oversight

Review of Foster and Associates� Management Activities for Clark Fork Manor and Whitefish Manor, Kalispell, Montana

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-09-28.

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

                                  Audit Report
                                  District Inspector General for Audit
                                  Rocky Mountain District




               Foster and Associates
                          Kalispell, Montana

            Review of Management
             Activities for Projects
            Clark Fork Manor and
               Whitefish Manor
                                2001-DE-1003
                              September 28, 2001

Department of Housing and Urban Development
District Office of Inspector General For Audit
633 17th Street, 14th Floor
Denver, CO 80202-3607
                                          Audit Report
                                          District Inspector General for Audit
                                          Rocky Mountain District
                                          Report: 2001-DE-1003           Issued: September 28, 2001



TO: Larry Sidebottom, Director, Denver Multifamily HUB, 8AHMLA




FROM: Robert C. Gwin, District Inspector General for Audit, 8AGA

SUBJECT: Review of Foster and Associates’ Management Activities for
         Clark Fork Manor and Whitefish Manor
         Kalispell, Montana

We completed a review of Foster and Associates of Kalispell, Montana. Our review was of their
management activities of Clark Fork Manor, located in Missoula, Montana, and of Whitefish Manor,
located in Whitefish, Montana.

This audit report contains one audit finding dealing with Management Agent’s questionable oversight of
the two projects.

Within 60 days please furnish to this office, for each recommendation contained in the finding in this
report, a status report on: (1) the corrective action, (2) the proposed corrective action and the corrective
date to be completed, or (3) why action is considered unnecessary. Also, please furnish us copies of any
correspondence or directives issued because of the audit.

We appreciate the courtesies and assistance extended by officials of Foster and Associates, staff of the
two projects, and Denver HUD Multifamily HUB officials and staff.

Should you have any questions, please contact Ernest Kite, Assistant District Inspector General for Audit,
at (303) 672-5452.
           2001-DE-1003




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Executive Summary
We completed a review of Foster and Associates’ administration of Clark Fork Manor and
Whitefish Manor. Foster and Associates was appointed as Management Agent for the two
projects when the sponsor, Health Services Association, was terminated as management agent
effective April 28, 1999.

We found that the Management Agent has not administered the two projects to effectively ensure
implementation of the required provisions of the Regulatory Agreements between the projects’
owners and HUD. While the Management Agent, Foster and Associates, has executed the
necessary “Project Owner’s and Management Agent’s Certification” (Management Agent’s
Certification) for each project, they have not fulfilled the requirements of the certifications. This
relates mainly to the effective execution of a management agreement with each project,
establishing and maintaining current books of account for each project, and ensuring HUD
requirements are met. In addition, the Management Agent has been collecting management fees
for the two projects and been receiving salaries as project administrative employees. This results
in the duplicate payment for administrative services.


                                 The Regulatory Agreements between HUD and the project owners
   Project Owners and
                                 for both Clark Fork Manor and Whitefish Manor require the
   Management Agents
                                 projects to be administered and operated in conformity with HUD
   to comply with HUD
                                 requirements. In addition, a management agent for the projects is
   requirements
                                 required to execute a Management Agent’s Certification that
                                 specifies that the management agent will execute a management
                                 agreement with the project, operate the project in accordance with
                                 the Regulatory Agreement and HUD requirements, and maintain
                                 the books of accounts for the project in a current and accurate
                                 manner.

                                 The objectives of our audit were to determine if the:
   Audit objectives
                                 •   Management controls over the disbursements functions have
                                     been effectively established and implemented by Foster and
                                     Associates, and

                                 •   Disbursements, since Foster and Associates became
                                     Management Agent, were allowable and reasonable.

   Questionable                  Foster and Associates have not administered the two projects,
   Management Agent              Clark Fork Manor and Whitefish Manor, in full compliance with
   and Project                   the Regulatory Agreements and HUD requirements. The
   Administrator                 Management Agent has not: properly executed the required
   Operations and                management agreements; ensured that the required accounting
                                 records were properly established and used in the operations of the
   Compensation


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                               2001-DE-1003


                   projects; or taken sufficient actions to ensure the annual financial
                   audits were properly performed for the projects.

