oversight

The Ann Arbor, Michigan Housing Commission's Administration of Its Section 8 Housing Choice Voucher Program Needs to Be Improved

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-07-21.

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

                                                                  Issue Date
                                                                           July 21, 2006
                                                                  Audit Report Number
                                                                           2006-CH-1013




TO:        Robert E. Nelson, Director of Public Housing Hub, 5FPH



FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The Ann Arbor, Michigan Housing Commission’s Administration of Its Section
           8 Housing Choice Voucher Program Needs to Be Improved

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Ann Arbor Housing Commission’s (Commission) Section 8
             Housing Choice Voucher program (program). The audit was part of the activities
             in our fiscal year 2006 annual audit plan. We selected the Commission based
             upon a risk analysis that identified it as having a high-risk program. The
             objective was to determine whether the Commission managed its program in
             accordance with the U.S. Department of Housing and Urban Development’s
             (HUD) requirements.

 What We Found

             The Commission’s program administration regarding housing unit conditions,
             housing assistance payment calculations and reexaminations, and allocation of its
             indirect costs was inadequate. The Commission did not adequately inspect
             program units because it did not effectively monitor the inspection process and
             quality control reviews were not effective in identifying violations. Of the 62
             housing units statistically selected for inspection, 45 did not meet HUD’s housing
             quality standards and 40 had 125 violations that existed at the time of the
             Commission’s previous inspections. The 40 units had between one and eight
             preexisting violations per unit. Based on our stastistical sample, we estimate that
           over the next year HUD will pay nearly $2 million in housing assistance
           payments on units with material housing quality standards violations.

           The Commission improperly calculated the housing assistance payments for 16 of
           25 tenant files selected for review and did not perform reexaminations timely.
           This resulted in more than $8,000 in housing assistance payment errors. Also, the
           Commission did not establish an adequate cost allocation plan for charging
           indirect costs to its program.

           The Commission had adequate policies and procedures for monitoring payment
           standards and utility allowances, and it initiated corrective actions by making
           changes to its quality control inspection process and quality control procedures
           over tenant file reviews.

What We Recommend

           We recommend that the director of HUD’s Detroit Office of Public Housing
           require the Commission to reimburse its program from nonfederal funds for the
           improper use of more than $58,000 in program funds, ensure that program
           housing units inspected during this audit are repaired to meet HUD’s housing
           quality standards, and implement procedures and controls to address the findings
           cited in this audit report. These procedures and controls should help ensure that
           nearly $2 million in program funds are spent on housing units that meet 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 audits report to the Commission’s executive
           director, its board chairman, and HUD’s staff during the audit. We held an exit
           conference with the Commission’s executive director on June 20, 2006.

           We asked the Commission’s executive director to provide comments on our
           discussion draft audit report by July 19, 2006. The Commission’s executive
           director provided written comments dated July 18, 2006, and agreed to implement
           corrective actions to address our three findings. The complete text of the written
           comments can be found in appendix B of this report.




                                            2
                              TABLE OF CONTENTS

Background and Objective                                                             4

Results of Audit

        Finding 1: Housing Quality Standards Were Not Adequately Enforced            5

        Finding 2: Controls over Housing Assistance Payments Were Inadequate and
                   Tenant Reexaminations Were Not Timely                             12

        Finding 3: The Commission Lacked a Cost Allocation Plan for Indirect Costs   14

Scope and Methodology                                                                16

Internal Controls                                                                    18

Appendixes

   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use               20
   B.   Auditee Comments                                                             21
   C.   Criteria                                                                     27
   D.   Units with Preexisting Violations                                            30
   E.   Tenant File Exceptions                                                       32




                                              3
                      BACKGROUND AND OBJECTIVE

The Ann Arbor Housing Commission (Commission) was established by the City of Ann Arbor,
Michigan (City) in September 1965 under the laws of the State of Michigan, pursuant to the U.S.
Housing Act of 1937, as amended. A five-member board of commissioners governs the
Commission. The City’s mayor appoints the commissioners to five-year terms, with approval by
the city council. The Commission’s main administrative office is located at 727 Miller Avenue,
Ann Arbor, Michigan.

As of May 2006, the Commission administers various programs under the U.S. Department of
Housing and Urban Development (HUD), which include the Section 8 Housing Choice Voucher,
low-rent housing, Public Housing Capital Fund, Section 8 Project-Based Voucher, and Shelter
Plus Care programs. The Commission’s Section 8 Housing Choice Voucher program (program)
provides housing assistance to its tenants in the counties of Washtenaw, Monroe, and western
Wayne. The Commission provides assistance to low and moderate-income individuals seeking
decent, safe, and sanitary housing by subsidizing rents with owners of existing private housing.
As of February 2, 2006, the Commission had 1,166 units under contract with annual housing
assistance payments totaling more than $8.6 million in program funds for calendar year 2006.

Our objective was to determine whether the Commission managed its program in accordance
with HUD’s requirements.




                                               4
                                RESULTS OF AUDIT

Finding 1: Housing Quality Standards Were Not Adequately Enforced
The Commission’s program units did not meet HUD’s housing quality standards due to the poor
condition of most units inspected. Of the 62 program units inspected, 45 did not meet minimum
housing quality standards, and 40 had violations that existed before the Commission’s last
inspections. The violations existed because the Commission did not perform effective quality
control inspections of its contract inspector to ensure that units met HUD’s requirements. As a
result, $51,081 in program funds was not used efficiently and effectively. Also, program tenants
lived in units that were not decent, safe, and sanitary. Based on our statistical sample, we
estimate that over the next year HUD will pay nearly $2 million in housing assistance payments
on units with material housing quality standards violations.



