oversight

Tulalip Tribes Housing Authority Cannot Account for Grant Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-10-21.

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

                                                                 Issue Date
                                                                          October 21, 2004

                                                                 Audit Case Number

                                                                              2005 SE 1001

                                   .



TO:         Ken Bowring, Administrator, Northwest Office of Native American Programs,
              0API


FROM:
            Frank E. Baca, Regional Inspector General for Audit, Northwest Region, 0AGA

SUBJECT: Tulalip Tribes Housing Authority Cannot Account for Grant Funds
         Marysville, WA


                                   HIGHLIGHTS


 What We Audited and Why

             To address Office of Inspector General concerns regarding regulatory and
             administrative violations in the Tulalip Tribes Housing Authority’s (Authority)
             accounting records, we audited the Authority’s Indian Housing Block Grant
             program to determine whether the Authority established and operated its program
             in accordance with HUD requirements for financial management systems.



 What We Found


             We found the Authority cannot account for more than $5.1 million in Indian
             Housing Block Grant funds. The Authority’s financial management system is
             unauditable because the financial statements, general ledger, and subsidiary
             ledgers for fiscal years 1999 through 2001 are not complete and accurate as
             required. Further, the Authority did not obtain the necessary financial statement
             audits for fiscal years 2002 and 2003. As a result, the Authority cannot provide
             reasonable assurance that its Indian Housing Block Grant funds helped the
             intended beneficiaries. In our opinion, this occurred because the Board of
           Commissioners and the Authority’s management did not have effective control of
           Authority accounting operations.


What We Recommend


           We recommend you take administrative action to ensure the Authority complies
           with program requirements and require the Authority to return any Indian
           Housing Block Grant funds not used for authorized purposes.

           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


           The draft audit report requested that the Tulalip Tribes provide their comments by
           October 4, 2004. The Tulalip Tribes requested and received an extension until
           October 12, 2004. We received the Tulalip Tribes’ response on October 12, 2004.

           While not specifically agreeing or disagreeing with the draft report, the Tulalip
           Tribes made several comments to which we responded.

           The complete text of the Tulalip Tribes’ 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: Tulalip Tribes Housing Authority Cannot Properly Account for More   5
      Than $5.1 Million in Grant Funds

Scope and Methodology                                                                7

Internal Controls                                                                    8

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use                  9
   B. Auditee Comments and OIG’s Evaluation                                          10
   C. Accounting System Discrepancies                                                16




                                            3
                     BACKGROUND AND OBJECTIVES

The Tulalip Tribes

The Tulalip Tribes is a federally recognized Indian Tribe with more than 3,600 members
living on the Tulalip Reservation in the Puget Sound area of Washington State. The
Tulalip Tribes Board of Directors oversees the seven-member Board of Commissioners
that governs the Authority. The Authority provides nearly 300 housing units for qualified
tribal members.

Native American Housing Assistance and Self-Determination Act of 1996

The Native American Housing Assistance and Self-Determination Act of 1996 enabled the block
grant approach to housing for Native Americans. The Indian Housing Block Grant is a formula
grant that provides for a range of affordable housing activities on Indian reservations and areas.
These activities include housing development, assistance to housing developed under the Indian
Housing Program, housing services to eligible families and individuals, crime prevention and
safety, and model activities that provide creative approaches to solving affordable housing
problems.

Our objective was to determine whether the Authority established and operated a financial
management system that ensured

       Program costs were reasonable, accurate, and supportable;
       Its general and subsidiary ledgers were accurate, complete, and reliable;
       Its financial reporting was accurate, complete, and timely; and
       Housing Authority Board members and Tribal commissioners promoted program
       performance, maintained accountability, and took action to address significant
       deficiencies.




                                                4
                                RESULTS OF AUDIT

Finding 1: The Tulalip Tribes Housing Authority Cannot Account for
More Than $5.1 Million in Grant Funds
The Authority cannot provide reasonable assurance that the Indian Housing Block Grant funds
helped the intended beneficiaries. In our opinion, this occurred because the Board of
Commissioners and the Authority’s management did not have effective control of accounting
operations.