                   The Management Agent has been collecting management agent
                   fees for the two projects. These fees have been paid without the
                   proper execution of the required written management agreements.
                   Officials of the Management Agent also have been serving as full
                   time employees of the projects and receiving salaries.

                   For Clark Fork Manor, the Management Agent received $153,866
                   in management agent fees for the thirty-month period ending June
                   30, 2001. During this same period, a Management Agent official,
                   as the project administrator, received $141,516 in salaries. For
                   Whitefish Manor, the Management Agent received $11,247 in
                   management fees for the twenty-one month period ending January
                   31, 2001. A Management Agent official, as project manager, also
                   received $51,238 in salaries for this same period. Receiving both
                   management agent fees and full time salaries is in violation of the
                   HUD requirements.

                   While the Management Agent did not fulfill the required
                   responsibilities, the Boards of Directors for the two projects did
                   not take adequate actions to meet their overall responsibilities to
                   ensure that the projects were operated in conformity with HUD
                   requirements. These included ensuring that the Management
                   Agent was providing the required services to the projects.

                   The Boards of Directors need to determine the type of management
                   organization required to properly administer each project. This
                   determination includes selecting either an independent fee agent or
                   project administrator type of management agent, but certainly not
                   both at the same time. In either case, the duties and functions of
                   the management entity need to be clearly defined to ensure that the
                   projects are administered in conformity with HUD requirements.
                   Also, compensation to the management entity needs to be
                   reasonably and properly paid.

                   The draft audit finding and audit report were submitted to the
Auditee Comments   Chairman of both Boards of Directors on September 18, 2001 for
                   review and comment. We incorporated the written comments to
                   the draft audit report, as applicable, and the complete written
                   response is included in Appendix 1.




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Table of Contents
Management Memorandum........................................................................ i

Executive Summary..................................................................................iii

Table of Contents ..................................................................................... v

Abbreviations ..........................................................................................vi

Introduction.............................................................................................. 1

Finding and Recommendations

        1. Questionable Management Agent and Project Administrator
           Operations and Compensation..................................................... 3

Management Controls ..............................................................................13

Follow-up on Prior Audits........................................................................15

Appendices

        1. Auditee Comments ....................................................................17
        2. Distribution...............................................................................19




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                                    2001-DE-1003


Abbreviations:

HUD     Department of Housing and Urban Development




                                          vi
                                       2001-DE-1003



Introduction
Clark Fork Manor is a 133-unit property insured under Section 231 of the National
Housing Act. This project, located in Missoula, Montana, is owned by Clark Fork
Manor, Inc. Clark Fork Manor, Inc. is a nonprofit organization with a Board of
Directors, which entered into a Regulatory Agreement with HUD on March 1, 1978.
Clark Fork Manor, Inc. also entered into a Section 8 Housing Assistance Payments
Contract with HUD for 131 units. This project is also known as Clark Fork Riverside.

Whitefish Manor is a 30-unit property insured under Section 202 of the Housing Act of
1959. This project, located in Whitefish, Montana, is owned by Whitefish Manor, Inc.
Whitefish Manor, Inc. is a nonprofit organization with a Board of Directors, which
entered into a Regulatory Agreement with HUD on April 1, 1978. Whitefish Manor, Inc.
also entered into a Section 8 Housing Assistance Payment Contract with HUD for 30
units.

Health Services Association of St. Paul, Minnesota was the sponsor for Clark Fork
Manor and Whitefish Manor. Health Services Association was terminated as
Management Agent for the projects, effective April 28, 1999, because Health Services
Association had been seized by the State of Minnesota. On April 28, 1999, the Boards of
Clark Fork Manor and Whitefish Manor engaged Foster and Associates as the
Management Agent for the properties.

The Commissioner of Commerce for the State of Minnesota, based on a court order,
seized the records and assumed control of Health Services Association in April 1999.
The Commissioner provided the records relating to Clark Fork Manor and Whitefish
Manor to our office. We used these records to perform a review of Health Services
Association’s activities, as the sponsor and management agent of these properties. We
provided summary schedules and supporting documentation to HUD. Based on this
information, HUD issued letters, to the Boards of the properties in November 1999, that
identified questionable and/or unsupported costs that were possible violations of the
Regulatory Agreements. HUD is still working with the projects to resolve these matters.
Information relating to the costs and action taken is summarized in the Follow-up on
Prior Audits section of this report.

