Issue Date September 14, 2004 Audit Case Number 2004-FW-1008 TO: E. Ross Burton Director, Fort Worth Multifamily Housing HUB, 6AHMLAS Linda K. Hardway Director, Little Rock Multifamily Program Center, 6FHM Margarita Maisonet Director, Departmental Enforcement Center, CV FROM: D. Michael Beard Regional Inspector General, 6AGA SUBJECT: United Properties Management, Inc. Multifamily Management Agent Little Rock, Arkansas INTRODUCTION As part of our initiative to combat equity skimming, we have completed an audit of 12 multifamily projects managed by United Properties Management, Inc. (United). HUD either insured or held the mortgages on the properties. The owners sign regulatory agreements with HUD. The objective of the audit was to determine whether United complied with the regulatory agreements and HUD requirements when disbursing project funds. To accomplish the objective, we reviewed HUD’s regulations regarding Section 202, Section 811, Section 221(d)(3), and Section 221(d)(4) Programs, project regulatory agreements, HUD handbook requirements, and the owner’s and management agent’s certifications. We interviewed United’s owners and staff, and HUD Multifamily Housing officials in Little Rock, Arkansas. We reviewed accounting records and supporting documents such as bank statements and invoices. The audit covered a 41-month period: April 1, 1998, the date HUD approved United as a management agent, through August 31, 2001, the latest completed period at the time. We conducted the audit in accordance with generally accepted government auditing standards. In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each recommendation without a management decision, a status report on: (1) the corrective action taken, (2) the proposed corrective action and the date to be completed, or (3) why action is considered unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for any recommendation without a management decision. Also, please furnish us copies of any correspondence or directives issued because of the audit. Should you or your staff have any questions, please contact Jerry Thompson, Assistant Regional Inspector General, at (817) 978-9309. SUMMARY United officials disbursed project funds for items that violated project regulatory agreements with HUD. Officials used project funds to pay United’s supervisory expenses, unsupported accounting costs, and a property owner’s debt. In addition, officials made erroneous payments, loaned money to a site manager, and made unsupported payments. As a result, United officials misspent $445,612, which negatively affected the financial condition of the properties. We recommend that HUD require United’s owners to: (1) repay the projects for ineligible payments and (2) either furnish supporting documents or repay the projects for unsupported payments. If the owners do not payback amounts they misspent, we recommend that HUD impose administrative sanctions against them. We provided United officials a copy of the draft on June 21, 2004, and received a written response from them on July 15, 2004. They do not agree with the findings and say we have been unwilling to listen to their explanations. They say they provided support for questioned costs contained in our report. They declined to have an exit conference. Their response did not change our position. They did not provide documentation required to adequately support the questioned costs. We have included the complete response in Appendix B. BACKGROUND HUD’s Office of Multifamily Housing administers programs to provide an adequate supply of quality affordable housing. Programs include the Supportive Housing for the Elderly Program1 (Section 202), Supportive Housing for Persons with Disabilities Program2 (Section 811), and the Mortgage Insurance for Rental and Cooperative Housing Program3 (Section 221(d)(3) and (4)). Section 202 provides capital advances to finance the construction and rehabilitation of structures that will serve as supportive housing for very low-income elderly 1 Section 202 of the Housing Act of 1959 is governed by 24 CFR Part 891. 2 Section 811 of the National Affordable Housing Act of 1990 is governed by 24 CFR Part 891. 3 Section 221(d)(3) and (4) of the National Housing Act is governed by 24 CFR 221, subparts C and D. 2 persons. It also provides rent subsidies for the projects to help make them affordable. Section 811 provides interest-free capital advances to nonprofit sponsors to finance the construction, rehabilitation, or acquisition with or without rehabilitation of supportive housing to be used for very low-income adults with disabilities. It also provides rental assistance. The program is similar to Section 202. Sections 221(d)(3) and (4) provide mortgage insurance to finance rental or cooperative multifamily housing for moderate-income and displaced families. Through the programs, the Federal Housing Administration insures mortgage loans for the new construction or substantial rehabilitation of multifamily