AUDIT REPORT CHESTER HOUSING AUTHORITY CHESTER, PENNSYLVANIA 2001-PH-1002 FEBRUARY 15, 2001 OFFICE OF AUDIT, MID-ATLANTIC PHILADELPHIA, PENNSYLVANIA Issue Date February 15, 2001 Audit Case Number 2001-PH-1002 TO: Karen Newton, Director, Office of Troubled Agency Recovery, PB Malinda Roberts, Director, Office of Public Housing, Pennsylvania State Office, 3APH FROM: Daniel G. Temme, District Inspector General for Audit, Mid-Atlantic, 3AGA SUBJECT: Chester Housing Authority Chester, Pennsylvania We have completed our audit of selected operations at the Chester Housing Authority (CHA). The audit was an update of conditions we had noted during earlier audit work at the CHA. Our report contains four findings. We have provided copies of this report to the CHA, the CHA Receiver, and the Court. Within 60 days please give us, for each recommendation in the 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 unnecessary. Also, please furnish us copies of any correspondence and/or directives issued because of the audit. Should you or your staff have any questions, please contact Tina Schimony, Acting Assistant District Inspector General for Audit, at (215) 656-3401. Management Memorandum (THIS PAGE LEFT BLANK INTENTIONALLY) Page ii 2001-PH-1002 Executive Summary In November 1991, HUD designated the Chester Housing Authority (CHA) as a troubled authority and took control of the Authority because of numerous and long standing deficiencies. On April 29, 1994, the United States District Court for the Eastern District of Pennsylvania declared HUD liable for de facto demolition of housing units at the CHA. On August 31, 1994, the Court placed the CHA in Receivership. The Court appointed Receiver was to improve the CHA’s operations so the agency would provide its tenants housing that is structurally sound and functionally adequate along with appropriate services. Further, the Scope of Services, set by the Court in the August 31, 1994, Order of Appointment of Receiver, recognized that ineffective policies and procedures played a major role in the operational problems confronted by the CHA. On January 7, 2000 we began an audit to assess the Receiver’s and the CHA’s progress in: • analyzing existing policies and procedures; updating or revising procedures where warranted; training staff on and monitoring the effectiveness of the new policies and procedures; • improving procurement and administration of its legal service contracts; • developing procedures to govern the use of the CHA credit cards and stipulate the documentation required to obtain payment for credit card and out-of-pocket expenses; and • reducing tenant rent receivables and improving rent collections. Unfortunately, the Court did not permit our free and open access to CHA personnel and records during the conduct of this audit. The impediments and limitations to our audit constituted an external impairment and affected our independence. Hence, we were unable to comply with government auditing standards regarding independence and the external impairment constrained our efforts to form independent and objective opinions and conclusions. The results and observations from our review are summarized below and detailed in the report that follows. Although the Receiver made progress updating CHA Actions To Rework policies and some procedures, the Receiver did not update Outdated, Incomplete and procedures for some fundamental operations. As a result, Neglected Procedures Not CHA staff worked with outdated and incomplete Timely procedures. Though in fiscal year 2000, the Receiver contracted for the development of procedures, the CHA needs a plan to train its staff to apply the new procedures, monitor their application, and ensure the procedures are effective. Page iii 2001-PH-1002 Executive Summary The Receiver did not use free and open competition to Insufficient Progress In procure legal services for the CHA because the Court Procurement and excused the Receiver from observing that and other Federal Administration of Legal and HUD requirements. Consequently, capable law firms Services did not have the opportunity to compete for the CHA’s business. Also, the CHA did not have written procedures for reviewing and approving legal service invoices which may have contributed to CHA Counsel not critically reviewing all invoices. Further, the Receiver and CHA did not employ adequate safeguards to oversee a conflict of interest situation involving CHA’s General Counsel. The CHA needs to establish controls for procuring and administering its legal service contracts. The CHA needs to develop and implement adequate Inadequate Conrols Over controls to ensure the Receiver’s out-of-pocket expenses Out-of-Pocket and Credit and credit card charges are appropriate and adequately Cards Expenses Paid To supported. The CHA relied on the Court to review and Receiver approve Receiver out-of-pocket expenses. However, the CHA paid the out-of-pocket expenses without first obtaining written authorization from the Court. Therefore, the CHA lacked documentation to support the expenditures. We attributed the lack of controls over credit card charges to managers not being aware of the need for such procedures. The lack of controls contributed to the CHA paying for unsupported and ineligible credit card charges. During the audit, the CHA introduced some controls over the payment of credit card charges, but additional controls are needed. The Receiver and the CHA have reduced significantly CHA Should Effect tenant rent receivables and established a more effective rent Further Improvements In collection operation. Although the Receiver and CHA Its Rent Receivables and made progress to improve rent collections, the CHA did Rent Collection Practices not: • Evaluate prospective tenants thoroughly, and as a result, CHA could not ensure it accepts applicants who will meet their full obligations as tenants. • Apply its rent collection strategies consistently because the CHA did not have up-to-date comprehensive rent collection and eviction procedures. The CHA contracted to have the procedures developed to reflect a change in management philosophy. 2001-PH-1002 Page iv Executive Summary • Pursue in an aggressive manner, collection of rents from delinquent vacated tenants receiving Section 8 assistance. As a result, CHA may have recorded losses that were collectable if it had been more diligent in its collection efforts. The CHA needs to establish procedures, and train and monitor its staff in the areas of applicant screening, rent collections, and evictions. We discussed the results of our review during the audit and provided the Court, the Receiver, and the CHA with a draft report for comment. We discussed the draft report at an exit conference on December 19, 2000. The CHA provided a written response, which we included as Appendix AppendixBB without exhibits, and where appropriate their comments are summarized in this report. CHA generally agreed with our recommendations, but disagreed with some of the reported facts. Page v 2001-PH-1002 Executive Summary (THIS PAGE LEFT BLANK INTENTIONALLY) 2001-PH-1002 Page vi Table of Contents Management Memorandum i Executive Summary iii Introduction 1 Findings 1 Receiver Did Not Rework Outdated, Incomplete and Neglected CHA Procedures 7 2 Insufficient Progress In Procurement and Administration of Legal Service Contracts 15 3 CHA Has Not Yet Established Adequate Controls Over Out-of-Pocket Expenses and Credit Card Charges 29 4 CHA Should Effect Further Improvements In Its Rents Receivable and Rent Collection Practices 37 Management Controls 53 Follow Up On Prior Audits 55 Appendices A Schedule of Ineligible and Unsupported Costs 57 B Auditee Comments 59 C General Counsel’s Review Procedures 81 Page vii 2001-PH-1002 Table of Contents D Distribution 83 Abbreviations ACOP Admissions and Continued Occupancy Plan CHA Chester Housing Authority HUD US Department of Housing and Urban Development OIG Office of Inspector General TAR Tenant Accounts Receivable 2001-PH-1002 Page viii Introduction The Chester Housing Authority (CHA) was organized under the laws of the Commonwealth of Pennsylvania to develop, acquire, and operate low rent housing. In November 1991, HUD took control of the CHA because of the CHA’s numerous and long standing deficiencies. HUD determined the CHA was in substantial default and breach of the Annual Contributions Contract. The housing stock was in a deplorable condition. Furthermore, rent collection was a continuing problem and expenditures exceeded funding. Essentially, management lacked the capability to obtain and manage the funds necessary to make the needed improvements. On April 29, 1994, the United States District Court for the Eastern District of Pennsylvania ordered that HUD was liable for de facto demolition of housing units at the CHA. On June 2, 1994, the Court granted the Government’s motion to appoint a Receiver. On August 31, 1994, the Court placed the CHA in Receivership and appointed the Chairman of Grenadier Realty Corp., to serve as the Receiver. The Receiver left Grenadier in June 1997, formed the Rosenberg Housing Group, Inc., and continued to operate as the Receiver. The Court appointed the Receiver to improve the CHA’s operations so that the agency would provide its tenants housing that is structurally sound and functionally adequate, and provide residents with appropriate services. The Receiver appointed an employee of his organization to act as the CHA’s Executive Director. The Receiver appointed a permanent Executive Director in January 1997. By March 1998, the CHA’s condition improved to the point where HUD designated the Authority as a standard performer and removed the CHA from its list of troubled agencies. A major reason for the CHA’s improved condition was the substantial modernization work done at its developments. HUD provided more than $98 million to the CHA for modernization efforts during fiscal years 1995 through 1999. In June 1994, the CHA had 1,707 dwelling units in five conventional developments and 24 scattered site locations. By June 1999, the CHA’s public housing inventory included 1,453 dwelling units. Of these, tenants were occupying only 774 units. The other units were unoccupied due to pending demolition. The CHA relocated tenants occupying those units to housing in both the public and private sectors. In 1998, the CHA completed a major rehabilitation of one project and in 1999 completed the demolition and reconstruction of another project. Two additional projects were in the process of demolition and reconstruction. We did onsite audit work at the CHA between July 22, 1997 and July 24, 1998. The audit covered CHA operations during the period April 1, 1995 through March 31, 1998. We issued a report to HUD that addressed the Receiver’s compensation and term of services, but experienced delays in reporting on other areas. Government Auditing Standards require that reports be issued promptly so that information is available for timely use by management. Many of the reportable conditions we planned to address in the report, including Housing Quality Standards and maintenance issues, had since been superceded by the CHA’s modernization activities. However, there remained conditions noted earlier which were still unsettled and required updating to reflect current conditions. These conditions covered four areas: development of the CHA's policies and Page 1 2001-PH-1002 Introduction procedures; credit cards and Receiver's out-of-pocket expenses; tenant receivables and rent collections; and procurement and administration of legal services. We resumed the audit on January 7, 2000, intending to update conditions noted during the earlier audit work to learn if the CHA made needed improvements in the four areas. We notified the Court, the Receiver, and the CHA of our resumed audit. We requested an entrance meeting with the CHA’s Executive Director for January 24, 2000. The Court rescheduled the meeting to February 3, 2000. The meeting attendees were the Court, the Receiver, the HUD-OIG and CHA personnel. We notified the Court that we wished to update issues that remained open from our earlier audit work. The Court agreed that we should continue with a limited scope audit and agreed with the four objectives we outlined during the meeting. The Court expressed concerns that the audit resumption would disrupt the CHA's operations and requested we limit our time onsite. The Court also specified points of contact for each of the four audit objectives. To mitigate the Court’s concerns, we agreed to perform much of our audit effort off-site. On February 24, 2000, the Court further restricted our review to events and transactions that occurred in 1999 and 2000. On March 9, 2000, we explained to the Court that the restrictions limited our audit scope. We said that to accomplish the four objectives we needed to review events and transactions that occurred before 1999. We explained that by update we meant to complete our review of the activities in the four areas since the time the Receiver assumed control of the CHA. On March 17, 2000, the Court affirmed the audit period to 1999 only. However, in the interests of comity and cooperation, the Court said it would order the CHA to provide us with information prior to 1999 if, in the course of our audit, such information became necessary. The Court directed us to submit such requests to the Court as the need arose. We discuss this and other work impediments and audit scope limitations we experienced throughout the audit in the Audit Scope and Methodology section of this report. It is most unorthodox for auditors to function without free and open access to an auditee’s records and personnel. However, we recognized that the Court had a genuine commitment to improving the CHA’s operations and improving the CHA’s services to the residents of the CHA developments. We also shared the Court’s commitments and designed our audit to cause as little disruption to the CHA’s operations as possible so long as we were able to accomplish our audit objectives. However, the impediments and limitations we experienced during this audit constituted an external impairment which affected our independence. Hence, we were unable to comply with government auditing standards because the external impairment constrained our efforts to form independent and objective opinions and conclusions. Our objectives were to assess the