AUDIT REPORT Mount Saint Francis Health Center Federal Housing Administration Loan Number 016-43077 Woonsocket, Rhode Island 2006-BO-1004 March 3, 2006 OFFICE OF AUDIT, REGION 1 Boston, Massachusetts Issue Date March 3, 2006 Audit Report Number 2006-BO-1004 TO: Ellen R. Connolly, Director of Boston Multifamily Housing Hub, 1 AHMLA Margarita Maisonet, Acting Director, Departmental Enforcement Center, CV FROM: John A. Dvorak, Regional Inspector General for Audit, 1AGA SUBJECT: Mount Saint Francis Health Center Federal Housing Administration Loan Number 016-43077 Woonsocket, Rhode Island We audited Mount Saint Francis Health Center (project), located in Woonsocket, Rhode Island, to determine whether the owner complied with its U.S. Department of Housing and Urban Development (HUD) regulatory agreement and other applicable laws and regulations. We identified $4,402,305 in questionable cash disbursements and accrued expenses made by the project. We found that (1) under the direction of the owner and the identity-of-interest management agent, the project made questionable cash disbursements of $1,646,669 and accrued questionable expenses of $192,487 while in a non-surplus-cash position, and (2) The owner and identity-of- interest management agent billed $1,162,150 and $1,288,745, respectively, for services not provided (unsupported). In addition, the general manager of the management agent received a salary as the assistant administrator of the nursing home for a total of $112,254 in unnecessary expenses. In accordance with HUD Handbook 2000.06, REV-3, within 60 days, please provide us, for each recommendation without a management decision, a status report on (1) the corrective action taken, (2) the proposed corrective action and the date to be completed, or (3) why action is considered unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for any recommendation without a management decision. Also, please furnish us copies of any correspondence or directives issued because of the audit. Should you or your staff have any questions, please contact Michael Motulski, Assistant Regional Inspector General for Audit, at (617) 994-8380. Executive Summary We audited Mount Saint Francis Health Center (project), located in Woonsocket, Rhode Island. The primary purpose of our audit was to determine whether the project operated in accordance with the U.S. Department of Housing and Urban Development’s (HUD) regulatory agreement and other applicable laws and regulations. We identified $4,402,305 in questionable costs incurred. Audit Results The project disbursed and accrued questionable costs for non-project-related expenses, loan repayments, partnership management fees, and unnecessary services while the project was in a non-surplus-cash position. Of the $4,402,305 in questioned costs, we classified $1,024,148 as ineligible project costs, $2,743,728 as unsupported costs, and $634,429 as unnecessary project costs (see appendix A). The owner/management agent caused the conditions identified above by failing to operate the project in accordance with HUD’s regulatory agreement and other applicable laws and regulations. The owner/management agent disregarded prudent business practices and exploited weak management controls. As a result of these disbursements and accruals, the project encountered financial problems resulting in • Late mortgage payments, • Lack of funds to adequately fulfill its payroll obligations, and • Failure to pay approximately $3,741,000 in payroll taxes to the Internal Revenue Service. In addition, these actions resulted in federal tax liens on the property and generated several thousand dollars in unnecessary interest penalties and legal fees. The owner and management agent disbursed $1,646,669 in Disbursements and Payables questionable expenses to identity-of-interest and non- identity-of-interest entities while the project was in a non- surplus-cash position. The project improperly disbursed $978,675 to identity-of-interest entities and $667,994 to non-identity-of-interest entities (see finding 1). We consider these disbursements to be in violation of applicable federal statutes and HUD regulations. The 2 disbursements were not for reasonable or necessary goods and services. In addition, the project had accrued $192,487 in questionable expenses as of December 31, 2003, for services we determined to be ineligible, unsupported, or unnecessary. Our review disclosed that the owner and identity-of-interest Disbursements and Payables management agent, Sterling Health Care Management to Owner/Identity-of-Interest Company (Sterling), did not perform the services required Management Agent by their management agreements. As a result, neither the owner nor Sterling earned its annual management fees. Instead, project staff and consultants managed the project by performing the services described in the management agreements. The owner was compensated at 3 percent of net patient Owner Did Not Earn Fees revenue for services. According to the management agent profile submitted to HUD, the services provided by the owner were peculiar to the project’s status as a special- purpose and regulated facility. However, our review determined that the services identified in the management agent profile were either identical or similar to the services identified in the project’s management agreement with Sterling. Additionally, we determined that neither the owner nor Sterling provided the services required according to their management agreements. Instead, staff at the project and consultants performed these services. During our audit period, the owner billed the project $1,162,150 in unnecessary partnership management fees. We questioned $1,053,550 in payments to the owner and an additional $108,600 in accrued payables (see finding 2). Sterling was also compensated at 3 percent of net patient Management Agent Did Not revenue. It agreed to provide services (under the Earn Fees management agreement) that were performed by project employees or subcontracted out. The management agent billed the project $1,288,745 in unnecessary management fees during our audit period. We questioned $1,248,668 in payments to the management agent and an additional $40,077 in accrued payables (see finding 2). In addition, the general manager of Sterling received Disbursements to Assistant $112,254 from the project as the assistant administrator of Administrator the nursing home during our audit period. The duties of the assistant administrator duplicated the duties of the 3 administrator and business office manager and were similar to those required of the management agent (Sterling). Therefore, the assistant administrator position was not a necessary and reasonable project expense according to the regulatory agreement. These unnecessary payments place the HUD insured mortgage at risk and threaten the project’s financial viability. (See finding 2) We recommend that the director, Rhode Island Multifamily Recommendations Program Center, • Pursue the recovery of double the amount of questionable cash disbursements to identities-of-interest as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. • Obtain from the owner justification supporting the cash disbursements for unsupported costs. • Obtain from the owner adequate justification for disbursements that were deemed unnecessary to the nursing home. • Pursue the recovery of questionable distributions to non- identities-of-interest. • Take appropriate action to prevent payment of ineligible and unnecessary cash disbursements after our audit period, including the payment of questionable accrued payables. • Develop and implement procedures that ensure only eligible expenses are paid from project funds and that documentation is maintained to support the eligibility and the amount of operating funds expended. • Remove the management agent in accordance with the management certification and HUD regulations. • Pursue all applicable administrative sanctions against the owner, management agent, and identity-of-interest companies, specifically debarment. We discussed the findings in this report with the Findings and responsible auditee officials, as well as HUD program Recommendations Discussed officials during the course of the audit. We provided our draft audit report to the owner’s general partner on November 10, 2005, requesting written comments by November 28, 2005 and offered to conduct an exit conference if one was desired. On November 21, 2005, we received a letter from the owner’s legal counsel requesting a 60 day extension. We granted an extension to December 14, 2005 and received the auditee’s written response that day via FAX through the owner’s legal counsel. 4 Appropriate revisions were made to the audit report where deemed necessary. We included a complete copy of the auditee’s responses in appendix B of the report along with our evaluation. 