 HUD’s Housing Quality
 Standards Not Met

              From the 686 program units that were inspected by the Commission between
              August 2005 and January 2006, we statistically selected 62 units for inspection by
              using the Defense Contract Audit Agency’s EZ-Quant Statistical Sampling
              software. The 62 units were inspected to determine whether the Commission
              ensured that its program units met HUD’s housing quality standards. Our
              appraiser inspected the 62 units between February 21 and March 3, 2006.

              Of the 62 units inspected, 45 (72.6 percent) had 207 housing quality standards
              violations. Of the 207 violations, six were identified by the Commission during
              its previous inspections and were shown on the Commission’s inspection reports.
              In addition, 40 of the 45 units had 125 violations that existed before the
              Commission’s previous inspections and 33 units were considered to be in material
              noncompliance since they had health and safety violations that predated the
              Commission’s previous inspections. The following table categorizes the 207
              housing quality standard violations in the 45 units.




                                               5
                                                            Number of
                           Category of violations           violations
                          Electrical                            70
                          Windows                               24
                          Exterior surface                      19
                          Security                              18
                          Interior walls                        16
                          Floor                                  9
                          Stove                                  9
                          Lead-based paint                       9
                          Ceiling                                4
                          Tub or shower in unit/sink             3
                          Foundation                             3
                          Roofs/gutters                          3
                          Water heater                           3
                          Sink or fixed wash basin               2
                          Chimney                                2
                          Ventilation                            2
                          Fire exit                              2
                          Refrigerator                           1
                          Space for storage, preparation,
                          and serving of food                   1
                          Toilet                                1
                          Sewer connection                      1
                          Refuse disposal                       1
                          Stairs, rails, and porches            1
                          Garbage and debris                    1
                          Access to unit                        1
                          Smoke detector                        1
                                         Total                207

             We provided our inspection results to the director of HUD’s Detroit Office of
             Public Housing and the Commission’s executive director on May 3, 2006.

Electrical Violations

             Seventy electrical violations were present in 32 of the Commission’s program
             units inspected. The following items are examples of electrical violations listed in
             the table: outlets with open grounds, light fixtures hanging from wires, no cover
             on junction box, ground fault circuit interrupters not tripping, and exposed wires.
             The following pictures are examples of the electrical-related violations identified
             in the Commission’s program units inspected.




                                                 6
 Voucher TV4032-010:
 Loose electrical panel
 cover in basement.




Voucher V4040-030:
Exposed wires in ceiling
junction box in basement’s
bathroom.




 Window Violations

                Twenty-four window violations were present in 17 of the Commission’s program
                units inspected. The following items are examples of window violations listed in
                the table: window locks not working properly, mold on windowsills and sashes,
                television cables going through windows not allowing them to lock, drafty
                windows, and cracked windowpanes. The following pictures are examples of the
                window-related violations identified in the program units inspected.




                                                7
Voucher CV0042-029: Mold
on bedroom windowsill,
frame, and sash; crumbling
plaster and peeling paint on
window jamb.




Voucher CV4039-014:
Power cord passes through
utility room window
preventing it from closing
and locking.




  Exterior Surface Violations

                  Nineteen exterior surface-related violations were present in 15 of the
                  Commission’s program units inspected. The following items are examples of
                  exterior surface-related violations listed in the table: missing globes on entry
                  lamps, improper electrical wiring from a house to a garage, rotting door and
                  threshold, and no condulet cover on main power line. The following pictures are
                  examples of exterior surface-related violations identified in the program units
                  inspected.



                                                  8
Voucher CV4039-014:
Improper use of power
cords from a house’s utility
room through a window
lying on the sidewalk and
buried underground to
provide power to the
garage.




Voucher V4038-009:
Missing condulet cover
from conduit that covers
the unit’s main power
line.




  Causes for Violations

                  The housing quality standards violations existed because the Commission did not
                  perform effective quality control inspections of its contract inspector to ensure
                  that units were inspected in accordance with HUD’s requirements. This resulted
                  in its contract inspector failing to conduct all inspections in accordance with his
                  agreement with the Commission.

                  The contract inspector did not always perform tasks in accordance with his
                  agreement, such as providing the Commission with a schedule of inspections to


                                                   9
           be performed each week, timely inspection results, a schedule of followup
           inspections on units that failed inspection, or notification to tenants and/or
           landlords of the violations that caused the units to fail to meet HUD’s housing
           quality standards.

           The Commission’s contract inspector was based in Ohio and was only onsite to
           perform inspections for the Commission for approximately one week per month.
           This limited the amount of time the inspector had available to conduct required
           followup inspections on units that had previously failed inspection. Of the
           Commission’s 108 inspection reports for the period August 2005 through January
           2006 that we reviewed, 27 did not show whether a followup inspection was
           performed. Consequently, the Commission could not support when the units
           passed inspection and what, if any, abatement action of the housing assistance
           payment should have occurred. Without timely followup inspections, the
           Commission’s ability to adequately track unit inspections and enforce HUD’s
           housing quality standards was adversely affected.

           The Commission did not renew its contract with its quality control inspector that
           ended in July 2005 and did not resume performing quality control inspections
           until its staff was trained, late in November 2005, after our audit started. After
           performing a quality control inspection in December 2005, the Commission met
           with its contract inspector in an attempt to address violations that the inspector did
           not identify. After continued followup inspection issues which caused the
           Commission’s units to be noncompliant with HUD’s housing quality standards,
           the Commission terminated its contract inspector in March 2006. The
           Commission plans to submit proposals for a new contract inspector and will hire a
           staff inspector to perform annual inspections in the interim.

