AUDIT REPORT RIDGEVIEW MANOR APARTMENTS HOPKINS, SOUTH CAROLINA 2002-AT-1006 SEPTEMBER 30, 2002 OFFICE OF AUDIT, REGION 4 Table of Contents Exit Issue Date September 30, 2002 Audit Case Number 2002-AT-1006 TO: Glenda Fesperman, Acting Director, Columbia Multifamily Program Center, 4EHM FROM: Nancy H. Cooper Regional Inspector General for Audit, Region 4, 4AGA SUBJECT: Ridgeview Manor Apartments Hopkins, South Carolina We have completed an audit of Ridgeview Manor Apartments as requested by your office. This report contains three audit findings that require follow-up action by your office to implement appropriate corrective action. In accordance with Department of Housing and Urban Development (HUD) Handbook 2000.06 REV-3, within 60 days please provide us, for each recommendation without management decisions, 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. Additional status reports are required at 90 days and 120 days after report issuance for any recommendation without a management decision. Also, please furnish us copies of any correspondence or directives issued because of the audit. We have provided a copy of the audit report to Ridgeview Manor owners. If you have any questions, please contact me or contact Terry Cover, Assistant Regional Inspector General for Audit, at (404) 331-3369. Table of Contents Exit Management Memorandum THIS PAGE LEFT BLANK INTENTIONALLY 2002-AT-1006 Page ii Table of Contents Exit Executive Summary This report presents the results of our audit of Ridgeview Manor, FHA project number 054-43072. Our objectives were to determine if funds provided under a Section 232 HUD insured mortgage were properly expended for authorized activities, and if cost certification statements for the mortgage were valid. Ridgeview Manor’s $2.9 million project cost certification overstated project costs by $223,138 due to the inclusion of non-existent, ineligible, and unsupported costs. Additionally, Ridgeview owners disbursed $212,714 of construction funds and $61,815 of operating funds for ineligible uses during the period from January 1999 through February 2001. An additional $30,414 of construction expenditures and $20,419 of operating expenditures were unsupported. Improper draws of construction (mortgage) funds totaling $209,119 and unauthorized loans facilitated the ineligible expenditures. The improper draws were also based on non-existent and ineligible costs, and on accounts payables that Ridgeview did not pay in full. Ridgeview’s internal controls were not adequate to ensure proper accounting, timely submission of financial reports to HUD, and to safeguard assets against theft, loss, and misuse. Lastly, A&R Enterprises, a former management company, made unauthorized loans to Ridgeview, retained $19,571 of rental income belonging to Ridgeview Manor as repayment on the loans, and inflated prices for goods it provided to Ridgeview by $12,580. We recommended that HUD: Recommendations · Require Ridgeview in cure all defaults of the Regulatory Agreement before proceeding to final loan closing. If HUD decides to grant final endorsement of the loan, HUD should recompute the Maximum Insurable Mortgage to exclude $223,138 of non-existent, ineligible, and unsupported costs. · Require that Ridgeview owners pay $212,714 to the mortgagee for ineligible expenditures of mortgage funds. · Require Ridgeview owners to pay $61,815 to the operating account to replace funds expended for ineligible purposes. · Require Ridgeview owners to provide adequate support for disbursements of $30,414 or pay that amount to the mortgagee. Page iii 2002-AT-1006 Table of Contents Exit Executive Summary · Require Ridgeview owners to provide adequate support for $15,000 paid to an owner’s wife from the operating account or repay the operating account from non-project funds. · Require the construction contractor to submit an audited cost certification statement. · Require Ridgeview to submit a new security agreement covering all furniture and equipment purchased for use in the facility. · Require Ridgeview Manor to hire a qualified management agent capable of implementing adequate internal controls, and ensuring that accounting records are maintained in accordance with HUD requirements and financial reports are timely submitted. · Debar A&R Enterprises and its affiliates from participation in HUD programs. We provided the draft report to HUD officials and Ridgeview owners on June 13, 2002, and discussed findings with HUD officials and Ridgeview owners at an exit conference on July 2, 2002. The HUD Office of Multifamily Housing generally agreed with the findings and recommendations presented in the draft report. Ridgeview owners, through their accounting service, Automated Business Services, Columbia, South Carolina, provided written comments and additional information on July 31, 2002. Ridgeview Manor owners disagreed with many of the facts and conclusions presented in the draft. Their comments were incorporated in the Finding sections of this report. Based on the additional documentation they provided, we revised Finding 2 to show that adequate support was provided for five previously unsupported transactions. On September 9, 2002, we issued the final draft incorporating these changes and requested formal comments from the Ridgeview owners. Their written reply dated September 16 did not address the findings and recommendations and provided no substantive information. Both written replies are attached as Appendix C. 2002-AT-1006 Page iv Table of Contents Exit Table of Contents Management Memorandum i Executive Summary iii Introduction 1 Findings 1. Ridgeview Owners Overstated Project Costs and Incurred 3 Ineligible and Unsupported Project Costs 2. Ridgeview Internal Controls Were Inadequate 13 3. Prior Management Company Violated HUD Requirements 21 Management Controls 25 Follow-Up On Prior Audits 27 Appendices A. Schedule of Questioned Costs 29 B. Schedule of Certified Costs and Payables, Draw Amounts And Supported Costs/Payables 31 C. Ridgeview Comments 33 Page v 2002-AT-1006 Table of Contents Exit Table of Contents D. Distribution 39 Abbreviation HUD Department of Housing and Urban Development 2002-AT-1006 Page vi Table of Contents Exit Introduction Ridgeview of the Midlands, LP, dba Ridgeview Manor, is a limited partnership organized under the laws of South Carolina. Its primary mission is to provide a safe, clean, and pleasant atmosphere in nursing and assisted living facilities to those seeking care. In 1998, Ridgeview of the Midlands applied for and was approved to receive a $2.8 million HUD insured Section 232 mortgage to construct a new 30 bed nursing home, and rehabilitate a previously existing facility into a 26 bed assisted living facility. Ridgeview of the Midlands