AUDIT REPORT THE SANCTUARY MULTIFAMILY EQUITY SKIMMING GENEVA, OHIO The General Partner Improperly Used More Than $43,000 in Project Funds 2006-CH-1002 NOVEMBER 17, 2005 OFFICE OF AUDIT, REGION V CHICAGO, ILLINOIS Issue Date November 17, 2005 Audit Report Number 2006-CH-1002 TO: G. Alan Coupland, Director of Columbus Multifamily Housing Hub, 5EHM FROM: Heath Wolfe, Regional Inspector General for Audit, 5AGA SUBJECT: The General Partner of The Sanctuary of Geneva, Ohio Improperly Used More Than $43,000 in Project Funds HIGHLIGHTS What We Audited and Why We reviewed the books and records of The Sanctuary (project), a 39-bed assisted living facility located in Geneva, Ohio. The review was part of our efforts to combat multifamily equity skimming on the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration insurance fund. We chose the project based upon its negative surplus-cash position since 2002 and indicators of diverted project funds or assets. Our objective was to determine whether the owner/management agent used project funds in compliance with the regulatory agreement and HUD’s requirements. What We Found Eld-Terra, Incorporated (general partner), the managing general partner of The Sanctuary of Geneva Limited Partnership (owner), improperly used $38,009 in project funds from February 2003 through January 2005 when the project was in a non-surplus-cash position. The inappropriate disbursements included $37,000 to the general partner to repay owner advances to the project and $1,009 in legal services for the general partner. The general partner also lacked documentation to support that an additional $5,475 in project funds was properly used. We provided the general partner a schedule of the improper disbursements. What We Recommend We recommend that the director of HUD’s Columbus Multifamily Housing Hub require the general partner to (1) reduce the project’s management fee liability for the inappropriate payments, (2) provide documentation to support the unsupported payments or reduce the project’s management fee liability for the appropriate amount, and (3) implement procedures and controls to ensure that future repayments of owner advances are made only from project surplus cash or with prior HUD approval and project funds are used according to HUD’s requirements. For each recommendation without a management decision, please respond and provide status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or directives issued because of the audit. Auditee’s Response We provided our discussion draft audit report to the general partner and HUD’s staff during the audit. We held an exit conference with the general partner on October 26, 2005. We asked the general partner to provide comments on our discussion draft audit report by October 28, 2005. The general partner provided written comments dated October 20, 2005. The general partner disagreed with our finding and recommendations. The complete text of the written comments, along with our evaluation of those comments, can be found in appendix B of this report. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding: The General Partner Inappropriately Used or Lacked Supporting Documentation for the Use of More Than $43,000 in Project Funds 5 Scope and Methodology 7 Internal Controls 8 Appendixes A. Schedule of Questioned Costs 10 B. Auditee Comments and OIG’s Evaluation 11 3 BACKGROUND AND OBJECTIVES The Sanctuary (project) is a 39-bed assisted living facility located in Geneva, Ohio. The project is insured under section 232 of the National Housing Act and its regulatory agreement was executed on February 14, 2001. The project’s owner is The Sanctuary of Geneva Limited Partnership (owner). Eld-Terra, Incorporated (general partner) is the managing general partner while the Sanctuary Management Company (management agent) manages the project. Vincent J. Micucci is the owner of the general partner and management agent. The project has been in a non-surplus-cash position since December 2002. The review was part of our efforts to combat multifamily equity skimming on the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration insurance fund. We chose the project based upon its negative surplus-cash position since 2002 and indicators of diverted project funds or assets. Our objective was to determine whether the owner/management agent used project funds in compliance with the regulatory agreement and HUD’s requirements. 4 RESULTS OF AUDIT Finding: The General Partner Inappropriately Used or Lacked Supporting Documentation for the Use of More Than $43,000 in Project Funds The general partner improperly used $38,009 in project funds from February 2003 through January 2005 when the project was in a non-surplus-cash position. The inappropriate disbursements included $37,000 to the general partner to repay owner advances to the project and $1,009 in legal services for the general partner. The general partner also lacked documentation to support that an additional $5,475 in project funds was properly used. The inappropriate disbursements occurred because the general partner lacked effective procedures and controls over the use of project funds. As a result, project funds were not used efficiently and effectively. The General Partner Repaid $37,000 in Advances to the Project The general partner repaid itself $37,000 in project funds from March through December 2003 when the project was in a non-surplus-cash position. The general partner said the disbursements were made for the repayment of cash advances made to meet the project’s payroll needs. The general partner provided a related inter-company temporary advance to divert a crisis. The general partner did not request approval from HUD before the repayment as required by the project’s regulatory agreement. Paragraph 6(b) of the regulatory agreement requires that the owners will not, without prior written approval of the secretary of HUD, assign, transfer, dispose of, or encumber any personal property of the project, including rents, or pay out any funds except for surplus cash, except for reasonable operating expenses and necessary repairs, and make or receive and retain any distribution of assets or any income of any kind of the project except surplus cash. Page 2-16 of HUD Handbook 4370.2, REV-1, states that the repayment of owner advances when the project is in a non-surplus-cash position will subject the owner to criminal and/or civil penalties. 