Receiver’s and the CHA’s Audit Objectives progress in: • analyzing existing CHA policies and procedures; updating or revising procedures where warranted; training CHA staff on and monitoring the effectiveness of the new policies and procedures; 2001-PH-1002 Page 2 Introduction • improving procurement and administration of its legal service contracts; • developing procedures to govern the use of the CHA credit cards and stipulate the documentation required to obtain payment for credit card and out-of-pocket expenses; and • reducing tenant rent receivables and improving rent collections. We performed our initial audit work at the CHA between Audit Scope and July 22, 1997 and July 24, 1998, and covered the CHA Methodology operating period extending from April 1, 1995 through March 31, 1998. We experienced delays in reporting on various aspects of the CHA’s operation. Many of the reportable conditions we planned to address were superceded by the CHA’s modernization activities. However, there remained four conditions which were still unsettled and required updating to reflect current conditions. The audit work discussed in this report represents an update of the conditions we discovered during our earlier audit work that remained reportable conditions. We were not able to resume audit work until January 7, 2000 because an experienced auditor was not available to lead this assignment until that date. The original auditor-in- charge for this assignment experienced a serious illness which eventually caused him to leave government service. We extended the period as necessary to include more recent data, so that our report would reflect current conditions. Our audit period eventually covered transactions from April 1, 1995 through June 16, 2000. We reviewed copies of pertinent records, discussed issues with the Court, and interviewed designated CHA officials and key personnel at HUD’s Pennsylvania State Office. We also reviewed: • HUD’s monitoring reports and other correspondence, • independent public accountants reports, Page 3 2001-PH-1002 Introduction • tenant files and tenant accounts receivable, • policies and procedures, • contract files, • payment transactions, and • Receiver’s reports. We tried to audit within the guidelines we agreed to with the Court. However, we encountered obstacles from the audit outset. For example: • The auditors found themselves being judged by the CHA personnel. The auditors were questioned whether the records they requested or operations they wanted to review complied with the four audit objectives agreed to with the Court. These CHA personnel, rather than accepting the auditors’ assurances that their requests were consistent with the audit objectives, would delay assisting the auditors until they first obtained the Court’s consent. • The general CHA employee population was not permitted to converse or interact with the auditors under the threat of dismissal. The Court said it directed this threat be conveyed to CHA employees. • The CHA staff refused auditors access to site locations and oversaw the areas of audit interest and the records which were being evaluated by the auditors. The Court said CHA staff was following the Court’s directions. • The CHA officials designated as contacts for audit inquiries were often not available and slow to respond to requests for records. Further, the records provided the auditors were copies and not the original documents. • The Court determined that the Receiver was answerable for his performance only to the Court and that his performance could not be the subject of any audit work. The Court, therefore, denied our request to meet with the Receiver during our attempt to audit. However, the Court did arrange for the Receiver to be present to discuss the draft report at our Exit Conference on December 19, 2000. 2001-PH-1002 Page 4 Introduction • The Court and the CHA did not allow the auditors access to all the records pertinent to the four audit objectives and determined the period of the CHA operations the auditors were to review. Finally, the Court suggested when the audit should be concluded. The audit impediments and limitations created an atmosphere not helpful to accomplishing our audit objectives timely or with the level of completeness we wanted to achieve. This situation constituted an external impairment of our audit independence. We were not able to reach reliable conclusions concerning the adequacy of the CHA policies and procedures, the propriety of the CHA credit card usage, the propriety of legal services procurements and the adequacy of the legal contract administration, or the adequacy of CHA actions with respect to Tenant Receivables. Due to the external impairments previously discussed, we did not complete this audit according to the generally accepted government auditing standards. We provided a copy of this report to the Court, the Receiver and the CHA Executive Director. Page 5 2001-PH-1002 Introduction (THIS PAGE LEFT BLANK INTENTIONALLY) 2001-PH-1002 Page 6 Finding 1 Receiver Did Not Rework Outdated, Incomplete and Neglected CHA Procedures In 1994, the Court ordered the Receiver to review, and as necessary, update the CHA’s policies and procedures. Although the Receiver made progress updating CHA policies and some procedures, the Receiver did not update procedures for fundamental operations such as rent collections. Also, the Receiver was tasked with the responsibility of training staff on the CHA’s policies and procedures, and monitoring how employees applied the procedures to their work. However, since the Court limited our access to information, the CHA staff, and freedom to observe daily CHA operations, we could not determine with certainty whether the Receiver accomplished these tasks effectively. During FY 2000, the CHA executed a contract with a consulting firm to update its procedures. However, significant CHA operations have transpired during the interim six years, and examples of the impact of not having updated procedures are reflected in Findings 2, 3 and 4 of this report. The Scope of Services set by the Court in the August 31, Court Recognized the 1994, Order of Appointment of Receiver, recognized that Importance of Effective ineffective policies and procedures played a major role in Policies and Procedures the operational problems confronting the CHA. The Court also recognized that any immediate improvements at the CHA would not be sustained without the CHA having a comprehensive system of policies and procedures. Therefore, as part of the order establishing the Receivership, the Court directed the Receiver to review the operating effectiveness of the CHA’s functions, leading to a reform of those operating areas that were not efficient and cost effective. This review had to include: • evaluating and updating all CHA’s current policies and procedures; • training staff on new policies and procedures; and • monitoring new policies and procedures for effectiveness and cost efficiency. During our earlier audit work, we noted the CHA did not have comprehensive policies and procedures for its staff to use in administering CHA’s operations. During our current review we wanted to assess the Receiver’s response to and progress made in effecting the Court’s directions regarding the CHA’s policies and procedures. Page 7 2001-PH-1002 Finding 1 In large measure, the Court controlled our access to the CHA information, the CHA staff, and freedom to observe daily CHA operations. The conditions described in this assessment are limited to the CHA records and the CHA officials to which we had access. This situation constituted an external impairment of our audit independence. Because of the external impairment, we were constrained in our efforts to form independent and objective opinions and conclusions concerning the adequacy of the CHA’s policies and procedures. Internal controls are a major part of managing any Importance of Internal organization. An internal control system is made up of Controls plans, methods, policies and procedures to meet an organization’s mission, goals, and objectives. The organization’s internal control system requirements change over time because business conditions change. The business environment changes because of changes in laws and regulations, societal concerns, technology, managerial philosophies and leadership. The Court recognized the need to change the policies and procedures used to manage the CHA operations. Prudent business practices prescribe that policies and procedures should be communicated in writing. The documentation aspect is critical because oral communication of policies and procedures is unreliable; spoken words can be changed too easily, forgotten or never even heard. Further, it is important for organizations to have consolidated policies and procedures organized systematically. Fragmented or decentralized policies and procedures hinder the employees using them and do not ensure for their consistent application. Employees need to be trained in an organization’s policies and procedures so they know how to do their jobs efficiently and effectively. Just as important, employees need to know the needs and expectations of those within the organization who rely on their work product. In 1994, shortly before the Receiver’s appointment, a Receiver’s Actions to consulting firm completed a Procedures Manual for the Update the CHA Policies CHA that included unit and site inspection, maintenance, and Procedures security monitoring, investigation, and follow-up on criminal and drug related activity. The Procedures Manual was to serve as a desk reference for the CHA’s staff, a tool 2001-PH-1002 Page 8 Finding 1 for training new employees, and a basis for conducting internal management audits, and evaluating employee performance. The Procedures Manual did not encompass procedures for all the CHA’s operations and excluded accounting and Section 8 procedures. The CHA’s Executive Director maintained that because the consulting firm overhauled the procedures immediately before the Receiver’s appointment, there was no present need to revise the procedures. The Executive Director said the Receiver revised and updated procedures, as needed, because the Receiver’s initial efforts focused on establishing management tools and systems. We noted that since 1994, the Receiver developed and updated some procedures, but found no evidence the Receiver updated the Operations Manual or developed procedures for other fundamental housing authority functions such as accounting and budgeting. During the years of Receivership, the CHA introduced new Uncontrolled and guidance to its staff. For example: Neglected Revisions to Procedures • in January 1995, a set of User’s Manuals for operating a new computer software system; • in February 1996 and June 1998, a revised Procurement Policy Manual; • in June 1997, with later revisions in October 1997 and October 1999, the Admissions and Continued Occupancy Plan; • in June 1997, the Section 8 Administrative Plan; and • in July 1999 and May 2000, revisions to the Human Resources Policy Manual. Though the Receiver updated some of the CHA’s procedures, the updates were not controlled. For example, the procedures manuals did not always: • list the dates the procedures were initially issued; • list the dates when procedures were revised, replaced or added; or • identify the applicable sections of the procedures being revised, replaced or added. Page 9 2001-PH-1002 Finding 1 The CHA needs to adopt a control system for its procedures, such as a log in front of each manual, which would allow users to readily ascertain the latest issuance and identify procedures that have been superceded. Also, a log would ensure users that the manuals they need contain the current procedures for their area of responsibility. The Receiver neglected revising some procedures that were outdated. For example, we asked the CHA to furnish us procedures on rent collection and non-payment evictions. The CHA provided the procedures, but the Deputy Executive Director said the procedures were out-of-date. Our assessment of the CHA staff applying policies and Improvements to procedures on the job was generally limited to those Procedures Needed procedures governing legal service contract procurement and administration, tenant accounts receivable and rent collections, and credit card and out-of-pocket expenses. We cover the details of these assessments in the findings that follow. However, in general, while the CHA has developed or improved its procedures in these areas of the CHA operations, further improvements are justified. For example: • The CHA did not have written procedures for its General Counsel to use in administering the CHA legal service contracts (Finding 2). • The CHA did not have written policies and procedures for administering the Receiver’s Out-of- pocket expenses (Finding 3). • The CHA’s guidance for rent collections, and evictions was incomplete and out-of-date (Finding 4). Receiver’s Recent In January 1998, the Receiver instructed the CHA to Comprehensive Approach procure the services of a consulting contractor to develop to Updating Policies and comprehensive standard operating procedures. However, Procedures HUD approval was needed to fund the contract. Problems in defining a specific scope of services for the contract delayed HUD’s funding approval until August 1999. The CHA advertised for bids in August 1999 and awarded a contract in February 2000. 