oversight

Nuestra Casa (also known as La Casa Elderly Housing) Project Number 017-EH125 Hartford, Connecticut

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-02-18.

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

     AUDIT REPORT




         NUESTRA CASA
PROJECT MANAGEMENT OPERATIONS
    HARTFORD, CONNECTICUT


           2004-BO-1006


       FEBRUARY 18, 2004


    OFFICE OF AUDIT, NEW ENGLAND
       BOSTON, MASSACHUSETTS
                                                                   Issue Date
                                                                            February 18, 2004
                                                                    Audit Case Number
                                                                            2004-BO-1006




TO:            Suzanne C. Baran, Director, Multifamily Program Center, Hartford Field Office,
               1EHMLAT


FROM:          Barry L. Savill, Regional Inspector General, Office of Audit, 1AGA


SUBJECT:       Nuestra Casa (also known as La Casa Elderly Housing)
               Project Number 017-EH125
               Hartford, Connecticut


As requested by your office, we performed an audit of Nuestra Casa (also known as La Casa
Elderly Housing). Our report contains three findings with recommendations requiring action. Our
review disclosed that Nuestra Casa’s management agent: (1) Used the Operating Account to Fund
Affiliates; (2) Charged Ineligible, Unsupported, and Unnecessary/Unreasonable Costs to the
Project; and (3) Failed to Adequately Manage Project Operations.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each
recommendation without a management decision, 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.

Should you or your staff have any questions, please contact Michael Motulski, Assistant Regional
Inspector General for Audit, at (617) 994-8380.
Management Memorandum




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2004-BO-1006             Page ii
Executive Summary
We have completed an audit of Nuestra Casa (also known as La Casa Elderly Housing) located in
Hartford, Connecticut. We initiated the audit in response to a management request from the U.S.
Department of Housing and Urban Development’s (HUD’s) Hartford Field Office (HFO) of
Multifamily Housing.    The primary purpose of our audit was to assess the project
owner’s/management agent’s performance relating to:
           Appropriate use of project funds.
           Maintaining the property in a satisfactory physical condition.
           Other general management practices.

Our audit determined that the management agent improperly managed project funds totaling
$371,430 by:
           Improperly transferring $244,103 in project funds to affiliates.
           Spending $16,385 in project funds on other ineligible, unsupported, and
           unnecessary/unreasonable costs.
           Circumventing HUD’s Reserve Fund for Replacement (RFR) requirements leaving
           the RFR under funded by $110,942.

As a result, $371,430 in project funds is not available for the project’s normal operations and
maintenance. Therefore, HUD’s and the residents’ interests in the project are not sufficiently
protected.


                                      The management agent improperly transferred $244,103 in
 Agent Used Operating                 project funds to affiliates. For fiscal years (FYs) 1999
 Account to Fund                      through 2002, the management agent transferred a total of
 Affiliates                           $639,331 to affiliated entities. The management agent
                                      indicated that the transfers were for salaries, employee
                                      benefits, management fees, and reimbursements to
                                      affiliated entities for project tax payments and loans.
                                      However, the management agent’s records showed that the
                                      project received only $395,228 in reasonable and necessary
                                      services. As a result, $244,103 ($639,331- $395,228) in
                                      project funds was not available for the project’s normal
                                      operations and maintenance. Therefore, the management
                                      agent did not sufficiently protect HUD’s interest in the
                                      project (see Finding 1).

                                      The management agent used $16,385 in project funds for
 Agent Charged Ineligible             other   ineligible,  unsupported,     and   unnecessary/
 and Unsupported Costs to             unreasonable project costs.     The management agent
 the Project                          incurred an ineligible cost of $4,132 for an Internal
                                      Revenue Service (IRS) penalty for the management agent’s


                                          Page iii                                    2004-BO-1006
Executive Summary


                      failure to file an IRS Form 990 (“Return of Organization
                      Exempt from Income Tax”) on time. The management
                      agent charged the project $1,630 in unsupported costs, for
                      such items described by the management agent as food
                      purchases, supplies, and payments to individuals. We also
                      determined that the management agent incurred $10,623 in
                      unnecessary/unreasonable costs, for resident field trips to a
                      gambling casino and New York City; as well as meals at
                      restaurants, and other ineligible goods and services. As a
                      result, $16,385 in project funds was not available for the
                      project’s normal operations and maintenance. Therefore,
                      HUD’s and the residents’ interests in the project were not
                      sufficiently protected (see Finding 2).

                      The management agent circumvented HUD’s RFR
 Agent Circumvented   requirements (see Finding 3).   Specifically, the
 HUD’s RFR            management agent:
 Requirements
                         Failed to deposit $83,225 into the RFR as required by
                         HUD as a condition for a retroactive rent increase.
                         Failed to return $21,903 advanced to the operating
                         account from the RFR.
                         Loaned $10,000 of RFR funds to an affiliate against
                         HUD requirements ($4,000 remains unpaid).
                         Withdrew $1,814 more from the RFR than HUD
                         approved.

                      As a result, the project’s RFR is under funded by $110,942.
                      Management is expected to use RFR funds to make
                      necessary capital repairs and replacements.

                      The management agent failed to manage the project in
 Agent Failed to
                      compliance with HUD regulations and requirements (See
 Adequately Manage
                      Finding 3). Specifically, the management agent:
 Project Operations
                         Did not keep the accounting records current and did not
                         comply with HUD requirements to submit timely
                         annual financial reports. In addition, the management
                         agent did not maintain a chart of accounts in the HUD
                         prescribed format.
                         Did not consistently maintain bank statements,
                         invoices, contracts, and supporting documentation for
                         purchases/costs and make them readily available for
                         review.




2004-BO-1006              Page iv
                                                          Executive Summary


                     Did not pay utility bills and other bills timely resulting
                     in liens being attached to the property.
                     Did not update HUD management certifications and
                     profiles and make them readily available for review.
                     Did not put adequate computer controls into practice.
                     Did not maintain operating procedures and manuals.
                     Did not carry the fidelity bond coverage as required by
                     HUD.
                     Did not implement a capital improvement plan or an
                     effective maintenance program.

                  As a result of the management agent’s failure to properly
                  manage operations, the project:
                     Has a serious cash flow problem.
                     Incurred ineligible penalty costs.
                     Has unpaid utilities that may result in these services
                     being terminated.
                     Has liens placed against the property.

                  We recommend that the HUD Multifamily (MF) Director
Recommendations   require the owner/management agent to take corrective
                  actions regarding the $371,430. The owner/management
                  agent should repay $244,103 (less any accrued fees earned)
                  for the unauthorized transfers of funds to affiliates, $4,132
                  for the other ineligible costs, and $10,623 for the
                  unnecessary/unreasonable costs from non-project funds.
                  The owner/management agent should also be required to
                  replenish the project’s RFR in the amount of $110,942 for
                  the questionable transactions. The owner/management
                  agent should also reimburse the project $1,630 for
                  unsupported costs from non-project funds unless adequate
                  supporting documentation is provided.

                  In addition, we recommend that HUD MF Director require
                  the owner/management agent to bring current all bills
                  exceeding 30 days old and ensure all liens on the property
                  are satisfied using non-project funds, or move to release
                  any invalid liens.

                  We also recommend that the HUD MF Director require the
                  project owner to terminate the management agreement
                  between the current management agent and the project
                  owner because of the management agent’s failure to


                      Page v                              2004-BO-1006
Executive Summary


                    comply with the provisions of the Regulatory Agreement
                    and the Management Agent Certification. In doing so, the
                    project owner should seek a new management entity
                    acceptable to HUD.