5 The General Partner Improperly Paid $1,009 in Nonproject Legal Expenses The general partner inappropriately disbursed $1,009 in project funds for legal services related to the allocation of interest in the project’s ownership entity. The services were not reasonable and necessary expenses of the project as required by paragraph 6(b) of the regulatory agreement. The disbursement was made in March 2004 while the project was in a non-surplus-cash position. The General Partner Lacked Documentation to Support the Use of $5,475 in Project Funds The general partner lacked documentation to support that an additional $5,475 in project funds was properly used. The unsupported disbursements included such items as petty cash, cable television service, and food service. The disbursements occurred between June 2003 and January 2005 while the project was in in a non- surplus-cash position. We provided the general partner a schedule of the unsupported disbursements. As of October 13, 2005, the project owed the general partner $118,090 in management fees. Recommendations We recommend that the director of HUD’s Columbus Multifamily Housing Hub require the general partner to 1A. Reduce the project’s management fee liability by $38,009 ($37,000 for the repayment of owner advances and $1,009 in nonproject legal expenses) for the inappropriate disbursements from project funds cited in this finding. 1B. Provide documentation to support the $5,475 in unsupported payments cited in this finding or reduce the project’s management fee liability for the appropriate amount. 1C. Implement procedures and controls to ensure that future repayments of owner advances are made only from project surplus cash or with prior HUD approval and project funds are used according to HUD’s requirements. 6 SCOPE AND METHODOLOGY We performed the review at HUD's Cleveland Multifamily Housing Program Center and its Columbus Multifamily Housing Hub, the general partner’s office, and the project from March to June 2005. To accomplish our objective, we interviewed HUD’s staff, the general partner’s employees, and a partner from the project’s independent public accountant. To determine whether the owner/management agent used project funds in compliance with the regulatory agreement and HUD’s requirements, we reviewed • HUD’s files for the project; • The project’s audited financial statements for the years ending December 31, 2003, and 2004; and • The project’s financial records such as bank statements, canceled checks, and general ledgers. We also reviewed Title 12, United States Code, sections 1715 and 1735; Title 31, United States Code, section 3801; 24 CFR [Code of Federal Regulations] Parts 24 and 232; and HUD Handbooks 2000.06, REV-3; 4350.1, REV-1; 4370.2, REV-1; and 4381.5, REV-2. The review covered the period February 1, 2003, through January 31, 2005. This period was adjusted as necessary. We performed our review in accordance with generally accepted government auditing standards. 7 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: • Effectiveness and efficiency of operations, • Reliability of financial reporting, • Compliance with applicable laws and regulations, and • Safeguarding resources. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined the following internal controls were relevant to our audit objectives: • Program operations – Policies and procedures that management has implemented to reasonably ensure that a program meets its objectives. • Validity and reliability of data – Policies and procedures that management has implemented to reasonably ensure that valid and reliable data are obtained, maintained, and fairly disclosed in reports. • Compliance with laws and regulations – Policies and procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. • Safeguarding resources – Policies and procedures that management has implemented to reasonably ensure that resources are safeguarded against waste, loss, and misuse. We assessed all of the relevant controls identified above. A significant weakness exists if internal controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet the organization’s objectives. 8 Significant Weakness Based on our review, we believe the following item is a significant weakness: • The general partner lacked effective procedures and controls over the use of project funds (see finding). 9 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS Recommendation number Ineligible 1/ Unsupported 2/ 1A $38,009 1B $5,475 Totals $38,009 $5,475 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 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 of departmental policies and procedures. 10 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 11 Ref to OIG Evaluation Auditee Comments 12 OIG Evaluation of Auditee Comments Comment 1 When HUD’s asset manager for the project provided this information to the general partner, the asset manager was unaware that the general partner provided the cash advance to the project. The asset manager was under the impression that the management agent provided the cash advance to the project. Further, HUD Handbook 4370.2, chapter 2, clearly outlines an owner's responsibilities with regard to repayment of owner advances as required by the regulatory agreement. Advances to help a project are encouraged, but repayment must be in accordance with the regulatory agreement and written guidance. 13
The General Partner of The Sanctuary of Geneva, Ohio Improperly Used More Than $43,000 in Project Funds
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-11-17.
Below is a raw (and likely hideous) rendition of the original report. (PDF)