oversight

The Housing Authority of the City of Prichard, Alabama, Did Not Ensure Section 8 Subsidy Payments Were for Eligible Units, Eligible Tenants, and Eligible Landlords

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-01-13.

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

                                                                Issue Date
                                                                         January 13, 2006
                                                                 Audit Case Number
                                                                             2006-AT-1004




TO:         R. Edmond Sprayberry, Director, Office of Public Housing, 4CPH


FROM:
            James D. McKay
            Regional Inspector General for Audit, 4AGA


SUBJECT: The Housing Authority of the City of Prichard, Alabama,
         Did Not Ensure Section 8 Subsidy Payments Were for Eligible Units,
         Eligible Tenants, and Eligible Landlords



                                   HIGHLIGHTS

 What We Audited and Why

             As part of the Department of Housing and Urban Development (HUD), Office of
             the Inspector General’s (OIG) strategic plan, we audited the Housing Authority of
             the City of Prichard’s (Authority) Section 8 Housing Choice Voucher program.
             We selected the Authority for review based on a Section 8 risk assessment we
             conducted. Our audit objectives were to determine whether the Authority made
             Section 8 subsidy payments only for units that were decent, safe, and sanitary;
             properly determined tenant program eligibility and subsidy payment amounts; and
             made Section 8 subsidy payments to eligible landlords.




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What We Found


           The Authority failed to ensure that its Section 8 housing stock met housing
           quality standards. We determined that 97 percent, or 63 of 65 units, did not meet
           housing quality standards. Of the 63 units, 45 were in material noncompliance
           with housing quality standards. In addition, the Authority paid $63,545 for
           ineligible units including $8,512 for failed units requiring housing assistance
           payment abatements and $55,033 for units that lacked annual inspections. The
           Authority also earned $6,373 in administrative fees for ineligible units. As a
           result, HUD lacked assurance that more than $14 million in Section 8 funds was
           effectively used to benefit the Authority’s Section 8 tenants.

           The Authority’s internal controls over processing Section 8 tenant files were
           inadequate. As a result, HUD should reduce the Authority’s administrative fees
           by $232,974 for fiscal years 2003 and 2004.

           The Authority violated federal and local conflict-of-interest provisions by
           allowing an Authority employee and board member to have interest in Section 8
           properties resulting in $22,482 of ineligible costs.

What We Recommend


           We recommend that the director of the Office of Public Housing terminate the
           Authority’s Section 8 Housing Choice Voucher program and transfer it to another
           Alabama housing authority to prevent $14,625,468 from being spent on units that
           are in material noncompliance with housing quality standards; require the
           Authority to immediately abate the Section 8 housing assistance payments or
           terminate tenant vouchers on the 63 units that do not meet housing quality
           standards if deficiencies are not corrected; and repay $69,918 from nonfederal
           funds for housing assistance payments it paid and administrative fees it earned for
           ineligible units.

           Also, since the Authority had inadequate internal controls over processing tenant
           files, HUD should reduce the Authority’s administrative fees by 10 percent for
           fiscal years 2003 and 2004, for a total of $232,974. Finally, the director should
           require the Authority to repay ineligible costs of $22,482 from non-federal funds
           for the conflict of interest violation.

           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.

                                            2

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Auditee’s Response


           We discussed the findings with Authority and HUD officials during the audit. We
           provided a copy of the draft report to Authority officials on December 6, 2005, for
           their comments and discussed the report with the officials at the exit conference
           on December 15, 2005. The Authority provided its written comments to our draft
           report on December 29, 2005.

           The complete text of the Authority’s response, along with our evaluation of that
           response, can be found in appendix B of this report. The Authority also provided
           exhibits with its response that are available for review upon request.




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                                            3
                            TABLE OF CONTENTS

Background and Objectives                                                             5

Results of Audit
      Finding 1: The Authority’s Section 8 Units Did Not Meet Housing Quality         6
                 Standards

      Finding 2: The Authority’s Internal Controls over Processing Section 8 Tenant   15
                 Files Were Inadequate

      Finding 3: The Authority Violated Conflict-of-Interest Provisions               17

Scope and Methodology                                                                 19

Internal Controls                                                                     21

Followup on Prior Audits                                                              23

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                  24
   B. Auditee Comments and OIG’s Evaluation                                           25
   C. Schedule of Units in Material Noncompliance with Housing Quality Standards      34




                                             4
                     BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Prichard (Authority) was chartered in 1940 pursuant to the
Alabama Housing Authorities Law. Its primary objective is to provide decent, safe, and
affordable housing for low- and moderate-income families, including the elderly, handicapped,
and disabled in compliance with its annual contributions contract (contact) with the U.S.
Department of Housing and Urban Development (HUD).

