Grant Program
 bid without retaining the   construction project. The contractor stated he withdrew the
 bid guarantee               bid based on an error made in the bid formulation. However,
                             the contractor did not identify the error in the bid. CHA’s
                             files did not include adequate justification to support the
                             decision to allow the bidder to withdraw its bid. Therefore,
                             CHA should have attempted to obtain performance of the
                             contract or retained the bid guarantee.

                             HUD Handbook 7460.8 REV-1 sets forth requirements for
                             obtaining bid guarantees and provides procedures to be
                             followed when the low bidder is allowed to withdraw a bid.
                             Paragraph 4-14 (D) states that under the “firm bid” rule, one
                             of the principles upon which sealed bidding is based, the
                             bidder is legally bound by the bid, as submitted, after the
                             bids have been opened. The only exception to this rule is an
                             obvious mistake in the bid, such as a misplaced decimal.
                             Paragraph 4-15 (F) further provides that withdrawal of a bid
                             is permissible where there is an obvious error in the lowest
                             bid, such as a math error or misplaced decimal, but the
                             mistake must be readily apparent from the bid itself. A
                             bidder may be permitted to withdraw a low bid if a mistake
                             is clearly evident on the face of the bid document, but the
                             intended correct bid is not




00-AT-202-1008               Page 8
                                                 Finding 1

similarly evident, or the bidder submits written supporting
evidence before allowing withdrawal by the bidder. If
withdrawal is allowed by the housing authority, it should be
without forfeiting the bid bond, upon verification of the
error. Paragraph 4-15 (J) states that decisions to allow
correction or withdrawal of mistakes in bids must be
properly documented in the contract file. As a minimum, the
Contracting Officer shall prepare a written determination,
citing the reasons. Paragraph 4-16 (A) (2) states that if the
contractor does attempt to renege on the contract, the surety
for the bond is required to step in and take over performance
of the contract, or the check tendered (bid guarantee) may be
cashed.

The contract bids were opened and presented to the Board
of Commissioners on November 16, 1999. The Board had
questions about the bids and the contractors. Therefore, the
contract was not awarded at that time, instead the Board
required the Architect to satisfy its questions and report back
for the final awarding of the contract. On December 9,
1999, the lowest bidder submitted a letter to CHA
requesting to withdraw the bid because of an error in the bid
formulation. However, the contractor did not identify the
error in the bid. Based on the letter, the Board awarded the
contract to the second lowest bidder for $389,400.

The Architect said that it has been HUD’s accepted industry
practice for over 30 years to allow the Board of
Commissioners of each local Authority to accept or deny the
explanation of a bidder who requests release from a bid. He
further said that HUD allowed each Board the discretion
whether to retain or not retain the bid guarantee. However,
the HUD Handbook permits the lowest bidder to withdraw
the bid when specific criteria is met and it requires the
Contracting Officer, as a minimum, to document the files
with a written determination justifying the decision. CHA
files did not include a determination explaining why the
lowest bidder was not required to perform the contract or
why the bid guarantee was not retained.

                      *   *   *   *   *




             Page 9                            00-AT-202-1008
Finding 1

                 Overall, the deficiencies occurred because CHA staff did
                 not adhere to the requirements, lacked knowledge of certain
                 requirements, and the Board failed to adequately monitor the
                 Authority’s operations. The Board granted the Executive
                 Director complete authority to make procurement decisions
                 with little or no oversight.

                 In summary, CHA did not effectively manage its
                 procurement function. Procurements were made without
                 evidence of proper planning and authorization. Also, there
                 was no assurance that goods and services were procured at
                 the most favorable prices to CHA.

                 Excerpts from CHA’s comments on our draft findings
                 follow. Appendix B contains the complete text of the
                 comments.


                 CHA generally agreed with the finding. The Authority was
 CHA comments    closed when the purchase order numbers were created.
                 During any given fiscal year the Authority will issue 1,000
                 or more purchase orders covering purchases of maintenance
                 materials. Only two did not have proper purchase order
                 numbers, .002 percent of the total purchase orders. If the
                 Authority had been open, these numbers would not have
                 been needed. In the future, the Authority will review all
                 purchase orders issued to ensure correctness of the numbers.

