oversight

The Housing Authority of Lawrence County, Kentucky, Spent More Than $71,000 for Questionable Purchases

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-08-28.

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

                                                                 Issue Date:
                                                                          August 17, 2006
                                                                 Audit Report Number:
                                                                          2006-AT-1017




 TO:        Don Clem, Director, Office of Public Housing, 4IPH


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

 SUBJECT: The Housing Authority of Lawrence County, Kentucky, Spent More Than
          $71,000 for Questionable Purchases


                                   HIGHLIGHTS

  What We Audited and Why

             We audited the Housing Authority of Lawrence County, Kentucky (Authority), to
             determine whether the Authority managed its procurement and financial
             management systems in accordance with U.S. Department of Housing and Urban
             Development (HUD) requirements. We conducted the review pursuant to a
             request by the director of the Office of Public Housing, Louisville, Kentucky.

  What We Found

             The Authority spent more than $71,000 for questionable purchases and travel
             expenses. This occurred because it did not follow Office of Management and
             Budget requirements that expenses be reasonable and necessary, did not have
             sufficient management controls to ensure adequate segregation of duties or
             adequate board oversight, and did not follow its procurement policies or federal
             procurement requirements. The Authority and HUD’s Office of Public Housing,
             Louisville, Kentucky, entered into an improvement plan and memorandum of



Table of Contents
              agreement on April 18, 2006, to address deficiencies in the Authority’s
              operations, but additional actions are needed.

 What We Recommend


              We recommend that the director of the Office of Public Housing

              1. Require the Authority to provide support for $71,741 in questionable costs or
                 repay any ineligible or unsupported amounts from nonfederal funds.

              2. Revise the improvement plan and memorandum of agreement with the
                 Authority to include actions that ensure that the Authority

                 •    Adequately segregates its accounts payable processes,
                 •    Provides adequate supervisory oversight over credit card purchases and
                      travel advances to include review of supporting documents by a board
                      member before signing checks, and
                 •    Complies with its procurement policies and federal procurement
                      regulations.

              3. Reevaluate the corrective actions at a later date to determine whether the
                 actions were appropriate.

              For each recommendation without a management decision, please respond and
              provide status reports in accordance with HUD Handbook 2000.06, REV-3.
              Please furnish us copies of any correspondence or directives issued because of the
              audit.

 Auditee’s Response

              We discussed the finding with Authority and HUD officials during the audit. We
              provided a copy of the draft report to Authority and HUD officials on July 14,
              2006, for their comments and discussed the report with the officials at the exit
              conference on July 21, 2006. The Authority provided its written comments to our
              draft report on July 28, 2006. The Authority agreed with the finding and the
              recommendations.

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




Table of Contents
                                               2
                           TABLE OF CONTENTS

Background and Objectives                                                           4

Results of Audit
      Finding 1: The Authority Spent More Than $71,000 for Questionable Purchases   5


Scope and Methodology                                                               10

Internal Controls                                                                   11

Followup on Prior Audits                                                            13

Appendixes
   A. Schedule of Questioned Costs                                                  14
   B. Auditee Comments and OIG’s Evaluation                                         15




                                           3
                      BACKGROUND AND OBJECTIVES

The Housing Authority of Lawrence County, Kentucky (Authority), is organized under the laws
of the Commonwealth of Kentucky for the purpose of engaging in the development, acquisition,
leasing, and administration of a low-rent housing program. The Authority owns and operates 87
public housing units, 130 Section 8 units, and Public Housing Capital Fund program grants.

The Authority was awarded $627,849 in operating subsidies and $542,070 in Public Housing
Capital Fund program grants for 2002 through 2005. For 2006, the Authority was awarded
$195,326 in operating subsidies. A five-member board of commissioners governs the Authority.
The executive director resigned during our review, and the executive director of the Catlettsburg,
Kentucky, Housing Authority is serving as the interim executive director.

We initiated the audit at the request of the director of the Office of Public and Indian Housing,
Louisville, Kentucky.

Our objective was to determine whether the Authority managed its procurement and financial
management systems in accordance with U.S. Department of Housing and Urban Development
(HUD) requirements.




Table of Contents

                                                 4
                               RESULTS OF AUDIT


Finding 1: The Authority Spent More Than $71,000 for Questionable
           Purchases

The Authority spent $71,741 without adequately supporting that the funds were used to operate
its housing programs. It also could not support its decisions to noncompetitively award
contracts. This occurred because the Authority did not follow Office of Management and
Budget requirements that expenses be reasonable and necessary, did not have sufficient
management controls to ensure adequate segregation of duties or adequate board oversight, and
did not follow its procurement policies or federal procurement requirements. As a result, the
$71,741 was not available to support the Authority’s housing programs. The questionable
purchases contributed to the Authority’s decrease in operating funds and investment balances
from $223,295 on March 31, 2002, to $68,715 on December 31, 2005.