A five-member board of commissioners governs the Authority with members appointed by the
mayor of Prichard, Alabama. Each member is appointed for a five-year term. Reverend Michael
Howard is the board chairman, and Charles Pharr is the executive director.

The Authority administers 2,071 housing choice vouchers in the city of Prichard and its vicinity.
The annual housing assistance payments and administrative fees approved for fiscal year 2004
were $15 million. In addition, annual housing assistance payments and administrative fees
pending for 2005 is $14 million.

HUD’s Alabama State Office of Public Housing in Birmingham, Alabama, is responsible for
overseeing the Authority.

Our audit objectives were to determine whether the Authority made Section 8 subsidy payments
only for units that were decent, safe, and sanitary, properly determined tenant program eligibility
and subsidy payment amounts, and made Section 8 subsidy payments to eligible landlords.




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                                                 5
                                RESULTS OF AUDIT

Finding 1: The Authority’s Section 8 Units Did Not Meet Housing
           Quality Standards
The Authority’s Section 8 housing stock did not meet minimum housing quality standards. Our
inspection of 65 units identified that 63 units (97 percent) contained numerous housing quality
standards violations. Of the 63 units not meeting housing quality standards, 45 were in material
noncompliance with housing quality standards. These deficiencies have existed with the
Authority’s Section 8 housing program for more than four years. This occurred because the
Authority failed to implement the corrective actions as required by independent public
accountant audits and HUD Field Office reviews. Additionally, the Authority’s management did
not implement adequate internal controls over its inspection process and did not have adequate
written procedures for conducting inspections. As a result, the Authority paid $63,545 for
ineligible units including $8,512 for failed units requiring housing assistance payment
abatements and $55,033 for units that lacked annual inspections. The Authority also earned
$6,373 in administrative fees for ineligible units. In addition, HUD lacked assurance that more
than $14 million in Section 8 funds was effectively used to benefit the Authority’s Section 8
tenants.




 Prior Section 8 Reviews


              Prior independent public accountant audits and HUD reviews conducted in 2003
              and 2004 disclosed continuous significant weaknesses in the Authority’s Section
              8 program. Specifically, the Authority’s independent public accountant report for
              fiscal year 2003 disclosed that the Authority failed to track housing quality
              standards inspections. HUD performed a rental integrity monitoring review of the
              Section 8 program in August 2003. The Authority failed to fully implement the
              required corrective action plan. A rental integrity monitoring re-review was
              completed in August 2004. The re-review determined that the Authority still
              needed to make major improvements to its Housing Choice Voucher program.
              The Authority did not report on the corrective action plan. HUD approved a
              contract for Section 8 technical assistance in February 2005. The Birmingham
              Office of Public Housing gave the Authority until October 8, 2005, but extended
              the date, due to circumstances beyond the Authority’s control, until the end of
              December 2005 to comply with its corrective action plan.

              The Authority has been designated troubled since fiscal year 2001. The 2003
              Section 8 Management Assessment Program confirmatory review determined the
                                               6
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            Authority’s score was 31 percent, with 60 percent as a passing score. In fiscal year
            2004, the Authority’s score was 32 percent.

            In response to the independent public accountant’s audit report, the Authority
            hired a contractor in October 2003 to provide technical assistance in correcting
            tenant files. HUD approved a technical assistance contractor in February 2005 to
            assist the Authority with implementing its corrective action plan and providing
            other technical assistance needed to improve the overall performance of the
            Authority’s Housing Choice Voucher program and Section 8 Management
            Assessment program score.

            In March 2005, HUD placed the Authority on automatic review of all transactions
            and drawdown of funds from the line of credit control system partly due to long-
            standing problems with the Section 8 program.


Units Contained Numerous
Health and Safety Violations


            Our inspections showed the Authority’s Section 8 units contained numerous health
            and safety violations. We identified 618 standards violations in 63 of the 65 units
            we inspected. The following table lists the most frequently occurring violations for
            the 65 units:


                       Type of            Number of            Number         Percentage
                     deficiency           deficiencies         of units        of units
                 Electrical hazards           163                 54              83
                 Windows                       89                 40              62
                 Interior doors                56                 34              52
                 Exterior doors                29                 23              35

            Additionally, 45 of the 63 failed units were in material noncompliance with
            housing quality standards. Appendix C provides details on the 45 units.

            The most prevalent deficiencies were electrical hazards, including inoperable
            ground fault interrupter outlets and exposed wiring.




