oversight

City of Little Rock Housing Authority Procurement and Asset Control Little Rock, Arkansas

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-01-26.

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

     AUDIT REPORT




    THE CITY OF LITTLE ROCK
      HOUSING AUTHORITY

PROCUREMENT AND ASSET CONTROL

    LITTLE ROCK, ARKANSAS

           2004-FW-1001

          January 26, 2004

      OFFICE OF AUDIT, REGION 6
         FORT WORTH, TEXAS
                                                                 Issue Date
                                                                         January 26, 2004
                                                                Audit Case Number
                                                                         2004-FW-1001




TO:          Jesse Westover
             Director, Public and Indian Housing, 6FPH



FROM:        D. Michael Beard
             Regional Inspector General for Audit, 6AGA

SUBJECT: The City of Little Rock Housing Authority
         Procurement and Asset Control Audit
         Little Rock, Arkansas


We performed an audit of the City of Little Rock Housing Authority (Authority). The purpose
of the audit was to determine whether the Authority maintained adequate controls over cash and
procurement. Specifically, we determined whether the Authority: (1) expended funds for
eligible activities; (2) accounted for collections and deposits; and (3) complied with federal and
Authority procurement requirements. We expanded the audit to include observations of units
and interviews with residents to determine the adequacy of the condition of the units.

The report contains three findings requiring follow up actions by your office. We will provide a
copy of this report to the Authority.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days, please furnish this office,
for each recommendation in this report, a status on: (1) corrective action taken; (2) the proposed
corrective action and the date to be completed; or (3) why action is not considered necessary.
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 related to the audit.

Please call William W. Nixon, Assistant Regional Inspector General for Audit, at (817) 978-
9309 if you or your staff have any questions.
Management Memorandum




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2004-FW-1001              Page ii
Executive Summary
We performed an audit of the City of Little Rock Housing Authority (Authority). The
purpose of the audit was to determine whether the Authority maintained adequate controls
over cash and procurement. Specifically, we determined whether the Authority:

(1)    Expended funds for eligible activities;
(2)    Accounted for collections and deposits; and
(3)    Complied with federal and Authority procurement requirements.

We expanded the audit to include observations of units and interviews with residents to
determine the adequacy of the condition of the units.



                                  Generally, the Authority lacked sufficient controls and
  Authority had inadequate        management over its procurement process and assets. Of
  controls over procurement       11 non-representatively selected contracts reviewed, the
  and assets.                     Authority did not always adhere to procurement
                                  requirements. This resulted in sole-source contracts, not
                                  approved by HUD, resulting in $228,211 in unsupported
                                  payments. Because of the Authority’s actions, the
                                  Authority did not know if it received the best price and
                                  performance under these contacts.

                                  The Authority needs to improve the conditions of some
                                  sites. Maintenance throughout the Authority managed units
                                  appeared slow or non-existent. Needed maintenance
                                  included: demolition of units not viable to rehabilitate;
                                  routine repairs; maintenance of common areas, and
                                  improved security.

                                  Further, the Authority did not develop and implement
                                  written policies and procedures for disbursements to ensure
                                  its funds were properly expended or assets were properly
                                  utilized. Further, the Authority’s audits were not
                                  completed timely as required by OMB Circular A-133 for
                                  Fiscal Years 2000 and 2001 and the audits did not disclose
                                  identity-of-interest issues with related not-for-profit
                                  entities. These entities paid a total of $20,000 to the
                                  Executive Director and the Deputy Director.

                                  We recommend the Authority ensures it adheres to its
  Recommendations                 procurement policy; support or repay any amounts that it
                                  paid in excess of reasonable costs; and re-procure the
                                  contracted services. We recommend the Authority
                                  promptly identify and correct maintenance deficiencies.

                                       Page iii                                 2004-FW-1001
Executive Summary


                    We are also recommending the Authority implements the
                    necessary policies to correct the deficiencies.

                    We provided a discussion draft to the Authority on
                    October 9, 2003. We held an exit conference with the
                    Authority and its attorneys on November 5, 2003. After
                    incorporating some changes into the report, we provided
                    the Authority a final draft on November 20, 2003. The
                    Authority provided written comments on December 10,
                    2003. Generally, the Authority disagreed with the findings.
                    The Authority believes some statements in the report are
                    misleading and without merit. The Authority highlighted
                    some of its accomplishments that it felt we had not
                    recognized. The Authority had some positive responses to
                    the recommendations. We have included the Authority’s
                    entire response as Appendix C. We considered the
                    Authority’s response in preparation of our final report and
                    amended as necessary.




2004-FW-1001            Page iv
Table of Contents
Management Memorandum                                                i



Executive Summary                                                  iii



Introduction                                                        1



Findings

1 The Authority Needs to Strengthen its Adherence to                7
  Procurement Requirements

2 Some Authority Sites Appeared in Poor Condition                 11


3 The Authority Exercised Poor Administration Over its            25
  Operations


Management Controls                                               35



Follow-Up on Prior Audits                                         37



Appendices
   A. Schedule of Questioned Costs                                39

   B. Listing of Units Observed and Repairs Needed                41

   C. Auditee Comments                                            43




                              Page v                     2004-FW-1001
Table of Contents



Abbreviations

ACC            Annual Contributions Contract
Authority      City of Little Rock Housing Authority
CFR            Code of Federal Regulations
FHA            Federal Housing Administration
GAAP           Generally Accepted Accounting Principals
HUD            Department of Housing and Urban Development
LOCCS          Line of Credit Control System
OIG            Office of the Inspector General
OMB            Office of Management and Budget
PIC            PIH Information Center
PIH            Public and Indian Housing
PASS           Physical Inspection Assessment Subsystem
QASS           Quality Assurance Subsystem
RAB            Resident Advisory Board
REAC           Real Estate Assessment Center
RFP            Request for proposal




2004-FW-1001                          Page vi
Introduction
                                            The City of Little Rock created the Housing Authority of
    Background                              the City of Little Rock (Authority) in 1940. The Mayor of
                                            Little Rock appointed the first Board of Commissioners
                                            (Board) for the Authority. After the initial appointment, the
                                            Board members approve subsequent changes in the Board’s
                                            composition. Each Commissioner serves a 5-year term
                                            with one term expiring each year. Currently, Wooten Epes
                                            serves as the Board Chairman.

                                            The Board is responsible for setting policy and appoints an
                                            Executive Director to administer the day-to-day operation
                                            of Authority programs. In 1993, the Board appointed Lee
                                            Jones as Executive Director to manage the Authority
                                            including its existing 1,600 low-income units.1

                                            As of January 13, 2003, the Authority managed 1,136
                                            Public Housing low rent units at ten sites.2 The Authority
                                            directly managed 999 of the Public Housing low rent units.
                                            McCormack Baron, Inc. managed 137 low-income units
                                            located in mixed finance developments. However, the
                                            Authority is still responsible for the administration of the
                                            137 units. We limited the scope of our audit to only the
                                            administration and management of the 1,136 low rent units.



                                            The Public Housing low-income properties are disbursed
                                            throughout ten developments as follows:




1
     According to the Executive Directors, the Authority administered 900 Section 8 vouchers when he arrived and
     the Authority had 439 vacant units.
2
     As of January 13, 2003, the Authority administered 2,025 Section 8 vouchers. We did not include the
     administration of these units in our audit. Based upon low SEMAP scores, it appears that the Authority has
     problems managing its Section 8 program, also.