rental projects. The difference between (3) and (4) is that HUD may insure up to 100 percent of replacement cost under (3) for nonprofit or cooperative mortgagors, but only up to 90 percent under (4) irrespective of the type of mortgagor. The property owner participating in HUD programs has the ultimate responsibility for compliance with HUD regulations and requirements. The property owner pledges compliance by signing a regulatory agreement with HUD. The agreement governs project operations. The property owner may seek out and hire a management agent, which is subject to HUD approval. HUD expects an owner to oversee the performance of its management agent and take steps to correct deficiencies that occur. If the owner does not, HUD will step in to assure compliance with applicable HUD regulations and program requirements. Management agents play a key role in helping HUD provide quality affordable housing. The owner and management agent together certify in writing that they will comply with HUD requirements and contract obligations. HUD Handbook 4381.5 REV-2, The Management Agent Handbook, provides basic guidance regarding owner and management agent responsibilities and HUD procedures. During the period of audit, April 1, 1998, through August 31, 2001, United managed 12 projects that HUD either assisted or insured. HUD held the mortgages of five properties under Section 202,4 which exceeded $9.6 million. HUD assisted one property under Section 8115, with a capital advance and project rental assistance that together exceeded $1.8 million. HUD insured the mortgages of five properties under Section 221(d)(3)6 and the mortgage of one property under Section 221(d)(4),7 which exceeded $7.9 million. 4 Park Street Apartments, St. John Alexander Towers, Sarah Daisy Garden Courts, Shorter College Plaza, and Theressa James Manor are owned by nonprofit corporations. 5 Chaucer Street Apartments, which is owned by a nonprofit corporation, does not have mortgage payments so long as the housing remains available to the very low-income elderly and disabled person.. 6 Chicot Apartments, Pilgrim Rest Apartments, St. John Apartments (26th Street), and Shorter College Gardens are owned by limited partnerships. West Apartments is owned by a nonprofit corporation. 7 Scott County Apartments is owned by a limited partnership. 3 Before United, Mays Property Management, Inc. (Mays) managed eight of the above projects. In addition to managing the projects, Mays had ownership interest in four of the properties. It was the managing general partner of the limited partnerships that owned three properties: Chicot Apartments, St. John Apartments, and Shorter College Gardens. It was a general partner of the limited partnership that owned Pilgrim Rest Apartments. In July 1997, United began managing the eight projects for Mays. United is an outgrowth of Mays and is owned and operated by former Mays officials. United’s majority stockholder was Mays’ executive vice-president, and United’s minority stockholder was Mays’ comptroller. Initially, United’s principal staff was all former Mays employees. By September 1998, United had officially replaced Mays as management agent for all eight projects. Management of the four projects, which Mays had not managed, started in 1997. United began managing Shorter College Plaza in June 1997, Scott County Apartments in February 1999, Park Street Apartments in September 1999, and Chaucer Street Apartments in July 2000. The projects paid United monthly fees for its management services. The fees approximated $30,000 a month. The HUD Office of Inspector General’s initiative to combat equity skimming consists of audits such as this one where auditors consult with the appropriate United States Attorney’s Office and HUD Assistant General Counsel to recover project funds used in violation of the regulatory agreement. Under Title 12, United States Code, Section 1715z-4a, HUD may recover double the amount of project assets used for purposes other than those permitted by the regulatory agreement, plus the cost of any audit, litigation, and attorney’s fees. We provided a prosecution/litigation package to the HUD Assistant General Counsel on March 31, 2003, and to the United States Attorney’s Office, Eastern District of Arkansas on May 13, 2003. The United States Attorney has declined prosecution since the Director of the Little Rock Multifamily Program Center did not support a lawsuit against United and the principals that manage United. On May 17, 2004, we received a copy of a letter dated May 10, 2004, from the United States Attorney to the Director, Little Rock Multifamily Program Center. In the letter, the United States Attorney advises that he has decided not to institute a civil action against United and the involved individuals. He declined because of the Director’s assertions about United, which she expressed in her letter dated April 5, 2004, to the Assistant United States Attorney. In the letter, the Director