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         Air conditioning unit’s disconnect box had exposed wires and no fixed cover

         In addition, we identified hazards such as inadequately installed furnace flues and
         water heaters, unsafe stairs, and roach infestation.




         Furnace flue inadequately installed and touching wooden building components,
         causing a fire hazard




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                                          8
         Pressure relief discharge pipe missing from electric water heater




         Unstable makeshift stair on side of porch




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                                          9
            Evidence of roach infestation

            Federal regulations at 24 CFR [Code of Federal Regulations] 982.401(a)(3)
            require that all program housing must meet housing quality standards
            performance requirements, both at commencement of assisted occupancy and
            throughout the assisted tenancy.

            Authority officials stated that the inspectors either overlooked the housing
            deficiencies or were unaware of housing quality standards requirements, which
            resulted in the inspectors passing units with housing quality standards violations.

Authority Inspectors Did Not
Report Deficiencies


            Several deficiencies existed at the time of the Authority’s most recent unit
            inspection, but the inspectors did not report them. Damage from water leaks
            around the windows at one apartment complex and a house had existed for some
            time. We identified other conditions, such as missing or damaged foundation
            vents and broken door and window locks. Additionally, in 14 of 65 instances,
            inspectors identified deficiencies but improperly passed the units.




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                                              10
          Hole in foundation wall into crawl space




          Rotted and moldy window frame




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                                         11
             The sewer vent pipe is normally on the inside of the house and extends through
             the roof. This is to ensure that noxious gases vent to the outside and do not enter
             the structure. In this case, the sewer vent pipe is barely above the ground and is
             below a window. Extending the pipe upward would ensure that the sewer gases
             would dissipate and not enter the living spaces.


 The Authority Paid $63,545 for
 Ineligible Units


             The Authority paid $63,545 for ineligible units including $8,512 for 14 failed units
             requiring housing assistance payment abatements, and $55,033 for eight units that
             lacked annual inspections. The Authority also earned 6,373 in administrative fees
             for ineligible units.

             The Authority continued to pay rent on 10 units that failed inspections 3 to 27 days
             after the specified time the owners had to complete the repairs. The Authority also
             continued to pay rent on four units that failed inspections 1 to 10 months after the
             specified time the owners had to correct the deficiencies. The Authority did not
             abate the housing assistance payment as required.

             For the eight units in which the Authority did not conduct inspections, one unit had
             not been inspected since 2001, three units had not been inspected since 2002, and the
             other four units had not been inspected since 2003. We identified a number of
             housing quality standards violations at the units during our July 2005 inspection.

             Federal regulations at 24 CFR [Code of Federal Regulations] 982.404 (a) (2) state
             that if the owner fails to maintain the dwelling unit in accordance with housing
             quality standards, the public housing authority must take prompt and vigorous action

                                              12
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            to enforce the owner obligations. The public housing authority remedies for such a
            breach of the housing quality standards include termination, suspension or reduction
            of housing assistance payments, and termination of the housing assistance contract.

            Federal regulations at 24 CFR [Code of Federal Regulations] 982.404 (a) (3) state
            that the public housing authority must not make any housing assistance payments for
            a dwelling unit that fails to meet the housing quality standards unless the owner
            corrects the defect within the period specified by the authority and the authority
            verifies the correction.

            In addition, 24 CFR [Code of Federal Regulations] 982.405(a) state that the public
            housing authority must inspect the unit leased to a family before the initial term of
            the lease, at least annually during assisted occupancy, and at other times as needed to
            determine whether the unit meets housing quality standards.

            Authority officials stated that human error, an antiquated computer system (all
            work completed manually), and a breakdown in communication between the
            inspectors and leasing occupancy technicians led to the failed units not being
            abated as required. Authority officials also stated that human error and lack of
            knowledge attributed to some inspections not being performed as required.


 The Inspection Process Was
 Inadequate


            The Authority’s management did not implement an effective internal control
            process that ensured units met minimum housing quality standards and
            inspections complied with requirements.

            The Authority’s internal control process did not include policies, procedures that
            provided guidance or a quality control plan that ensured policies, and procedures
            were followed. The process should be sufficient to ensure the Authority complies
            with HUD regulations and other requirements.

            The Authority’s policies and procedures did not identify which items were
            emergency and nonemergency repairs. In addition, it did not provide timeframes
            for correcting deficiencies found in units.

            The Authority did not conduct supervisory quality control housing standards
            inspections, as required by 24 CFR [Code of Federal Regulations] 982.405(b).
            The inspectors did not identify all violations and passed units with housing quality
            violations.