  Questionable Credit Card
  Purchases of More Than
  $64,000

              Office of Management and Budget Circular A-87 requires that costs be necessary
              and reasonable for proper and efficient performance and administration of federal
              awards to be allowable. Our review of more than $99,000 in credit card
              purchases determined that $64,852 was spent for questionable purchases that did
              not have supporting receipts or did not appear to be needed to operate housing
              programs. Without the supporting documentation, the Authority cannot show it
              complied with requirements. Further, many of the purchases that did have
              supporting documentation were not for program operations. This occurred
              because the Authority did not separate accounts payable duties, board members
              did not review supporting documents before signing checks, and in violation of
              the Authority’s policy, the deputy director sometimes signed checks instead of a
              board member.




Table of Contents
                                              5
            Examples of questionable and unsupported purchases included

            •   More than $2,100 for airline tickets, reservations, and fees for a Caribbean
                Cruise.

            •   Purchases of $1,155 between October 9 and 10, 2004, at stores such as
                Dillards, the GAP, Too Incorporated, and New York & Company. Receipts
                supported none of these purchases, and none appear to be for program
                operations.

            •   Purchases of more than $2,000 from March 17 to 19, 2005, at stores such as
                Kroger, Gymboree, Target, and Home Depot, including playground
                equipment for $731. The playground equipment was not located at the
                Authority’s complexes.

            •   Purchases of more than $800 from stores such as Kroger, Target, Marshalls,
                and Ronk’s Uniform Center. The credit card statement was annotated that the
                purchases were for the Authority’s Resident Management Corporation.
                Officials of the Resident Management Corporation informed us they did not
                receive these items.


 Unsupported Travel Advances


            The Authority could not provide support that $6,889 it paid as travel advances
            was spent for Authority business or was repaid to the Authority. Our review of 40
            travel advance checks from June 2002 through December 2005 found that the
            Authority did not have the required vouchers or receipts to support 32 of the
            travel advances. This occurred because the Authority’s travel policy did not
            include procedures for reviewing the executive director’s travel expenses. The
            Authority’s travel policy required travelers to submit a voucher and receipts for
            expenses over $5 to the executive director, who would then sign the voucher as
            the approving official. Any unused travel advance funds were to be repaid by
            personal check and deposited into the Authority’s bank account. However, there
            was no procedure for the independent review of the executive director’s travel
            expenses. Without the supporting vouchers and receipts, the Authority cannot
            show the $6,889 in travel advances was spent in accordance with Office of
            Management and Budget Circular A-87 requirements.




Table of Contents
                                             6
  Procurements Not in
  Accordance with
  Requirements


              Our review of seven procurements found that the Authority did not follow its
              policies and procedures or federal procurement requirements for four
              procurements totaling $41,864. Both the Authority’s procurement policy and 24
              CFR [Code of Federal Regulations] 85.36(C) require that all procurement
              transactions be conducted in a manner that provides full and open competition and
              that the Authority document its procurement decisions. The Authority’s
              procurement policy states that it shall seek full and open competition for all
              procurements and that sealed bidding is the preferred method for construction
              procurements. For contracts over $1,000 but less than $20,000 small purchase
              procedures could be used. However, at least three quotes were required.

              The Authority paid $13,228 for the renovation of its office. Since this was a
              construction project, the preferred procurement method was sealed bidding;
              however, since the procurement was less than $20,000, small purchase procedures
              could have been used, according to the Authority’s procurement policy. There
              was no evidence in the files that sealed bids were received or that there was any
              competition. The Authority paid the same contractor $9,886 for heating and
              cooling services. Again, there was no evidence of any competition. Similarly,
              the Authority paid $4,058 to a consultant without competition.

              The Authority also paid $14,692 to a former Authority employee for financial
              services that were not fully needed because the Authority’s fee accountant was
              already providing some of the same services such as bank reconciliations. Again,
              there was no evidence in the files that this procurement was made in accordance
              with the Authority’s policies or federal regulations.

              Without documented competitive procurements, the Authority cannot ensure that
              it obtained goods and services at a price that was most advantageous.


  Funds Not Available for
  Housing Programs


              The questionable purchases contributed to the Authority’s decline in operating
              funds and investment balances. On March 31, 2002, the Authority had $223,295,
              but by December 31, 2005, the balance had decreased to $68,715 and consisted
              primarily of Section 8 reserves. The Authority’s cumulative balance, along with
              those for the public housing, Section 8, and Public Housing Capital Fund
              programs, are shown in the following chart.


Table of Contents                             7
                                        Cash and investments

                  $250,000
                  $200,000
                  $150,000
                  $100,000
                   $50,000
                        $0
                                       Mar. 31, 2002 - Dec. 31, 2005

                                       Public Housing       Section 8
                                       Capital Funds        Total Authority




 Improvement Plan
 Revision Needed

            The Authority and HUD’s Office of Public and Indian Housing, Louisville,
            Kentucky, entered into an improvement plan and memorandum of agreement on
            April 18, 2006, to address deficiencies in the Authority’s operations. The agreed-
            upon actions include general actions designed to improve the Authority’s Public
            Housing Assessment System financial scores. However, additional actions are
            needed to address the deficiencies we identified.