           The Commission has made efforts to improve the tracking of housing quality
           standards inspection results through the use of an Excel spreadsheet. Coupled
           with the implementation of quality control procedures and controls as we
           recommended, this should assist the Commission in monitoring the effectiveness
           of its inspection program.

HUD Funds Not Effectively
Used


           The Commission did not effectively use program funds when it failed to fully
           enforce HUD’s housing quality standards. Our appraiser identified 40 units with
           housing quality standards violations that existed at the time of the Commission’s
           previous inspections. However, the Commission’s contract inspector passed 29 of
           the 40 units. Our appraiser noted these preexisting housing quality standards
           violations on the inspection reports that we provided to the Commission and
           HUD.

           The Commission should not have made housing assistance payments on the 40
           units due to the preexisting violations. The table in appendix D of this report lists

                                            10
             the 40 units, the period after the Commission’s previous inspection (beginning 30
             days after the Commission’s inspection or immediately if it was an initial
             inspection), and $47,110 in housing assistance payments that should not have
             been paid by the Commission. In addition, the Commission should not be entitled
             to the associated administrative fees of $3,971.

Conclusion

             The Commission’s tenants were subjected to health and safety-related violations
             while living in program units that failed to meet HUD’s housing quality standards.
             Through the Commission’s implementation of adequate procedures and controls
             over its unit inspections to ensure compliance with HUD’s housing quality
             standards, we estimate that $1,995,816 in future housing assistance payments will
             be spent for units that are decent, safe, and sanitary. We determined this amount by
             multiplying 274 units (estimated number of units that would be in material
             noncompliance with housing quality standards if appropriate actions are not taken by
             the Commission) times $607 (average monthly subsidy of each housing unit). This
             amount was then annualized to give the total estimate of funds to be put to better
             use.

Recommendations

         We recommend that the director of HUD’s Detroit Office of Public Housing require
         the Commission to

             1A.    Conduct followup housing quality standards inspections on housing units
                    that failed inspection to determine whether violations still exist and abate
                    housing assistance payments to landlords accordingly.

             1B.    Reimburse its program $51,081 from nonfederal funds ($47,110 for
                    housing assistance payments and $3,971 in associated administrative fees)
                    for the 40 units that contained preexisting violations not identified in the
                    Commission’s previous inspections.

             1C.    Implement adequate procedures and controls to ensure that all program
                    inspections are performed adequately and all units meet HUD’s housing
                    quality standards. By implementing adequate procedures and controls, the
                    Commission should help ensure that $1,995,816 in program funds support
                    units that are decent, safe, and in sanitary condition over the next year.




                                              11
Finding 2: Controls over Housing Assistance Payments Were
       Inadequate and Tenant Reexaminations Were Not Timely
The Commission failed to comply with HUD’s requirements and its program administrative plan
regarding housing assistance payments and tenant reexaminations. It did not always calculate
housing assistance payments correctly, maintain complete documentation to support tenant
eligibility, and complete annual and interim reexaminations in a timely manner. These
conditions occurred because the Commission did not identify areas requiring additional training
through quality control reviews and lacked written procedures for conducting reexaminations.
As a result, the Commission overpaid $7,459 and underpaid $1,318 in housing assistance
payments.



 Numerous Errors in Tenant
 Case Files

              We identified errors in 20 of 25 program tenant case files that were randomly
              selected from the Commission’s files. The errors included miscalculation of
              income and utility allowances, missing third-party verifications, use of incorrect
              payment standards, outdated verification forms, and untimely reexaminations.
              The errors affected the housing assistance payments for 16 of the 25 tenant files
              reviewed and totaled $8,777 in housing assistance payment errors, including
              overpayments of $7,459 and underpayments of $1,318. A schedule summarizing
              the results of our 25 tenant file reviews is in appendix E of this report.

              The Commission was aware of the condition of its tenant case files based on its
              own quality control reviews and prior HUD reviews. In addition, the Commission
              reported to its board the results of its own quality control reviews stating that only
              44 of 79 (56 percent) of its quality control reviews of tenant files were accurate.
              However, additional procedures and controls are needed to ensure that the
              Commission follows HUD’s requirements and its program administrative plan
              regarding housing assistance payments and tenant reexaminations.

 Increased Oversight and
 Procedures Needed


            The Commission needs to enhance its oversight of housing assistance payment
            calculations to determine the training needs of its staff and establish written
            procedures for performing annual reexaminations. According to the housing
            programs manager, the Commission’s program experienced staff turnover and a
            reorganization in 2005, which contributed to the tenant file errors. The
            Commission’s program coordinator staff went from four to five positions, with
            three being staffed by employees new to the position. In the process of hiring an
            additional program coordinator, the Commission eliminated two administrative
            support staff positions.


                                               12
        To address tenant file discrepancies, the Commission provided a corrective action
        plan to HUD in November 2005 in response to its confirmatory review. The
        corrective action plan stated that management would perform at least three quality
        control reviews per program coordinator each month. Although the Commission
        appeared to be doing sufficient reviews toward the end of our audit (81 quality
        control reviews from November 2005 through February 2006), it needs to analyze
        the review results to determine areas in which additional training is needed by its
        staff.