                 The Authority will closely follow the procurement
                 procedures outlined in its procurement policy and other
                 regulations as applicable.


                 Because of the weakness in the Authority’s purchase order
 OIG response    system, we could not identify all purchases made with the
                 created numbers. During the course of the review, the
                 Executive Director ordered pre-numbered purchase orders
                 for future use.

                 CHA is in the process of implementing steps toward
                 correcting its procurement deficiencies. We believe these
                 actions will bring about improvement in its procurement
                 function.




00-AT-202-1008   Page 10
                                                               Finding 1



Recommendations   We recommend that you require CHA to:

                  1A. Implement its procurement policies and procedures for
                      purchase order administration to ensure proper
                      oversight and effective monitoring of purchases.

                  1B. Properly segregate the duties over purchasing, so that
                      the duties pertaining to authorization, payment, and
                      receiving are not performed by the same individual.

                  1C. Submit for your review and approval policies and
                      procedures on procurement and contract administration
                      to ensure compliance with 24 CFR 85.36 and other
                      HUD requirements.

                  1D. Advise the Board of Commissioners of their duties and
                      responsibilities to ensure proper oversight and
                      effective monitoring of the Authority.

                  1E. Obtain justification from the bidder explaining the bid
                      error or reimburse the $18,700 bid guarantee from
                      non-Federal funds.




                             Page 11                          00-AT-202-1008
Finding 1




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00-AT-202-1008         Page 12
                                                                                     Finding 2


    Internal Control Procedures Were Inadequate
The Cullman Housing Authority failed to maintain an adequate system of internal controls to
safeguard its assets. The Authority did not adequately segregate duties over its assets. The
Executive Director commingled business and personal affairs that resulted in CHA making
payments of $4,572 for cellular telephone charges which included charges incurred by the
Executive Director’s son and for the Executive Director’s personal cellular phone. The Authority
also made monthly payments for a storage building without a written contract which the Executive
Director’s son used. In addition, CHA did not: (1) properly select applicants for its housing units
and paid ineligible housing assistance payments totaling $4,115; (2) safeguard its equipment; (3)
ensure controls were adequate to properly dispose of its surplus assets; (4) support cost
allocations; and (5) obtain adequate fidelity bond coverage. This occurred because CHA officials
lacked knowledge of certain requirements, and the Board of Commissioners did not effectively
carry out its responsibilities. Also, the Executive Director was excessively involved in the
Authority’s decision making. As a result, HUD lacked assurance that CHA’s resources were used
to the maximum extent to benefit its residents.


                                      CHA did not adequately segregate duties over its assets.
 Improper segregation                 The Executive Director performed various activities without
 of duties                            adequate internal checks and balances. For example, the
                                      Executive Director had complete control over the
                                      Authority’s assets. The Executive Director controlled the
                                      purchasing, receiving and disposing of assets. He signed
                                      and prepared checks; initiated and signed purchase orders;
                                      received goods; authorized accounting entries; and set the
                                      prices for and disposed of equipment. This occurred
                                      because the Executive Director was excessively involved in
                                      the Authority’s decision making, and did not adequately
                                      delegate duties and responsibilities, as cited in a HUD on-
                                      site review. The HUD Alabama State Office performed an
                                      on-site review of the Authority in February and March 1998.
                                      The HUD Office observed that the Executive Director
                                      maintained an excessive amount of control and
                                      responsibility for the program administration and decision
                                      making. In addition, the Board of Commissioners did not
                                      effectively carry out its responsibilities. Proper internal
                                      controls should preclude the Executive Director from having
                                      access to various assets without internal checks and
                                      balances. As a result, CHA unnecessarily increased its
                                      susceptibility to program abuse.




                                                Page 13                            00-AT-202-1008
Finding 2

                          HUD Handbook 7510.1G, Section II (3) states in part that
                          effective control and accountability must be maintained for
                          all cash, real and personal property, and other assets. The
                          housing authority must adequately safeguard all such
                          property and must assure that it is used solely for authorized
                          purposes. The control techniques used to establish and
                          maintain the system of internal controls include such things
                          as separation of duties so that no one staff member has
                          complete control over an asset and clearly defined staff
                          responsibilities and job accountability.

