oversight

Use of Project Funds, Timberlake Care Center, Kansas City, Missouri

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-03-10.

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

  AUDIT REPORT




 USE OF PROJECT FUNDS

TIMBERLAKE CARE CENTER
  KANSAS CITY, MISSOURI

       2004-KC-1002

      March 10, 2004



  OFFICE OF AUDIT, REGION 7
       KANSAS CITY, KS




        Table of Contents
                                                                  Issue Date
                                                                          March 10, 2004
                                                                 Audit Case Number
                                                                          2004-KC-1002




TO: Herman Ransom, Director, Office of Multifamily Housing, Kansas City Hub, 7AHM


FROM: Ronald J. Hosking, Acting Regional Inspector General for Audit, 7AGA

SUBJECT:       Use of Project Funds
               Timberlake Care Center
               Kansas City, Missouri

We have completed an audit of Timberlake Care Center, a Section 232 Nursing Home located in
Kansas City, Missouri. We selected the project based on an audit request from your office that
indicated there were unallowable disbursements from project funds. Our overall audit objective
was to determine if the owner/management agent used project funds in accordance with applicable
requirements.

Our report contains two findings with recommendations requiring oversight by your office. The
first finding addresses unsupported and/or unallowable disbursements made during the audit period.
The second finding addresses Timberlake Care Center’s failure to perform monthly bank
reconciliations.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each
recommendation without management decisions, a status report on: (1) the corrective action taken;
(2) the proposed corrective action and the date to be completed; or (3) why action is considered
unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for
any recommendation without a management decision. Also, please furnish us copies of any
correspondence or directives issued because of the audit.

Should you or your staff have any questions, please contact me at (913) 551-5870.




                                         Table of Contents
Management Memorandum




                        THIS PAGE LEFT
                            BLANK
                        INTENTIONALLY




2004-KC-1002              Page ii
Executive Summary
We have completed an audit of Timberlake Care Center, a Section 232 Nursing Home located in
Kansas City, Missouri. We selected the project based on an audit request from the Office of
Multifamily Housing, Kansas City Hub, which indicated there were unallowable disbursements
from project funds. Our overall audit objective was to determine if the owner/management agent
used project funds in accordance with applicable requirements.



                                    Timberlake Care Center made payments for other than
 Timberlake Made                    reasonable operating expenses and necessary repairs of the
 Unsupported and/or                 project. Timberlake paid $76,192 in unsupported and/or
 Unallowable                        unallowable disbursements from the operating account
 Disbursements                      during fiscal years 2002 and 2003. Timberlake’s owner did
                                    not alter property operations to ensure HUD rules and
                                    regulations were followed after Timberlake obtained HUD
                                    insured financing in August 2001. As a result, funds that
                                    should have been used to pay the operating expenses of the
                                    property were used for unsupported and/or unallowable
                                    purposes, contributing to Timberlake’s negative surplus
                                    cash position.

                                    Timberlake Care Center did not reconcile the operating
 Timberlake Did Not                 account bank statements to the general ledger each month to
 Perform Bank                       ensure the amounts balanced. Over the two-year audit period,
 Reconciliations                    the operating account general ledger balance was understated by
                                    $17,590. Timberlake’s staff was aware that the operating
                                    account bank statements did not reconcile to the general ledger
                                    balance. However, they did not know how to correct the
                                    problems, and therefore, took no action.

                                    We provided a discussion draft of our audit report to the
                                    auditee following the audit. We held an exit conference with
                                    the auditee on January 29, 2004. The auditee provided
                                    written comments to our findings on March 1, 2004. We
                                    incorporated excerpts of the comments into our report as
                                    appropriate. The complete text of the comments is contained
                                    in Appendix B.

                                    We recommend that the Director, Office of Multifamily
 Recommendations                    Housing, Kansas City Hub, ensure Timberlake Care Center
                                    owners develop and implement policies and procedures to
                                    control funds in accordance with HUD requirements, and
                                    require that Timberlake’s operating account be reimbursed
                                    $76,192 for the unsupported and/or unallowable
                                    disbursements paid during our audit period.

                                        Page iii                                     2004-KC-1002



                                      Table of Contents
Executive Summary



                    We also recommend that the Director ensure Timberlake
                    Care Center owners provide adequate support for the
                    adjusting entry to cash made at the end of fiscal year 2002,
                    and properly correct the fiscal year 2003 general ledger, or
                    repay Timberlake’s general operating account the amount
                    that cannot be supported up to $17,590. Finally, we
                    recommend that the Director verify that Timberlake Care
                    Center owners are correctly reconciling the bank statements
                    to the general ledger each month, and if they are unable to
                    determine how to identify and resolve all reconciling items,
                    have obtained outside assistance in doing so.