            The deficiencies in the Authority’s inspection process are significant and do not
            assure HUD that its Section 8 units meet housing quality standards or that it
                                              13
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          performed all required inspections. As a result, the Authority did not properly use
          the Section 8 funds when it failed to enforce compliance with HUD’s housing
          quality standards. In accordance with 24 CFR [Code of Federal Regulations]
          982.152(d), HUD is permitted to reduce or offset any Section 8 administrative
          fees paid to the Authority if it fails to enforce HUD’s housing quality standards.
          The Authority made $63,545 in housing assistance payments for units that did not
          meet housing quality standards, and earned $6,373 in Section 8 administrative
          fees for the ineligible units. Therefore, we recommend that HUD terminate the
          Authority’s Section 8 Housing Choice Voucher program and transfer the housing
          vouchers to another Alabama housing authority so that more than $14 million in
          program funds can be used more efficiently and effectively.

Recommendations

          We recommend that the director of the Office of Public Housing

          1A.     Terminate the Authority’s Section 8 Housing Choice Voucher program, as
                  permitted by Section 15 of the Section 8 annual contribution contract and
                  transfer the Section 8 Housing Choice Voucher program to another Alabama
                  housing authority, to prevent $14,625,468 from being spent on units that
                  are in material noncompliance with housing quality standards.

          1B.     Require the Authority or the acquiring authority to immediately abate the
                  Section 8 housing assistance payments or terminate the tenant vouchers on
                  the 63 units that do not meet housing quality standards if deficiencies are
                  not corrected within the appropriate period.

          1C.     Require the Authority to repay its Section 8 program $69,918 from
                  nonfederal funds, which included $63,545 for housing assistance
                  payments made and $6,373 for administrative fees earned for ineligible
                  units.




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                                           14
Finding 2: The Authority’s Internal Controls over Processing Section 8
           Tenant Files Were Inadequate

The Authority’s internal controls over processing Section 8 tenant files were inadequate.
The Authority did not (1) perform recertifications in a timely manner or at all, (2) properly
maintain tenant file documentation, (3) verify family income, and (4) properly calculate Section
8 housing assistance payments. These problems occurred because the Authority did not have
adequate policies and procedures or adequate quality controls regarding Section 8 tenant file
processing. HUD was not assured that the Authority only paid subsidies for eligible tenants or
that the amounts paid were appropriate. As a result, HUD should reduce the Authority’s
administrative fees by $232,974.




 Controls Were Inadequate

               The Authority did not have adequate controls to ensure it processed Section 8
               tenant files in accordance with HUD requirements. Based on our review of 10
               tenant files, eight files contained the following errors:

               •      Seven had either late or no recertifications performed,
               •      Four had missing documents,
               •      One had no income verification performed, and
               •      One had housing assistance payment calculation error.

               Federal regulations at 24 CFR [Code of Federal Regulations] 982.516(a) require
               the public housing authority to conduct a reexamination of family income and
               composition at least annually and document in the tenant file third-party
               verification or why third-party verification was not available.

               Also, 24 CFR [Code of Federal Regulations] 982.158 require the public housing
               authority to maintain complete and accurate accounts and other records for the
               program in accordance with HUD requirements.

               In addition, 24 CFR [Code of Federal Regulations] 982.451 (b)(1) state that the
               amount of the monthly housing assistance payment by the public housing
               authority to the owner is determined by the authority in accordance with HUD
               regulations and other requirements.

               Finally, 24 CFR [Code of Federal Regulations] 5.240(c) require the responsible
               entity to verify the accuracy of the income information received from the family
               and change the amount of the total tenant payment as appropriate, based on such
               information.

                                               15
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          Prior independent public accountant audits and HUD reviews disclosed the same
          deficiencies. The Authority’s independent public accountant report for fiscal year
          2003 disclosed that the Authority had compliance problems with its Section 8
          participant files. Similar findings were also disclosed in the Authority’s fiscal
          year 2004 audit.

          The rental integrity monitoring review conducted by HUD in August 2003
          disclosed that the Authority did not (1) consistently obtain written third-party
          verifications; (2) conduct and completely implement all recertifications within the
          required 12-month period; (3) ensure the landlord properly notified tenants of rent
          increases; (4) accurately and completely report data to the Public and Indian
          Housing Information Center and the Multifamily Tenant Characteristics System;
          (5) properly calculate and verify tenant income, deductions, and assets; and (6)
          properly calculate utility allowances.

          The acting Section 8 program manager stated that inadequate policies, procedures,
          and controls attributed to the tenant file deficiencies. She stated the Authority is
          in the process of revising its policies and procedures.