                                                 Page 1                                            2004-FW-1001
Introduction


                                                         Number of
                                Development              Authority                  Type of Units
                                                           Units
                        Sunset Terrace                         74        Family w/ Disability Access
                        Amelia B. Ives Homes                   50        Family w/ Disability Access
                        Amelia B. Ives Homes                  100        Family w/ Disability Access
                        Hollinsworth Grove                    180        Family/Designated
                                                                         Elderly/Disability Access
                        Fred Parris Towers                    249        Elderly/Handicap
                        Cumberland Towers                     178        Elderly/Handicap
                        Jesse Powell Towers                   168        Elderly/Handicap
                        Madison Heights, Phase I              59         PH/Mixed Finance Development/
                                                                         Privately Managed Property
                        Madison Heights, Phase II             38         PH/Mixed Finance Development/
                                                                         Privately Managed Property
                        Homes at Granite                      40         PH/Mixed Finance Development/
                        Mountain                                         Privately Managed Property
                        Total                             1,136


                                           The Authority has accumulated a considerable amount of
                                           unexpended funds. As of January 13, 2003, the Authority
                                           received and disbursed funds from HUD in the amount of: 3

                                                                     Funds     Funds               Available
                                    Program                        Authorized Disbursed            Balance
                   Capital Fund Program4                             $8,214,235 $1,795,103 $6,419,132
                   Comprehensive Grant Program                          793,904          0    793,904
                   Drug Elimination Grant Program                       601,965    378,022    223,943
                   Operating Fund                                       318,325     81,814    236,511
                   Public Housing Development Grants                  8,531,280 8,039,277     492,003
                   Resident Opportunity & Self
                   Sufficiency5                                        200,000                 0      200,000
                   Urban Revitalization Program
                   (HOPE6)                                            1,669,261     1,366,749         302,512
                   Totals                                           $20,328,970 $11,660,965 $8,668,005




3
    This included the Authority’s open grant funds available for the low-income housing between 1995 and 2002.
    It did not include Section 8 funds or grant programs that the Authority completed.
4
    Approximately $3.6 million is reserved for the construction of replacement housing.
5
    According to the Authority, this amount was not available to them until December 18, 2002.

2004-FW-1001                                    Page 2
                                                                                                    Introduction

                                           HUD designed the Capital Fund and Comprehensive Grant
                                           Programs to improve or expand public housing. As the
                                           above chart shows, the Authority has a combined $7.2
                                           million6 in unexpended funds to improve or expand its
                                           public housing stock. These funds have been accumulating
                                           since 1999. Current HUD guidelines allow for this
                                           accumulation of funds.

                                           The Authority received 26 out of 30 on its 2002 PASS
                                           REAC7 score or equivalent to 87 percent. Based upon
                                           conclusions reached in Finding 2 and the Authority’s
                                           acknowledgment of the age of the developments and the
                                           documented need for $14 million in physical rehabilitation,
                                           this score appears inflated. The total REAC score for fiscal
                                           year 2002 was 55 out of 100. HUD considers a housing
                                           authority “troubled” if it scores less than 60.

                                           The Independent Auditors reported significant findings to
                                           the Authority.8 Commendably, the Authority has addressed
                                           and resolved many of the findings, but the Authority still
                                           needs to improve. However, HUD’s Real Estate
                                           Assessment Center (REAC) performed a verification
                                           review of the 2001 Independent Auditors’ report. HUD
                                           REAC’s review identified material weaknesses and / or
                                           reportable conditions that the Independent Auditor’s report
                                           did not disclose.

                                           The Authority has an identity-of-interest nonprofit, Little
    The Authority has
                                           Rock Housing Redevelopment, Inc. (Housing
    established an identity-of-
                                           Redevelopment), that the Authority appointed to develop
    interest nonprofit.                    Madison Heights III, a mixed finance community.

                                           While the Authority originally attempted procurement of
                                           this contract,9 Housing Redevelopment’s attorney claims
                                           that the Authority did not need to procure a developer
                                           because it hired itself through the identity-of-interest firm

6
    $793,904 + $6,419,132 = $7,213,036.
7
    HUD’s Real Estate Assessment Center (REAC) performs annual assessments of housing authorities.
    Assessments are conducted with both internal and external resources and are intended to measure the following:
    federal statutory and regulatory compliance, physical housing condition, housing management, financial
    condition, and resident satisfaction. The Physical Inspection Assessment Subsystem (PASS) assesses the
    condition of HUD properties through annual inspections conducted by contract inspectors.
8
    The fiscal year 2000 and 2001 independent audit reports listed 13 and 5 findings, respectively. Both reports
    contained a qualified opinion due to the Authority’s non-compliance with federal requirements.
9
    Originally, we reviewed this transaction as procurement and determined the Authority limited competition and
    effectively sole-sourced the award to the nonprofit. Based upon the exit conference with the Authority and
    attorneys, we removed it from the procurement conclusions.

                                                  Page 3                                           2004-FW-1001
Introduction

                                          of Housing Redevelopment. According to Housing
                                          Redevelopment’s attorney, Housing Redevelopment uses
                                          Authority offices rent-free.10

                                          The Authority maintains its financial records at its
                                          administration office located at 1000 Wolfe Street, Little
                                          Rock, Arkansas, and its procurement records at its
                                          Technical Services building located at 201 E. Roosevelt
                                          Road, Little Rock, Arkansas.

                                          Our overall objective was to determine whether the
     Audit Objective and Scope            Authority maintained adequate controls over accounts
                                          payable, cash collections, disbursements, receivables, and
                                          procurement. Specifically, we determined whether the
                                          Authority:

                                          1. Followed requirements in its procurement and
                                             contracting activities and
                                          2. Followed requirements over cash collections and
                                             receivables and over cash disbursements and accounts
                                             payable.

                                          Based upon a cursory observation of the Authority’s sites,
                                          we expanded our initial scope to include a determination of
                                          whether the Authority’s public housing units appeared to be
                                          maintained in a decent, safe, and sanitary manner.

                                          To accomplish the objectives, we:

                                          • Reviewed relevant HUD regulations and guidelines and
                                            the available Annual Contributions Contract;
                                          • Reviewed relevant Arkansas State Statutes;
                                          • Examined records maintained by the Authority;
                                          • Reviewed the Authority’s accounting records;
                                          • Reviewed a non-representative selection of contracts;
                                          • Analyzed the Authority’s computer information using
                                            computer assisted auditing software;
                                          • Interviewed HUD officials, Authority personnel, and
                                            residents;
                                          • Observed and photographed resident units; and
                                          • Reviewed the minutes of the Board of Commissioners’
                                            meetings.


10
      We removed the procurement of Housing Redevelopment from Finding 1 but discuss Housing Redevelopment
      in Finding 3.

2004-FW-1001                                   Page 4
                                                                                                      Introduction

                                             To determine if the Authority met the objectives, we took
                                             non-representative selections of contracts11 and
                                             disbursements, interviews with residents, and observation
                                             of units.12 While not able to extrapolate to the population,
                                             we believe our selections do provide sufficient evidence to
                                             support our conclusions.

                                             Throughout the audit, we reviewed various computer-
                                             generated data. Specifically, using computer-assisted
                                             auditing software we analyzed, assessed, and evaluated the
                                             Authority’s financial records. In addition to using
                                             computer software including ACL and Excel, we assessed
                                             the data by comparison with paper records, i.e. the data
                                             showed numerous missing checks but a manual comparison
                                             to bank statements showed many of the checks were not
                                             missing. We determined the cause of this was that the data
                                             was not formatted consistently. In another example, the
                                             Authority’s contract register was determined incomplete.
                                             Therefore, we could not satisfy ourselves that these records
                                             were complete and accurate. We concluded that the data
                                             had an undetermined reliability. We did not assess other
                                             computer-generated data.

                                             We conducted our fieldwork between January and June
                                             2003. Our audit period generally covered the period from
                                             January 1, 2001, through December 31, 2002, with the
                                             scope expanded as necessary.

                                             We conducted the audit in accordance with generally
                                             accepted governmental auditing standards.




11
     Because the Authority did not have an accurate contract register, it did not know how many contracts it had
     during the audit period.
12
     See listing of properties and number of units on page 2 for the universe.

                                                    Page 5                                           2004-FW-1001
Introduction




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2004-FW-1001     Page 6
                                                                                                             Finding 1


           The Authority Needs to Strengthen its
          Adherence to Procurement Requirements
Of 11 non-representatively selected contracts reviewed, the Authority did not adhere to
procurement requirements in two instances. Violating procurement requirements, the
Authority sole-sourced the John D. Blake & Associates ($204,211) and Senior Citizens
Activities Today (SCAT) ($24,000) contracts. Both federal and Authority requirements
prohibit sole-source contracts unless the Authority met certain conditions. As a result of
the Authority’s actions, the Authority did not know if it received the best price and
performance under these contracts. The Authority should ensure that it adheres to its
procurement policy; support or repay any amounts that it paid in excess of reasonable
costs; and re-procure the contracted services.