2004-KC-1002            Page iv



                      Table of Contents
Table of Contents


Management Memorandum                                                                    i



Executive Summary                                                                     iii



Introduction                                                                             1



Findings

1.    Timberlake Made Unsupported and/or Unallowable Disbursements From Operating    3
      Funds


2.    Timberlake Did Not Reconcile Bank Accounts                                    11



Management Controls                                                                 15



Follow Up On Prior Audits                                                           17



Appendices
     A. Schedule of Questioned Costs and Funds Put to Better Use                    19

     B. Auditee Comments                                                            21

     C. Unallowable Disbursements                                                   35




                                     Page v                                 2004-KC-1002
Table of Contents




                    THIS PAGE LEFT
                        BLANK
                    INTENTIONALLY




2004-KC-1002          Page vi
Introduction
Mission Lake Convalescent Center, Inc. owns and operates a 150-bed licensed nursing facility
doing business as Timberlake Care Center in Kansas City, Missouri. The Project is financed
with a mortgage loan insured by the U.S. Department of Housing and Urban Development
(HUD), under Section 232 of the National Housing Act. The mortgage was endorsed on August
16, 2001. Timberlake Care Center is an owner-managed property.

We selected Timberlake Care Center for review based on an audit request from HUD’s Office of
Multifamily Housing, Kansas City HUB. The request was sent in regards to a management
review performed at Timberlake Care Center on July 30, 2003. The management review
indicated there were unallowable disbursements made from project funds. As a result of this
review, HUD requested an extensive review of Timberlake’s books and records created after
August 15, 2001.



                                   Our overall audit objective was to determine if the
 Audit Objectives                  owner/management agent used project funds in accordance
                                   with applicable requirements. Specifically, our audit
                                   objectives were to determine whether all cash transactions
                                   were recorded in the project’s books for fiscal years 2002
                                   and 2003, to determine if funds disbursed from the project
                                   accounts to the owner/management agent were for
                                   allowable and supported purposes, and to determine if other
                                   funds disbursed from the project accounts were for
                                   allowable and supported purposes.

                                   We performed on-site work from September through
 Audit Scope and                   November 2003. During our audit, we interviewed HUD
 Methodology                       program staff to obtain background information on the
                                   project, and to obtain more details related to the Office of
                                   Housing’s audit request. We interviewed the project’s
                                   owner and management staff to gain an understanding of
                                   the staff’s responsibilities and operational processes. We
                                   also interviewed the project’s independent certified public
                                   accountant to obtain financial data.

                                   To determine whether project funds were used in accordance
                                   with applicable requirements, we reviewed HUD project files
                                   for background information, including the Regulatory
                                   Agreement, Management Certification, and Management
                                   Review performed by HUD in July 2003. We reviewed
                                   Timberlake’s bank statements, cash receipts and deposits,
                                   and general ledgers from Fiscal years 2002 and 2003 to
                                   perform a Proof of Cash analysis. We also reviewed check

                                       Page 1                                     2004-KC-1002



                                     Table of Contents
Introduction


               registers and invoices along with the above information for
               those items selected in our sample for further review.

               Our sample included all payments made to the
               owner/management agent or any principles of the
               owner/management agent and/or related parties during fiscal
               years 2002 and 2003, all payments made to those accounts
               identified in the HUD audit referral, the five largest payments
               each year recorded in each “high risk” account identified by
               scanning the general ledger that had not already been chosen
               for review, all payments to cash, to employees (for other than
               payroll expenses), and to other related parties (including
               identity-of-interest vendors or contractors), the largest
               disbursement made each month, and 20 disbursements from
               each fiscal year selected at random from the remainder of all
               payments not previously selected. Further, we reviewed
               Reserve for Replacement Withdrawals and the project’s
               year-end financial statements for the periods ended May 31,
               2002 and 2003.

               The audit covered the period from August 15, 2001, the date
               Timberlake Care Center obtained a HUD insured mortgage,
               through May 31, 2003. We conducted the audit in
               accordance with generally accepted government auditing
               standards.




2004-KC-1002       Page 2



                 Table of Contents
                                                                                       Finding 1


    Timberlake Care Center Made Unsupported
     and/or Unallowable Disbursements from
                Operating Funds
Timberlake Care Center made payments for other than reasonable operating expenses and
necessary repairs of the project. Timberlake paid $76,192 in unsupported and/or unallowable
disbursements from the operating account during fiscal years 2002 and 2003. Timberlake’s
owner did not alter property operations to ensure HUD rules and regulations were followed after
Timberlake obtained HUD insured financing in August 2001. As a result, funds that should have
been used to pay the operating expenses of the property were used for unsupported and/or
unallowable purposes, contributing to Timberlake’s negative surplus cash position.



                                    HUD Handbook 4370.2, Financial Operations and
   HUD Regulations                  Accounting Procedures for Insured Multi-Family Projects,
                                    Chapter 2, states that the regular operating account “is used
                                    to pay operating expenses of general administration
                                    including mortgage payments, management fees, utilities,
                                    and maintenance.” Project funds are to be used for the
                                    following purposes only: 1) to make mortgage payments; 2)
                                    to make the required deposits to the Reserve Fund for
                                    Replacements; 3) to pay reasonable expenses necessary for
                                    the operation and maintenance of the project; and 4) to make
                                    distributions of surplus cash permitted and to repay owner
                                    advances authorized by HUD.