5 Table of Contents Management Memorandum 1 Executive Summary 2 Introduction 7 Findings 1. The Owner and Identity-of-Interest Management Agent Diverted Funds from the Project 11 2. The Owner/Identity-of Interest Management Agent and Assistant Administrator Received and Accrued $2,563,149 for Services Not Provided 24 Management Controls 31 Appendixes A. Summary of Questioned Costs 33 B. Auditee Comments and OIG’s Evaluation 34 6 Introduction Mount Saint Francis Health Center (project) is a 194-unit nursing home for the elderly and disabled, located in Woonsocket, Rhode Island. It is owned and operated by Mount St. Francis Associates, a Rhode Island for-profit limited partnership. Under Section 232 of the National Housing Act, the U.S. Department of Housing and Urban Development (HUD) insured a mortgage for $6,129,900 on November 9, 1983 (Federal Housing Administration Loan Number 016-43044). Congress established the Section 232 nursing home program in 1969. HUD’s Office of Multifamily Housing administers the program. The program’s primary purpose is to insure mortgages made by private lending institutions. These mortgages are used to finance construction or renovation of nursing homes and assisted living and rest homes for the elderly. Congress established the program to • Conserve and increase the supply of nursing homes, intermediate care facilities, and board and care homes, • Provide credit enhancement through insurance of mortgages for new or substantially rehabilitated projects, and • Purchase or refinance existing Section 232-insured projects with or without repair The nursing home program is unique because in many instances, there can be several parties involved in the arrangement as follows: • HUD/insurer • The mortgagee/lender • The mortgagor/owner of the property/borrower • The operating entity/lessee/operator • The management agent/manager In addition, the owner, management agent, and operating entity may have an identity-of-interest relationship. An identity-of-interest relationship exists when companies/partnerships are owned and/or controlled through common ownership and/or management. For the project, an identity of interest relationship exists among the owner, lender, management agent and companies that provided services to the nursing home. A listing of related companies and their officers is provided as Attachment F to this report. Identity-of-interest relationships can result in a control structure that may not be sufficient to ensure identity-of-interest transactions are at “arms length” and in the best interest of the project or HUD. On November 1, 1984, the project entered into a management agreement with Health Management Services Company. Health Management Services Company was a Rhode Island- based management company not affiliated with the owner. Health Management Services Company was compensated at 3 percent net patient revenue for its services. On August 17, 1993, HUD approved a project owner’s and management agent’s certification for multifamily housing project for identity-of-interest agents, which lists the project’s general partner (owner) as the management agent. The owner was to be compensated at 3 percent of net patient revenue for 7 services required by the special-purpose nature of the facility. This partnership management fee was in addition to the management fee received by Health Management Services Company. On January 1, 1995, the owner entered into a management agreement with Sterling Health Care Management Company (Sterling), an identity-of-interest company that provided a management fee of 3 percent of net patient revenue. Sterling replaced Health Management Services Company as the management agent. Therefore, since January 1, 1995, the owner and identity-of-interest related management agent have had full control over the project’s ownership, operations, and management. On July 13, 1995, the owner refinanced the existing HUD-insured mortgage for $8,622,900 (Federal Housing Administration Loan Number 016-43077). On July 14, 1995, the owner signed a new regulatory agreement. The final endorsement, which occurred on July 10, 1996, reduced the mortgage amount to $8,616,900. After payoff of the existing mortgage, the project used the remaining proceeds to rehabilitate the project. As of December 1, 2003, the unpaid principal balance of the mortgage was $8,359,468. On June 22, 1999, the project received an operating loss (working capital) loan insured by HUD for $1,103,600 (Federal Housing Administration Loan Number 016-15011). The regulatory agreement was amended on June 22, 1999, to include the operating loss loan. Suburban Mortgage Associates, Incorporated, an identity-of-interest company, financed and serviced both the mortgage and operating loss loan. As of December 1, 2003, the unpaid principal balance of the operating loss loan was $1,071,940. The overall audit objective was to determine whether the Audit Objectives project operated according to HUD’s regulatory agreement and other applicable laws and regulations. To accomplish the audit objectives, we Audit Scope and Methodology Reviewed federal requirements, including the Code of Federal Regulations, HUD handbooks, and civil statutes. Reviewed the project’s project files maintained by the HUD Rhode Island Multifamily Program Center; specifically, the reserve fund for replacements account; mortgage instruments; management certification/management agreement; regulatory agreement; monthly accounting reports, and independent public accountants’ reports for fiscal years ending December 31, 1999 through 2002 (2003 reports had not been prepared as of March 2004). 8 Interviewed the management agent, nursing home staff, and HUD personnel to obtain procedures for administration, procurement, maintenance, cash receipts, cash disbursements accounting, and computer procedures to determine whether the project had adequate management controls in place to operate in accordance with the regulatory agreement. Tested management controls relevant to the audit through inspection, review, and analysis of documents and records and evaluated the effects of any exceptions. Reviewed the project’s books and records to determine a) the reliability of information, b) the appropriateness of disbursements, and c) the sampling methods to be used to test payroll and disbursements for the necessity and reasonableness of costs. Reviewed a statistical sample of payroll errors to determine whether payroll funds were properly used and deducted from the employee’s net pay. Tested a sample of transactions, within the audit period, from the operating account for unusual and questionable disbursements. Our sample was based on high-dollar value and risk. Our results relate only to those items reviewed. Reviewed 100 percent of disbursements and accruals related to a) identity-of-interest vendors and individuals; b) non-identity-of-interest vendors providing legal, audit, and accounting services; c) vendors for renovations; and d) activity from the reserve fund for replacements account. Reviewed the project’s last two inspections performed by HUD’s Real Estate Assessment Center on March 2, 2000, and May 15, 2003, and an inspection performed by Suburban Mortgage Associates on November 11, 2000. We also conducted a walk-through inspection of the facility on September 23, 2003, and inspected the maintenance systems with the maintenance director on December 30, 2003, to determine the physical condition of the project. 9 Reviewed the land records for the project maintained at the Office of the City Clerk (Woonsocket, Rhode Island) for liens and discharges. The audit was conducted on site between September 2003 and March 2004 and covered the period from January 1, 2000, to December 31, 2003. When appropriate, the audit was extended to include other periods. We conducted our audit in accordance with generally accepted government auditing standards. 10 Finding 1 The Owner and Identity-of-Interest Management Agent Diverted Funds from the Project The owner and management agent of the project directed the payment of $1,646,669 in questionable cash disbursements between January 2000 and December 2003. In addition, the project had accrued $192,487 in questionable expenses as of December 31, 2003. The owner and management agent diverted operating funds to identity-of-interest entities of the project and paid for non-project-related expenses; loan repayments; and ineligible, unsupported, or unnecessary services while the project was in a non-surplus-cash position. This constituted a direct violation of HUD’s regulatory agreement. The owner and management agent disregarded prudent business practices and exploited weak management controls. This misuse of funds places the HUD-insured mortgages in jeopardy and threatens the project’s financial viability. The owner and management agent’s actions contributed to (1) late mortgage payments, which resulted in late fee penalties; (2) lack of funds to make payroll obligations; and (3) failure to pay payroll taxes to the Internal Revenue Service, which resulted in approximately $3,741,000 in federal liens being placed on the property and unnecessary interest penalties and legal fees. HUD has issued regulations governing the insurance Program Regulations programs. These regulations provide for HUD to regulate and restrict the borrower by means of a regulatory agreement as long as HUD insures the mortgage. The regulatory agreement requires that owners shall not pay out any project funds except for reasonable operating expenses and necessary project repairs. The agreement further states that the owner shall not transfer any personal property of the project without prior HUD approval. The United States Code at 12 U.S.C. Sec. 1715z-4a stipulates that HUD may recover any assets or income used by any person in violation of a regulatory agreement applicable to a multifamily project insured by HUD. For purposes of this statute, the “use of assets or income” includes any use not established by records and documentation as a reasonable or necessary operating expense of the project. For purposes of a mortgage insured under Title II of the National Housing Act, the term “any person” refers to any person or entity which owns a project, including stockholders, and any beneficial owner, officer, director, or partner of an entity owning the project. The U.S. government may recover double the value of any 11 assets and income of the project that have been used in violation of the regulatory agreement, plus all related costs such as reasonable attorney and auditing fees. The owner and management agent directed disbursements Cash Disbursements and of operating funds of the project in the form of loan Accrued Payables repayments, payments for services that were ineligible, unsupported, and/or unnecessary. From January 2000 to December 2003, we identified a total of $1,646,669 in questionable cash disbursements while the project was in a non-surplus-cash position. Of the total $1,646,669 in questioned costs, we classified $931,849 as ineligible project costs, $288,445 as unsupported costs and $426,375 as unnecessary project costs. The following chart further summarizes the questionable disbursements from the project. Summary of questionable cash disbursements Questioned costs Total Payees Disbursement paid Ineligible Unsupported Unnecessary Consultants, Inc. Loan/payments $61,247 $8,000 $0 $69,247 Consultants Associates Loan/payments $244,720 $0 $0 $244,720 My Place, Inc. Emp. relations $0 $4,000 $268,200 $272,200 Construction Software, Acct. services $0 $1,200 $46,080 $47,280 Inc. Hillside Health Center Loan/payments $104,520 $0 $0 $104,520 Sterling Loan/expenses $101,141 $8,671 $0 $109,812 Suburban Mortgage, Inc. Late fees $22,326 $0 $0 $22,326 Director of purchasing Payroll $0 $0 $108,570 $108,570 Identity-of-interest subtotal $533,954 $21,871 $422,850 $978,675 Adler, Pollock & Sheehan Legal fees $78,536 $250 $0 $78,786 George Babcock Legal fees $9,249 $0 $0 $9,249 Chaine des Rotisseurs Entertainment $0 $0 $3,525 $3,525 Lefkowitz, Garfinkel, Acct. fees $0 $263,832 $0 $263,832 Champi & DeRienzo O. Ahlborg & Sons, Inc. Renovations $223,308 $0 $0 $223,308 Various vendors Various $86,802 $2,492 $0 $89,294 Non-identity-of-interest subtotals $397,895 $266,574 $3,525 $667,994 Grand total $931,849 $288,445 $426,375 $1,646,669 In addition, as of December 31, 2003, the project had a total of $192,487 classified as accrued payables for services that we determined were ineligible, unsupported, or unnecessary. 