                          The Executive Director commingled CHA’s affairs with his
 The Executive Director   personal affairs. As a result, CHA made ineligible
 commingled business      payments for cellular telephone charges and made monthly
 and personal affairs     payments for a storage building without a written agreement.

                          CHA paid the cellular telephone costs for charges incurred
                          by the Executive Director’s son and for the Executive
                          Director’s personal cellular phone. Although the Executive
                          Director reimbursed CHA monthly for the personal phone
                          charges, the costs were not eligible expenses. CHA made
                          payments to the cellular telephone provider totaling $4,572
                          from January 1998 to December 1999. CHA files did not
                          include adequate documentation to show whether the
                          cellular phone usage was related to CHA business. The
                          billings did not provide sufficient detail, such as phone
                          numbers and locations of calls, etc., to identify CHA and
                          non-CHA related calls.

                          Therefore, the Executive Director said the vendor was
                          analyzing the calls to identify specific calls made by his son.
                          Once the total amount is determined, he will pay CHA for
                          the charges incurred by his son. He said his son mistakenly
                          took the CHA cellular phone out of town thinking it was the
                          Executive Director’s personal cellular phone. He also said
                          that he would have his personal cellular phone bills come
                          directly to him for payment, rather than reimbursing CHA for
                          the payments. The service for the phone mistakenly used by
                          his son was canceled.




00-AT-202-1008            Page 14
                                                                    Finding 2

                    In June 1999, CHA made two cellular phone payments
                    totaling $978, which included $693 of charges the Executive
                    Director identified as possible charges incurred by his son.
                    As a result, HUD and CHA lack assurance that funds were
                    used properly.

                    Section 9 of the Annual Contributions Contract (ACC)
                    requires that Housing Authorities may withdraw funds from
                    the General Fund only for the payment of the costs of
                    development and operation of projects under ACC with
                    HUD.

                    In addition, the Authority obtained and paid for a storage
                    building without a written agreement. CHA did not have a
                    cost or price analysis relating to the procurement, and
                    CHA’s records did not document the necessity for the rental
                    or the reasonableness of the rental rate paid. At various
                    times, the Executive Director allowed his son to use and pay
                    the owner for the same storage building. We observed that
                    the storage building did contain property of the CHA.

                    Part 85.36 (f) (1) requires that grantees and subgrantees must
                    perform a cost or price analysis in connection with every
                    procurement action.

                    The Authority did not properly select applicants for its
Procedures over     housing units. Also, payments were made for Section 8 units
tenant placement    that did not meet Housing Quality Standards (HQS). As a
needs improvement   result, eligible families were not timely provided housing
                    assistance and tenants were deprived of decent, safe, and
                    sanitary housing.

                    For 2 of 20 applicants who received conventional housing
                    from November 1, 1998, to January 31, 1999, we
                    determined that the applicants applied for housing one day
                    and moved in the next day. There were 18 applicants ahead
                    of one and 13 applicants ahead of the other, for the same size
                    bedroom units when they moved into CHA housing. The
                    applicants applied on December 28 and 29, 1998,
                    respectively. Other eligible applicants were on CHA’s
                    waiting list with applications dating back to June 6, 1997.




                                Page 15                           00-AT-202-1008
Finding 2

                 HUD Handbook 7465.1, Public Housing Occupancy
                 Handbook, paragraph 5-7 (a) states that in filling an actual
                 or expected vacancy, the Public Housing Authority must
                 offer the dwelling to an applicant needing that size and type
                 of unit in that type of project. The Authority must make the
                 offer in sequence until someone accepts it, in the order of the
                 applicants’ priority, based on the Public Housing Authority's
                 tenant selection preferences and the date and time of
                 application.

                 In addition, between November 1, 1998, to January 31,
                 1999, we determined that two of five applicants received
                 Section 8 assistance prior to other eligible applicants with
                 earlier application dates.

                 Title 24 CFR, parts 982.202 and 982.204 regarding HUD’s
                 Section 8 Programs states that except for special admissions,
                 participants must be selected from the Authority’s waiting
                 list in accordance with HUD regulations and other
                 requirements, and admission policies in the Housing
                 Authority administrative plan. The Housing Authority
                 admission policy must state the system of admission
                 preferences that the Authority uses to select applicants from
                 the waiting list, including any federal preferences, local
                 preferences, and residency preference.