2001-PH-1002 Page 10 Finding 1 The Court ordered Statement of Work for the Receiver identified those CHA operational areas of interest to the Court and thus the procedures the Receiver was responsible to analyze and update. The February 2000 consultant contract’s Scope of Services required the contractor to develop procedures for several operational areas that were included in the August 1994 Receiver’s Statement of Work. These areas included: • admissions and occupancy, • public housing lease enforcement (including rent collection and eviction), • Section 8, • modernization, • accounting and budgeting, • maintenance, and • procurement. The target completion date was June 15, 2000. However, revisions to the delivery schedule pushed the completion date back to June 30, 2000, and then again to October 31, 2000. The CHA’s General Counsel did not explain the reason for the slipped delivery schedule. The CHA’s General Counsel said managers arranged to The CHA Needs to train their staff on new CHA initiatives, policies and Ensure Staff Are Trained procedures during departmental staff meetings. Counsel said the CHA augmented training by sending staff to training courses or having consultants do the training. We did not observe sufficient evidence to demonstrate that staff training occurred regularly as the CHA introduced new procedures. For example, though the CHA General Counsel said training was provided at weekly staff meetings, we were provided little evidence to support this statement during our review of Rents Receivable. In Finding 4 of this report, we identify instances where staff did not fully apply the CHA’s admission’s policy. We attributed this condition to the staff not receiving adequate training and managers not effectively monitoring the work done by staff. Page 11 2001-PH-1002 Finding 1 The Court’s order required the Receiver to ensure staff received training on the new policies and procedures and to monitor the procedures’ effectiveness. Due to audit impairments, we could not determine with confidence the training staff received to execute the policies and procedures, nor that CHA managers monitored staff usage of the updated policies and procedures. A properly functioning system of internal control depends High Personnel Turnover on the competence of the entity’s officers, department at CHA Adds Urgency to heads and other key employees. A stable environment Establishing Sound promotes good internal controls. The impact of not having Internal Control Structure effective policies and procedures is amplified in an environment of high employee turnover. Effective, documented policies and procedures promote consistency and continuity of operations in an environment with frequent employee turnover. Accordingly, the CHA, through training and managerial oversight, needs to ensure its staff understands the procedures governing their position and apply the procedures correctly on the job. Since the appointment of the Receiver, the CHA has experienced significant turnover in the management ranks as well as staff positions. Frequent turnover in any organization affects negatively the internal control environment and makes continual training even more essential. A healthy internal control environment that includes sound policies and procedures, an effective training program and good supervision, can minimize the negative effects such turnover can cause. Although we noted the Receiver’s recent progress in The CHA Needs to developing and updating CHA’s procedures, additional Implement New Operating attention is needed. We believe it is critical for the CHA to Procedures introduce the new procedures and train its staff as soon as the procedures become available. Since the consultant was expected to complete the procedures in October 2000, the CHA should have a plan for training its staff in place. Concurrently, the CHA managers must be instructed to monitor staff application of the procedures to ensure they are understood and provide for periodic assessments of the procedures to measure their effectiveness. 2001-PH-1002 Page 12 Finding 1 Auditee Comments CHA agrees with the recommendations, but disagrees with some of the reported facts. CHA’s response is provided as Appendix B. We modified the report, where necessary, based on an OIG Evaluation of evaluation of CHA’s response, and additional information Auditee Comments submitted with CHA’s response. Recommendations We recommend that you request the Court to advise the Receiver to: 1A. Direct the CHA to create a plan to train staff on the standard operating procedures being developed by the consulting firm. The training should focus on ensuring that staff understands the new procedures. The CHA should maintain a record of the training staff received including dates and times, the policies and procedures discussed, and an employee attendance sheet. 1B. Establish a plan to monitor the effectiveness of new policies and procedures and make modifications as necessary. 1C. Annotate revisions to the policy and procedure manuals with the date of the revision, and establish control logs to record changes to procedures so users can determine if their manuals are current. Page 13 2001-PH-1002 Finding 1 (THIS PAGE LEFT BLANK INTENTIONALLY) 2001-PH-1002 Page 14 Finding 2 Insufficient Progress In Procurement and Administration of Legal Service Contracts During our prior audit work covering CHA operations from April 1, 1995 through March 31, 1998, we noted certain improvements the CHA needed to make in its procurement and administration of legal service contracts. Since that earlier work, the Court appointed Receiver and the CHA have not improved their procurement of legal service contracts though they have made limited progress to improve their administration of the contracts. This limited progress is reflected in the CHA hiring of an in-house General Counsel in July 1999 to assign work to the law firms, monitor their progress, and review and approve legal service invoices for payment. The Receiver and the CHA still do not comply with all Federal requirements governing their procurement of legal services. Specifically, the Receiver and the CHA: did not use free and open competition to select suitable law firms; did not obtain HUD approval before entering contracts that exceeded two-year terms or involved litigation proceedings; and did not maintain a written record of their actions to procure legal services. Also, we observed the CHA’s General Counsel in a conflict of interest situation which the Receiver and the CHA did not adequately address. We also noted incomplete legal service contract files and ineffective controls for managing the legal service contracts. Though we sought free access to all the CHA’s records Court Denied Auditors related to legal services, the Court limited our access and Access to Records directed the CHA to provide us only 1999 legal services information. The Court reasoned that the 1999 records would be sufficient to measure the CHA’s progress. Therefore, our review of legal services procured by, and provided to, the CHA was confined to data we gathered during our earlier audit work and 1999 legal services information. Since the CHA did not provide us information before 1999, we were unable to review payment information for eight months of 1998. Lack of access also prevented us from confirming certain issues we identified during our earlier audit work. The records to which the CHA did grant us access were copies of invoices, receipts and other supporting documents, and not actual source documentation. It is normal audit procedure for auditors to examine original documentation. Also, the CHA personnel did not respond timely to our questions about legal services, taking as long as two months to provide answers. In addition, the Court did not allow us to discuss with the Receiver the procurement and administration of legal Page 15 2001-PH-1002 Finding 2 services, or permit us to review the Receiver’s records dealing with legal issues. The Receiver hired a consulting firm to perform a risk Historical Perspective of management assessment of the CHA. The firm reported the CHA’s Legal Services that before the appointment of the Receiver in 1994 outside legal counsel represented the CHA. During that time, the CHA experienced severe managerial problems which included monitoring the legal work and the mounting legal expenses. When the Receiver took control of the CHA he considered the quality of services by outside counsel substandard and legal service costs high. To resolve this condition, the Receiver contracted with another law firm. However, the CHA incurred substantial fees from the new legal counsel. While the Receiver reviewed and approved legal invoices for outside counsel, neither the Receiver nor the CHA were tracking the time charged and the expenses claimed by the legal service firms. Consequently, invoices mounted to more than $400,000 and went unpaid. In May 1997, the Receiver negotiated a unique agreement to pay the debt over time. In June 1999, after the CHA made a final $96,000 payment to the law firm, the Receiver terminated the agreement. The consultant’s report also said the CHA did not have an experienced person to review the legal work done for the CHA. It advised the CHA to retain in-house counsel to handle routine litigation, monitor legal expenditures, track legal invoices, approve legal work by outside counsel and coordinate legal strategy with the Receiver and senior CHA management. In July 1999, the CHA hired an in-house General Counsel recommended by the Court. The General Counsel’s duties included: assigning work to law firms; monitoring their progress; and reviewing and approving legal service invoices for payment. From July 1995 to December 1999, the CHA paid more than $1.9 million for legal services provided by 11 different law firms and their own in-house counsel. We could not determine the exact amount paid for legal services due to scope limitations we have detailed in the Executive Summary. 2001-PH-1002 Page 16 Finding 2 L e g a l S e r v ic e P a y m e n ts /1 $ 9 0 0 ,0 0 0 $ 8 2 3 ,5 7 3 $ 8 0 0 ,0 0 0 $ 7 0 0 ,0 0 0 $ 6 0 0 ,0 0 0 $ 5 0 0 ,0 0 0 $ 4 0 0 ,0 0 0 $ 3 7 4 ,0 1 7 $ 3 0 3 ,2 3 0 $ 3 0 0 ,0 0 0 $ 2 7 1 ,6 3 2 $ 1 9 2 ,8 1 8 $ 2 0 0 ,0 0 0 $ 1 0 0 ,0 0 0 $0 1 9 9 5 /2 1996 1997 1 9 9 8 /3 1 9 9 9 /4 C a le n d a r Y e a r s Footnotes: /1 Costs for 1995 through 1998 could not be verified for completeness /2 July through December only /3 January through September only /4 Includes $57,300 for cost of in-house Counsel from July through December and a $96,000 payment for prior years services A. The Receiver and the CHA Did Not Follow HUD Requirements for Procuring Legal Services During our prior audit we noted that the Receiver did not use competitive procedures to award contracts for legal services. The Receiver also did not request HUD approval before awarding contracts that exceeded a two-year term and for contracts that involved litigation proceedings. Further, there was no evidence that either the CHA or the Receiver prepared cost estimates for the legal service contracts. As a result, qualified firms were not given the opportunity to participate in the procurement process and HUD’s oversight was diminished. The Receiver, with the Court’s participation and agreement, selected the CHA’s legal service providers and determined the reasonability of fees to be paid for legal services. The Court assured us that after the CHA’s transition from Receivership to its own governance, the CHA General Counsel would ensure the CHA complied with all applicable regulatory requirements. Receiver Did Not Use The Receiver awarded at least 17 contracts to 11 law firms Competitive Procedures during our audit period. Federal requirement 24 CFR 85.36 To Procure Legal Services prescribes that public housing authorities conduct all procurement transactions with full and open competition. Page 17 2001-PH-1002 Finding 2 HUD Handbook 7460.8 REV-1, paragraph 4-27 generally amplifies the principles of 24 CFR 85.36 and further provides that, when contracting for legal services, the goal is to acquire the services of a highly qualified firm at a reasonable price. Since qualifications and experience can be as important as price, the procurement of legal services should follow the competitive proposal procedures. The CHA’s Procurement Policy Manual did not reflect Federal and HUD requirements to acquire legal services competitively. It made competition for procuring legal services an option. The only mandatory requirements in procuring legal services were confidentiality and negotiation of a reasonable price. The CHA did not use competition to procure legal services. The Court directed the Receiver to obtain legal services in the same manner a private client would obtain legal services. The General Counsel said the Court and the Receiver based their selection of legal service firms on the firm’s expertise and reputation. The Court and the Receiver would agree on which law firm to select and ensure the legal fees were reasonable. According to 24 CFR 85.36 (f)(1), housing authorities are The CHA Did Not to do a cost analysis in connection with every procurement Document Actions to action and prepare cost estimates before receiving bids or Procure Legal Services proposals. Regulation 24 CFR 85.36 (b)(9) requires housing authorities to maintain records sufficient to detail the significant history of a procurement to include the basis for the contract price. The CHA’s files did not contain evidence of cost estimates being prepared in anticipation of the bid for services or documentation explaining the basis of the contract price. The Court and Receiver maintained they reviewed projected charges to the CHA for legal services. However, the evaluation was not documented in the contract file. In normal circumstances, a housing authority that does not Court Participated in use free and open competition to select a contractor and Procuring the CHA Legal does not maintain records to detail its procurement history Services would raise audit concerns. We recognize the Court has the personal knowledge and historical perspective to choose capable law firms for the variety of legal services 2001-PH-1002 Page 18 Finding 2 demanded by the CHA, and negotiate reasonable and appropriate terms for the CHA. In fact, we found the firms were highly skilled, and fees charged by these law firms were in line with fees charged in the region. We believe the CHA was fortunate the Court engaged itself in the selection of legal services during the Receivership. However, the CHA must be prepared for the transition from Receivership to self-governance by having in effect procedures that will allow for free and open competition in all its procurement transactions, including professional services, and a documented record of the procurement’s history. Free and open competition will allow all capable law firms the opportunity to compete for the CHA’s business. The Receiver did not obtain required HUD approval for Court Exempted Receiver long-term legal service and litigation contracts. From Complying With HUD Requirements • HUD Handbook 7460.8 REV-1, paragraph 4-27(B)(2) prohibits housing authorities from entering into agreements or contracts for legal services with any person or firm where the term of the contract exceeds two years, without