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
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)