In July 2000, Foster and Associates hired a fee accountant, located in Kalispell, Montana,
to prepare the books of account for each project. As of August 2001, books of account
have not been prepared for Whitefish Manor. The available records for the two projects,
for 1999 to the present, are located at the projects, at the Management Agent’s residence,
at the Management Agent administrative assistance’s residence, with the fee accountant,
or with the independent auditor hired to conduct the 1999 and 2000 financial audits.




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                                       2001-DE-1003


Foster and Associates is also the Management Agent for the HUD insured project
Lafayette Square Apartments, located in Macomb, Illinois. Our review of this project is
reported in a separate audit report.


                               The objectives of the audit were to determine if the:
 Audit Objectives and
 Methodology                   •    Management controls over the disbursements
                                    functions had been effectively established and
                                    implemented by Foster and Associates, and

                               •    Disbursements, since Foster and Associates became
                                    Management Agent, were allowable and reasonable.

                               During our review, we examined the available
                               disbursements records and other documents of Foster and
                               Associates and HUD’s Multifamily HUB, relating to Clark
                               Fork Manor and Whitefish Manor. We also obtained and
                               reviewed information provided by the projects’ fee
                               accountant. In addition, we conducted interviews with
                               officials and staff of the Management Agent, the two
                               projects, the fee accountant, and HUD.

                               We originally selected an audit period of January 1, 1999
 Scope                         through June 30, 2000. The scope was expanded as needed
                               to cover subsequent activities. We conducted our site work
                               during July 2000. Additional information was
                               subsequently obtained from the projects, persons associated
                               with the projects, and HUD. The completion of our review
                               was interrupted by situations that necessitated reassignment
                               of staff.

                               Considering our scope adjustment, our review was
 Generally accepted
                               performed in accordance with generally accepted
 government auditing
                               government auditing standards.
 standards




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Finding
Questionable Management Agent and Project
Administrator Operations and Compensation
Under HUD requirements, management agents for HUD insured projects are to execute
Management Agent’s Certifications that specify primarily that a management agreement
will be executed and that the management agent will administer or operate the project in
conformity with HUD requirements. While the Management Agent, Foster and
Associates, have executed the needed certifications, they have not fulfilled the terms of
the certificates or administered the projects in full compliance with HUD requirements.

The Management Agent has been collecting management agent fees for Clark Fork
Manor and Whitefish Manor without effectively fulfilling the requirements. The required
written management agreements had not been executed at the time of our site work. A
proposed “Management Plan/Agreement” was subsequently established for Clark Fork
Manor; however, it did not contain required statements. Officials of the Management
Agent also have been serving as full time employees of the projects and receiving
salaries.

For Clark Fork Manor, the Management Agent received $153,866 in management agent
fees for the thirty-month period ending June 30, 2001. During this same period, an
official of the Management Agent, as the project administrator, received $141,516 in
salaries. For Whitefish Manor, the Management Agent received $11,247 in management
fees for the twenty-one month period ending January 31, 2001. An official of the
Management Agent, as project manager, also received $51,238 in salaries for the same
period. Receiving both management agent fees and full time administrative salaries is in
violation of HUD requirements.

The Management Agent has not ensured that the required accounting records were
properly established and used in the operations of the projects. In addition, the
Management Agent has not ensured that the annual financial audits were appropriately
performed for the projects.

While the Management Agent did not fulfill the required responsibilities, the Boards of
Directors for the two projects did not take adequate actions to meet their overall
responsibilities to ensure that the projects were operated in conformity with HUD
requirements. This included ensuring that the Management Agent was providing the
required services for the projects.

The Boards of Directors need to determine the type of management organization required
to properly administer each project. This determination includes selecting either an
independent fee agent or project administrator type of management agent, but certainly
not both at the same time. In either case, the duties and functions of the management

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                                         2001-DE-1003


entity need to be clearly defined to ensure that the projects are administered in conformity
with HUD requirements. Also, compensation to the management entity needs to be
reasonably and properly paid.