the prior written approval of HUD. The Receiver did not obtain HUD approval for three legal service contracts that exceeded a two-year term. • HUD Litigation Handbook 1530.01 REV-4, paragraph 5-4 requires housing authorities to submit a request to HUD Regional Counsel for prior written approval before entering into litigation service contracts over $100,000. The Receiver did not seek the required HUD approval for two contracts that involved litigation proceedings. The Court directed the Receiver to obtain legal services in the manner that a client would obtain such services. Therefore, the Court exempted the Receiver from following HUD contracting requirements. Page 19 2001-PH-1002 Finding 2 The Court said that after the CHA changes over from Revised Procurement Receivership to self governance, the CHA General Counsel Policy and Complete Files would ensure the CHA complies with all applicable Will Ease the Transition regulatory requirements. However, in preparation for the from Receivership transition, the Receiver should ensure the CHA’s Procurement Policy Manual is revised to reflect Federal and HUD requirements. The Receiver should also provide the CHA complete copies of his legal service contract files. CHA agrees with the recommendations, but did not accept Auditee Comments some of the facts. CHA’s response is provided as Appendix B. CHA said it will continue to procure legal services as a private concern during the term of the Receivership, and follow standard business practice in monitoring its legal contracts. Following the end of the Receivership, CHA will adhere to Federal procurement requirements. We revised the report to update facts based on CHA’s OIG Evaluation of response and additional information CHA provided. In Auditee Comments addition, since CHA said it will procure legal services in accordance with Federal procurement regulations at the end of the Receivership, we consider this matter closed and we deleted a recommendation relating to the procurement of legal services. Recommendations We recommend that you: 2A. Request the Court to direct the Receiver to improve the CHA’s Procurement Policy Manual by including Federal and HUD requirements governing free and open competition for legal services. 2B. Request the CHA to fully document the future selection of firms providing legal as well as other professional services. 2001-PH-1002 Page 20 Finding 2 B. Additional Controls Can Augment the CHA’s Administration of Legal Service Contracts During our prior audit we noted that the CHA’s controls for administering its legal service contracts needed improvement. Since our earlier audit work, the Receiver and the CHA have taken steps to strengthen these controls. In July 1999, the Receiver appointed an in-house Counsel. The CHA Counsel’s responsibilities included assigning work to law firms under contract to the CHA, monitoring the firms’ work, and reviewing and approving law firm invoices for payment. Though the CHA now has a professional to oversee its substantial legal operations, the CHA did not record the Counsel’s work responsibilities as written procedures. The absence of written procedures may have contributed to instances where the CHA’s Counsel did not critically review invoices by corroborating invoiced work to an independent record of work assignments or assuring that invoice rates agreed with the payment rates specified in contracts. Also, Counsel accepted partial and incomplete documentation in support of legal service invoices. Basic financial accounting principles define an invoice as Reviewing Invoices For the basis for entries in the accounting records of both the Payment buyer and seller. An invoice should contain a description of the goods or services rendered, the quantities, prices, and credit terms. The act of verifying an invoice establishes that an entity actually ordered and received the goods or services. It also includes verifying that the prices billed agree with those specified in the contract. Upon receipt of an invoice, the buyer should verify the following aspects of the transaction: • the invoice agrees with the contract as to prices, quantities and other provisions; • the invoice is arithmetically correct in all extensions of price times quantity and in the addition of amounts; and • the goods or services provided were satisfactory. Closely related to the process of reviewing invoices are controls over expenditures. Good controls will permit the system to process only properly approved invoices and pay vendors for approved invoices. A chain of documentary evidence supports each transaction in an environment with good controls. Page 21 2001-PH-1002 Finding 2 The CHA Did Not Have Before July 1999, there was no one at the CHA with Written Procedures for experience monitoring and reviewing the legal work of Reviewing Invoices outside counsel. The CHA did not assign anyone responsibility for validating legal invoices. With the appointment of a General Counsel in July 1999, the CHA now had a professional with background for overseeing the CHA’s legal operations, and reviewing and approving all legal service invoices for payment. Hiring in-house Counsel to assign, monitor, and approve legal work was a large improvement. However, the procedures Counsel used to effect these functions were not documented. Because the procedures were not documented, Counsel described to us the procedures used to review and approve legal service invoices (seeAppendix Appendix C). C Our review of legal services showed that the CHA’s Counsel Adjusted Some General Counsel did review the invoices. We found the Invoices General Counsel took exception to and would not approve labor charges for local travel as well as other labor charges the Counsel referred to as “administrative time”. Counsel’s adjustments to invoices reviewed between July and December 1999 reduced legal expenses by $4,655. Though the CHA’s General Counsel reviewed invoices submitted by legal service providers, we found Counsel could monitor legal services better if a daily log documenting phone calls and meetings with legal service representatives was compared to firms’ invoices. It was during these phone calls and meetings that General Counsel would assign work to the firms or discuss their legal work. Without making the comparisons, Counsel had to rely on memory to review invoices and labor charges resulting from these work assignments or phone discussions. The comparisons would assist Counsel to corroborate the accuracy and appropriateness of the invoices. We reviewed legal invoices totaling $155,681 the CHA Bulk of Legal Service paid from October through December 1999 to determine Costs Were Adequately the effectiveness of the General Counsel’s review process. Supported The legal service costs consisted of labor and reimbursable expenses such as photocopying, telephone calls, faxes, postage, and stenographer fees. We reviewed available documentation supporting the payments and determined that $108,632 had adequate support. 2001-PH-1002 Page 22 Finding 2 Insufficient Support For The CHA did not have adequate documentation to support Some Legal Service Costs the remaining $47,049 in legal service payments. Our review of available contracts and invoices showed that they were not adequate to determine if the payments were appropriate. During our review, Counsel requested the law firms to provide additional information relating to these invoices. We reviewed the additional information Counsel provided. The additional documents supplied by law firms to the CHA were sufficient to support $26,458 of the $47,049 we questioned initially. Of the remaining $20,591, we determined $11,501 were still unsupported, and $9,090 were ineligible costs. The ineligible costs represented duplicate payments, undetected billing errors, and over- billings for labor and other expenses. We also found the CHA underpaid two firms $4,702 which constitutes unrecorded liabilities. There are occasions when the General Counsel needs to be Invoices Need To Be more thorough in reviewing the invoices. Also, the CHA Complete and Reviewed needs to be a more demanding customer; requiring all law More Thoroughly firms to provide a level of detail in their invoices that will allow the CHA to effectively examine charges. Also, the firms need to provide documentation supporting all claims for reimbursable expenses. We found legal service invoices lacking: the names of the attorneys charging time on the invoice; the attorneys’ billing rates; and extensions of the dollar amounts for individual time charges. Further, the CHA did not maintain lists of each firms’ employees by position and the authorized billing rate for each employee. Without detailed information of this sort in the CHA’s files, contracts, or invoices, Counsel lacked the means to do comprehensive validations of the charges received for legal services. Generally, the law firms did not provide the CHA documentation to support the reimbursable expenses they claimed on their invoices. Though labor was clearly the greater part of the invoiced costs, the CHA should still require law firms to provide documentation to substantiate their claims of reimbursable expenses. Page 23 2001-PH-1002 Finding 2 The procedures under development for reviewing and Additional Controls paying invoices will assist the CHA in their administration Would Improve CHA’s of legal service contracts. However, the CHA needs to Administration of Legal establish controls to accumulate the data needed to perform Service Contracts efficient, effective reviews of legal service invoices. Auditee Comments CHA agrees with Recommendation 2C. CHA also provided additional documentation for Recommendations 2D through 2F to address some unsupported and ineligible costs, and unrecorded liabilities. CHA disagrees with some of the facts and their response is provided as Appendix B. OIG Evaluation of We modified the report, where necessary, based on an Auditee Comments evaluation of CHA’s response and additional information submitted with CHA’s response. Recommendations We recommend that you request the Court to advise the Receiver to: 2C. Direct the CHA to establish controls which will enable the CHA to do efficient and effective reviews of legal service invoices. The controls should include: • written procedures for reviewing invoices; • a contract register, log, or similar system that will readily identify contracts, actual and estimated costs for legal service tasks, and amounts due and paid for legal services rendered; • lists of the law firms’ employees working on the CHA matters including names, positions and billing rates; • a log, maintained by Counsel, which documents phone conversations and meetings with legal service representatives; • invoices from law firms itemizing the names of the attorneys charging time, the attorneys’ 2001-PH-1002 Page 24 Finding 2 billing rates, and extended dollar amounts to individual time charges; and • documentation from law firms to support claims for reimbursable expenses. 2D. Direct the CHA to provide documentation to explain the $11,501 in unsupported legal service costs. The CHA should reimburse its operating account from non-Federal sources, costs that it cannot support as a justifiable CHA legal service cost. 2E. Direct the CHA to reimburse the CHA’s operating fund $9,090, from non-Federal funds, representing the ineligible costs charged to the CHA legal services. 2F. Investigate with the appropriate law firms the status of the $4,702 we identified as unrecorded liabilities. C. General Counsel’s Conflict of Interest The CHA hired a General Counsel in July 1999. Counsel’s responsibilities included assigning legal work to outside law firms, monitoring the firms’ progress, and reviewing and approving invoices for payment. In June 1998, the Receiver engaged a law firm owned by Counsel's spouse to perform legal work for the CHA. We found that the CHA Counsel reviewed and approved payment of invoices submitted by the Counsel’s spouse’s firm. Furthermore, we learned that Counsel was a joint owner of the law firm. This familial relationship of Counsel to the law firm principal and Counsel’s ownership interests in the law firm constitutes a conflict of interest. According to 24 CFR 85.36 (b) (3), no employee, officer or Guidance For Conflict Of agent shall participate in the selection, or in the award or Interest Situation administration of a contract supported by Federal funds if a conflict of interest, real or apparent, would be involved. Further, the CHA’s Human Resources Policy Manual, dated July 1999, requires personnel to discuss conflicts of interest with either their supervisor or the Human Resources Manager. We attempted to meet confidentially with the CHA’s Executive Director to determine whether Counsel disclosed the apparent conflict of interest. However, we canceled the meeting because Counsel insisted on attending the meeting. Page 25 2001-PH-1002 Finding 2 Counsel said that the Court directed Counsel to attend all of our meetings with the CHA personnel. We notified the Court to explain the sensitivity of the conflict of interest situation. The Court said the Executive Director was already aware of the apparent conflict of interest. Also, to avoid any perception of impropriety, the Court directed that services provided by Counsel’s spouse be scaled back, and assignments of new work to the spouse’s firm made only with the approval of the Receiver and the Court. Further, the Court said the Receiver was reviewing and approving the subject firm's invoices. We reviewed the subject firm’s invoices and related records Counsel Reviewed and maintained by the CHA and found no evidence the Approved Spouse’s Receiver reviewed and approved the invoices for payment. Invoices From July through December 1999, the firm addressed invoices totaling more than $16,500 to the CHA and not the Receiver. While Counsel annotated approval on each invoice, there was no indication the Receiver had seen the invoices. The Court did not permit us to discuss this issue with the Receiver or to review the Receiver’s records, which may have provided additional information. Since the Executive Director was aware of Counsel’s relationship with the subject law firm, we anticipated a corresponding management control over the processing and payment of this law firm’s invoices. The CHA Executive Director was responsible for authorizing payment to the