                 CHA did not have a tenant selection preference for its
                 conventional or Section 8 Programs. The applicant’s
                 position on the waiting list was based on the date and time
                 of the application.

                 Therefore, offers should have been made sequentially from
                 the waiting list in the order of the date and time of the
                 application.

                 The Executive Director said he favored one applicant over
                 the others because he had compassion for the applicant. The
                 applicant was recently released from the hospital and
                 needed a place to stay; as a result, CHA offered him housing
                 immediately.

                 The Administrative Assistant said attempts were made to
                 contact some of the applicants; however, due to various
                 reasons they were not offered housing. He could not explain
                 why the other applicants were not offered housing.



00-AT-202-1008   Page 16
                                                                   Finding 2

                    Further, we determined that CHA allowed two Section 8
                    tenants to move into units that did not meet HQS. As of
                    December 1, 1999, CHA had paid ineligible housing
                    assistance payments totaling $4,115 for substandard units.
                    One unit still has not passed the HQS inspection; however,
                    CHA continues to make the housing assistance payments.
                    The HQS violations include a broken storm window in the
                    living room, GFI plugs needed in the kitchen and bathroom,
                    missing smoke detector in the dining room, and repair or
                    replace the front door. The Authority also continues to make
                    housing assistance payments on another unit that has not met
                    HQS from inception to the time of our audit. The HQS
                    violations include a missing GFI plug in the bathroom and no
                    smoke detectors. As a result, CHA paid $4,115 of ineligible
                    housing assistance payments for substandard units.

                    Title 24 CFR, parts 882.108 (a) and 982.1 (a) require that
                    Section 8 dwelling units be decent, safe, and sanitary. Part
                    982.401 (a) (3) states that all program housing must meet the
                    HQS performance requirements both at commencement of
                    assisted occupancy, and throughout the assisted tenancy.

                    CHA staff said that deficiencies in the operation of its
                    Section 8 Programs were caused by the prior Section 8
                    Coordinator. The Authority staff agreed that improvements
                    were needed in this area. Also, CHA staff said it was
                    improving the procedures to ensure that Section 8 housing
                    payments were not made for units with HQS violations.

                    CHA did not maintain adequate perpetual inventory records
Inventory records   of its equipment. We conducted spot inspections on 13
were not properly   items and could not trace 11 of the items to CHA’s inventory
maintained          records. The items consisted of one refrigerator, three
                    stoves, two electric generators, two heaters, two televisions
                    and one video recorder. In addition, three of the items did
                    not have the CHA inventory bar code label attached, or any
                    markings identifying the equipment as CHA’s. We also
                    determined that of the 12 grills identified one was missing
                    and another one was “on loan” to another agency. As a
                    result, HUD has no assurance the equipment inventory was
                    properly accounted for or safeguarded against loss, misuse,
                    theft, or waste.




                               Page 17                           00-AT-202-1008
Finding 2

                 Section 15 of the ACC requires Housing Authorities to
                 maintain complete and accurate books of accounts and
                 records. Records must be kept of all personal property,
                 including an annual inventory of equipment.

                 The Executive Director said the televisions and video
                 recorder were not included in CHA’s inventory because the
                 cost was below the $300 capitalization value. Also, due to
                 various errors the other equipment was not properly
                 included in CHA’s inventory.

                 We obtained a copy of CHA’s report identifying the
                 inconsistencies between its inventory records and its
                 physical inspection results. The report identified equipment
                 that was:

                    •      physically inspected; however, was not included on
                           its inventory records;
                    •      included in its inventory, but not located at the
                           Authority; and
                    •      located in different places from what was shown on
                           its inventory records.

                 According to CHA’s staff, inconsistencies were identified
                 annually; however the causes for the inconsistencies were
                 not addressed and the inventory results were not corrected.