                                    The Regulatory Agreement between HUD and Timberlake
                                    Care Center, Paragraph 6, states that “Owners shall not
                                    without prior written approval of the Secretary: (b) Assign,
                                    transfer, dispose of, or encumber any personal property of
                                    the project, including rents, or pay out any funds except
                                    from surplus cash, except for reasonable operating expenses
                                    and necessary repairs, and (e) Make, or receive and retain,
                                    any distribution of assets or any income of any kind of the
                                    project except surplus cash.”

                                    Timberlake Care Center made payments for other than
   Unsupported and/or               reasonable operating expenses and necessary repairs of the
   Unallowable                      project. Timberlake paid a total of $76,192 in unallowable
   Disbursements                    and/or unsupported disbursements from the operating
                                    account during fiscal years 2002 and 2003.

                                         Page 3                                     2004-KC-1002



                                      Table of Contents
Finding 1



                    During fiscal year 2002, all of Timberlake Care Center’s
    Unallowable     disbursements that we reviewed were adequately supported;
    Disbursements   however, they paid $26,272 in unallowable disbursements
                    as follows (See Appendix C, Fiscal Year 2002, for details
                    of transactions)

                       ·   Four disbursements to Allstate Insurance Co. to
                           insure four of the owner’s personal vehicles,
                           totaling $1,944.

                       ·   Eight disbursements to the owner’s personal Amoco
                           credit card for purchases unrelated to the property,
                           totaling $1,656.

                       ·   Two disbursements to Citibank VISA for food
                           purchases unrelated to the property, totaling $75.

                       ·   Nine disbursements to General Motors Acceptance
                           Corporation for leases on two of the owner’s
                           personal vehicles, totaling $8,352.

                       ·   Nine disbursements to Smith Trust that were for
                           debt unrelated to the property, totaling $6,637.

                       ·   Four disbursements to Mass Mutual Life Insurance
                           to pay the monthly premium of $1,500 for a life
                           insurance policy on the owner, totaling $7,500.

                       ·   Two disbursements related to repairs on the owner’s
                           personal vehicles, totaling $108.

                    During fiscal year 2003, Timberlake Care Center paid
                    $44,397 in unallowable disbursements(see Appendix C,
                    Fiscal Year 2003, for details of transactions) as follows:

                       ·   Four disbursements to Allstate Insurance Co. to
                           insure four of the owner’s personal vehicles,
                           totaling $1,338.

                       ·   Eight disbursements to the owner’s personal Amoco
                           credit card for purchases unrelated to the property,
                           totaling $1,640.



2004-KC-1002            Page 4



                      Table of Contents
                                                                          Finding 1


                           ·   Four disbursements to Citibank VISA for food
                               purchases unrelated to the property, totaling $276.

                           ·   Thirteen disbursements to General Motors
                               Acceptance Corporation for leases on two of the
                               owner’s personal vehicles, totaling $13,066.

                           ·   Eleven disbursements to Smith Trust that were for
                               debt unrelated to the property, totaling $8,112.

                           ·   Nine disbursemetns to Mass Mutual Life Insurance
                               to pay the monthly premium of $1,500 for a life
                               insurance policy on the owner, totaling $13,500.

                           ·   Two disbursements related to repairs on the owner’s
                               personal vehicles, totaling $1,076.

                           ·   One disbursement to O’Conner Heating and
                               Cooling to pay for repairs to the owner’s personal
                               air conditioner, totaling $5,390.

                        Also during fiscal year 2003, Timberlake Care Center paid
Unsupported             $5,523 in unsupported disbursments (see table below for
Disbursements           each of these disbursements).

                        Check #   Payee         Date     Amount       Unsupported
                         3404 Rea Law Office 12/18/2002 $2,000        $ 1,520
                         3803 Rea Law Office 2/11/2003 $2,003         $ 2,003
                         4082 Rea Law Office 4/14/2003 $2,000         $ 2,000
                        A                    TOTALS     $6,003        $ 5,523


                        During the first several years of operation, Timberlake Care
Owner Did Not Change    Center was financed with a conventional loan. During this
Mode of Operation       time, there were no restrictions on the operating funds.
                        Since August 15, 2001, when the loan was refinanced as a
                        HUD insured loan through the Section 232 loan program,
                        the owner of Timberlake continued to operate the property
                        as if it were still financed thorugh a conventional loan
                        program. The operations of the property were not altered to
                        ensure HUD rules and regulations were being followed.

                        As a result, funds that should have been used to pay the
 Disbursements Impact   operating expenses of the property were used for
 Financial Position     unsupported and/or unallowable purposes during a time
                        when Timberlake was in a negative surplus cash position.

                            Page 5                                     2004-KC-1002



                          Table of Contents
Finding 1




                   Excerpts from Timberlake Care Center’s comments on our
Auditee Comments   draft audit report follow. Appendix B contains the
                   complete text of the comments.

                   Summary:

                   A) There were eight disbursements, totaling $3,282 to
                      Allstate Insurance Company in 2002 and 2003 for
                      insurance on the owner’s personal vehicles. Timberlake
                      stated that this practice was discontinued immediately
                      and the owner agreed to repay the total amount.