states she allowed the management agent to continue business with HUD because: • Punishment must be consistently applied to HUD partners, and there are examples of more egregious violations in HUD programs where the participant was not suspended or debarred; • Mays Property Management no longer exists; • United Properties Management has no, and never had, business affiliation with Mays Property Management; and 4 • United Properties Management has addressed the financial irregularities with the OIG, and has corrected its previous erroneous accounting practices to HUD’s satisfaction. In addition, she does not see United as a threat to HUD's interest in multifamily properties. To the contrary, she states that United is one of her best management agents to intervene in troubled properties and return them to HUD standards. The audit results below do not support the Director’s assertions about United and its principals. Since the United States Attorney has declined civil prosecution, we have addressed this report to HUD management for resolution. FINDING United officials misspent over $445,000 of project funds. In violation of regulatory agreements, and without HUD authorization or knowledge, United officials used project funds to pay: • $218,428 in management agent supervisory expenses; • $126,893 of a management agent owner’s salary; • $28,938 in an owner’s secondary loan payments; • $14,200 in erroneous payments related to the former management agent; • $2,940 in duplicate payments to a contractor and for a loan to a project manager; and • $54,213 in payments that were not supported by adequate documentation such as approved invoices. This happened because officials disregarded requirements and, to a lesser extent, United staff made errors, which United had not corrected and paid back the properties. As a result, officials misspent over $445,000, which negatively impacted the financial condition of the properties. The regulatory agreements direct the following. “Neither Mortgagor nor its agents shall make any payment for services, supplies, or materials unless such services are actually rendered for the project or such supplies or materials are delivered to the project and are reasonably necessary for its operation. Payments for such services, or materials shall not exceed the amount ordinarily paid for such services, supplies, or materials in the area where the services are rendered or the supplies or materials furnished.” The regulatory agreements prohibit the use of project funds, other than surplus cash where applicable, for unreasonable and unnecessary operating costs. 5 Distributions to owners8 of limited distribution projects are limited and distributions to owners of nonprofit projects are prohibited. Distributions to owners are prohibited when a project mortgage is in default, the project is in a non-surplus cash position, or HUD has notified the owner that the project is in need of maintenance. Books and accounts of the operations of the mortgaged property and of the project shall be kept in accordance with the requirements of HUD and in a reasonable condition for proper audit. United owners entered into Project Owner’s & Management Agent’s Certifications for Multifamily Housing Projects for Identity-of-Interest or Independent Management Agents (Certifications). Those Certifications required United to comply with the regulatory agreements, HUD handbooks, and other policy directives that related to the management of the projects. HUD Handbook 4381.5 REV-2, The Management Agent Handbook, provides basic guidance regarding owner and management agent responsibilities and HUD procedures. The Management Agent Handbook requires salaries of management agents’ supervisory staff not assigned to any project, to be paid from the agent’s management fee and not from project-operating funds. According to The Management Agent Handbook, Paragraph 6.39(c), agent supervisory personnel must be paid from the management fee unless one of the two exceptions is met. The exceptions are when supervisory personnel: • Provide oversight of centralized accounting and computer services for projects at a cost that does not exceed the cost of obtaining comparable services from an independent contractor or • Replace a project employee on temporary leave after the first 40 consecutive hours of the assignment. The Handbook requires travel expenses for management agents’ supervisory staff to be paid from management agent fees. In addition, HUD does not allow reimbursement of commuting mileage from project funds. For centralized accounting services, the Handbook requires management agents to charge the properties for bookkeeping costs based on actual costs. According to the HUD handbook, the agent is responsible for treating the cost of bookkeeping services performed as part of a centralized bookkeeping system as a project cost. Such expenses are paid out of project funds based on actual costs attributable to the project. 