law firms after the invoices were reviewed and approved by Counsel. The Executive Director was not responsible for critically reviewing the invoices. Rather, the Executive Director relied on Counsel to review the invoices and ensure that the charges represented assigned work, were consistent with the contract terms, and were fully supported. Counsel, in reviewing invoices from the subject law firm, did not detect, and the Executive Director authorized payment for, a $5,000 double billing and a $3,000 bill for services not supported by a contract. The CHA disbursed $8,000 for these invoices. We requested the CHA to provide the contract supporting the $3,000 payment. The CHA did not provide any documentation to support this payment. The ineligible and unsupported costs associated 2001-PH-1002 Page 26 Finding 2 with these payments are covered by Recommendations 2D and 2E under Part B of this finding. Auditee Comments CHA agrees with the recommendation, but disagrees with some of the reported facts. CHA’s response is provided as Appendix B. OIG Evaluation of CHA’s comments were reviewed and considered, and there Auditee Comments are no modifications to the report. Recommendation We recommend that you: 2G. Request the Court to direct the Receiver to remove the CHA General Counsel from participating in the future assignment of work to, or reviewing invoices submitted by, the law firm owned by Counsel and Counsel’s spouse. The individual assigning work to, and reviewing the invoices submitted by, Counsel’s spouse should be independent of the CHA General Counsel. Page 27 2001-PH-1002 Finding 2 (THIS PAGE LEFT BLANK INTENTIONALLY) 2001-PH-1002 Page 28 Finding 3 CHA Has Not Yet Established Adequate Controls Over Out-of-Pocket Expenses and Credit Card Charges During our prior audit work, we noted that the CHA did not have the prerequisite controls to ensure out-of-pocket expenses and credit card charges were adequately supported and eligible for payment. During the current review, we decided to update these conditions to learn whether the CHA had developed the necessary procedures. The following two sections explain the results of our updated audit work. A. The CHA Lacked Documentation to Support Reimbursements for Receiver Out-of-pocket Expenses In April 1995, the Court authorized the Receiver up to $5,000 per month for actual out-of-pocket expenses. This allowance was retroactive to January 1995. Beginning March 1, 1997, the Court reduced the allowance to $2,500 per month at the Receiver’s request. The Receiver made the request because he would not be incurring automobile and housing costs due to the departure of the Acting Executive Director, a Receiver employee. During the period from January 1995 to December 1999, the CHA paid $215,000 to the Receiver for out-of-pocket expenses. Office of Management and Budget (OMB) Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, provides principles for determining allowable costs for Federal awards. This Circular stipulates costs must be reasonable, necessary, adequately documented and consistently treated. Title 24 CFR 85.20 requires that accounting records be supported by source documentation such as canceled checks and paid invoices. Also, the Court, in authorizing the out-of-pocket expenses, noted that the funds were to reimburse the Receiver for actual out-of- pocket expenses incurred. There was considerable discussion between HUD and the Out-of-Pocket Expenses Receiver in defining what type of costs should be included Defined as out-of-pocket expenses. In a December 6, 1995 meeting, HUD and the Receiver’s representatives agreed that out-of- pocket expenses would include the Receiver’s travel expenses to Philadelphia for meetings related to the CHA, travel expenses to the CHA for Receiver employees, and copying expenses for documents related to the Receivership. The Court never defined in writing the types of expenses that would be out-of-pocket expenses. However, the Court informed us during a meeting that out- of-pocket expenses would include travel and related costs Page 29 2001-PH-1002 Finding 3 incurred by the Receivership in providing services to the CHA. In our view, the Court, HUD, and Receiver were reasonably consistent in their understanding of what costs constituted out-of-pocket expenses for the Receivership. During our earlier audit work, we noted that the CHA CHA Did Not Maintain reimbursed the Receiver for his out-of-pocket expenses but Documentation did not maintain documentation to support that the costs were reasonable or that the expenditures represented appropriate uses. We informed the CHA of this condition at the time of our earlier work and decided to update this condition during the resumed audit. CHA personnel did not review Receiver claims for out-of- CHA Did Not Review pocket expenses. The CHA, as a matter of routine, simply Receiver’s Claims paid the Receiver’s out-of-pocket expense invoices without question and without requiring the Receiver to produce documentation to support the claim. Further, though the payments to the Receiver were designed to be reimbursements for actual costs, the Receiver billed the CHA at the beginning of the month in anticipation of costs being incurred. The CHA advanced the maximum authorized amount for out-of-pocket expenses without objection or observation that the practice was contrary to the procedure set by the Court. The CHA personnel were subordinate to the Receiver. CHA Responsibility for Consequently, having a subordinate review and possibly Reviewing Out-of-Pocket questioning the expenses submitted by the Receiver would Expenses not have been appropriate. Therefore, the CHA managers may not have considered developing procedures for processing Receiver out-of-pocket expenses as being in their authority. It is a management weakness for subordinates to review the expenses of a manager having significant control and authority over the subordinates. As a consequence, the Court was in the best position to provide oversight for the Receiver’s out-of-pocket expenses. The Court assumed responsibility for reviewing the Court Review of Out-of- Receiver’s out-of-pocket expenses. The Court informed us Pocket Expenses the Receiver provides the Court with a monthly summary of the out-of-pocket expenses, and the Court reviews the costs claimed for reasonableness and appropriateness. The Court instructed the auditors not to audit these expenses. Therefore, we relied on the Court’s assurances that out-of- 2001-PH-1002 Page 30 Finding 3 pocket expenses claimed by the Receiver and reimbursed by the CHA were reasonable and for authorized purposes. The Court said that the Receiver did not submit Court Authorization to documentation to support the costs listed on the summary Pay Out-of-Pocket of out-of-pocket expenses. However, the Court noted that Expenses it was familiar with cost reasonableness for transportation, hotel accommodations and meals, and would be able to identify amounts that were out of line. The Court also noted that invariably the Receiver’s out-of-pocket expenses were greater than the monthly allowance for these costs. Therefore, there was no need to pay the Receiver less than the maximum amount established for out-of-pocket expenses. The Court acknowledged that, as a matter of practice, it did not provide the CHA written notification of its reviews nor written authorization that the CHA should reimburse the Receiver. The Court said that in the future, after reviewing the Receiver’s out-of-pocket expenses, it would submit written authorization to the CHA to reimburse the Receiver. Providing the CHA with written authorization offers Need to Fully Support assurance that there is oversight for the out-of-pocket Out-of-Pocket Expenses expenses claimed by the Receiver. The CHA not making disbursement until it receives the Court’s authorization should preclude further advances of out-of-pocket expenses being made to the Receiver. However, for the CHA to comply with the Federal requirement that costs be adequately documented by source documentation, the Court should forward the Receiver’s cost summaries with the payment authorization to the CHA. Also, the Court should direct the Receiver to submit the actual payment receipts for the out-of-pocket expenses to the CHA so that its accounting records will be complete. Recording these procedures in writing and providing them to the CHA will enhance fiscal controls. CHA agrees with the recommendations, but did not agree Auditee Comments with some of the reported facts. CHA’s response is provided as Appendix B. OIG Evaluation of CHA’s comments were reviewed and considered, and there Auditee Comments are no modifications to the report. Page 31 2001-PH-1002 Finding 3 Recommendations We recommend that you: 3A. Confirm that the CHA does not reimburse Receiver out-of-pocket expenses until it receives the Court’s written notification that it has reviewed the expenses and that the CHA is authorized to pay the reimbursement. 3B. Request the Court to help the CHA maintain complete records of its financial transactions by forwarding to the CHA the approved Receiver summary of out-of-pocket expenses to serve as a supporting document. Also, request the Court to direct the Receiver to submit to the CHA the actual payment receipts for the out-of-pocket expenses claimed on the summary. 3C. Request the Court to direct the Receiver to provide the CHA written procedures that require receipt of the Court’s written notification and authorization, and the Receiver’s supporting documentation prior to reimbursing the Receiver for actual out-of-pocket expenses. B. The CHA Lacked Documentation to Support Payments for Credit Card Expenses and Incurred Unnecessary Expenses The Receiver, the former CHA Acting Executive Directors, and the current CHA Executive Director had the use of the CHA credit cards. From July 1995 through December 1999, the CHA paid $59,066 in credit card charges. The Court did not grant access to credit card information covering the period April through December 1998 because it believed this information was unnecessary to accomplish our audit objective. OMB Circular A-87 describes the principles for Costs Must be Supported determining allowable costs for Federal awards. Circular A-87 stipulates that costs must be reasonable, necessary, adequately documented and consistently treated. Also, 24 CFR 85.20 requires that accounting records be supported by source documentation. 2001-PH-1002 Page 32 Finding 3 During our earlier work we recognized the CHA did not The CHA Did Not Have have written procedures governing the use of credit cards or Written Procedures explaining the administration of credit card transactions. Consequently, the CHA lacked guidance for ensuring credit card expenditures were reasonable and necessary to the CHA’s operations and adequately supported. Due to the CHA’s earlier procedural weakness over credit card usage and processing credit card statements, we wanted to determine the updated status of these conditions to see if the CHA made the obligatory improvements to this portion of its financial operations. Our overall review covered CHA’s credit card activity from Scope of Credit Card July 1995 through December 1999, excluding the period Review April through December 1998. The Court did not permit us access to the records for these nine months. Our prior review work covered the period July 1995 through March 1998, and our current work covered the period January through December 1999. We noted the same conditions during both periods. Though we wanted to review the source documents supporting credit card expenses, the CHA did not grant access to the original documents. We had to rely on copies of the documents. Normal audit practice is to rely on the original documents. Our review of credit card transactions during the period July 1995 through March from July 1995 through March 1998 disclosed ineligible 1998 Credit Card Activity expenditures and other charges without documentation to explain their purpose or support their eligibility. Total credit card charges paid by the CHA during this period amounted to $39,569. However, the CHA did not have procedures requiring credit card statements to be supported with documentation prior to being paid. The statements we reviewed did not contain receipts or information to explain how the credit card charges were related to the CHA’s operations. At our request, the CHA researched its records and gathered for our review documentation for $29,255 of the $39,569 charged to the credit card account. The CHA did not provide adequate documentation to support $10,314. We reviewed the documentation supporting $29,255 in credit card charges for adequacy and ensured the charges represented an appropriate use of the credit cards. We Page 33 2001-PH-1002 Finding 3 found $520 in credit card charges, for items such as flowers, were unrelated to the CHA’s operations and ineligible for payment with Federal funds. Another $2,239 represented costs attributable to the Receiver’s services, such as local travel expenses, and meals and automobile expenses for the Acting Executive Director. The Receiver’s allowance for out-of-pocket expenses was the appropriate funding source for these items, and historically the Receiver charged these types of costs as out-of-pocket expenses. Therefore, the $2,239 was ineligible as a credit card expense. Without credit card receipts, the CHA lacked the means to determine if cardholders were using credit cards appropriately. Credit card charges during 1999 totaled $19,497. During January 1999 through our current review, we found the CHA made improvements December 1999 Credit in administering credit card charges for payment. Because Card Activity of concerns raised by the auditors during our earlier work in 1998, the CHA began collecting credit card receipts and supporting documents and attaching them to the credit card statements. This allowed the CHA to reconcile the credit card statements with the supporting receipts and ensure charges were adequately supported. Though the CHA has the means to assure credit card charges are adequately supported, we found that the CHA needed to provide the cardholders additional guidance to ensure credit cards were being used for appropriate purposes. We reviewed the documentation supporting the $19,497 in 1999 credit card charges. We found the CHA did not have adequate documentation