12 Questioned payables Total Payee Ineligible Unsupported Unnecessary payables George Babcock $6,775 $0 $0 $6,775 Lefkowitz, Garfinkel, Champi $0 $4,388 $0 $4,388 & DeRienzo O. Ahlborg & Sons, Inc. $85,524 $0 $0 $85,524 Non-identity-of-interest $92,299 $4,388 $0 $96,687 subtotal My Place, Inc. (identity-of- $0 $0 $95,800 $95,800 interest) Grand total $92,299 $4,388 $95,800 $192,487 The owner, management agent (Sterling) and the lender Disbursements to Identity- (Suburban Mortgage Associates, Inc.) all have identity-of- of-Interest Entities interest relationships. In addition, several other identity-of- interest companies have business connections with the project. These identity-of-interest relationships created an environment that made it possible for the owner/management agent to direct questionable cash disbursements with little risk of detection. To accomplish this end, the owner/management agent disregarded prudent business practices and exploited weak management controls. We identified $978,675 in questionable cash disbursements to identity-of-interest companies during our audit period and $95,800 in accrued payables as of December 31, 2003, as explained below. The project disbursed $69,247 to Consultants, Inc., for loan Consultants, Inc. repayments and unsupported costs while in a non-surplus- (Identity-of-Interest) cash position. Neither the project nor Consultants, Inc. notified HUD of these advances. According to the regulatory agreement, the project could not pay back advances from operations except from surplus cash unless the HUD office approved the payments. HUD did not approve repayment of these loans to Consultants, Inc., (as it was unaware of the advances). Therefore, we determined these payments totaling $61,247 to be ineligible. The project also paid $8,000 to Consultants, Inc., in unsupported costs. The project disbursed $244,720 to Consultants Associates, Consultants Associates, Inc., for loan repayments while in a non-surplus-cash Inc. (Identity-of-Interest) position. Consultants Associates, Inc., made loans to the project to cover mortgage and payroll obligations. Neither the project nor Consultants Associates, Inc., notified HUD 13 of these advances. According to the regulatory agreement, the project could not pay back advances from operations except from surplus cash unless the HUD office approved the payments. HUD did not approve repayment of these loans to Consultants Associates, Inc. Therefore, we determined these payments totaling $244,720 to be ineligible. The project disbursed $272,200 to My Place, Inc., which is My Place, Inc. (Identity- owned and operated by the owner’s daughter. The project of-Interest) paid My Place, Inc., to provide social services, educational services, administrative consulting services, promotional activities, and a comprehensive child-care program. However, our review determined that this contract was not properly procured and the services provided were not reasonable or necessary operating expenses. My Place, Inc. provided incentive programs for project employees to show appreciation for the staff. For example, it held parties for the staff and their families, conducted raffles, and provided gifts of nominal value to project employees. It did not provide child-care services but, rather only provided referrals for child-care needs and for support services on an as-needed basis. My Place, Inc., provided seminars for the staff; however, the seminars were subcontracted out to Delta Consultants. The project had a human resources department on site that could have provided these services. We determined that My Place, Inc.’s services were not necessary and reasonable operating expenses of the nursing home. Therefore, we classified $268,200 as unnecessary payments to My Place, Inc. We also identified one payment to My Place, Inc., for $4,000 based on a memo from the administrator to the accounts payable clerk. The project did not provide any further explanation or support for this disbursement. In addition, as of December 31, 2003, the project had accrued $95,800 payable to My Place, Inc., for services related to the contract for employee relations and a community outreach program, which we determined to be unnecessary expenses. Construction Software, The project disbursed $47,280 to Construction Software, Inc., Inc. (Identity-of-Interest) an identity-of-interest company. According to the monthly invoices, Construction Software, Inc., provided the following services: 14 • Accounting and general ledger review, • Review of monthly reports, • Submission of monthly reports to HUD, • Review of input for financial statements, and • Review of quarterly operations report However, the business office manager at the project stated that these tasks were performed in house. The administrator and business office manager acknowledged that Construction Software, Inc., employees never worked at or came to the nursing home at any time, although the project paid Construction Software, Inc., $960 per month. Further, according to the administrator, who approves the payments, he was not sure what services Construction Software, Inc., provided and did not know whether it performed any work at the project. The administrator believed it provided computer software to Sterling. Therefore, we consider payments of $46,080 unnecessary since the duties were performed by in-house staff and the project’s accountants. In addition, we identified a payment to Construction Software, Inc., for $1,200 based on a memo from the administrator to the accounts payable clerk. The project did not provide any further explanation or support regarding the services provided for this disbursement. We identified one disbursement of $104,520 to Hillside Hillside Health Center Health Center, an identity-of-interest nursing home. This (Identity-of-Interest) disbursement was to repay a loan Hillside Health Center made to the project for a mortgage payment. Neither the project nor Hillside Health Center notified HUD of this advance. According to the regulatory agreement, the project could not pay back advances from operations except from surplus cash unless the HUD office approved such payment. HUD did not approve repayment of these loans to Hillside Health Center (as it was unaware of the advances). Therefore, we determined this disbursement to be ineligible. We determined that the project disbursed $109,812 in Sterling (Management questionable costs to Sterling. Of this amount, the project Agent) (Identity-of- disbursed $95,000 for loans to Sterling without HUD Interest) approval and in direct violation of the regulatory agreement. Therefore, we determined these disbursements 15 to be ineligible because the project was in a non-surplus- cash position. Furthermore, the project disbursed $14,812 to Sterling for questionable miscellaneous expenses. Our review of these expenses disclosed $6,141 in ineligible expenses, which included services that were the responsibility of the management agent and should have been paid from the management fee. The remaining $8,671 was classified as unsupported. Sterling submitted invoices to the project for expenses it incurred. However, Sterling did not provide us with original invoices from the vendors for these costs as requested. (See finding 2 for the management agent fee.) The project disbursed $5,050,617 to Suburban Mortgage Suburban Mortgage Associates, Inc., an identity-of-interest company, for Associates, Inc. (Identity- mortgage payments and operating loss loan payments of-Interest) during our audit period. We determined a portion of the disbursements totaling $22,326 to be ineligible project expenses. The ineligible amounts included late charges due to mortgage and/or operating loss loan payments after the 15th of the month and bank charges for returned check fees. Additionally, we noted that the project submitted numerous letters to Suburban Mortgage Associates, Inc., with its regular mortgage payments, requesting Suburban Mortgage Associates, Inc., to hold the check until a specified time, usually between the 16th and 21st of the month. The director of purchasing was previously the general Director of Purchasing partner of the owner. Currently, he is the vice president of Salary (Identity-of- two identity-of-interest companies, Gregory Building Interest) Company and Mast Construction. The project created the director of purchasing position at the project in October 2001. The director of purchasing was hired a few days after submitting an application and used the general manager of Sterling as his reference. There was no clear distinction between the director of purchasing position and the following positions at the nursing home: • Medical supply clerk, who responsibilities included purchasing all medical supplies for the facility. The 16 medical supply clerk stated that he does not interact with the director of purchasing and has never met him. • Maintenance director, who is involved with researching and purchasing major capital equipment. The maintenance director stated that the director of purchasing helped him contact the “right” companies when a job needed to be completed. The amount of major capital equipment purchased does not appear to justify a position at the project for 20 hours per week at $47 per hour. Further, the maintenance director and administrator performed these tasks as necessary. In addition, according to paragraph 2, section 2.2 (c), of the management agreement between the owner and Sterling, the management agent was to arrange contracts for the purchase of all medical supplies and dietary, office, and other items required to operate the facility. According to the Director of Purchasing’s time cards, he worked the same hours every week at the project. However, while conducting