                    After the removal of the management agent, we
                    recommend that the project owner be required to:
                       Prepare, execute, and submit a Management
                       Agreement, a new Management Agent Certification
                       form, and a new Entity Profile form to HUD with the
                       selection and approval of a new management agent.
                       Work closely with the new management agent to ensure
                       that these deficiencies do not recur.

                    Finally, we recommend that HUD program officials and the
                    Department      Enforcement  Center   (DEC)      initiate
                    administrative sanctions (Debarment) against the
                    management agent.

                    We discussed the findings in this report with the
 Findings and       responsible auditee officials, as well as HUD program
 Recommendations    officials, during the course of the audit. We discussed the
 Discussed          draft audit report with the auditee and HUD program
                    officials at an exit conference held on December 10, 2003.
                    On December 16, 2003, we requested the responsible
                    auditee officials to submit written comments and any
                    supporting documentation based on the draft report
                    discussed at the exit conference. We received the auditee’s
                    formal written responses by letters dated January 15, 2004,
                    and January 16, 2004. We revised the draft report as
                    necessary. We included a summary of the comments in the
                    Findings section of this report. The complete written
                    responses are included in Appendix F. We did not attach
                    the auditee’s supporting documentation because it was too
                    voluminous.




2004-BO-1006            Page vi
Table of Contents
Management Memorandum                                                   i



Executive Summary                                                     iii



Introduction                                                           1



Findings
  1. Management Agent Used Operating Account To Fund Affiliates        5

  2. Management Agent Charged Ineligible, Unsupported, and
     Unnecessary/Unreasonable Costs to the Project                   11

  3. Management Agent Failed to Adequately Manage Project
     Operations                                                      15


Management Controls                                                  25



Appendices
  A. Summary of Questioned Costs                                     27

  B. Schedule of Transfers to Affiliates                             29

  C. Schedule of Ineligible, Unsupported, and
     Unnecessary/Unreasonable Costs                                  31

  D. Schedule of Questioned Reserve Fund for Replacement Activity    33

  E. Schedule of Liens                                               35

  F. Auditee Comments                                                37




                              Page vii                      2004-BO-1006
Table of Contents


                                         Abbreviations
AFS            Annual Financial Statements
CFR            Code of Federal Regulations
CNA            Comprehensive Needs Assessment
DEC            (HUD) Departmental Enforcement Center
FRC            Family Resource Center (affiliated for-profit entity)
FY             Fiscal Year
GAAP           Generally Accepted Accounting Principles
GAGAS          Generally Accepted Government Auditing Standards
HAP            Section 8 Housing Assistance Payments
HFO            HUD Hartford Field Office
HUD            U.S. Department of Housing and Urban Development
IOI            Identity of Interest
IRS            U.S. Internal Revenue Service
LCDP           La Casa De Puerto Rico, Inc. (management agent)
LCI            La Casa Investments, Inc. (affiliated for-profit entity)
OIG            Office of Inspector General
REAC           (HUD) Real Estate Assessment Center
REMS           (HUD) Real Estate Management System
RFR            Reserve Fund for Replacements




2004-BO-1006                              Page viii
Introduction
Nuestra Casa (also known as La Casa Elderly Housing), the “project,” is a 40-unit apartment
complex for elderly and handicapped persons, located in Hartford, Connecticut. The project
operates under Section 202 of the National Housing Act, in which HUD provided a direct loan for
the construction of the project (project number 017-EH125). As of December 2003, the outstanding
loan balance was approximately $2,113,717. The project owner makes monthly principal and
interest payments for $18,386, with interest computed at 9.25% per year. The project also has a
Section 8 Housing Assistance Payments (HAP) contract with HUD (contract number
CT26T841004), which is a rental subsidy program that provides most of the project's rental income.

The Direct Loan Program for Housing for the Elderly or Handicapped was authorized by Section
202 of the Housing Act of 1959, as amended, Public Law 86-372, 73 Stat. 654, 667, 12 U.S.C.
1701q. Applicable program regulations are located in Subpart E of 24 CFR 891. The purpose of
the program is to provide direct Federal loans for a maximum term of 40 years. The program
provides for assistance to private, nonprofit corporations and consumer cooperatives in the
development of new or substantially rehabilitated housing and related facilities to serve the elderly,
physically handicapped, developmentally disabled, or chronically mentally ill adults. HUD also
provides project rental assistance funds to cover the difference between the HUD-approved
operating cost for the project and the tenants' contribution towards rent.

In consideration for HUD subsidy, the project owner must agree to various controls and regulations
of certain aspects of the project’s operations, including but not limited to: (a) restrictions on the use
of project funds, (b) proper maintenance of the project in accordance with HUD’s Uniform Physical
Condition Standards, (c) limits on rental rates, and (d) tenant eligibility requirements. These
regulations are contained in the Regulatory Agreement between the project owner and HUD.

The project owner may enter into a management agreement with a firm or entity to manage the
project on the owner's behalf. The management agreement shall conform to the pertinent
requirements of the Regulatory Agreement, the HAP Contract, and directives issued by HUD. The
project owner may delegate to the management agent any management duties that HUD does not
require the owner to perform by itself. Even when the owner delegates duties, the owner remains
responsible for all aspects of management, including duties delegated to the management agent.

The project “owner”, La Casa Elderly Housing, Inc., is a non-profit, non-stock corporation that
holds legal title to the project. The project is managed by La Casa De Puerto Rico, Inc., the
“management agent”, which is an identity-of-interest (IOI), non-profit organization located in
Hartford, Connecticut. The same Board of Directors controls both entities. The owner currently
pays the management agent a fee equal to 5.13% of the annual gross rent collections.


                                        The overall audit objectives were to assess the project’s
 Audit Objectives                       performance relating to:
                                            Appropriate use of project funds.
                                            Maintenance of the property in satisfactory physical
                                            condition.


                                             Page 1                                        2004-BO-1006
Introduction


                      Other general management practices.

                   To accomplish the audit objectives, we:
 Audit Scope and
 Methodology          Reviewed Federal requirements including: the
                      applicable Code of Federal Regulations (CFR);
                      applicable HUD Handbooks; applicable HUD Housing
                      Notices and Directives; and the Regulatory Agreements
                      between HUD and the mortgagor/project owner.
                      Reviewed the project’s files maintained by the HUD
                      Hartford Field Office (HFO) and HUD’s automated
                      systems, such as the Real Estate Management System
                      (REMS).
                      Reviewed      the     project’s    organizational     and
                      administrative structure.
                      Reviewed Independent Public Accountant (IPA) reports
                      prepared for the operator and the certified financial
                      statements submitted to REAC on behalf of the owner
                      for fiscal years ending December 31, 1999 through
                      2001 (the fiscal year ending December 31, 2002 reports
                      and statements were not prepared as of June 2003).
                      Interviewed former IPA accountants to obtain
                      additional clarification or explanation of items resulting
                      from our review of the financial reports.
                      Interviewed applicable management agent personnel to
                      obtain information relating to the project’s operations,
                      management controls, and computer controls; and its
                      procedures      for     accounting,      administration,
                      procurement, maintenance, cash receipts, and cash
                      disbursements.
                      Tested management controls relevant to the audit
                      through inquiries, observations, inspection of
                      documents and records, or review of other reports, and
                      evaluated the effects of any exceptions found.
                      Reviewed the project’s books and records and assessed:
                      a) the reliability of information contained in the books
                      and records; b) the appropriateness of disbursements;
                      and c) the reasonableness of costs incurred.
                      Tested disbursements from the operating account. We
                      selected items of interest based on risk factors. The
                      results only apply to the items selected.
                      Tested all transactions from the reserve fund for
                      replacement during FYs 1999 through 2002.


