AUDIT REPORT MICHAELSON, CONNOR AND BOUL MANAGEMENT AND MARKETING CONTRACTOR HUNTINGTON BEACH, CALIFORNIA 00-PH-222-1005 September 29, 2000 OFFICE OF AUDIT, MID-ATLANTIC PHILADELPHIA, PENNSYLVANIA Issue Date September 29, 2000 Audit Case Number 00-PH-222-1005 TO: Engram Lloyd, Director, Homeownership Center, 3AHH FROM: Daniel G. Temme, District Inspector General for Audit, Mid-Atlantic, 3AGA SUBJECT: Michaelson, Connor & Boul Management and Marketing Contractor Huntington Beach, California We completed an audit of Michaelson, Connor & Boul, a Management and Marketing (M&M) contractor. This report presents the results of our audit of Michaelson, Connon & Boul’s ability to manage and market FHA’s single family properties. The report includes two findings with recommendations for corrective action. Within 60 days, please provide us, for each recommendation in this report, a status report on: (1) the corrective action taken; (2) the proposed corrective action and a planned completion date; or (3) why action is considered unnecessary. Also, please furnish us copies of any correspondence or directives issued as a result of the audit. Note that Handbook 2000.06 REV-3 requires management decisions to be reached on all recommendations within 6 months of report issuance. It also provides guidance regarding interim actions and the format and content of your reply. We provided a copy of this report to the auditee. We appreciate your cooperation during the audit. We would also like to thank Michaelson, Connor & Boul’s management and staff for its cooperation during the audit and commend the professionalism of its management and staff. Should you or your staff have any questions, please contact Allen Leftwich, Assistant District Inspector General for Audit at (215) 656-3401. Management Memorandum (THIS PAGE LEFT BLANK INTENTIONALLY) 00-PH-222-1005 Page ii Executive Summary We completed an audit of Michaelson, Connor & Boul, a Management and Marketing (M&M) contractor. The purpose of the audit was to determine whether the M&M contractor managed and marketed FHA’s single family properties according to contract requirements. Specifically, we determined whether: (1) the contractor managed properties according to HUD policies, procedures and regulations, and the terms and conditions of its M&M contract; (2) the contractor had adequate controls to ensure FHA’s assets are adequately protected; and (3) contractor operations resulted in FHA accomplishing its mission and performance goals. Consistent with FHA and contract objectives, we found MCB’s monthly property sales have steadily increased, and the number of properties in its inventory has steadily declined since MCB assumed management and marketing responsibilities for the Philadelphia HOC Area-2 property inventory. However, despite these accomplishments we did identify a number of areas where improvements need to be made by the contractor. These areas are summarized below and detailed in the findings of the report. MCB did not repair and MCB did not repair and maintain assigned properties maintain properties according to contract requirements. Specifically, MCB did not: (1) perform timely initial inspections and property appraisals; (2) ensure property inspectors accurately reported property conditions; (3) make needed repairs or perform routine maintenance to preserve and protect properties; or (4) correct hazardous conditions. MCB relied exclusively on subcontractors and third party service providers to perform its inspection, appraisal, and property repair responsibilities, but did not adequately monitor their work to ensure it was completed according to contract provisions. As a result, the Department and the surrounding neighborhoods are at risk since poor property conditions reflect negatively on the Department’s image, decrease marketability of property inventory, and in some cases threaten the health and safety of neighbors and potential buyers. MCB did not properly Contrary to contract requirements, MCB processed, process vouchers invoiced, and received payment from HUD for voucher items which were not properly supported, and or approved. This occurred because MCB’s oversight of its invoicing and voucher payment process did not ensure: services were provided; complete and accurate files were maintained; and invoices included only eligible costs according to contract requirements. As a result, MCB received $28,402 for duplicative and ineligible costs. Page iii 00-PH-222-1005 Executive Summary Recommendations We recommended that MCB develop and implement a comprehensive monitoring plan over its subcontractors. At a minimum, the plan should include: (1) key contract performance requirements and outputs; (2) a methodology for conducting periodic and systematic reviews of subcontractor performance; and (3) procedures for documenting review and follow-up results. We also recommended that MCB develop and implement procedures to ensure pass-through vouchers are processed in accordance with contract specifications. We discussed the results of our review with the contractor during the audit and at an exit conference on August 30, 2000. The contractor was also given a draft copy of the report for comment. The contractor generally agreed with the report and has reimbursed HUD for ineligible costs and taken steps to improve its operations. The contractor’s written comments are contained in Appendix Appendix FF and summarized, in pertinent part, elsewhere in the report. 