oversight

Petersburg Redevelopment and Housing Authority, Petersburg, VA, Did Not Follow Federal Procurement Regulations or Properly Manage HUD Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-09-08.

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

                                                                Issue Date
                                                                         September 8, 2004
                                                                 Audit Case Number
                                                                         2004-PH-1011




TO:        William D. Tamburrino, Director, Baltimore Public Housing Program Hub,
            3 BPH


FROM:      Daniel G. Temme, Regional Inspector General for Audit, Mid-Atlantic, 3AGA

SUBJECT: Petersburg Redevelopment and Housing Authority, Petersburg, VA, Did Not
            Follow Federal Procurement Regulations or Properly Manage HUD Funds


                                  HIGHLIGHTS

 What We Audited and Why

            We completed an audit of the operations of the Petersburg Redevelopment and
            Housing Authority (Authority) in response to a citizen’s complaint. The
            complainant alleged procurement irregularities, accounting problems, and overall
            mismanagement at the Authority.

            Our audit objective was to determine if the Authority properly awarded contracts
            to its consultants and attorneys and whether it could support that it used HUD
            funds to meet its mission of providing safe and sanitary housing for the low-
            income citizens of the city of Petersburg, Virginia.

 What We Found


            The Authority did not properly award contracts to its consultants and attorneys
            and it could not support that it used all HUD funds to meet its mission of
            providing safe and sanitary housing for the low-income citizens of the city of
            Petersburg, Virginia. We reviewed all payments the Authority made to
            consultants and attorneys from January 1998 to October 2003 in which it used
            federal funds, and found in all instances it violated federal procurement
           regulations. Specifically, the Authority paid $558,842 to four consultants and
           attorneys who were never awarded written contracts that specified the terms and
           conditions of the services they would be required to provide the Authority. It also
           paid another law firm $324,074 under a contract that was never competitively bid
           to ensure it obtained the best value for those services. In addition, it could not
           provide required documentation such as invoices, receipts, cancelled checks and
           payroll records to substantiate how it spent $1.9 million HUD provided it from
           December 1998 to May 2003. We estimate the Authority could put $583,357 to
           better use annually by following federal procurement regulations and ensuring it
           supports its future costs.

What We Recommend


           We recommend HUD take appropriate administrative action against the
           Authority’s former Executive Director and former Finance Director. We also
           recommend that it require the Authority to reimburse HUD $2.8 million from
           nonfederal sources unless it can provide additional documentation to resolve the
           cited deficiencies. We further recommend that HUD periodically monitor the
           Authority to ensure it complies with federal regulations governing procurement
           and bookkeeping requirements in the future.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We discussed the report with the Authority during the audit and at an exit
           conference on August 5, 2004. The Authority provided written comments to our
           draft findings on August 24, 2004. In its response, the Authority agreed it did not
           follow federal procurement requirements or its own procurement policy in its
           payments to consultants and attorneys. It also acknowledged it could not support
           the expenditures we reviewed from its own records and that it did not maintain
           complete and accurate books. However, the Authority stated that it has now
           instituted policies and procedures to preclude all of these problems from
           reoccurring. It also believes it can verify that it received satisfactory value from
           its consultants and attorneys, and is optimistic it will be able to support questioned
           expenditures by obtaining needed documentation from its contractors or other
           parties.

           The complete text of the Authority’s response can be found in Appendix B of this
           report.



                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                    4

Results of Audit
      Finding 1: The Authority Improperly Paid $882,916 to Consultants and   5
                Attorneys
      Finding 2: The Authority Could Not Support Costs of $1.9 Million       8

Scope and Methodology                                                        12

Internal Controls                                                            13

Appendixes
   A. Schedule of Questioned Costs and Funds Put to Better Use               15
   B. Auditee Comments                                                       16




                                            3
                      BACKGROUND AND OBJECTIVES

The Petersburg Redevelopment and Housing Authority was established in 1968 to provide safe and
sanitary housing for the low-income citizens of the city of Petersburg, Virginia. The Authority’s
mission is to serve its citizens by providing affordable housing opportunities in a safe environment,
revitalizing and maintaining neighborhoods, providing opportunities for low- and moderate-income
homeownership, and continuing an active partnership with the city of Petersburg. The City Council
appoints a seven-member Board of Commissioners to govern the Authority. The current Board
Chairman is Joseph Dickens. The current Executive Director is Julian Marsh. The Authority is
located at 128 South Sycamore Street in Petersburg, Virginia.