          The Authority still needs to make improvements in its procedures and controls for
          processing Section 8 tenant files. It has not corrected its processing of Section 8
          tenant files since the last HUD rental integrity monitoring review. As a result,
          HUD lacked assurance the administrative fees were appropriately earned by the
          Authority. In accordance with 24 CFR [Code of Federal Regulations]
          982.152(d), HUD is permitted to reduce or offset any Section 8 administrative
          fees paid to the Authority if it fails perform its administrative responsibilities
          adequately under the program. Therefore, we recommend that 10 percent of the
          Authority’s administrative fee be withheld for fiscal years 2003 and 2004.

Recommendations

          We recommend the director of the Office of Public Housing

          2A. Reduce the Authority’s administrative fees by 10 percent for fiscal years
              2003 and 2004, for a total of $232,974.




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                                           16
Finding 3: The Authority Violated Conflict-of-Interest Provisions

The Authority violated federal and local conflict-of-interest provisions by allowing an Authority
employee and board member to have interest in Section 8 properties. The Authority staff did not
comply with regulations prohibiting the employee from having direct and indirect interest in the
housing assistance program contract or in any benefits or payments under the contract. As a
result, HUD was not assured that the Authority did not practice favoritism or operated within the
confines of the law in its administration of the affected Section 8 units.



 The Authority Was Doing
 Business with Related
 Individuals

               The Authority approved five units for the spouse of an Authority employee. The
               employee’s spouse received $22,482 from June 2003 to June 2005 for three
               properties on the Authority’s Section 8 program. The employee’s spouse
               inherited the three properties on the Section 8 program before the Authority
               employee was hired. The tenants were living in the properties when the
               properties were deeded to the spouse. The spouse has inherited two other
               properties on the Section 8 program; however, no housing assistance payments
               had been made on the units as of August 11, 2005.

               The employee oversees the HOPE VI program at the Authority. Under the HOPE
               VI program, Section 8 vouchers were used to relocate public housing residents
               who were displaced due to the demolition of the public housing project. The
               HOPE VI staff coordinates with the Section 8 staff in relocating the displaced
               residents. In addition, the employee serves on the HOPE VI Advisory
               Committee, working with the displaced residents and local social service
               providers to devise a community and supportive service plan geared toward
               providing opportunities for displaced residents to become self-sufficient and
               achieve homeownership. The employee is also a board member for the
               Authority’s nonprofit corporation and a former Authority board member. The
               positions held by the employee afforded him the opportunity to influence
               decisions with respect to the programs of the Authority.

               The Authority’s Code of Professional Conduct for Employees, Officers, and
               Agents specifically prohibits any employee, officer, or agent of the Authority
               from participating in the selection, award, or administration of any contract
               supported by federal funds if a real or apparent conflict of interest would be
               involved. Such a conflict would arise when the employee, officer, or agent; any
               member of his or her immediate family; his or her partner; or an organization
               which employs or is about to employ any of the parties indicated herein has a


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           financial interest in the firm selected for an award. Employees are further
           required to avoid even the appearance of impropriety or conflict of interest.

           In addition, the housing assistance payment contract prohibits a covered
           individual as defined in 24 CFR [Code of Federal Regulations] 982.161 from
           having direct or indirect interest in the contract, including the interest of an
           immediate family member to include a spouse.

           The Birmingham Office of Public Housing staff does not have any knowledge of
           waivers issued for the Authority employee.

           The executive director stated that the Authority did not view the Section 8
           properties as a conflict of interest because the HOPE VI director’s wife inherited
           the properties. Therefore, the Authority did not seek waivers, as required.


Recommendations

           We recommend that the director of the Office of Public Housing

           3A. Require the Authority, if the Authority retains its Section 8 program, to
               follow the federal and local requirements regarding conflict of interest by
               disclosing financial interests of any board member, employee, public
               official, or family member of a board member or an employee and
               requesting waivers as required.

           3B. Require the Authority to issue notices to the applicable landlord, if the
               Authority retains its Section 8 program, that the current tenants may stay
               until the next reexamination, thereafter terminate the housing assistance
               payments on all identified properties.

           3C. Instruct the Authority, if the Authority retains its Section 8 program, not to
               process rent increases for families living in units identified as conflict of
               interest or otherwise ineligible units.

           3D. Require the Authority to repay HUD $22,482, or current amount paid to
               date, from nonfederal funds for ineligible housing assistance payments, and
               make all future housing assistance payments from nonfederal funds.