                                HUD requirements are set out in the Regulatory
HUD requirements
                                Agreements between the projects and HUD, as well as in
                                various HUD regulations and handbooks. The management
                                agent must follow certain requirements dealing with the
                                oversight and administration of the projects. Also, the
                                Boards of Directors, as the governing oversight bodies,
                                have the main responsibilities to ensure that the projects are
                                administered in conformity with provisions of the
                                Regulatory Agreements with HUD and with specific HUD
                                requirements.

                                HUD requires the project owner and management agent to
                                submit a Management Agent’s Certification to HUD for
                                review and approval. The Management Agent’s
                                Certification requires the management agent to:

                                •    Execute a Management Agreement within 30 days of
                                     the approval of the Certification by HUD;

                                •    Calculate the management fee based on actual income
                                     collected;

                                •    Disburse management fees only after HUD approval of
                                     the management agent to manage the project;

                                •    Select and admit tenants, compute tenant rents and
                                     assistance payments, recertify tenants and carry out
                                     other subsidy contract administration responsibilities;

                                •    Comply with the Regulatory Agreement, Subsidy
                                     Contract, HUD Handbooks, and other HUD
                                     requirements;

                                •    Assure that all expenses of the project are reasonable
                                     and necessary; and

                                •    Establish and maintain the project’s accounts, books
                                     and records in accordance with the requirements.

                                HUD Handbook 4381.5, The Management Agent
                                Handbook, defines the types of management agents,


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                             2001-DE-1003


                      including the independent fee agent and the project
                      administrator. The Handbook also details the required
                      contents of the management agreement and the services to
                      be paid from the management fee and from the project
                      operating funds.

                      The Board of Directors for each project is the overall
                      governing body for the project owner. Each Board is
                      ultimately responsible to ensure that the project
                      administration is carried out in conformity with HUD
                      program requirements and to ensure that the Management
                      Agent also complies with these requirements.

Management Agent      On May 10, 1999 and subsequently on July 18, 2000, the
Agreements have not   project owners and the Management Agent, Foster and
been properly         Associates, executed a Project Owner’s and Management
executed.             Agent’s Certification for each project. These Certifications
                      stipulate that a management agreement is to be executed for
                      each project within 30 days. HUD Handbook 4381.5 states
                      that the management agreement must contain the scope of
                      service; the length or term of the agreement; and certain
                      required clauses including that management fees will be
                      computed and paid according to HUD requirements and
                      HUD may require the owner to terminate the agreement for
                      specific conditions. The scope of service must describe the
                      services the agent is responsible for performing and for
                      which the agent will be paid management fees.

                      At the time of our site review, the required management
                      agreements had not been executed between the projects and
                      the Management Agent. On August 15, 2000, the
                      Chairman of the Board for Clark Fork Manor issued a letter
                      to HUD, which included a proposed “Management
                      Plan/Agreement.” However, it does not contain required
                      clauses, term, or specific Management Agent scope of
                      service. This document is basically a policy and procedure
                      plan that establishes more requirements for the Board and
                      project staff than for the Management Agent; therefore, the
                      scope of service is not clearly defined. A management
                      agreement for Whitefish Manor has not been submitted to
                      HUD. Without a properly established agreement, neither
                      the project owner nor the Management Agent can identify
                      the specific services to be performed by the Management
                      Agent for the compensation.

 Dual compensation    HUD Handbook 4381.5 defines the four types of
 being paid to the    management agent. The two that are applicable to this
 Management Agent
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        2001-DE-1003


review are the Independent Fee Agent and the Project
Administrator. The Independent Fee Agent is a
management company or individual having no financial
interest or involvement in the project, other than earning a
fee for providing management services. A Project
Administrator is an individual who directs the day-to-day
activities of the project, who is a salaried employee with a
job description instead of a management agreement.

The Handbook also states that salaries of management
agent supervisory personnel must be paid from the
management fee. The requirements state that the costs of
the salary for a supervisory employee of the agent
designated to replace a project employee on temporary
leave may be paid out of project funds after the first 40
hours of the assignment. If the Management Agent
officials, who manage the two projects, are considered staff
of the management company instead of supervisory
personnel, the Handbook requires that the agent must
prorate the total associated costs among the projects served
in proportion to the actual use of services. Salaries are
included in the costs to be prorated.