our audit fieldwork, we never observed the director of purchasing at the project. The general manager of Sterling stated the director of purchasing worked at the management agent site. Based on our review, we concluded that the director of purchasing position was not necessary. We identified $108,570 in unnecessary payments to the director of purchasing during our audit period. (See related finding 2 for unnecessary salary to the assistant administrator.) Disbursements to Non- Our audit further identified $667,994 in questionable cash Identity-of- disbursements and $96,687 in questionable accrued InterestVendors payables to non-identity-of-interest vendors for services and other costs that were not necessary and reasonable expenses of the project. These disbursements were in direct violation of the regulatory agreement. The cash disbursements and payables were for various legal services, auditing and accounting services, renovations, unnecessary employee benefits, and late payments. The project disbursed $3,525 to Chaine des Rotisseurs, an Chaine des Rotisseurs organization which the project owner exerted control. The disbursements were related to employee entertainment for dinners in excess of $75 per person. Therefore, we 17 concluded that the $3,525 was not for reasonable operating expenses or necessary repairs of the project. The project made $88,035 in questionable cash Legal Expense disbursements to two law firms during our audit period. • Adler, Pollock, and Sheehan – the project disbursed $78,536 in ineligible expenses and $250 in unsupported expenses to Adler, Pollock, and Sheehan, the nursing home’s principal law firm. These ineligible disbursements were for ¾ Legal services totaling $44,226 related to the project’s nonpayment of payroll taxes to the Internal Revenue Service. Legal expenses related to this situation were not a reasonable and necessary expense of the project since it should have paid its payroll taxes in a timely manner. ¾ Legal services totaling $19,310 regarding a zoning appeal for the expansion of the property. The costs of expanding the facility were not an allowable expense of the project, and HUD consent should have been obtained for these expenses. HUD did not consent to any payment from the operating account. ¾ Legal services totaling $15,000 related to dismissing the owner and Consultants, Inc., as general partners of Edmund Place Associates in May 2000. This is a legal matter of the partnership for Edmund Place–a different HUD-insured project that defaulted in April 2000—not the project. ¾ Legal services totaling $250 that were not properly supported to determine whether they were necessary and reasonable project expenses. • George Babcock Esquire – the project disbursed $9,249 in ineligible expenses to George Babcock Esquire. These disbursements were for legal services related to lawsuits filed against Health Facilities Associates, the limited partner of the owner, the general partner of 18 Health Facilities, and the general partner of the owner. Therefore, these costs were not necessary and reasonable expenses of the project. As of December 31, 2003, the project had accrued $6,775 in payables to George Babcock Esquire. The invoices related to these payables were related to the lawsuits mentioned above, which we determined to be ineligible project expenses. The project disbursed a total of $263,832 to Lefkowitz, Accounting Expenses Garfinkel, Champi & DeRienzo. P.C., from January 1, 2000, to December 31, 2003. Although the costs appear to be for eligible accounting services, we classified the total costs as unsupported due to the following: • Expenses were invoiced in a manner that did not allow the cost to be reconciled to a specific contract. Instead, services provided and costs billed and paid under different contracts were combined on invoices. Further, the project made partial payments on these invoices and did not identify how to apply the payments. • The project was only able to provide us with two contracts covering only one year between the project and Lefkowitz, Garfinkel, Champi & DeRienzo for our audit period. One contract was for professional services to “audit the Partnership’s balance sheet as of December 31, 2001 and the related statements of loss...and...audit the Partnership’s compliance with specific requirements applicable to the major HUD- assisted programs for the year ended December 31, 2001.” The second contract was an assistance contract “to assist REAC [the Real Estate Assessment Center] in determining whether the electronic submission of certain information agrees with the corresponding hard copy documents included within the Consolidated Audit Guide for Audits of HUD Programs.” The administrator stated that Sterling might have the rest of the contracts. However, since the project made payments on these contracts, a copy should have been available at the project to ensure invoices were accurate according to the terms of the contract. 19 As of December 31, 2003, the project had accrued $4,388 in payables to Lefkowitz, Garfinkel, Champi & DeRienzo. The invoices for these payables are all related to accounting services, which are currently unsupported. Upon receipt of adequate supporting documentation, HUD should perform a review of the necessity and reasonableness of these disbursements and payables. O. Ahlborg and Sons, Inc., was the general contractor Renovations during the HUD-approved rehabilitation of the project in 1995. After the renovations of the project, it refinanced its HUD-insured mortgage. According to the management agent, the rehabilitation exceeded the HUD-approved mortgage amount. Therefore, the project issued a promissory note for $200,000 to O. Ahlborg and Sons, Inc., on December 20, 1995. The note was payable upon demand and not secured by the property and no payment terms were specified. The interest on the note accrued at 10 percent of the unpaid balance per year. HUD did not approve this obligation; however, the project has been making payments on this note since 1996. It should have issued a HUD-approved surplus cash note, and payments should have only been made on this note if the project was in a surplus-cash position. The project paid O. Ahlborg and Sons, Inc., $223,308 on this promissory note while the project was in a non-surplus-cash position. Therefore, we determined that these disbursements were ineligible project expenses. As of December 31, 2003, the remaining principal balance was $85,524. Our review of 90 questionable disbursements to various Various Individual non-identity-of-interest vendors disclosed $86,802 in Payments ineligible expenses. The ineligible costs consist of benefits to employees, including Christmas parties, luncheons, gifts, and flowers, and penalties and interest for late tax payments while the nursing home was in a non-surplus-cash position. We further identified $2,492 in unsupported expenses. The project was not able to support the costs to determine whether they were eligible, necessary, and reasonable expenses for nursing home operations. The above deficiencies are contrary to the regulatory Consequences of agreement, management certifications, and HUD Diverting Project Funds handbooks. Project diversions are a serious matter and a direct breach of the owner’s and management agent’s 20 fiduciary responsibilities to the project and to HUD. The owner and management agent’s actions contributed to • Late mortgage payments, which resulted in late penalties; • Lack of funds to make payroll obligations; and • Failure to pay payroll taxes to the Internal Revenue Service, which resulted in liens on the property of approximately $3,700,000 and unnecessary interest penalties and legal fees. These actions raise concerns pertaining to the owner and management agent’s ability to comply with HUD regulations. The diversion of project funds jeopardizes the project’s financial condition, and the funds must be repaid to diminish potential insurance claims against HUD. 21 Auditee Comments We received the auditee’s comments to our audit on December 15, 2005 and are located in Appendix B of this report. OIG Evaluation of Our evaluation of the auditee’s comments has not changed Auditee Comments our audit position. Our responses are located in Appendix B of this report, starting on page 129. Recommendations We recommend that the director, Rhode Island Multifamily Program Center: 1A. Pursue the recovery of double the amount of $533,954 in ineligible costs to identities-of-interest from the owner/management agent, as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. 1B. Obtain adequate documentation from the owner/management agent for the cash disbursements for unsupported costs of $21,871 costs to identities- of-interest or pursue the recovery of double this amount as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. 1C. Pursue the recovery of double the amount of $426,375 in unnecessary costs to identities-of-interest and non- identities-of-interest from the owner/management agent, as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. 1D. Pursue the recovery of $397,895 in ineligible costs to non-identities-of-interest. 1E. Obtain justification from the owner/management agent supporting the cash disbursements for unsupported costs of $266,574 to non-identities-of- interest or pursue recovery of this amount. 1F. Take appropriate action to prevent payments of ineligible and unnecessary cash disbursements after our audit period, including the payment of questionable accrued payables to identities-of-interest of $95,800. If they have been paid, pursue the 22 recovery of double this amount as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. 1G. Take appropriate action to prevent payments of ineligible accrued payables to non-identities-of- interest of $92,299. If they have been paid, pursue the recovery of this amount. 1H. Obtain adequate documentation from the owner/management agent for the $4,388 in unsupported accrued payables or pursue recovery of this amount. 1I. Remove the management agent (Sterling) in accordance with the management certification and HUD regulations. 1J. Develop and implement procedures that ensure only eligible expenses are paid from project funds and that documentation is maintained to support the eligibility and the amount of operating funds expended. In addition, we recommend that HUD’s Departmental Enforcement Center 1K. Pursue all applicable administrative sanctions against the owner, management agent, and identity-of-interest companies, specifically debarment. 