                                               In accordance with Authority policy and HUD
     The Authority was
                                               requirements, the Authority was required to promote full
     required to provide full
                                               and open competition for all procurement contracts.
     and open competition.
                                               Requirements only allow procuring goods and services
                                               non-competitively “when the award of a contract is
                                               infeasible under small purchase procedures, sealed bids, or
                                               competitive proposals and one of the following
                                               circumstances applies: the item is available from a single
                                               source; emergency; competition determined inadequate;
                                               and HUD authorizes the noncompetitive proposals.”13

                                               The Authority has been previously informed of
                                               procurement violations and in 2000, the Arkansas
                                               Democrat-Gazette detailed procurement problems with a
                                               plumbing contractor. The Authority did have a
                                               procurement policy that complies with HUD requirements;
                                               however, it was not adhered to in these two instances. The
                                               Authority should ensure that all procurements follow the
                                               federal procurement policy and its own procedures.

                                               To determine if the Authority followed procurement
                                               requirements, we reviewed the disbursement file to
                                               determine a non-representative selection of contracts. We
                                               used this method because the Authority’s contract register
                                               was incomplete.14 In reviewing the disbursement file, we

13
      24 CFR 85.36.
14
      As a result, the Authority did not have a complete listing of contracts and the universe of contracts was
      unknown. The Authority’s listing only contained 41 contracts for the period.

                                                     Page 7                                              2004-FW-1001
Finding 1

                                              noted large payments15 and smaller recurring payments.16
                                              This resulted in selecting eight contracts. We selected the
                                              remaining three contracts based on suggestions.

     The Authority sole-                      Since 1995, John D. Blake & Associates (Blake) have been
     sourced computer                         computer consultants for the Authority. The Authority used
     consultant.                              Blake’s consulting services on the Authority’s computer
                                              software, Emphasys Computer Solutions (ECS). The
                                              services provided include assisting the Authority in: custom
                                              report requirements, training and keeping their work order
                                              history file functional, yearend closings for Section 8 and
                                              financial accounting, and designing yearend accounting
                                              database balance reports. Blake also reviews the software
                                              quarterly and updates it as needed.

                                              A written contract did not exist between the Authority and
                                              Blake. Furthermore, the Authority did not have any
                                              procurement documentation such as advertisements, bids,
                                              and work specifications. Despite the lack of a contract and
                                              documentation, the Authority continued to pay Blake. In
                                              2001 and 2002, the Authority paid Blake $78,121 for
                                              consulting services and lodging for the consultant.17 Since
                                              1995, the Authority has spent $204,211 on consulting
                                              services from Blake.

                                              Without a written contract, the Authority should sever its
                                              current relationship with Blake. The Authority needs to
                                              follow requirements when procuring for a computer
                                              consultant including precise work specifications, price/cost
                                              analysis, advertising, evaluating proposals, and monitoring
                                              contractor performance.

                                              The Authority originally contracted with Senior Citizens
     The Authority continually                Activities Today (SCAT) in 1976 and has continually
     renewed a resident                       renewed it without procurement. SCAT’s main purpose is
     services contract since                  providing recreational services to the seniors18 of the
     1976.                                    Authority’s three high-rise buildings. Examples of
                                              recreational services include weekday lunches, bingo,
                                              movies, and crafts. In addition to providing recreational
                                              services, SCAT manages the vending machines, washers,
                                              and dryers in the high-rise developments. SCAT receives


15
      Consisting of $20,000 or more.
16
      Consisting of $1,000 - $20,000.
17
      Includes travel expenses of $2,270.
18
      SCAT is open to all high-rise residents, regardless of age, for a small membership fee.

2004-FW-1001                                        Page 8
                                                                                                   Finding 1

                                               all profit from these machines. Further, SCAT received
                                               rent and utilities free of charge.

                                               According to the files, the only amendment to the contract
                                               was dated 1980. It did not appear the Authority attempted
                                               to procure or justify the costs paid to SCAT since 1976.
                                               The Authority paid SCAT $24,000 during 2001 and 2002.19

                                               The Executive Director stated the reason why the Authority
                                               has not procured this service was because there wasn’t a
                                               ‘good alternative.’ Further, the Executive Director believed
                                               that SCAT leverages other funds so the Authority residents
                                               receive much more value than what the Authority paid.
                                               Nonetheless, the Authority needs to support its position by
                                               either performing a cost analysis or by soliciting proposals.
                                               Also, HUD’s guidance20 stated the Authority must submit
                                               any professional service contracts to HUD if the term of the
                                               contract, including renewals or options, exceeded 2 years.

                                               Overall, the Authority did not procure 2 out of 11 contracts
                                               properly. The Authority improperly entered into sole-
                                               sourced contracts. Further, in one instance, the Authority
                                               did not have contracts. The Authority did not know if it
                                               received the best price or services. Also, the Authority
                                               needs to ensure that its contract register is complete and
                                               accurate.



Auditee Comments                               In its response, the Authority agreed to take actions to
                                               implement the recommendations. The Authority expressed
                                               confidence that it could support the questioned costs. The
                                               Authority stated it administered approximately 100 contracts
                                               during this period and did not believe two failures were
                                               unreasonably high.


OIG Evaluation of                              We commend the Authority for acknowledging the
Auditee Comments                               procurement problems and agreeing to take positive actions
                                               to correct the problems. As stated in the body of the finding,
                                               the Authority’s contract register only listed 41 contracts as
                                               opposed to the 100 cited in the Authority’s response. From
                                               the 41 contracts, we reviewed 11 or 27 percent of the


19
     This did not include the rent, utilities, or profit from vending machines.
20
     HUD Handbook 7460.8 4-27 B.2.

                                                      Page 9                                    2004-FW-1001
Finding 1

                  contracts provided. The two contracts cited represent 19
                  percent of the contracts reviewed.




Recommendations
                  We recommend the Director of the Little Rock Office of
                  Public and Indian Housing require the Authority to:

                  1A. Adhere to the Authority and HUD procurement
                      requirements.

                  1B. Sever its existing relationship with Blake.

                  1C. Support or repay the $204,211 paid to Blake for
                      consulting services and lodging.

                  1D. Determine its needed computer services and properly
                      procure the services.

                  1E. Support or repay the $24,000 paid to SCAT since
                      2001.

                  1F. Determine the recreational services needed and
                      properly procure.

                  1G. Ensure it has written contracts.

                  1H. Ensure its contract register is current and accurate.




2004-FW-1001          Page 10
                                                                                                            Finding 2


                      Some Authority Sites Appeared
                           in Poor Condition
Based upon observations of the Authority’s units’ exterior and interviews with 25
residents,21 the Authority units appeared to be in poor condition.22 The observations of
needed maintenance included:

          •    Demolition of units not viable to rehabilitate;
          •    Secure vacant buildings;
          •    Routine repairs to and repainting of units per tenant requests;
          •    Treatment for insects;
          •    Replace smoke detector batteries;
          •    Replacement of air conditioning filters;
          •    Clean common areas; and
          •    Improve security.

Several buildings have been burned out and uninhabitable for over 2 years at Hollinsworth
Grove and Amelia B. Ives complexes. Maintenance throughout the Authority managed units
appeared to be slow or non-existent. In addition, residents believed security was poor in the
high-rise properties. The units managed by McCormack Baron have minor problems as
compared to the properties managed by the Authority, albeit, the McCormack Baron
properties are new as compared to the older properties managed by the Authority. A
comparison between the properties would not be appropriate. The Authority should develop
a schedule for routine maintenance and make every attempt to keep the schedule. The
Authority needs to demolish the units not viable for rehabilitation and rehabilitate the units
that can be future homes for families. Although the Authority cannot make every resident
“feel” secure or even have residents report all the maintenance needs, the Authority needs to
be aware of the residents attitudes and communicate the Authority’s actions and if necessary,
the facts about the maintenance and security of the sites.



