oversight

The Housing Authority of the City of Winston-Salem, North Carolina, Used More Than $4.9 Million in Operating Subsidies for Other Programs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-03-30.

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

                                                                  Issue Date:
                                                                                March 30, 2006
                                                                  Audit Report Number:
                                                                                2006-AT-1007




TO:         Michael A. Williams, Director, Office of Public Housing, 4FPH


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

SUBJECT: The Housing Authority of the City of Winston-Salem, North Carolina,
         Used More Than $4.9 Million in Operating Subsidies for Other Programs



                                    HIGHLIGHTS

 What We Audited and Why

             As part of U.S. 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 Winston-Salem (Authority) located in Winston-Salem, North
             Carolina. Our objective was to determine whether the Authority used funds
             subject to its low-income housing annual contributions contract (contract) for the
             benefit of other programs or entities without HUD approval.

 What We Found

             In violation of its contract with HUD, the Authority used more than $4.9 million
             in operating subsidies to pay expenses of other federal and nonfederal programs.
             Further, the Authority violated its contract by encumbering assets when it
             executed a guarantee of payment agreement for a $475,000 loan for an affiliated
             entity. As a result, the funds were not available for operation or modernization of
             public housing units, and assets are at risk.



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             The Authority’s board of commissioners often was not aware of transactions that
             occurred because it did not establish control procedures that ensured it was
             provided necessary financial reports and ensured management fully informed it of
             Authority activities.


What We Recommend


             Our recommendations include requiring the Authority to

             •   Repay ineligible costs of $4,976,616 to its public housing fund,
             •   Establish a procedure that requires the executive director to provide monthly
                 financial documents such as a source and application of funds statements to
                 the board prior to meetings to assist the board in providing oversight, and
             •   Obtain release of encumbered assets, thereby putting potentially as much as
                 $475,000 to better use.

             We also recommend that the director of the Office of Public Housing,
             Greensboro, North Carolina, determine whether the Authority substantially
             defaulted on its contract.

Auditee’s Response

             We discussed the findings with the Authority and HUD officials during the audit.
             We provided a copy of the draft report to Authority officials on March 3, 2006,
             for their comments and discussed the report with the officials at the exit
             conference on March 8, 2006. The Authority provided its written comments to
             our draft report on March 27, 2006. The Authority generally agreed with the
             finding.

             The complete text of the auditee’s response, along with our evaluation of the
             response, can be found in appendix B of this report.




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                            TABLE OF CONTENTS

Background and Objectives                                                 4

Results of Audit
      Finding 1: The Authority Used More Than $4.9 Million in Operating   5
                 Subsidies for Other Programs

Scope and Methodology                                                     9

Internal Controls                                                         10

Follow-up on prior Audit                                                  11

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use      12
   B. Auditee Comments and OIG’s Evaluation                               13




                                            3
                     BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Winston-Salem (Authority) was formed in 1941 pursuant
to the North Carolina Housing Authorities Law. Its primary objective is to provide decent, safe,
and sanitary housing to low-income residents in the Winston-Salem, North Carolina, area in
compliance with its low-income housing annual contributions contract (contract) with the U.S.
Department of Housing and Urban Development (HUD). The Authority administers 1,218 units
funded under the public housing program and more than 4,200 housing choice vouchers.

A nine-member board of commissioners appointed by the mayor of Winston-Salem governs the
Authority. The board increased its membership from five members to nine during our audit
period. The Authority’s executive director resigned during our audit; therefore, the board
appointed an interim executive director.

HUD’s Greensboro, North Carolina, Office of Public Housing is responsible for overseeing the
Authority.

Our audit objective was to determine whether the Authority used funds subject to its low-income
housing contract for the benefit of other programs or entities without HUD approval.




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                                               4
                                 RESULTS OF AUDIT


Finding 1: The Authority Used More Than $4.9 Million in Operating Subsidies
                for Other Programs

In violation of its contract with HUD, the Authority used more than $4.9 million in operating
subsidies to pay expenses of other federal and nonfederal programs. Further, the Authority
violated its contract by encumbering assets when it executed a guarantee of payment agreement
for a $475,000 loan for an affiliated entity. The Authority’s board of commissioners often was
not aware of transactions that occurred because it did not establish control procedures that
ensured it was provided necessary financial reports and ensured management fully informed it of
Authority activities. As a result, the Authority did not have more than $ 4.9 million available for
operating its public housing program and potentially put $475,000 in assets at risk.