00-PH-222-1005 Page iv Table of Contents Management Memorandum i Executive Summary iii Introduction 1 Findings 1 MCB Did Not Adequately Maintain Properties 5 2 MCB Needs To Improve Its Voucher Processing To Comply With Contract Requirements 11 Management Controls 17 Follow Up On Prior Audits 19 Appendices A Schedule of Questioned Costs 21 B Summary of Inspection Deficiencies 23 C Selected Photographs Of Hazardous Conditions And Inspection Deficiencies 25 D Duplicate Pass-Through Costs 31 E Ineligible Pass-Through Expenses 35 F Auditee Comments 37 Page v 00-PH-222-1005 Table of Contents G Distribution 43 Abbreviations FHA Federal Housing Administration HOC Homeownership Center HUD U.S. Department of Housing and Urban Development M&M Management and Marketing MCB Michaelson, Connor and Boul, Inc. OIG Office of Inspector General REO Real Estate Owned 00-PH-222-1005 Page vi Introduction FHA’s Single Family Mortgage Insurance Program helps low and moderate income families become homeowners by reducing downpayments and limiting lender fees. Every year, however, thousands of borrowers default on their FHA-insured loans. When they default, FHA encourages lenders to work with them to bring their payments current. When they cannot do this, their homes may be sold to third parties, voluntarily conveyed to the lenders, or surrendered to lenders through foreclosure. Once lenders obtain the properties, they generally convey title to the Secretary of HUD in exchange for payment of their insurance claim. The National Housing Act of 1934 confers on the Secretary the authority to manage, rehabilitate, rent, and dispose of properties acquired under the Single Family Property Disposition Program. Title 24, Code of Federal Regulations, part 291 implements statutory authority to manage and dispose of acquired properties. Handbook 4310.5, REV-2, dated May 17, 1994, Property Disposition Handbook - One to Four Family Properties, supplements the regulations. FHA’s Office of Insured Single Family Housing, Asset Management Division, is responsible for administering the program. As part of HUD’s continuing reinvention efforts, FHA issued its 2020 Field Consolidation Plan for Single Family Housing and awarded contracts in March 1999 to manage and market its properties nationwide. The primary contract objectives are to ensure: (1) properties are protected and preserved, properly managed, evaluated, and marketed in a manner which produces the highest possible return to the insurance fund; (2) average losses on sales and the average time properties remain in inventory are reduced; and, (3) the overall program and the image of properties is positive. The M&M contractor originally responsible for the Philadelphia HOC Area-2 (Ohio, Michigan, West Virginia) experienced performance difficulties and was terminated. On September 23, 1999, FHA awarded a new M&M contract to MCB and the company assumed management and marketing responsibilities for the Philadelphia HOC Area-2 property inventory. MCB was incorporated in 1994 and its main office is located in Huntington Beach, California. Ms. Joan Heid is president. During the audit period, MCB was responsible for managing and marketing an average inventory of over 1,800 properties. As of May 31, 2000, HUD had paid MCB about $7.8 million for its services. On May 18, 2000, HUD awarded another M&M contract to MCB to manage the Philadelphia HOC’s Area-4 inventory (Maryland), formerly managed by HUD in-house staff. The Area-4 inventory significantly increased the number of properties managed by MCB to about 5,500, an increase of over 200 percent. Audit Scope And Objectives This audit of MCB is one in a series of audits OIG is performing regarding M&M contractor operations. Each audit is part of a nationwide assessment of FHA’s ability to meet its program mission and goals while outsourcing its management and marketing activities. In addition to the Page 1 00-PH-222-1005 Introduction issues addressed in this report, we identified other matters which will be addressed in a nationwide report. For example, the percentage of property sales to owner occupants declined significantly during the audit period. However, the primary cause for the decline is not directly attributable to the contractor. The audit objectives were to determine if: (1) the contractor managed properties according to HUD policies, procedures and regulations, and the terms and conditions of its M&M contract; (2) the contractor had adequate controls to ensure FHA’s assets are adequately protected; and (3) contractor operations resulted in FHA accomplishing its mission and performance goals. To meet our objectives, we: • Interviewed MCB and HOC officials; • Reviewed a judgmental sample of 30 active, 18 closed, and 15 held-off-market property case files; • Inspected a judgmental sample of 36 properties; • Reviewed a judgmental sample of contractor payment vouchers; • Obtained direct SAMS access and queried financial and property inventory data tables; • Analyzed all pass-through costs paid during the audit period; • Reviewed the contractor’s policies and procedures, and observed its operations; and, • Analyzed inventory and sales trends. We assessed management controls over: (1) property preservation and protection; (2) billings to HUD for services; (3) property sales; (4) property appraisals; (5) review of sales closing documents; and (6) subcontracting. Our audit was performed from April through July 2000 and generally covered the activities from contract inception on September 23, 1999 through April 1, 2000. We expanded our scope to other periods as necessary to accomplish the audit objectives. 