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
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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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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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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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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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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)