 Authority Records Are
 Inaccurate, Incomplete, and
 Untimely


              We found the Authority could not properly account for more than $5.1 million in
              Indian Housing Block Grant funds. The Authority’s financial management system
              is unauditable because the Authority did not have accurate, complete, or timely
              financial statements and accounting records as required by HUD regulations.

              Financial management system requirements for the Native American Housing
              Assistance and Self-Determination Act of 1996 are contained in the Code of Federal
              Regulations at 24 CFR 85.20. These regulations require that Indian Housing Block
              Grant recipients

                     Provide financial reports that are accurate, current, and complete and
                     disclose the financial results of assisted activities;
                     Maintain accounting records that adequately identify the source and
                     application of funds provided for financially assisted activities;
                     Have accounting records supported by source documentation; and
                     Have an internal control system that effectively controls and accounts for all
                     assets and assures that they are used solely for authorized purposes.

              Regulations in the Act also require grantees to submit an audited financial statement
              annually.

              We found the Authority

                     Posted journal entries to the wrong accounts;
                     Entered charges to accounts as credits and vice versa;
                     Deleted fiscal year 1999 journal entries in the general ledger without
                     reversing entries;
                     Delayed making fiscal year 1999 adjusting and correcting entries until 2001
                     and 2002, resulting in erroneous accounting records for this period;




                                                5
                          Commingled program and non-program funds, making it impossible to
                          determine how the Authority spent its program funds;
                          Changed the recording of routine expense charges to assets inappropriately.
                          The understated expenses and overstated assets result in an inaccurate
                          picture of the Authority’s financial position;
                          Neglected to get audited financial statements for fiscal years 2002 and 2003,
                          so that the Tribe, the Board of Commissioners, and management did not
                          have an accurate picture of the Authority’s financial position; and
                          Made significant unexplained and undocumented adjustments. Adequate
                          explanation and documentation of adjustments are essential because
                          adjustments can hide defalcations, losses, and errors.

                 Also, our review of the Authority’s financial statements, general ledger, and trial
                 balances for fiscal years 1999 through 2001 found that the

                           Operating expenses in the financial statements were overstated compared
                           with the general ledger balances (see appendix C, table 1);
                           Trial balance, general ledger, and financial statements did not agree (see
                           appendix C, table 2); and
                           Ending balances for fiscal year 1999 and beginning balances for fiscal 2000
                           did not agree for several accounts (see appendix C, table 3).

                 During fiscal years 1999 through 2003, the Authority’s accounting records were
                 inadequate to properly account for all grant funds received. Consequently, the
                 Authority’s financial management system cannot provide reasonable assurance
                 that the Authority used $5,178,3141 on eligible activities to help the intended
                 beneficiaries.

    Recommendations

                 We recommend you

                 1A. Take administrative action to ensure the Authority complies with program
                     requirements.

                 1B. Require the Authority to return any Indian Housing Block Grant funds for
                     fiscal years 1999 through 2003 not used for authorized purposes.




1
 This amount represents Indian Housing Block Grant funds disbursed for fiscal years 1999 through 2003 as of
August 12, 2004.


                                                       6
                        SCOPE AND METHODOLOGY

Our review covered the period of July 1, 1997, through June 30, 2003 (fiscal years 1998 through
2003).

To accomplish our objectives, we reviewed the Authority’s internal controls and financial
management system records, including the Authority’s audited financial statements. To address
issues raised by an independent public accountant concerning specific journal entries and wire
transfers, we also reviewed Authority account journal entries, cash transactions over $7,000 from
July 1998 through July 2000, and wire transfers in October 1999 and March 2000. We did not
look at travel, stipends, or credit card expenditures because those areas are being reviewed by
other entities. We performed our fieldwork at the Authority’s office in Marysville, WA, from
April through July 2004. We conducted the audit in accordance with generally accepted
government auditing standards.