                   B) There were 16 disbursements, totaling $3,296 to the
                      owner's personal Amoco credit card in 2002 and 2003.
                      Timberlake maintains that much, if not most, of the fuel
                      expense was used in connection with the business but
                      was not documented. To correct the problem, they
                      currently document the use and where the fuel goes.
                      Timberlake has asked our office to consider reducing
                      the total amount owed.

                   C) There were six disbursements to Citibank VISA, totaling
                      $351, for food purchases unrelated to the property in
                      2002 and 2003. Timberlake's owner agreed to repay the
                      total amount.

                   D) There were 22 disbursements to GMAC, totaling
                      $21,418, for the leases on two of the owner's personal
                      vehicles in 2002 and 2003. Timberlake maintains that
                      the payments are for one car and one truck. The truck is
                      used exclusively by the nursing home in
                      maintenance/supply and seems an obvious appropriate
                      expense. Timberlake also claims that the car is used by
                      the owner in representing Timberlake with their
                      providers, contract doctors, and HMO affiliates. They
                      claim this is a legitimate "company car" and is almost
                      standard practice in their industry.

                      Timberlake claims, regardless of the above information,
                      the accumulated amount of car payments were deducted
                      from the owner's salary at the end of calendar years
                      2002 and 2003. They also stated that the owner has
                      been personally making the payments since September

2004-KC-1002           Page 6



                     Table of Contents
                                                  Finding 1


   2003, so this is no longer an issue. Timberlake
   provided a copy of their ledger and claimed that the
   ledger shows the car payments being deducted out of
   the owner's salary.

E) There were 20 disbursements to Smith Trust, totaling
   $14,749, for debt unrelated to the property made in
   2002 and 2003. Timberlake claims that the note was
   for land that the nursing home is partially built on and
   that it became an unsecured note only after the
   acquisition of a HUD-insured mortgage kept
   Timberlake from carrying the second mortgage.
   Timberlake claims that common sense shows HUD
   should be delighted to have access to these five acres
   and that the value of the property would be substantially
   decreased, or perhaps not even viable, without the
   property. Therefore, they maintain that Timberlake
   should continue to make the payments and the owner
   should not have to pay back the $14,749.

F) There were 13 disbursements to Mass Mutual Life
   Insurance, totaling $21,000, for life insurance premiums
   on the owner. Timberlake claims this is intended to be
   "key man" insurance in order for Timberlake to be able
   to continue if something were to happen to the owner.
   They claim 25% of the proceeds are assigned directly to
   Timberlake and the remaining 75% are assigned to
   family members with instructions on how to proceed in
   the will. According to their attorney, this is common
   practice and Timberlake continues to make the
   payments.

G) There were four disbursements to repair the owner's
   personal vehicle, totaling $1,184, in 2002 and 2003.
   Timberlake's owner agreed to repay the total amount.

H) There was one disbursement for O'Conner Heating and
   Cooling, totaling $5,390, in 2003.           Although
   Timberlake claims the bill included some property
   repairs, they have no documentation to substantiate
   percentages, so Timberlake's owner agreed to repay the
   total amount.

I) Timberlake paid $5,523 in unsupported disbursements to
    Rea Law Office in 2003. Timberlake claims that the

    Page 7                                     2004-KC-1002



  Table of Contents
Finding 1


                       law office is their legal council on all legal matters that
                       affect Timberlake/Mission Lake.            They provided
                       additional billings from the law office that they claim
                       support these payments, and stated that all monies paid
                       to Rea Law Office since the inception of the HUD-
                       insured mortgage are legitimate Mission Lake expenses.


                    Our evaluation of auditee comments addresses each of the
OIG Evaluation of   above sections in which Timberlake Care Center disagreed
Auditee Comments    with our recommendations:

                    B) Timberlake Care Center had a business account with
                       Amoco that was used to purchase fuel for nursing home
                       vehicles. The amount disallowed will not be reduced
                       because the owner made the above purchases on his
                       personal account, not the business account. Therefore,
                       we will not alter our recommendation for the $3,296 to
                       be repaid by the owner.

                    D) The disbursements included in our finding did not
                       include payments for a truck. The payments were for
                       two of the owner's personal cars. HUD Handbook
                       4370.2, states that project funds are to be used for the
                       following purposes only:        1) to make mortgage
                       payments; 2) to make the required deposits to the
                       Reserve Fund for Replacements; 3) to pay reasonable
                       expenses necessary for the operation and maintenance of
                       the project; and 4) to make distributions of surplus cash
                       permitted and to repay owner advances authorized by
                       HUD. Therefore, payments for the owner's personal
                       vehicles are not allowable.

                      Timberlake provided an account activity report for their
                      Auto Expense - Officer's Vehicle Account for fiscal year
                      2003. They did not provide information from fiscal year
                      2002, and did not provide any payroll information
                      showing the claimed deductions from the owner's salary.
                      The information provided is not enough to reduce the
                      disallowed amount; therefore, we will not alter our
                      recommendation for $21,418 to be repaid by the owner.