2004-BO-1006           Page 2
                                             Introduction


   Reviewed the project’s last three HUD physical
   inspection reports (1999, 2001, 2002) and conducted
   physical inspections to assess the general condition of
   the project.
   In conducting our inspections, we selected a non-
   representative sample of units considered a high risk.
   We selected the units because they exhibited exigent
   health and safety issues and/or other significant
   problems in recent HUD and management agent
   inspection reports. The results only apply to the units
   selected.
   Reviewed the property records for the project
   maintained at the Office of the City Clerk of Hartford,
   CT.

We conducted the audit between January 2003 and June
2003, and generally covered the period from January 1,
2000, through December 31, 2002. When appropriate, we
extended the audit to include other periods. We conducted
our audit in accordance with generally accepted
government auditing standards (GAGAS).




    Page 3                                   2004-BO-1006
Introduction




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2004-BO-1006     Page 4
                                                                                            Finding 1


Management Agent Used Operating Account
          To Fund Affiliates
The management agent improperly transferred $244,103 in project funds to affiliates. The
management agent transferred these funds to subsidize the operating expenses of affiliated entities.
This occurred because the management agent did not establish adequate financial control policies and
procedures for its employees to understand that these fund transfers were improper. As a result, the
project has a serious cash flow problem and $244,103 in project funds was not available for the project
to maintain services necessary for residents and to protect HUD’s interest.


                                       Federal regulations require that project owners ensure
 Costs Must Be                         project funds are used for the operation of the project (24
 Reasonable and Necessary              CFR Part 891.400(e)). The Regulatory Agreement also
                                       requires that: (1) project income and assets shall be used
                                       only for services, supplies, or materials that are reasonable
                                       and necessary for the project’s operation, and; (2) the
                                       project’s books and records will be maintained in
                                       accordance with HUD’s requirements and in reasonable
                                       condition for proper audit.

                                       During fiscal years 1999 through 2002, the management
 Funds Transferred without             agent transferred $639,331 in project funds from the
 Support or Authorization              project’s operating account to three identity-of-interest
                                       (IOI) affiliates, including the management agent itself (see
                                       Appendix B for details on the individual disbursements).
                                       These IOI entities were:

                                           La Casa De Puerto Rico, Inc. (LCDP), the management
                                           agent.
                                           La Casa Investments, Inc. (LCI), a for-profit rental
                                           project.
                                           The Family Resource Center (FRC), a for-profit family
                                           services entity.

                                       The management agent was able to support $395,228 of the
                                       $639,331 in transfers as reasonable and necessary project
                                       expenses. We determined that the following expenses were
                                       allowable costs: (1) $297,721 for prorated salaries and
                                       benefits, (2) $74,276 in HUD approved management fees,
                                       and (3) $23,231 in services due to affiliates from the
                                       project’s FY 1998 audited annual financial statements
                                       (AFS). We determined that the remaining $244,103


                                            Page 5                                       2004-BO-1006
Finding 1


                     represented ineligible transfers of project funds in violation
                     of the terms of the Regulatory Agreement. We illustrated
                     the breakdown of cost transfers below:




                     Our audit determined that the management agent made
                     $244,103 in ineligible cost transfers to support the operations
                     of affiliated entities. The management agent made the
                     transfers to cover such items as salaries and employee
                     benefits (paid through the centralized payroll account) and to
                     reimburse affiliates for loans made to the project. The
                     management agent did not provide documentation for the
                     loans.

                     As of May 28, 2003, the management agent did not
                     properly close the project’s FY 2002 books and posted
                     management fees for FY 2002 only through May 2002.
                     We expect that appropriate management fees will reduce
                     the total amount due from the affiliates when the books are
                     closed. This posting, which should be similar to previous
                     years (approximately $12,000), needs to be verified when
                     HUD calculates the final amount due back to the project.

                     Our review showed that the management agent lacked
 Lack of Knowledge   knowledge of HUD regulations concerning the use of project
 Concerning HUD      funds and did not keep adequate records to track and monitor
 Requirements        the amount of salary costs and other payments. For example,
                     the management agent charged $67,447 in unsupported
                     maintenance fees to the project during the period of FY
                     1999 to 2002. We determined there was no basis for the
                     charges because the project paid the maintenance
                     employees’ salaries, as well as the maintenance
                     supervisor’s salary through the central payroll account


2004-BO-1006             Page 6
                                                                            Finding 1


                        maintained by LCDP. The management agent also charged
                        cleaning supplies and materials for repairs directly to the
                        project’s account. Therefore, we questioned the $67,447
                        in maintenance fee costs as part of the $244,103 improperly
                        transferred to affiliates.

                        The management agent did not attempt to conceal the
                        transfers. The management agent posted all payments to
                        affiliates on the general ledger as accounts receivable. The
                        management agent subsequently reduced receivables when it
                        expensed employee salaries, management agent fees, and
                        maintenance fees. The management agent did not have HUD
                        Handbooks concerning financial and accounting procedures
                        readily available for employee use. During our audit, the
                        management agent requested the HUD Handbooks from the
                        HUD Hartford Field Office (HFO).

                        Based on the conditions cited in this finding, the
 HUD Should Terminate   owner/management agent is in violation of the Regulatory
 Management Agreement   Agreement. An independent public accountant identified
                        improper transfers in the FY2000 and FY2001 audited annual
                        financial statements (AFS). In December 2001, the HFO
                        directed the management agent to repay these transfers from
                        non-project sources. However, as of December 2003, the
                        management agent had not repaid these transfers.

                        The audit findings discussed elsewhere in this report
                        identified additional violations of the Regulatory Agreement.
                        Therefore, we recommend that the HFO move to terminate
                        the management agreement between the management agent
                        and the project owner for failure to comply with the
                        provisions of the Regulatory Agreement and the
                        Management Agent Certification.           In addition, HUD
                        program officials and the Department Enforcement Center
                        (DEC) should initiate administrative sanctions (Debarment)
                        against the management agent.



Auditee Comments        The auditee responded that the Board of Directors and the
                        interim Executive Director are taking the following actions:
                        (a) tightening controls in accordance to HUD and GAAP
                        practices; (b) upgrading the computer systems and programs;
                        (c) establishing a business continuity program; (d) providing
                        additional training for staff associated with this program; (e)
                        having the Board actively participate in monitoring the
                        implementation of the changes being made; and (f) hiring a


                            Page 7                                       2004-BO-1006
Finding 1


                    financial consultant to oversee accounting and financial
                    policies and procedures.

                    The auditee also requested that the we reduce the $244,103
                    identified as ineligible transfers by $83,225. The auditee
                    indicated that this amount was used to reimburse the
                    management agent for funds used on behalf of the project for
                    operating expenses.


OIG Evaluation of   We recognize the corrective actions taken as a result of our
Auditee Comments    draft report. However, the auditee was silent on our
                    recommendation to remove the current management agent
                    (LCDP).

                    Due to the severity of the Findings presented in this report,
                    we do not feel LCDP has the capacity to correct the
                    deficiencies found. Some of the issues identified in our
                    report are long-standing, and have gone uncorrected to this
                    date. For example, the fiscal year ended December 31, 2000,
                    audited annual financial statements (AFS) indicated
                    deficiencies including ineligible transfers/loans and
                    mismanagement of the RFR account.

                    The auditee’s response did not contain sufficient
                    documentation to allow us to change our recommendations.