23 Finding 2 The Owner/Identity-of-Interest Management Agent and Assistant Administrator Received and Accrued $2,563,149 for Services Not Provided The owner and identity-of-interest management agent (Sterling) did not perform the services required by their management agreements. As a result, neither the owner nor Sterling earned its annual management fees. Instead, project staff and consultants performed the services described in their management agreements. In addition, the general manager of the management agent received a salary from the project as the assistant administrator of the nursing home. The duties of the assistant administrator are the same as the duties of the administrator and business office manager positions and similar to those required of the owner and management agent. During our audit period: • The owner billed the project $1,162,150 in questionable partnership management fees, • The management agent billed the project $1,288,745 in questionable management fees, and • The assistant administrator received $112,254 in unnecessary salary costs. The owner and management agent disregarded prudent business practices and exploited weak management controls. These unsupported fees and unnecessary salaries place the HUD-insured mortgage at risk and threatens the project’s financial viability. The regulatory agreement states that owners shall not pay out Costs Must Be any project funds except for reasonable operating expenses Reasonable and Necessary and necessary project repairs. The United States Code at 12 U.S.C. Sec. 1715z-4a stipulates that HUD may recover any assets or income used by any person in violation a regulatory agreement applicable to a multifamily project insured by HUD. For purposes of this statute, the “use of assets or income” includes any use not established by records and documentation as a reasonable or necessary operating expense of the project. For purposes of a mortgage insured under Title II of the National Housing Act, the term “any person” refers to any person or entity which owns a project, including stockholders, and any beneficial owner, officer, director, or partner of an entity owning the project. The U.S. government may recover double the value of any assets and income of the project that have been used in 24 violation of the regulatory agreement, plus all related costs such as reasonable attorney and auditing fees. Both the regulatory agreement and the certificate executed by Maintenance of Books the borrower, at the time the mortgage is insured, contain and Accounts provisions that accounts of mortgaged property operations be kept in accordance with the requirements of the HUD secretary and in such form as to permit a speedy and effective audit. Further, the borrower or owner agrees that “The mortgaged property, equipment, buildings, apparatus, devices, books, contracts, records, documents, and other papers relating thereto shall at all times be maintained in reasonable condition for proper audit and shall be subject to examination and inspection at any reasonable time by the HUD Secretary or his duly authorized agents. Owners shall keep copies of all written contracts or other instruments which affect the mortgaged property, all or any of which may be subject to inspection and examination by the Secretary or his duly authorized agents.” On August 17, 1993, HUD approved a project owner’s and Unsupported Owner management agent’s certification for multifamily housing Partnership Management project for identity-of-interest agents, which lists the general Fees partner (owner) of the project as the management agent. The owner was compensated at 3 percent of net patient revenue for services required by the special-purpose nature of the facility. These fees were in addition to the management fee of 3 percent of net patient revenue to the management agent. According to the management agent profile submitted to HUD, the services provided by the owner were peculiar to the project’s status as a special-purpose and regulated facility. However, our review determined that the owner’s services identified in the management agent profile were either identical or similar to the services identified in the project’s management agreement with Sterling. Further, the owner subcontracted with Consultants, Inc., an identity-of-interest entity controlled by the owner, for a substantial portion of the services. The owner is the president of Consultants, Inc. Other personnel include the general manager of Sterling (also the assistant administrator) and the owner’s son. Additionally, our review determined that neither the owner nor Sterling provided the services required according to its management agreements. Instead, staff at the project and consultants performed these services. 25 The owner billed the project $1,162,150 in partnership management fees during our audit period. We identified $1,053,550 in payments to the owner. In addition, as of December 31, 2003, the project had accrued $108,600 payable to the owner for partnership management fees. We determined that the partnership management fees to the owner are unsupported due to the lack of evidence that required services were performed. On January 1, 1995, the owner entered into a management Unsupported Management agreement with Sterling (an identity-of-interest management Fees agent). As compensation for these services, the owner paid Sterling 3 percent of net patient revenue. During our audit period, the management agent billed the project $1,288,745 for management fees. The project paid $1,248,668 in management fees. It paid $1,230,977 to Sterling and $17,691 to Management Realty Services, another identity-of-interest company. According to the general manager of Sterling, while Sterling was being set up in 1995, the project paid Management Realty Services for management services. The general manager advised that the same employees worked for both Management Realty Services and Sterling. As of December 31, 2003, the project had recorded an additional $40,077 as an accrued payable to Sterling related to the management fee. Due to the lack of adequate documentation of services provided, we determined that the management fees were unsupported project costs. According to the management agreement, Sterling is responsible for keeping the nursing home running smoothly and in conformity with HUD requirements. However, our review determined that project staff and/or consultants performed these responsibilities and were paid directly by the project as explained below. The project had the following positions on site at the facility: Project Staff • Administrator, • Business office manager, • Accounts payable clerk, • Accounts receivable clerk, and • Human resources director 26 According to the nursing home administrator and the business office manager, project nursing home staff carried out the majority of the owner and management agent functions. These functions included such tasks as: • Analyzing and solving nursing home problems; • Recruiting, hiring, and supervising nursing home personnel; and • Monitoring project operations by visiting the nursing home or analyzing project performance reports The project also paid consultants to perform the work Consultants described in the management agreement. The management agreement stated under section 3, “Statements and Reports,” that the management agent shall perform these tasks or cause them to be performed. For example, Lefkowitz, Garfinkel, Champi & DeRienzo, P.C., a non-identity-of-interest company, performed accounting services; these services included preparation of Medicaid and Medicare cost reports and correspondence with HUD. Before 2003, Sterling had an individual in charge of financial reports. Later, Lefkowitz, Garfinkel, Champi & DeRienzo, P.C., took over this responsibility; however, Sterling did not pay for these services from the management fee. Instead, the project directly paid for these services. As these services described above were the responsibility of the owner and Sterling according to the management agreements, the services should have been paid with management fees rather than directly by the project. Instead, the project paid two or three times for these services including: • Salaries to the staff employed by and located at the project or fees to consultants, • Partnership management fees to the owner, and • Management fees to the management agent We concluded that the administrator, business office staff, and human resources personnel are on site daily and actively performing the tasks described under their job descriptions. We further determined that Sterling did not perform any of the services required by the management agreement and did not have the necessary staff to perform these services. As a result, we concluded that the partnership management fee and management fee were unsupported project costs. 