                                               The Authority contracted with HUD to: “…at all times
     The Authority contracted                  develop and operate each project solely for the purpose of
     to provide safe, decent,                  providing decent, safe, and sanitary housing for eligible
     and sanitary housing.                     families in a manner that promotes serviceability, economy,
                                               efficiency, and stability of the projects, and the economic
                                               and social well-being of the tenants.”23


21
      Non-representative selection.
22
      To determine if the Authority met this objective, we took a non-representative selection of residents to interview
      and units to observe. While not able to extrapolate to the population, we believe our selections provide
      sufficient evidence to support our conclusions.
23
      Mission Statement 4, Consolidated Annual Contributions Contract with HUD, dated December 15, 1995.

                                                    Page 11                                             2004-FW-1001
Finding 2



                                            Some of the sites the Authority manages appear to be in
     Some sites are in poor                 poor condition. The family units range from clusters of
     condition.                             duplexes to one- or two-story apartment style residences
                                            located in complexes named Amelia B. Ives, Hollinsworth
                                            Grove, or Sunset Terrace. The Authority’s units were built
                                            in the early 1940s through the early 1950s. Sunset Terrace
                                            has 74 units and Amelia B. Ives has 150 units. The
                                            Authority has designated both as “Family w/Disability
                                            Access.” Hollinsworth Grove, consisting of 180 units, is
                                            designated “Family/Designated Elderly/Disability Access.”
                                            Residents complained of the lack of routine maintenance
                                            and the Authority’s slow or lack of response to requests for
                                            repairs. The exterior of the properties supported the
                                            residents’ statements. The Authority needs to perform the
                                            necessary repairs to ensure the units meet HUD’s decent,
                                            safe, and sanitary housing standards.

                                            Hollinsworth Grove, built in 1952, appears to be a severely
     Hollinsworth Grove.                    distressed development that suffers from obvious neglect.
                                            Located between the Little Rock International Airport and
                                            the Arkansas River, the majority of the units are single
                                            story. A few buildings had a second story added with
                                            siding and flat roofs. A visual inspection of the exterior of
                                            the units revealed apparent major problems with the
                                            maintenance of the development.

                                            Hollinsworth Grove has needed rehabilitation for several
                                            years. For example, severe fire damage to several buildings
                                            prevented their use and posed a safety hazard for the
                                            remaining residents. Additional buildings were
                                            uninhabitable because of a lack of general maintenance or
                                            repair. The neglected buildings were disbursed throughout
                                            the development. Three attempts to speak to the site
                                            manager were unsuccessful due to a closed office during
                                            business hours.24 The residents had no apparent means to
                                            resolve problems on-site with the lack of site manager
                                            availability.

                                            The following pictures were taken at Hollinsworth Grove
                                            showing examples of abandoned buildings throughout the
                                            development.




24
      The site manager was contacted on April 2, 2003.

2004-FW-1001                                     Page 12
                                                                     Finding 2




Picture 1 This building consists of four units. Note the missing windows and
screen on the second floor and graffiti covered exterior.




Picture 2 This picture shows fire damage at the opposite end of the same
building.

               At the time of the picture, the Authority had not secured
               this fire-damaged building, i.e. boarding up the units. By
               not securing the building, the Authority exposed the
               building to additional damage from the elements and
               vandals. The building posed a sanitary and safety issue to
               the residents living in Hollinsworth Grove.

                     Page 13                                      2004-FW-1001
Finding 2



                                           An additional example at Hollinsworth Grove was an
                                           occupied unit and another abandoned building as its
                                           neighbor. In Picture 3, note the occupied building in the
                                           foreground and the abandoned building behind it. The
                                           abandoned building has a chain link fence around it but that
                                           has done little to deter entry into the unit as evidenced by
                                           the fence being bent in several places where it has been
                                           compromised.




                           Picture 3


                                           The Authority has known about the conditions at
                                           Hollinsworth Grove since 2001. In 2001, the Authority
                                           wanted some Hollinsworth Grove units demolished. The
                                           Authority solicited contractors to demolish and restore the
                                           site of Booker Homes and demolish three units at
                                           Hollinsworth Grove. In August 2001, the Authority elected
                                           not to proceed with the demolition of the three units at
                                           Hollinsworth Grove.25 The bid amount of $35,000 was
                                           deducted from the contract and the buildings remain. The
                                           Authority stated HUD had not approved its demolition
                                           application. The Authority should demolish buildings not


25
     Change order number 7 to the Authority’s Contract 1139 dated August 20, 2001, with Jimmy A. Patton
     Contractor, Inc.

2004-FW-1001                                    Page 14
                                                                                  Finding 2

                              viable for rehabilitation and secure and rehabilitate those
                              viable buildings.

                              Amelia B. Ives appeared only marginally better than
Amelia B. Ives.               Hollinsworth Grove. It also has several buildings not fit for
                              habitation. The Amelia B. Ives development consists of
                              150 units that were built over 50 years ago. The
                              appearance of many of the units is poor. Of the 150 units,
                              several were boarded or needed demolition and/or
                              rehabilitation. For example, one unit is missing
                              approximately 50 percent of its brick at one end. A two-
                              story building, Picture 4, and a one-story building, Picture
                              5, had obvious fire damage. Unlike the units shown at
                              Hollinsworth, the Authority did board up the lower and
                              upper floor windows limiting the exposure to the elements
                              and vandals.




                  Picture 4




                                   Page 15                                     2004-FW-1001
Finding 2




                         Picture 5 – Note the weathered appearance of the plywood boarding the windows.

                                          As with Hollinsworth Grove, the damaged properties at
                                          Amelia B. Ives appear to have needed repair or demolition
                                          for some time.

                                          In addition to the poor exterior maintenance of buildings in
     Residents cannot get                 the development, interior condition appeared poor. For all of
     Authority to maintain                the Authority’s sites, 25 residents were interviewed.26 Two
     property.                            residents living in Hollinsworth Grove had concerns with the
                                          management of the development. An elderly resident of
                                          Hollinsworth Grove presented the more serious concerns.
                                          She reported extensive termite damage in her unit and a lack
                                          of routine maintenance despite repeated requests to
                                          management (see Picture 6).




26
      A non-representative selection.

2004-FW-1001                                   Page 16
                                                                Finding 2




Picture 6

            The resident also had a bullet hole in her front screen door.
            A repair was observed in the main door behind the screen
            in the bullet’s trajectory (see Picture 7). The resident said
            she was in the kitchen at the time of the gunshot and
            thankfully, did not get hurt.




Picture 7

            A resident at the Amelia B. Ives development also
            expressed problems with termites. According to the

                 Page 17                                    2004-FW-1001
Finding 2

                           resident, she called the Authority’s maintenance department
                           numerous times but the Authority has not dispatched an
                           exterminator. The resident said the Authority told her to
                           use dish soap to get rid of the termites. Also, her sink is
                           pulling away from the wall. Despite several calls to
                           maintenance repair, no one has come. The approximately
                           ½” gap between the sink and wall is shown in Picture 8:




               Picture 8

                           Another resident at Amelia B. Ives reported that she could
                           not get a hole repaired in her floor (see Picture 9). She has
                           also requested paint for some wall patches in her living
                           room. According to the resident, these existed when she
                           moved into the unit. The resident has been unsuccessful in
                           persuading the Authority to make the needed repairs.




2004-FW-1001                   Page 18
                                                                                        Finding 2




                            Picture 9


                                    The high-rise developments had problems with both
General maintenance                 security issues and maintenance problems. The Authority
appears poor in the high-           managed three high-rise buildings, Fred Parris Towers,
rise developments.                  Cumberland Towers, and Jesse Powell Towers. All the
                                    high-rises were built in the mid-1970s and were designated
                                    as Elderly/Handicapped units. It appeared the Authority
                                    did not perform routine maintenance at the high-rises.

                                    To illustrate the need for routine cleaning and maintenance at
Parris Towers.                      Parris Towers, Picture 10 shows the laundry room air
                                    conditioning vent on the ninth floor.




                                         Page 19                                     2004-FW-1001
Finding 2




                            Picture 10


                                              All three of the high-rises had similar general maintenance
                                              issues in their common areas. The residents also
                                              complained of dirty elevators and lobbies.