has no other business activities involving HUD. Ridgeview of the Midlands is owned as follows: (1) limited partner MacJoe LLC owns a 49.5 percent interest. MacJoe is owned by F. McCord Ogburn, President of Ridgeview of the Midlands, and Joseph F. Saleeby, Vice President of Ridgeview of the Midlands, (each having a 50 percent interest in MacJoe), (2) limited partners Jerry Yarborough, Secretary of Ridgeview of the Midlands, and James Kirby, Treasurer of Ridgeview of the Midlands, each own a 24.75 percent interest. (3) general partner Ridgeview Inc., a corporation organized under the laws of South Carolina, owns a 1 percent interest. Ogburn, Saleeby, Kirby, and Yarborough are each 25 percent shareholders in the general partner. HUD’s Columbia Office of Multifamily Housing in Columbia, South Carolina, is responsible for overseeing Ridgeview of the Midlands compliance with HUD requirements. Ridgeview of the Midlands maintains books and records for the facility at various locations including a previous accountant’s office in Columbia, South Carolina; the current bookkeeping service facility in Columbia, South Carolina, and the Ridgeview Manor facility, located at 1645 Ridge Road, Hopkins, South Carolina. The objective of our audit was to determine if funds Audit Objectives provided under a Section 232 HUD insured mortgage were properly expended for authorized activities. Further, it was our objective to determine if the cost certification for the mortgage was valid. Due to the conditions noted during the audit, we expanded the audit scope to include tests of operating expenditures. To accomplish our objectives, we interviewed Columbia, Audit Scope and SC, Office of Multifamily Housing staff and Ridgeview Methodology owners, employees, and business associates, and we reviewed pertinent project files at the HUD office and Page 1 2002-AT-1006 Table of Contents Exit Introduction Ridgeview office. Our audit included evaluations and tests of: · management controls pertinent to our audit, · project accounting records and supporting documentation, · mortgage draw requests submitted by Ridgeview, · the project cost certification and supporting documentation, and · compliance with program requirements. To ensure that the cost certification was valid, we reviewed each line item and traced the certified cost back to supporting documentation. To evaluate the propriety and accuracy of operating expenditures and accounting records we selected two non-representative samples of expenditure transactions. The results of these transaction tests cannot be considered representative of all transactions. We selected 25 transactions from the operating account check register for the period November 2000 through February 2001, and 26 transactions from the general ledger for the period January 1999 through October 2000. We selected transactions involving high and even dollar amounts, payments to cash, and payments to persons/entities that did not appear to be 'normal' vendors. We also examined four months of bank records to confirm payments because the owners were unable to provide any supporting documentation. We also reviewed each transaction relating to a line of credit established by Ridgeview. Our audit primarily covered the period of November 1998 through August 2000. However, we extended the period as deemed necessary to achieve our objectives. We performed the audit from August 2001 through June 2002. We performed the audit in accordance with generally accepted government auditing standards. 2002-AT-1006 Page 2 Table of Contents Exit Finding 1 Ridgeview Owners Overstated Project Costs and Incurred Ineligible and Unsupported Project Costs Ridgeview Manor’s certified project cost statement (a) overstated project costs by $223,138 due to inclusion of non-existent, ineligible, and unsupported costs, and (b) omitted other costs paid and payable of $65,073. Ridgeview owners also disbursed $212,714 of construction funds and $61,815 of operating funds for ineligible uses. An additional $30,414 of construction expenditures and $15,000 of operating expenditures were unsupported. These improper disbursements were facilitated by improper mortgage draws of $209,119 and unauthorized loans and lines-of-credit totaling at least $217,591. These conditions occurred, in part, because the facility generated insufficient revenues to cover operating expenses, and the owners used mortgage funds and unauthorized loans to make-up shortfalls rather than contribute additional capital. As a result, Ridgeview Manor owners overstated the project certified cost and risked the financial viability of the project. The overstatement of project costs and improper use of mortgage funds undermined the purpose of the section 232 program and could have caused HUD to over insure the mortgage. The project owner must certify that costs submitted on Criteria draw request forms have been paid or will be paid within five days of receiving loan funds. The cost certification statement (column A) should include costs actually paid in cash as of the date of the form. Column B of the certification form should include all costs to be paid within 45 days (payables) of the date of the form.1 The forms also require that the owner certify that all prior work, labor, and materials to be paid for with the requested funds are satisfactory and in accordance with contract drawings.2 HUD regulations state that owner advances made for reasonable and necessary operating expenses may be repaid from surplus cash at the end of the annual or semi-annual period. However, repayment of owner advances when the project is in a non-surplus cash position may subject the owner to criminal and civil monetary penalties.3 1 HUD Form 92403 (8/94) 2 HUD Handbook 4470.2 Rev 1 Chapter 4-1 (4/94) 3 HUD Handbook 4370.2 Rev 1 Chapter 2-11 Page 3 2002-AT-1006 Table of Contents Exit Finding 1 Ridgeview Manor owners improperly drew $209,118.90 of Mortgage funds were construction loan funds by overstating costs cited in draw improperly drawn requests. · Price quotations - Ridgeview submitted price quotations totaling $153,512.27 with draw requests. The price quotes appeared to be invoices, but were not billed to, nor paid by, Ridgeview. The vendors informed us that the ‘invoices’ were price quotations rather than bills. Certified construction costs also included these price quotations. · Costs not incurred - Ridgeview Manor drew $37,500 for pre-marketing expenses shown as paid or payable to two management companies. However, these costs were not incurred and no corresponding disbursements were made. One management company stated they did not bill Ridgeview for the $20,800 listed in the draw request. Ridgeview Manor owners stated that the other management company, A&R