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                                            18
                          SCOPE AND METHODOLOGY


To accomplish our audit objectives, we reviewed the following:

•       Applicable laws, regulations, and other HUD program requirements;

•       Minutes from the board of commissioners meetings;

•       The Authority’s policies and procedures related to the administration of its Section 8
        Housing Choice Voucher program;

•       HUD’s rental integrity monitoring review reports and files;

•       Files and documents obtained from the Authority; and

•       The Authority’s latest independent public accountant reports.

We performed a detailed review of a representative sample of 10 tenant files from a universe of
439. We examined and reviewed the tenant files to determine whether the Authority (1)
performed recertifications (annual or interim) in accordance with HUD requirements; (2)
adequately supported the eligibility requirements of each family; and (3) accurately calculated
the participant’s annual income and expenses, deductions, unit utility allowances, housing
assistance payments, and total tenant payments. We performed our tenant file testing at the
Authority.

We inspected a sample of 65 units with a HUD Office of Inspector General (OIG) inspector and
the Authority’s acting inspection supervisor. We performed the inspections July 13 through July
22, 2005.

We obtained a listing of the Authority’s current units from the housing assistance payment
register for May 2005. There were 1,744 units as of May 1, 2005. We used a statistical software
program to select a random statistical sample of the 1,744 tenants. Based on a confidence level
of 90 percent, a precision level of 10 percent, and an assumed error rate of 50 percent, the
software returned a statistical sample of 65 units with a random selection start. We used the
software to generate 65 additional sample units to be used as replacements if needed. We
performed our inspections testing at the Authority.

Projecting the results of the 63 failed units in our statistical sample to the population indicates

      The lower limit is 93.47 percent x 1,744 units = 1,630 units not meeting housing quality
      standards.



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     The point estimate is 96.92 percent x 1,744 units = 1,690 units not meeting housing quality
     standards.

     The upper limit is 99.89 percent x 1744 units = 1,742 units not meeting housing quality
     standards.

We evaluated the 63 units that did not meet housing quality standards to identify those that were
in material noncompliance with housing quality standards. Based on our judgment, we
determined 45 units were in material noncompliance with housing quality standards because they
had (1) deficiencies that had existed for an extended period, (2) deficiencies noted in a prior
inspection that were not corrected, and/or (3) deferred maintenance that consistently fails a unit.

Projecting the results of the 45 units that were in material noncompliance with housing quality
standards to the population indicates

     The lower limit is 59.99 percent x 1,744 units = 1,046 units in noncompliance with
     minimum housing quality standards.

     The point estimate is 69.23 percent x 1,744 units = 1,207 units in noncompliance with
     minimum housing quality standards.

     The upper limit is 78.47 percent x 1,744 units = 1,369 units in noncompliance with
     minimum housing quality standards.

Using the lower limit and the average annual housing assistance payments for the population
based on the Authority’s May 2005 housing assistance payment register, we estimated the
Authority spent at least $5,372,256 for 1,046 units that were in material noncompliance with
housing quality standards. The estimate is not a statistical projection and is used only for the
purpose of determining funds that can be put to better use.

We interviewed the Birmingham, Alabama, Office of Public Housing program officials and the
Authority management and staff.

Our audit generally covered the period July 1, 2003, through May 31, 2005. We expanded our
audit period as necessary to accomplish our objectives. We performed our on-site work from
March through August 2005 at the Authority’s offices in Prichard, Alabama, and the
Birmingham field office.

We performed our review in accordance with generally accepted government auditing standards.




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                                                 20
                             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:

              •   Compliance with laws and regulations - Policies, and procedures that
                  management has implemented to reasonably assure that resource use is
                  consistent with laws and regulations.

              •   Safeguarding of resources - Policies and procedures that management has
                  implemented to reasonably assure that resources are safeguarded against
                  waste, loss, and misuse.

              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 have a system in place to ensure that housing assistance
                  payments were being made only for eligible units (see finding 1),



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          •     The Authority did not have a system in place to ensure that housing
                subsidy payments were made only on behalf of eligible tenants (see
                finding 2), and

          •     The Authority did not have a system in place to ensure that housing subsidy
                payments were made only to eligible landlords (see finding 3).




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                                         22
                       FOLLOWUP ON PRIOR AUDITS



 OIG Report - Housing
 Authority of the City of
 Prichard - Audit Report No:
 2006-AT-1002

This most recent Office of Inspector General audit of the Authority’s nonprofit activities
contained findings that the Authority sale of affordable homes was inadequate, the Authority’s
public housing plan did not include proceeds from sale and estimated sale of affordable homes,
and the Authority’s control over the expenditure of low-income programs were inadequate. The
findings have not been resolved.