                                               7
                             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:

              •       The Authority’s process for reporting its financial position and maintaining
                      its accounting records.

              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 item (as reported in the finding) is a
              significant weakness:

              The Authority does not have adequate internal control processes for

              •       Overseeing accounting system changes,
              •       Entering and adjusting transactions in its accounting system, and
              •       Correcting identified errors in its accounting records.




                                                8
                                    APPENDIXES

Appendix A

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

 Recommendation           Ineligible 1/    Unsupported      Unreasonable or     Funds To Be Put
       Number                                       2/       Unnecessary 3/      to Better Use 4/
              1B                             $5,178,314


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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when 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/   Unreasonable/unnecessary 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 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,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                               9
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         10
Comment 3




Comment 4




            11
12
Comment 5


Comment 6




            13
                           OIG Evaluation of Auditee Comments

Comment 1 HUD regulations require the Authority to accurately, completely, and timely
          disclose the results of financially assisted activities. The annual audits done by an
          Independent Certified Public Accountant are meant to satisfy this requirement.
          HUD regulations also require the Authority to maintain records that adequately
          identify the source and application of funds provided for the financially assisted
          activities. The financial information in the audited financial statements is taken
          from these accounting records. As noted in the report, we found that the audited
          financial statements for 1999 and 2000 do not agree with the corresponding
          accounting records from which the information in the statements was drawn.

              In October 2002, the Northwest Office of Native American Programs found the
              Authority's financial and fiscal management systems and the related systems of
              internal control were not adequate to ensure the financial records were current,
              accurate, and complete. Also, a Certified Public Accountant hired by the Tulalip
              Tribes Board of Directors also found significant accuracy and completeness issues
              regarding the Authority's financial records for 1999 and 2000 and recommended
              that the accounting for 1999 and 2000 be corrected, completed, and audited.

              During our audit, the Authority's Chief Financial Officer was well into the process
              of reconstructing the 1999, 2000, and 2001 financial records. Finally, the
              Authority’s Housing Co-Manager said the accounting records were unauditable.


Comment 2     The Authority uses a Journal Voucher to document the adjusting entries. The
              Journal Voucher shows the Journal Entry Number, the fund (Mutual Help, Low
              Rent, or Proceeds), the account number, the account description, and the debit and
              credit amounts. The Authority's 1999 Journal Voucher shows the Authority
              posted entries totaling over $500,000 to various accounts. However, the general
              ledger shows the Authority posted those entries to different accounts than those
              listed in the Journal Voucher.

              We did not provide the Tulalip Tribes with specific examples of wrong entries we
              found because we did not have the working papers at the exit conference. Our
              intent in reporting the discrepancies was not to list specific accounting
              transactions the Authority must fix, but to explain our basis for determining the
              accounting records were unauditable.


Comment 3     The Authority commingled funds in 1999 when changing from a manual to a
              computerized accounting system. Our analysis found that during the transition,
              about $1,200,000 of Proceeds funds were combined with Low Rent funds.
              According to Authority accounting staff, Low Rent accounts are HUD funds and
              Proceeds accounts are non-HUD funds.

              We did not provide the Tulalip Tribes the details of the commingling of funds
              because we did not have the working papers at the exit conference. As stated


                                              14
            above, the intent in reporting the discrepancies was not to list specific accounting
            transactions the Authority must fix. Our intent was to show the types of
            accounting errors we found that call into question the accuracy of the financial
            records and hence the ability to properly account for Indian Housing Block Grant
            funds.


Comment 4   At the exit conference, we told the Tulalip Tribes that they need to get Northwest
            Office of Native American Programs (NwONAP) concurrence with whatever they
            decide to do. As they stated in their response, the Tulalip Tribes is taking steps to
            account for all grants received. The NwONAP will decide if the Authority has
            adequate documentation for its grant expenditures.