Recommendations     We recommend that you require:
                    1A. The owner/management agent to reimburse the project
                        $244,103 (less any amount of management fees
                        properly expensed for June though December 2002)
                        from non-project sources.
                    1B. The project owner to terminate the Management
                        Agreement with LCDP for failure to comply with the
                        provisions of the Regulatory Agreement and the
                        Management Agent Certification.
                    1C. The project owner to prepare, execute, and submit a
                        Management Agreement, a new Management Agent
                        Certification form, and a new Entity Profile form to
                        HUD with the selection and approval of a new
                        management agent. Furthermore, we recommend that
                        your office work closely with the new management




2004-BO-1006            Page 8
                                                  Finding 1


     agent to ensure that the deficiencies identified do not
     recur.
1D. The HUD Departmental Enforcement Center (DEC) to
    initiate administrative sanctions, such as debarment,
    against the management agent, for the improper
    transfers as well as for the improper use of project
    funds as described in Finding 2.




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Finding 1




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2004-BO-1006    Page 10
                                                                                              Finding 2


      Management Agent Charged Ineligible,
         Unsupported, and Unnecessary/
        Unreasonable Costs to the Project
The management agent charged $16,385 to the project’s operating account for ineligible project
expenses ($4,132), unsupported costs ($1,630), and unnecessary/unreasonable costs ($10,623) (see
Appendix C). The management agent incurred an ineligible cost of $4,132 for an Internal Revenue
Service (IRS) penalty for the management agent’s failure to file an IRS Form 990 (“Return of
Organization Exempt from Income Tax”) on time. The management agent charged the project
$1,630 in unsupported costs, for such items described by the management agent as food purchases,
supplies, and payments to individuals. We also determined that the management agent incurred
$10,623 in unnecessary/unreasonable costs, for resident field trips to a gambling casino and New York
City; as well as meals at restaurants, and other ineligible goods and services. This occurred because the
management agent did not establish adequate financial accounting policies and was not familiar with
HUD financial operating requirements. As a result, $16,385 in funds was not available for the project’s
normal operations and maintenance. Therefore, HUD’s and the resident’s interests in the project were
not sufficiently protected.


                                        Project owners must ensure project funds are used for the
  Costs Must Be                         operation of the project (24 CFR Part 891.400). The
  Reasonable and Necessary              Regulatory Agreement further requires that: (1) project
                                        income and assets shall be used only for services, supplies, or
                                        materials that are reasonable and necessary for the project’s
                                        operation, and; (2) the project’s books and records will be
                                        maintained in accordance with HUD’s requirements and in
                                        reasonable condition for audit.

                                        HUD requires that books and records be accurate and
                                        complete and all disbursements be supported by approved
                                        invoices/bills or other supporting documentation (HUD
                                        Handbook 4370.2, REV-1, Chapter 2).

                                        The IRS assessed a penalty with interest of $4,132 on the
 Ineligible IRS Penalty                 project’s accounts for the tax year ended December 31, 2000.
 Cost                                   The penalty was the result of the management agent’s failure
                                        to file an IRS Form 990 (“Return of Organization Exempt
                                        From Income Tax”) on time. The IRS assesses a $20 penalty
                                        per day for such violations. The IRS also put a tax lien on
                                        the project’s tenant security deposit account on June 26, 2002
                                        to secure payment. The management agent made a payment
                                        from project funds and the IRS received it on July 2, 2002.



                                            Page 11                                        2004-BO-1006
Finding 2


                      The IRS subsequently removed the tax lien. This cost paid
                      from project operating funds was not an eligible expense.

                      The management agent did not support all costs questioned
 Unsupported Costs    during our audit (see Appendix C). The remaining
                      unsupported costs questioned total $1,630. The management
                      agent charged the project $1,030, for miscellaneous meals,
                      snacks, and entertainment. The management agent also
                      made a unsupported payment for $600 to an individual.
                      The management agent failed to show what goods or
                      services were purchased or provided.

                      The management agent also disbursed $10,623 for goods and
 Unnecessary/         services that were not considered necessary and reasonable
 Unreasonable Costs   project operating costs. The management agent spent funds
                      in the amount of $9,443 on resident field trips, which
                      included two trips to New York City, admission to a play and
                      dinner for 45 people, a trip to the zoo, a trip to a museum
                      with dinner, and two trips to a casino. The management
                      agent also charged $1,040 for a cooperative membership to
                      allow residents to purchase food at reduced prices. Finally,
                      we identified $140 in other miscellaneous payments to
                      individuals. The management agent failed to show how the
                      costs were necessary and reasonable project costs.

                      These conditions occurred because the management agent
 Poor Management      did not establish financial accounting policies and
 Oversight            procedures, or project cost controls as required by HUD. The
                      management agent did not maintain HUD Handbooks on-site
                      and employees were not familiar with HUD financial and
                      accounting requirements. In addition, the management agent
                      did not provide adequate training their accounting
                      employees, despite the high employee turnover rate.



Auditee Comments      The auditee provided documentation for $28,710 of the
                      $39,182 questioned in our draft report. The auditee requested
                      that we reduce the amount of funds required to be returned to
                      the project by this amount. The auditee also responded that
                      any costs charged without proper authorization will be
                      reimbursed to the project by the owner/management agent.




2004-BO-1006              Page 12
                                                                        Finding 2




OIG Evaluation of   The auditee requested that the $244,103 in ineligible transfers
Auditee Comments    (Finding 1) be reduced by $28,710, based on the
                    documentation submitted. However, the amounts questioned
                    in Finding 2 are separate from the amount questioned in
                    Finding 1 and represent additional funds to be returned to the
                    project.

                    The auditee submitted documentation relating to only
                    $28,710 of the $39,182 questioned in our draft report. Of this
                    amount, we accepted $22,797 as support for reasonable and
                    necessary project expenses. This amount relates to all of the
                    utility amounts questioned and one of the payments to an
                    individual contained in our draft report.

                    As a result, we reduced the total amount of questioned costs
                    in this Finding that requires corrective action to $16,385. We
                    revised the recommendations and Appendix C to reflect the
                    changes.



Recommendations     We recommend that you require:
                    2A. The owner/management agent to reimburse the project
                        $14,755 for the ineligible IRS penalty cost ($4,132) and
                        unnecessary/unreasonable costs ($10,623) from non-
                        project sources (see Appendix C).
                    2B. The owner/management agent to provide adequate
                        documentation for the $1,630 in unsupported costs (see
                        Appendix C). If the management agent does not
                        provide support in a timely manner or if the support is
                        determined to be inadequate, we recommend that you
                        require the owner/management agent to reimburse the
                        project for such costs out of non-project funds.




                        Page 13                                      2004-BO-1006
Finding 2




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2004-BO-1006    Page 14
                                                                                               Finding 3


    Management Agent Failed to Adequately
         Manage Project Operations
The management agent failed to manage the project properly and comply with numerous federal
regulations as follows:
   The management agent circumvented Reserve Fund for Replacements (RFR) requirements
   and depleted the RFR by $110,942 (see Appendix D) by:
           Failing to make $105,128 in required deposits from the operating account.
           Loaning $10,000 in funds to an affiliate ($4,000 has not been repaid).
           Withdrawing $1,814 more funds than HUD approved.

   The management agent did not properly maintain the project’s books and records and did
   not report financial statements on time as follows:
           The accounting records were not updated monthly or maintained in the HUD prescribed
           format.
           Contracts, agreements, and invoices with affiliates were not consistently maintained to
           support expenditures.
           The accounting records for fiscal year (FY) 2002 were not audited as of December 2003.