8 A distribution is any withdrawal or taking of cash or any assets of the project other than for the payment of reasonable expenses necessary to the operation and maintenance of the project. 6 For the period of the audit, HUD had established an acceptable accounting fee range of $3.50 to $6.00 per unit per month. The range was set for Region VI, which includes Arkansas. Thus, HUD limited costs of accounting fees charged to projects to the lesser of actual cost or $6 per unit per month. HUD’s intent was to reimburse the actual costs incurred but not provide additional income to management agents. HUD Handbook 4370.2, REV-1, Financial Operations and Accounting Procedures for Insured Multifamily Projects, Chapter 2, Section 2-6, paragraph E, states all disbursements from the Regular Operating Account must be supported by approved invoices, bills, or other supporting documentation. The use of operating funds should only be to make mortgage payments, make required deposits to the Reserve for Replacements, pay reasonable expenses necessary for the operation and maintenance of the project, and repay owner advances authorized by HUD. United charged $218,428 of supervisory staff expenses to the projects. United officials used $218,428 of project funds to pay United $217,446 in management agent salaries and $982 in management agent mileage expense. This occurred because United officials disregarded requirements. United paid the salaries of its district manager and administrator from project-operating funds even though they did not meet the requirements for payment. Both are related to the owners of United. United paid $122,539 and $94,907 for the salaries of the district manager and administrator, respectively. Officials made the payments between May 1, 1998, and September 30, 2001.9 However, time records did not show that either one had provided oversight of centralized accounting or computer services for projects or had worked as a temporary project employee for more than 40 consecutive hours. Furthermore, the ineligible salary of the administrator exceeded the actual salary paid to the administrator by $21,491. Of the excess, $18,148 resulted from billing salary for drug elimination grant work to project-operating funds. This duplicated what United had collected from the HUD drug elimination grants for the same period. The remaining $3,343 resulted from errant charges to projects. HUD staff had conducted management reviews and reported that the management agent was using project-operating funds to pay supervisory salaries. Staff disclosed the finding following HUD’s August 1997 management reviews of properties managed by Mays Property Management and United Properties Management. Staff concluded that officials should have paid those salaries from management fees. Staff advised officials to become familiar with HUD Handbook 4381.5 REV-2. It sets out specific situations when management agents can charge supervisory salaries to projects. United officials did not comply with HUD requirements. Officials did the opposite of what they said they would do. In a letter to HUD dated November 14, 1997, United’s majority stockholder wrote that officials had ceased paying for supervisors’ salaries from project 9 The costs were incurred before the end of August 2001. 7 funds. Contrary to that statement, officials continued to charge supervisor salaries to the projects. United officials misled HUD staff by reporting that the district manager and administrator did not perform any supervisory functions. In a letter dated November 5, 1997, HUD staff asked for generalist job descriptions of all central office staff that perform HUD- approved activities and do not perform supervisory functions. HUD requested job descriptions of persons whose salaries are reimbursable from project funds. In a letter to HUD dated November 13, 1997, United’s minority owner described the jobs of the district manager and administrator. His descriptions were not complete because he omitted their supervisory functions. For example, the district manager had oversight responsibility for project managers and the administrator had oversight responsibility for employees doing grant work. He only listed functions that one could charge to projects, leaving the impression that the two did not perform supervisory functions for United, which was not true. In addition, during March and May 1999, United used Scott County Apartment funds to pay $982 to its administrator for mileage to and from the property. United officials disregarded HUD direction that commuting mileage is not reimbursable from property funds. An official said they paid the mileage from project funds because at the time the administrator was the acting on-site manager. United charged $126,893 of an owner’s salary as accounting cost to the projects. For the pay periods between April 1, 1998, and August 31, 2001, officials reimbursed United $126,893 for the salary of its minority owner. Officials used project-operating