Enterprises, forgave the $16,700 debt (for pre-marketing expense) and Ridgeview transferred the funds to its operating account. · Costs Not Paid - Draw requests included $18,106.63 for payables that were not paid to the vendors. Ridgeview Manor owners drew $15,383.74 in one request and did not pay the vendor. Further, the owners drew $2,722.89 for equipment and did not pay another vendor. The cost certification also improperly included the $2,722.89 drawn but not paid to the vendor. Through improper draw requests, project owners were able to circumvent the need for additional capital contributions to cover shortages in operating funds and to incur ineligible expenses. Ridgeview’s owners stated that they submitted documentation with draw requests that was acceptable to HUD, and if the documentation was incomplete, they should have been notified at that time. As explained to the 2002-AT-1006 Page 4 Table of Contents Exit Finding 1 owners at the exit conference, HUD does not audit transactions documented in draw requests. Our audit found that Ridgeview overstated costs submitted with its draw requests, because it had no evidence that it paid $209,119 of purported costs. Ridgeview Manor improperly established at least three Unauthorized loans were loans/lines of credit without HUD approval. The obtained unauthorized loans allowed the owners to avoid making capital contributions to cover operating shortages and ineligible costs. We identified two loans totaling $22,500 from the general contractor, and a revolving line of credit for $60,000 from First Community Bank. Ridgeview received advances on the line of credit totaling $135,091. Ridgeview deposited at least $50,000 from the line of credit in the construction account. Ridgeview also received $60,000 from A&R Enterprises, a former management company, which was identified as operating loans by an A&R official. A&R had no documentation to show the funds were loans, but provided documentation confirming wire transfers from A&R’s bank account to Ridgeview’s account for $25,000 on November 8, 1999, and $35,000 on August 28, 2000. Further, A&R identified a $25,000 payment from Ridgeview on December 15, 1999, as repayment of the corresponding “loan.” We also noted other deposits to the construction account totaling $30,238.48, but were unable to identify their source. HUD Regulations prohibit an insured project from incurring liabilities (other than the mortgage) that are not in the form of HUD approved promissory notes. By accepting a loan from their general contractor, Ridgeview created an identity of interest with the contractor. HUD requires that the contractor submit an audited cost certification when an identity of interest exists. Ridgeview’s owners stated orally at the exit conference and in their written reply to the draft report that they did not receive loans from A&R Enterprises nor their contractor. Their written reply stated that amounts cited as loans by an A&R official were management fees not paid to A&R. Page 5 2002-AT-1006 Table of Contents Exit Finding 1 This explanation does not logically explain $60,000 wired to Ridgeview’s bank account from A&R’s bank account. Correspondence dated May 21, 2001, from Ridgeview’s current accounting service to HUD also acknowledged debt owed to A&R Enterprises. An invoice, correspondence, and repayment by Ridgeview provide conclusive evidence that Ridgeview received loans from the contractor. Thus we conclude that Ridgeview did receive undocumented loans from both A&R and the contractor. Cost certification contained Ridgeview Manor’s project cost certification statement was non-existent, ineligible and overstated by $223,137.67 due to the inclusion of non- unsupported costs existent, ineligible, and unsupported costs. Costs paid were overstated by $221,594.81 and costs payable were overstated by $1,542.86. We also identified $6,768.77 of paid costs and $58,303.76 of payables that were omitted from the cost certification statement. Overstatement of the project cost could have resulted in HUD overstating the Maximum Insurable Mortgage, putting excess HUD funds at-risk. Furthermore, the incorrect cost certification would allow Ridgeview owners to deposit insufficient funds in escrow at the loan closing to cover outstanding payables. Ridgeview’s cost certification identified $2,432,015.97 of paid costs and $432,898.37 of payable costs as of August 31, 2000. Overstatements of eligible paid costs totaled $221,594.814, including the following items. · Non-existent Costs – Certified costs included $188,710.53 of non-existent costs. Price quotations on equipment for $153,512.27 were improperly included in the cost certification. Pre-marketing expense of $18,650 that was not incurred was improperly included. An $18,650 check was written to a former management company, but had been endorsed by Ridgeview and deposited in the Ridgeview operating account. As such, it did not represent an expense to Ridgeview. Additionally, Ridgeview included the $104,631 escrow accounts (working capital, minor movables and operating deficit) in certified costs, but had only paid 4 Cost overstatements identified in this section exceed the total overstatement of $221,594.81 by $10,326.48. This difference exists because documents supporting the cost certification totaled $10,326.48 more than the $200,185.18 claimed on line 15b of the certification. 2002-AT-1006 Page 6 Table of Contents Exit Finding 1 $88,082.745 for eligible expenses. The remaining $16,548.26 was improperly included in the certification. · Duplicated Costs – The cost certification line item for ‘minor movables’ included $9,687.95 for goods procured using escrow funds. Ridgeview Manor duplicated these costs by also including them in the “other approved financing expense” line of the certification statement. · Ineligible Costs – Ineligible costs totaling $33,529.78 were included in the cost certification. Ineligible costs included an $8,250 consultant fee that had been refunded to Ridgeview Manor, $15,393.39 in architect design fees that had been previously disallowed by HUD, $8,000 for a software lease that should have been paid from operating funds and $1,886.39 for a computer that was missing during our review of assets. · Costs Difference – The cost certification contained differences between supporting documentation and certified cost that understated the total by $6.97. The cost certification overstated construction costs payable by $1,542.86. · Unsupported costs - The cost certification included $23,271.04 of unsupported payables. Ridgeview certified these costs as payable to a vendor, but was unable to provide any supporting documentation. · The cost certification understated costs payable by $21,728.18 because damages due from the