Yeager and Boyd, LLC, Certified Public Accountants, completed the most recent independent
auditor’s audit report for the 12-month-period ending June 30, 2004. The report contained two
findings, one of which pertains to the Authority’s Section 8 program. The report included the
following deficiencies, which are also discussed in the findings of this report:

   •   Reexaminations were not conducted within the required 12-month period.

   •   The Authority failed to obtain written third-party verification for tenants income and
       deductions or to properly document other verification methods used when third-party
       verifications were not available.

The recommendations remain open pending completion of corrective actions.




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                                        APPENDIXES

Appendix A

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


                                                                Funds to be put
                     Recommendation          Ineligible 1/      to better use 2/
                            1A                                      $14,625,468
                            1C                $ 69,918
                            2A                 232,974
                            3D                  22,482              __________
                           Total              $325,374              $14,625,468


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
        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.




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                                                 24
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         25
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Comment 2




Comment 2




Comment 2




Comment 2




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Comment 3




 Table of Contents   27
Comment 4




Comment 5




Table of Contents   28
Comment 6




Table of Contents   29
Table of Contents   30
                          OIG Evaluation of Auditee Comments



            The Authority disagreed with the conclusion of our finding. We do not agree with the
Comment 1   Authority’s comment that a 3 percent sampling was used to conclude that 97 percent of the
            housing stock does not meet housing quality standards. Due to limited audit resources and
            time, we could not inspect all of the units. We used a statistical software program to select a
            random statistical sample of the 1,744 tenants. Based on a confidence level of 90 percent, a
            precision level of 10 percent, and an assumed error rate of 50 percent, the software returned a
            statistical sample of 65 units with a random selection start. Our inspection of 65 units
            identified that 63 units (97 percent) contained numerous housing quality standards violations.

            The Authority believed that pursuant to applicable Prichard City codes, the Housing Choice
            Voucher program guidelines pertaining to non-grounding type receptacles do not apply to
            older houses. However, the Housing Choice Voucher guidelines apply to all units. City codes
            have no effect on housing quality standards inspections unless the code requirements were
            added to the Authority’s administrative plan and approved by the local HUD Office. The
            Authority’s administrative plan did not include the Prichard City codes.

            Guidelines used by the local HUD office state that non-grounding receptacles (2 prong) are
            acceptable, but replacing non-grounding with grounding (3 prong) receptacles is not unless the
            wiring is upgraded to include a ground.

            The HUD OIG inspector found that the landlords had replaced 2-prong outlets with grounding
            type outlets (3-prong) that were not ground fault circuit interrupter protected and not grounded
            (open ground). In cases where the outlets were replaced with non-grounded ground fault
            circuit interrupters, there were no labels indicating the non-grounded status. Therefore, the
            HUD OIG inspector determined the receptacles did not meet housing quality standards. In
            many cases, the outlets were replaced with grounding type outlets that were not properly
            grounded.

            The Authority requested reconsideration of our recommendation that the Authority repay HUD
Comment 2   for housing assistance payments paid in the amount of $69,918 for failed units and units that
            lacked annual inspections from nonfederal funds. The Authority identified and proposed
            corrective actions to address the deficiencies.

            We do not agree with the Authority’s alternative recommendation. We maintain that the
            Authority failed to adequately perform its duties in ensuring Section 8 subsidy payments were
            only made for units that were decent, safe, and sanitary. The Authority continued to pay rent
            for failed units and units that lacked annual inspections. The Authority failed to fulfill its
            contractual obligations of performing its inspections responsibilities correctly and adequately.
            Therefore, we are requesting the repayment of the funds.

            The Authority stated it had put processes and procedures in place in 2005 to ensure that
            housing assistance payments are being made only for eligible units. We maintain that the
            Authority did not have adequate controls over the inspection process and did not have
            adequate written procedures for conducting inspections during our review. The inspections we
            conducted in July 2005 showed the Authority still did not have adequate controls in place and
            that the deficiencies continued to exist in 2005. We found the inspectors improperly passed
            units with housing quality standards violations.


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               We also found that several deficiencies existed at the time of the Authority’s most recent unit
               inspection, but the inspectors did not report them. In addition, the Authority did not conduct
               supervisory quality control housing standards inspections, as required. The Authority stated
               that quality control inspections were conducted for only 1.6 percent of the units inspected in
               2005. The Authority is required to conduct quality control inspections for 5 percent of the
               units under the housing assistance contract.

