oversight

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)

        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




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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




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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




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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