funds to reimburse the owner’s salary as accounting fees. However, they had nothing to support the salary as accounting costs, which The Management Agent Handbook requires. The owner had not prepared reports to record his actual accounting time. Furthermore, if the salary was in fact an accounting cost, United officials had overcharged the projects $61,712. For the period, HUD had set the maximum accounting costs at $6 per unit per month for Arkansas properties. However, total accounting fees, which included part of the owner’s salary, exceeded the limit. United Officials said HUD had never provided documentation showing that HUD had a $6.00 per unit per month maximum for accounting costs. United officials paid $28,938 from project-operating funds on a second mortgage. Between December 1, 1998, and September 30, 2000, United officials used $28,938 of non- surplus project-operating funds to pay down the property owner’s second mortgage. This occurred because officials disregarded HUD requirements and the promissory note terms that specified payment from surplus cash. In order to rehabilitate the property, the owner, 26th Street Limited Partnership obtained a $415,000 secondary loan from the Arkansas Development Finance Authority (Authority), 8 using St. John Apartments as collateral. On September 4, 1997, the president of the 26th Street Limited Partnership signed the promissory note dated June 3, 1997, and the second mortgage on St. John Apartments. HUD Handbook 4350.1, REV-1, Multifamily Asset Management and Project Servicing, governs the approval of second mortgages. Appendix G, Section II (F), Secondary Financing, authorizes only the use of surplus cash to make payments on secondary mortgage notes. HUD worked with the Authority on the terms of the note between 26th Street Limited Partnership and the Authority. The note in part reads: “...Any payments due from project income under this Note shall be payable only from permissible distributions from surplus cash of the said project, as that term is defined in the regulatory agreement dated November 7, 1968, between the Secretary of Housing and Urban Development and 26th Street Limited Partnership.” Thereby the promissory note limits payments from the project to permissible distributions from surplus cash. St. John’s regulatory agreement, Section 6(e), further limits use of surplus cash by specifying a time for distribution and requiring written approval from HUD. Officials paid down the second mortgage from the operating account despite not having surplus cash. The project reported cash deficiencies of $89,808 at September 30, 1998, $51,483 at September 30, 1999, and $56,050 at September 30, 2000. Officials made second mortgage payments, generally on a monthly basis. United’s minority owner stated that HUD’s asset manager had authorized him to pay the second mortgage from project funds. However, he had nothing in writing to support this approval. The asset manager asserted he had not given HUD’s authorization to make second mortgage payments with project-operating funds. United erroneously paid $14,200 to and for Mays Property Management, Inc. United officials made two erroneous payments totaling $14,200 to and for the former management agent, Mays Property Management, Inc. (Mays). They overpaid Mays $4,626 because of an accounting error. They also inadvertently paid Mays’ own $9,574 payroll for the period ending December 25, 1998. Auditors advised officials of the misspent funds on January 29, 2001. However, officials had not paid back the funds to the projects. An accounting error resulted in Pilgrim Rest reimbursing Mays three times for its March 15, 1996 payroll. While under Mays’ management, Mays correctly reimbursed itself $2,333 on March 18, 1996, for the project’s March 15, 1996 payroll. Sometime after the payment, United’s accounting clerk incorrectly entered the March 15, 1996 payroll as a payable to Mays, revising the amount to $2,313. When the payroll clerk saw her mistake, she attempted to remove the payable from the books. But instead she entered the $2,313 9 amount again, increasing the payable amount to $4,626. On June 30, 1998, United officials issued a $4,626 check from Pilgrim Rest to Mays for the payable. On January 4, 1999, officials used West Apartment’s funds to pay $9,574 to a payroll processing company for Mays’ payroll for its period ended December 25, 1998. The payroll had nothing to do with the operation of the project. It included $5,900 for the salary of the owner of Mays. United owes two projects $2,940 resulting from duplicate payments to a contractor and a loan to a project manager. United owes Theressa James Manor and Chicot Apartments $2,740 and $200, respectively. From project-operating funds of Theressa James Manor, United overpaid a contractor twice. From project-operating funds of Chicot Apartments, United loaned a site manager $800, which was not a proper use of funds, and the site manager still owes $200 on the