oversight

Richmond Redevelopment and Housing Authority, Richmond, VA, Did Not Always Properly Use HUD Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-04-08.

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

                                                                Issue Date
                                                                       April 8, 2005
                                                                 Audit Report Number
                                                                       2005-PH-1009




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



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

SUBJECT: Richmond Redevelopment and Housing Authority, Richmond, VA, Did Not
          Always Properly Use HUD Funds


                                  HIGHLIGHTS

 What We Audited and Why

            We completed an audit of the operations of the Richmond Redevelopment and
            Housing Authority (Authority) in response to a citizen’s complaint. The
            complainant alleged program and accounting irregularities at the Authority.

            Our audit objective was to determine if the Authority properly used HUD funds in
            accordance with its Annual Contributions Contract.

 What We Found

            The Authority did not always properly use HUD funds in accordance with its
            Annual Contributions Contract. Contrary to its Annual Contributions Contract, the
            Authority improperly used $6.1 million in Public Housing Low Rent Funds to pay
            the administrative expenses of other HUD programs. Additionally, the Authority
            improperly used $1.5 million in HUD funds to support its nonfederal entities and
            could not support all costs. These problems occurred because the Authority’s
           former Executive Director and the Authority’s Board of Commissioners did not
           ensure adequate internal controls were in place to prevent them.

What We Recommend


           We recommend HUD require the Authority to reconcile funds it owes to its
           Public Housing Low Rent Funds by the other HUD Grants and then reduce
           funding to the Authority’s Public Housing Low Rent Funds by $6.1 million or the
           amount certified during reconciliation. We further recommend that HUD require
           the Authority to discontinue the practice of using Public Housing Low Rent Funds
           to the pay administrative expenses of its other programs. We further recommend
           the Authority recover $1.5 million it provided its nonfederal entities or repay it
           from nonfederal sources. Lastly, we recommend the Authority pass a Board
           resolution approving procedures requiring it to maintain required supporting
           documentation such as cancelled checks, paid bills, payrolls, and time and
           attendance records.

Auditee’s Response


           We discussed the report with the Authority during the audit and at an exit
           conference on March 10, 2005. The Authority provided its written comments to
           our draft report on April 4, 2005. The complete text of the Auditee’s response,
           along with our evaluation of that 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 Used $6.1 Million of Low Rent Funds To   5
      Support Other HUD Programs
      Finding 2: The Authority Improperly Used $1.5 Million To Support Its         8
      Nonfederal Entities
      Finding 3: The Authority Could Not Adequately Support All of Its Line of     10
      Credit Draws From HUD

Scope and Methodology                                                              12

Internal Controls                                                                  13

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use               14
   B. Auditee Comments and OIG’s Evaluation                                        15




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                     BACKGROUND AND OBJECTIVES

The Richmond Redevelopment and Housing Authority (Authority) was established in 1940 to
provide safe and sanitary housing for the low-income citizens of the city of Richmond, Virginia.
The Authority’s mission is to provide affordable housing, promote self-sufficiency, provide
homeownership for its housing residents, and revitalize Richmond neighborhoods to achieve
common goals in partnership with the city. The City Council appoints a seven-member Board of
Commissioners to govern the Authority. The current Board Chairman is Leonard A. Venter. The
current Executive Director is Sheila Hill-Christian. The Authority is located at 901 Chamberlayne
Parkway in Richmond, Virginia.

The Richmond Redevelopment and Housing Authority owns and manages 4,191 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 2000 to 2004:

   •   $51 million Operating Subsidy to operate and maintain its housing developments,

   •   $35.6 million Capital Fund Program funding to modernize public housing units,

   •   $53.9 million to provide housing assistance through tenant-based Section 8 certificates
       and vouchers, and

   •   $2 million to the Public Housing Drug Elimination Program funds to eliminate or reduce
       drug related crime and other major crime and disorder problems.

Our audit was in response to a citizen’s complaint. The complainant alleged program and
accounting irregularities at the Authority. Our audit objective was to determine if the Authority
properly used HUD funds in accordance with its Annual Contributions Contract.




                                                4
                                      RESULTS OF AUDIT


Finding 1: The Authority Improperly Used $6.1 Million of Low Rent
Funds To Support Other HUD Programs
Contrary to its Annual Contributions Contract, the Authority used $6.1 million from its Public
Housing Low Rent Funds1 to pay administrative expenses of other HUD programs. This occurred
because Authority officials erroneously believed they could use Public Housing Low Rent Funds to
pay for costs exceeding amounts budgeted for other programs.