00-PH-222-1005 Page 2 Introduction We conducted our audit in accordance with generally accepted government auditing standards. Page 3 00-PH-222-1005 Introduction (THIS PAGE LEFT BLANK INTENTIONALLY) 00-PH-222-1005 Page 4 Finding 1 MCB Did Not Adequately Maintain Properties MCB did not repair and maintain assigned properties according to contract requirements. Specifically, MCB did not: (1) perform timely initial inspections and property appraisals; (2) ensure property inspectors accurately reported property conditions; (3) make needed repairs or perform routine maintenance to preserve and protect properties; or (4) correct hazardous conditions. MCB relied exclusively on subcontractors and third party service providers to perform its inspection, appraisal, and property repair responsibilities, but did not adequately monitor their work to ensure it was completed according to contract provisions. As a result, the Department and the surrounding neighborhoods were at risk since poor property conditions reflect negatively on the Department’s image, decrease marketability of property inventory, and in some cases threaten the health and safety of neighbors and potential buyers. Contract Requirements to Section C-2 of MCB’s contract requires it to perform an Secure and Maintain initial inspection of newly assigned properties within 24 Properties hours of assignment and to take all necessary actions to preserve, protect, and maintain each property in a presentable condition at all times. Section C-2 also requires MCB to obtain an appraisal of each property no later than 10 days after title is conveyed to HUD. MCB Did Not Perform To determine if inspections and appraisals were performed Timely Property Inspections in a timely manner, we randomly selected 30 active and Appraisals property case files, and analyzed inspection reports and other relevant documentation. Of the 30, 12 properties were originally assigned to the former M&M contractor and were inherited by MCB. Because these files generally were not properly maintained, we did not include their results in our analyses of the cases fully processed by MCB. Our review of case files for the 18 newly acquired properties disclosed that MCB did not inspect 10 of the properties within 24 hours of assignment as required by contract provisions. Inspections ranged from 1 to 23 days late. Our review also showed that 11 of 18 appraisals were not obtained within prescribed time frames. Delays ranged from 1 to 70 days. Although MCB was aware of contract requirements, they did not effectively monitor subcontractors assigned to perform inspection and appraisal services to ensure timely completion. Timely inspections are critical to ensure properties are properly secured and protected and that potential hazards and needed repairs are Page 5 00-PH-222-1005 Finding 1 identified and corrected. Additionally, obtaining timely appraisals ensures properties are promptly listed for sale. Inspections Did Not Identify In order to evaluate the effectiveness of MCB’s property Property Deficiencies inspection and maintenance procedures, we performed 36 detailed inspections of randomly selected properties in Michigan and Ohio and compared our results to the most recent inspections performed by MCB and its subcontractors. Since 9 of the 36 properties we inspected were scheduled for demolition, occupied, or entry could not be obtained, we did not include these inspections in our comparative analysis. We found MCB’s inspections did not identify evident deficiencies in any of the 27 remaining properties. The number and types of deficiencies are summarized below and detailed in Appendix Appendix B.B Number of Description Deficiencies Interior/Exterior Debris 12 Lawn/Shrubbery Not Maintained 14 Evidence of Roof Leaks 10 Structural Damage 5 Vandalism 19 Defective Interior/Exterior Paint 20 Missing Proper Sign 11 Emergency Maintenance Items 17 Interior/Exterior Hazardous Conditions 19 As shown above, MCB’s inspections did not identify deficient property conditions, and routine repair and maintenance needs required by contract specifications were not performed. Additionally, our inspections identified hazardous conditions that were not detected and immediately corrected as prescribed by contract requirements. The number of unidentified hazardous safety deficiencies by type is as follows: 00-PH-222-1005 Page 6 Finding 1 Number of Hazardous Condition Deficiencies Unsafe Flooring 7 Exposed Electrical Wires or Circuits 11 Missing or Broken Handrails 9 Broken or Unsafe Steps 3 Unsafe Garage Door 1 Broken Glass 14 The M&M contract specifies that MCB will routinely inspect and take all actions necessary to preserve, protect, and maintain each property. The contract also clearly specifies each of the routine and hazardous deficiencies identified in the charts above should have been repaired by MCB. See Appendix Appendix CC for selected photographs of hazardous conditions and inspection deficiencies. * * * * * * We attributed MCB’s property inspection, appraisal, and repair/maintenance difficulties to not establishing and implementing a formal, comprehensive subcontractor monitoring plan. MCB fulfilled its inspection, appraisal, and property repair responsibilities exclusively through subcontractors and third party service providers. Although MCB had office locations in each state staffed with in- house personnel to monitor work performed by subcontractors, subcontract monitoring was informally managed through spot inspections, and electronic and telephone contact with subcontractors and MCB main office personnel. MCB’s field office personnel lacked a