general contractor were incorrectly computed. Ridgeview’s owners’ response after the exit conference stated: “The Cost Certification was performed by a HUD approved CPA. The Cost Certification was approved when submitted. The partners feel it is unreasonable to ask for clarification and documentation after this extended period 5 Withdrawals from escrow were $2,722.89 more than costs paid because one vendor was not paid. This payable was supported for $2,871.96, but was omitted from the payables section of the cost certification by Ridgeview. See section on omitted costs payable. Page 7 2002-AT-1006 Table of Contents Exit Finding 1 of time.” We deem Ridgeview’s owners’ statements to be unresponsive to the deficiencies identified by our audit. Cost certification omitted The cost certification omitted $6,768.77 of paid costs and some costs $58,303.76 of payables. Invoices for linens and a copying machine supported the $6,768.77 of paid costs. The $58,303.76 of payables included equipment we confirmed was present at the facility. An unpaid invoice from the general contractor supported $55,431.80 of equipment, and we identified $2,871.96 payable to another vendor while confirming transactions. These payables were also omitted from Ridgeview’s general ledger. Since these costs were omitted from the cost certification and/or had not been paid, HUD will need to determine whether they may be included in certified cost and the calculation of the maximum insurable mortgage. Ineligible and unsupported Ridgeview Manor owners disbursed an additional disbursements during $286,412.03 of construction and operating funds for project construction ineligible and unsupported purposes. These disbursements were not included in the project cost certification and, thus, are in addition to ineligible costs identified in the cost certification. The following table summarizes the ineligible and unsupported disbursements. Table 1 Ineligible and Unsupported Disbursements Description - Ineligible: Construction Operating Improper transfers from construction/ mortgage funds to the operating account. $ 88,375.00 Use of construction funds for operating expenses. 4,902.11 Payments to Banks for unknown costs. 31,767.00 Payments on Unauthorized Line of Credit. 16,139.63 $61,814.69 Payment on Unauthorized Loan from Contractor. 13,000.00 Payment to A&R Enterprises for undocumented loan. 25,000.00 Ineligible Subtotal: $179,183.74 $61,814.69 Description – Unsupported: Payments to Owner & Spouse for services. 15,000.00 Payments from construction account, payable to Ridgeview, not traceable to operating accounts. 3,161.37 Untraceable payments, could not determine payee. 27,252.23 Unsupported Subtotal $30,413.60 $15,000.00 Total Ineligible and Unsupported $209,597.34 $76,814.69 2002-AT-1006 Page 8 Table of Contents Exit Finding 1 · Ridgeview Manor owners improperly transferred $88,375 from the construction account to the operating and payroll accounts. · Ridgeview Manor owners drew checks totaling $4,902.11 on the construction account for payment of miscellaneous operating expenses. · Ineligible and Unsupported Disbursements – Ridgeview Manor owners paid $31,767 to First Union and First Community Banks. Ridgeview owners did not include these disbursements in the cost certification statement and were unable to produce supporting documentation. Therefore, we deemed these disbursements as an ineligible use of construction funds. · Ridgeview Manor owners made payments on the unauthorized loans and line of credit while in a non-surplus cash position. Ridgeview Manor paid $16,139.63 from construction funds on the unauthorized line of credit and $13,000 on loans from its construction contractor. Ridgeview owners also paid $61,814.69 from operating funds for repayments on the line of credit. · Payment for $25,000 was made via check No. 130, dated December 15, 1999, to A&R Enterprises. The check noted the payment as “Computer Software,” (an ineligible use of construction funds), but was not recorded in Ridgeview’s books and was not included in Ridgeview’s cost certification. A&R stated this was a loan repayment but had no supporting documentation for a loan. However, the payment correlated with a $25,000 wire transfer from A&R to Ridgeview on November 8, 1999, that A&R cited as a loan to Ridgeview. Ridgeview owners stated no loans were received from A&R, but documentary evidence shows that they did receive $60,000 in wire transfers. We deemed this an ineligible use of construction funds. Page 9 2002-AT-1006 Table of Contents Exit Finding 1 · Ridgeview Manor owners paid $15,000 to a partner’s wife. The partner stated the payments were for his wife’s services as the acting director of nursing and were not intended as management fees. However, the partner had previously submitted a written explanation to HUD stating the payments were for general manager services provided by the partner and wife. Correspondence from Ridgeview’s attorney to HUD stated the payments were for assisting the owner in management of the facility. Although the wife was paid as a contractor, no contract or bills for her services were provided. HUD had not approved the partner or wife to provide management services. · Unauthorized Transfers of Funds from Construction Account – Ridgeview owners transferred $30,413.60 from the construction account to unidentified payee accounts. Ridgeview’s bank statements showed four transfer transactions totaling $27,252.23. Ridgeview could not provide support for the purpose and destination of the transfers. · Miscellaneous Debit 12/18/98 $ 712.59 · Miscellaneous Debit 08/02/00 $15,000.00 · Miscellaneous Debit 05/08/01 $ 3,539.64 · Miscellaneous Debit 05/09/01 $ 8,000.00 Checks for the remaining $3,161.37 were made payable to Ridgeview Manor. However, we could not identify the checks as being deposited into Ridgeview’s operating accounts and their purpose was not documented. At the exit conference, Ridgeview’s owners acknowledged that it was a mistake to transfer funds from the construction account to the operating account. They stated that their former management agent, A&R Enterprises, instructed them to make the transfers. 2002-AT-1006 Page 10 Table of Contents Exit Finding 1 Comments on the initial draft report, at the exit conference Ridgeview Comments by the Ridgeview owners and in a written response from their accounting service, were incorporated into the Findings. A final draft report was then issued with a request for the owners’ formal written comments. Their written reply did not address the findings and provided no additional information. OIG Evaluation of We incorporated our evaluation of Ridgeview’s comments Ridgeview Comments on the initial draft report into the finding above. Since their written reply to the final draft provided no information and did not address the finding, we have no further evaluation comments. Recommendations We recommend that you: 1A. Require Ridgeview to cure all violations of the Regulatory Agreement before proceeding to final loan closing. If HUD decides to grant final endorsement of the loan, HUD should recompute the Maximum Insurable Mortgage to exclude $223,137.67 of non-existent, ineligible, and unsupported costs, and determine whether to allow any of the $65,072.53 omitted from the project cost certification. 