oversight

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)

                      AUDIT REPORT




               RIDGEVIEW MANOR APARTMENTS

                    HOPKINS, SOUTH CAROLINA

                           2002-AT-1006

                       SEPTEMBER 30, 2002



                      OFFICE OF AUDIT, REGION 4




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                                                                 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.




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 Management Memorandum




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 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.



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 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.

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 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



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     D. Distribution                                                 39


 Abbreviation

 HUD            Department of Housing and Urban Development




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 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

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 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.




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                                                                                             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


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 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

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                                                                                 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.

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 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.


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                                                                                                       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.

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 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




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                                                                 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.




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 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.




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                                                                          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.




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                    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.




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     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

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                                  (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.




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   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.




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     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.



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                                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

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                               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.

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                    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.




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                                                                                          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


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                                 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.




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                                                                                                          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.)


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                      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.




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 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.




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 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.




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                                                                                                                                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.




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                                                                                      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.

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 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.)




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                              Appendix C

 Auditee Comments




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                                                                   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




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