               We also do not agree that the Authority’s new policies and procedures are adequate for us to
               reconsider our recommendation. The inspections we conducted in July 2005 showed the
               Authority still did not have adequate controls in place and that the deficiencies continued to
               exist in 2005. The Authority stated it needs to hire a more qualified housing quality standards
               inspection supervisor, provide remedial training to the inspectors requiring additional
               guidance, and outsource its housing quality inspections for one year. Based on the Authority’s
               comments, its current staff is unable to ensure that the units are properly inspected and
               appropriate actions are taken on failed units. The Authority hired and trained staff, and hired
               contractors to assist in improving its Section 8 program, but we still found problems with its
               Section 8 program. The Authority has not provided adequate assurances that its Section 8
               program would improve within a year. Based on HUD’s past experience with the Authority
               and the significant number of deficiencies we noted during our audit, there is no certainty that
               the Authority will improve the operations of its Section 8 program.

               The Authority stated staff had re-inspected each of the 65 housing units and took action to
 Comment 3     correct the standards violations. Based on our review of the Authority’s spreadsheet, all of the
               violations were not identified and corrected. We provided the Authority our inspection reports
               to use in identifying all of the violations.

               The Authority provided an alternative recommendation to reconsider our preliminary
 Comment 4     recommendation to terminate the Authority’s Section 8 Housing Choice Voucher program and
               transfer it to another Alabama housing authority. We do not agree with the Authority’s
               alternative recommendations. The Authority’s Section 8 program has been designated
               troubled since fiscal year 2001 and it has had a long history of failing to administer its Section
               8 program. The longstanding problems were disclosed in the independent public accountant
               audits, HUD Field Office reviews, and the OIG audit; therefore, we recommended the
               termination and transfer of the Authority's Section 8 program to another Alabama housing
               authority to prevent $14,625,468 from being spent on units that did not meet housing quality
               standards. The Authority had failed to implement the corrective actions required by the
               independent public accountant audits and HUD Field Office reviews and did not have
               adequate policies and procedures or adequate quality controls over its Section 8 inspection and
               tenant file processing. The Authority did not implement the initial corrective action plan in the
               timeframe allotted. HUD’s subsequent review of the plan showed minimal progress had been
               made. Items that were designated as closed by the Authority were confirmed still open in the
               August 2004 RIM re-review. HUD granted the Authority a new corrective action plan
               completion date of October 8, 2005, but extended it to December 31, 2005, giving the
               Authority additional time to comply with its corrective action plan.

               HUD has given the Authority more than one opportunity to fully implement its corrective
               action plan, but the Authority has not been diligent in ensuring that the plan was implemented.
               Although the Authority stated it now has controls and procedures in place to prevent future
               deficiencies, the Authority’s past poor performance dictates that our recommendation remains
               to provide further assurance that HUD’s interests are protected.




Table of Contents                                    32
Comment 5    The Authority requested reconsideration of the recommendation to reduce the Authority’s
             administrative fees by 10 percent. According to 24 CFR 982.152(d), HUD may reduce or
             offset any administrative fee to the Authority if it fails to perform its administrative
             responsibilities correctly or adequately under the program. We maintain that the Authority
             failed to adequately perform its administrative duties in not ensuring Section 8 tenant files
             were properly processed. Our recommendation to reduce the administrative fees by 10
             percent for fiscal years 2003 and 2004, for a total of $232,974 addresses the deficiencies
             found during our audit period.


Comment 6    The Authority concurred with recommendations 3A through 3D and plans to implement
             corrective action in January 2006.




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Appendix C

     SCHEDULE OF UNITS IN MATERIAL NONCOMPLIANCE
           WITH HOUSING QUALITY STANDARDS



                                     Deficiencies existed for
                                    extended period or at the
                                     time of the Authority’s
                       Deferred          last inspection
        Item Number   maintenance
              1           X                    X
              2                                X
              3                                X
              4           X                    X
              5                                X
              6                                X
              7           X                    X
              8           X                    X
              9                                X
             10           X                    X
             11                                X
             12                                X
             13                                X
             14                                X
             15                                X
             16                                X
             17                                X
             18           X                    X
             19                                X
             20                                X
             21                                X
             22                                X
             23                                X
             24                                X
             25           X                    X
             26                                X
             27                                X


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                                   Deficiencies existed for
                                  extended period or at the
                                   time of the Authority’s
                     Deferred          last inspection
      Item Number   maintenance
           28                                X
           29                                X
           30                                X
           31                                X
           32                                X
           33                                X
           34                                X
           35           X                    X
           36                                X
           37                                X
           38                                X
           39                                X
           40                                X
           41                                X
           42                                X
           43                                X
           44                                X
           45                                X




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