                                              Four residents were interviewed at Parris Towers and two
                                              of the four expressed concern about their safety in the
                                              building. One was so frightened of other residents
                                              “hassling” her; she answered her door with a knife in hand.
                                              She quickly apologized and put it away but reported to us
                                              that there were “outlaw folks” in the building and she
                                              needed to protect herself. Another resident said she felt the
                                              Authority was just pulling people off the street without any
                                              background check. Another resident interviewed stated he
                                              has developed a “thick skin” and did not let the other
                                              residents bother him. He did not know where he could live
                                              for the amount of money he pays in rent so he had to stay.

                                              Of seven residents interviewed at Cumberland Towers, each
                                              complained about the “new” people coming to the building to
     Cumberland Towers.
                                              live. One tenant reported an attack on a friend in the elevator
                                              the night before. She would not report the attack because the
                                              other resident would hurt her worse.27 Another said she did
                                              not like the Authority letting dope addicts and drunks live

27
      Other than communication of the policy and taking corrective action when brought to the Authority’s attention,
      OIG does not have a recommendation to correct residents not reporting maintenance problems or crime.

2004-FW-1001                                       Page 20
                                                                                                Finding 2

                                            with the elderly. When they get drunk and “stuff” they pick
                                            on the other residents. Another resident agreed with the other
                                            residents that more security was needed as well as a site
                                            coordinator that could manage the building. He feared the
                                            drug addicts from Flower Square were moving into the
                                            building and he did not want to live where guns are going off
                                            down the hall.

                                            The longtime Cumberland residents said serious problems
                                            with security and maintenance have developed within the
                                            last couple of years. They reported that the fire alarm goes
                                            off accidentally so often that they ignore it. According to a
                                            resident, most of the residents were old and frail they can’t
                                            walk down the stairs once, much less several times a day or
                                            week.

                                            Of four residents interviewed at Powell Towers, three
     Powell Towers.                         expressed concern for their safety. One resident lived in
                                            the high-rise for many years and explained it was not an
                                            elderly development anymore. When she moved in, it was
                                            the nicest low-income property in the City but in the last 2
                                            years most of the “new tenants” are middle-aged men with
                                            drug problems. Coupled with the “new tenants,” the
                                            residents interviewed noted a severe decline in
                                            maintenance. Residents stated their complaints directly to
                                            the Executive Director of the Authority had been ignored.

                                            The Resident Advisory Board for the properties also
     Overall tenant                         expressed their dissatisfaction with maintenance in
     dissatisfaction with                   particular. Some Board members felt routine maintenance
     Authority maintenance.                 would prevent problems. For example if air filters were
                                            replaced routinely, the air conditioning systems in the high-
                                            rise properties might run more efficiently and break down
                                            less. In addition, the dirty air causes health problems for
                                            some of the residents. The less frequent calls for repair
                                            would save the Authority money in the long run. Another
                                            concern was pest problems. Residents didn't feel that the
                                            Authority was doing everything it could to prevent pests.
                                            The residents explained that contacting the Executive
                                            Director did not help.

                                            Dissatisfaction for maintenance and safety was evident in
                                            all Authority controlled developments. Overall, of 22
                                            residents interviewed,28 77 percent were dissatisfied with
                                            maintenance and 59 percent were concerned for their
28
      Three residents interviewed live in McCormack Baron managed properties.

                                                  Page 21                                   2004-FW-1001
Finding 2

                                             safety. These numbers are significant and indicate a need
                                             for management to address the issues.

                                             The Authority was aware the elderly residents fear the
                                             disabled residents, as they were sometimes aggressive or
                                             unruly. The Executive Director and the Deputy Director
                                             stated they were concerned about the residents but have not
                                             found the best means to resolve the problems. According to
                                             the Executive Director, the Authority lacked funds to add
                                             security and fair housing issues prevented the Authority
                                             from moving the disabled residents by any means other
                                             than attrition. The Authority should attempt to use some of
                                             its reserves for added security while the composition of
                                             residents is rearranged through attrition. Additionally, the
                                             Authority should continue its efforts to alleviate residents’
                                             concerns by informing residents of obstacles and working
                                             with HUD for additional solutions. Also, the Authority
                                             should use necessary reserves to repair units and
                                             demolished uninhabitable buildings.

                                             Madison Heights I, Madison Heights II, and Granite
     Properties managed by                   Mountain Developments had few problems.29 These
     McCormack Baron had                     properties were new and should not require the same degree
     few problems.                           of maintenance as the older properties. Any opinion on
                                             whether or not the difference in management has any
                                             bearing on the better physical condition would be
                                             speculative.

                                             The Authority refuted that it had not met its responsibility
     Authority claims it has                 with respect to maintenance and it could not control the
     met its responsibility.                 way residents “feel.” The Authority cited its
                                             accomplishments in the areas of maintenance and the
                                             systems it has in place to identify and correct maintenance
                                             problems. Further, it was in the process of correcting
                                             deficiencies noted. Lastly, it cited HUD’s positive physical
                                             inspection of the units.

                                             We agree with the Authority’s action to correct the
                                             problems noted and further agree that the Authority cannot
                                             control residents “feeling.” Further, we acknowledge
                                             HUD’s physical inspection of the units. Based upon our
                                             limited inspections and interviews with residents, we
                                             maintain some of the sites appear in poor condition. Also,
                                             we would suggest the local office or REAC perform a re-

29
      McCormack Baron manages these properties. A few hairline cracks were noted in the Granite Mountain
      properties and some loose tile. Madison Heights was constructed with exposed wiring in the utility room.

2004-FW-1001                                      Page 22
                                                                                                 Finding 2

                                           inspection of the sites specifically mentioned in this
                                           finding.



Auditee Comments                           The Authority took great exception to this finding. The
                                           Authority questioned the scope and methodology used by us
                                           in drawing our conclusions. It cited the inclusion of the
                                           discussion on Hollinsworth Grove in the report as “wholly
                                           without merit.” The Authority plans to demolish the
                                           buildings at Hollinsworth Grove in February 2004. The
                                           Authority stands by the scores provided by the REAC
                                           inspectors and the tenant surveys.



OIG Evaluation of                          We commend the Authority for correcting the problems cited
Auditee Comments                           from our observations. Further, we are pleased that the
                                           Authority will finally demolish the buildings at Hollinsworth
                                           Grove. The Authority did not specifically discuss the actions
                                           it would take to demolish or repair the units at Amelia B.
                                           Ives. We did not entirely understand the Authority’s strong
                                           objection to this finding. For instance, the Authority states it
                                           concluded that Hollinsworth Grove was a “severely
                                           distressed development,” but our inclusion of this “fact” in
                                           the report is irresponsible.30 Further, the Authority cited in
                                           its response the age of the developments, about 50 years for
                                           the low-rise sites and 25 years for the high-rise sites, and the
                                           documented need for $14 million of rehabilitation.31 The
                                           Authority’s response seems to strengthen the conclusions in
                                           the report, specifically, “some Authority sites appeared in
                                           poor condition.” We would be remiss if we did not report
                                           this.



Recommendations                            We recommend the Director of the Little Rock Office of
                                           Public Housing require the Authority to:

                                           2A. Improve its system of correctly collecting,
                                               performing, reporting, and verifying maintenance
                                               requests.

                                           2B. Demolish the burned out units at Hollinsworth Grove.

30
     Hollinsworth Grove makes up approximately 18 percent of the Authority managed units.
31
     This is approximately $14,000 per an Authority managed unit.

                                                 Page 23                                     2004-FW-1001
Finding 2



               2C. Demolish or repair the burned out units at Amelia B.
                   Ives.

               2D. Perform the repairs identified for units visited (see
                   Appendix B).

               2E. Communicate to the residents the policies and
                   corrective action the Authority has taken to improve
                   security and maintenance.