                    E) Timberlake explained in our exit conference that the
                       nursing home initially sat on the land in question;
                       however, prior to the HUD insured mortgage being

2004-KC-1002            Page 8



                      Table of Contents
                                                                    Finding 1


                    closed, the 5 acre tract was surveyed into the property
                    used to secure the HUD insured mortgage, and the
                    original loan for that land was converted to an unsecured
                    note. Therefore, the note does not cover the property the
                    building is currently sitting on. Also, the loan from
                    Smith Trust is unsecured. Therefore, we will not alter
                    our recommendation for the $14,749 to be repaid by the
                    owner, and suggest the owner discontinue using
                    operating funds to pay this note.

                  F) No documentation was provided by Timberlake to
                    support their claim that the insurance policy benefits the
                    nursing home. We asked them to provide more
                    information on the policy so we could determine if it
                    was an asset to the property. They did not provide any
                    new information in their written comments; therefore,
                    we will not alter our recommendation for the $21,000 to
                    be repaid by the owner, and suggest the owner
                    discontinue using operating funds to pay the premiums.

                  I) The additional billings provided by Timberlake do not
                     provide enough information to separate the bills that
                     legitimately relate to Timberlake project operations and
                     those that relate to the owner, and the ownership entity,
                     Mission Lake.       Therefore, we will not alter our
                     recommendation for the $5,390 in unsupported
                     disbursements to be repaid by the owner, and suggest the
                     property discontinue using operating funds to pay for
                     legal services not specifically related to project
                     operations.


Recommendations   We recommend the Director, Office of Multifamily Housing,
                  Kansas City Hub ensure Timberlake Care Center owners:

                  1A.     Develop and implement policies and procedures to
                          control funds in accordance with HUD requirements.

                  1B.     Reimburse Timberlake Care Center’s operating
                          account for the $76,192 in unsupported and/or
                          unallowable disbursements paid during fiscal years
                          2002 and 2003.




                        Page 9                                   2004-KC-1002



                    Table of Contents
                   Finding 1




THIS PAGE LEFT
    BLANK
INTENTIONALLY




    Page 10      2004-KC-1002
                                                                                          Finding 2


 Timberlake Did Not Reconcile Bank Accounts
Timberlake Care Center did not reconcile the operating account bank statements to the general ledger
each month to ensure the amounts balanced. Over our two-year audit period, the operating account
general ledger balance was understated by $17,590. Timberlake’s staff was aware that the operating
account bank statements did not reconcile to the general ledger balance. However, they did not know
how to correct the problems, and therefore, took no action.



                                      HUD Handbook 4370.2, REV-1, Financial Operations and
 HUD Requirements                     Accounting Procedures for Insured Multi-Family Projects,
                                      Chapter 2-12, Cash Management Controls, Section A,
                                      Receipt Controls, states that bank statements shall be
                                      reconciled promptly to the formal accounting records.
                                      Section B, Disbursement Controls, states that a monthly
                                      reconciliation shall be performed to ensure that all checks
                                      disbursed are accounted for (i.e. cashed, outstanding, or
                                      void).

                                      Timberlake Care Center did not reconcile the operating
 Bank Accounts Were                   account bank statements to the general ledger each month
 Not Reconciled                       to ensure the amounts balanced. Timberlake staff reviewed
                                      the bank statements each month to compile a list of
                                      outstanding withdrawals and deposits, and to determine
                                      what the ending balance should be in the operating account;
                                      however, this amount was never reconciled with the general
                                      ledger balance.

                                      Timberlake made an unsupported adjusting entry to the
 General Ledger Balance               operating account at the end of fiscal year 2002 for $18,419
 Was Incorrect                        to correct the irreconcilable balance. In addition, the general
                                      ledger balance was understated at the end of fiscal year 2003
                                      by $829. Therefore, over the two-year period $17,590 in the
                                      operating account general ledger balance was unsupported.

                                      Timberlake Care Center’s accounting staff was aware that
 Staff Did Not Know                   the operating account bank statements did not reconcile to
 How to Correct                       the general ledger balance. However, they did not know
 Problems                             how to bring them in balance. Therefore, they took no
                                      action. The staff stopped performing the reconciliations
                                      during fiscal year 2002. They are currently trying to
                                      determine how to correctly balance the general ledger to the

                                          Page 11                                      2004-KC-1002



                                        Table of Contents
Finding 2


                    bank statements. It is important for Timberlake to reconcile
                    bank accounts to ensure all funds are correctly disbursed
                    and accounted for.




Auditee Comments    Excerpts from Timberlake Care Center’s comments on our
                    draft audit report follow. Appendix B contains the
                    complete text of the comments.

                    Summary: Timberlake Care Center claims extensive
                    training has recently been provided to its employees and, as
                    of January 2004, the operating account reconciles to the
                    general ledger. In the future, any variance will be
                    investigated and errors will be corrected immediately.

                    Timberlake claims that the adjusting entry to cash made in
                    May 2002 related to improper recording of actual payroll
                    nets to the cash account done by the previous accounting
                    manager. They provided payroll and general ledger detail
                    that illustrates that operating cash account for net payroll in
                    the general ledger detail is not what is reflected in the
                    actual payroll detail; however, the payroll detail does match
                    the reconciled bank account.



