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
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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
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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.
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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.
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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
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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
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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).
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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.
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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
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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.
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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
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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:
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• 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
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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
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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
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45
Ref to OIG Evaluation Auditee Comments
46
Ref to OIG Evaluation Auditee Comments
47
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48
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49
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50
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51
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52
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54
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55
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56
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57
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63
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64
Ref to OIG Evaluation Auditee Comments
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Ref to OIG Evaluation Auditee Comments
Tab 2
85
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93
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Tab 3
95
Ref to OIG Evaluation Auditee Comments
96
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97
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98
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Tab 4
111
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Tab 5
118
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119
Ref to OIG Evaluation Auditee Comments
120
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Tab 6
121
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Tab 7
122
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Ref to OIG Evaluation Auditee Comments
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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
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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.
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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
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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.
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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
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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.
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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
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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)
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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
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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
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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)