The Petersburg Redevelopment and Housing Authority owns and manages 479 public housing units
under its Consolidated Annual Contributions Contract with HUD. The Consolidated Annual
Contributions Contract defines the terms and conditions under which the Authority agrees to
develop and operate all projects under the agreement. HUD authorized the Authority the
following financial assistance from Fiscal Years 1999 to 2003:

   •   $5.3 million Operating Subsidy to operate and maintain its housing developments.

   •   $4.3 million Capital Fund Program and Comprehensive Grant Program funding to
       modernize public housing units.

   •   $12.7 million to provide housing assistance through tenant-based Section 8 certificates
       and vouchers.

   •   $543,208 Public Housing Drug Elimination Program funds to eliminate or reduce drug
       related crime and other major crime and disorder problems.

This audit report is the second and final audit report on the Petersburg Redevelopment and
Housing Authority that resulted from the aforementioned citizen’s complaint. In our first report
(Audit Case Number 2004-PH-1005, dated March 25, 2004) we identified $1.9 million in
questioned costs. Specifically, we noted the Authority improperly pledged assets to guarantee
debt incurred by its nonfederal entities and paid salaries from federal funds for work its
employees performed in support of its affiliated nonfederal entities. HUD agreed with our
recommendations to require the Authority to withdraw its pledge of Consolidated Annual
Contributions Contract assets and recover or repay improperly paid salaries estimated at
$620,236 from nonfederal funds. HUD also agreed that the Authority could more effectively
utilize another $1.3 million by removing and preventing improper loan guarantees and by
ensuring it was properly accounting for work its employees performed for its affiliated
nonfederal entities. This second report addresses the complainant’s allegations of procurement
irregularities, accounting problems, and overall mismanagement at the Authority.




                                                  4
                                   RESULTS OF AUDIT

Finding 1: The Authority Improperly Paid $882,916 to Consultants and
          Attorneys
Our review showed that the Authority violated federal procurement regulations related to
payments of $882,916 it made to its consultants and attorneys from January 1998 to October
2003. This occurred because the Authority’s former Executive Director erroneously believed
the Authority was not required to follow federal procurement requirements for certain service
contracts. Since the Authority did not follow federal or its own procurement policy, it did not
ensure it properly used HUD funds to meet its mission of providing safe and sanitary housing for
the low-income citizens of the city of Petersburg, Virginia.

Specifically, our audit showed the Authority violated federal procurement regulations by paying
$558,842 to four consultants and attorneys without awarding them contracts identifying terms
and conditions of the services it would require them to provide. It also paid $324,074 to a law
firm without competitively bidding the contract to ensure it obtained the best value for the
taxpayer. We estimate the Authority could annually put $151,3571 to better use by properly
following its own established procurement policy. Although the Authority’s annual financial
audits identified similar problems in past years, its former Executive Director and Board of
Commissioners did not take sufficient action to correct them.




    The Authority Paid Consultants
    and Attorneys $558,842
    Without Issuing Contracts


                The Authority violated federal procurement regulations by paying $558,842 to
                four consultants and attorneys, from January 1998 to October 2003, without
                competitively bidding the work or issuing written contracts for the services. This
                occurred because the Authority’s former Executive Director did not believe the
                Authority was required to follow federal procurement regulations for certain
                services. However, the Authority is a recipient of federal funding, and therefore
                is in fact required to follow federal regulations2 in regard to how it utilizes that
                funding. As such, it is required to conduct all procurement transactions in a
                manner providing for full and open competition. In addition, HUD’s Procurement
                Handbook3 specifically requires contracting officers to follow the Housing
                Authority’s written procurement policy. In this regard, the Authority’s

1
  $882,916/70 months reviewed = $12,613 per month x 12 months = $151,357
2
  Title 24 Code of Federal Regulations 85.36 (c)
3
  7460.8, REV-1, paragraph 3-4 B


                                                     5
                    Procurement Handbook4 contained its policy and it reinforced federal
                    requirements by requiring it to competitively award contracts for professional
                    services exceeding $30,000. Since the Authority did not follow federal or its own
                    procurement policy, it did not ensure it properly used HUD funds to meet its
                    mission of providing safe and sanitary housing for the low-income citizens of the
                    city of Petersburg, Virginia.