structured approach for enforcing MCB contract responsibilities through its subcontracting network and, as evidenced by our inspection results, could not adequately protect HUD’s interests. MCB needs to develop a comprehensive monitoring plan that identifies the performance outputs and describes the inspection methodology in sufficient detail so it can serve as the basis for conducting systematic and structured evaluations of subcontractor performance. Page 7 00-PH-222-1005 Finding 1 Auditee Comments Inspection and Appraisal Timeliness MCB acknowledged that additional improvements were needed to ensure property inspection, and appraisal services were provided by its subcontractors within prescribed contract time frames. To improve its M&M contract operations, MCB has: (i) terminated their relationship with subcontractors who have consistently demonstrated an inability to complete assigned tasks within contract limits; (ii) increased its in-house oversight responsibility and no longer subcontracts with 3rd parties to perform monitoring functions; and (iii) made changes to its inspection and appraisal ordering process to ensure timely and effective performance. Comparative Inspection Analyses MCB generally agreed that property inspection and repair and maintenance procedures needed improvement and have instituted procedural changes that increased in-house inspection frequency and subcontractor oversight. MCB disagreed, in some instances, with the OIG’s interpretation of contract inspection and repair requirements and cited examples relating to interior water damage, defective paint surfaces, posting of signs, and vandalism. MCB stated contract terms do not require the disclosure and repair of interior water damage caused by roof leaks that were repaired prior to being assigned to the M&M property inventory. While MCB agreed that the defective paint surfaces identified by the OIG inspections had merit, they should not be considered a performance deficiency since MCB generally does not make these repairs until just prior to the sale of the property. Concerning the sign posting deficiencies noted by the OIG, MCB stated that their records indicated that the proper signs were posted. Regarding apparent vandal damage identified by the OIG, MCB stated in some cases its records show that MCB had previously identified and repaired damage caused by vandals and indicated repeated acts of vandalism on the same property are common. 00-PH-222-1005 Page 8 Finding 1 MCB is to be commended for its commitment towards OIG Evaluation of developing and implementing procedural changes to improve Auditee Comments its inspection, appraisal, and repair and maintenance services. Additionally, we have taken MCB responses into consideration and made appropriate revisions to the finding. Regarding the areas of disagreement we respond as follows: Comparative Inspection Analyses As stated in the finding, we performed detailed property inspections of randomly selected properties and compared our results with the most recent inspections performed by MCB and its subcontractors. The comparative analyses of the differences between the two inspections are detailed in the finding and in Appendix B. The fundamental essence of the problem is the fact that we found property conditions that were not identified, disclosed, and when appropriate, repaired as a result of MCB’s property inspection process. Contrary to MCB’s stated position, contract terms require that detailed initial and periodic inspections be performed to document the property’s condition without regard to the nature and timing of prior repairs. Regarding MCB’s comments concerning the defective paint, sign posting, and vandalism examples, our results clearly showed that MCB’s inspection documentation failed to identify and disclose these conditions. Unless inspections are properly conducted and accurately documented in accordance with contract provisions, there are minimal assurances that properties will be adequately protected and preserved, hazardous conditions remedied, and HUD’s interests will be protected. Recommendations We recommend you: 1A. Require MCB to develop and implement a comprehensive monitoring plan over its subcontractors. At a minimum, the plan should include: • key contract performance requirements and outputs (inspection, appraisal, and repair/maintenance) • a methodology for conducting periodic and systematic reviews of subcontractor performance Page 9 00-PH-222-1005 Finding 1 • procedures for documenting review and follow-up results 1B. Once implemented, closely monitor MCB’s subcontractor monitoring initiatives to ensure that inspection, related repair and maintenance, and appraisal services are provided in accordance with contract requirements. 