The officials of the Management Agent are also the Project
Administrators, or onsite project managers, for Clark Fork
Manor and Whitefish Manor. They are receiving regular
manager salaries and full management agent fees.

For Clark Fork Manor, the Management Agent received
$153,866 in management agent fees for the thirty-month
period ending June 30, 2001. During this same period, an
official of the Management Agent, as the project
administrator, received $141,516 in salaries. The records
for the project show the administrator is working forty
hours each week and is classified as a full-time employee.
However, in a memorandum to HUD, this official stated
that the only office function she performs is the monthly
Housing Assistance Payment report. The official stated
that the fee accountant and two project office employees
handle the financial and tenant account functions.
Additionally, we were told that this official also does
consulting work for a doctor.

For Whitefish Manor, the Management Agent received
$11,247 in management fees for the twenty-one month
period ending January 31, 2001. An official of the


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                                             2001-DE-1003


                                    Management Agent, as project manager, also received
                                    $51,238 in net salaries1 for the same period. This official
                                    estimated that 40 percent of his time was spent on
                                    Management Agent business and 60 percent as project
                                    manager.

Eligibility of                      The HUD requirements do not allow for officials of the
compensation is                     Management Agent to receive regular salaries as project
                                    employees; therefore, the salaries of $141,516 for Clark
questionable
                                    Fork Manor and $51,238 for Whitefish Manor are
                                    questionable. The Management Agent has not effectively
                                    or properly provided the required services; therefore, the
                                    management fee payments of $ 153,866 for Clark Fork
                                    Manor and of $11,247 for Whitefish Manor are
                                    questionable.

Official project books              At the time of our site review in July 2000, the
of account have not                 Management Agent had not established any books of
been adequately                     account for the projects even though they had been
established.                        functioning as Management Agent for over thirteen
                                    months. Since that time, books of account for Clark Fork
                                    Manor have been established and maintained. The fee
                                    accountant has indicated that several adjustments are
                                    needed to the accounting records. These adjustments will
                                    be made once the independent auditor conducting the
                                    financial audit issues the 1999 audited financial statements
                                    report.

                                    Presently, the required books of account have not been
                                    established for Whitefish Manor. The fee accountant has
                                    indicated that he will establish these accounting records
                                    when he receives the information he requested from the
                                    Management Agent.

                                    The Management Agent, in the certification for each
                                    project, agreed to maintain the accounting records on a
                                    current and accurate basis. This has not been done.

Annual fiscal audits                HUD requirements are that audited financial statements are
have not been                       to be submitted to HUD within 60 days of each fiscal year
performed                           end. The Management Agent has hired an independent
                                    auditor to perform the annual financial audits for the 1999
                                    and 2000 fiscal years for both projects. However, the

1
  The net salary is the amount of actual monies received by the administrator in salary checks. Since the
accounting records for the project have not been established, the amount of gross salaries paid to the
Administrator was not available.


                                                     7
                                  2001-DE-1003


                          independent auditor stated that he has only done work on
                          the 1999 fiscal year audit for Clark Fork Manor and has not
                          started on the 1999 fiscal year audit for Whitefish Manor or
                          the 2000 fiscal year audits. The audits for the 1998 fiscal
                          year were completed by a different auditor, but were not
                          electronically submitted to HUD, as required. HUD
                          considers the projects to be delinquent in submitting the
                          required audited financial statements.

                          Obviously, without any formally established accounting
                          records for Whitefish Manor, the required independent
                          annual audits cannot be conducted. Ensuring that the
                          project financial records are timely audited and submitted
                          to HUD is one of the responsibilities of the Management
                          Agent.

Improved oversight of     In summary, the Management Agent has not properly
projects’ activities is   fulfilled the obligations required in the Management
needed                    Agent’s Certifications. The Management Agent has not
                          ensured that the required accounting records were properly
                          established and used in the operations of the projects. In
                          addition, the Management Agent has not ensured that the
                          annual financial audits were properly performed for the
                          projects. Even with these deficiencies, the Management
                          Agent collected management agent fees for both projects,
                          as well as salaries as full-time employees of the projects.

