U.S. Department of Housing and Urban Development Office of Inspector General, Rocky Mountain 633 17th Street, North Tower, 14th Floor Denver, CO 80202-3607 (303) 672-5452 Fax (303) 672-5006 OFFICE OF INSPECTOR GENERAL FOR AUDIT Audit Memorandum No. 2001-DE-1802 September 28, 2001 MEMORANDUM FOR: Edward J. Hinsberger, Director, Chicago Multifamily HUB, 5AHM FROM: Robert Gwin, District Inspector General for Audit, 8AGA SUBJECT: Review of Management Controls Over Disbursements Lafayette Square Apartments Macomb, Illinois INTRODUCTION We completed a review of Lafayette Square Apartments, located in Macomb, Illinois. The objectives of the review were to determine if: • The management controls over the disbursements functions have been effectively established and implemented by the management agent and • The disbursements, since the management agent changed in 1999, are allowable and reasonable. We reviewed procedures and management controls over the disbursements and related financial activities of the project and management agent between January 1, 1999 and June 30, 2000. The scope was expanded as needed to cover subsequent activities. We accomplished the objectives by evaluating: the management controls over the disbursements functions and procedures; related accounting activities; and, the expenses for allowability and reasonableness. We reviewed records relating to the project and interviewed individuals associated with the project and also HUD personnel. We conducted the onsite work during July 2000. Additional information was subsequently obtained from the project, persons associated with the project, and HUD. The completion of our review was interrupted by situations which necessitated reassignment of staff. Considering this situation, we conducted the review in accordance with Generally Accepted Government Auditing Standards. BACKGROUND Lafayette Square Apartments was owned by Lafayette Square, Inc., a non-profit corporation, and sponsored by Health Services Association. The owner’s Articles of Incorporation, dated June 9, 1978, stated the purpose was to provide elderly and handicapped persons with housing facilities and services specifically designed to meet their physical, social and psychological needs, and to promote their health, security, happiness and usefulness in longer living. The Articles also stated that the Board of Directors shall consist of not less than three nor exceed seven persons and shall have the specific authority to designate an individual or committee to carry out the functions of the non-profit corporation with full authority to act on behalf of the Board. Members of the sponsor’s Board of Directors also were members of the owner’s Board. Lafayette Square, Inc. signed an original FHA mortgage note for a direct loan, which was insured under Section 202 of the Housing Act of 1959, as amended. The owner executed a Regulatory Agreement with HUD dated October 1, 1981, and a Section 8 Housing Assistance Payments Contract effective September 30, 1982, for 100 units. The project has a total of 101 units. The sponsor functioned as management agent from the inception of the project until April 1999, at which time the State of Minnesota, under a court order, seized the sponsor’s records and the entity was effectively dissolved. The Board of Directors appointed Foster and Associates as Lafayette Square Apartment’s management agent in May 1999. The project is located at 100 West Jefferson Street, Macomb, Illinois. The management agent was located in Kalispell and Whitefish, Montana. The management agent hired in July 2000 a fee accountant, located in Kalispell, Montana to prepare the books of account for the project. Various project records, from 1999 to the present, were maintained at these different locations. RELATED REVIEW We initially conducted a review of the project’s records maintained by Health Services Association, the project sponsor, located in St. Paul, Minnesota. Our review was conducted of the project sponsor’s records that were seized by the State of Minnesota and provided to our office in Denver. Results of this review of the project records were provided to the HUD Multifamily HUB in Chicago. HUD used the results as the basis for initiating administrative actions against the project owner. On February 1, 2000, HUD issued a Notice of Potential Violations of Regulatory Agreement letter to the owner. HUD questioned the project eligibility of costs totaling $315,639.12. The project owner has subsequently provided information to HUD on the questioned costs. The resolution of the possible Regulatory Agreement violations is still continuing. Page 2 2001-DE-1802 Health Services Association was also the project sponsor for two other HUD insured projects located in Whitefish and Missoula, Montana. The sponsor’s records for these two Montana projects were also seized by the State of Minnesota. The Board of Directors for each of these two project also appointed Foster and Associates as management agent for the projects. A separate audit report is being issued for our review of these two projects. AUDIT RESULTS We reviewed the management controls over the disbursements functions and related accounting activities. We also reviewed the reasonableness of the expenses from May 1999 through June 2000. We expanded the review to June 2001 for specific expenses. We found that the project management oversight by the project fee management agent and Board of Directors to be deficient. This is discussed in the following finding: Finding: Deficient Project Management Oversight We reviewed the management controls over the disbursements functions and related accounting activities as well as reviewed the reasonableness of the project expenses for the audit period. We noted that the fee management agent has not carried out their responsibilities of managing the project. The management agent has not executed the required