loan. United officials made two duplicate payments to a contractor. United made the payments from the operating account of Theressa James Manor for cabinets and countertops. • On May 20, 1998, and again on June 2, 1998, they paid the contractor the total amount of the April 30, 1998, invoice for $1,370. As a result, they paid the contractor $2,740 (checks #6024 and #6046), which includes an overpayment of $1,370. • On July 20, 1998, and again on August 17, 1998, they paid the contractor $1,370 for cabinet units and countertops installed in Units A211 and A215. As a result, the project paid the contractor $2,740 (checks #6120 and #6179) for the work, which includes another overpayment of $1,370. On April 29, 1998, United loaned the manager of Chicot Apartments $800. Instead of using United’s funds they used project funds. Officials acknowledged that they should not have used project funds. The manager quit before she repaid the loan, leaving a balance of $200 owed. To write-off the $200 outstanding is not an eligible project-operating expenditure since the loan was not an eligible use of project funds. Therefore, United should pay back the project. United used project funds to pay unsupported purchases totaling $54,213. From April 1, 1998, through August 31, 2001, officials paid $54,213 from project- operating funds without having approved invoices, bills, or other supporting documentation. As a result, officials had nothing to show that the costs were necessary and reasonable, as required by the regulatory agreements. 10 United officials wrote 25 checks totaling $24,000 from three project accounts. From the Shorter College Gardens account, officials wrote nine checks payable to a local bank. The checks totaled $11,450 and were written monthly starting on April 1, 1998, through December 31, 1998. Amounts ranged from $750 to $1,800. From the St. John Apartments account, they wrote nine checks payable to a local bank. The checks totaled $7,550 and were written monthly starting on April 1, 1998, through January 31, 1999, except December 1998. Amounts ranged from $450 to $1,350. From the Pilgrim Rest Apartments account, they wrote seven checks payable to an individual. The checks totaled $5,000 and were written monthly starting on April 2, 1998, through October 1, 1998. Amounts ranged from $600 to $900. Officials stated the checks paid for grounds work at the three projects. However, they had nothing from the payees, or any other party, to support the payments. United officials wrote checks totaling $30,213 to two contractors and a site manager. Invoices or other similar documents from the three payees supported none of the checks. Although the contractors generally provided invoices, invoices or other similar documents did not support payments totaling $30,013 to the contractors. Without supporting documents officials could not show that the payments were for reasonable operating costs or necessary repairs. Officials wrote one check for $200 to a site manager. However, they did not have anything to support the payment. Auditee Comments United’s president disagrees with the findings except for the duplicate payments and the loan to a project manager. The president says the audit started with the audit of Mays Property Management, Inc. (Mays). The OIG carried the audit over to United. The OIG did this because the owner of Mays is the father of the majority owner and president of United. He says United is not an outgrowth of Mays. United is a new company and not Mays with a new name. It is a company that has had success in bringing properties up to HUD standards. The change caused vastly improved financial and physical conditions. Additionally, he says he was not ever the president and has never had an ownership interest in Mays. It is not unusual for persons to leave one company to form another one. This is what they did and United has had great success. United’s actions have not harmed the properties. He asserts United saved the properties more than $300,000 over the 41 months, the audit period. Further he believes the report is not balanced. It states that United Properties earned $30,000 a month in management fees. However, the OIG did not report that United had many times deferred its fees to pay operating expenses. Some properties still owe United Properties deferred fees. In addition, the OIG refuses to acknowledge the positive results reported by HUD. 11 The OIG has unduly audited United compared to others that have violated HUD requirements. He believes the audit is unfair and that someone in an influential position is behind it. In addition to the above general comments, he provided the following specific comments: • United followed the handbook when it charged $218,428 of supervisory staff expense to the projects. The staff had done front-line and day-to-day activities. The handbook shows such costs are eligible property expenses. In addition, the administrator did two jobs: grant work and property