                 The Executive Director agreed that CHA’s inventory
                 records were inaccurate. He said that the Authority would
                 conduct a physical inspection of its property and equipment
                 and adjust the records to reflect the actual results. He
                 further stated that he would require the fee accountant, who
                 provided the computer software and inventory procedures
                 used to perform its inventory, to review the computer
                 programs and procedures to determine the causes of the
                 inaccuracies. Also, CHA will take the necessary actions to
                 correct the inaccuracies and the causes for the recurring
                 inaccuracies.

                 On September 14, 1999, CHA increased its capitalization
                 value from $300 to $500. The Executive Director said that
                 equipment valued below the capitalization amount such as
                 televisions, video recorders, and grills, would be marked to




00-AT-202-1008   Page 18
                                                                          Finding 2

                         identify the items as property of the Authority. He also
                         stated that CHA will start maintaining a list of its equipment
                         and identify its location.

                         As a result of CHA not properly reconciling its physical
                         inventory count to its book and records, and following up on
                         the differences between the books and the actual count, there
                         was no assurance that equipment was adequately
                         safeguarded.

                         CHA did not have adequate controls to ensure that its assets
Inadequate disposition   were properly disposed of and the best possible price was
controls                 obtained for the disposals. CHA sold or gave away
                         appliances without proper Board approval. The Board
                         minutes documented general approval of items for disposal;
                         however, specific items were not identified. As a result,
                         CHA was unable to account for, or identify, assets disposed
                         of. Also, CHA did not have adequate assurance that its
                         assets were disposed of at the most favorable prices.

                         The Authority’s disposition policy states that: (1) goods that
                         can be written off, sold or traded must have Board approval
                         for disposition prior to disposition; (2) goods which have
                         become surplus, obsolete or unusable and have current
                         values, shall not be sold or exchanged for less than their fair
                         market value. Personal property in excess of the estimated
                         fair value or $1,000 shall be sold at public sale. The award
                         shall be made to the highest bidder; (3) goods that have no
                         real or scrap value shall be written off. Goods which have a
                         value of $350 or more shall be advertised and sold; and (4)
                         the Authority shall maintain complete records relating to the
                         disposition of all excess property.

                         The Board gave the Executive Director complete control
                         over the disposition of assets. The Executive Director
                         arbitrarily set amounts for the disposed items and gave items
                         away. The disposed appliances were not always identified
                         by serial or model numbers. The only records maintained
                         for a disposal was a copy of the receipt from the sale
                         proceeds. Some of the serial numbers were identified on the
                         receipt. However, CHA could not identify the items given
                         away. This data is needed to




                                     Page 19                            00-AT-202-1008
Finding 2

                        accurately adjust the Authority’s inventory records and
                        substantiate the disposition.    Due to the lack of
                        accountability, we cannot determine the extent of the
                        inadequate disposition.

                        CHA did not support the allocation of indirect costs for its
 CHA did not support    programs.     Neither the Executive Director nor the
 its cost allocations   Administrative Assistant could explain the basis for
                        allocating their salaries between the various programs.
                        However, CHA operates three HUD programs and manages
                        and collects rents for three units owned by Cullman
                        Affordable Housing. As a result, neither HUD nor CHA had
                        assurance that the indirect costs charged to the Authority’s
                        various programs were adequately supported.

                        Title 24 CFR, part 85.22 (b) requires that State, local, and
                        Indian tribal governments follow Office of Management and
                        Budget Circular A-87, Cost Principles for State and Local
                        Government.

                        Office of Management and Budget Circular A-87,
                        Attachment A, states in part that State, local, and Federally-
                        recognized Indian tribal governments shall establish
                        principles to provide that Federal awards bear their fair
                        share. Further, Attachment C of the Circular states in part
                        that governments need a process whereby costs can be
                        assigned to benefited activities on a reasonable and
                        consistent basis. The cost allocation plan provides that
                        process. All costs and other data used to distribute the costs
                        included in the plan should be supported by formal
                        accounting and other records that support the propriety of the
                        costs assigned to Federal awards.