1B. Require Ridgeview owners to pay $212,713.52 to the mortgagee for ineligible disbursements of construction funds, ($33,529.78 in the cost certification and $179,183.74 other ineligible.) Repayment must be from non-project funds. 1C. Require the owners of Ridgeview to pay $61,814.69 into the operating account to replace ineligible disbursements. Repayment must be from non- project funds. Page 11 2002-AT-1006 Table of Contents Exit Finding 1 1D. Require Ridgeview owners to provide adequate support for $30,413.60 disbursed from the construction account, or pay the mortgagee from non-project funds. 1E. Require Ridgeview owners to provide adequate support for $15,000 paid to an owner’s wife from the operating account, or repay the account from non-project funds. 1F. Require the general contractor to submit an audited cost certification statement. 2002-AT-1006 Page 12 Table of Contents Exit Finding 2 Ridgeview Internal Controls Were Inadequate Ridgeview Manor’s accounting and management controls were inadequate to ensure that a) accounting reports were accurate and timely submitted to HUD, b) books and records were complete, accurate, and transactions were properly supported, and c) assets were properly safeguarded against theft, loss, and misuse. The controls were inadequate because Ridgeview Manor’s owners did not follow guidance prescribed in HUD Handbooks and its Regulatory Agreement. As a result, Ridgeview did not timely submit monthly accounting reports to HUD, accounting records were incomplete, inaccurate and unreliable, and project assets were at risk for loss, theft, or misuse. HUD regulations required project owners and management Criteria agents to maintain (1) accounting records in accordance with Generally Accepted Accounting Principles and (2) an approved invoice, bill, or other supporting documentation for operating disbursements. HUD regulations further provide that invoices should be marked "paid" and the check number and date should be posted to invoices. Regulations also required that numbered rent receipts be used and reconciled to actual collections.6 Generally Accepted Accounting Procedures encourage separation of duties, defined in the Office of Management and Budget Circular 123 as separation of the duties of authorizing, processing, recording, and reviewing transactions between multiple individuals. HUD regulations also provided that if the owner/agent failed to follow proper record-keeping and reporting requirements, or an owner/agent did not provide the required reports to HUD, the owner/agent may be considered in violation of the applicable HUD agreement or contract. Ridgeview Manor and its management company A&R Ridgeview owners did not Enterprises did not timely submit accounting reports as timely submit accounting requested by HUD. HUD was not provided with monthly reports accounting reports for October 2000 through April 2001 until May 2001. Ridgeview Manor owners attributed this deficiency in part to a lack of documentation resulting from a poor relationship with their prior management company 6 HUD Handbook 4370.2 Page 13 2002-AT-1006 Table of Contents Exit Finding 2 (A&R Enterprises). However, Ridgeview owners fired A&R Enterprises in October 2000 and took over management responsibilities, including preparation of monthly accounting reports, at that time. Audited financial statements were due to HUD 60 days after the December 31 close of Ridgeview’s fiscal year. As of October 16, 2001, audited financial statements had not been submitted to HUD. During our audit, Ridgeview owners provided us with Fiscal 2000 financial statements marked “Tentative” with a tentative auditor disclaimer on the fairness of the financial reports. Annual and monthly accounting reports were a critical tool for evaluation of project performance. Without timely reports, HUD could not assess the project’s financial status and identify any corrective actions needed. We noted numerous accounting deficiencies during the Ridgeview Manor’s books and time periods when A&R Enterprises was the management records were not complete and agent and, subsequently, when Ridgeview owners managed accurate the project. Ridgeview did not record construction expenditures and receipts of mortgage funds in its general ledger. Thus, the general ledger was materially incomplete and accounting controls over project construction and funding were non- existent. We reviewed 25 operating transactions totaling $47,951.41 between November 2000 and February 2001 when Ridgeview owners managed the project. Nine transactions totaling $34,753.73 were not adequately supported and/or were not properly recorded. After the exit conference on July 2, 2002, Ridgeview provided satisfactory documentation for five transactions, as noted in the table below. 2002-AT-1006 Page 14 Table of Contents Exit Finding 2 Transaction Transaction Transaction Date Source Amount Observations 11/21/00 Check # 50036 $ 300.00 Supporting documentation for the first 12/09/00 Check # 50067 417.90 five transactions was provided after the 10/10/01 Check # 50115 6,465.87 July 2, 2002, exit conference. 01/11/01 Check # 50141 300.00 01/25/01 Check # 50156 300.00 01/11/01 Check # 50142 488.28 Interest payment on a line of credit was an ineligible expense because project was in a non-surplus cash position. Transaction was improperly recorded to wages/payroll payable account. 01/12/01 Check # 50146 25,000.00 Invoice from MTX , a physical therapy firm, provided after exit conference. Payment incorrectly recorded to wages/payroll payable account. 12/14/00 Check # 50089 175.24 Expenses misclassified – various items such as copier paper and bakeware incorrectly classified as housekeeping expense. 01/25/01 Check # 50153 1,306.44 Transaction was a patient refund, improperly classified in suspense account. Totals $34,753.73 Supported after 07/02/02 = $7783.77 Total Ineligible = $488.28 Misclassified = $26,481.68 We reviewed 26 transactions totaling $207,161.56 recorded by A&R Enterprises between January 1999 and October 2000. Sixteen transactions totaling $95,419.44 were not adequately supported. Page 15 2002-AT-1006 Table of Contents Exit Finding 2 Transaction Unsupported Date Payee Amount Observations 05/99 Petty Cash $ 353.11 Unsupported – no receipts identifying purpose of expense. 