27 The general manager of Sterling was also paid $112,254 for Unnecessary Assistant the assistant administrator position at the project during our Administrator Salary audit period. The general manager of Sterling has served as the assistant administrator at the nursing home since October 2001. According to the current administrator, the owner and management agent created the assistant administrator position to ensure a licensed individual was available to run the facility in the administrator’s absence. The assistant administrator holds a nursing home administrator’s license from the State of Rhode Island. Regardless of whether the administrator is in the office, the project pays the assistant administrator for 20 hours every week. All of the tasks assigned to the assistant administrator are also assigned to the administrator and/or the business office manager, with the exception of the following task contained in his job description: “Assume overall administrative responsibility for the facility operations while the Administrator is away from the facility. May assume direct supervision of specific departments under the guidance of the Administrator.” Additionally, the duties identified in administrator, assistant administrator, and business office manager job descriptions are also similar to those of the management agent. Therefore, not only was the project paying the management agent 3 percent of net patient revenue for services provided by staff at the project, it was also paying the general manager a salary for these services. In addition, according to the owner’s management agent profile, the general manager was also employed by Consultants, Inc., the company used by the owner to perform several of his partnership management tasks. According to the assistant administrator’s time cards, he Assistant Administrator worked the same hours every week at the project. Did Not Justify His However, during the course of conducting our audit Hours/Duties fieldwork, we never observed the assistant administrator at the project. The assistant administrator stated he worked in the capacity of assistant administrator at the management agent site, reviewed reports, worked with project staff, or worked on behalf of the project at least 20 hours per week; however, regardless of the hours worked, he received a salary of $856 every week. The assistant administrator was not able to provide a clear distinction between his duties as the management agent and assistant administrator. During 28 this time, the project was in a non-surplus-cash position, and this salary was not a necessary or reasonable operating expense. Therefore, we questioned the salary of $112,254 to the assistant administrator. Auditee Comments We received the auditee’s comments to our audit on December 15, 2005 and are located in Appendix B of this report. OIG Evaluation of Our evaluation of the auditee’s comments has not changed Auditee Comments our audit position. Our responses are located in Appendix B of this report, starting on page 129. Recommendations We recommend that the director, Rhode Island Multifamily Program Center: 2A. Obtain adequate documentation from the owner/management agent for cash disbursements of $1,053,550 in unsupported partnership management fees paid to the owner or pursue the recovery of double this amount as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. 2B. Obtain adequate documentation from the owner/management agent for unsupported accrued payables of $108,600 payable to the owner or pursue the recovery of double this amount as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. 2C. Obtain justification from the owner/management agent supporting the cash disbursements for unsupported costs paid to the owner/management agent of $1,248,668 or pursue the recovery of double this amount as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. 2D. Take appropriate action to prevent unnecessary cash disbursements after our audit period, including the payment of questionable accrued payables to the management agent of $40,077. If they have been 29 paid, pursue the recovery of double this amount as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. 2E. Pursue recovery of double the amount of $112,254 in questionable salary payments paid to the assistant administrator as stipulated in 12 U.S.C. [United States Code] Sec. 1715z-4a. 30 Management Controls In planning and performing our audit, we obtained an understanding of the management controls used by the management agent, Sterling, and those in place at the project that were relevant to our audit objectives. We reviewed the management control systems to determine our auditing procedures and not to provide assurance on management controls. Management controls consist of a plan, organization, methods, and/or procedures adopted by management to ensure that resource use is consistent with laws, regulations, and policies; that resources are safeguarded against waste, loss, and misuse; and that reliable data are obtained, maintained, and fairly disclosed in reports. We determined the following management controls were Relevant Management relevant to our audit objectives: Controls Management controls over the appropriateness of project expenditures, specifically assuring compliance with the provisions of the regulatory agreement, the management agent certification, applicable laws and regulations, and other HUD regulations. Management controls over controls over payroll. Assuring the safeguarding of project assets. We assessed the relevant controls identified above. It is a significant weakness if management controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet an organization’s objectives. Based on our review, we believe the following items are Significant Weaknesses significant weaknesses: Management controls over the appropriateness of project expenditures, specifically assuring compliance with the provisions of the regulatory agreement, the management agent certification, applicable laws and regulations, and other HUD regulations (See findings 1 and 2). Assuring the safeguarding of project assets (See finding 1). 31 We discussed the specific weaknesses in the Findings section of this report. 32 Appendix A Summary of Questioned Costs Type of questioned cost Recommendation number Ineligible 1 Unsupported 2 Unnecessary/unreasonable 3 1A $533,954 1B $21,871 1C $426,375 1D $397,895 1E $266,574 1F $95,800 1G $92,299 1H $4,388 2A $1,053,550 2B $108,600 2C $1,248,668 2D $40,077 2E $112,254 Totals $1,024,148 $2,743,728 $634,429 Total questioned $4,402,305 costs 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. 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. 3. Unnecessary/unreasonable costs are those costs not generally recognized as ordinary, prudent, relevant, and/or necessary within established practices. Unreasonable costs exceed the costs that would be incurred by a prudent person in conducting a competitive business. 33 Appendix B Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments Comment 1 34 Ref to OIG Evaluation Auditee Comments Comment 2 Comment 3 Comment 4 35 Ref to OIG Evaluation Auditee Comments Comment 5 Comment 6 Comment 7 Comment 8 36 Ref to OIG Evaluation Auditee Comments Comment 6 Comment 7 Comment 9 Comment 9 Comment 9 Comment 3 37 Ref to OIG Evaluation Auditee Comments Comment 10 Comment 11 Comment 5 Comment 10 Comment 12 38 Ref to OIG Evaluation Auditee Comments Comment 12 39 Ref to OIG Evaluation Auditee Comments Comment 13 Comment 14 Comment 15 40 Ref to OIG Evaluation Auditee Comments Comment 16 Comment 13 Comment 17 Comment 18 41 Ref to OIG Evaluation Auditee Comments 42 Ref to OIG Evaluation Auditee Comments Tab 1 43 Ref to OIG Evaluation Auditee Comments 44 Ref to OIG Evaluation Auditee Comments 45 Ref to OIG Evaluation Auditee Comments 46 Ref to OIG Evaluation Auditee Comments 47 Ref to OIG Evaluation Auditee Comments 48 Ref to OIG Evaluation Auditee Comments 49 Ref to OIG Evaluation Auditee Comments 50 Ref to OIG Evaluation Auditee Comments 51 Ref to OIG Evaluation Auditee Comments 52 Ref to OIG Evaluation Auditee Comments 53 Ref to OIG Evaluation Auditee Comments 54 Ref to OIG Evaluation Auditee Comments 55 Ref to OIG Evaluation Auditee Comments 56 Ref to OIG Evaluation Auditee Comments 57 Ref to OIG Evaluation Auditee Comments 58 Ref to OIG Evaluation Auditee Comments 59 Ref to OIG Evaluation Auditee Comments 60 Ref to OIG Evaluation Auditee Comments 61 Ref to OIG Evaluation Auditee Comments 62 Ref to OIG Evaluation Auditee Comments 63 Ref to OIG Evaluation Auditee Comments 64 Ref to OIG Evaluation Auditee Comments 65 Ref to OIG Evaluation Auditee Comments 66 Ref to OIG Evaluation Auditee Comments 67 Ref to OIG Evaluation Auditee Comments 68 Ref to OIG Evaluation Auditee Comments 69 Ref to OIG Evaluation Auditee Comments 70 Ref to OIG Evaluation Auditee Comments 71 Ref to OIG Evaluation Auditee Comments 72 Ref to OIG Evaluation Auditee Comments 73 Ref to OIG Evaluation Auditee Comments 74 Ref to OIG Evaluation Auditee Comments 75 Ref to OIG Evaluation Auditee Comments 76 Ref to OIG Evaluation Auditee Comments 77 Ref to OIG Evaluation Auditee Comments 78 Ref to OIG Evaluation Auditee Comments 79 Ref to OIG Evaluation Auditee Comments 80 Ref to OIG Evaluation Auditee Comments 81 Ref to OIG Evaluation Auditee Comments 82 Ref to OIG Evaluation Auditee Comments 83 Ref to OIG Evaluation Auditee Comments 84 Ref to OIG Evaluation Auditee Comments Tab 2 85 Ref to OIG Evaluation Auditee Comments 86 Ref to OIG Evaluation Auditee Comments 87 Ref to OIG Evaluation Auditee Comments 88 Ref to OIG Evaluation Auditee Comments 89 Ref to OIG Evaluation Auditee Comments 90 Ref to OIG Evaluation Auditee Comments 91 Ref to OIG Evaluation Auditee Comments 92 Ref to OIG Evaluation Auditee Comments 93 Ref to OIG Evaluation Auditee Comments 94 Ref to OIG Evaluation Auditee Comments Tab 3 95 Ref to OIG Evaluation Auditee Comments 96 Ref to OIG Evaluation Auditee Comments 97 Ref to OIG Evaluation Auditee Comments 98 Ref to OIG Evaluation Auditee Comments 99 Ref to OIG Evaluation Auditee Comments 100 Ref to OIG Evaluation Auditee Comments 101 Ref to OIG Evaluation Auditee Comments 102 Ref to OIG Evaluation Auditee Comments 103 Ref to OIG Evaluation Auditee Comments 104 Ref to OIG Evaluation Auditee Comments 105 Ref to OIG Evaluation Auditee Comments 106 Ref to OIG Evaluation Auditee Comments 107 Ref to OIG Evaluation Auditee Comments 108 Ref to OIG Evaluation Auditee Comments 109 Ref to OIG Evaluation Auditee Comments 110 Ref to OIG Evaluation Auditee Comments Tab 4 111 Ref to OIG Evaluation Auditee Comments 112 Ref to OIG Evaluation Auditee Comments 113 Ref to OIG Evaluation Auditee Comments 114 Ref to OIG Evaluation Auditee Comments 115 Ref to OIG Evaluation Auditee Comments 116 Ref to OIG Evaluation Auditee Comments 117 Ref to OIG Evaluation Auditee Comments Tab 5 118 Ref to OIG Evaluation Auditee Comments 119 Ref to OIG Evaluation Auditee Comments 120 Ref to OIG Evaluation Auditee Comments Tab 6 121 Ref to OIG Evaluation Auditee Comments Tab 7 122 Ref to OIG Evaluation Auditee Comments 123 Ref to OIG Evaluation Auditee Comments 124 Ref to OIG Evaluation Auditee Comments 125 Ref to OIG Evaluation Auditee Comments 126 Ref to OIG Evaluation Auditee Comments 127 Ref to OIG Evaluation Auditee Comments 128 OIG Evaluation of Auditee Comments Comment 1 HUD did not approve the $305,967 in advances or repayments while Mount Saint Francis was in a non-surplus cash position. The Mount Saint Francis regulatory agreement prohibited the owner or management agent from using project revenue to engage in any other business or activity not related and essential to the operation of the project. The agreement also stated that the owners shall not assign, transfer, dispose