                        CHA’s budget for fiscal year ending September 30, 2000,
                        showed that salary costs for the Executive Director and the
                        Administrative Assistant were allocated between different
                        programs. The salaries for the other employees were not
                        allocated between the programs. The budget showed the
                        following allocations:

                                                                        Section 8
                         Employee         Management    Modernization   Programs
                         Executive           57%            19%             24%
                         Director
                         Administrative      90%                            10%
                         Assistant




00-AT-202-1008          Page 20
                                                                        Finding 2
                         CHA did not have documentation to support the cost
                         allocations. The Executive Director said the Fee Accountant
                         determined how costs were allocated.

                         CHA did not have fidelity bond coverage for the Board Vice
Fidelity bond coverage   Chairperson, who is one of the Authority’s check signers. In
was not adequately       addition, CHA did not have support to verify the adequacy
supported                of the fidelity bond coverage for its employees.

                         The ACC, Part B, Attachment VII, Section 1, states that
                         employee dishonesty insurance coverage is mandatory for
                         all housing authorities. HUD Handbook 7401.5G, Public
                         and Indian Housing Property/Casualty Insurance, Chapter 8
                         provides guidance on employee dishonesty coverage.
                         Paragraph 8-13 states that the recommended minimum limit
                         is based on the cash flow of the authority. The Department
                         has developed a work sheet to measure the cash flow from
                         which the required minimum limit is determined. The work
                         sheet, Form HUD-5462, is included in the handbook.

                         CHA did not have criteria to support the adequacy of the
                         fidelity bond coverage for its employees. The Authority
                         relied on its independent auditor to determine the adequacy
                         of its coverage. The auditor used the amount of fidelity bond
                         coverage from other housing authorities in Alabama as the
                         criteria for determining the adequacy of CHA’s coverage

                         The Executive Director said he believed the coverage for
                         the employees was not adequate. Therefore, he contacted
                         the insurance company and requested an increase in the
                         coverage for the employees and included the Vice
                         Chairperson.    The Executive Director increased the
                         coverage for the check signing positions from $100,000 to
                         $200,000 and the employees from $25,000 to $60,000.
                         However, based on the cash flow of the Authority, the
                         minimum bond limit for its employees was $75,000. As a
                         result, CHA employees were under insured by $50,000 and
                         remain under insured by at least $15,000.

                                           *      *       *       *




                                    Page 21                           00-AT-202-1008
Finding 2

                   In summary, establishing or improving internal controls is a
                   crucial area of sound management. Internal controls should
                   provide reasonable assurance fraud and abuse are prevented
                   or detected. Internal controls should not be viewed as a
                   reflection upon the honesty of employees responsible for
                   overseeing disbursements of funds, but as a protective
                   measure for establishing responsibility and accountability.
                   Internal controls include such matters as documenting
                   procedures, segregating duties, and maintaining adequate
                   records. Inadequate internal controls increased the risk that
                   cash and other assets could be diverted without proper
                   detection, and resources were not effectively and efficiently
                   used.

                   Excerpts from CHA’s comments on our draft findings
                   follow. Appendix B contains the complete text of the
                   comments.


                   CHA generally agreed with the finding. The Authority will
 CHA comments      contact the HUD Office for guidance in establishing policies
                   and procedures to be adopted that will ensure segregation of
                   duties and responsibilities. Also, CHA will closely follow
                   its disposition policy on future disposition of equipment.


                   We believe CHA’s action will strengthen controls over its
 OIG response      procurement function.



 Recommendations   We recommend that you require CHA to:

                   2A.       Ensure the Board of Commissioners establishes and
                             implements policies segregating the duties of the
                             Executive Director among various employees. No
                             employee should have complete control over a
                             program area. The duties should be segregated to
                             provide checks and balances on all work.

                   2B.       Analyze the cellular phone charges for the past 2
                             years and provide support that all charges were
                             necessary and reasonable for the operation of CHA
                             or repay the $4,572. All unsupported charges
                             identified, including charges made by the Executive

                             Director’s son, should be reimbursed from Executive
                             Director’s personal funds.
00-AT-202-1008     Page 22
                                             Finding 2

2C.   Properly procure the storage building and document
      the necessity and reasonableness of the storage rate.

2D.   Establish and implement policies and procedures for
      tenant selection to ensure compliance with HUD
      Handbook 7465.1 and Title 24 CFR 982.

2E.   Repay the $4,115 of ineligible housing assistance
      payments made for the units that did not meet HQS.