00-PH-222-1005 Page 10 Finding 2 MCB Needs To Improve Its Voucher Processing To Comply With Contract Requirements Contrary to contract requirements, MCB processed, invoiced, and received payment from HUD for voucher items which were not properly supported, and/or approved. This occurred because MCB’s oversight of its invoicing and voucher payment process did not ensure services were provided, complete and accurate files were maintained, and invoices included only eligible costs according to contract requirements. As a result, MCB was paid $28,402 for duplicative and ineligible costs. Contract Payment All costs of performance under the M&M contract are to be Requirements at the expense of the contractor, unless otherwise specifically identified as a pass-through cost. Section C-4 (III)(A) of the M&M contract defines a pass-through cost as an actual out-of-pocket expense incurred and paid by the contractor that is not deemed a contractor’s expense such as utility bills and homeowner association fees which are cost- reimbursable as an allowable pass-through cost. Because the inventory managed by the former contractor (transitional inventory) was generally in a state of disrepair, special contract modifications (Exhibit 16) were created that allowed MCB to claim as pass-through costs, expenses such as debris and defective paint removal, and securing the property for these transitional properties that normally would be borne by MCB. Exhibit 16 specifies that these exception pass-through costs require written bids and GTR approval based upon certain dollar thresholds. Section G-4 (IV)(G) of the M&M contract states that pass- through costs will be billed monthly and must be supported with original documentary evidence, such as invoices from vendors, to support the cost of each item for which reimbursement is requested. Invoices must indicate the name of the vendor, service dates, amount per type of service, and a sufficiently detailed description. Pass- through reimbursements must be submitted on Form SAMS-1106, Invoice Transmittal, and properly coded to identify the item or service. Page 11 00-PH-222-1005 Finding 2 Section C-4 (III) (B) and (C) of the M&M contract states that MCB will be reimbursed for the actual cost of eligible pass-through services that are paid to the billing parties and that no administrative costs are to be added. Payments made by MCB for penalties, fees, or interest incurred by MCB due to late payment to other parties are unallowable costs. Pass-through Costs Were Not We judgmentally selected and reviewed 26 pass-through Properly Processed items (17 repair/maintenance and 9 miscellaneous expense items) submitted on MCB’s February and March 2000 vouchers. Our review showed that pass-through costs were not always properly supported, approved, and processed. As noted below, we found deficiencies in nine categories. Please note, not all categories were applicable to each of the 17 repair and maintenance items selected. This is reflected in the chart below. Number of Deficiencies Noted Occurrences Repair and Maintenance Items MCB invoiced and HUD paid ineligible costs 4 of 4 associated with post transitional properties MCB invoices consisted of summary spreadsheets 17 of 17 which did not identify the vendor, date of service, nor detail the unit of measure and quantity. Bids were not maintained in property case files, 7 of 7 submitted with invoices, or submitted to the GTR when required. When some bids were subsequently provided one appeared to be contrived, and in another case the winning bidder had prior knowledge of competing bids. Supporting documentation to include invoices and 9 of 12 invoices photographs was not always maintained in the 12 property case files provided for our review. 7 of 12 photos GTR approval was not obtained when required. 6 of 6 Pass-through costs were processed with the wrong 5 of 10 description post code; therefore, expenses were incorrectly reported to HUD and HUD could have paid for otherwise ineligible voucher items. MCB could not locate the property case file for our 5 of 17 review. Miscellaneous Expense Items Utility, Homeowner Association (HOA), and 4 of 9 miscellaneous bills were not consistently date received stamped; therefore, we were unable to determine whether late payment fees were an allowable cost. 00-PH-222-1005 Page 12 Finding 2 Duplicative, Ineligible, and Because of the variety and significance of the deficiencies Unreasonable Pass-through we identified in our initial sample of pass-through items, Costs we expanded our review to identify duplicative and ineligible pass-through costs on a larger scale. Using computer-assisted auditing techniques (CAAT’s), we analyzed $1.25 million of pass-through costs paid from September 1999 (contract inception) through March 2000 and determined MCB was paid $18,839 and $11,433 in duplicate invoices1 and ineligible costs, respectively. Details of this review follow. Duplicate Payments Using CAAT’s we identified 100 duplicate payments valued at $18,839. In some cases, the same invoice was paid three times. We found MCB accounting personnel had already identified and reimbursed HUD $5,181 for 17 of the duplicate payments which resulted from a HUD payment error. Due to time constraints we selected the 2 largest of the remaining 83 duplicate payments valued at $3,572 and determined MCB submitted these invoices in error due to weak invoicing and payment processing controls. MCB took immediate action and promptly reimbursed HUD $8,753 for the 19 duplicate payments. The remaining 81 duplicative payments totaling $10,086 should be reviewed and reimbursed to HUD as appropriate. Appendix Appendix D D contains a detailed chart of all duplicate payments and their status at the end of the audit. Ineligible Items MCB invoiced and was reimbursed $11,433 for 33 items during the review period that were not eligible as a pass- through expense as stipulated in the contract provisions. In these cases, MCB accounting personnel treated these costs as if they were associated with the inventory assigned to the former contractor and eligible under the special exceptions. However, because MCB failed to recognize that these properties were newly acquired, they inappropriately invoiced HUD for these items. When brought to their attention, MCB agreed with our assessment and promptly initiated actions to repay the $11,433 in ineligible costs. In order to