    Operating policies and procedures were inadequate as follows:
           The management agent did not update and provide employees with operating manuals and
           written procedures. Computer controls were also weak.
           Bills were not paid when due resulting in $70,770 in liens being attached to the project, as
           well as incurring late charges and legal fees.
           The management agent did not implement a capital improvement plan and an effective
           maintenance program to correct known deficiencies.
           The management agent did not procure required fidelity bond coverage.

These conditions occurred due to the management agent’s lack of attention to HUD program
requirements. For example, the HUD Departmental Enforcement Center (DEC) fined the management
agent $3,000 for failure to submit timely financial reports. Also, the management agent did not
adequately support expenditures to show they were valid project costs (See Finding 1 and Finding 2 in
this report).

As a result, the project does not have adequate funds set aside for replacement of capital items. In
addition, the project does not have the required fidelity bond coverage and the management agent
did not maintain the project’s books and records in such form as to permit a timely audit. Finally,
many of the project’s bills are overdue and liens have been placed against the property.




                                            Page 15                                         2004-BO-1006
Finding 3




                             The Regulatory Agreement esablishes requirements for the
 Reserve FundReserve
 Replacement  for            the Reserve Fund for Replacements (RFR). The RFR
 Requirements
 Replacement                 provides funds for the replacement of capital items such as
 Requirements                heating, ventilation, air conditioning, plumbing, and roofing.
                             However, HUD may approve the temporary use of RFR
                             funds for other purposes so long as certain conditions exist
                             and the mortgagor agrees in writing to repay the advance
                             within a reasonable period of time. (HUD Handbook 4350.1
                             REV-1, paragraph 4-28).

                             The management agent must submit a written request to
                             HUD seeking approval for withdrawals from the RFR. The
                             request must be supported by invoices showing what the
                             management agent purchased and the cost thereof. (HUD
                             Handbook 4370.2 REV-1, paragraph 2-7).

                             In April 1999, the HUD Hartford Field Office (HFO)
 Retroactive Rent Increase   approved a rent increase retroactive to January 1, 1997. The
 Approved by HUD in          purpose of the rent increase was to:
 1999
                                Remedy deferred maintenance.
                                Bring overdue bills current.
                                Fund a new position for a security guard.
                                Improve the physical condition of the project.
                                Establish an adequate RFR balance.

                             The project received the $353,225 retroactive lump sum
                             payment in May 1999. HUD permitted the management
                             agent to use $80,000 to bring overdue bills current. HUD
                             required that the management agent transfer the remaining
                             funds ($353,225 - $80,000 = $273,225) from the operating
                             account to the RFR.

                             However, the management agent did not transfer all the
 RFR Deposit                 required funds into the RFR. The management agent only
 Requirements Not Met        transferred $190,000 of the $273,225 into the RFR and
                             retained the additional $83,225 in the operating account.
                             Thus, the management agent circumvented the requirement
                             to fund the RFR to the level required by the HFO.

                             The managment agent also failed to return RFR funds
 Advance from RFR Not        advanced to the operating account. HUD approved a
 Returned                    $21,903 withdrawal of funds from the RFR as an advance of


2004-BO-1006                     Page 16
                                                                               Finding 3


                             Section 8 Housing Assistance Payments (HAP) not yet
                             received in October 1999 (see Appendix D).               The
                             management agent acknowledged the requirement to repay
                             the advance upon receipt of the subject HAP payment.
                             However, the management agent did not return the funds to
                             the RFR, once again facilitating the improper use of project
                             funds from the operating account (see Findings 1 and 2).

                             In March 2000, the management agent improperly loaned
 Ineligible Loan to an       $10,000 in RFR funds to an affiliate. The project’s FY 2000
 Affiliate and Withdrawals   audited financial statements disclosed the improper loan. In
 Exceeded Approved           December 2001, the HFO required that the management
 Amounts                     agent repay the loan from non-project sources by March
                             2002. However, as of December 2003, the management
                             agent only repaid $6,000, leaving a $4,000 balance.

                             In addition, the management agent withdrew more funds than
                             HUD approved from the RFR. On two occasions, RFR
                             withdrawals exceeded the amount HUD approved by $1,814
                             ($1,208 + $606), see Appendix D).

Amount Required to be        Because of the management agent’s questionable activity, the
Returned to RFR              project’s RFR lacks $110,942 ($83,225 + $21,903 + $4,000 +
                             $1,814) in funds. These funds, again, are necessary to make
                             future capital repairs and replacements.

                             The project’s accounting records were not current and
 Accounting Books Not        required HUD forms were inaccurate. According to HUD
 Current and HUD Forms       regulations the project’s:
 Inaccurate
                                "Books and accounts must be complete and accurate.
                                The books of original entry must be kept current at all
                                times, and postings must be made at least monthly to
                                ledger accounts. Standard journal entries may be
                                established for recurring items and posted monthly.”
                                (HUD Handbook 4370.2 REV-1 Section 2-3.B)

                             However, as of May 29, 2003, the management agent had
                             not updated several ledger accounts, including payroll and
                             management fee accounts, since June 2002.

                             HUD also requires that project owners update and maintain
                             management certifications and profiles to provide HUD
                             with the information needed to assess the acceptability of
                             an agent and to monitor compliance with regulations.
                             (HUD Handbook 4381.5 REV-2, Section 2-9)



                                 Page 17                                    2004-BO-1006
Finding 3


                            We observed several changes that warranted an update
                            including new board members and key staff.         The
                            management fee percentage had also changed from 6% to
                            5.13%. However, the management agent did not update the
                            project’s Management Agent Certification (form HUD-
                            9839-b) and Management Profile (form HUD-9832).

                            The agent did not submit the project’s financial reports
 Financial Statements Not   when required.       The Regulatory Agreement required
 Submitted Timely           audited financial statements (AFS) be submitted to HUD no
                            later than 90 days after the end of the FY.

                            However, the management agent did not submit the
                            project’s AFS for fiscal years 2000 and 2001 until October
                            2002. Consequently, HUD's Departmental Enforcement
                            Center (DEC) assessed the project owner $3,000 in
                            penalties for their late submission. The management agent
                            initially paid this penalty out of project funds, which is an
                            ineligible cost. However, the management agent corrected
                            the situation and subsequently paid the penalty from non-
                            project funds as a result of our audit inquiry.

                            Additionally, the agent did not contract with an
                            independent auditor to prepare the FY2002 AFS until late
                            April 2003. Thus, these statements, due March 31, 2003,
                            were late and the project owner will most likely be assessed
                            another penalty. As of December 2003, the auditee had not
                            filed the FY 2002 AFS.

                            The agent did not maintain adequate records to support
 Required Documentation     expenditures and project costs. Bank statements, invoices,
 Not Maintained             contracts,      and     supporting      documentation     for
                            purchases/costs were not consistently maintained and
                            readily available for review. Management agreements and
                            other Identity-of-Interest (IOI) contracts as well as service
                            agreements/contracts also were not available for review.
                            The lack of supporting information impeded the
                            management agent’s ability to support expenditures, and
                            justify costs for IOI services (see Findings 1 and 2).

                            The management agent did not maintain the project’s
 Chart of Accounts Not In   accounting records in the prescribed format. HUD requires
 Prescribed Format          that Section 202 direct loan projects use HUD’s chart of
                            accounts, as described by the HUD Real Estate Assessment
                            Center (REAC) to ensure that books are complete and
                            reporting is uniform. Consistency allows REAC and HUD



2004-BO-1006                    Page 18
                                                                              Finding 3


                           field offices to input data directly from the financial
                           statements into their computer system without
                           misinterpretation (HUD Handbook 4370.2 Rev-1, Chapters
                           2 and 4).