2F.   Re-inspect the Section 8 units identified and require
      the owners to correct all of the HQS violations for
      the units.

2G.   Update, reconcile and explain the differences
      between its actual inventory and the inventory
      records.

2H.   Establish and implement policies and procedures
      which outline the proper steps required to control
      and account for its inventory.

2I.   Implement its disposition policies and procedures.

2J.   Maintain documentation to adequately identify assets
      when they are disposed of.

2K.   Maintain documentation to support cost allocations
      in accordance with the Office of Management and
      Budget Circular A-87.

2L.   Ensure fidelity bond coverage is sufficient based on
      the Authority’s analysis of cash flow and exposure in
      accordance with HUD Handbook 7401.5G. Also,
      ensure that the Vice Chairperson is included on the
      fidelity bond coverage.




          Page 23                          00-AT-202-1008
Finding 2




                 (This Page Left Blank Intentionally)




00-AT-202-1008         Page 24
Management Controls
In planning and performing our audit, we considered CHA’s management controls to determine our
audit procedures and not to provide assurance on those controls. Management is responsible for
establishing effective management controls to ensure that its goals are met.

Management controls include the plan of organization, methods and procedures adopted by
management to ensure that its goals are met. Management controls include the processes for
planning, organizing, directing, and controlling program operations. They include the systems for
measuring, reporting, and monitoring program performance.


                                     We determined the following management controls were
 Relevant Management                 relevant to our audit objectives:
 Controls
                                        ·   Compliance with Laws and Regulations
                                        ·   Procurement and Contracting
                                        ·   Safeguarding Resources
                                        ·   Tenant Selection

                                     We evaluated the relevant controls in place. To the extent
                                     possible, we obtained an understanding of CHA’s
                                     procedures and HUD’s requirements, assessed controls risk,
                                     and performed various substantive tests of the controls.

                                     A significant weakness exists if management controls do not
 Significant Weaknesses              give reasonable assurance that resource use is consistent
                                     with laws, regulations, and policies; that resources are
                                     safeguarded against waste, loss, and misuse; and that
                                     reliable data are obtained, maintained, and fairly disclosed.

                                     Based on our review, we believe CHA had significant
                                     weaknesses in the management controls tested. The specific
                                     weaknesses are discussed in the findings.




                                               Page 25                            00-AT-202-1008
Management Controls




                      (This Page Left Blank Intentionally)




00-AT-202-1008              Page 26
Follow-Up on Prior Audits
Our prior audit report (97-AT-202-1807) dated April 30, 1997, did not include any findings.

The last Independent Auditor’s audit report was completed by Moody & Morgan, P.C., Certified
Public Accountants, for the fiscal year ended September 30, 1998. The report was issued
February 11, 1999, and contained one finding. Finding 98-1 related to CHA failing to calculate a
Section 8 resident’s subsidized rent properly. This issue was resolved at the time of our review.




                                               Page 27                            00-AT-202-1008
Follow-Up On Prior Audits




                            (This Page Left Blank Intentionally)




00-AT-202-1008                    Page 28
                                                                                                  Appendix A


Schedule of Questioned Costs

          Recommendation                            Ineligible1                           Unsupported2

                  1E                                                                         $ 18,700

                  2B                                                                            4,572

                  2E                                 $ 4,115

                Totals                               $ 4,155                                 $ 23,272




1
    Ineligible costs are not allowed by law, contract, HUD or local agency policies or regulations.
2
    Unsupported costs are not clearly eligible or ineligible but warrant being contested because of the lack of
    documentation supporting the need to incur such costs.
                                                         Page 29                                    00-AT-202-1008
Schedule of Questioned Costs




                               (This Page Left Blank Intentionally)




00-AT-202-1008                       Page 30
                             Appendix B


Auditee Comments




                   Page 31   00-AT-202-1008
Auditee Comments




00-AT-202-1008     Page 32
          Auditee Comments




Page 33         00-AT-202-1008
Auditee Comments




                   (This Page Left Blank Intentionally)




00-AT-202-1008           Page 34
                                                                             Appendix C