OIG Evaluation of   We commend Timberlake for taking the necessary steps to
Auditee Comments    train its employees in this area and on its plan to investigate
                    any variance and immediately correct errors. Although
                    Timberlake provided documentation showing discrepancies
                    between the operating cash account for net payroll in the
                    general ledger and the actual payroll detail, they did not
                    correlate this amount to the $18,419 adjusting entry to cash
                    that was made in May 2002. The payroll discrepancy
                    shown by the information provided by Timberlake is
                    $103,568. Therefore, we will not alter our recommendation
                    for Timberlake to provide adequate support for the $18,419
                    adjustment to cash made at the end of fiscal year 2002, and
                    properly correct the fiscal year 2003 general ledger, or
                    repay the general operating account the amount that cannot
                    be supported up to $17,590.




2004-KC-1002            Page 12



                      Table of Contents
                                                                      Finding 2


                  Based on Timberlake's statement claiming they have
                  obtained outside assistance to provided training on
                  reconciling the bank statements to the general ledger, and
                  are currently doing this, we will alter our recommendation
                  to request the Director, Office of Multifamily Housing,
                  Kansas City Hub, verify that Timberlake Care Center is
                  correctly reconciling the bank statements to the general
                  ledger each month and, if they are unable to determine how
                  to identify and resolve all reconciling items, has obtained
                  outside assistance in doing so.



Recommendations   We recommend the Director, Office of Multifamily Housing,
                  Kansas City Hub:

                  2A.      Ensure that Timberlake Care Center owners provide
                           adequate support for the $18,419 adjustment to cash
                           made at the end of fiscal year 2002, and properly
                           correct the fiscal year 2003 general ledger, or repay
                           Timberlake Care Center’s general operating account
                           the amount that cannot be supported up to $17,590.

                  2B.      Verify that Timberlake Care Center owners are
                           correctly reconciling the bank statements to the
                           general ledger each month, and if they are unable to
                           determine how to identify and resolve all reconciling
                           items, have obtained outside assistance in doing so.




                        Page 13                                    2004-KC-1002



                    Table of Contents
Finding 2




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2004-KC-1002       Page 14
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 the following management controls were
 Relevant Management
                                   relevant to our audit objectives:
 Controls
                                       ·   Controls over cash disbursements.

                                       ·   Controls over financial recording and reporting.

                                   We assessed the relevant controls identified above.

                                   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 review, we believe the following items are
 Significant Weaknesses            significant weaknesses:

                                       ·   Timberlake did not have policies and procedures in
                                           place to ensure that payments were made only for
                                           reasonable operating expenses and necessary repairs
                                           of the project. Timberlake made unsupported and/or
                                           unallowable disbursements from the operating
                                           account during fiscal years 2002 and 2003. (See
                                           Finding 1).

                                       ·   Timberlake did not reconcile the operating account
                                           bank statements to the general ledger each month to
                                           ensure the amounts balance, and that all cash
                                           transactions are properly recorded in the project's
                                           books for fiscal years 2002 and 2003 (Finding 2).




                                       Page 15                                     2004-KC-1002



                                      Table of Contents
Management Controls




                      THIS PAGE LEFT
                          BLANK
                      INTENTIONALLY




2004-KC-1002           Page 16
Follow Up On Prior Audits
This is the first Office of Inspector General audit of Timberlake Care Center, a Section 232
Nursing Home located in Kansas City, Missouri.




                                       Page 17                                  2004-KC-1002



                                     Table of Contents
Follow Up On Prior Audits




                            THIS PAGE LEFT
                                BLANK
                            INTENTIONALLY




2004-KC-1002                 Page 18
                                                                                  Appendix A

Schedule of Questioned Costs
and Funds Put to Better Use
Recommendation                    Type of Questioned Cost               Funds Put to
   Number                  Ineligible 1/         Unsupported 2/          Better Use 3/
     1B                      $70,669                $5,523
     2B                                            $17,590


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law, contract or Federal, State or local
     policies or regulations.

2/   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.

3/   Funds Put to Better Use are costs that will not be expended in the future if our
     recommendations are implemented.




                                       Page 19                                    2004-KC-1002



                                     Table of Contents
Appendix A




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2004-KC-1002    Page 20
                                       Appendix B

Auditee Comments




                    Page 21            2004-KC-1002



                   Table of Contents
Appendix B




2004-KC-1002    Page 22



               Table of Contents
                    Appendix B




 Page 23            2004-KC-1002



Table of Contents
Appendix B




2004-KC-1002    Page 24



               Table of Contents
                    Appendix B




 Page 25            2004-KC-1002



Table of Contents
Appendix B




2004-KC-1002    Page 26



               Table of Contents
                    Appendix B




 Page 27            2004-KC-1002



Table of Contents
Appendix B




2004-KC-1002    Page 28



               Table of Contents
                    Appendix B




 Page 29            2004-KC-1002



Table of Contents
Appendix B




2004-KC-1002    Page 30



               Table of Contents
                    Appendix B




 Page 31            2004-KC-1002



Table of Contents
Appendix B




2004-KC-1002    Page 32



               Table of Contents
                                                                                    Appendix B




Please Note: Due to space considerations, the appendices to the auditee’s response are not
included in this report, but are available on request.