    The Authority Improperly Used
    $6.1 Million of Low Rent Funds
    To Pay Administrative
    Expenses of Other HUD
    Programs


                 We obtained an automated download of the Authority’s general ledger and used
                 audit software to analyze the Authority’s various fund transfers. Using computer
                 assisted audit techniques we determined that as of September 30, 2003, other
                 Authority programs owed the Authority’s Public Housing Low Rent Funds $6.1
                 million. The Authority used a due-from/due-to accounting system to account for
                 transactions directly between other funds and/or other entities included within its
                 general ledger. A program or entity's due-to balance represents amounts it owes
                 (payable) another fund or entity for disbursements and/or advances made in its
                 behalf. Conversely, a due-from balance (receivable) represents an amount owed
                 the entity.

                 Since the Authority’s general ledger did not identify what specific programs are
                 owed money to its Public Housing Low Rent Funds, we reviewed the Authority’s
                 financial statements and other documentation the Authority provided to try to
                 determine what the other programs owed the funds. We found:




1
 Represents public housing operating subsidy and rent revenues. In fiscal year 2003 operating subsidies totaled
$15.3 million and rental revenues $8.2 million.

                                                         5
                                                                       Due Low
                                  Program                             Rent Funds

           New Construction                                           $ 41,432
           Community Development Block Grant                          $2,177,984
           Homeownership for People Everywhere                        $3,612,497
           Homeownership for Public Housing Section 5H                $ 10,214
           Homeownership Made Easy                                    $ 175,999
           Resident Opportunity Self Sufficiency                      $ 50,566
           Capital Fund Program                                       $ 540,379
           Drug Elimination Drug Grants                               $ 253,532

           Total                                                      $6,862,603

           As shown above, eight different Authority programs owed $6.9 million to the
           Public Housing Low Rent Fund. However, the Authority did not reconcile its
           accounts to verify the amounts owed to the fund from other programs. Authority
           officials informed us that most of these programs did not have enough
           administrative funds available to cover administrative expenses. Therefore,
           officials transferred Public Housing Low Rent Funds or other low rent funds to
           cover existing funding shortfalls. For example, as of September 30, 2003, the
           Authority’s Homeownership for People Everywhere Program owed other
           Authority programs $3.6 million. HUD previously provided this program $2.1
           million to cover the program’s administrative expenses.

           The aforementioned practice violates the Authority’s Annual Contributions
           Contract. Part A, Section 9(C) of the contract states the Authority may withdraw
           funds from the General Fund only for the payment of the costs of development
           and operation of the projects under the Annual Contributions Contract with HUD;
           the purchase of investment securities as approved by HUD; and such purposes as
           may be specifically approved by HUD. It further states that program funds are
           not fungible and that withdrawals shall not be made for a specific program in
           excess of the funds available for the program.

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


           In February 2004, the Board of Commissioners appointed a new Executive
           Director who inherited major challenges. The new Executive Director has
           attempted to address the Authority’s problems. For example, during the audit, the
           Executive Director tasked the Internal Audit Manager and the Management

                                           6
          Information Systems Director to develop a Strategic Plan to address problems
          associated with the Authority’s accounting system. In addition, the Authority
          needed to reconcile its accounts to verify the amounts owed to its Public Housing
          Low Rent Fund from other programs. Although more needs to be done, we are
          encouraged that the Authority has taken some initial steps to correct its problems.


Recommendations


          We recommend that HUD:

          1A.     Require the Authority to reconcile funds owed to its Public Housing Low
                  Rent Funds from the other HUD programs. Reduce funding to the
                  Authority’s Public Housing Low Rent Funds by $6,053,499 or the amount
                  certified during reconciliation.

          1B.     Require the Authority to discontinue the practice of using Public Housing
                  Low Rent Funds to the pay administrative expenses of its other programs.




                                           7
Finding 2: The Authority Improperly Used $1.5 Million To Support Its
Nonfederal Entities

The Authority improperly used $1.5 million in HUD funds to support its affiliated nonfederal
entities. This occurred because Authority officials erroneously believed that the use of HUD
funds to support its affiliated nonfederal entities was in line with their mission to serve public
housing residents. Our audit showed the Authority improperly provided $1.3 million to its
nonfederal entities and improperly paid salaries, rent and administrative expenses totaling
$182,868 from federal funds from January 2001 to December 2003. We also estimated the
Authority will annually put $60,956 to better use by properly accounting for and allocating work
and office space of its employees supporting its nonfederal entities.