management agreement with the project owner detailing what services were to be provided and the basis for compensation. While the management agent contracted for the establishment of the project’s books of account, the accounting records have not been used in providing financial information to the onsite project managers for the daily operation of the project. In addition, the official accounting records have not been independently audited for the 1999 and 2000 fiscal years as required by HUD. Furthermore, the management agent has not administered the tenant selection, rent calculations and tenant payment and HUD rental assistance collection activities but has allowed them to be performed by the onsite project managers or staff. The fee management agent, located in Montana, has not exercised any meaningful oversight of the Illinois located Lafayette Square Apartments project and its managers and staff. The onsite project managers and staff have been effectively carrying out the daily operations of the project. Without a management agreement and without the expected management services being provided, the total fee of $112,943 paid to the management agent for the period from May 1999 through June 2001 is questionable. The Board of Directors has not fulfilled its responsibilities for oversight of the project. The Board has not taken necessary action to ensure that the management agent is performing its required duties. The Board has allowed its management agent to receive fees for administering the project even though many of the required management agent services have not been performed. HUD Program Requirements: HUD requirements are set out in the Regulatory Agreement between the project and HUD as well as in various HUD regulations and handbooks. Basically, the fee management agent must follow certain requirements dealing with the overall oversight and Page 3 2001-DE-1802 administration of the project in conformity with the provisions of a written agreement with the project ownership and with the applicable HUD requirements. Also, the Board of Directors as the governing oversight body has the main responsibility that the project is administered in conformity with provisions of the Regulatory Agreement with HUD and with specific HUD statutes and requirements. Management Agent Requirements: HUD requires the project owner and management agent to submit to HUD for HUD’s review and approval a Management Agent’s Certification. 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. The Certification also requires the owner to submit a new Management Agent’s Certification to HUD before changing the expiration date or renewing the Management Agreement. Project Governing Body Requirements: The Project Board of Directors is the overall governing body for the project owner, Lafayette Square, Inc. This Board is obligated to ensure that the Lafayette Square Apartments project is carried out in conformity with HUD statutes, regulations and program requirements and to ensure that its management agent also complies with these requirements. Management Agent Not Providing Required Services The owner and management agent signed a Management Agent’s Certification (Certification) on May 10, 1999, with a twelve-month term. HUD did not sign the Certification until October 1999. However, HUD considered the situation eligible for retroactive approval, so the effective date of the Certification was May 1999. The owner and management agent did not submit a new Management Page 4 2001-DE-1802 Agent’s Certification to HUD when the original one expired in May 2000. Therefore, the management agent has been receiving management fees without a valid Certification since May 2000. The Certification required that a Management Agreement be executed. HUD Handbook 4381.5 stated 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 that HUD may require the owner to terminate the agreement for specified 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. No evidence was provided that the management agent has executed the required management agreement with the project owner. Without an agreement, neither the project owner nor the management agency can identify the specific services to be performed by the management agent as well as the basis for any compensation. The management agent was collecting a set amount as the management fee, instead of using the actual income to calculate the fee each month. Initially, this was the same as the amount paid to the prior management agent. In December 1999, the amount was changed to the amount determined by HUD as the estimated monthly residential fee yield on the Certification. Therefore, the management agent was not in compliance with the requirements for calculating the management fee. The management agent, as of July 2000, had not established any formal books of account for 1999 or 2000. The management agent hired an accountant in July 2000 to prepare the books of account for 2000. In August 2001, the accountant provided us Excel files of the books of account he had prepared from January 2000 through June 2001 for the project. The current accountant in establishing the project’s official books of account has had to take into consideration various factors stemming from the records that were maintained by the former accountant. While the prior management agent’s accountant completed a trial balance for 1999, the 1999 ending balance was questionable. The current accountant had to make an adjustment of $18,564.26 in January 2000 to bring the books into balance with the bank. In December 2000, the accountant wrote off an Accrued Interest Payable account for $31,499.91 because there was no rationale for a payable on a direct loan with HUD. The accountant stated that the books of account will have to be further adjusted to include the adjustments in the 1999 audited financial statements report. The HUD requirements included