                          The Boards of Directors have the overall responsibilities to
                          ensure that the projects are operated in conformity with
                          HUD requirements. These include taking sufficient action
                          to ensure that the Management Agent is providing the
                          required services to the two projects.

                          The Boards of Directors need to determine the type of
                          management organization required to properly administer
                          each project. This determination includes selecting either
                          an independent fee agent or project administrator type of
                          management agent, but certainly not both at the same time.
                          In either case, the duties and functions of the management
                          entity need to be clearly defined to ensure that the projects
                          are administered in conformity with HUD requirements.
                          Also, compensation to the management entity needs to be
                          reasonably and properly paid.

Auditee Comments          We received the written response on September 26, 2001.
                          The response states, “We do not concur with the contents
                          of the report in that is was our understanding that the

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                           2001-DE-1003


                    involvement of Foster and Associates in the management of
                    both Clark Fork Manor and Whitefish Manor had been
                    discussed with officials of HUD and that they were
                    advised, pending further direction from HUD, that it was
                    okay for Foster and Associates to serve as the Management
                    Agent as well as on-site administrators. This was not a
                    case where there was any double billing or any payment to
                    Foster and Associates for services not performed.”

OIG Evaluation of   The Auditee’s response indicates that HUD has authorized
Auditee Comments    the Management Agent to function as an independent
                    management agent and that the officials of the management
                    agent could also be employees of the two projects. We
                    provided a copy of the comment draft of the audit report to
                    a Denver Multifamily HUB official. The official concurred
                    with the report and stated that the Management Agent is
                    responsible for complying with the HUD requirements.
                    This is supported in HUD requirements for the two projects
                    whereby a management agent cannot receive compensation
                    as a management agent as well as receiving salaries from
                    the projects. This results in duplicate compensation.

                    The Management Agent signed a copy the Management
                    Agent’s Certification twice for each project. Clause 3 of
                    each certification specifies that the Management Agent will
                    comply with HUD requirements. The Management Agent
                    for the two projects did not execute an HUD acceptable
                    management agreement as required that would detail the
                    services to be provided by the management agent as well as
                    identify the basis for compensation. As stated in the
                    finding, the Management Agent has not fully complied
                    with HUD requirements in connection with managing the
                    projects. Examples are that accounting records have not
                    been properly established and maintained and an annual
                    audit not being performed each year As such, the
                    management agent would not be entitled to full
                    compensation as a management agent.

                    As stated in the finding, HUD Handbook 4381.5 precludes
                    officials of the Management Agent from receiving regular
                    compensation as a project employee. The Management
                    Agent has the responsibility to know and comply with this
                    requirement. As stated in the finding, the officials of the
                    Management Agent did not function as full time
                    employees. The official of the Management Agent who
                    was paid a full time salary as project administrator for


                                   9
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                  Clark Fork Manor stated that the only function the person
                  did was to prepare the Housing Assistance Payment request
                  for submission to HUD. In addition, this official was also
                  reported as providing outside services for a medical doctor.
                  As such, the individual did not function as a full time
                  employee and would not be entitled to receive a salary as a
                  full time employee.

                  For Whitefish Manor, the official of the Management
                  Agent who served as project manager did not function as a
                  full time employee. The project manager estimated that he
                  performed duties as a management agent sixty percent of
                  the time and as an employee forty percent of the time.
                  Therefore, the project manager would not be entitled to a
                  full salary or full management agent compensation.

                  In summary, the Management Agent will need to provide
                  HUD with supporting documentation to identify and
                  support the services provided as Management Agent to the
                  two projects and to document the time and duties
                  performed as full-time employees of each project and to
                  repay any and all amounts determined to be duplicate
                  and/or for services not properly and adequately
                  accomplished.


RECOMMENDATIONS   We recommend that the Denver Multifamily HUB:

                  1A. Require the Management Agent to provide to HUD
                      documentation to identify and support the services
                      provided as Management Agent to the two projects
                      and to repay any and all amounts determined by HUD
                      to be duplicate and/or for services not properly and
                      adequately accomplished. In addition, the
                      Management Agent officials who received salaries as
                      employees of the two projects need to provide to HUD
                      documentation to identify the time and duties
                      performed as full-time employees of each project and
                      to repay any and all amounts determined by HUD to
                      be duplicate and/or for services not properly and
                      adequately accomplished.