                           However, the agent did not use the required chart of
                           accounts. For example, HUD prescribes the use of 2300
                           series accounts for long-term payables; however, the agent
                           used 2700 accounts. HUD also prescribes the use of 5000
                           series accounts for revenue accounts; however, the agent
                           used 4000 accounts.

                           Thus, the agent’s failure to use the prescribed chart of
                           accounts increased the risk of either the agent misstating or
                           HUD misinterpreting the financial data provided.

                           Federal regulations require that managers:
Operating Procedures Not
Maintained                    "Maintain internal control over Federal programs that
                              provides reasonable assurance that the auditee is
                              managing Federal awards in compliance with laws,
                              regulations, and the provisions of contracts or grant
                              agreements that could have a material effect on each of
                              its Federal programs." (OMB Circular A-133 Subpart C)

                           Generally Accepted Accounting Principles (GAAP) also
                           require that organizations:
                              "... will establish policies and procedures to help ensure
                              management directives are carried out. Those policies
                              and procedures represent "control activities." Control
                              activities … include the following (in part): (1)
                              Information processing controls--such as controls to
                              check the accuracy, completeness, and authorization of
                              individual transactions. Information processing controls
                              include automated as well as manual controls; and (2)
                              Physical controls--such as physical security of assets,
                              including adequate safeguards over access to assets and
                              records, authorization for access to computer programs
                              and data files…” (SAS No. 55 and 78)

                           However, the management agent had not updated the
                           management plan (containing operating procedures) since the
                           project was established in 1986. The management plan, as
                           well as HUD manuals and handbooks, were not available on
                           site for staff use before our audit began. Management agent
                           officials acknowledged that they did not maintain operational
                           policies and procedures in all areas.          Consequently,


                               Page 19                                     2004-BO-1006
Finding 3


                          employees were not aware of operating procedures and thus
                          did not refer to them in their day-to-day activities.

                          Computer controls governing the agent’s major accounting
 Weak Computer Controls   system also were not developed. Password security was not
                          maintained and passwords for the project’s accounting
                          system had not changed in some time. We observed a former
                          employee accessing the system using a non-secure password.
                          Consequently, procedures were inadequate to detect and
                          prevent security violations (i.e. unauthorized use, damage,
                          loss, or modifications to the system).

                          Also, back-up or disaster recovery procedures were not in
                          place in the event of a major disaster to the computer system
                          or physical location. During the audit, back-up disks were
                          made for the current year’s accounting books. However,
                          back-up disks for past year’s books were not maintained.

                          The management agent failed to pay utility bills in a timely
 Utility Bills Not Paid   manner, resulting in late fees, legal fees, and other penalties
 Timely                   (which are ineligible project costs). As of April 2003, the
                          total amount past due was $23,275: (1) $2,911 for electricity;
                          (2) $3,525 for gas; and (3) $16,839 for water.

                          As discussed below, lack of timely payments also resulted in
                          liens placed against the project.

                          We attributed late payments, in part, to the significant
                          amounts of project funds expended for other ineligible,
                          unnecessary, and unreasonable purposes (see Finding 1 and
                          Finding 2).

                          Property records at the Hartford City Clerk’s office indicated
 Liens Attached to the    that numerous liens were placed on the project. As of April
 Property                 29, 2003, four outstanding unsatisfied liens were attached to
                          the project totaling $70,770.

                          According to Section 10 of the Regulatory Agreement:
                             "Mortgagor shall, from funds other than project income,
                             immediately satisfy or release any mechanic's lien,
                             attachment, judgment lien, or any other lien which
                             attaches to the mortgaged property…"

                          According to Section 7 of the Regulatory Agreement, the
                          mortgagor shall not, without the written approval of HUD:



2004-BO-1006                  Page 20
                                                                             Finding 3


                          “...transfer, dispose of, or encumber any of the
                          mortgaged property.”

                      In response to our draft report, the auditee moved to release
                      the outstanding liens. Two of the four outstanding liens
                      identified in our draft report were released and supporting
                      documentation was provided. For the remaining two
                      outstanding liens identified, the auditee provided a copy of a
                      letter from the water utility company (lien holder) indicating
                      that a payment arrangement was made and the two liens will
                      be released. The lien holder also stated in the letter that if the
                      account is kept in good standing with regards to billing and
                      payments, no further action will be taken. However, the
                      auditee did not provide any documentation from the Hartford
                      City Clerk’s office that the lien releases were actually filed.

                      The HFO required that the management agent submit a
Capital Improvement   Comprehensive Needs Assessment (CNA) as a provision for
Plan and Effective    granting the 1999 rent increase. HUD requested a list
Maintenance Program   prioritizing the capital improvements needed and the time for
Not Implemented       implementing them. The CNA was completed in December
                      1999. However, the agent did not develop or submit a plan
                      to implement the capital improvements and modernization
                      needs identified in the CNA.

                      The CNA concluded that overall the facility was generally in
                      good condition and:
                          The problems facing this building are fairly typical of a
                          structure its size, age and use. However, the lack of a
                          significant maintenance program has resulted in the
                          premature failure of some components. (Emphasis
                          added.)

                      In April 2000, the HFO conducted its own physical
                      inspection of the project in response to a substandard October
                      1999 REAC inspection. The HFO concluded that the project
                      needed improvements. HUD specifically found that the
                      management agent lacked an effective maintenance program
                      for tracking repairs and in-house inspections, the quality of
                      repairs was poor, and the rate of repair was slow.

                      The project received a favorable score in the most recent
                      REAC inspection in June 2002. However, several capital
                      items still require repair and/or replacement. Previous REAC
                      inspections, the CNA, our inspections, and the management
                      agent's own routine physical inspections indicated that,


                          Page 21                                         2004-BO-1006
Finding 3


                         among other items, kitchen appliances, cabinets, and
                         windows required maintenance or replacement.

                         The agent established several systems to schedule and track
                         routine maintenance. However, we determined that the
                         systems were not always effective, used consistently, or
                         maintained to ensure that work was completed. Additionally,
                         inconsistent information provided by the management
                         agent’s employees offered little assurance to HUD that they
                         were actively pursing corrective action regarding deficiencies
                         previously cited by REAC.

                         We recognize that the project’s physical inspection scores
                         have improved since 1999; however, the lack of an effective
                         maintenance and inspection program and capital
                         improvement plan may very well reverse this trend.

                         The owner/agent did not carry a fidelity bond in accordance
 Missing Fidelity Bond   with HUD requirements. In order to provide a basic level of
 Coverage                protection for project assets the management agent must
                         certify in the Management Agent Certification that it carries
                         fidelity bond or employee dishonesty coverage for: (1) all
                         principals of the management entity, and (2) all persons who
                         participate directly or indirectly in the management and
                         maintenance of the project and its assets, accounts, and
                         records. The project must be insured for at least the value of
                         two months gross potential income for the project and must
                         be maintained during the life of the loan. According to the
                         latest HUD approved rent schedule, this would equate to
                         aproximately $76,540 in required fidelity bond coverage
                         ($38,270 X 2 months).

                         These conditions occurred due to the management agent’s
 Deficient Management    lack of oversight over project operations and expenditures.
 Oversight               In addition, the management agent did not establish
                         operational and financial accounting policies and procedures,
                         especially those relating to project cost controls and HUD
                         requirements over the administration of the RFR.