 The Authority Used Operating
 Subsidies to Pay Nonprogram
 Expenses

               The Authority used operating subsidies to pay nonprogram expenses. It deposited
               funds from all its programs into its general fund and used the funds to pay all
               expenses of various federal and nonfederal programs, including those of its
               affiliated entities. As of June 30, 2005, 13 programs or entities owed the general
               fund more than $4.9 million. For example, an affiliated nonprofit entity, Forsyth
               Economic Ventures, Inc., owed almost $1.1 million but only had $89,309 on
               deposit as of June 30, 2005. In addition, the Authority’s “corporate account”
               owed more than $1.5 million.

               Part C, section 9, of the Authority’s contract with HUD allows the Authority to
               use general fund cash only for (1) the payment of the costs of development and
               operation of projects under contract with HUD, (2) the purchase of investment
               securities approved by HUD, and (3) such other purposes as may be specifically
               approved by HUD.

               Further, because the Authority did not have adequate controls over its source and
               use of funds, some of the programs/entities do not have adequate funds to repay
               the general fund. The Authority’s records show that without the use of the
               Authority’s funds, Forsyth Economic Ventures, Inc., does not have sufficient
               funds to continue operations. Further, both Oak Hill Apartments and Lansing
               Ridge experienced net losses in 2004 and 2005. The “corporate account” consists
               primarily of payroll and other expenses for both public housing operations and
               management of nonfederal apartments. As shown below, several other
               programs/entities did not have sufficient funds to repay the general fund.


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                                        Programs/entities that owed general fund
                                                               Amount due to      Funds on
                                    Program/entity              general fund       deposit
                          Lansing Ridge                        $       10,443    $           0
                          Oak Hill Apartments                          13,910            5,061
                          Oak Creek                                    68,065            2,968
                          Plaza Apartments                             68,355            3,441
                          Pinnacle Place                              106,442            1,559
                          Johnson Square                              121,628            2,577
                          Administrative fund                         145,266                0
                          Public Housing Capital Fund                 204,104                0
                          HOPE VI                                     285,835          264,935
                          Rolling Hills                               471,684           53,590
                          Section 8 Housing Choice Voucher            837,125        1,949,843
                          program
                          Forsyth Economic Ventures, Inc.           1,087,130           89,309
                          Corporate account                         1,556,629                0
                           Totals                                 $ 4,976,616     $ 2,373,2841


    The Board Did Not Establish
    Adequate Controls


                    The Authority’s board of commissioners often was not aware of transactions that
                    occurred because it did not establish control procedures that ensured it was
                    provided necessary financial reports and ensured management fully informed it of
                    Authority activities. The only financial reports that were provided to the board
                    were budgets. The interim executive director acknowledged that operating
                    subsidies were used for other programs.

    The Authority Inappropriately
    Encumbered Assets

                    Part A, section 7, of the Authority’s contract with HUD states that the Authority
                    shall not encumber any such project, or portion thereof, without prior written
                    approval from HUD. Part A, section 17, of the contract provides that upon
                    occurrence of a substantial default by the housing authority, as determined by
                    HUD in accordance with the contract, HUD shall be entitled to any or all of the
                    remedies set forth in paragraphs (E), (F), and (H) of section 17 of the contract.
                    Paragraph (F) states that nothing contained in the contract shall prohibit or limit


1
    Differences in individual amounts and total amounts are due to rounding.

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                                                           6
          HUD from the exercise of any other right or remedy existing under applicable law
          or available at equity.

          The Authority violated its contract by encumbering assets when it executed a
          guarantee of payment agreement for a $475,000 loan for an affiliated entity,
          Forsyth Economic Ventures, Inc. The repayment agreement (agreement) provides
          that in the event that the guarantor fails to pay his obligation, any of the
          guarantor’s assets of any kind, nature, or description in possession, control, or
          custody of the bank may, without notice to the guarantor, be reduced to cash or
          the like and applied by the bank in reduction of payment of the guarantor’s
          obligation. By potentially putting $475,000 at risk, the Authority may not have
          the funds available for eligible program activities if Forsyth Economic Ventures,
          Inc., defaults on the loan. As previously discussed, the Authority’s records show
          that without the use of the Authority funds, Forsyth Economic Ventures, Inc.,
          does not have sufficient funds to continue operations.


Recommendations


          We recommend that the director of the Office of Public Housing require the
          Authority to

          1A.     Repay ineligible costs of $3,649,552 representing funds owed by other
                  entities, or the current balance owed to the general fund. Repayment
                  should be from nonfederal funds and should be repaid to the low-income
                  public housing reserve account. If any of the amounts owed by the
                  corporate account represents expenses for the low-income public housing
                  program, the director should require the Authority to provide a complete
                  accounting, showing the source and use of the funds for eligible program
                  activities.