submitting an audited financial statements report within 60 days of each fiscal year end. The project’s fiscal year end was December 31, so the report was due by March 1. The CPA, hired to complete the audits, stated in June 2001, that he had not started the audits for 1999 or 2000. The 1998 audit has been completed but it has not been properly submitted electronically to HUD. Consequently, HUD considered the project to be three years delinquent in submitting the audited financial statement reports. Ensuring that the project financial Page 5 2001-DE-1802 records are timely audited and submitted to HUD would be one of the responsibilities of the management agent. The project records showed no involvement by the management agent in the occupancy functions. The onsite project managers fulfilled all these functions and there was no evidence of management agent review or oversight. The project records did not contain evidence of management agent involvement in the disbursements functions. The project managers stated that the management agent gave telephone, e-mail or faxed approval of the check requests; however, the project records did not show management agent approval of the transactions. The management agent was not providing the required budgets or other financial reports that would be beneficial to the project managers in the administration of the project operations. Project Managers Functioning Effectively The onsite project managers were providing the majority of the services required in the Management Agent’s Certification. They were performing all of the tenant occupancy functions. They established and maintained a combined receipts and disbursements ledger and reconciled the bank statement to this ledger monthly. They prepared and submitted the required Monthly Report for Establishing Net Income to HUD. They were responsible for the day-to-day management and maintenance of the project and determined the necessary project expenses. They submitted check requests to the management agent for approval. They also submitted the check requests to a member of the Board of Directors, who had possession of the check blanks but was not an authorized signature on the bank account. The Board member wrote the checks and sent them to the project managers, who signed and issued the checks. The project managers also submitted weekly and monthly financial summary reports to the management agent. Payroll Procedures Need Improvement The onsite project management and staff were functioning without any specific guidance or written instructions from the management agent. Even so, the project managers had established effective procedures for most functions; however, the procedures over payroll were weak. The project managers did have an old employee handbook as a payroll procedures guide. The handbook required that time cards be prepared by the employees and approved by the project manager and the management agent. Time cards were not prepared and the computer generated payroll schedules did not have evidence of approvals. However, the management agent did not instruct the project managers to comply with the employee handbook. Personnel files containing wage rates and benefits information were not maintained at the project. The project did not have documentation showing Board of Director authorization of wage increases and benefit payments. For example, the full time employees were receiving annual IRA payments, but the project records did not show authorization by the Board or approval of payment by the Page 6 2001-DE-1802 management agent. Despite these weak procedures, the regular payroll expenses were allowable and reasonable. Management Fee Disbursements Were Questionable We reviewed the expenses for allowability and reasonableness. The project level expenses were for allowable items and were reasonable. The one expense that was questionable was the management fee. The payments to the management agent were questionable since the project managers, not the management agent, were providing the majority of the required services. The management fees paid, from May 1999 through June 2001, totaled $112,943. The full amount was questionable since the project records did not show evidence that the management agent provided the required services. Lack of Effective Oversight Neither the management agent nor the Board of Directors was effectively interacting with the project. Distance was a factor in the lack of effective oversight. The management agent located in Montana had never visited the project, so they did not have first hand knowledge of the project status. As stated above, the management agent has not provided the services it was to provide as specified in their Certification to HUD. Instead the onsite project staff has carried out the day-to- day operations of the project. The use of a remote management agent may not be the most beneficial form of oversight management for the project. One possible alternative would be to utilize the services of a management agent entity that is located in the same locality as the project. This would enable the management agent to provide improved and accessible services to the project and its staff. Another alternative would be to use a project administrator type of project management. This type of management as authorized in HUD Handbook 4381.5 allows an individual hired by the project to direct the day-to-day activities of the project and would report directly to the Board. This individual or administrator would perform the duties and activities required by the management agent. In effect, the onsite project managers have function in most instances as a project administrator. Distance has also been a factor in the lack of oversight by the project’s Board of Directors. Most of the Board members live in Minnesota and have not had direct contact with the project or the management agent. The Board’s