                  1B. Require the Board of Directors for each project to
                      determine the type of management agent that is needed
                      for each project, such as an independent fee agent or a
                      project administrator, and to take the necessary steps


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       2001-DE-1003


    to implement a proper project administrative and
    oversight entity for each project. This should ensure
    that the duties and functions of the management agent
    are clearly defined and the compensation is reasonable
    and equitable.

1C. Provide technical assistance to the Board of Directors
    and the management entity for each project in
    establishing effective procedures to ensure full
    compliance with the HUD requirements. This should
    include action to establish and properly maintain the
    required accounting records on a current basis, plus
    steps to have the required annual audits properly
    performed and submitted to HUD.

1D. Once the actions have been taken in connection with
    1B and 1C above, determine that the management
    entity and related established procedures are in
    compliance with HUD requirements.




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


                               We determined the following management controls were
 Management controls           relevant to our audit objectives:
 assessed
                               •   Controls, over the disbursement functions, established
                                   and implemented by the Management Agent;

                               •   Procedures for ensuring that project expenditures were
                                   reasonable and allowable by HUD requirements; and

                               •   Oversight procedures by the projects’ Boards of
                                   Directors to ensure each project’s administration and
                                   activities complied with HUD requirements.

                               The following audit procedures were used to evaluate the
 Assessment procedures
                               management controls:

                               •   Review of established procedures over disbursements
                                   for the two projects;

                               •   Interviews with officials of the Management Agent,
                                   employees of the two projects, and entities and
                                   contractors performing services for the two projects;

                               •   Review of related records and files pertaining to the
                                   two projects;

                               •   Review of records and files maintained by the Denver
                                   Multifamily HUB; and

                               •   Interviews with applicable officials and employees of
                                   the Denver Multifamily HUB relating to activities
                                   associated with the two projects.


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                         A significant weakness exists if management controls do
Significant weaknesses   not give reasonable assurance that resource use is
                         consistent with laws, regulations, and policies; that
                         resources are safeguarded against waste, loss, and misuse;
                         and that reliable data is obtained and maintained, and fairly
                         disclosed in reports. Based on our audit, we identified the
                         following significant weaknesses:

                         •   The Management Agent for the two projects was not
                             fully complying with the terms of the Management
                             Agent’s Certifications (Finding);

                         •   Dual compensation in the form of management agent
                             fees and full-time employee salaries were being paid to
                             officials of the Management Agent (Finding); and

                         •   The Boards of Directors for the two projects were not
                             exercising sufficient oversight of the projects to ensure
                             the projects were operating in compliance with HUD
                             requirements (Finding).




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Follow-up on Prior Audits
This is the first HUD Office of Inspector General for Audit review of activities of Foster
and Associates’ administration of Clark Fork Manor and Whitefish Manor.

Prior to our review of Foster and Associates’ management of Clark Fork Manor and
Whitefish Manor, we performed a review of Health Services Association, which was the
sponsor and initial management agent. The project records were provided to our office
after the State of Minnesota seized the records and assumed control of Health Services
Association. We inventoried all the records and copied the pertinent legal documents and
other significant records. The records were historical from the inception of each project
up to the time the records were seized in April 1999.

We selected the two most recent complete years for a thorough review of the financial
data. We reviewed the available books of account and financial records for 1997 and
1998 and determined that they did not provide sufficient financial detail. Therefore, we
prepared comprehensive disbursements and receipts records for these two years.
Utilizing the bank statements for all known bank accounts for each project, we scheduled
all the disbursements and receipts recorded by the banks. We then reviewed the available
invoices and other documents to identify the source and support for each transaction.
Some transactions were questionable because support documentation was not available.
We prepared schedules that identified significant questioned and/or excessive costs. We
provided this information, along with copies of the available support documentation, to
HUD’s Denver Office of Counsel and Multifamily HUB.