preclude future occurrences, MCB needs to strengthen its pass-through invoice processing procedures by ensuring that pass-through cost exceptions are only applied to properties inherited from the former M&M 1 Our analyses identified a duplicate payment when the invoiced amount, property case number, and description code all were the same. Page 13 00-PH-222-1005 Finding 2 contractor. The ineligible pass-through expenses are detailed in Appendix Appendix E.E * * * * * * When made aware of our results, MCB initiated immediate procedural changes to better document pass-through costs and to ensure more accurate processing. MCB indicated that it has developed and implemented Auditee Comments additional management and accounting controls to ensure vouchers are processed in accordance with contract provisions. Invoicing procedures have been revised to require the application of a step-by-step process to ensure vouchered costs are eligible and properly supported, approved, and non-duplicative. Additionally, MCB performed a detailed review of the duplicative costs questioned in the finding. Of the 72 unresolved items valued at $10,086.31, MCB determined that 59 were duplicative and promptly reimbursed HUD $8,215.53. MCB’s research further disclosed that 13 line items valued at $1,870.78 were associated with recurring home owners’ association fees or were correctly processed and were not duplicative. OIG Evaluation of Auditee We concur with MCB’s duplicate cost analyses and commend their prompt response in improving vouchering Comments procedures, and validating and reimbursing HUD $8,215.53 for duplicative pass-through costs. Additionally, we have taken MCB’s responses regarding questionable pass-through costs into consideration and made appropriate revisions to the finding. Recommendation We recommend you: 2A. Require MCB to develop and implement procedures to ensure pass-through vouchers are processed in accordance with contract specifications. At a minimum, procedures should be developed to ensure pass-through expenses are: • invoiced only for allowable services and items 00-PH-222-1005 Page 14 Finding 2 • reimbursed only for the actual amount of the service and do not include additional administrative fees • supported with detailed invoices and comparable before and after photographs • awarded competitively, when appropriate • documented fully and supported in property case files, including invoices, photographs, and bids, when appropriate • approved by the GTR, when appropriate • coded properly • stamped with date received Page 15 00-PH-222-1005 Finding 2 (THIS PAGE LEFT BLANK INTENTIONALLY) 00-PH-222-1005 Page 16 Management Controls In planning and performing our audit, we obtained an understanding of the management controls that were relevant to our audit. Management is responsible for establishing effective management controls. Management controls, in the broadest sense, include the organizational plan, methods, and procedures adopted by management to ensure that its goals are met. Management controls include the process for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. Significant Controls We determined that the following management controls were relevant to our audit objectives: • performing timely inspections and appraisals • repairing and maintaining properties • reporting accurate property conditions • monitoring and oversight of subcontractors • processing voucher payments • complying with invoicing requirements, including making sure invoices included only allowable costs We assessed all of the relevant controls identified above. Significant Weaknesses It is a significant weakness if management controls do not give reasonable assurance that the entity’s goals and objectives are met; 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 in reports. Based on our review, we believe the following items are significant weaknesses: • MCB did not perform timely inspection and appraisal services, and did not adequately maintain properties • MCB did not adequately process and invoice payment vouchers These weaknesses are detailed in the findings in this report. Page 17 00-PH-222-1005 Management Controls (THIS PAGE LEFT BLANK INTENTIONALLY) 00-PH-222-1005 Page 18 Follow Up On Prior Audits This is the first audit of Michaelson, Connor and Boul by HUD’s Office of Inspector General. Page 19 00-PH-222-1005 Follow Up On Prior Audits (THIS PAGE LEFT BLANK INTENTIONALLY) 00-PH-222-1005 Page 20 Appendix A Schedule Of Questioned Costs Finding Type of Questioned Costs Number Ineligible 1/ 2 $28,402 2/ 1/ Ineligible costs are costs charged to a HUD program or activity that the auditor believes are not allowable by law, contract, or Federal, State, or local policies or regulations. 2/ MCB reimbursed HUD for ineligible costs. Page 21 00-PH-222-1005 Appendix A (THIS PAGE LEFT BLANK INTENTIONALLY) 00-PH-222-1005 Page 22 Appendix B Summary of Inspection Deficiencies Case Lawn Evidence of Structural Defective Sign Not Emergency Hazardous LINE Number Debris * Uncut Roof Leak Damage Vandalism Paint * Posted Maintenance Items Conditions * DETAILED INTERIOR-EXTERIOR INSPECTIONS 1 261-387952 X X X X X X 2 261-498824 X X X X 3 261-538521 X X X 4 261-540913 X X X X X 5 261-608767 X X X X X X 6 261-638906 X 7 261-646304 X X X X X X X 8 261-653344 X X X X X X 9 261-653929 X X X 10 261-659307 X X X X X X X 11 261-665023 X X X X X X 12 261-702594 X X X X X X 13 412-209985 X X X 14 412-238835 X X X X X X 15 412-243319 X X X X 16 412-304609 X X X X X 17 412-305483 X 18 412-367738 X X X X 19 412-368699 X 20 412-372093 X X X X X X