Auditee Comments         The auditee acknowledged that they did not properly
                         maintain the project books and records. The auditee
                         responded that they took immediate actions including the
                         hiring of a new accountant. The auditee also acknowledged




2004-BO-1006                 Page 22
                                                                         Finding 3


                    that HUD manuals were not up-to-date and not readily
                    available for use by the employees.

                    In addition, the auditee stated that they took immediate
                    corrective actions on the liens. The auditee indicated that all
                    liens had been removed.

                    The auditee also acknowledged that the capital improvement
                    and preventive maintenance program need improvements.
                    The auditee indicated that the last three HUD REAC
                    inspections showed that the project is in good physical
                    condition. The auditee also indicated that the occupancy rate
                    has been close to 95 percent over the last several years.

                    The auditee also indicated that they purchased the HUD
                    required Fidelity Bond coverage on June 17, 2003, for
                    $100,000.

                    Finally, the auditee provided the results of the most recent
                    Section 8 program billing and subsidy review (March
                    2002), conducted by REAC.            The REAC reviewer
                    concluded that no discrepancies or other issues existed.



OIG Evaluation of   The auditee concurred with the majority of our findings and
Auditee Comments    has taken some corrective action. However, the auditee did
                    not specifically address the RFR deficiencies.

                    We do not agree that by hiring another accountant the
                    management agent will be able to correct the deficiencies
                    found, manage the project effectively, and protect HUD’s
                    interest. The hiring of the current accountant is the fifth such
                    accountant in the last two years. The inability to retain a
                    qualified accountant is another indication of poor
                    management and greatly influences the project’s ability to
                    provide timely financial information to HUD and in a manner
                    required by HUD.

                    We concur with the auditee’s response that physical
                    inspection scores have improved since 1999; however, the
                    lack of an effective maintenance and inspection program and
                    capital improvement plan may very well reverse this trend.

                    We also acknowledge that REAC did not find any
                    discrepancies or other issues in the most recent HUD Section



                        Page 23                                       2004-BO-1006
Finding 3


                  8 program billing and subsidy review (March 2002). REAC
                  conducted this review in support of the Rental Housing
                  Income Integrity Project mandate. However, the auditee
                  affirmation does not affect our results or recommendations
                  because we did not review the Section 8 billing and subsidy
                  calculations.


Recommendations   We recommend that you require the owner/management
                  agent to:
                  3A. Replenish the project’s RFR $106,942 ($105,128 +
                      1,814) for the questionable activity.
                  3B. Reimburse the project’s RFR $4,000 from non-project
                      funds for the balance of the unpaid ineligible loan to its
                      affiliate.
                  3C. Provide support from the Hartford City Clerk’s Office
                      that a release of lien was filed for each of the two
                      outstanding liens placed by the Water Bureau of the
                      Metropolitan District (Appendix E) and verify that no
                      additional liens were placed on the property since our
                      review period ended.
                  3D. Bring current all bills exceeding 30 days, especially
                      those related to major utilities (any late fees, legal fees
                      and penalties from unpaid bills should be paid from
                      non-project funds).
                  3E. Develop and implement operating and financial
                      accounting procedures, polices, and manuals with the
                      new management agent. In particular, these documents
                      should address HUD requirements for proper record
                      keeping, maintaining accounting books and records
                      current, and the timely submission of annual financial
                      reports.
                  3F. Update all accounting records and ensure timely
                      submission of future AFS to HUD.
                  3G. Develop and implement computer control polices and
                      procedures, especially concerning security concerns
                      and disaster recovery, with the new management agent.
                  3H. Update the existing CNA and submit it to your office,
                      along with a plan for addressing capital improvements
                      needed at the project, and the time period for
                      implementing them.
                  3I.    Develop and implement a comprehensive inspection
                         and maintenance program acceptable to your office.


2004-BO-1006            Page 24
Management Controls
In planning and performing our audit, we obtained an understanding of the management controls
used by the management agent, La Casa De Puerto Rico (LCDP), that were relevant to our audit
objectives. We reviewed the LCDP’s management control systems to determine our auditing
procedures and not to provide assurance on management controls.

Management controls consist of a plan, organization, methods, and/or procedures adopted by
management to ensure that resource use is consistent with laws, regulations, and policies; that
resources are safeguarded against waste, loss, and misuse; and that reliable data is obtained,
maintained, and fairly disclosed in reports.


                                    We determined the following management controls were
 Relevant Management                relevant to our audit objectives:
 Controls                               Management controls over project expenditures.
                                        Management controls over project financial reporting
                                        requirements.
                                        Management controls over maintaining the project in
                                        satisfactory physical condition.
                                        Assuring the safeguarding of project assets.
                                        Assuring compliance       with    applicable    laws   and
                                        regulations.
                                    We assessed the relevant controls identified above.

                                    A significant weakness exists if management controls do not
 Significant Weaknesses             give reasonable assurance that resource use is consistent with
                                    laws, regulations, and policies; that resources are safeguarded
                                    against waste, loss, and misuse; and that reliable data is
                                    obtained, maintained, and fairly disclosed in financial
                                    statements and reports.

                                    Based on our review, we believe the following items are
                                    significant weaknesses: (1) Management controls over cash
                                    receipts, cash disbursements and the safeguarding of
                                    project assets (including computer controls); (2)
                                    Management controls assuring compliance with financial
                                    reporting requirements and HUD regulations; (3)
                                    Management controls of maintaining the project in a
                                    satisfactory physical condition, and (4) Management
                                    controls assuring compliance with applicable HUD
                                    regulations.

                                    We discussed the specific weaknesses in the Findings
                                    sections of this report.


                                        Page 25                                        2004-BO-1006
Management Controls




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2004-BO-1006           Page 26
                                                                                       Appendix A

Summary of Questioned Costs


                                                     Type of Questioned Cost
       Recommendation
           Number                Ineligible 1   Unsupported 2     Unnecessary/unreasonable 3
             1A                   $244,103
             2A                    $4,132                                   $10,623
             2B                                      $1,630
             3A                   $106,942
             3B                    $4,000
            Totals                $359,177           $1,630                 $10,623
    Total Questioned Costs                                    $371,430



1. Ineligible costs are those that are questioned because of an alleged violation of a provision of
   a law, regulation, contract, grant, cooperative agreement, or other agreement or document
   governing the expenditure of funds.

2. Unsupported costs are those whose eligibility cannot be clearly determined during the audit
   since such costs were not supported by adequate documentation. A legal opinion or
   administrative determination may be needed on these costs.

3. Unnecessary/unreasonable costs are those that are not generally recognized as ordinary,
   prudent, relevant, and/or necessary within established practices. Unreasonable costs exceed
   the costs that would be incurred by a prudent person in conducting a competitive business. A
   legal opinion or administrative determination may be needed on these costs.