    The Authority Paid $324,074
    for Legal Services Without
    Competing the Work


                    The Authority violated federal procurement regulations by paying $324,074 to
                    another law firm from January 1998 to October 2003 without allowing other firms to
                    bid for the work. Here again, this occurred because the Authority’s former
                    Executive Director did not believe she needed to competitively bid the services. As
                    stated previously, federal regulations require the Authority to conduct all
                    procurement transactions in a manner providing for full and open competition and
                    the Authority’s own procurement policy required it to competitively award all
                    professional service contracts exceeding $30,000. Since the Authority did not
                    compete this work, it violated federal procurement regulations and its own policy.
                    Since competition results in substantial savings, it did not ensure it efficiently used
                    HUD funds to meet its mission of providing safe and sanitary housing for the low-
                    income citizens of the city of Petersburg, Virginia.

    Previous Independent Audits
    Noted Similar Procurement
    Problems


                    In past years, other independent auditors reported similar procurement problems
                    at the Authority. Nevertheless, as shown by our audit, these problems remain
                    uncorrected. For example, the Authority’s Certified Public Accounting firm
                    reported in both Fiscal Years 2000 and 2001 that the Authority’s staff
                    demonstrated a lack of understanding of the Authority’s procurement policy. The
                    auditors further reported that the Authority did not follow proper procurement
                    procedures such as ensuring that it competitively bid work. The independent
                    auditors recommended that the Authority educate its employees on their
                    obligations to abide by the Board’s policies. Regrettably, as shown by our audit,
                    the Authority’s former Executive Director and Board of Commissioners did not
                    take sufficient action to ensure this occurred.




4
    Chapter 3, Section A (2)


                                                      6
HUD Monitoring Review Also
Identified Procurement
Problems at the Authority


          During the audit, we briefed officials from HUD’s Virginia State Office on the
          problems identified in this finding along with other concerns we had regarding
          critical documentation we found missing from the Authority’s contract files.
          HUD officials informed us they conducted their own review in May 2003.
          HUD’s review noted the following similar problems:

          •   Files were missing documentation such as cost estimates, modifications,
              supporting documentation;

          •   Contracts did not exist or were not competed; and

          •   Existing contracts did not contain mandatory clauses to protect HUD’s
              interests.

          In its report, HUD’s Virginia State Office required the Authority to submit a
          Corrective Action Plan addressing these issues. It also stated it planned to
          conduct a follow-up review regarding these issues in 2004.

Recommendations


          We recommend that HUD:

          1A. Take appropriate administrative action against the Authority’s former
              Executive Director based on issues identified in this finding.

          1B. Require the Authority to reimburse HUD $882,916 from nonfederal sources.

          1C. Ensure the Authority’s Corrective Action Plan adequately addresses the
              issues in this finding.

          1D. Periodically perform reviews at the Authority to ensure it is complying with
              its Corrective Action Plan and following federal procurement regulations.

          1E. Prior to hiring consultants and attorneys, require the Authority to furnish
              documentation to HUD showing it competitively awarded contracts as
              required, thereby putting $151,357 to better use annually.




                                           7
Finding 2: The Authority Could Not Support Costs of $1.9 Million

The Authority could not substantiate that it used $1.9 million in HUD funds to meet its mission
of providing safe and sanitary housing for the low-income citizens of the city of Petersburg,
Virginia. This occurred because the Authority did not maintain accurate records or books of
account to support the disbursements. Responsible managers at the Authority said they did not
maintain the proper supporting documentation because their former Finance Director erroneously
informed them that she was maintaining the documentation. We estimate the Authority could
annually put $432,0005 to better use by ensuring its future costs are allowable, properly
supported, and well documented. Although the Authority’s annual financial audits identified
similar problems in past years, its former Executive Director and Board of Commissioners did
not take sufficient action to correct the problems.



    The Authority Could Not
    Provide Adequate Records and
    Documentation to Support $1.9
    Million of Expenditures


                In performing our audit, we reviewed all documentation the Authority provided to
                support payments it drew down from HUD’s computerized cash management
                system known as the Line of Credit Control system. We reviewed documentation
                such as accounting records, cancelled checks, payrolls, and time and attendance
                records. We selected 24 of 189 high value draw downs, totaling $2.7 million out
                of $5.6 million the Authority drew down from 1995 to 2003.

                We found it could not support how it spent $1.9 million of $2.7 million (70-
                percent) of the disbursements audited. The Authority’s Annual Contributions
                Contract6 with HUD requires it to maintain complete and accurate books to
                facilitate timely and effective audits. Federal regulations7 also require the
                Authority to maintain complete and accurate records identifying the source and
                application of grant funds such as cancelled checks, paid bills, payrolls, and time
                and attendance records. Office of Management and Budget Circular A-1228
                further requires the Authority to adequately document its costs under federal
                awards.