        Due to the staffing changes, the Commission redistributed its tenant file caseload to
        the five program coordinators. This resulted in 4 of the 25 tenants that we reviewed
        not being reexamined in a timely manner—ranging from one to five months late on
        annual reexaminations. Two other tenants were required to have interim
        reexaminations since they claimed no income at their last annual reexaminations.
        However, these reexaminations were not performed because the Commission’s
        program coordinators did not know which tenants in their case workload were
        required to have an interim reexamination. To assist the coordinators, the
        Commission should run quarterly reports to identify program tenants who claimed
        zero income at their last annual reexamination. Tenants claiming zero income and
        who have not been reexamined in the last three months should be scheduled for an
        interim reexamination as required by the Commission’s program administrative
        plan.

        The Commission’s program administrative plan also did not address how tenants
        would be reimbursed when an underpayment of housing assistance payment occurs.

Recommendations

          We recommend that the director of HUD’s Detroit Office of Public Housing
          require the Commission to

          2A.     Reimburse its program $7,459 from nonfederal funds for the overpayment
                  of housing assistance payments cited in this finding.

          2B.     Reimburse the appropriate tenants $1,318 for the underpayment of
                  housing assistance payments from unobligated program funds.

          2C.     Implement adequate procedures and controls over its housing assistance
                  payment calculations and tenant reexaminations to ensure they meet
                  HUD’s requirements and/or its program administrative plan.

          2D.     Revise its program administrative plan to address how tenants will be
                  reimbursed when an underpayment of housing assistance occurs.




                                          13
Finding 3: The Commission Lacked a Cost Allocation Plan for Indirect
                              Costs
The Commission failed to establish an adequate cost allocation plan for costs shared by its
various programs. It allocated costs based on estimates by its executive director and fiscal and
administrative manager to improve the deficit position of its low-rent housing program.
However, this effort was not adequately supported since the Commission allocated all of its
utility costs for its administrative offices located at 727 Miller Avenue to its low-rent housing
program, and lacked a plan showing the basis for the allocation of other indirect costs. These
conditions occurred because the Commission thought its allocation basis was appropriate and
reasonable. Without adequate documentation to support the allocation of indirect costs, HUD
and the Commission cannot be assured that costs were reasonable and appropriate in relation to
the benefits derived from the indirect costs.



 No Written Allocation Plan

             The Commission lacked a written cost allocation plan for distributing indirect costs
             to its various programs. These programs include the Section 8 Housing Choice
             Voucher, low-rent housing, Public Housing Capital Fund, Section 8 Project-Based
             Voucher, and Shelter Plus Care programs. Based upon the Commission’s various
             programs and its fiscal year 2004 and 2005 expenditures, the program constituted
             70 percent of the Commission’s total expenses.

             The Commission allocated 85 percent of its indirect costs to the program and 15
             percent to its low-rent housing program. No indirect costs were allocated to the
             Commission’s other programs (Public Housing Capital Fund, Section 8 Project-
             Based Voucher, and Shelter Plus Care). The allocation was based on estimates
             made by its executive director and fiscal and administrative manager. According to
             the fiscal and administrative manager, the Commission previously allocated 75
             percent of its indirect costs to the program and 25 percent to its low-rent housing
             program. The Commission’s staff obtained board approval to change the allocation
             to an 85/15 split primarily because the low-rent housing program was determined to
             be operating at a deficit for fiscal year 2005. However, the Commission could not
             provide documentation to support the reasonableness of the 85/15 split and lacked a
             written cost allocation plan.

 Expenses Not Allocated
 Properly

             The Commission used the 85/15 split between the program and its low-rent housing
             program to allocate indirect costs that included computer software and support,
             office rent, insurance premiums, telephone service, postage, and administrative
             supplies. It lacked a written cost allocation plan to support the reasonableness of
             the 85/15 split.


                                                14
          Further, the Commission did not allocate any of the utility costs for its
          administrative offices located at 727 Miller Avenue to the program. Instead, it
          charged all utility costs to its low-rent housing program. The executive director
          said that the utility costs for the administrative offices’ building were not allocated
          to the Commission’s various programs because there was only one managed utility
          meter for the entire property which also includes 104 low-rent housing units and its
          maintenance offices.

Commission’s Justification for
Using 85/15 Percent Split


          The Commission’s position was that the 85/15 split between the program and the
          low-rent housing program was appropriate since it did not spend a significant
          amount of time administering the Section 8 Project-Based Voucher and Shelter Plus
          Care programs. The executive director said the Commission acts as fiduciary
          administrator for the two programs (Section 8 Project-Based Voucher and Shelter
          Plus Care). The Commission’s management and staff involved with the two
          programs have a portion of their salaries charged to the programs; however, they do
          not incur administrative costs. For the Shelter Plus Care program, the entire
          administrative fee is passed through to the Commission’s sponsors. For the Section
          8 Project-Based Voucher program, direct costs such as housing quality standards
          inspections are directly charged to the program. The executive director did agree
          that the basis for the Commission’s 85/15 allocation should be explained in a
          written cost allocation plan.

Recommendation

          We recommend that the director of HUD’s Detroit Office of Public Housing require
          the Commission to

          3A.      Implement a cost allocation plan to properly allocate indirect costs to all of
                   its programs in accordance with HUD’s requirements and the annual
                   contributions contract.




                                             15
                         SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

               •   Applicable laws; HUD’s program requirements at 24 CFR [Code of Federal
                   Regulations] Parts 5, 85, 982, and 985; HUD Public and Indian Housing Notices
                   1998-27, 2005-01, 2005-09, 2006-03, and 2006-05; HUD’s Housing Choice
                   Voucher Guidebook 7420.10; and the Commission’s program administrative
                   plan and operations manual.