07/99 Petty Cash 364.65 Unsupported – no receipts identifying purpose of expense. 03/99 No Payee 50.00 Unsupported – no invoice and Payee not identified 03/99 No Payee 290.00 Unsupported – no invoice and Payee not identified. 03/99 No Payee 202.76 Unsupported – no invoice and Payee not identified. 02/00 Petty Cash 986.47 Unsupported – no receipts identifying purpose of expense. 06/00 Petty Cash 867.51 Unsupported – no receipts identifying purpose of expense. 06/00 Petty Cash 431.62 Unsupported – no receipts identifying purpose of expense. 07/00 Petty Cash 467.62 Unsupported – no receipts identifying purpose of expense. 08/00 Petty Cash 513.11 Unsupported – no receipts identifying purpose of expense. 08/00 Petty Cash 392.09 Unsupported – no receipts identifying purpose of expense. 10/00 Petty Cash 500.00 Unsupported – no receipts identifying purpose of expense. 03/00 Deposit 25,000.00 No supporting documentation for $25,000 included in deposit of $59,089.09. Audit found this was a transfer from construction funds.7 04/00 Deposit 15,000.00 No supporting documentation for $15,000 included in deposit of $48,663.61. Audit found this was a transfer from construction funds.7 08/00 Deposit 35,000.50 No supporting documentation – no loan document. 10/00 A&R 15,000.00 Unsupported – no documentation for payment. Enterprises Total $95,419.44 Unsupported Deposits = $75,000.50 Unsupported Disbursements = $20,418.948 7 The two unsupported deposits ($25,000 and $15,000) are included in $88,375 of improper transfers cited in Finding 1 8 Of the $20,418.94 shown, the $15,000 check to A&R Enterprises was returned by the bank and not paid. Therefore, Recommendation 2B addresses the balance of $5,418.94. 2002-AT-1006 Page 16 Table of Contents Exit Finding 2 We also noted various other transactions that were improperly recorded, including various loan transactions that were unrecorded or were improperly recorded as revenue or other income. For example: · In December 2000, $28,300 obtained from the line of credit was recorded as patient revenue. · Ridgeview’s general contractor provided a $9,500 loan that was not recorded in Ridgeview’s books. · Review of bank records and the general ledger identified receipts totaling $3,273 for August 1999 that were recorded in the general ledger, but were not deposited into the bank. · In September 1999, $14,904 was paid from the checking account, but no entries for disbursements were made to the general ledger. · In October 1999, receipts totaling $708.84 were posted to the general ledger, but did not appear in the bank statements. · In November 1999, $7,252.70 of expenses was recorded in the general ledger, but the expenses were not actually paid. See Finding 3 for other examples of improper record keeping. The separation of duties over petty cash was not sufficient Petty cash was not properly to protect funds from theft, loss, or misuse. The asset safeguarded custodian and approving officials had access to the funds and made petty cash disbursements. The current bookkeeping service had acknowledged that the petty cash fund was not properly safeguarded and was planning to develop and implement control procedures. Ridgeview Manor did not maintain cash receipts or paid Cash receipts and paid invoices in accordance with HUD regulations. Ridgeview invoices were not properly Manor staff stated they did not use numbered receipts, and maintained the bookkeeping service did not mark invoices and corresponding vouchers as paid and did not post the check number on paid invoices. As a result, cash receipts were Page 17 2002-AT-1006 Table of Contents Exit Finding 2 not adequately safeguarded and there was no assurance that a voucher/invoice could not be submitted for a duplicate or second payment. Security agreement omitted We also noted that the security agreement submitted by some assets Ridgeview Manor did not identify all assets purchased for the project. The security agreement included only $112,181 of $234,850 of assets included in the certified cost. Comparison of the assets included in the cost certification and the assets included in the security agreement showed that furniture for the renovated assisted living facility was not included in the security agreement. HUD regulations required that equipment and furniture included in replacement cost, even if paid for by the mortgagor, be included in the mortgage security and covered by a security agreement or other instrument creating a security interest for the mortgagee. Ridgeview Comments Comments on the initial draft report, at the exit conference by the Ridgeview owners and in a written response from their accounting service, were incorporated into the Findings. A final draft report was then issued with a request for the owners’ formal written comments. Their written reply did not address the findings and provided no additional information. OIG Evaluation of We incorporated our evaluation of Ridgeview’s comments Ridgeview Comments on the initial draft report into the finding above. Since their written reply to the final draft provided no information and did not address the finding, we have no further evaluation comments. Recommendations We recommend that you: 2A. Require Ridgeview Manor to hire a qualified management agent capable of ensuring adequate internal controls are implemented, accounting records are maintained in accordance with HUD requirements, and financial reports are timely submitted. 2002-AT-1006 Page 18 Table of Contents Exit Finding 2 2B. Require Ridgeview owners to provide proper supporting documents or repay the operating account $5,418.94 for unsupported disbursements. Repayment must be from non-project funds. 