X 21 412-372302 X X X X X X X 22 412-372609 X X X X 23 412-375628 X X X X X X X 24 412-380519 X X X X X 25 412-389175 X X X X 26 412-397739 X X X X 27 412-364956 X X X X X TOTAL DEFICIENCIES 12 14 10 5 19 20 11 17 19 PERCENT DEFICIENT 44% 52% 37% 19% 70% 74% 41% 63% 70% PROPERTY INTERIOR NOT INSPECTED DUE TO OCCUPANCY OR UNABLE TO OPEN LOCK ** 1 261-376523 X X X X X 2 261-463489 X X X X 3 261-585343 4 261-645993 5 412-263917 X X X X X X 6 412-313060 X X PROPERTIES SCHEDULED FOR DEMOLITION ** 1 261-497947 2 261-519695 3 412-237212 36 TOTAL INSPECTIONS X = Deficiency found per OIG inspection and not identified on MCB inspection * Includes both interior and exterior deficiencies ** Full interior/exterior inspections were not feasible; therefore, noted deficiencies were not included in the results. Finding 1 Page 23 00-PH-222-1005 Appendix B (THIS PAGE LEFT BLANK INTENTIONALLY) 00-PH-222-1005 Page 24 Appendix C Selected Photographs of Hazardous Conditions and Inspection Deficiencies FHA Case Number 412-397739 Cleveland, Ohio OIG Inspection May 31, 2000 Broken Floorboards - Top View FHA Case Number 412-397739 Cleveland, Ohio OIG Inspection May 31, 2000 Broken Floorboards Bottom View Finding 1 Page 25 00-PH-222-1005 Appendix C FHA Case Number 412-238835 Cleveland, Ohio OIG Inspection June 1, 2000 Ceiling Damage from Water Leak FHA Case Number 412-238835 Cleveland, Ohio OIG Inspection June 1, 2000 Missing/Broken Steps, Yard Not Maintained Finding 1 00-PH-222-1005 Page 26 Appendix C FHA Case Number 412-304609 Cleveland, Ohio OIG Inspection June 1, 2000 Exposed Electrical Circuits and Wires FHA Case Number 261-376523 Detroit, Michigan OIG Inspection May 25 2000 Broken/Missing Window Finding 1 Page 27 00-PH-222-1005 Appendix C FHA Case Number 412-372302 Cleveland, Ohio OIG Inspection May 31, 2000 Uncovered Hole in Floor FHA Case Number 261-463489 Detroit, Michigan OIG Inspection May 22, 2000 Exposed Electrical Circuits and Deteriorated Siding Finding 1 00-PH-222-1005 Page 28 Appendix C FHA Case Number 412-372093 Cleveland, Ohio OIG Inspection June 1, 2000 Defective Exterior Paint Surfaces FHA Case Number 412-372093 Cleveland, Ohio OIG Inspection June 1, 2000 Exposed Electrical Wires Finding 1 Page 29 00-PH-222-1005 Appendix C FHA Case Number 261-608767 Detroit, Michigan OIG Inspection May 22, 2000 Ceiling Damage from Water Leak FHA Case Number 412-237212 Cleveland, Ohio OIG Inspection June 2, 2000 Debris Under Front Porch Finding 1 00-PH-222-1005 Page 30 Appendix D Duplicate Pass-Through Costs CASE TRANSMITTAL DESCRIPTION DUPLICATE REIMBURSED NOTES UNRESOLVED NUMBER NUMBERS CODE PAYMENT BY MCB AMOUNT 262 033170 00022, 00041 UT $45.00 $45.00 1 $0.00 262 042929 00219, 000506 BR $180.00 $180.00 571 047852 00022, 00041 TX $437.41 $437.41 1 $0.00 571 052726 00413, 00059 MM $1,212.37 $1,212.37 2 $0.00 262 076711 00364, 00506 BR $180.00 $180.00 412 097708 00511, 00636 BR $42.00 $42.00 262 102907 00022, 00041 UT $45.00 $45.00 1 $0.00 262 106058 00219, 00380 BR $180.00 $180.00 262 113382 00380 CD $180.00 $180.00 413 117550 00254, 00378, 00511 CD $60.00 3 $60.00 413 126147 00254, 00378 CD $30.00 $30.00 413 127073 00254, 00378 CD $30.00 $30.00 413 139045 00254, 00378, 00511 CD $60.00 3 $60.00 413 157411 00254, 00378, 00511 CD $60.00 3 $60.00 411 192519 00142, 00224 CF $110.00 $110.00 411 192519 00022, 00041 CF $120.00 $120.00 1 $0.00 412 234689 00469, 00635 BR $180.00 $180.00 412 253426 00378, 00396 CD $384.00 $384.00 263 255706 00219, 00364 BR $30.00 $30.00 411 256879 00022, 00041 CF $381.21 $381.21 1 $0.00 263 257041 00022, 00041 UT $105.70 $105.70 1 $0.00 413 257119 00215, 00632 CD $30.00 $30.00 411 257146 00248, 00395 CD $480.00 $480.00 413 259980 00224, 00329 UT $6.13 $6.13 263 262732 00178, 00243 BR $180.00 $180.00 411 262874 00224, 00329 UT $53.43 $53.43 413 264626 00215, 00511 CD $30.00 $30.00 411 264724 00022, 00041 CF $654.26 $654.26 1 $0.00 411 264956 00120 BR $180.00 $180.00 412 267331 00377, 00469 BR $180.00 $180.00 413 268903 00215, 00511 CD $30.00 $30.00 263 268954 00499, 00640 CF $136.44 $136.44 411 269336 00022, 00041 CF $780.00 $780.00 1 $0.00 412 273911 00469, 00630 BR $180.00 $180.00 413 277494 00142, 00224 CF $94.00 $94.00 413 277494 00241, 00499, 00640 CF $198.00 3 $198.00 413 277494 00022, 00041 CF $203.00 $203.00 1 $0.00 411 278684 00583, 00640 CF $56.34 $56.34 411 278684 00022, 00041 CF $218.80 $218.80 1 $0.00 413 282778 00022, 00041 CF $475.00 $475.00 1 $0.00 412 283707 00510, 00511 DF $144.00 $144.00 413 284751 00215, 00511 CD $30.00 $30.00 Page 31 00-PH-222-1005 Finding 2 Appendix D CASE TRANSMITTAL DESCRIPTION DUPLICATE REIMBURSED NOTES UNRESOLVED NUMBER NUMBERS CODE PAYMENT BY MCB AMOUNT 413 285184 00142, 00224 CF $85.00 $85.00 413 285184 00022, 00041 CF $455.00 $455.00 1 $0.00 413 285259 00384, 00499, 00640 CF $164.00 3 $164.00 413 285585 00022, 00041 CF $455.00 $455.00 1 $0.00 412 289583 00254, 00501, 00215 BR $60.00 3 $60.00 413 290687 00022, 00041 CF $225.22 $225.22 1 $0.00 413 298069 00215, 00511 CD $30.00 $30.00 413 302074 00329, 00457 WT $220.97 $220.97 413 307643 00215, 00254, 00511 CD $60.00 3 $60.00 413 312234 00022, 00041 CF $336.00 $336.00 1 $0.00 412 313636 00243, 00635 BR $180.00 $180.00 412 317963 00215, 00513 CD $120.00 $120.00 412 321961 00022, 00041 UT $242.23 $242.23 1 $0.00 412 349977 00254, 00378 BR $30.00 $30.00 412 349977 00254, 00378 CD $2,359.20 $2,359.20 2 $0.00 412 358171 00378, 00396 BR $42.00 $42.00 412 358171 00378, 00396 CD $66.00 $66.00 412 363185 00583, 00640 CF $125.00 $125.00 412 380199 00502, 00635 BR $180.00 $180.00 412 380280 00377, 00507 BR $180.00 $180.00 