for $701 of its 1999 credit card charges. There was either no support for the charges or else the documentation was insufficient to explain how the charges related to the CHA’s operations. We attributed the ineligible credit card payments to: staff not having a clear understanding of what charges were permitted; the absence of written guidance specifying the purpose of the credit card; and the types of costs for which credit cards may be used. In response to our inquiries to the CHA policies and The CHA Develops procedures governing credit card use, the CHA Credit Card Procedures supplemented its Human Resources Policy Manual with a policy on credit card use on May 12, 2000. The policy covered: the positions authorized to hold and use credit 2001-PH-1002 Page 34 Finding 3 cards; the official business uses of credit cards; credit card security; the process for approving credit card transactions; and the reconciliation process prior to paying the credit card statement. We are encouraged the CHA adopted the credit card New Procedures Need procedures and believe their implementation will correct Strengthening the conditions we noted in this finding. However, we believe the procedures can be more complete and more effective if they also: remind the card holder that credit card charges should be reasonable and necessary; prescribe a maximum amount for an individual credit card transaction; specify a CHA position with responsibility for reconciling credit card statements with credit card receipts and assuring the charges are for authorized CHA purposes; and specify appropriate actions in the event of unsupported charges or charges for unauthorized purposes. CHA generally agrees with the three recommendations, but Auditee Comments disagrees with Recommendation 3F. CHA said Recommendation 3F was not part of the current audit because it addressed pre-1999 credit card costs. CHA also submitted additional documentation relating to unsupported and ineligible costs. In addition, CHA disagrees with some of the reported facts. CHA’s response is provided as Appendix B. We modified the report, where necessary, based on an OIG Evaluation of evaluation of CHA’s response and additional information Auditee Comments submitted with CHA’s response. Regarding Recommendation 3F, CHA contended that the audit was not to include a review of pre-1999 credit card expenses and we had closed this issue. This was not the case. In our letter notifying the Court, the Receiver, and the CHA of our resumed audit, we said we needed to update conditions we noted during our earlier review. We reiterated this to the Court during our audit. As such, CHA still needs to explain the $11,015 in credit card charges lacking adequate support ($10,314 from 1995 through 1998 and $701 from 1999). Page 35 2001-PH-1002 Finding 3 Recommendations We recommend that you request the Court to: 3D. Advise the Receiver/CHA to amend its credit card procedures by including requirements that: • stipulate that credit card purchases be reasonable and necessary; • establish a maximum amount for individual credit card transactions; • charge a specific CHA position with responsibility for reconciling credit card statements with credit card receipts and ensuring the charges are for authorized CHA purposes; and • specify actions the CHA will take in the event of unsupported credit card charges or charges incurred for unauthorized purposes. 3E. Advise the Receiver that the $2,239 in credit card charges attributable to the Receivership should have been claimed as part of Receiver’s out-of-pocket expenses. Therefore, direct the Receiver to pay $2,239 to the CHA’s operating fund. 3F. Advise the Receiver to secure from the appropriate cardholder, documentation to explain the $11,015 in credit card charges lacking adequate support ($10,314 from the 1995 through 1998 period and $701 from 1999). Any portion of the $11,015 the CHA cannot support with documentation, or if the charge is found to be for unauthorized or otherwise ineligible purposes, must be reimbursed to the CHA operating account from non-Federal sources. 3G. Advise the Receiver to direct the Authority to reimburse $520 (from the 1995 through 1998 period) to the operating fund with non-Federal funds for the ineligible expenses paid with Federal funds. 2001-PH-1002 Page 36 Finding 4 CHA Should Effect Further Improvements In Its Rents Receivable and Rent Collection Practices During our prior audit work, we noted that CHA’s Tenant Accounts Receivable (TARs) were excessive and that the CHA encountered significant challenges in maintaining adequate rent collections. Since that time, the Receiver and the CHA have reduced TARs significantly and established a more effective rent collection operation. Although the Receiver and the CHA made significant progress to improve its rent collections, the CHA can screen prospective tenants better, be more consistent in applying its rent collection strategies, and ensure that collection efforts are not ended prematurely. CHA Has Moderated A 1999 consultant’s report noted that prior to the Problems In Rent appointment of the Receiver in 1994, the CHA historically Collections and suffered from severe management problems. Delinquencies Mismanagement impacted heavily the quality and condition of the CHA’s public housing units. CHA management would not or could not act against tenants who chose not to pay rent. Also, residents who voluntarily entered into repayment agreements for back rent regularly failed to live up to their agreements. Consequently, the CHA often initiated tenant eviction actions in an effort to collect overdue rent. However, since housing was often substandard, the Court excused tenants from their rent obligations and ordered the CHA to abate their rent. The CHA’s modernization program has improved housing quality. Therefore, the matter of tenants not paying rent because of substandard housing conditions is no longer an issue. The CHA has been able to substantially improve its collections of tenant rent and reduce its tenant rent delinquencies. The CHA was able to accomplish these improvements by adopting several strategies that included: implementing a Federal Master System for evictions; abating TARs; using repayment agreements; counseling tenants on negative effects of bankruptcy filings; developing a policy to evict tenants that habitually paid rent late; and refusing to accept partial payments of rent once the CHA initiated the eviction process. Page 37 2001-PH-1002 Finding 4 The CHA Reduced TARs The CHA tenant rent is due on the first of the month and and Losses, and Improved payable by the fifth of the month. When the CHA provides Rent Collections housing to a tenant, it records the amount due as rental income and as a TAR if the tenant does not initially pay the rent due. If the CHA later determines that a TAR is uncollectable, the CHA records the amount as a loss. Applicant screening practices, rent collection strategies, loss recording policies, and modernization efforts can have a major impact on the Rental Income, TAR, and Losses Accounts. The impact of the Receiver’s and the CHA’s initiatives on the three accounts follow. Rental Income $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 1995 1996 1997 1998 1999 The Rental Income Account, amounts earned but not Rental Income necessarily collected, decreased from $2,125,538 in 1995 to $1,796,092 in 1999, or 16 percent. This was due primarily to the reduction in the number of tenants because of the ongoing modernization efforts. The CHA informed us that for 1999, 86 percent of the tenants paid rent during the month it was due and that overall rent collections for the year were 97 percent of rents due. During 1995, the CHA only collected 57 percent of rents due. According to the CHA, overall rent collections improved a significant 40 percent. 2001-PH-1002 Page 38 Finding 4 Downward Trend In CHA TARs And Losses $1,000,000 $900,000 $800,000 $700,000 1995 $600,000 1996 $500,000 1997 $400,000 1998 $300,000 1999 $200,000 $100,000 $0 TARs Losses TARs and losses decreased substantially from 1995 through TARs and Losses 1999. The CHA reduced its TARs from $925,055 in 1995 to $169,841 in 1999, a decrease of 82 percent. This decrease is even more notable when examining TAR balances for individual tenants. We compared August 1997 TAR data to March 2000 data. In August 1997, the TAR balance was $676,691. Of this amount, there were 150 tenants with TAR balances over $1,000. The balances for these 150 tenants totaled $602,054, with individual balances as high as $17,474. As of March 2000, the TAR balance was $122,940. Of this amount, there were 30 tenants with TAR balances over $1,000. The TAR balances for these 30 tenants totaled $73,068, with individual balances as high as $6,256. The CHA also reduced its losses from $660,746 in 1995 to $310,641 in 1999, a decrease of 53 percent. Of more importance was the relationship of the losses and TARs to the rental income for the same period. Page 39 2001-PH-1002 Finding 4 Comparison of Losses and Receivables to Rental Income 60% 40% Losses/Rent 20% Receivables/Rent 0% 1995 1996 1997 1998 1999 The TAR/Rental Income indicator decreased from 44 percent in 1995 to 9 percent in 1999. This was a significant improvement. The Losses/Rent indicator decreased from 31 percent in 1995 to 17 percent in 1999, another significant improvement. We wanted to determine the methods CHA used to improve rent collections and reduce TARs. We found the changes could be attributed mainly to four factors: • modernization of housing stock • screening applicants • collection strategies • recording losses We reviewed the CHA’s files and performed other tests to determine how well the CHA employed these factors and to see if the CHA could realize additional improvements in its rent collections and TARs. A. HUD and the CHA Devoted Resources to Modernize Housing Stock From 1995 to 1999, HUD provided over $98 million to improve the CHA’s housing. The CHA gutted, partially demolished and rehabilitated one development, and completely demolished and rebuilt another development. Presently, the CHA is demolishing and reconstructing two other developments. Due to these modernization efforts, the condition of the CHA’s housing stock has improved considerably. Because of the improved housing stock, the number of Court ordered TAR abatements went down substantially since abatements were based mainly on the condition of the units. Therefore, the amount of TAR write-offs (losses) decreased. Also, the ongoing modernization efforts enabled the CHA to divest itself of hard-core tenants who refused to pay their rent. 2001-PH-1002 Page 40 Finding 4 B. A Strong Applicant Screening Program Can Create More Acceptable TAR Levels According to HUD’s Public Housing and Occupancy Handbook, HUD Handbook 7465.1 Rev-2, a public housing authority must make an informed judgment about an applicant’s suitability as a tenant. The handbook prescribes the authority to examine the applicant’s history of meeting financial obligations, especially rent. The CHA’s Admissions and Continued Occupancy Plan (ACOP) revised October 1999, Chapter 2, reiterates HUD guidance and defines the CHA’s criteria for admission to public housing. It states the CHA will screen applicants to assess their suitability as renters. The CHA Procedures Manual, dated August 15, 1994, identifies the detailed steps admission personnel perform when they screen applicants. An effective applicant screening program considers such factors as an applicant’s rent payment history, housekeeping practices, social interaction with neighbors, and police history. We found the CHA could do a better job evaluating prospective tenants. For example, the CHA did not always: do criminal checks; analyze credit reports nor have evaluation standards for reviewing credit reports; contact prior landlords to determine applicants’ rent paying habits; and correctly apply its housekeeping inspection standards. We attributed these conditions to a lack of diligence, inadequate training, and incomplete procedures. As a result, the CHA did not ensure it was accepting applicants for its units who could or would meet their full obligations as tenants. Better tenant screening should lead to a tenant population that creates a more acceptable level of TARs and improved rent collections. A CHA report of rejected applicants covering the period The CHA Screened from July 1999 to June 2000 identified 57 applicants denied Prospective Tenants for cause. The reasons for denial included: 18 for negative criminal reports; 23 for negative credit checks; four for negative rental references; seven for negative housekeeping inspections; and five for other causes. Although the report indicated the CHA was screening applicants, we reviewed CHA records to determine the documentation maintained to substantiate applicant screening. We reviewed the files of 20 tenants, who occupied the Review of Files CHA units between July 1999 and May 2000, to confirm the CHA’s screening checks. We looked for evidence the CHA did criminal checks, obtained and analyzed credit reports, obtained rental references from prior landlords, and performed housekeeping inspections. Following are the results of our review. Applicant Criminal Checks Page 41 2001-PH-1002 Finding 4 CHA procedures require admissions personnel to do criminal checks for applicants of the CHA units and site managers to maintain the criminal checks in the tenants’ files. The tenant files for 7 of 20 tenants we reviewed did not contain evidence of criminal checks being done. The Deputy Executive Director later provided evidence of criminal checks for 5 of the 7 tenants but did not explain why the checks were not in the tenants’ files. There was no information of criminal checks for the two remaining tenants. Drug and criminal activity has been a problem at the CHA. The CHA’s General Counsel informed us that 4 of the last 12 eviction actions were for the “One Strike You’re Out” policy. Thorough applicant criminal checks will aid the CHA to avoid these types of tenants. Applicant Credit Checks CHA procedures require admissions personnel to perform credit checks for housing applicants and site managers to maintain these checks in the tenants’ files. Only 1 of the 20 tenant files we reviewed lacked an applicant credit report. More importantly, however, the files did not contain evidence that anyone from the CHA