2004-FW-1001       Page 24
                                                                                                         Finding 3


     The Authority Exercised Poor Administration
                 Over Its Operations
The Authority had poor controls over cash disbursements, accounts payable and accounts
receivable, and asset management. HUD required the Authority to expend funds for
reasonable and necessary items and to maintain financial records. Specifically, the
Authority’s Board of Commissioners were responsible for ensuring that the Authority had
systems in place to measure, monitor, and report program performance. The Authority
did not develop and implement written policies and procedures for disbursements to ensure
its funds were properly expended or assets were properly utilized. For example, manuals
provided contained some instructions on processing of payments in the Authorities
computer but did not contain who approved payments or the documents needed for
payment. Further, the Authority did not have written procedures for reconciliation of
bank accounts or accounting for receivables. In a test of 100 disbursements, the Authority
had sufficient documentation to support all the payments.32

The Authority’s audits were not completed timely as required by OMB Circular A-133 for
fiscal years 2000 and 2001 and the audits did not disclose identity-of-interest issues with
related not for profit entities.33

The Authority has turned over the development of Madison Heights III to an identity-of-
interest firm, Housing Redevelopment. The Authority has granted or will grant Housing
Redevelopment significant amount of funds. The Authority needs to ensure that both it
and Housing Redevelopment have the proper controls to ensure the funds received are
expended in accordance with applicable requirements.

It appears the Authority has lost sight of its primary purpose of providing decent, safe, and
sanitary housing for low-income residents. This is illustrated in Finding 2 that shows the
conditions of some units and sites. Further, the Authority has not used its assets in some
instances consistent with its mission; for instance, it leased land for a nominal amount to
the Audubon Society for 99 years eliminating the land as a resource for low-income
housing.

The Authority needs to strengthen its internal control over its accounting functions to protect
its assets. In the event the Authority chooses to lease property, it should ensure the property
is related to its mission of providing decent and safe housing to Little Rock’s low-income
families.



32
     The Authority provided sufficient support at the exit conference to correct the $14,052 in unsupported amounts
     included in the discussion draft.
33
     Supposedly, the Authority’s 2002 audit has disclosed the identity-of-interest firm, Housing Redevelopment.
     The Authority did not provide to us.

                                                  Page 25                                            2004-FW-1001
Finding 3



                               Generally Accepted Accounting Principles (GAAP) require
  Need for segregation of      the accounting duties of paying vendor invoices, receiving
  duties and limited control   payments, and reconciling bank statements be segregated to
  to accounting functions.     the greatest degree possible. At the Authority, accounting
                               employees that make payments also collect receivables.
                               Also, employees perform each other’s work so each
                               employee has access to all phases of the accounting
                               process.

                               All accounting employees had access to the signature
                               cartridge used to sign checks with two signatures: (1)
                               Executive Director’s and (2) the Deputy Director’s. The
                               employees’ access circumvented the Authority’s
                               requirement of two signatures on checks. The Authority’s
                               actual practice of allowing all employees access to the
                               signature cartridge usurped any policy.

                               Further, the Authority did not use preprinted check
                               numbers or computer-generated numbers. A manual log
                               for check numbers was maintained for the employees to
                               assign check numbers that allowed any check number be
                               assigned to any payment thereby eliminating accountability
                               for each check.

                               In this environment, the opportunity for diversion of funds
                               was higher than a mere assessment of high risk for internal
                               control purposes; it was a continuous opportunity for
                               diversion of funds by any of the employees.

                               The Authority needs to segregate duties to the greatest extent
                               possible. In addition, computer-generated or pre-numbered
                               checks should be used in order to safeguard its cash.
                               Controls need to be reinstated for the signature cartridge so
                               that only the persons who are signature authorities have
                               access and control of the cartridge. In instances where
                               further segregation of duties is not cost-effective, the
                               Executive Director and Board members must actively review
                               controls, receipts, expenditures, and reports and follow-up
                               when questions arise.

                               To accomplish our objectives, we reviewed the disbursement
                               file, using computer software, to determine a non-
                               representative selection of disbursement checks. To
                               determine the selection, we utilized the software’s “random
                               sample” function. Limitations in the selection included

2004-FW-1001                       Page 26
                                                                                           Finding 3

                                       separating the 2001 and 2002 information and filtering out
                                       any payments under $1,000. As a result, we selected 50
                                       disbursements from 2001 and 2002.

                                       The Authority’s former Systems and Finance Director had
     Former Systems and                access to six Authority bank accounts totaling $525,943.
     Finance Director still has        The Authority had not corrected the situation because the
     access to $525,000 in             Finance Director was overhauling the accounting
     Authority bank accounts.          department and has not had time to correct the bank
                                       account access list. Despite HUD requirements to the
                                       contrary, the Authority did not have written policies for
                                       accurate bank account access list. As a result, the
                                       Authority unnecessarily put itself at increase risk of theft.
                                       The Authority should ensure its bank has a correct access
                                       list.

                                       The former Systems and Finance Director resigned in
                                       January 2002.

                                       The former Systems and Finance Director resigned from
                                       the Authority in January 2002. This resignation should
                                       have constituted a change in the access list of all Authority
                                       bank accounts. However, as of August 18, 2003, the
                                       Authority had not done this. The reasons included no
                                       policy requiring it and the Finance Director has not had the
                                       time to do so. Consequently, the former Systems and
                                       Finance Director still as access to six accounts totaling
                                       $525,943.34

                                       The Authority is required to maintain “Effective control
                                       over and accountability for all funds, property and other
                                       assets. Recipients shall adequately safeguard all such
                                       assets and assure they are used solely for authorized
                                       purposes.” In addition, the Authority must maintain
                                       “Effective control and accountability must be maintained
                                       for all grant and subgrant cash, real and personal
                                       property, and other assets. Grantees and subgrantees must
                                       adequately safeguard all such property and must assure
                                       that it is used solely for authorized purposes.” 35

                                       The Authority put itself at risk for possible theft. A written
                                       policy could reduce this unnecessary exposure to theft.
                                       However, the Authority should remove the former Systems


34
      As of December 31, 2002.
35
      24 CFR 84.21 and 24 CFR 85.20.

                                            Page 27                                     2004-FW-1001
Finding 3

                                             and Finance Director’s name and anyone else that does not
                                             need access to its bank accounts.

                                             The Authority received miscellaneous income from the
     Incorrect method of
                                             rental of the roofs of the high-rises to wireless providers.
     accounting for lease
                                             Generally Accepted Accounting Principals (GAAP)
     income.
                                             requires leases to be accounted for as a receivable and the
                                             income recognized as it becomes due to the Authority.
                                             This allows the income to be recognized by matching the
                                             income to the period earned and shown as the asset or
                                             liability36 on the balance sheet. It also allows the lease
                                             amounts to be considered in the cash projections as money
                                             that may be utilized in the future.

                                             The Authority's Finance Officer said he knew the receipts
                                             for the Telephone Company rent receipts for the towers on
                                             top of the high-rise buildings were not being recorded
                                             correctly. The Finance Officer said he had been recording
                                             them as "Miscellaneous Deposits" and then transferring to
                                             the appropriate account with a journal voucher. The
                                             Finance Officer stated he has not had the time or staff to set
                                             them up correctly. It did not appear the Authority had
                                             enough trained staff to assist in accounting for all
                                             transactions for the Authority. In addition to maintaining
                                             its books and records according to GAAP, the Authority
                                             should ensure that staff is adequately trained.

                                             We tested 100 disbursement checks37 from 2001 through
     The Authority needs                     2002. Of the 100 checks tested, the Authority had
     better controls over                    supporting documentation for all checks.
     disbursements.
                                             However, the Authority did not stamp 66 of the 100
                                             invoices “paid” or otherwise cancel to prevent multiple
                                             payments from the same original invoice, 12 of the
                                             payments did not reflect an accounting distribution to show
                                             how the checks were charged.

                                             The Authority did not have a written control policy over
                                             disbursements. The Authority should establish and
                                             implement a written control policy regarding disbursements
                                             reflecting federal laws and regulations.




36
      Prepaid Lease for the tower would be a liability until it is earned.
37
      A non-representative selection from approximately 4,700 checks during the audit period.

2004-FW-1001                                      Page 28
                                                                                    Finding 3

                               The Executive Director did not have the authority to lease
The Authority leased 68        property for purposes other than low-income housing. The
acres to the Audubon           Authority leased 68 acres of property to the Arkansas
Society for a dollar a year.   Audubon Society for 99 years. HUD Little Rock field
                               office General Counsel disclosed at least a portion of the
                               leased property has deed restrictions, which prevented it
                               from being used for anything other than low-income
                               housing. At first, the Executive Director denied that a lease
                               existed, but staff later provided a copy of the lease.
                               According to the Authority, the City of Little Rock was
                               about to condemn the acreage for the benefit of the
                               Audubon Society so the Authority leased it to the Audubon
                               Society for $1 per year for 99 years. Besides not having the
                               authority to lease the entire property, the choice to lease
                               was a poor one if the City of Little Rock was going to
                               condemn it. Generally, when property is condemned, the
                               City would pay the owner fair value of the property. The
                               condemnation proceeds could have been spent to acquire
                               property in another location for housing.