2C. Require Ridgeview to submit a new security agreement covering all furniture and equipment purchased for use in the facility. Page 19 2002-AT-1006 Table of Contents Exit Finding 2 THIS PAGE LEFT BLANK INTENTIONALLY 2002-AT-1006 Page 20 Table of Contents Exit Finding 3 Prior Management Company Violated HUD Requirements A&R Enterprises, the management company for Ridgeview Manor from August 1999 through October 2000, violated its Management Agreement and HUD regulations. A&R Enterprises (a) improperly retained project rental income, (b) improperly charged Ridgeview Manor inflated prices for goods it provided for the facility, and (c) did not maintain accurate accounting records and provide required accounting reports to HUD. As a result, A&R Enterprises improperly benefited at Ridgeview’s expense, and Ridgeview Manor incurred revenue losses of $19,570.67 and excessive development costs of $12,579.94. Additionally, A&R Enterprises could not provide HUD with accurate financial information on the project. A&R Enterprises entered into a HUD Management Criteria Agreement that required it to comply with HUD regulations and the project Regulatory Agreement. The Regulatory Agreement provided that all rents/receipts were to be deposited in the name of the project in a financial institution whose deposits are Federally insured. The Management Agreement required that the A&R Enterprises assure that all expenses of the project are reasonable and necessary; exert reasonable effort to maximize project income and take advantage of discounts, rebates, and similar money-saving techniques; obtain contracts, materials, supplies, and services on terms most advantageous to the project; and credit the project with all discounts or commissions received. HUD regulations also required that all operating account disbursements be supported by an approved invoice/bill or other supporting documentation, and that books be maintained in accordance with Generally Accepted Accounting Principles. HUD regulations also provided that if the owner/agent failed to maintain project books and records in a reasonable condition for proper audit under HUD requirements or an owner/agent did not provide the required reports to HUD, the owner/agent may be considered in violation of the applicable HUD agreement/contract. HUD directives provide that persons may be debarred from participation in any HUD program or activity for a material violation of a statutory or regulatory provision or program requirement Page 21 2002-AT-1006 Table of Contents Exit Finding 3 applicable to a public agreement or transaction, including conditional or final commitment to insure. A&R Enterprises made unauthorized loans to Ridgeview Management agent made (see Finding 1) and retained a $19,570.67 Medicaid unauthorized loans and reimbursement check that should have been deposited into retained project income the operating account of Ridgeview Manor. A&R Enterprises deposited this check in its bank account on October 23, 2000, as partial repayment of an unapproved loan in made to Ridgeview Manor. A&R Enterprises and Ridgeview’s owners did not obtain HUD approval for the loans as required by HUD regulations. Ridgeview owners stated they talked with the attorney of A&R Enterprises, but did not take legal action to recover the funds because they had insufficient funds to file suit. Correspondence indicates that one of Ridgeview’s owners may have authorized A&R to use the check to partially repay loans. The Ridgeview ledger balance for Loan Payable to A&R Enterprises was $15,429.35, which is equal to the $35,000 wire transfer to Ridgeview, less the $19,570.67 Medicaid check. A&R Enterprises sold goods to Ridgeview Manor at Management agent inflated inflated prices in violation of their Management prices for goods provided to Agreement. As a result, Ridgeview Manor incurred Ridgeview excessive development costs totaling $12,579.94. 2002-AT-1006 Page 22 Table of Contents Exit Finding 3 Amount Cost From Charged to Original Excess Goods Purchased Ridgeview Vendor Costs 4 Pentium II 466 computers $ 6,284.28 $ 4,834.04 $ 1,450.24 8 Port 100BT network hub 358.02 101.44 256.58 Metal stack cart 3,587.50 2,587.50 1,000.00 Ice machine 3,100.00 2,650.00 450.00 Carpet extractor 3,187.90 2,187.90 1,000.00 216x82 channel canvas 2,905.20 1,452.60 1,452.60 126x82 channel canvas 979.60 489.80 489.80 Freight 369.04 184.52 184.52 Sales tax 212.69 106.35 106.34 Copier 6,000.00 4,743.50 1,256.50 Binder 1,254.60 627.30 627.30 Divider set 1,227.60 613.80 613.80 Spine id 94.50 47.25 47.25 Picture pocket 106.20 53.10 53.10 Chart storage rack 1,260.00 630.00 630.00 Shipping 366.10 183.05 183.05 Tax 197.15 118.29 78.86 Software9 8,000.00 5,300.00 2,700.00 Totals $39,490.38 $26,910.44 $12,579.94 Former management agent A&R Enterprises did not maintain accurate books and did not maintain accurate records in accordance with HUD regulations and did not books and records provide all required accounting reports to HUD. We found numerous transactions were improperly posted. For example, in August 1999, A&R Enterprises posted deposits of $3,273.00 to the general ledger. However, these transactions were not deposited in the bank accounts. Similarly, in September 1999, the bank statement showed charges of $14,904; however, there were no corresponding expense or disbursement entries in the general ledger. As a result, cash balances in the general ledger were overstated and the general ledger cannot be relied upon for accurate financial data. 9 The $8,000 software cost, and the $2,700 excess cost included therein, is reported as an ineligible use of construction funds in Finding 1. Therefore, Recommendation 3A omits the $2,700 excess cost as a further reduction in the maximum insurable mortgage ($12,579.94 less $2,700. =$9,879.94.) Page 23 2002-AT-1006 Table of Contents Exit Finding 3 Further, A&R Enterprises and Ridgeview did not provide required monthly accounting reports to HUD. By not timely submitting these reports, both A&R Enterprises and Ridgeview Manor violated of their agreements with HUD. Untimely and/or inaccurate financial information may result in poor management decisions by project owner's, managers, and HUD. Ridgeview Comments Comments on the initial draft report, at the exit conference by the Ridgeview owners and in a written response from their accounting service, were incorporated into the Findings. A final draft report was then issued with a request for the owners’ formal written comments. Their written reply did not address the findings and provided no additional information. OIG Evaluation of We incorporated our evaluation of Ridgeview’s comments Ridgeview Comments on the initial draft report into the finding above. Since their written reply to the final draft provided no information and did not address the finding, we have no further evaluation comments. Recommendations We recommend the Office of Housing: 3A. Reduce the certifiable project cost by $9,879.94 for excessive costs and adjust the maximum insurable mortgage accordingly.9 3B. Instruct Ridgeview’s owners to seek recovery from A&R Enterprises of the $12,579.94 in excessive charges. 3C. Debar A&R Enterprises and its affiliates from participation in HUD programs. 