          1B.     Repay $837,125 to the low-income public housing reserve account, or the
                  current balance owed to the general fund, from its Section 8 program.

          1C.     Repay $285,835 to the low-income public housing reserve account, or the
                  current balance owed to the general fund, from its HOPE VI program.

          1D.     Repay $204,104 to the low-income public housing reserve account, or the
                  current balance owed to the general fund, from its Public Housing Capital
                  Fund program. Funds owed from any grants which are closed must be
                  provided from nonfederal funds.

          1E.     Establish a procedure that requires the executive director to provide
                  monthly financial documents such as a source and application of funds
                  statement to the board prior to meetings to assist the board in providing
                  oversight.


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           1F.      Obtain release of encumbered assets, thereby putting potentially as much
                    as $475,000 to better use.

           1G.      Submit monthly accounting reports, showing the source and use of its
                    low-income public housing operating funds, along with adequate
                    supporting documentation, for your review until such time as you are
                    assured funds are only used for program activities.

           We recommend that the director of the Office of Public Housing

           1H.      Determine whether the Authority substantially defaulted on its contract
                    with HUD and what sanctions and remedies are available to HUD as
                    prescribed by part A, section 17, of the contact.




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                        SCOPE AND METHODOLOGY

Our audit objective was to determine whether the Authority used funds subject to its low-income
housing contract for the benefit of other programs or entities without HUD approval. To
accomplish our objective, we did the following:

   •   Reviewed applicable laws, regulations, and other HUD program requirements.

   •   Interviewed HUD and Authority management and staff.

   •   Reviewed various documents, including financial statements, general ledgers, bank
       statements, minutes from board meetings, loan documents, and other records as needed.

We conducted our audit from July through December 2005 at the Authority’s offices in
Winston-Salem, North Carolina. Our audit period was from January 1, 2002, through June 30,
2005. We expanded our audit period as needed to accomplish our objectives.

We conducted the audit in accordance with generally accepted government auditing standards.




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                                               9
                             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 ensure resource use is consistent with laws and
               regulations.

           •   Safeguarding of resources – Policies and procedures that management has
               implemented to reasonably ensure 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 Weakness

       Based on our review, we believe the following item is a significant weakness:

           •   The Authority did not have an adequate system to ensure that federal funds were
               properly used and the funds were not put at risk (see finding 1).




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                       FOLLOWUP ON PRIOR AUDITS

Office of Inspector General (OIG) audit report 2006-AT-1005, issued January 18, 2006, reported
that Authority management failed to implement an effective internal control plan that ensured its
Section 8 units met minimum housing quality standards. As a result, tenants lived in units that
were not decent, safe, and sanitary, and HUD made housing assistance payments for units that
did not meet standards. The report found that 51 of 67 units inspected (76 percent) did not meet
minimum housing quality standards. Of the 51 units, 26 were in material noncompliance with
housing quality standards. Projecting the results of the statistical sample to the population
indicates at least 2,813 of the Authority’s 4,255 units did not meet minimum housing quality
standards and 1,230 units were in material noncompliance with housing quality standards. Based
on the sample, the report estimated that over the next year, HUD would pay housing assistance
payments of more than $6.4 million for units in material noncompliance with housing quality
standards. The report contained two significant recommendations that remain open, pending
obtaining management decisions and completing corrective actions.

Darnell & Thompson, P.C., Certified Public Accountants, completed the most recent
independent auditor’s audit report for the 12-month period ending September 30. 2004. The
report contained three findings, one of which pertains to the Authority’s interprogram balances.
The report included the following deficiency:

       •   Interprogram balances are not being reimbursed on a timely basis.

The report recommended that the Authority repay balances on a regular and timely basis to
eliminate large interprogram payables and receivables. As discussed in the finding of this report,
the Authority continued to accumulate large interprogram payables and receivables.




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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                      $3,649,552
                         1B                         837,125
                         1C                         285,835
                         1D                         204,104
                         1F                        _______                $475,000
                        Total                    $ 4,976,616              $475,000


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

2/       “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, reduction in outlays, avoidance of unnecessary expenditures, loans
         and guarantees not made, and other savings.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




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Comment 2




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                       OIG Evaluation of Auditee Comments



Comment 1   The Authority should ensure it does not include HOPE VI funds in its
            revolving fund.

Comment 2   The Authority should submit documentation supporting changes in the
            balances to the director of the Office of Public Housing, Greensboro, North
            Carolina for review.




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