of, or encumber any personal property of the project. No matter what the reason for the advances, they require prior approval and, therefore, the $305,967 is an ineligible cost. In addition, submission of monthly accounting reports does not constitute approval of those items from HUD. In reviewing the detail of the $305,967 disbursed from Mt. Saint Francis Health Center, we realized we inadvertently combined the total disbursements under Consultants Inc. There were two companies operating out of 190 Broad Street in Providence, Rhode Island with similar registered names. We determined that $61,247 was paid to Consultants, Inc. The remaining $244,720 was paid to Consultants Associates, Inc., another identity of interest company. We have revised the report to reflect the two companies. Comment 2 The repayment of the Hillside Health Center, LLC’s advance of $104,520 to Mount Saint Francis was not approved by HUD. In addition, when Hillside Health Center, LLC, a related HUD insured property, made the loan, it violated its regulatory agreement with HUD since the Mount Saint Francis mortgage payment was not a reasonable and necessary cost of Hillside Health Center, LLC. Also, as stated in Comment 1 above, the Mount Saint Francis regulatory agreement prohibits such activity. In addition, submission of monthly accounting reports does not constitute approval of those items from HUD. Therefore, the $104,520 is an ineligible cost. Comment 3 $95,000 of the $109,812 in questionable payments to Mount Saint Francis represent loans made to Sterling Health Care Management. We have attached details of the remaining $14,812 (see Attachment A), of which $8,671 is unsupported. HUD approved a Mount Saint Francis request to borrow funds from the Reserve Fund for Replacement account to cover payroll expenses of the project. The $95,000 was subsequently wired by Suburban Mortgage Associates, Inc., to Mount Saint Francis’ bank account. Mount Saint Francis then transferred $45,000 of the $95,000 to Sterling Health Care Management’s bank account. Sterling Health Care Management ultimately transferred the $45,000 to Hillside Health Center, LLC (a related nursing home) for their payroll. The Mount Saint Francis regulatory agreement prohibited the owner or management agent from 129 using project revenue to engage in any other business or activity not related and essential to the operation of the project. The agreement also stated that the owners shall not assign, transfer, dispose of, or encumber any personal property of the project. Additionally, the following list of check disbursements by Mount Saint Francis to Sterling Health Care Management represents the balance of the $95,000 in questionable payments: Check No. Check Date Amount 15678 5/18/2001 $20,000 15730 6/14/2001 $25,000 15953 10/4/2001 $ 5,000 Total $50,000 No approvals were made by HUD for these loans. The fact that payments to Sterling Health Care Management were noted in monthly accounting reports to HUD is not an authorization of such loans and does not constitute HUD approval. In fact, the monthly reports filed with HUD show the disbursement description simply as “Management.” This would not necessarily raise suspicion since the same description was used every month for Sterling Health Care Management’s management fee payments. As stated above, the Mount Saint Francis regulatory agreement prohibits such a transfer. Therefore, these costs are ineligible costs. Comment 4 Mount Saint Francis was well aware of it cash flow cycle given the nature of its revenue stream, and should have planned accordingly. For the project to incur and pay $22,326 in late fees was avoidable and unreasonable. The fact that the late fees ultimately go to an investor is irrelevant. Comment 5 Payroll taxes are not an optional business expense. Mount Saint Francis used monies earmarked for the Internal Revenue Service to support their operations. Mount Saint Francis’s failure to submit payroll taxes and subsequently incur legal costs to defend possible litigation was not a reasonable operating expense of the project since they should have been paid when due and payable. Therefore, the $44,226 in legal fees to Adler, Pollock & Sheehan is an ineligible cost. Legal fees pertaining to a proposed project expansion are development costs, not project operating costs. Therefore, this cost is ineligible as an operating cost. Also according to HUD records, there was no approval consenting to the $19,310 in legal fees to pay for development costs. Mount Saint Francis paid $15,000 (Check # 14025, dated 4/18/2000) in legal fees to Adler, Pollock, & Sheehan that were invoiced to Sterling Health Care Management. The payment was made for non-project expenses to remove Antonio L. Giordano as general partner from Edmund Place, another nursing home. We determined these costs were not related to the project. 130 Also, the unsupported disbursement for $250.00 (Check # 14752, dated 7/28/2000) was made to Adler, Pollack, & Sheehan. Comment 6 The auditee’s response indicated that the $9,249 in legal fees paid to Mr. Babcock were covered under a policy of insurance. Mount Saint Francis should have sought recovery from the insurer and repaid the costs to the project. In addition, the auditee’s response did not provide supporting documentation indicating the removal of $6,775 in accruals to Mr. Babcock. Comment 7 In 1995, Mount Saint Francis executed a $200,000 promissory note, at an interest rate of 10%, with O. Ahlborg & Sons, Inc., for construction costs. Mount Saint Francis did not obtain HUD approval for this note and had it done so, the note would have required payments only from surplus cash. The rehabilitation should have been paid for out of development funds and not operating funds. Additionally, as noted above, Mount Saint Francis’s regulatory agreement stated that the owners shall not assign, transfer, dispose of, or encumber any personal property of the project or pay out any funds except from surplus cash, and except for reasonable operating expenses and necessary repairs. Therefore, payments could only have been made from surplus cash and Mount Saint Francis’s note repayments from operating funds totaling $223,308 violated the project’s regulatory agreement with HUD. Disclosure of payments to HUD in monthly accounting reports did not constitute approval of such loans. Additionally, the principal balance remaining at December 31, 2003 of $85,524 is an ineligible cost. Comment 8 The details of the $86,802 in non identity-of-interest payments are provided in Attachment B. Comment 9 We determined that payments to My Place Inc., Construction Software, and Antonio L. Giordano were made in addition to their regular monthly billing and payment cycle. Also, all of these payments were expensed to general ledger account 5340 “Other Expense”, including the one made to Consultants, Inc. These costs were paid at the direction of the Mount Saint Francis’ administrator as noted in an interoffice memo to the business office (See Attachment E). None of the payments had any supporting documentation. Therefore, our position that these costs are unsupported remains unchanged. Comment 10 The auditee’s response contained several engagement letters from Lefkowitz, Garfinkel, Champi & DeRienzo (Tab 1) to support disbursements totaling $263,832 for accounting services. The primary engagement letters were for audits of Mount Saint Francis’ financial statements for calendar years 1999, 2000, 2001, and 2002 with estimated fees totaling $112,000 plus out of pocket expenses. Based on these documents it appears that significant additional services were performed/billed for which no support was provided. Also, invoices obtained at the audit site lacked sufficient detail to allow reconciliation back to contracted amounts. Although we believe some of the costs may be eligible, until 131 detailed backup and reconciliation is provided for all expenditures we consider the $263,832 to be unsupported. Comment 11 The following list of check disbursements provide detail to unsupported payments made to various vendors: Check No. Check Date Amount 13925 2/16/2000 $ 250.00 14679 7/21/2000 $ 500.00 15082 7/28/2000 $ 241.82 20660 6/13/2003 $1,500.00 Total $2,491.82 Comment 12 The management agent’s certification for Mount Saint Francis and Antonio L. Giordano contained in the auditee’s response expired, and was superseded by a subsequent management certification for Mount Saint Francis and Sterling Health Care Management dated January 1, 1995 (see Attachment C). Section 4 of the revised agreement (Special Fees) did not provide for compensation to the owner at 3% of net patient revenue, in addition to the 3% management agent fee, to Sterling Health Care Management. Therefore, the owner’s fees were not approved by HUD as auditee’s response claims. In addition, copies of partnership management agreements and management agent profiles were not sufficient evidence to support the reasonableness and necessity of services actually provided. Although monthly accounting reports submitted to HUD indicated payments were made for the management fees, HUD’s receipt of monthly accounting reports does not constitute approval. Comment 13 The listing of My Place, Inc. on the management agent certification only identifies the business as an identity-of-interest company. However, HUD’s approval of the management agent certification did not give My Place, Inc., authority to invoice and receive payment for services that were grossly inflated. The auditee did not provide any evidence to support or justify the need for My Place Inc.’s services. The management agent’s certification, dated January 1, 1995, signed by Mount Saint Francis and Sterling Health Care Management certified both parties agreed to comply with item 3(d) of the certification (see Attachment C). Item 3(d) states that, “both parties agree to refrain from purchasing goods and services from entities that have identity-of-interest with us unless the costs are low as or lower than arms-length, open market purchases.” We could not locate any business that My Place, Inc., provided services to other than related nursing homes or affiliates owned by Antonio L. Giordano. The auditee did not provide documentation to assure that Mount Saint Francis was in fact receiving a competitive price for the services provided My Place Inc. 132 Furthermore, on March 