involvement was usually limited to quarterly telephone conferences, which usually did not include the project managers. The use of a management organization structure that is located within the locality of the project to administer the project and its activities would better serve the Board in its oversight responsibilities of the project. Page 7 2001-DE-1802 Auditee Comments The Auditee provided written response to the draft memorandum report on September 26, 2001. Basically, they disagreed with the audit finding. The Auditee states that the required management agreement has been submitted to the Chicago HUD office and that the management agent has provided management oversight and direction to the on-site staff. The response indicates that the on-site personnel have day-to-day input into the expenditures and are part of the budget process. Any and all needed information is available and provided to the on-site staff. The Auditee indicates that they were granted an extension to have the annual audits performed. Part of the problem in performing the 1999 annual financial audit was that some of the accounting records were held by this office and unavailable to the independent project auditor. The Auditee’s written response indicates that various documents and information have been supplied to the Denver HUD office and that the HUD officials were aware of and accepted the practices and procedures being followed by the Management Agent. Evaluation of Auditee’s Comments The Auditee’s response is not responsive to the finding. The response indicates that the Management Agent has executed a management agreement with the project. The Chicago HUD office is not aware of any management agreement being executed by the Management Agent and owner. In addition, we were not provided a copy of the agreement during our on-site review. Without the required agreement, a determination could not be made as to the exact nature of services to be provided by the Management Agent or the basis for any compensation. As stated in the finding, the Management Agent has not provided any direct supervision over the on-site staff except in limited areas such as approving disbursements. Official accounting records for the project were not established until after July 2000; however, as of May 2001, the on-site staff still had not received any accounting or budget information from the Management Agent to be used in administering the daily operations of the project. The Auditee’s written response to the draft memorandum and related finding indicates that this office has not provided needed information to the project’s independent auditor, thereby delaying the audit. This is inaccurate since the independent auditor has not even started the audits for the 1999 and 2000 fiscal years. Furthermore, this office has not received any request to provide any information and/or records to the independent auditor for Lafayette Square Apartments. A lot of the information provided by the Auditee in their response related to situations and events that occurred prior to our audit period and prior to the current Management Agent being appointed. Finally, the auditee indicates that various documents and information has been furnished to the Denver HUD Page 8 2001-DE-1802 Office and that the Denver HUD officials were aware of and accepted the practices and procedures being followed by the Management Agent. This is not relevant since the Chicago HUD Office has the responsibility for oversight of the Lafayette Square project, not the Denver HUD Office. RECOMMENDATIONS We recommend that the Office of Multifamily Housing: 1A. Require the management agent to provide documentation for the $112,943 paid in management fees showing evidence of effective fulfillment of the management agent services and to repay the fees received for any services not properly or adequately accomplished. 1B. Require the Board of Directors to determine if the management agent should be replaced. If the determination is to replace the management agent, provide assistance to the Board in selecting a new management agent, including consideration of utilizing a project administrator type of project management. 1C. Provide technical assistance to the Board of Directors and management agent in establishing effective procedures to ensure full compliance with the HUD requirements. 1D. Once the effective procedures under 1C above have been established, determine that the project management and related procedures are in compliance with HUD requirements. These recommendations will be controlled under the Departmental Automated Audit Management System. Within 60 days please furnish to this office, for each recommendation in this report, a status report on: (1) the corrective action taken; (2) the proposed corrective action and the date to be completed; or (3) why action is considered not necessary. Also, please furnish us copies of any correspondence or directives issued because of the audit. We appreciate the courtesies and assistance extended by the personnel of Lafayette Square, Inc. and the Chicago Multifamily HUB. Should you have any questions, please contact Ernest Kite, Assistant District Inspector General for Audit, at (303) 672-5452. Page 9 2001-DE-1802 Appendix A Auditee Comments Page 10 2001-DE-1802 Page 11 2001-DE-1802 Page 12 2001-DE-1802 Page 13 2001-DE-1802 Page 14 2001-DE-1802 Page 15 2001-DE-1802 Appendix B Distribution Secretary’s Representative, 5AS (2) Director, Chicago Multifamily HUB, 5AHM (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 Chief 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 Page 16 2001-DE-1802 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 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 Page 17 2001-DE-1802
Review of Management Controls over Disbursements, Lafayette Square Apartments, Macomb, Illinois
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)