                The Authority’s managers told us that they did not have the required records and
                documentation because the Authority’s former Finance Director erroneously told
                them she maintained the proper supporting documentation. The Authority was

5
  $1,943,993/54 months reviewed = $36,000 per month x 12 months = $432,000
6
  Part A, Section 15(A)
7
  Title 24 Code of Federal Regulations 84.20
8
  Attachment A, Paragraph A, Subparagraph 2.g.


                                                     8
                   required to use the unsupported $1.9 million we reviewed mostly to modernize its
                   public housing units. However, since the Authority did not maintain required
                   documentation, the taxpayer has no assurance the Authority used federal funding
                   in this manner, or to meet its overall mission of providing safe and sanitary
                   housing for the low-income citizens of the city of Petersburg, Virginia.

    The Authority Did Not
    Maintain Complete and
    Accurate Books


                   The Authority’s books were not complete, accurate, or prepared in a manner that
                   would permit a timely and effective audit. We obtained an automated download of
                   the Authority’s general ledger for 2001 and 2002 and found the data was
                   substantially unreliable. For example, debits and credits were significantly out of
                   balance in both years. We found debits exceeded credits by $4.9 million in Fiscal
                   Year 2001, and by $446,779 in Fiscal Year 2002. Accounting personnel stated they
                   needed to make numerous adjustments, but could not adequately explain the large
                   discrepancies. As stated previously, the Authority’s Annual Contributions Contract9
                   with HUD requires it to maintain complete and accurate books to facilitate timely
                   and effective audits. Since it did not do so, the taxpayer has no assurance it
                   efficiently used federal funding to meet its overall mission of providing safe and
                   sanitary housing for the low-income citizens of the city of Petersburg, Virginia.

    The Authority’s Independent
    Auditors Also Reported
    Unsupported Costs and
    Inaccurate Books in Previous
    Audits


                   In past years, the Authority’s independent auditors also reported the existence of
                   unsupported costs and inaccurate books at the Authority. Nevertheless, as shown
                   by our audit, these problems remain uncorrected. For example, the Authority’s
                   Certified Public Accounting firm reported in Fiscal Year 2001 the Authority made
                   an improper withdrawal of HUD funds. The auditors reported that in order to
                   keep from losing funds at year-end, the Authority represented to HUD that it
                   needed $29,234 for construction related costs. However, the auditors reported the
                   Authority did not expend the funds for that purpose. The independent auditors
                   recommended that the Authority implement procedures to ensure it withdraws
                   HUD funds only when its costs are allowable, properly supported, and well
                   documented. In both Fiscal Years 2000 and 2001 the auditors also reported the
                   Authority’s inaccurate financial statements were caused by inadequate internal
                   controls and control procedures. The independent auditors also noted
                   questionable results of operations and prior period adjustments. As our audit
9
    Part A, Section 15(A)


                                                    9
            demonstrates, the Authority’s former Executive Director and Board of
            Commissioners did not take sufficient action to ensure managers corrected these
            problems.

The Authority’s New
Leadership Is Attempting to
Address the Problems


            In April 2003, the Board of Commissioners appointed a new Executive Director
            who inherited major challenges. However, the Authority has had difficulty
            recruiting and retaining a qualified Finance Director, and this has contributed
            significantly to its problems. The Authority has been operating without a Finance
            Director for the past year. It ultimately recruited and hired a candidate for the
            position in June 2004, and it now plans to hire another accountant. However,
            during 2002 and 2003, three different individuals held the position of Finance
            Director. The Authority removed one of those individuals from the position because
            of problems identified in its Fiscal Year 2000 financial audit. The next Finance
            Director served only six months. An individual who was also serving as Vice
            Mayor of Petersburg replaced her. This individual resigned in June 2003 because of
            apparent conflicts of interest identified in our previous audit report (Audit Case
            Number 2004-PH-1005).

            Despite its personnel problems, we are encouraged that the Authority’s current
            accounting staff and the newly appointed Executive Director expressed a sincere
            desire to correct the Authority’s deficiencies.

Recommendations


            We recommend that HUD:

            2A. Take appropriate administrative action against the Authority’s former
                Finance Director and Executive Director based on issues identified in this
                finding.

            2B. Direct the Authority to provide adequate documentation to support
                $1,943,993 or reimburse HUD from nonfederal sources.

            2C. Direct the Authority’s Executive Director to certify on all drawdowns that
                costs are allowable, properly supported, and well documented, thereby
                putting $432,000 to better use annually.