work. Therefore, United paid the administrator from grant funds and property funds, which HUD had approved. • The salary of the Minority Owner is accounting costs. The report implies that United just classified his salary as accounting work to skim money from the properties. This is not true. A simple analysis shows United charged a very reasonable fee for accounting. • He acknowledges that United paid $28,938 from project-operating funds on a second mortgage note. However, he says that the HUD asset manager, after talking to the second mortgagee, instructed United to make the payments until the payment issue is resolved. The payments did not benefit United in anyway. • United had support for the purchases totaling $54,213 that the OIG questioned as unsupported costs. The auditor said the documents were not good enough. OIG Evaluation This audit did result from our audit of Mays Property Management, Inc. As stated in our report, two officials left Mays and formed a new company, United. All the operating personnel of Mays Property Management became the personnel of United. Mays ceased operations and turned over the management of all its HUD properties to United. In addition, United initially used the Mays’ bank account. Since we had found problems with Mays expenditures in a previous audit, we surveyed payments to find out whether the same problems existed at United. The survey disclosed United misspent funds and this led to the in-depth audit work. The family relationships had nothing to do with the decision to do the audit. Although based on a corporate resolution dated October 22, 1996, we concluded that Gregory T. Mays was the president of Mays Property Management, Inc.; we accept Mr. Mays’ statement that he was not the president of Mays and have revised our report. With regard to the comments regarding the objectives and scope of the audit, our objective was to determine whether United complied with the regulatory agreements and HUD requirements when disbursing project funds. We believe our scope was sufficient to accomplish this. Our scope did not include an objective to determine whether United Properties deferred its fees. 12 The comments regarding our finding that United misspent project funds did not change our position. United officials could not provide us any evidence required to show the questioned disbursements, i.e., the supervisory staff expense, the charges for the minority owner’s salary, or the unsupported costs, were appropriately charged to the projects, necessary and reasonable project operating costs, or consistent with HUD requirements. As our finding states, United could not provide invoices, bills, or other adequate documentation for the unsupported costs. Further, HUD officials deny approving the payments on the second mortgage and any of the questioned charges to the projects. RECOMMENDATIONS We recommend the HUD Directors of Multifamily Housing: 1A. Require United owners or the property owners to repay the projects $264,506 for the ineligible expenditures from project funds. 1B. Require United owners or the property owners to repay the projects $181,106 for the unsupported expenses, if the owners cannot furnish adequate documentation supporting those costs as reasonable and necessary operating expenses. We recommend the Director, Departmental Enforcement Center: 1C. Take administrative sanctions against the owners of United. 13 MANAGEMENT CONTROLS Management controls 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. We determined that the following management controls were relevant to our audit objective to determine whether United complied with the regulatory agreements and HUD requirements when disbursing project funds: • Controls to ensure compliance with regulatory requirements It is a significant weakness if management controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet an organization’s objectives. Based on our objective we gained an understanding of the applicable controls. However, we did not test or rely on them in conducting the audit. We generally reviewed all allocation and disbursement transactions. 14 Appendix A SCHEDULE OF QUESTIONED COSTS Type of Questioned Cost Recommendation No. Ineligible 1 Unsupported 2 1A $264,506 1B $181,106 Totals $264,506 $181,106 1 Ineligible costs are those that are questioned because of an alleged violation of a provision of a law, regulation, contract, grant, cooperative agreement, or other agreement or document governing the expenditure of funds. 2 Unsupported costs are those whose eligibility cannot be clearly determined during the audit since such costs were not supported by adequate documentation. A legal opinion or administrative determination may be needed on these costs. 15 Appendix B 16 17 18 19 20 21
United Properties Management, Inc., Multifamily Management Agent, Little Rock, Arkansas
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-09-14.
Below is a raw (and likely hideous) rendition of the original report. (PDF)