Comment 5   We performed limited testing of Authority bank account transactions and found
            no evidence of wrongdoing. Also as discussed in the Scope and Methodology
            section, we did not review areas reviewed by other entities.


Comment 6   See our response to Comment 1 above.




                                             15
Appendix C

                ACCOUNTING SYSTEM DISCREPANCIES


                                       TABLE 1
                         Operating Expense Differences Between
                     General Ledger and Financial Statement Balances
                         Fiscal Year 1999      Fiscal Year 2000      Fiscal Year 2001
General ledger         $      521,168       $       365,348       $        302,003
Financial statements   $    1,068,301       $     1,554,085       $      1,350,391
      Difference       $      547,133       $     1,188,737       $      1,048,388



                                         TABLE 2
                                  Differences Between the
                  Trial Balance, General Ledger, and Financial Statements

       Category             Trial Balance        General Ledger    Financial Statements
                                      Fiscal Year 1999
Assets                  $   31,360,547        $ 31,426,048         $    30,735,388
Liabilities/surplus     $   31,360,547        $ 31,426,024         $    30,735,388
Income                  $      685,535        $      685,596       $       685,596
Expenses                $    1,067,974        $      521,168       $     1,068,301
                                      Fiscal Year 2000
Assets                  $   31,560,087        $ 31,560,087         $    31,560,847
Liabilities/surplus     $   30,867,275        $ 30,867,275         $    31,560,847
Income                  $           -         $    1,659,768       $     1,909,103
Expenses                $       23,560        $      365,348       $     1,554,085
                                      Fiscal Year 2001
Assets                  $   31,231,345        $ 31,231,345         $    31,545,506
Liabilities/surplus     $   31,234,859        $ 31,234,859         $    31,545,506
Income                  $           -         $    1,333,291       $     1,114,153
Expenses                $           -         $      302,002       $     1,350,391




                                             16
Appendix C


                                        TABLE 3
           Differences Between Fiscal Year 1999 Ending Account Balances and
                      Fiscal Year 2000 Beginning Account Balances
                                                                      Fiscal Year
                                                       Fiscal Year       2000
 Fiscal Year 1999 Account       Fiscal Year 2000      1999 Ending     Beginning
            (1)                   Account (1)           Balance        Balance          Difference
LR - Land, Structures, &    Land, Structures, &
Equipment (2)               Equipment - LR            $ 5,542,851    $ 4,852,191    $    (690,660)
LR - HUD Cumulative         LR Cumulative
Contribution                Contribution 2840         $ 3,613,204    $ 4,710,313    $    1,097,109
PRO – Cumulative Tribal     PRO Cumulative Tribal
Funds                       Funds                     $ 1,222,109    $        -     $ (1,222,109)
MH – Cumulative HUD         MH Cumulative HUD
Grant                       Grant 2845                $ 11,906,202   $11,645,690    $    (260,512)
                            MH Unreserved Surplus
MH – Unreserved Surplus     2810                      $   (775,618) $ (717,118) $          (58,500)
MH Unrefundable MH          MH Unrefundable
Reserve                     Reserve                   $     58,500   $   546,204    $      487,704
LR – Unreserved Surplus     LR Unreserved Surplus     $ (3,263,588) $ (3,222,939) $        (40,649)

PRO – Operating Reserve      PRO Retained Earnings    $   695,775    $        -     $    (695,775)
(No corresponding account in
FY 1999)                     Operating Reserve        $        -     $   892,001    $      892,001

(1) The Authority changed account names in fiscal year 2000 when it changed accounting systems.
Note that LR = Low Rent, PRO = Proceeds, and MH = Mutual Help.
(2) This item includes balances from nine different accounts. For fiscal year 2000, the Authority
combined the nine fiscal year 1999 accounts into the Land Structures, & Equipment – LR account. The
sum of the amounts before conversion differed from the amount after conversion.




                                                 17