As a result, HUD issued Regulatory Agreement violations letters to each of the projects.
On November 16, 1999, HUD issued a Notice of Potential Violation of the Regulatory
Agreement letter to the Board of Clark Fork Manor, questioning the use of project funds
in the amount of $429,439.89. HUD questioned whether the funds were used for
purposes permitted by the Regulatory Agreement. The Board’s response addressed some
of the questioned costs, but not all of them, so HUD issued a second letter, Notice of
Violation of the Regulatory Agreement, on June 9, 2000. HUD stated that the Owner
violated the Regulatory Agreement, and the amount of funds questioned was
$380,875.57. In August 2001, HUD received a response from the project owner
providing further information and details to the questioned costs. Currently, HUD is
reviewing the response from the Owner.

On November 16, 1999, HUD issued a Notice of Potential Violation of the Regulatory
Agreement letter to the Board of Whitefish Manor, questioning the use of project funds
in the amount of $52,473.73. HUD questioned whether the funds were used for purposes
permitted by the Regulatory Agreement. Since the Board’s response did not adequately
address the first letter, HUD issued a second Regulatory Agreement violation letter on
October 4, 2000, which questioned $25,640.73. The Whitefish Manor Board has not
provided HUD with a response to the second letter.


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Appendices
Appendix 1

Auditee Comments




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Appendix 2

Distribution
Secretary’s Representative, 8AS (2)
Director, Denver Multifamily HUB, 8AHMLA (2)
Special Assistant for Multifamily Housing, HT, Room 6106
Deputy Secretary, SD, Room 10100
Chief of Staff, S, Room 10000
Assistant Secretary for Administration, A, Room 10100
Deputy Chief of Staff, S, Room 10226
Deputy Chief of Staff for Operations, S, Room 10226
Deputy Chie f of Staff for Programs and Policy, S, Room 10226
Assistant Secretary for Congressional and Intergovernmental Relations, J, Room 10120
Senior Advisor to the Secretary, Office of Public Affairs, S, Room 10132
Deputy Assistant Secretary for Public Affairs, W, Room 10222
Special Counsel to the Secretary, S, Room 10234
General Counsel, C, Room 10214
Deputy General Counsel, CB, Room 10220
Office of Policy Development and Research, R, Room 8100
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7106
Director, Office of Department Operations and Coordination, I, Room 2124
Chief Procurement Officer, N, Room 5184
Chief Information Officer, Q, Room 3152
Chief Financial Officer, F, Room 2202
Deputy Chief Financial Officer for Operations, FF, Room 10166
Director, Office of Budget, FO, Room 3270
Director, Enforcement Center, V, 200 Portals Building
Director, Real Estate Assessment Center, X, 1280 Maryland Ave., SW, Suite 800
Departmental Audit Liaison Officer, FM, Room 2206
Headquarters Audit Liaison Officer, Public and Indian Housing, PF, Room P8202
Field Audit Liaison Officer, 6AF, (2)
Director of Scheduling and Advance, AL, Room 10158
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7108 (2)
Special Assistant to the Deputy Secretary for Program Management, SD, Room 10100
Acquisitions Librarian, Library, AS, Room 8141
Inspector General, G, Room 8256
The Honorable Joseph Lieberman, Chairman, Committee on Governmental Affairs, 340 Dirksen
        Senate Office Building, United States Senate, Washington, DC 20510
The Honorable Fred Thompson, Ranking Member, Committee on Governmental Affairs, 706
        Hart Senate Office Building, United States Senate, Washington, DC 20510
The Honorable Dan Burton, Chairman, Committee on Governmental Reform, 2185 Rayburn
        Bldg., House of Representatives, Washington, DC 20515
Henry A. Waxman, Ranking Member, Committee on Governmental Reform, 2204 Rayburn
        Bldg., House of Representatives, Washington, DC 20515
Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neil House
        Office Building, Washington, DC 20515




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                                      2001-DE-1003

Director, Housing and Community Development Issue Area, United States General Accounting
        Office, 441 G Street, NW, Room 2474, Washington, DC 20548 (Attention: Stan
        Czerwinski)
Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy and Urban
        Resources, B373 Rayburn House Office Building, Washington, DC 20515
Steve Redburn, Chief, Housing Branch, Office of Management and Budget, 725 17th Street, NW,
        Room 9226, New Executive Office Building, Washington, DC 20503
Andy Cochran, House Committee on Financial Services, 2129 Rayburn H. O. B., Washington,
        DC 20515




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