                                           Page 27                                    2004-BO-1006
Appendix A




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2004-BO-1006    Page 28
                                                               Appendix B

Schedule of Transfers to Affiliates (Finding 1)
         Check Number   Payee             Date       Amount
         2493           LCDP              01/14/99   $ 6,700
         2496           LCDP              02/11/99     4,500
         2506           LCI               03/30/99     5,500
         2507           LCDP              04/09/99     6,200
         2510           LCDP              04/23/99       770
         2527           FRC               04/30/99     4,900
         2528           LCDP              04/30/99    23,527
         2538           LCDP              05/07/99     5,050
         2544           LCDP              05/12/99    40,000
         2545           LCDP              05/19/99    10,000
         2547           LCDP              05/20/99    25,000
         2548           LCDP              06/03/99     6,400
         2561           LCDP              06/17/99    10,000
         2566           LCDP              07/15/99     9,300
         2568           LCDP              07/28/99    11,834
         2571           LCDP              08/12/99    12,250
         2588           LCDP              09/08/99    12,000
         2589           LCI               09/08/99     2,000
         2596           LCDP              10/07/99     6,000
         2598           LCDP              10/21/99     3,650
         2600           LCI               10/28/99     3,500
         2602           LCDP              11/04/99    15,850
         2610           LCDP              11/18/99     3,500
         2613           LCDP              12/06/99    12,000
         2626           LCDP              12/16/99    11,750
         2629           LCDP              12/29/99    16,250
         2635           LCDP              01/12/00     6,000
         2643           LCI               01/28/00     3,000
         2645           LCDP              02/09/00     9,000
         2656           LCI               03/08/00     3,300
         2657           LCDP              03/03/00    13,900
         2796           LCDP              04/06/00    14,900
         2799           LCDP              04/20/00     4,400
         2800           LCDP              05/04/00    14,000
         2813           LCDP              06/01/00    11,200
         2816           LCDP              06/15/00    12,000
         2826           LCI               06/29/00     2,000
         2827           LCI               07/05/00     5,350
         2829           LCDP              07/13/00     8,000
         2836           LCDP              07/24/00     8,000
         2848           LCI               08/03/00     1,300
         2849           LCDP              08/03/00     3,900



                                Page 29                        2004-BO-1006
Appendix B

Schedule of Transfers to Affiliates
               Check Number Payee      Date             Amount
               2861         LCDP       09/07/00           5,850
               2862         LCDP       09/11/00           3,500
               2865         LCDP       09/13/00           2,000
               2868         LCDP       09/21/00           5,000
               2870         LCDP       10/05/00           8,050
               2874         LCDP       10/20/00          10,000
               2882         LCDP       11/02/00          12,500
               2891         LCDP       11/16/00           5,000
               2900         LCDP       12/13/00           5,000
               2914         LCDP       12/28/00           9,000
               2917         LCDP       01/10/01           7,250
               2918         LCI        01/10/01           5,000
               2924         LCDP       01/25/01           4,750
               2928         LCDP       02/08/01          12,500
               2930         LCDP       02/22/01           6,000
               2949         LCDP       04/09/01           6,000
               2958         LCDP       05/02/01           4,000
               2959         LCDP       05/16/01           9,000
               2978         LCDP       06/26/01          14,250
               2987         LCDP       07/12/01          10,000
               3005         LCDP       08/28/01          10,000
               3011         LCDP       09/19/01          10,000
               3075         LCDP       01/09/02          10,000
               3126         LCDP       04/18/02          13,000
               3148         LCDP       06/13/02           1,000
               3157         LCDP       07/10/02          10,000
               3172         LCDP       08/07/02          15,000
               3179         LCDP       08/22/02           4,500
               3196         LCDP       10/17/02          10,000
               3199         LCDP       10/03/02           5,500
               3202         LCDP       10/31/02           5,000
               3218         LCDP       11/26/02           2,500
               Wire         LCDP       08/09/00           6,500
               Wire         LCDP       01/03/02           3,000
                      TOTAL TRANSFERS TO AFFILIATES:   $639,331




2004-BO-1006                     Page 30
                                                                                             Appendix C

Schedule of Ineligible, Unsupported, and
Unnecessary/Unreasonable Costs (Finding 2)
                                                                                               Unnecessary/
Check                                                                 Ineligible   Unsupported unreasonable
Number Date         Description                                        Amount          Amount       Amount
   2520   4/30/1999 Cooperative Membership                                                             $600
   2540    5/3/1999 Food & supplies for celebration                                          $75
   2564   6/23/1999 Food & supplies for celebration                                          100
   2580   8/19/1999 Boxes for food Cooperative                                                25
   2593   9/14/1999 Tour Company                                                                       1,576
   2606 11/12/1999 Tour Agency                                                                          114
   2609 11/16/1999 Lunch for celebration                                                     160
   2648    2/9/2000 Decorations for Holiday                                                   60
   2803    5/8/2000 Celebration                                                               30
   2804    5/8/2000 Celebration                                                              115
   2838   7/26/2000 Ocean trip                                                                          100
   2839   7/26/2000 Food for beach trip                                                                 150
   2840 7/26/2000 Bus transportation to beach                                                           425
   2841 7/26/2000 Payment to Individual                                                      600
   2857 8/28/2000 Music at picnic                                                                       300
   2858 8/25/2000 Music at picnic                                                            200
   2889 11/6/2000 Bus to casino                                                                         415
   2893 11/17/2000 Bus to city to see a play                                                            670
   2895 11/17/2000 44 tickets to see a play                                                             616
   2896 11/17/2000 45 meals during trip to see a play                                                   673
   2941 3/30/2001 Payment to Individual                                                                 100
   2943 3/27/2001 Bus to casino                                                                         440
   2945 3/30/2001 Food cooperative                                                                      440
   2955   5/1/2001 Bus to city to see a play                                                            700
   2988 7/17/2001 Trip to beach                                                                         682
   2989 7/17/2001 Trip to a Rhode Island Zoo                                                            748
   3007 9/12/2001 Trip to Museum and dinner                                                             704
   3107   4/3/2002 Trip to Casino                                                                       460
   3156   7/2/2002 IRS Penalty Payment                                  $4,132
   3166   8/1/2002 Trip to NYC Statue of Liberty and Spanish Harlem                                     350
   3174 8/19/2002 Trip to Aquarium                                                                      320
   3177 8/19/2002 Celebration dinner                                                         140
   3216 8/25/2002 Celebration dinner for 45 people                                           125
   3219 12/10/2002 Payment to Individual                                                                    40
                                                         SUBTOTALS:     $4,132          $1,630       $10,623
                                                      GRAND TOTAL:                 $16,385




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2004-BO-1006    Page 32
                                                                                       Appendix D

Schedule of Questioned Reserve Fund for
Replacement Activity (Finding 3)
              HUD
 Transaction Approved  Amount Outstanding
    Date     Amount Withdrawn Amount                           Audit Comment
    5/99             0        0   $83,225 Retroactive rent increase proceeds not deposited in RFR
                                          $21,903 of approved $27,202 HAP advance had
  10/29/99      27,202   27,202    21,903
                                           not been returned as of June 2003
  03/03/00           0   10,000     4,000 Management agent only repaid $6,000 as of June 2003
  06/16/00      10,763   11,971     1,208 Excess Withdrawal Questioned
  06/06/02      13,294   13,900       606 Excess Withdrawal Questioned
                              Total   $110,942




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2004-BO-1006    Page 34
                                                                                                 Appendix E

Schedule of Liens (Finding 3)

Date Filed   Amount    Status        Description
                                     Construction Lien for services rendered and materials furnished in the
09/28/87     $63,000   Released      construction, erection, raising, and removal of buildings at 68 Oak Street,
                                     Hartford, CT
                                     Utility Lien to secure payment due 1/30/97 to 10/29/97 inclusive for use
01/30/98       3,848   Outstanding   of water to the project provided by Water Bureau of the Metropolitan
                                     District
                                     Utility Lien to secure payment for the use of water during the period of
06/09/99       3,239   Outstanding
                                     4/29/98 to 4/29/99 provided by Water Bureau of the Metropolitan District
                                     Tax Lien to secure payment of taxes, interest, and fees due the City of
05/31/02        683    Released
                                     Hartford 7/1/01
     Total   $70,770




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                               Appendix F

Auditee Comments




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