            2D. Direct the Authority to take actions to ensure its books are complete,
                accurate, and prepared in manner that would permit a timely and effective
                audit.



                                            10
2E. Periodically perform reviews at the Authority to ensure it maintains
    documents identifying the source and application of grant funds such as
    cancelled checks, paid bills, payrolls, and time and attendance records.




                               11
                          SCOPE AND METHODOLOGY

We performed the audit:

   •    From December 2003 through June 2004;

   •    In accordance with generally accepted government auditing standards and included tests of
        management controls that we considered necessary under the circumstances; and

   •    At the Petersburg Redevelopment and Housing Authority located in Petersburg, Virginia.

The audit covered transactions representative of operations current at the time of the audit and
included the period January 1998 to December 2003. We expanded the scope of the audit as
necessary. We reviewed applicable guidance and discussed operations with management and
staff personnel at the Petersburg Redevelopment and Housing Authority, and key officials from
HUD’s Virginia State Office.

To determine if the Authority properly awarded contracts to its consultants and attorneys and if it
could support that it used HUD funds to meet its mission of providing safe and sanitary housing
for the low-income citizens of the city of Petersburg, Virginia, we:

    •   Used audit software to identify and review all of the payments the Authority made to its
        consultants and attorneys from January 1998 to October 2003 from federal funds.

    •   Non statistically selected high dollar transactions drawn down by the Authority from
        1995-2003.

    •   Used audit software to analyze the overall reliability of the Authority’s General Ledger.

    •   Reviewed all documentation provided by the Authority to support its payments to
        consultants and attorneys and its draw down of funds from HUD’s computerized cash
        management system known as the Line of Credit Control system. Documentation
        reviewed included available contracts, award documents, accounting records, cancelled
        checks, payrolls, and time and attendance records.

    •   Reviewed the Authority’s available Independent Auditors’ Reports for Fiscal Years 2000
        and 2001.

    •   Reviewed HUD and Authority correspondence related to the audit, and results of the
        monitoring reviews HUD’s Virginia State Office conducted.




                                                12
                             INTERNAL CONTROLS

Internal Control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals and objectives. Internal controls include the processes and procedures for
planning, organizing, directing and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


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

                  •   Conducting all procurement transactions in accordance with federal
                      procurement regulations and in a manner providing for full and open
                      competition,

                  •   Maintaining complete and accurate records identifying the source and
                      application of grant funds to include cancelled checks, paid bills, payrolls,
                      and time and attendance records, and

                  •   Maintaining complete and accurate books to facilitate timely and effective
                      audits in accordance with the Authority’s Annual Contributions Contract
                      with HUD.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.


 Significant Weaknesses


              Based on our review, we believe the following items are significant weaknesses:



                                               13
The Authority did not:

•   Conduct procurement transactions in accordance with federal procurement
    regulations and in a manner providing for full and open competition (Finding 1).

•   Identify the source and application of grant funds to include cancelled checks,
    paid bills, payrolls, and time and attendance records (Finding 2).

•   Maintain complete and accurate books to facilitate timely and effective audits
    in accordance with the Authority’s Annual Contributions Contract with HUD
    (Finding 2).




                                 14
                                Appendices
Appendix A

                 SCHEDULE OF QUESTIONED COSTS
                  AND FUNDS PUT TO BETTER USE

 Recommendation          Ineligible 1/    Unsupported     Unreasonable or        Funds Put to
       Number                                      2/      Unnecessary 3/        Better Use 4/

              1B            $882,916
              1E                                                                     $151,357
              2B                            $1,943,993
              2C                                                                     $432,000


           Total            $882,916        $1,943,993                               $583,357


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 those costs charged to a HUD-financed or HUD-insured program
     or activity, where we cannot determine eligibility at the time of audit. Unsupported costs
     require a 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/   Unnecessary/Unreasonable costs are those costs not generally recognized as ordinary,
     prudent, relevant, and or necessary within established practices. Unreasonable costs
     exceed the costs that would be incurred by a prudent person in conducting a competitive
     business.

4/   Funds Put to Better Use are quantifiable savings that are anticipated to occur if an OIG
     recommendation is implemented, resulting in reduced expenditures at a later time for the
     activities in question. This includes costs not incurred, de-obligation of funds,
     withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures,
     loans and guarantees not made, and other savings.




                                             15
Appendix B

             AUDITEE COMMENTS


                Auditee Comments




                       16
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