                                         Page 33                                    2004-KC-1002



                                       Table of Contents
Appendix B




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2004-KC-1002    Page 34
                                                                                   Appendix C

Schedule of Unallowable Disbursements
                                     Fiscal Year 2002

Check # Date Written Date Cleared              Payee            Amount           Comments
   31461   9/12/2001     9/17/2001 Allstate Insurance Co.   $      581.00   Personal Vehicles
   31710  10/19/2001   10/25/2001 Allstate Insurance Co.    $      581.18   Personal Vehicles
    1005  12/21/2001   12/31/2001 Allstate Insurance Co.    $      285.91   Personal Vehicles
    1931   5/10/2002     5/15/2002 Allstate Insurance Co.   $      496.17   Personal Vehicles
   31460   9/12/2001     9/19/2001 Amoco                    $      206.75   Unrelated Expense
   31590   10/9/2001   10/15/2001 Amoco                     $      244.17   Unrelated Expense
   31779   11/2/2001     11/8/2001 Amoco                    $      159.15   Unrelated Expense
   32026   12/7/2001   12/14/2001 Amoco                     $      133.05   Unrelated Expense
    1251   1/18/2002     1/24/2002 Amoco                    $      127.23   Unrelated Expense
    1516     3/6/2002    3/12/2002 Amoco                    $      455.73   Unrelated Expense
    1806   4/10/2002     4/17/2002 Amoco                    $       79.79   Unrelated Expense
    2025   5/23/2002     5/31/2002 Amoco                    $      250.03   Unrelated Expense
    1817   4/17/2002     4/24/2002 Citibank VISA            $       21.03   $1,128.05 Check Amt.
    1939   5/10/2002     5/16/2002 Citibank VISA            $       54.20   $174.52 Check Amt.
   31407     9/1/2001    9/11/2001 GMAC                     $      927.96   Personal Vehicles
   31601   10/9/2001   10/12/2001 GMAC                      $      927.96   Personal Vehicles
   31830   11/8/2001   11/14/2001 GMAC                      $      927.96   Personal Vehicles
   32025   12/7/2001   12/12/2001 GMAC                      $      927.96   Personal Vehicles
    1189   1/10/2002     1/17/2002 GMAC                     $      927.96   Personal Vehicles
    1357     2/6/2002    2/13/2002 GMAC                     $      927.96   Personal Vehicles
    1527     3/6/2002    3/12/2002 GMAC                     $      927.96   Personal Vehicles
    1746     4/5/2002    4/12/2002 GMAC                     $      927.96   Personal Vehicles
    1955   5/10/2002     5/15/2002 GMAC                     $      927.96   Personal Vehicles
   31394     9/5/2001    9/14/2001 Smith Trust              $      737.41   Unrelated Debt
   31612  10/10/2001   10/17/2001 Smith Trust               $      737.41   Unrelated Debt
   31834   11/8/2001   11/15/2001 Smith Trust               $      737.41   Unrelated Debt
   32014   12/7/2001   12/13/2001 Smith Trust               $      737.41   Unrelated Debt
    1171     1/3/2002    1/16/2002 Smith Trust              $      737.41   Unrelated Debt
    1336     2/4/2002    2/13/2002 Smith Trust              $      737.41   Unrelated Debt
    1572     3/6/2002    3/15/2002 Smith Trust              $      737.41   Unrelated Debt
    1777     4/5/2002    4/17/2002 Smith Trust              $      737.41   Unrelated Debt
    1998   5/10/2002     5/20/2002 Smith Trust              $      737.41   Unrelated Debt
 Transfer  2/28/2002      N/A      Mass Mutual Life         $    3,000.00   Personal Insurance
 Transfer  3/29/2002      N/A      Mass Mutual Life         $    1,500.00   Personal Insurance
 Transfer  4/29/2002      N/A      Mass Mutual Life         $    1,500.00   Personal Insurance
 Transfer  5/28/2002      N/A      Mass Mutual Life         $    1,500.00   Personal Insurance
   31873  11/15/2001   11/19/2001 Superior Buick Cadillac   $       80.26   Personal Vehicles
   32037  12/13/2001   12/17/2001 Jiffy Lube                $       27.99   Personal Vehicles
                                    TOTAL                   $26,271.97