               •   The Commission’s accounting records, annual audited financial statements for
                   2004 and 2005, general ledgers, bank statements and cancelled checks, tenant
                   files, policies and procedures, board meeting minutes for 2004 and 2005,
                   organizational chart, and program annual contributions contract.

               •   Downloaded electronic program tenant file information from the Commission’s
                   computer system.

               •   HUD’s reports and files for the Commission.

We also interviewed the Commission’s employees, HUD staff, and program tenants. We
statistically selected 62 of the Commission’s program units to inspect using the Defense Contract
Audit Agency’s EZ-Quant Statistical Sampling software from the 686 units that were inspected
by the Commission from August 2005 through January 2006. The 62 units were selected to
determine whether the Commission’s program units met HUD’s housing quality standards. Our
sampling criteria used a 90 percent confidence level, 50 percent estimated error rate, and
precision of plus or minus 10 percent.

Our sampling results determined that 33 of the 62 units (53.2 percent) materially failed to meet
HUD’s housing quality standards. This surpassed our 50 percent estimated error rate, so we
adjusted our error rate downward to 50 percent. Materially failed units were those units with
health and safety violations that preceded the Commission’s last inspection.

The Commission’s September 2005 through February 2006 housing assistance payment registers
(one month after each of our inspection periods noted above) showed that the average monthly
housing assistance payment was $607. Using the lower limit of the estimate of the number of
units that materially failed and the average housing assistance payment, we estimated that the
Commission will annually spend $1,995,816 (274 units times $607 average payment times 12
months) for units that are in material noncompliance with HUD’s housing quality standards.
This estimate is presented solely to demonstrate the annual amount of program funds that could
be put to better use on decent, safe, and sanitary housing if the Commission implements our
recommendation. While these benefits would recur indefinitely, we were conservative in our
approach and only included the initial year in our estimate. We also considered that (1) the
Commission did not identify many of the preexisting violations during its most recent
inspections, (2) the units would not be scheduled for another inspection for another year under



                                                16
normal circumstances, and (3) it would take the Commission at least a year to complete all
inspections under an improved inspection process.

Using our lower precision limit of 40 percent, we projected this error rate to the population of
686 units that were inspected by the Commission over a six-month period. We estimated that the
Commission spent $1,995,816 in housing assistance payments for 274 units that materially failed
housing quality standards, computed as 274 units times the average annual housing assistance
payment of $7,284.

The administrative fee was calculated by dividing the year-to-date administrative fee received by
the Commission from July 2005 through February 2006 ($492,878) by the number of lease-ups
the Commission maintained for the same period (9,495). This resulted in an average
administrative fee earned of $52 per unit for the period within the scope of our statistical sample
of unit inspections. We multiplied the administrative fee earned per unit by the inappropriate
period to arrive at a total improper administrative fees paid to the housing commission of $3,971
(see finding 1).

We performed our onsite audit work from November 2005 to April 2006 at the Commission’s
administrative offices located at 727 Miller Avenue, Ann Arbor, Michigan. The audit covered the
period July 1, 2004, through September 30, 2005, and was expanded as necessary to accomplish our
objective.

We performed our audit in accordance with generally accepted government auditing standards.




                                                17
                             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 objective:

              •       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 the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
                                      program operations will meet the organization’s
 Significant Weakness
                                      objectives.


              Based on our review, we believe the following item is a significant weakness:



                                               18
•   The Commission lacked sufficient procedures and controls to ensure
    compliance with HUD’s regulations and/or its program administrative plan
    regarding unit inspections, and housing assistance payments, and tenant
    reexaminations (see findings 1 and 2).




                               19
                                   APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

                   Recommendation                         Funds to be put
                       number            Ineligible 1/     to better use 2/

                          1B               $51,081
                          1C                                  $1,995,816
                          2A                  7,459
                          2B                                       1,318
                         Totals            $58,540            $1,997,134


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
     policies or regulations.

2/   “Funds to be put to better use” are estimates of amounts that could be used more
     efficiently if an Office of Inspector General (OIG) recommendation is implemented.
     This includes reductions in outlays, deobligation of funds, withdrawal of interest subsidy
     costs, costs not incurred by implementing recommended improvements, avoidance of
     unnecessary expenditures noted in preaward reviews, and any other savings which are
     specifically identified. In this instance, if the Commission implements our
     recommendation, it will cease to incur program costs for units that are not “decent, safe,
     and sanitary,” and instead, will expend those funds for units that meet HUD’s standards.
     Once the Commission successfully improves its controls, this will be a recurring benefit.
     Our estimate reflects only the initial year of these recurring benefits.




