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 (This Page Left Blank Intentionally) 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 (This Page Left Blank Intentionally) 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 (This Page Left Blank Intentionally) 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 (This Page Left Blank Intentionally) 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 Page 37 00-AT-202-1008
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)