Distribution
Executive Director, Cullman Housing Authority, Cullman, Alabama
Deputy Secretary, SD (Room 10100)
Chief of Staff, S (Room 10000)
Special Assistant to the Deputy Secretary for Project Management, SD (Room 10100)
Acting Assistant Secretary for Administration, S (Room 10110)
Assistant Secretary for Congressional and Intergovernmental Relations, J (Room 10120)
Senior Advisor to the Secretary, Office of Public Affairs, S (Room 10132)
Deputy Assistant Secretary of Administrative Services/Director of Executive Secretariat, AX
    (Room 10139)
Director of Scheduling and Advance, AL (Room 10158)
Counselor to the Secretary, S (Room 10234)
Deputy Chief of Staff, S (Room 10226)
Deputy Chief of Staff for Operations, S (Room 10226)
Deputy Chief of Staff for Programs and Policy, S (Room 10226)
Director, Office of Special Actions, AK (Room 10226)
Deputy Assistant Secretary for Public Affairs, W (Room 10222)
Special Assistant for Inter-Faith Community Outreach, S (Room 10222)
Executive Officer for Administrative Operations and Management, S (Room 10220)
Senior Advisor to the Secretary for Pine Ridge Project, W, (Room 10216)
General Counsel, C (Room 10214)
Director, Office of Federal Housing Enterprise Oversight, O (9th Floor Mailroom)
Assistant Secretary for Housing/Federal Housing Commissioner, H (Room 9100)
Office of Policy Development and Research, R (Room 8100)
Inspector General, G (Room 8256)
Assistant Secretary for Community Planning and Development, D (Room 7100)
Assistant Deputy Secretary for Field Policy and Management, SDF (Room 7108)
Government National Mortgage Association, T (Room 6100)
Assistant Secretary for Fair Housing and Equal Opportunity, E (Room 5100)
Chief Procurement Officer, N (Room 5184)
Assistant Secretary for Public and Indian Housing, P (Room 4100)
Chief Information Officer, Q (Room 3152)
Director, Office of Departmental Equal Employment Opportunity, U (Room 5128)
Director, Office of Departmental Operations and Coordination, I (Room 2124)
Chief Financial Officer, F (Room 2202)
Director, HUD Enforcement Center, X, 1250 Maryland Avenue, SW, Suite 200
Director, Real Estate Assessment Center, X, 1280 Maryland Avenue, SW, Suite 800
Director, Office of Multifamily Assistance Restructuring, Y, 1280 Maryland Avenue, SW, Suite
4000
Deputy Chief Financial Officer for Finance, FF (Room 2202) (2)
Director, Office of Budget, FO (Room 3270)




                                           Page 35                            00-AT-202-1008
Distribution


Secretary's Representative, 4AS
State Coordinator, Alabama State Office, 4CS
Director , Office of Public Housing, 4CPH
Audit Liaison Officer, 3AFI
Audit Liaison Officer, Office of Public and Indian Housing, PF (Room P8202)
Departmental Audit Liaison Officer, FM (Room 2206)
Acquisitions Librarian, Library, AS (Room 8141)
Counsel to the IG, GC (Room 8260)
HUD OIG Webmanager-Electronic Format Via Notes Mail (Cliff Jones@hud.gov)
Public Affairs Officer, G (Room 8256)
Director, Housing and Community Development Issue Area, U.S. GAO, 441 G Street N.W.,
  Room 2474, Washington DC 20548 ATTN: Judy England-Joseph
The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs,
  United States Senate, Washington DC 20510-6250
The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs,
  United States Senate, Washington DC 20510-6250
The Honorable Dan Burton, Chairman, Committee on Government Reform,
  United States House of Representatives, Washington DC 20515-6143
The Honorable Henry A. Waxman, Ranking Member, Committee on Government Reform,
  United States House of Representatives, Washington, DC 20515-4305
Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212,
  O'Neil House Office Building, Washington, DC 20515-6143
Steve Redburn, Chief, Housing Branch, Office of Management and Budget, 725 17th Street, NW,
  Room 9226, New Executive Office Bldg., Washington, DC 20503
Sharon Pinkerton, Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug
  Policy and Human Resources, B373 Rayburn House Office Bldg., Washington, DC 20515




00-AT-202-1008                      Page 36
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