                                             20
Appendix B

             AUDITEE COMMENTS

                   Auditee Comments




                    21
Auditee Comments




 22
Auditee Comments




 23
Auditee Comments




 24
Auditee Comments




 25
Auditee Comments




 26
Appendix C
                                         CRITERIA

Finding 1
HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.152(d) state that HUD may
reduce or offset any administrative fee to a public housing authority, in the amount determined
by HUD, if the authority fails to perform its administrative responsibilities correctly or
adequately under the program, such as not enforcing HUD’s housing quality standards.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.305(a) state that the public
housing authority may not give approval for the family of the assisted tenancy or execute a
housing assistance contract until the authority has determined that the following meet program
requirements: (1) the unit is eligible, and (2) the unit has been inspected by the authority and
passes HUD’s housing quality standards.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.401 require that all program
housing meet HUD’s housing quality standards performance requirements both at
commencement of assisted occupancy and throughout the tenancy.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.404 require owners of program
units to maintain the units in accordance with HUD’s housing quality standards. If the owner
fails to maintain the dwelling unit in accordance with HUD’s housing quality standards, the
authority must take prompt and vigorous action to enforce the owner’s obligations. The
authority’s remedies for such breach of the housing quality standards include termination,
suspension, or reduction of housing assistance payments and termination of the housing
assistance payment contract. The authority must not make any housing assistance payments for
a dwelling unit that fails to meet the housing quality standards unless the owner corrects the
defect within the period specified by the authority and the authority verifies the correction. If a
defect is life threatening, the owner must correct the defect within 24 hours. For other defects,
the owner must correct them within 30 calendar days.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 24.982.405(a) require public
housing authorities to perform unit inspections before the initial move-in and at least annually.
The authority must inspect the unit leased to a family before the term of the lease, at least
annually during assisted occupancy, and at other times as needed to determine whether the unit
meets housing quality standards.

HUD’s Housing Choice Voucher Program Guidebook 7420.10, chapter 10, pages 10 through 33,
states that quality control inspections provide feedback on inspectors’ work, which can be used
to determine whether individual performance or general housing quality standards training issues
need to be addressed. The Authority should maintain a quality control tracking system for each
program year, which indicates the address of the units; date of original inspection and inspector;
date of the quality control inspection; and location of the unit by neighborhood, zip code, and
census tract.



                                                27
Finding 2
HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.516(a)(1) require the authority
to conduct a reexamination of family income and composition at least annually. The authority
must obtain and document in the tenant file third-party verification or why third-party
verification was not available for the following factors: (1) reported family annual income, (2)
the value of assets, (3) expenses related to deductions from annual income, and (4) other factors
that affect the determination of adjusted income. At any time, the authority may conduct an
interim reexamination of family income and composition. Interim examinations must be
conducted in accordance with policies in the authority’s administrative plan. As a condition of
admission to or continued assistance under the program, the authority shall require the family
head and such other family members as the authority designates to execute a HUD-approved
release and consent form (including any release and consent as required under 5.230 of this title)
authorizing any depository or private source of income or any federal, state or local agency to
furnish or release to the authority or HUD such information as the public housing authority or
HUD determines to be necessary. The authority and HUD must limit the use or disclosure of
information obtained from a family or from another source pursuant to this release and consent
to purposes directly in connection with administration of the program.

HUD’s Housing Choice Voucher Program Guidebook7420.10, chapter 5, pages 13 through 35,
states that determinations of program eligibility and total tenant payment for the housing choice
voucher program require that the applicant or participant family’s annual income be computed at
least annually. Regulations specify the amounts to be included in the calculation of annual
income. The chapter further explains how to determine annual income and adjusted income.

HUD’s Housing Choice Voucher Program Guidebook7420.10, chapter 6, pages 1 through 11,
explains how to calculate the housing assistance payment and the tenant’s total payment toward
rent and utilities, including circumstances in which gross rent for the unit exceeds the payment
standard for the unit size.

HUD’s Housing Choice Voucher Program Guidebook7420.10, chapter 12, pages 1 through 10,
states that public housing agencies must establish a policy regarding annual reexamination
effective dates that ensures that reexamination for every family takes effect within a 12-month
period. Public housing agencies must develop their own interim reporting requirements, which
must be stated in the administrative plan and the briefing materials. The policy must include
clear guidance on when (how soon after the change occurs) and under what circumstances the
family must report a change in family income or composition and rules on effective dates of any
changes in the housing assistance payment resulting from an interim reexamination. The interim
reporting rules must be applied uniformly to all families. It is important that the agency has
tracking and monitoring procedures and systems in place to ensure that the required
reexaminations for each assisted family are initiated and completed on time.

The Commission’s program administrative plan, chapter 6, discusses calculating rent and
housing assistance payments and the specific guidance to be used, such as when families report
zero income. Chapter 6, section D, states that families who report zero income are required to
complete a written certification every 90 days and provide a written statement as to how they
meet their basic needs. Chapter 6, section F, states that if family expenses exceed known
income, the family will be questioned about contributions and gifts. Chapter 7, page 8, of the

                                                28
administrative plan states that families claiming to have no income will be required to execute
various verification forms to determine that income is not being received by the household.

Finding 3
HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.152(a)(3) states that [housing
authority] administrative fees may only be used to cover costs incurred to perform [housing
authority] administrative responsibilities for the program in accordance with HUD’s regulations
and requirements.

Section 11 of the annual contributions contract, between the Commission and HUD, states that
program receipts may only be used to pay program expenditures.

HUD’s Housing Assistance Payments Program Accounting Handbook 7420.6, chapter 5, page
34, states that if the [public housing agency] is administering other low-income housing
programs or is involved in enterprises other than the program and certain costs incurred are
applicable to other than the program, it will be necessary to prorate such costs in order to charge
the program with its applicable portion of the costs. The [public housing agency] shall maintain
for audit purposes appropriate schedules and worksheets showing how the allocation of costs
was made.