                               According to the Authority, the land is not suitable for
                               housing due to its proximity to the airport and created a
                               liability to the Authority in terms of safety and upkeep of the
                               vacant property. The Authority believes the lease to the
                               Audubon Society is advantageous and is a good use of the
                               land.

                               The HUD field office should review the Audubon Society
                               lease with the Authority, the property involved, and the
                               portion that has land use agreements attached. This land or
                               comparable fair value should be returned to the Authority
                               to provide housing for low- and moderate-income families.

                               The Authority selected Housing Redevelopment as the
The Authority hired an         developer for Madison Heights III. The Authority
identity-of-interest firm to   attempted procurement of a developer but according to
develop Madison Heights        Housing Redevelopment’s attorney decided to contract
III.                           with itself through Housing Redevelopment. By selecting
                               itself as the developer, the Authority said it did not have to
                               follow procurement requirements.

                               The following table shows the relationship between the two
                               organizations:




                                    Page 29                                      2004-FW-1001
Finding 3


                                                                                  Housing
                                            Name        Authority Position    Redevelopment
                                                                                  Position
                                      Wooten Epes     Current Board Chairman President
                                      L. Lee Jones    Executive Director     Executive Director
                                      John Toney, CPA Former Board Chairman Project Manager
                                      Calvin Scribner Former Board Member Board Member

                                            The Authority will provide significant amount of funds to
                                            Housing Redevelopment. Currently, no contract or
                                            memorandum of understanding exists between the two
                                            organizations.38 Further, Housing Redevelopment has no
                                            employees and consequently, no systems or policies in
                                            place to ensure the proper use of funds. According to staff,
                                            the Executive Director and Deputy Director have
                                            performed many of Housing Redevelopment’s tasks.

                                            According to Housing Redevelopment’s attorney, Housing
                                            Redevelopment has hired a consultant to help run Housing
                                            Redevelopment until it has sufficient funds to hire full-time
                                            employees.39 Also, Housing Redevelopment is striving
                                            towards unquestionable independence from the Authority.
                                            However, it will not be considered independent until
                                            Housing Redevelopment no longer utilizes any Authority
                                            employees, has an entirely independent board, and no
                                            longer seeks the cooperation and input of the Authority.

                                            Currently, Housing Redevelopment operates rent free from
                                            the Authority’s office. Through cursory review of the
                                            Authority’s records, it appears the Authority has provided
                                            Housing Redevelopment over $180,000 from its low-rent
                                            funds.40

                                            According to HUD regulations,41 “…no employee, officer,
                                            or agent of the grantee or sub grantee shall participate in
                                            selection, or in the award or administration of a contract
                                            supported by federal funds if a conflict of interest, real or
                                            apparent, would be involved.”


38
     Housing Redevelopment’s lawyer did provide a recycling agreement between the Authority and Housing
     Redevelopment that sets out the general use of funds and repayments.
39
     We did not review the awarding of this contract or the awarding of the contract to Housing Redevelopment’s
     attorney.
40
     We did not review the transactions because they were outside our scope. Further, we did not review the
     Authority’s financial data to determine the total amount provided to Housing Redevelopment.
41
     24 CFR 85.36 (b)(3).

2004-FW-1001                                     Page 30
                                                                                                    Finding 3

                                              HUD should scrutinize and monitor this development
                                              agreement and the funds provided to Housing
                                              Redevelopment to ensure that it has appropriate controls to:

                                              o Safeguard assets.
                                              o Ensure compliance with regulations including those
                                                over revenue and expenditures.
                                              o Capacity to perform its missions.

                                              Further, if Housing Redevelopment becomes “independent”
                                              from the Authority, the Authority and HUD need to ensure
                                              it continues to monitor Housing Redevelopment for
                                              compliance with regulations and agreements.

                                              Financial statements issued by the Authority during the audit
     Nondisclosure of material                period did not disclose the interest of the Executive Director,
     items in financial                       current Chairman of the Board of Commissioners and former
     statements.                              Chairman of the Board of Commissioners in the Authority’s
                                              identity-of-interest firms, Housing Redevelopment. GAAP
                                              required full disclosure in order for the users of the financial
                                              statements in order for the statements to be useful. The
                                              failure to disclose the interests limited the financial
                                              statement’s usefulness as the interests in Housing
                                              Redevelopment and Granite Mountain Development Limited
                                              Partnership.

                                              Furthermore, the Authority’s Board Chairman and Housing
                                              Redevelopment’s President signed a certification stating that
                                              Housing Redevelopment did not have a conflict of interest
                                              with the Authority.

                                              Management was responsible for the financial statements and
                                              should ensure all interests in other entities were disclosed.
                                              The financial statements for fiscal year 2002 should be
                                              complete and include all appropriate disclosures to ensure
                                              they are useful to their readers.42

                                              Both the Executive Director and the Deputy Director
The Executive Director                        received $10,000 from two not-for-profit entities related to
and the Deputy Director                       the Authority. Housing Redevelopment paid the Executive
inappropriately accepted                      Director $10,000 and Granite Mountain Development
$10,000.                                      Limited Partnership paid the Deputy Director $10,000. The
                                              Authority claimed these payments were for work on Granite
                                              Mountain Development.


42
     According to the Authority’s response, the 2002 audit has the appropriate disclosures.

                                                     Page 31                                    2004-FW-1001
Finding 3

                     The Authority and Housing Redevelopment’s attorney claims
                     the payments were compensation for services rendered. But,
                     they did not provide any evidence of what, when, or how the
                     services were provided.

                     Neither the Executive Director nor the Deputy Director
                     should have accepted the payments. According to 24 CFR
                     85.36, “employees or agents will neither solicit nor accept
                     gratuities, favors or anything of monetary value from
                     contractors, potential contractors, or parties to
                     subagreements.”43

                     The HUD field office should determine how to correct the
                     receipt of the money by the Executive Director and Deputy
                     Director.



Auditee Comments     In its response, the Authority stated, “there are a number of
                     separate conclusions reached in Finding 3. Many of these are
                     easily corrected. Others, however, will take more work.
                     Finally, on some of the findings, no change will be made.
                     The OIG auditors merely failed to review all of the records
                     available to them.”

                     The Authority states it has established proper controls
                     disbursements and bank account access. It also agreed to
                     implement other recommendations. The 2002 audited
                     financial statements were in accordance with GAAP and had
                     proper disclosure. Based upon the 2002 audit, the Authority
                     believes the recommendation regarding the disclosure of the
                     identity of interest is “entirely without merit.”

                     The Authority stated that the lease with the Audubon Society
                     would not be effective until HUD approved.

                     The Authority’s response explained the relationship between
                     Housing Redevelopment and the Authority. The response
                     also claimed that HUD would “review and approve all of the
                     documents for the revitalization of Madison Heights III.”
                     The Authority’s response again states that the payments to
                     the Executive Director and Assistant Executive Director were
                     for compensation and appropriate. The Authority’s response
                     stated, “the Report’s questioning of this payment is further


43
     24 CFR 85.36.

2004-FW-1001             Page 32
                                                                         Finding 3

                    evidence that it did not fully understand the concept of an
                    identity-of-interest corporation.”



OIG Evaluation of   We commend the Authority for taking positive action to
Auditee Comments    correct the identified problems. The Authority never
                    provided the 2002 financial statements so we could not
                    determine the accuracy of their statements. Nonetheless,
                    correcting the accounting and disclosing identity-of-
                    interests firms in 2002 does not change the fact that the
                    audited financial statements did not report these items in
                    the 2001 or 2000 financial statements.

                    After reviewing the Authority’s response and the evidence,
                    we removed the phrase “misappropriation of assets” in the
                    discussion of the Audubon lease.