29, 2005, Mount Saint Francis responded (see Attachment D) to HUD’s concerns with various expenses related to Mount Saint Francis’s January 2005 monthly accounting report. Mount Saint Francis’s response stated that contracts with Sterling Health Care Management Co., My Place Inc., and Construction Software were canceled; effective July 1, 2004 a full 9 months before Mount Saint Francis issued the March 29, 2005 letter. After many years, the services provided by these companies were abruptly cut off by the auditee with no adverse impact to project operations. Therefore, it is obvious that the services were unnecessary. In addition to canceling the contracts, all accrued balances owed to the identity-of-interest companies were voluntarily written off. These facts further support our position that these services were unreasonable and unnecessary. Comment 14 As stated in comment 13 above, listing Construction Software Inc. in the management agent certification only notifies HUD that they are an identity-of- interest company. It does not indicate HUD had approved all payments and those payments are reasonable and necessary. We identified $46,080 in payments to Construction Software Inc. Construction Software Inc. was paid for services that the auditee’s response described as systems specialization. However, according to various monthly accounting reports submitted to HUD by Mount Saint Francis, the services were described simply as either “management” or “management fees.” Construction Software Inc., invoice billings to the Mount Saint Francis describe the services as accounting related. The invoices list the services provided as follows: 1. Accounting and General Ledger Review 2. Review of Monthly Reports 3. Submission of Monthly Reports to HUD 4. Review of Input for Financial Statements 5. Review of Quarterly Operations Report The services provided by Construction Software Inc., overlap and/or conflict with services provided by Sterling Health Care Management, which was receiving a management fees to perform these functions. Also, Mount Saint Francis’ accountants, Lefkowitz, Garfinkel, Champi & DeRienzo, as well as Mount Saint Francis staff were paid to perform accounting services. In the management agent’s certification, both parties certified that all expenses of the project would be necessary and reasonable. During our audit, we interviewed the nursing home administrator and the management agent’s general manger and neither could provide requested, contracts or adequate explanation of the services provided by Construction Software, Inc. Therefore, our position remains that these costs were unnecessary and unreasonable. Comment 15 We concur that Chaine Des Rotisseurs was not an “IOI company.” We have revised the report to reflect this change. However, Antonio L. Giordano does 133 have an affiliation and exerts control over the Rhode Island chapter. According to the organizations web site “www.chaineus.org/rhodeisland,” Antonio L. Giordano is the Rhode Island’s chapter President. Gatherings to Chaine De Rotisseurs events were at the request of the project owner. Administrators and selected staff were strongly encouraged to attend the various events. The cost per attendee varied from $75 to as much as $125 per person, a fee the project paid. Given the fact the project was in a non-surplus cash position and had failed to pay over $3,700,000 in federal taxes attendance at these events was clearly unnecessary to reward management in what resulted in unreasonable project expenses. Comment 16 Mount Saint Francis’s response did not provide adequate documentation to justify payment of $108,580 to the Director of Purchasing at Mount Saint Francis. During our audit, we determined that Mount Saint Francis had adequate staff in place to support purchasing duties. The director of purchasing position was created in late 2001. Mount Saint Francis had been in existence since the early 1980’s. Since the project ran almost 20 years without a purchasing director we disagree that this position was even required. We have also demonstrated the most services performed by identity-of-interest companies were not properly procured. In addition, the management agent’s agreement stated that one of the services to be provided was “Arrange for contracts for the purchase of all medical supplies, dietary, office and other items required to operate the Facility.” Therefore, $108,580 paid for a director of purchasing position was clearly unnecessary and unreasonable. Lastly, the audits performed by the State of Rhode Island Medicaid program are not relevant, since we do not know the scope and objectives of their audit. Comment 17 The assistant administrator’s position should have been compensated on an as needed basis. It was unnecessary and unreasonable for the project to pay for a position that was required periodically. The general manager could not justify his hours and duties to warrant payment of 20 hours per week as assistant administrator. The general manager was already receiving compensation from Construction Software and Sterling Health Care Management. Comment 18 As detailed in our previous comments, all costs were not adequately disclosed to HUD, nor approved by HUD. Moreover, receipt of an operating loss (working capital) loan insured by HUD does not constitute approval of all prior expenses. Therefore, we continue to maintain that the costs claimed were unnecessary/unreasonable or unsupported. 134 Attachment A Comment 3 135 Attachment B Comment 8 136 Attachment C Comment 12 137 138 139 140 Attachment D Comment 13 141 Comment 13 142 Attachment E Comment 9 143 Attachment F Antonio L. Giordano Related Entities 1. Construction Software Inc. (Computer systems business) Giordano interest RI Office of Secretary of State records indicate the officers as follows; President: John J. Montecalvo, From 2000 to 2004 Secretary: Janice M. Strang, From 2001 to 2004 Treasurer: Antonio A. Giordano, From 2001 to 2004, (Son of Antonio L. Giordano) 2. Consultants Associates, Inc. (Real estate consulting firm) Giordano interest RI Office of Secretary of State records indicate the officers as follows; President: Antonio A. Giordano, From 2001 to 2003, (Son of Antonio L. Giordano) Vice President: Mary D. Gentili, From 2001 to 2003, (Daughter of Antonio L. Giordano) Secretary: Madonna D. Giordano, From 2001 to 2003, (Daughter of Antonio L. Giordano) Treasurer: Antonio A. Giordano, From 2001 to 2003, (Son of Antonio L. Giordano) President: Casimir Kolaski, From 2004 (Former Director of HUD Providence Field Office) Secretary: Janice M. Strang, From 2004 3. Consultants, Inc. (Real estate consulting firm) Giordano interest RI Office of Secretary of State records indicate the officers as follows; President: Antonio A. Giordano, From 2000 to 2004, (Son of Antonio L. Giordano) Vice President: Mary D. Gentili, From 2002 to 2004, (Daughter of Antonio L. Giordano) Secretary: Janice M. Strang, From 2000 to 2004 Treasurer: John J. Montecalvo, From 2000 to 2004 4. Gregory Building Company (Construction company) Giordano interest RI Office of Secretary of State records indicate the officers as follows; President: Antonio A. Giordano, From 2001 to 2004, (Son of Antonio L. Giordano) Vice President: Peter Castriotta, From 2001 to 2004 Secretary: Madonna D. Giordano, From 2002 to 2004, (Daughter of Antonio L. Giordano) Secretary: Mary D. Gentili, 2001, (Daughter of Antonio L. Giordano) Treasurer: Mary D. Gentili, From 2001 to 2004, (Daughter of Antonio L. Giordano) 5. Hillside Health Center Associates, LP (Nursing home owner) Giordano interest RI Office of Secretary of State records indicate the officers as follows; General Partner: Consultants Inc. (See above) 144 6. Hillside Health Center, LLC (Nursing home operator) Giordano interest RI Office of Secretary of State records indicate the officers as follows; Manager: John J. Montecalvo, From 2000 to 2003 7. Management Reality Services (Real estate management agent) Giordano interest RI Office of Secretary of State records indicate the officers as follows; President: Mary D. Gentili, From 2003 to 2004, (Daughter of Antonio L. Giordano) President: Mona Renchan, 2002 President: Juliette A. Vaccaro, 2001 Vice President: Mary D. Gentili, 2002, (Daughter of Antonio L. Giordano) Secretary: Mary D. Gentili, From 2002 to 2004, (Daughter of Antonio L. Giordano) Secretary: Janice M. Strang, From 2001 to 2004 Treasurer: Antonio A. Giordano, From 2001 to 2004, (Son of Antonio L. Giordano) 8. Mount Saint Francis Associates. (Nursing home owner/operator) Giordano interest RI Office of Secretary of State records indicate the officers as follows; General Partner: Antonio L. Giordano 9. My Place, Inc. (Employee relations firm) Giordano interest RI Office of Secretary of State records indicate the officers as follows; President: Mary D. Gentili, From 2001 to 2004, (Daughter of Antonio L. Giordano) Vice President: Madonna Giordano, From 2001 to 2004, (Daughter of Antonio L. Giordano) Secretary: Janice M. Strang, From 2001 to 2004 Treasurer: John J. Montecalvo, From 2001 to 2004 10. Simon and Windsor Interiors (Interior design firm) Giordano interest RI Office of Secretary of State records indicate the officers as follows; President: Mary D. Gentili, From 2001 to 2004, (Daughter of Antonio L. Giordano) Vice President: Antonio A. Giordano, From 2001 to 2004, (Son of Antonio L. Giordano) Secretary: Janice M. Strang, From 2001 to 2004 Treasurer: John J. Montecalvo, From 2001 to 2004 11. Sterling Health Care Management Company, LLC (Nursing home management agent) Giordano interest RI Office of Secretary of State records indicate the officers as follows; Manager: John J. Montecalvo, From 2000 to 2003 145 12. Suburban Mortgage Associates Inc. (State of Maryland public records) Giordano interest President: J. Walsh Richards, From 1978 to present Vice President: Antonio L. Giordano, From 1978 to 2003 Vice President: Edmond Richards, dates of service unavailable, Vice President: Kimberly Papuchis, dates of service unavailable Vice President: David N. Eaton, dates of service unavailable Treasurer: Ngyuet M. Pham, dates of service unavailable 146
Mount Saint Francis Heath Center Federal Housing Administration Loan Number 016-43077, Woonsocket, Rhode Island
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-03-03.
Below is a raw (and likely hideous) rendition of the original report. (PDF)