                                                29
Appendix D

                  UNITS WITH PREEXISTING VIOLATIONS
                                                                                    Improper
                    Housing                                                          housing        Improper
                   assistance          Last unit                                    assistance    administrative
    Voucher number payment            inspection        From             To          payment           fee
    WV066-7              $530        12/2/2005        2/1/2006       2/21/2006           $397                 $38
    TV4041-0261           584        11/22/2005      12/1/2005       2/27/2006           1,731                153
    WV4027-132            838        12/14/2005       2/1/2006       2/27/2006             808                 50
    TV4040-035            813         9/2/2005        11/1/05        2/27/2006           3,222                205
    V4038-0111            671        10/13/2005      10/14/2005      3/1/2006            2,792                239
    V4040-133             888         1/3/2006        2/3/2006       2/22/2006               --                 --
    CV4011-0141           715         8/3/2005       8/10/2005       2/28/2006           4,611                348
    WV4027-0961          1012         1/6/2006        1/6/2006       2/28/2006           1,860                 95
    WV4027-152            926        12/14/2005       2/1/2006       2/24/2006             793                 44
    CV4039-014            817        12/13/2005       2/1/2006       2/28/2006             817                 51
    WV4027-200            773        12/13/2005       2/1/2006       3/1/2006              797                 53
    V4044-1222            224        12/14/2005       2/1/2006       2/27/2006               --                 --
    WV4027-038            590        12/14/2005       2/1/2006       2/27/2006             568                 50
    TV4041-066            341        12/12/2005       2/1/2006       2/21/2006             255                 38
    TV4032-009            495        12/14/2005       2/1/2006       2/27/2006             477                 50
    CV4038-067           267         12/15/2005       2/1/2006       3/2/2006              284                 55
    TV4041-0513           499        12/2/2005        2/1/2006       2/24/2006               --                 --
    V4040-007             859        9/19/2005       11/1/2005       2/23/2006           3,282                198
    V4040-026             685        12/14/2005       2/1/2006       3/1/2006              707                 53
    V4041-094             361        12/13/2005       2/1/2006       3/2/2006              384                 55
    CV0042-029            635        10/12/2005      12/1/2005       2/22/2006           1,768                144
    WV4027-030           1100        12/12/2005       2/1/2006       2/23/2006             903                 42
    V4045-006             370        12/14/2005       2/1/2006       2/27/2006             356                 50
    V0043-017             452        12/14/2005       2/1/2006       2/28/2006             452                 51
    TV4044-076            566        10/19/2005      12/1/2005       2/24/2006           1,617                148
    V4038-009             644        12/14/2005       2/1/2006       3/1/2006              664                 53
    WV4027-0061           464        10/28/2005      11/1/2005       2/22/2006           1,756                196
    WV4027-149            846        12/15/2005       2/1/2006       2/28/2006             846                 51
    TV066-062             471         9/2/2005       11/1/2005       2/22/2006           1,783                196
    MCV066-058            889        12/2/2005        2/1/2006       2/23/2006             730                 42
    V4040-0301            307        10/7/2005       10/7/2005       2/28/2006           1,475                249
    WV4027-086            717        12/2/2005        2/1/2006       2/22/2006             563                 40
    V4041-053              77        12/13/2005       2/1/2006       3/1/2006               79                 53




1
  The last unit inspection was an initial inspection; therefore, the housing assistance payment should not have been
paid until the unit met HUD’s housing quality standards.
2
  According to the housing assistance payments register as of February 6, 2006, the Commission took appropriate
abatement action for the unit.
3
  The Commission abated the housing assistance payment for December 2005 and part of January 2006, for a total
of $692. This amount was subtracted from the improper housing assistance payment amount.


                                                         30
 UNITS WITH PREEXISTING DEFICIENCIES (continued)
                                                                 Improper
                Housing                                           housing       Improper
               assistance    Last unit                           assistance   administrative
Voucher number payment      inspection     From         To        payment          fee
V4044-041          $615     12/13/2005   2/1/2006    3/2/2006        $654               $55
CV4040-044          751     12/12/2005   2/1/2006    2/23/2006         616               42
V0043-0731          860      8/8/2005    8/8/2005    3/3/2006        4,583              356
V4044-073           936     12/14/2005   2/1/2006    3/2/2006          996               55
V4040-0201          811     10/1/2005    10/1/2005   3/2/2006        2,859              262
TV4032-010           87     12/14/2005   2/1/2006    3/3/2006           95               56
TV4041-158          498     12/2/2005    2/1/2006    3/2/2006          530               55
                              Totals                               $47,110           $3,971




                                           31
        Appendix E

                                           TENANT FILE EXCEPTIONS
  Voucher                                                                                                        Assistance   Assistance
  number             Exception                  Description of exception           Period        Calculation     underpaid    overpaid
                                                                                   6/1/04 –    12 months times         $168
CV4038-064   Income calculation error      Trust fund counted as asset in error.    5/1/05        $14/month
             Rent reasonableness           Rent increased in 2005 from $650 to
CV4038-064   review not performed          $675 without a rent review.
WV4027-033   Income document missing       Child support not documented.
             Incorrect payment             Correct payment standard should be      5/1/05 –    12 months times         180
V4041-057    standard                      $713 but used $698.                      4/1/06        $15/month
                                           Two conflicting verifications in file                                                  $2,002
             Conflicting information       with different terms. More recent       6/1/05 –    11 months times
V4041-151    for child care expenses       and detailed verification used.          4/1/06       $182/month
                                           Tenant moved to new unit in 2005,
             Rent reasonableness           but only one comparable was used
V4041-151    review not complete           for the review.
                                           Utility allowance calculation failed                                        174
                                           to include allowance for “other         7/1/05 –    6 months times
V4041-062    Utility allowance error       electric.”                              12/1/05       $29/month
             Reexamination not             Annual reexamination due 6/1/05,
V4041-062    performed timely              but prepared on 7/1/05.
CV4038-014   None identified
                                           Food stamps counted as income,                                              240
                                           child support income understated,
                                           and wrong utility allowance
             Income calculation error      schedule used (2004 instead of          5/1/05 –    12 months times
WV4027-038   and utility allowance error   2005).                                   4/1/06        $20/month
WV4027-185   None identified
CV0042-046   None identified
                                           No evidence that child resided with                                                       120
                                           tenant at least 51 percent of time to
             Dependent allowance           receive dependent allowance.            7/1/05 –    10 months times
CV4038-025   error                                                                  4/1/06        $12/month
             Rent reasonableness           Rent increased in 2004 from $860 to
CV4038-025   review not performed          $897.
                                           Zero income tenant. Tenant                                                                100
                                           reported new job in August 2005,
                                           but change in income was not
                                           processed in a timely manner.
                                           Effect could not be determined for
                                           period 3/1/05 to 9/1/05 when interim
                                           should have been performed. But
                                           for 10/1/05 to 11/1/05, housing
             No interim examinations       assistance payment overstated as        10/1/05 –   2 months times
WV4027-093   performed                     calculated.                              11/1/05      $50/month
                                           Tenant’s annual reexamination was
                                           due August 2005 but was not
             Reexamination not             prepared. It was five months late as
CV4040-002   performed timely              of review in December 2005.
                                           Tenant reported job loss in 2005.                                                         774
                                           No followup verification performed
                                           to determine any unemployment           8/1/05 –    9 months times
V4044-056    Unreported income             benefits received.                       4/1/06       $86/month