critically reviewed the credit reports to determine the applicant’s financial suitability for a CHA unit. Further, the CHA procedures did not contain guidance for reviewing, or standards for evaluating credit report histories. The credit reports for five tenants showed creditors writing off the applicants’ debts as uncollectable. For three of the five tenants, creditors wrote- off tenants’ debts at least four times. The creditors for one tenant wrote-off debts 11 times. References From Prior Landlords As part of the CHA’s evaluation of applicants for housing, the CHA should contact prior landlords to consider their experiences with the applicant. The CHA’s ACOP requires admissions personnel to obtain rental references from the prior landlord when a housing applicant resided less than five years with the current landlord. While the CHA received positive references from applicants’ landlords, there were 9 tenants in our sample of 20 who had resided less than five years with their current 2001-PH-1002 Page 42 Finding 4 landlords. The CHA did not obtain rental references from the prior landlords for these nine tenants. One tenant’s file from another review illustrated the result of not obtaining landlord references. That file contained documentation that the tenant’s prior landlord was another public housing authority. We contacted that authority and found the tenant owed that authority $1,059. The CHA’s files did not contain any evidence that it requested a rental reference from the other authority. The CHA eventually evicted the tenant for non-payment of rent. Housekeeping Inspections Housekeeping inspections assure that prospective tenants exhibit acceptable housekeeping habits. The CHA’s ACOP contained a checklist for use by admissions personnel to evaluate prospective tenants. However, CHA personnel used a different checklist, less detailed than the ACOP checklist, when inspecting applicants’ residences. The Deputy Executive Director said the detailed checklist was for the CHA’s annual unit inspection, and the less detailed checklist was more appropriate for applicant home inspections. We examined the less detailed inspection checklist and found it effective for evaluating housekeeping habits. If the CHA intends to use the less detailed inspection checklist in this manner, it should amend its procedures to stipulate this checklist as the mechanism for inspecting prospective tenant housekeeping. Though the inspections appeared effective, we found that 2 of the 20 tenant files we reviewed did not pass the housekeeping inspection and yet the tenants were granted admission to the CHA units. There was no information in the tenants’ file justifying giving units to tenants who failed the housekeeping inspections. The two tenants were too recent to have received the CHA’s annual housekeeping inspection. Effective use of screening procedures would enable the Need to Develop CHA to make further progress in reducing TARs and Complete Procedures, improving rent collections. CHA has entered into a Train and Monitor Staff Page 43 2001-PH-1002 Finding 4 contract to develop written procedures for screening housing applicants. CHA needs to ensure these procedures are complete and contain criteria for performing criminal checks; analyzing credit reports; contacting prior landlords; and performing housekeeping inspections. The staff will need to be trained and monitored on the use of the procedures to ensure the procedures and training are effective. CHA agrees with the recommendations, but disagrees with Auditee Comments some of the reported facts. CHA’s response is provided as Appendix B. OIG Evaluation of CHA comments were reviewed and considered, and there are Auditee Comments no modifications to the report. We recommend that you request the Court to direct the Recommendations Receiver to: 4A. Ensure procedures under development prescribe the CHA to screen applicants. The screening program should include: • criminal checks; • credit checks; • rental references from prior landlords; and • housekeeping inspections. Also, the screening program should include guidelines for interpreting data obtained from the checks, references, and inspections. 4B. Define the Housekeeping Inspection Checklist to be used during the admission process. 4C. Advise the CHA to train and monitor admissions personnel on the procedures to ensure the procedures are effective and applied correctly. C. The CHA Did Not Demonstrate It Implemented Collection Strategies 2001-PH-1002 Page 44 Finding 4 The CHA did not have up-to-date comprehensive written rent collection and eviction procedures to provide its employees guidance for executing effective rent collection strategies. The CHA officials said the procedures were out-of-date and were being rewritten to reflect a change in management philosophy. The CHA contracted with a consultant to write the rent collection procedures. Incomplete tenant files complicated our efforts to examine the CHA’s actions to collect delinquent rents and pursue evictions for non-paying tenants. We also could not determine the effectiveness of the training received by the CHA staff to apply the rent collection strategies because training was not always documented. From our review, we did learn that the CHA staff was not consistent when preparing and forwarding payment requests to delinquent vacated tenants. Also, the CHA did not report delinquent vacated accounts to a credit-reporting agency. Further, we noted the CHA’s contract with a collection agent for vacated tenant receivables was silent regarding the actions the agent must take to collect past due rent. The ACOP, Chapter 14, provides that when families owe The CHA Did Not Have money to the CHA, the CHA will make every effort to Comprehensive Written collect it. It requires the CHA to use a variety of collection Procedures for Rent tools to recover debts including, but not limited to, Collection preparing requests for lump sum payments, and reporting delinquent vacated accounts to collection agencies and credit reporting agencies. The CHA Procedures Manual contains steps for preparing and forwarding lump sum payment requests to vacated tenants, forwarding delinquent accounts to collection agencies, and requesting collection agencies to report uncollectable debts to a credit-reporting agency. The CHA did not have up-to-date comprehensive written procedures to guide its rent collection efforts and eviction proceedings. The CHA’s General Counsel provided the following narrative description of the CHA’s process for delinquent tenants. A tenant who has not paid rent is sent a CHA late notice on the fifth day of the month. If the tenant has not paid the rent due by the 15th day, the CHA sends the tenant a Notice to Quit. This Notice informs the tenant to vacate the premises unless the tenant pays all the rent within the next 15 days. It also informs the tenant of the grievance process should the tenant believe there is a just cause for not paying rent. Failure to pay or vacate will result in the CHA notifying the law firm responsible for eviction litigation. The law firm files a Request for Hearing and Order to initiate the eviction process. Court hearings can result in judgments, eviction orders, abatement of rent, and Page 45 2001-PH-1002 Finding 4 repayment agreements. When delinquent tenants leave public housing, the CHA provides them lump sum payment requests. The CHA’s General Counsel stated it could take over 10 months to evict a tenant for non-payment of rent. CHA entered into a contract with a consultant to develop these procedures to move from a central-based to a site- based management system. Meanwhile, employees relied on fragmented guidance found in other documents such as the ACOP and standard lease. The CHA General Counsel told us managers trained their Training Not Documented staff on new or changed policies, procedures or initiatives at weekly staff meetings. We reviewed the Property Management Director’s minutes from weekly staff meetings held in 1999 to determine the extent of staff training. From January to August, minutes were available for 14 meetings. There were no minutes of meetings after August. While there was evidence of training at some meetings, we could not determine the extent of training provided or establish the training’s effectiveness because of the lack of documentation. Tenants’ files did not contain information that identified Tenant Files Were Not significant events relating to a tenant's occupancy. The Complete files frequently lacked: late notices, Notices to Quit, repayment agreements, Requests for Hearing and Order, Notices of Hearing Date, Notices of Disposition, appeals, and Notices of Intent to Vacate. These documents are necessary for the eviction process. In September 1999, HUD recommended the CHA use Notation Sheets to record significant events for tenants. Since files were incomplete and the CHA did not record all significant events on the Notation Sheets, the CHA lacked a ready means to determine all the significant actions that occurred during a tenant’s residency. We reviewed the files of 20 tenants, who became Review of Recent delinquent during 2000, to determine if the CHA used the Delinquent Tenants procedures narrated to us by the CHA Counsel. We found 2001-PH-1002 Page 46 Finding 4 no evidence in the tenants’ files that the CHA prepared late notices for 19 of 20 delinquent tenants. Similarly, Notices to Quit were absent for 17 of 20 files sampled. We requested Counsel to research legal files for the documents, and 4 additional notices to quit were provided. Though the CHA’s documented collection efforts for the 20 delinquent tenants were incomplete, we found the 20 tenants eventually paid in full or the CHA initiated eviction actions. Having the CHA take aggressive action to collect Tenants Vacated Owing delinquent rent, even after a tenant vacates a CHA unit, can Back Rent encourage remaining tenants to keep their rent current. The CHA’s ACOP and Procedures Manual prescribed specific actions in the event a tenant vacated a unit owing rent. These actions included forwarding the TAR to a collection agency for action and having the collection agent report uncollectable accounts to a credit-reporting agency. We reviewed the files pertaining to the 20 largest losses recorded by the CHA in 1999 to determine if the CHA took the required actions. We found the CHA forwarded the accounts to the collection agency for collection, but did not authorize its collection agency to report tenants’ uncollectable debts to a credit-reporting agency until February 2000. The act of reporting uncollectable debts to a credit-reporting agency is meant to induce tenants to pay their back rents. Chapter 11, paragraph 1.B.4 of the CHA’s Procedures Uncollectable Accounts Manual, requires CHA personnel to refer uncollectable Not Reported to a Credit tenants’ accounts to a collection agent. CHA personnel are Reporting Agency also required to request the agent to report the information to a credit-reporting agency. The CHA’s contract with the collection agent did not address reporting referred tenants to a credit-reporting agency. The CHA’s Deputy Executive Director did not know if the CHA’s collection agent reported uncollectable accounts to a credit-reporting agency. The Deputy Executive Director recognized that the CHA did not have sufficient staff to report uncollectable accounts themselves. At our request the CHA queried the credit-reporting agency on eight tenants who vacated the CHA units owing rent. Page 47 2001-PH-1002 Finding 4 The credit-reporting agency did not list any of the eight tenants’ rent delinquencies. The CHA entered a collection service contract in 1998. The collection service contract was essentially an engagement letter whereby the collection agent acknowledged its engagement by the CHA. The contract was incomplete in that it did not: • explain how funds collected were to be transferred to the CHA; • specify the minimum steps the collection agent will take to collect funds; • explain how collections or uncollectable amounts were to be reported to the CHA; and • identify the information the CHA would provide to the collection agent. CHA officials informed us that they contracted for Need for Formal development of new rent collection and eviction procedures Procedures, Training, and to reflect a change in management philosophy. Upon Monitoring completion of the procedures, the CHA will need to train its staff to use the procedures, and arrange monitoring to ensure the procedures are effective, and that staff correctly apply the procedures. CHA agrees with the recommendations and provided Auditee Comments additional documentation for review. CHA’s response is provided as Appendix B. In responding to the recommendations, CHA provided a copy of a new collection recovery procedure that required preparation and forwarding of lump sum payment requests to vacated tenants, and required reporting of uncollectable rents to a collection agency and credit-reporting agencies. CHA also provided copies of the missing five lump sum payment requests. We modified the report, where necessary, based on our OIG Evaluation of evaluation of CHA’s response and the additional information Auditee Comments submitted with CHA’s response. 2001-PH-1002 Page 48 Finding 4 Recommendations We recommend that you request the Court to direct the Receiver to: 4D. Ensure that the CHA’s staff is trained in the use of the rent collection and eviction procedures, and that the staff is monitored to determine the effectiveness of the procedures. 