2002-AT-1006 Page 24 Table of Contents Exit Management Controls In planning and performing our audit, we considered management control systems of Ridgeview Manor to determine our auditing procedures. Our review of management control systems was not performed to provide assurance on the management controls. Management controls include the plan of organization, methods, and procedures adopted by management to ensure that goals are met. Management controls include the processes for planning organizing, directing, and controlling program operations. We assessed the management controls that we determined to be relevant to our audit objectives. We assessed controls pertaining to accuracy of accounting, financial reporting to HUD, safeguarding assets and whether expenditures complied with HUD requirements. A significant weakness exists if management control does not give reasonable assurance that the entity’s goals and objectives are met; that resource use is consistent with laws, regulations, and policies; that resources are safeguarded against waste, loss, and misuse; and that reliable data are obtained, maintained, and fairly disclosed in reports. Significant weaknesses existed in the controls we assessed. The control weaknesses were primary causal factors for Findings 1 and 2. Page 25 2002-AT-1006 Table of Contents Exit Management Controls THIS PAGE LEFT BLANK INTENTIONALLY 2002-AT-1006 Page 26 Table of Contents Exit Follow-Up On Prior Audits This was the Office of Inspector General’s first audit of Ridgeview Manor, FHA project number 054-43072. We reviewed the audited project cost certification and accompanying financial statements for the period of May 1, 2000, through August 31, 2000. The Independent Public Accountant’s report provided an unqualified opinion on the financial statements. Our audit found numerous and material misstatements in Ridgeview’s cost certification and financial records for that period. We concluded that the Independent Public Accountant’s report could not be relied upon. A subsequent audit by another Independent Public Accountant, covering the period September 1, 2000, through December 31, 2000, was provided to us as a “tentative” draft as of October 2001. This report disclaimed an audit opinion due to lack of supporting documentation, identified material weaknesses in internal controls over financial reporting and Federal awards, and noted noncompliance material to the financial statements. Page 27 2002-AT-1006 Table of Contents Exit Follow-Up On Prior Audits THIS PAGE LEFT BLANK INTENTIONALLY 2002-AT-1006 Page 28 Table of Contents Exit Appendix A Schedule of Questioned Costs Recommendation Number Ineligible 1/ Unsupported 2/ 1B $ 212,713.52 1C 61,814.69 1D $ 30,413.60 1E 15,000.00 2B 5,418.94 Total Questioned Costs: $ 274,528.21 $ 50,832.54 1/ Ineligible costs are costs that are costs charged to a HUD program or activity that the auditor believes are not allowable by law, contract, Federal, State, or local policies or regulations. 2/ Unsupported costs are costs charged to a HUD program or activity without proper documentation and eligibility cannot be determined at the time of audit. The costs are not supported by adequate documentation or there is a need for legal or administrative determination on the eligibility of the costs. Unsupported costs require a future decision by HUD program officials. Page 29 2002-AT-1006 Table of Contents Exit Appendix A THIS PAGE LEFT BLANK INTENTIONALLY 2002-AT-1006 Page 30 Table of Contents Exit Appendix B Schedule of Certified Costs and Payables, Draw Amounts, and Supported Costs/Payables Column A Supported Line Certified Paid Costs Number Description Paid Costs Total Draws per Audit 1a Amount Due Under Lump Sum Construction Contract $ 1,610,560.70 $ 1,832,545.14 $ 1,610,580.67 2a Architect's Fee - Design 87,105.39 71,712.00 71,712.00 2b Architect's Fee - Supervision 31,197.00 32,216.00 31,578.00 3 Interest During Construction 165,299.29 130,325.00 165,299.29 4 Taxes During Construction 11,472.11 11,092.13 11,472.11 5 Property Insurance 13,409.73 14,000.00 13,409.73 6 MIP 28,185.50 28,185.50 28,185.50 7 FHA Exam Fee 8,850.00 8,456.00 8,456.00 8 FHA Inspection Fee 14,093.00 14,093.00 14,093.00 9 Title and Recording Fees 8,148.75 8,198.75 8,148.75 11a Initial Financing Fee 52,870.00 56,370.00 52,870.00 11b Permanent Placement Fee 13,185.00 13,185.00 13,185.00 Other Approved Financing Expenses 11d (escrow accounts) 104,631.00 90,805.63 88,082.74 12a Legal 21,791.75 18,541.75 21,791.75 12c Mortgagor's Cost Cert. Audit Fee 0 7,500.00 0 13 Engineering, Asbestos, GeoTech, Well 7,930.00 7,930.00 7,930.00 13 Surveyor Charges 6,869.02 6,869.02 6,869.02 15a Consultant's Fee 17,894.60 9,644.40 9,644.60 15b Major Movable Equipment 200,185.18 178,789.00 47,113.00 15d Pre-Marketing 18,650.00 37,500.00 0 15d Minor Movables 9,687.95 0 0 Totals $ 2,432,015.97 $ 2,577,958.32 $ 2,210,421.16 $ 2,432,015.97 Certified Paid Costs ( 2,210,421.16) Supported Paid Costs $ 221,594.81 Overstated Paid Costs The above table does not include $6,768.77 of paid costs for linens and a copier that we identified, but Ridgeview omitted from the cost certification. 2002-AT-1006 Page 31 Table of Contents Exit Appendix B Line Column B Supported Payables Number Description Certified Payables per Audit 1a Amount Due Under Lump Sum Construction Contract $ 376,294.87 $ 398,023.05 2b Architect's Fee - Supervision 1,022.00 640.61 9 Title and Recording Fees 352.00 352.00 11d Other Approved Financing Expenses (escrow accounts) 0 0 12a Legal 11,465.15 8,500.00 12c Mortgagor's Cost Cert. Audit Fee 7,500.00 7,500.00 13 Surveyor Charges 1,600.00 1,600.00 15b Major Movable Equipment 34,664.35 14.739.85 TOTAL $ 432,898.37 $ 431,355.51 432,898.37 Certified Payables ($431,355.51) Supported Payables $ 1,542.86 Overstated Payables in Certified Cost This table does not include $58,303.76 of payables that Ridgeview omitted from the cost certification. ($2,871.96 was omitted from line 11d, and $55,431.80 was omitted from line 15b.) 2002-AT-1006 Page 32 Table of Contents Exit Appendix C Auditee Comments Page 33 2002-AT-1006 Table of Contents Exit Appendix C 2002-AT-1006 Page 34 Table of Contents Exit Appendix C Page 35 2002-AT-1006 Table of Contents Exit Appendix C 2002-AT-1006 Page 36 Table of Contents Exit Appendix C Page 37 2002-AT-1006 Table of Contents Exit Appendix C 2002-AT-1006 Page 38 Table of Contents Exit Appendix D Distribution Outside of HUD President, Ridgeview of the Midlands, LP Sharon Pinkerton, Senior Advisor Subcommittee on Criminal Justice, Drug Policy & Human Resources Stanley Czerwinski, Director Housing and Telecommunications Issues Steve Redburn, Chief Housing Branch Office of Management and Budget The Honorable Joseph Lieberman Chairman, Committee on Government Affairs The Honorable Fred Thompson Ranking Member, Committee on Governmental Affairs The Honorable Dan Burton Chairman, Committee on Government Reform The Honorable Henry A. Waxman Ranking Member, Committee on Government Reform Andy Cochran House Committee on Financial Services Clinton C. Jones, Senior Counsel Committee on Financial Services Page 39 2002-AT-1006 Table of Contents Exit
Ridgeview Manor Apartments, Hopkins, South Carolina
Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)