                    The lack of procedures and controls at Housing
                    Redevelopment weakens its argument that agreements or
                    payments are appropriate. The Authority’s response states
                    that the payments to the Executive Director and Assistant
                    Executive Director were additional compensation decided
                    upon by the Housing Redevelopment Board of Directors and
                    criticized us for not understanding identity of interest.

                    As stated in the report, Housing Redevelopment had no
                    policies and procedures in place to determine the
                    appropriateness of the payments including, but not limited to,
                    adhering to HUD and Office of Management and Budget
                    requirements, documenting the services received for the
                    compensation, and documenting that the services were
                    beyond their duties as Executive Director and Assistant
                    Executive Director.



Recommendations     We recommend the Director of the Little Rock Office of
                    Public Housing require the Authority to:

                    3A. Establish and implement proper controls over
                        disbursement including segregation of duties; use of
                        pre-numbered or computer generated check numbers;
                        and restricting the access to the signature cartridge.




                         Page 33                                     2004-FW-1001
Finding 3

               3B. Establish and implement proper controls over its bank
                   account access list including immediately making any
                   necessary changes.

               3C. Ensure the accounting records are maintained in
                   accordance with GAAP.

               3D. Ensure that staff is adequately trained.

               3E. Ensure the financial statements for the current year
                   disclose all entities that have identity of interest with
                   the Authority.

               3F. Renegotiate the lease with the Audubon Society
                   removing the portion of the property that has land use
                   restrictions for low-income property.

               3G. Determine the fair market value for the use of the
                   Authority’s administration building and collect that
                   amount from Housing Redevelopment for the period
                   of time the not-for-profit has used the Authority’s
                   property and a fair rental rate for future periods.

               Further, we recommend the Director of the Little Rock
               Office of Public Housing:

               3H. Scrutinize and monitor this development agreement
                   and the funds provided to Housing Redevelopment to
                   ensure that it has appropriate controls to: (1)
                   safeguard assets; (2) ensure compliance with
                   regulations including those over revenue and
                   expenditures; and (3) capacity to perform its missions.

               3I.    Take appropriate action to correct the receipt of
                      money by the Executive Director and the Deputy
                      Director.




2004-FW-1001         Page 34
Management Controls
In planning and performing our audit, we obtained an understanding of the management
controls that were relevant to our audit objectives. Management is responsible for
establishing effective management controls. Management controls, in the broadest sense,
include the plan of organization, methods, and procedures adopted by management to ensure
that its goals are met. Management controls include the processes for planning, organizing,
directing, and controlling program operations. They include the systems for measuring,
reporting, and monitoring program performance.



                                   To determine if the Authority met the objectives, we took
 Relevant Management               non-representative selections of contracts, cash
 Controls                          disbursements and collections, interviews with residents, and
                                   observation of units. While not able to extrapolate to the
                                   population, we believe our selections do provide sufficient
                                   evidence to support our conclusions.

                                   We determined the following management controls were
                                   relevant to our audit objectives:

                                      Adequacy of and adherence to written policies and
                                      procedures regarding cash management and procurement.
                                      Selection, award, and performance of contracts.
                                      Eligibility and adequacy of records maintained for
                                      disbursements to employees and vendors in accordance
                                      with laws and regulations.
                                      Maintenance of units as decent, safe, and sanitary housing
                                      for residents.

                                   A significant weakness exists if management controls do
 Significant Weaknesses            not give reasonable assurance that resource use was
                                   consistent with laws, regulations, and policies; that
                                   resources were safeguarded against waste, loss, and misuse:
                                   and that reliable data were obtained, maintained, and fairly
                                   disclosed in reports. Based on our audit, the following
                                   items were significant weaknesses, in that the Authority
                                   lacked administrative controls to ensure:

                                   1) The contracts were properly procured in accordance with
                                      regulations (Finding 1).
                                   2) The contracts expend funds that were eligible, necessary,
                                      and supported (Finding 1).
                                   3) Cash collections and disbursements were used consistent
                                      with the Authority’s mission (Finding 3).

                                       Page 35                                     2004-FW-1001
Management Controls

                      4) Records were maintained which adequately identify the
                         source and application of funds provided for HUD-
                         assisted activities (Finding 3).
                      5) Properties are maintained as safe and decent low-income
                         housing (Finding 2).




2004-FW-1001             Page 36
Follow-Up on Prior Audits
Office of the Inspector General Audit Reports

This is the first audit of the Authority by the Office of Inspector General.

Independent Accountant Financial Audit Reports

Miller & Rose
Miller & Rose, CPAs, issued the Independent Auditor’s reports for the last 3 years. Due to
previous year’s noncompliance with annual independent audits, Miller & Rose issued audit
reports for Fiscal Years 1999, 2000, and 2001 in July 2002.44

The most recent report was for Fiscal Year 2001. In this audit report, Miller & Rose expressed a
qualified opinion citing a failure to keep a physical inventory and the inability to determine the
impact on the financial statements.

In accordance with Government Auditing Standards, Miller & Rose reported instances of
noncompliance with federal requirements. In addition, Miller & Rose found reportable
conditions in the design or operation of the internal control over financial reporting. These
conditions were also considered material weaknesses in their report.

In accordance with OMB Circular A-133, Miller & Rose reported the Authority did not comply
with requirements regarding eligibility and reporting that are applicable to its Public and Indian
Housing Section 8 Tenant Based Cluster and Low Income Housing residents. Miller & Rose
reiterated its concern over internal control over compliance with requirements and “noted certain
matters involving the internal control over compliance and its operation that we consider to be
reportable conditions.”




44
     OMB Circular A-133 requires annual audits from non-federal entities that expend $300,000 or more in a year in
     federal awards to have a single or program-specific audit conducted for that year.


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Follow-Up on Prior Audits




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                                                                                                     Appendix A

Schedule of Questioned Costs


     Recommendation                    Vendor Name                     Unsupported1
          1C                      John D. Blake                              $204,211
          1E                      SCAT                                          24,000
          3H                      Executive Director and
                                   Deputy Director                                  20,000

                                  Total                                          $248,211




1
    Unsupported costs are costs charged to a HUD-financed or HUD-insured program or activity and eligibility
    cannot be determined at the time of audit. The costs are not supported by adequate documentation or there is a
    need for a legal or administrative determination on the eligibility of the costs. Unsupported costs require a
    future decision by HUD program officials. This decision, in addition to obtaining supporting documentation,
    might involve a legal interpretation or clarification of Departmental policies and procedures.




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                                                                                                Appendix B

                  Listing of Units Observed and
                       Maintenance Needed
Name of             Unit Number or
Complex                Address                              Maintenance Needed

Amelia B. Ives       200 East 28th Street     Repair bathroom sink. Treat the unit for termites.
                                              Repair hole in floor in kitchen. Paint patches in living
Amelia B. Ives       201 East 28th Street     room.


Amelia B. Ives         31 I Les Walk          Replace Smoke Detector Battery.

                                              Ensure cabinet installation is complete and stove has
Cumberland Towers         Unit 601            been returned to apartment.


Cumberland Towers         Unit 304            Repair window in door leading to deck.


Cumberland Towers         Unit 605            Paint unit. Replace air filter.

                                              Repair peeling paint and metal plaster trim pulling away
Granite Mountain          1 A Harris          from wall

                                              Repair tile floor leading into the kitchen lifting from the
Granite Mountain      4 A Harris Circle       floor.

                                              Repair damage from termites. Repair burned floor.
Hollinsworth         74 Hollinsworth Dr       Clean air ducts. Replace air filter. Replace baseboard.


Madison Heights     1201 Monroe, Unit E       Cover exposed wiring in the laundry room.


Paris Towers              Unit 918            Repair front left burner on stove.


Paris Towers              Unit 1017           Replace air conditioning filter.

                                              Repair cabinet pulling away from ceiling. Cover
                                              telephone line outlet. Assist tenant in putting light
Paris Towers              Unit 613            covers back on lights.


Powell Towers             Unit 517            Replace air conditioning filter. Paint unit.


Powell Towers             Unit 903            Treat for insects.

                                              Repair broken window. Repair water fountain in the hall
Powell Towers             Unit 511            so water high enough to drink.


Sunset Terence        2706 Battery St.        Replace Smoke Detector Battery.

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                             Appendix C

Auditee Comments




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