4E. Advise the CHA to execute a new contract for collection services. The contract should describe: • information the CHA will provide to the collection agent; • minimum steps the collection agent must take to collect funds; • collection progress reporting to the CHA; and • details on how funds collected are transferred to the CHA. 4F. Establish procedures that ensure tenant files document significant events relating to a tenant’s occupancy. The documents include: late notices, Notices to Quit, repayment agreements, Requests for Hearing and Order, Notices of Hearing Date, Notices of Disposition, Notices of Intent to Vacate, Requests for Lump Sum Payment, and Notation Sheets. D. The CHA Recorded Losses For Tenant Rent When Collections Were Still Possible We attributed a portion of the reduced level of TARs to the CHA’s more effective housing applicant screening, and more timely and active pursuit of rent delinquencies. However, we discerned a major reason for the reduced TARs was the CHA’s write-off of uncollectable TARs as losses to the CHA. From 1995 through 1999, the CHA wrote-off TARs totaling $2,257,226. Though these write-offs were decreasing each year, the CHA write-offs in 1999 still amounted to $310,641. Because recorded losses were so significant, we wanted to learn the process the CHA used for determining TAR losses, survey the process for effectiveness, and examine a sample of the losses the CHA has recorded for compliance with its procedures to ensure the loss designation was appropriate. We learned that the CHA process for writing-off TARs was not effective and caused potentially collectable TARs to be written-off prematurely. CHA Leverage To Collect Page 49 2001-PH-1002 Delinquent Rent Finding 4 As discussed in the preceding section, our audit work for the vacated tenants was to assure the CHA referred these delinquencies to their contract collection agency, and reported the delinquent vacated tenant to a credit-reporting agency. Other delinquent tenants vacated their public housing units because of reconstruction, but continue to receive housing assistance in the form of Section 8 vouchers. It was with these delinquent tenants, still relying on the CHA for housing assistance, where the CHA retained authority and leverage to persuade the tenant to pay rent delinquencies. CHA Reaction To It was the CHA procedure to compel delinquent vacated Defaulted Repayment tenants to enter into repayment agreements with the CHA. Agreements Through a repayment agreement, delinquent vacated tenants acknowledged their debts to the CHA and tenants had an avenue for repayment. Our review of delinquent tenants, relocated during 1999 from public housing to Section 8 housing because of modernization efforts, showed the CHA was inconsistent in its use of repayment agreements. Also, in those cases where the CHA executed a repayment agreement with a vacated tenant, the CHA did not aggressively pursue collection or eviction actions when the tenant failed to live up to the repayment agreement. The CHA’s lack of aggressive action may have sent the wrong message to the CHA tenants that they could get away without paying their rent, and may have caused the CHA to record rent losses that were collectable if it had been more diligent in its collection efforts. According to 24 CFR 982.552 (b), an authority may at any time terminate program assistance for a tenant, if the tenant currently owes rent to an authority in connection with Section 8 or public housing assistance. Also, an authority may terminate a tenant’s Section 8 assistance if the tenant breaches an agreement to pay amounts to an authority. The CHA’s ACOP in Chapter 14, provides that when families owe money to the CHA, the CHA will make every effort to collect it. Further, the Section 8 Administrative Plan requires the use of repayment agreements to collect past due rents. We reviewed files applicable to 13 delinquent tenants who, Delinquent Tenants because of the CHA’s modernization program, relocated Relocated to Section 8 from public housing to Section 8 housing during 1999. The Housing 2001-PH-1002 Page 50 Finding 4 13 tenants owed $28,958, ranging from $322 to $8,537 per tenant, at the time of their move-out. The CHA entered into voluntary repayment agreements Repayment Agreements with only 3 of the 13 relocated delinquent tenants. The Not Used for All three agreements were valued at $5,603. Two other tenants Delinquent Tenants with TAR balances totaling $2,395 executed repayment agreements about six months before they relocated to Section 8 housing. The two tenants stopped paying on these agreements when they relocated and CHA recorded the balances as losses. The CHA did not execute repayment agreements with the other eight tenants who owed $20,961 in back rent. The CHA wrote off the balances as losses even though the eight tenants continued to receive Section 8 housing benefits from the CHA. The CHA’s Deputy Executive Director could not explain why the CHA did not enter into repayment agreements with these eight tenants. The payment record for the three tenants who entered into Relocated Tenants repayment agreements when they relocated was only partly Defaulted On Their satisfactory. One tenant, with a $743 rent delinquency, was Repayment Agreements current with payments. The remaining two tenants stopped making payments on $4,860 in acknowledged debt after paying a total of $58. Subsequently, the CHA recorded the remaining $4,802 as losses. The CHA recorded losses for $28,158 of the $28,959 owed Withholding Section 8 by tenants who relocated to Section 8 housing. Though the Assistance Not Used As CHA could have used withholding Section 8 assistance as Motivator motivation for tenants to pay their back due rents, the CHA chose not to take this action. More recently, the CHA entered repayment agreements with two delinquent tenants and notified another tenant, without a repayment agreement, that it would terminate housing assistance unless the back rent is paid. We asked what action the CHA initiated on the other tenants, but the Deputy Executive Director did not respond to the question. The CHA needs to make clear to its tenants that relocating Need to Collect Funds from public housing to other housing assistance does not from Prior Delinquent erase debt, nor will it preclude the CHA from aggressively Tenants Receiving pursuing such debts. The CHA needs to make repayment Housing Assistance agreements with former delinquent tenants a precondition for their receiving Section 8 assistance. Tenants who Page 51 2001-PH-1002 Finding 4 choose not to enter repayment agreements, or do not comply with the agreement terms, should expect the CHA to terminate their Section 8 assistance payments. CHA agrees with the recommendations, but took exception Auditee Comments with some of the reported facts. CHA’s response is provided as Appendix B. OIG Evaluation of CHA comments were reviewed and considered, and there are Auditee Comments no modifications to the report. Recommendations We recommend that you request the Court to advise the Receiver to: 4G. Ensure the CHA has repayment agreements with all former public housing tenants, who relocated to Section 8 units from public housing, owing rent to the CHA. 4H. Direct the CHA to end Section 8 assistance payments for tenants who: • choose not to execute repayment agreements for their delinquent rent; or • acknowledge their debt with a repayment agreement, but do not comply with the terms of their repayment agreements. 2001-PH-1002 Page 52 Management Controls In planning and performing our audit, we considered the management control systems used by the CHA to determine our auditing procedures and to provide assurance on the management control. Management control is a process effected by an entity’s management, and other personnel, designed to provide reasonable assurance for achieving objectives for program operations, validity and reliability of data, compliance with applicable laws and regulations, and safeguarding resources. We determined the following control systems were relevant Internal controls assessed to our audit objectives: • analysis and development of management’s policies and procedures and related training; • procurement and administration of legal services; • development of procedures for credit card use and out-of-pocket expenses; and • reduction of rent receivables and improvement in rent collections. With the exceptions as noted in our scope limitations discussed elsewhere in this report, we obtained an understanding of the control structure for the above systems, as they relate to the audit objectives. We determined the risk exposure to design audit procedures. We concluded that we could perform the audit more efficiently by doing substantive tests without reliance on management control. Therefore, we did not necessarily make a complete assessment of the control design or determine whether the CHA placed all policies and procedures in operation. A significant weakness exists if management control does Significant Weaknesses not provide reasonable assurance that control objectives are Were Noted met. We observed significant weaknesses with: the update of CHA’s procedures (Finding 1); procurement and administration of legal services (Finding 2); processing for payment Receiver’s out-of-pocket expenses and credit card charges (Finding 3); and CHA practices to reduce tenants’ rent receivables and improve rent collections (Finding 4). . Page 53 2001-PH-1002 Management Controls (THIS PAGE LEFT BLANK INTENTIONALLY) 2001-PH-1002 Page 54 Follow Up On Prior Audits This audit represented a resumption of audit work we did at the CHA between July 22, 1997 and July 24, 1998. The initial audit work covered the period April 1, 1995 through March 31, 1998. Many of the conditions we planned to report as a result of the earlier audit work concerned Housing Quality Standards and maintenance issues which became invalid due to the CHA’s housing and modernization activities. However, there remained conditions, noted earlier, which remained unsettled and required updating to reflect current conditions. These conditions represented reportable matters and are addressed in this report. The OIG issued an internal Audit Related Memorandum (No. 99-PH-202-0801) to HUD that addressed an issue relating to the Receiver’s compensation and term of services to the CHA. Although we did not perform additional audit work in this area, we monitored HUD’s progress in implementing the recommendations from that internal audit report. Page 55 2001-PH-1002 Follow Up On Prior Audits (THIS PAGE LEFT BLANK INTENTIONALLY) 2001-PH-1002 Page 56 Appendix A Schedule Of Ineligible and Unsupported Costs Finding Type of Questioned Costs Number Ineligible 1/ Unsupported 2/ 2 $9,090 $11,501 3 2,759 11,015 1/ Ineligible amounts are those that are questioned because of an alleged violation of a provision of a law, Regulation, contract, grant, cooperative agreement or other agreement or document governing the use of funds, or are otherwise prohibited. 2/ Unsupported amounts are those whose eligibility or reasonableness cannot be clearly determined during the audit since they were not supported by adequate documentation or due to other circumstances. Under Federal cost principles, a cost must be adequately supported to be eligible. Page 57 2001-PH-1002 Appendix A (THIS PAGE LEFT BLANK INTENTIONALLY) 2001-PH-1002 Page 58 Appendix B Auditee Comments Page 59 2001-PH-1002 Appendix B 2001-PH-1002 Page 60 Appendix B Page 61 2001-PH-1002 Appendix B 2001-PH-1002 Page 62 Appendix B Page 63 2001-PH-1002 Appendix B 2001-PH-1002 Page 64 Appendix B Page 65 2001-PH-1002 Appendix B 2001-PH-1002 Page 66 Appendix B Page 67 2001-PH-1002 Appendix B 2001-PH-1002 Page 68 Appendix B Page 69 2001-PH-1002 Appendix B 2001-PH-1002 Page 70 Appendix B Page 71 2001-PH-1002 Appendix B 2001-PH-1002 Page 72 Appendix B Page 73 2001-PH-1002 Appendix B 2001-PH-1002 Page 74 Appendix B Page 75 2001-PH-1002 Appendix B 2001-PH-1002 Page 76 Appendix B Page 77 2001-PH-1002 Appendix B 2001-PH-1002 Page 78 Appendix B Executive Summary Page 79 2001-PH-1002 Appendix B (THIS PAGE LEFT BLANK INTENTIONALLY) 2001-PH-1002 Page 80 Appendix C General Counsel’s Review Procedures The CHA’s General Counsel established undocumented review procedures for processing legal service invoices. The review procedures described by Counsel were as follows: • General Counsel receives all incoming invoices for legal services. • Counsel reviews invoices for “fluff” charges and obvious errors. Counsel requests corrected invoices if problems exist with the original invoices. • Counsel approves only current charges for payment on any invoice. • Counsel does not authorize payment upon receipt of “past due” or “reminder” notices unless supported by a copy of the original detailed invoice. • Counsel approves amounts for payment by circling the amount on the invoice which Counsel initials and dates. • Counsel sends approved invoices to the Accounting Department. • Accounts Payable will not process any invoices for payment without Counsel’s approval. • The Accounting Department directs the approved invoices to the appropriate operational department for their approval. Finding 2 Page 81 2001-PH-1002 Appendix C (THIS PAGE LEFT BLANK INTENTIONALLY) 2001-PH-1002 Page 82 Appendix D Distribution Director, Office of Troubled Agency Recovery, PB Director, Office of Public Housing, Pennsylvania State Office, 3APH Secretary’s Representative, Mid-Atlantic, 3AS Audit Liaison Officer, 3AFI Departmental Audit Liaison Officer, FM (Room 2206) Deputy Chief Financial Officer for Finance, FF (Room 2202) Director, Office of Budget, FO (Room 3270) Acquisitions Librarian Library, AS (Room 8141) 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 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 GAO, 441 G Street, N.W., Room 2474, Washington, DC 20548, Attn: Stanley Czerwinski The Honorable Dan Burton, Chairman, Committee on Government Reform, 2185 Rayburn Building, House of Representatives, Washington, DC 20515 The Honorable Henry Waxman, Ranking Member, Committee on Government Reform, 2204 Rayburn Building, House of Representatives, Washington, DC 20515 Mr. Steve Redburn, Chief, Housing Branch, Office of Management & Budget, 725 17th Street, N.W., Room 9226, New Executive Office Building, Washington, DC 20503 Executive Director, Chester Housing Authority, 1010 Madison Street, PO Box 380, Chester, Pennsylvania 19016-0380 Honorable Norma S. Shapiro, United States District Court, Eastern District of Pennsylvania, 10614 United States Courthouse, Independence Mall West, Philadelphia, Pennsylvania 19106-1774 Mr. Robert Rosenberg, Receiver, Chester Housing Authority, c/o Rosenberg Housing Group, Inc., 419 Park Avenue South, Suite 807, New York, NY 10016 Ms. Evette Hester, Deputy Executive Director, Chester Housing Authority, 1010 Madison Street, PO Box 380, Chester, Pennsylvania 19106-0380 Ms. Maria Zissimos, General Counsel, Chester Housing Authority, 1010 Madison Street, PO Box 380, Chester, Pennsylvania 19106-0380 Page 83 2001-PH-1002
Chester Housing Authority, Chester, PA
Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-02-15.
Below is a raw (and likely hideous) rendition of the original report. (PDF)