412 382891 00380, 00469 BR $180.00 $180.00 261 387952 00380 BR $180.00 $180.00 412 388578 00384, 00499, 00640 CF $166.00 3 $166.00 412 388891 00366, 00635 BR $180.00 $180.00 412 389560 00457, 00499, 00640 CF $166.00 3 $166.00 261 389849 00179, 00380 BR $180.00 $180.00 412 391116 00378, 00394 CD $162.00 $162.00 412 393514 00623, 00635 BR $180.00 $180.00 412 398149 00254, 00378 CD $30.00 $30.00 261 426151 00179, 00487 BR $180.00 $180.00 261 489372 00163, 00502 BR $180.00 $180.00 261 498942 00179, 00397 BR $180.00 $180.00 261 515291 00179, 00364 BR $180.00 $180.00 261 518531 00123, 00506 BR $180.00 $180.00 261 523097 00179, 00364 BR $180.00 $180.00 261 551302 00179, 00364 BR $180.00 $180.00 261 577702 00179, 00506 BR $180.00 $180.00 261 597474 00365, 00627 BR $180.00 $180.00 261 632928 00190 BR $180.00 $180.00 261 636452 00123, 00488 BR $180.00 $180.00 261 645099 00329, 00457 IF $150.00 $150.00 261 645993 00123, 00488 BR $180.00 $180.00 261 649553 00190, 00507 BR $180.00 $180.00 261 655111 00022, 00041 MI $2.00 $2.00 1 $0.00 261 657975 00583, 00640 IF $225.00 $225.00 00-PH-222-1005 Page 32 Finding 2 Appendix D CASE TRANSMITTAL DESCRIPTION DUPLICATE REIMBURSED NOTES UNRESOLVED NUMBER NUMBERS CODE PAYMENT BY MCB AMOUNT 261 664980 00243, 00502 BR $30.00 $30.00 261 669821 00183, 00507 BR $180.00 $180.00 261 669821 00183, 00507 CD $300.00 $300.00 261 688057 00380, 00623 BR $180.00 $180.00 TOTALS $18,838.71 $8,752.40 $10,086.31 NOTES: 1) DUPLICATE PAYMENT MADE IN ERROR BY HUD AND REIMBURSED BY MCB 2) DUPLICATE INVOICE PROCESSED BY MCB. HUD REIMBURSED WHEN NOTIFIED BY OIG 3) MCB INVOICED ITEM 3 TIMES, DUPLICATING PAYMENT TWICE Finding 2 Page 33 00-PH-222-1005 Appendix D (THIS PAGE LEFT BLANK INTENTIONALLY) 00-PH-222-1005 Page 34 Appendix E Ineligible Pass-Through Expenses CASE DATE DESCRIPTION TRANSMITTAL LINE AMOUNT NUMBER ACQUIRED 261 656144 10/23/99 CLEAN-UP & DEBRIS REMOVAL 00142 12 $111.17 411 247573 9/30/99 APPRAISAL NEEDED FOR FILE 00266 4 $300.00 411 252345 10/27/99 SECURE PROPERTY 00378 16 $30.00 411 267944 10/1/99 CLEANING 00253 2 $810.00 411 272993 11/13/99 CLEAN-UP 00217 103 $33.60 411 278684 10/28/99 CLEAN-UP 00217 116 $600.00 411 278684 10/28/99 SECURE PROPERTY 00217 115 $180.00 412 367468 10/14/99 CLEANING 00488 24 $60.00 412 367468 10/14/99 SECURE PROPERTY 00488 23 $180.00 412 367559 10/27/99 CLEANING 00393 2 $1,563.60 413 250988 1/8/00 CLEANING 00378 67 $466.80 413 250988 1/8/00 SECURE PROPERTY 00378 66 $42.00 413 283008 3/29/00 CLEAN-UP 00215 150 $504.00 413 283008 3/29/00 SECURE PROPERTY 00215 149 $30.00 413 290313 10/9/99 CLEAN-UP & DEBRIS REMOVAL 00137 5 $540.00 413 290313 10/9/99 MISCELLANEOUS INCOME 00137 4 $264.00 413 298723 12/23/99 CLEAN-UP & DEBRIS REMOVAL 00634 1 $30.00 413 304589 10/1/99 CLEAN-UP & DEBRIS REMOVAL 00132 26 $432.00 413 304589 10/1/99 BOARD-UP/SECURE 00132 25 $288.00 571 047676 12/1/99 CLEANING 00504 1 $48.00 413 111102 01/27/2000 SECURE PROPERTY 00511 60 $126.00 413 111102 01/27/2000 CLEANING 00511 61 $360.00 413 111102 01/27/2000 DEFECTIVE PAINT 00511 62 $150.00 413 146301 01/27/2000 SECURE PROPERTY 00511 65 $198.00 413 146301 01/27/2000 CLEANING 00511 66 $990.00 413 146301 01/27/2000 DEFECTIVE PAINT 00511 70 $210.00 261 587407 01/27/2000 SECURE PROPERTY 00626 1 $180.00 261 587407 01/27/2000 CLEANING 00626 2 $720.00 261 420491 01/27/2000 SECURE PROPERTY 00627 1 $186.00 261 420491 01/27/2000 CLEANING 00627 2 $1,014.00 412 252020 01/27/2000 SECURE PROPERTY 00635 4 $180.00 412 252020 01/27/2000 CLEANING 00635 5 $294.00 412 252020 01/27/2000 DEFECTIVE PAINT 00635 6 $312.00 TOTAL $11,433.17** ** MCB has recognized the ineligibility of these costs and has initiated actions to reimburse HUD $11,433.17. Finding 2 Page 35 00-PH-222-1005 Appendix E (THIS PAGE LEFT BLANK INTENTIONALLY) 00-PH-222-1005 Page 36 Appendix F Auditee Comments Executive Summary Page 37 00-PH-222-1005 Appendix F Executive Summary 00-PH-222-1005 Page 38 Appendix F Executive Summary Page 39 00-PH-222-1005 Appendix F Executive Summary 00-PH-222-1005 Page 40 Appendix F Executive Summary Page 41 00-PH-222-1005 Appendix F Executive Summary 00-PH-222-1005 Page 42 Appendix G Distribution Engram Lloyd, Director, Homeownership Center, 3AHH Secretary’s Representative, Mid-Atlantic, 3AS (Acting) Audit Liaison Officer, 3AFI Principal Staff The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, 340 Dirksen Senate Office Building, US Senate, Washington, DC 20510 The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs, 706 Hart Senate Office Building, US Senate, Washington, DC 20515 The Honorable Dan Burton, Chairman, Committee on Government Reform, House of Representatives, 2185 Rayburn Building, Washington, DC 20515 The Honorable Henry Waxman, Ranking Member, Committee on Government Reform, House of Representatives, 2204 Rayburn Building, Washington, DC 20515 Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neil House Office Building, Washington, DC 20515 Director, Housing and Community Development Issue Area, US General Accounting Office, 441 G Street, NW, Room 2474, Washington, DC 20548 ATTN: Stanley Czerwinski Mr. Steve Redburn, Chief, Housing Branch, Office of Management and Budget, 725 17th Street, NW, Room 9226, New Executive Office Building, Washington, DC 20503 Ms. Joan Heid, President, Michaelson, Connor and Boul, Inc., 4952 Warner Avenue, Suite 110, Huntington Beach, CA 92649 Page 43 00-PH-222-1005
Michaelson, Connor & Boul, Management and Marketing Contractor, Huntington Beach, California
Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-09-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)