 The Authority Improperly
 Provided Nonfederal Entities
 $1.3 Million


               Our review showed the Authority improperly provided its nonfederal entities $1.3
               million. Specifically, during fiscal year 2004 the Authority forgave a debt of
               $813,000 of a nonfederal entity and gave the same entity another $102,544.
               Authority officials informed us that it provided the $915,544 to a non-profit
               organization it set up to provide education and other approved programs and
               assistance to residents of the Authority’s public housing units. They stated the
               entity’s fundraising activities were not adequate to pay its expenses, and therefore
               the Authority provided it with needed financial assistance. The Authority’s
               books also showed that it advanced $401,070 to a nonfederal housing project to
               cover that entity’s expenses. Officials believed that using HUD funds in this way
               addressed its mission to serve public housing residents and therefore they
               believed HUD sanctioned it. However, this practice violated Part A, Section 9(C)
               of the Annual Contributions Contract, which states that the Authority may
               withdraw funds from the General Fund only for the payment of costs of
               development and operation of the projects under the Annual Contributions
               Contract with HUD.

 The Authority Improperly Used
 $182,868 To Support
 Nonfederal Entities


               The Authority improperly paid expenses totaling $182,868 from federal funds
               from January 2001 to December 2003 for work and office space of its employees
               supporting its nonfederal entities. Specifically, our audit showed the Authority


                                                8
                  did not properly allocate $137,062 in salaries, fringe benefits, and other
                  administrative expenses associated with at least 30 employees who performed
                  work for its affiliated nonfederal entities. Another $45,806 should have been
                  allocated for the office space used by one of its nonfederal entities. The 30
                  employees performed a variety of duties for the nonfederal entities such as
                  administrative, accounting, and management duties. Authority officials told us
                  that in their opinion the time the employees spent on the nonfederal entities was
                  insignificant and not worth the time to allocate the expenses. We disagree.

                  Part A, Section 9(C) of the Authority’s Annual Contributions Contract with HUD
                  requires it to maintain records identifying the source and allocation of federal
                  funds. Further, the contract specifies that the Authority can only withdraw federal
                  funds for the payment of costs associated with the development and operation of
                  projects under its Annual Contributions Contract or other projects specifically
                  approved by HUD. Thus, when employees work on multiple programs, a
                  distribution of their salaries should be supported by personnel reports or
                  equivalent documentation. Office of Management and Budget Circular A-87 also
                  requires the Authority to assign costs to benefited activities on a reasonable and
                  consistent basis. Formal accounting and other records should support all costs
                  and other data used to distribute the costs included in its cost allocation plan,
                  including the support needed to establish the propriety of the costs assigned to the
                  federal awards.

                  We estimated the Authority will be able to use $60,9562 more effectively on an
                  annual basis by properly accounting for the work of its employees in accordance
                  with the aforementioned guidance.


    Recommendations


                  We recommend that HUD:

                  2A. Require the Authority to recover $1,499,482 from its nonfederal entities for
                      funds it improperly provided the entities ($1,316,614) and expenses not
                      properly allocated to the entities ($182,868) or repay it from nonfederal funds.

                  2B. Require the Authority to develop a reasonable method for allocating its
                      future costs to its nonfederal entities, thereby putting $60,956 to better use.




2
    $182,868/36 months reviewed x 12 months = $60,956


                                                        9
Finding 3: The Authority Could Not Adequately Support All of Its Line
of Credit Draws From HUD

The Authority could not support payments it drew down from HUD’s computerized cash
management system known as the Line of Credit Control System. This occurred because the
Authority’s former Executive Director did not ensure costs were supported and the Authority’s
Board of Commissioners did not ensure adequate internal controls were in place to prevent these
problems from occurring. As a result, we question whether the Authority used these HUD funds
properly.




    The Authority Could Not
    Adequately Support All Line of
    Credit Draws


                  In performing our audit, we wanted to determine if the Authority could support its
                  draw of funds from HUD’s computerized cash management system known as the
                  Line of Credit Control System. To do this we nonstatistically selected 15 of 114
                  draw downs, totaling $9.7 million, out of $21.3 million the Authority drew down
                  from 2002 to 2004. We reviewed the accounting records, cancelled checks,
                  payrolls, and time and attendance records the Authority provided us to support its
                  draw down payments, and found the Authority could not adequately support 10 of
                  the draws totaling $6.33 million of $9.7 million (64 percent). As a result, we have
                  no assurance that the Authority used those HUD funds properly.