 Recommendations


            We recommend that the director of the Office of Public and Indian Housing

            1A.     Require the Authority to provide support for $71,741 in questionable costs
                    or repay any ineligible or unsupported amounts from nonfederal funds.

            1B.     Revise the improvement plan and memorandum of agreement with the
                    Authority to include actions that ensure that the Authority

                    •   Adequately segregates its accounts payable processes,

                    •   Provides adequate supervisory oversight over credit card purchases
                        and travel advances to include review of supporting documents by a
                        board member before signing checks, and



Table of Contents
                                             8
                    •   Complies with its procurement policies and federal procurement
                        regulations.

           1C.      Reevaluate the corrective actions at a later date to determine whether the
                    actions were appropriate.




Table of Contents

                                              9
                         SCOPE AND METHODOLOGY

 Our audit objective was to determine whether the Authority managed its procurement and
 financial management systems in accordance with HUD requirements. To accomplish our
 objectives, we

    •   Obtained and reviewed applicable reference materials,
    •   Interviewed HUD program staff and reviewed HUD files,
    •   Reviewed documents provided by the independent public accountant,
    •   Interviewed Authority staff and board members,
    •   Reviewed minutes of board meetings,
    •   Reviewed the Authority’s controls related to the administration of its procurement and
        financial management procedures,
    •   Reviewed the Authority’s financial operations, and
    •   Reviewed other documents as needed to accomplish our objectives.

 Because we identified questionable purchases during our review, we reviewed all American
 Express statements and available supporting documents during our audit period to determine
 whether they appeared to be for eligible Authority purchases. Our review showed that the
 Authority did not have sufficient documentation to support that these purchases were eligible.

 Because we identified unsupported travel advances to an employee, we reviewed $7,925 of the
 $14,774 advanced to that employee between June 2002 and December 2005. The Authority did
 not have sufficient documentation to support almost $6,900 in advances.

 We reviewed the Authority’s check registers for July 1, 2003, and December 31, 2005. From
 this, we selected a nonrepresentative selection of payments to payees based on payment patterns
 and auditor experience to determine whether the procurements were in accordance with
 requirements. The review showed the Authority did not follow procurement guidance when
 contracting with four vendors.

 We limited our review of the Public Housing Capital Fund program to procurement activities.

 We conducted our audit from February through June 2006 at the Authority’s offices in Louisa,
 Kentucky. Our audit covered the period April 1, 2002, through March 31, 2006. We expanded
 our audit period as needed to accomplish our objectives.

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




Table of Contents
                                                10
                             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:

              •   Program operations – Policies and procedures that management has
                  implemented to reasonably ensure that a program meets its objectives.

              •   Controls over the validity and reliability of data – Policies and procedures that
                  management has implemented to reasonably ensure that valid and reliable data
                  are obtained, maintained, and fairly disclosed in reports.

              •   Compliance with laws and regulations – Policies and procedures that
                  management has implemented to reasonably ensure that resource use is
                  consistent with laws and regulations.

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




Table of Contents
                                               11
Significant Weaknesses

             Based on our review, we believe the following items are significant weaknesses:

             •   Policies and procedures were not implemented to ensure a separation of
                 accounts payable functions and the full review of travel vouchers.

             •   Policies and procedures were not followed to ensure that the Authority
                 complied with procurement and cost allowability requirements.

             •   Policies and procedures for check signing and board oversight were not
                 followed to ensure that the Authority safeguarded assets.




Table of Contents

                                             12
                       FOLLOWUP ON PRIOR AUDITS

This was the first Office of Inspector General audit of the Authority. At the time of our review,
the Authority’s independent public accountant had provided draft audit reports to the Authority
for its fiscal years ending March 31, 2003, 2004, and 2005. The draft reports expressed
unqualified opinions on the Authority’s financial condition but also reported findings on late
audits, internal control weaknesses, and unallowed costs.




 Table of Contents

                                                13
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS


                           Recommendation        Unsupported 1/
                                  1A                    $ 71,741
                                                        _______
                                 Total                  $ 71,741


1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit. Unsupported costs
     require a decision by HUD program officials. This decision, in addition to obtaining
     supporting documentation, might involve a legal interpretation or clarification of
     departmental policies and procedures.




Table of Contents

                                            14
 Appendix B

         AUDITEE COMMENTS AND OIG’S EVALUATION

 Ref to OIG Evaluation   Auditee Comments




 Comment 1




Table of Contents         15
Table of Contents
                    16
Table of Contents
                    17
Table of Contents
                    18
                        OIG Evaluation of Auditee Comments

Comment 1   The Authority’s agreement with the finding and recommendations, along with its
            stated corrective actions to date, indicates its willingness to make necessary
            improvements to its operations.




Table of Contents
                                           19