                                          Page 35                                  2004-KC-1002



                                     Table of Contents
Appendix C



                                      Fiscal Year 2003

Check # Date Written Date Cleared              Payee          Amount          Comments
    2519     8/1/2002     8/7/2002 Allstate Insurance Co.   $ 144.39     Personal Vehicles
    2557     8/9/2002    8/15/2002 Allstate Insurance Co.   $ 161.89     Personal Vehicles
    3189  11/21/2002   11/26/2002 Allstate Insurance Co.    $ 962.64     Personal Vehicles
    3235   12/6/2002   12/11/2002 Allstate Insurance Co.    $    69.41   Personal Vehicles
    2097     6/5/2002    6/12/2002 Amoco                    $ 281.87     Unrelated Expense
    2423   7/25/2002      8/5/2002 Amoco                    $ 223.95     Unrelated Expense
    2561   8/19/2002     8/19/2002 Amoco                    $ 177.98     Unrelated Expense
    3137  11/25/2002   11/25/2002 Amoco                     $ 102.33     Unrelated Expense
    3237   12/6/2002   12/11/2002 Amoco                     $ 325.59     Unrelated Expense
    3579   1/24/2003      2/3/2003 Amoco                    $ 168.99     Unrelated Expense
    3693     2/6/2003    2/12/2003 Amoco                    $ 208.01     Unrelated Expense
    3927   3/12/2003     3/20/2003 Amoco                    $ 150.92     Unrelated Expense
    2754   9/11/2002     9/17/2002 Citibank VISA            $    69.25   $1,450.00 Check Amt.
    3144  11/10/2002   11/26/2002 Citibank VISA             $    84.00   $681.29 Check Amt.
    3245   12/6/2002   12/10/2002 Citibank VISA             $    84.75   $249.32 Check Amt.
    4033     4/9/2003    4/15/2003 Citibank VISA            $    38.36   $254.87 Check Amt.
    2115     6/5/2002    6/12/2002 GMAC                     $ 927.96     Personal Vehicles
    2303   7/10/2002     7/17/2002 GMAC                     $ 927.96     Personal Vehicles
    2576     8/9/2002    8/16/2002 GMAC                     $ 927.96     Personal Vehicles
    2710     9/5/2002    9/12/2002 GMAC                     $ 927.96     Personal Vehicles
    2916   10/7/2002   10/16/2002 GMAC                      $ 927.96     Personal Vehicles
    3181  11/19/2002   11/26/2002 GMAC                      $ 978.15     Personal Vehicles
    3260   12/6/2002   12/17/2002 GMAC                      $ 978.15     Personal Vehicles
    3503     1/8/2003    1/16/2003 GMAC                     $ 978.15     Personal Vehicles
    3718     2/6/2003    2/19/2003 GMAC                     $ 978.15     Personal Vehicles
    3890     3/7/2003    3/19/2003 GMAC                     $ 978.15     Personal Vehicles
    4039     4/9/2003    4/17/2003 GMAC                     $ 978.15     Personal Vehicles
    4238   5/19/2003     5/27/2003 GMAC                     $ 978.15     Personal Vehicles
    4041     4/9/2003    4/15/2003 GMAC                     $ 1,579.10   Personal Vehicles
    2157     6/5/2002    6/26/2002 Smith Trust              $ 737.41     Unrelated Debt
    2309   7/10/2002     7/17/2002 Smith Trust              $ 737.41     Unrelated Debt
    2730     9/5/2002    9/30/2002 Smith Trust              $ 737.41     Unrelated Debt
    2980   10/7/2002   10/11/2002 Smith Trust               $ 737.41     Unrelated Debt
    3187  11/21/2002     12/4/2002 Smith Trust              $ 737.41     Unrelated Debt
    3307   12/6/2002   12/13/2002 Smith Trust               $ 737.41     Unrelated Debt
    3532     1/8/2003    1/23/2003 Smith Trust              $ 737.41     Unrelated Debt
    3767     2/6/2003    2/20/2003 Smith Trust              $ 737.41     Unrelated Debt
    3903     3/7/2003    3/27/2003 Smith Trust              $ 737.41     Unrelated Debt
    4075     4/9/2003    4/14/2003 Smith Trust              $ 737.41     Unrelated Debt
    4215     5/7/2003    5/15/2003 Smith Trust              $ 737.41     Unrelated Debt
 Transfer 10/28/2002      N/A      Mass Mutual Life         $ 1,500.00   Personal Insurance
 Transfer 11/29/2002      N/A      Mass Mutual Life         $ 1,500.00   Personal Insurance
 Transfer  6/28/2002      N/A      Mass Mutual Life         $ 1,500.00   Personal Insurance

2004-KC-1002                            Page 36



                                      Table of Contents
                                                                                    Appendix C


Transfer    7/29/2002    N/A      Mass Mutual Life               $ 1,500.00 Personal Insurance
Transfer    8/28/2002    N/A      Mass Mutual Life               $ 1,500.00 Personal Insurance
Transfer    9/30/2002    N/A      Mass Mutual Life               $ 1,500.00 Personal Insurance
Transfer    1/28/2003    N/A      Mass Mutual Life               $ 1,500.00 Personal Insurance
Transfer    5/28/2003    N/A      Mass Mutual Life               $ 1,500.00 Personal Insurance
Transfer    2/28/2003    N/A      Mass Mutual Life               $ 1,500.00 Personal Insurance
  32224    10/28/2002   11/1/2002 Major Cadillac                   $1,039.50 Personal Vehicles
  32320     5/15/2003   5/20/2003 Valvoline Instant Oil Change        $36.56 Personal Vehicles
  32318     5/10/2003   5/13/2003 O'Conner Heating & Cooling       $5,389.70 Unrelated Expense
                                  TOTAL                          $44,397.55




                                     Page 37                                       2004-KC-1002



                                   Table of Contents