                  The Authority’s Annual Contributions Contract4 with HUD requires it to maintain
                  complete and accurate books to facilitate timely and effective audits. Federal
                  regulations5 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-876 further requires the Authority to adequately document its
                  costs under federal awards.




3
  Some of these costs are included in the $6.1 million questioned costs reported in Finding 1. Since the Authority
lacked adequate support, we could not determine the duplicate costs reported in Finding 1 and thus could not
quantify these questioned costs in Appendix A.
4
  Part A, Section 15(A)
5
  Title 24 Code of Federal Regulations 84.20
6
  Attachment A, Paragraph C, Subparagraph 1.j

                                                         10
Recommendation


          We recommend that HUD:

          3A.    Require the Authority’s Board of Commissioners to pass a Board
                 resolution approving procedures requiring it to maintain required
                 supporting documentation such as cancelled checks, paid bills, payrolls,
                 and time and attendance records.




                                         11
                          SCOPE AND METHODOLOGY

We performed the audit:

   •    From May 2004 through December 2004.

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

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

The audit covered transactions representative of operations current at the time of the audit and
included the period January 2001 through April 2004. We expanded the scope of the audit as
necessary. We reviewed applicable guidance and discussed operations with management and
staff personnel at the Richmond Redevelopment and Housing Authority, and with key officials
from HUD’s Virginia State Office.

To determine if the Authority properly managed HUD funds in accordance with its Annual
Contributions Contract we reviewed:

    •   The Authority’s general ledger using audit software to determine funds owed to the
        Public Housing Low Rent Funds from other programs.

    •   Funds owed by related parties and the Authority’s other Grant Programs and compared
        them to information contained in the Authority’s General Ledgers, audited financial
        statements, and with Authority officials.

    •   The Authority’s available Independent Auditors’ Reports for fiscal years 2001, 2002, and
        2003.

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

    •   Documentation provided by the Authority to support its draw down of funds from HUD’s
        computerized cash management system known as the Line of Credit Control System.




                                                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 objective.
              Ensuring the Authority:

              •   Only withdrew funds from its General Fund for the payment of the costs of
                  the projects under the Annual Contributions Contract with HUD.

              •   Properly allocated applicable costs to its affiliated nonfederal entities.

              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:
              The Authority did not:

              •   Withdraw funds from its General Fund for the payment of the costs of the
                  projects under the Annual Contributions Contract with HUD.

              •   Properly allocate applicable costs to its affiliated nonfederal entities.



                                                 13
                                       APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE

                  Recommendation          Ineligible 1/     Funds To Be Put
                        Number                              to Better Use 2/
                                 1A       $6,053,499
                                 2A       $1,499,482
                                 2B                              $60,956

                               Total      $7,552,981             $60,956


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
     polices or regulations.

2/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (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.




                                              14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




    “


    “


Comment 2




    “




                         15
Comment 2




Comment 2




Comment 1




            16
                         OIG Evaluation of Auditee Comments

Comment 1   Although the Authority had initiated some action prior to the audit to correct its
            accounting problems, it had not adequately addressed the majority of the
            problems the audit identified.

Comment 2   We are encouraged the Authority now understands it is not appropriate to use
            federal funds to support its nonfederal entities, and is now taking steps to recover
            the funds it improperly provided the entities.

            However, the report does not state the Authority acted inappropriately in
            establishing its nonfederal entities. Rather, the report dealt solely with the
            Authority’s use of HUD funds to support its nonfederal entities. In our exit
            conference with the Authority on March 10, 2005, the Authority explained that it
            originally created the entities to obtain private money to fund additional projects
            and programs, which it typically would have funded solely with public funds.
            The Authority stated that initially the venture was very successful. However, over
            time the Authority gradually replaced the private funding with HUD funds as
            evidenced by large account receivable balances the nonfederal entities owed the
            Authority.

            Since the Authority’s nonfederal entities are not covered by its Annual
            Contributions Contract with HUD, we did not audit the entities or their activities.
            However, the Authority’s practice of providing HUD funds to its nonfederal
            entities clearly violated Part A, Section 9(C) of its Annual Contributions Contract,
            which states that the Authority may withdraw funds from the General Fund only
            for the payment of costs of development and operation of the projects under its
            Annual Contributions Contract with HUD. This longstanding provision of the
            Annual Contributions Contract is intended to ensure housing authorities use HUD
            funds only in accordance with HUD requirements.




                                             17