                                                                      32
                              TENANT FILE EXCEPTIONS (continued)
  Voucher                                                                                                        Assistance   Assistance
  number             Exception                  Description of exception           Period       Calculation      underpaid    overpaid
                                          Tenant failed to disclose Family                                                          $451
                                          Independence Agency income
                                          between 2004 and 2005
                                          examinations. The Commission did         8/1/04 –    11 months times
V4041-137    Unreported income            not execute repayment agreement.          6/1/05        $41/month
                                          Unemployment benefits of                                                                 3,344
                                          $243/week reported in June but not
             Unreported income;           included. Form HUD-50058,
             wrong payment standard       effective 8/1/05, used payment           6/1/05 –    11 months times
WV4027-134   used                         standard of $913 instead of $863.         4/1/06       $304/month
                                          Tenant claimed zero income at last
                                          annual examination, effective
             No interim examinations      8/1/05, but no interim examination
WV4027-134   performed                    has been performed as required.
CV4038-049   None identified
                                          Monthly allowance of $8 for gas                                                            36
                                          service was given for a unit that was   11/15/05 –     4.5 months
V4041-030    Utility allowance error      all electric.                             3/1/06     times $8/month
                                          Contract shows incorrect amount of
             Housing assistance           $502 for housing assistance payment
V4041-030    payment contract error       when it should be $479.
                                          Higher housing assistance payment                                                          36
                                          paid for first and second months of
             Housing assistance           contract. $13 for November 2005         11/15/05 –
V4041-030    payment error                and $23 for December 2005.               12/31/05
                                          Interim examination was effective                                             254
                                          one month early which did not allow
                                          for 30-day notice for rent increase.
             Incorrect interim            Difference in tenant portion of rent                 1 month times
MCV066-026   examination effective date   is $254/month.                           12/1/05      $254/month
                                          Tenant claimed near zero income at
                                          last annual examination, effective
             No interim examinations      7/1/05. Known expenses exceeded
WV066-37     performed                    income.
                                          Tenant file shows contract effective                                          101
                                          8/27/04, but the payment register                    5 days/31 days
             Missing payment to           shows no disbursements for the          8/27/04 –     per month x
V0043-106    landlord                     period 8/27/04 through 8/31/04.          8/31/04      $627/month
                                          Tenant claimed zero income at last
             Reexamination not            annual examination, effective
             performed in a timely        5/1/05, but no interim examination
CV0042-052   manner                       has been performed as required.
                                          For 8/1/03 examination (8/1/03 –                                                          540
                                          7/31/04), childcare was calculated at
                                          $75/week although verification form
             Miscalculated childcare      indicated expense of $75 every 2         8/1/03 –     12 months x
WV4027-85    expense                      weeks.                                   7/31/04       $45/month
             Reexamination not            Annual reexamination was due
             performed in a timely        8/1/05 but was effective 11/1/05 (3
WV4027-85    manner                       months late).




                                                                    33
                              TENANT FILE EXCEPTIONS (continued)
  Voucher                                                                                                    Assistance   Assistance
  number             Exception               Description of exception           Period      Calculation      underpaid    overpaid
                                        Latest examination effective 11/1/05
             Expired verification       used expired verifications from June
WV4027-85    documents used             2005.
CV0042-002   None identified
                                        Did not use anticipated Social                                                           $48
             Income calculation error   Security income. Used $569 instead     3/4/05 –    12 months times
WV066-16     for 2005 examination       of $584.                                2/1/06        $4/month
             Income calculation error   Did not include state supplemental     3/1/06 –    2 months times                          8
WV066-16     for 2006 examination       security income of $168 annually.       4/1/06        $4/month
                                        Housing assistance payment                                                $201
                                        contract effective 2/21/05 indicated
                                        housing assistance payment of $239.
                                        However, on 4/11/05, housing
                                        assistance payment was revised to
                                        $327 made effective retroactively to
             No amended housing         2/21/05. No adjustments to
             assistance payment         disbursements were made as a result    2/21/05 –
V4044-030    contract                   of the revision.                        4/30/05
                                                Totals                                                          $1,318       $7,459




                                                                  34