oversight

Mount Vernon Urban Renewal Agency, Section 8 Housing Choice Voucher Program, Mount Vernon, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-02-16.

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

          AUDIT REPORT




MOUNT VERNON URBAN RENEWAL AGENCY
  Section 8 Housing Choice Voucher Program
           Mount Vernon, New York

               2006-NY-1004

             February 16, 2006




              OFFICE OF AUDIT
            NEW YORK/NEW JERSEY
                                                         Issue Date
                                                              February 16, 2006
                                                         Audit Report Number
                                                              2006-NY-1004




TO:       Mirza Negron Morales, Director, Public Housing Division, 2APH


FROM:     Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: Mount Vernon Urban Renewal Agency, Mount Vernon, New York, Section
         8 Housing Choice Voucher Program Has Administrative and Financial
         Management Weaknesses

                               HIGHLIGHTS

 What We Audited and Why


          We audited the Mount Vernon Urban Renewal Agency’s (the auditee)
          administration of its Section 8 Housing Choice Voucher program because of
          its designation by the U.S. Department of Housing and Urban Development
          (HUD) as troubled and our risk assessment, in which it was ranked ninth
          among public housing authorities in the HUD New York field office
          jurisdiction.

          Our audit objectives were to determine whether the auditee (1) correctly
          billed HUD for housing choice vouchers used, (2) complied with HUD
          program requirements for tenant admission, rental subsidy calculations and
          housing quality standards, and (3) implemented financial management
          controls to ensure that Section 8 Housing Choice Voucher program funds
          were adequately safeguarded.

 What We Found
          The auditee was overpaid Section 8 housing assistance payments and
          administrative fees because it over-requisitioned funds from HUD. As a
          result, the auditee was overpaid $1,165,138 during calendar years 2003 and
          2004. To date, HUD has recouped $604,976 of the overpayments through
          offsets. In addition, the auditee erroneously reported vouchers administered
               under the portability 1 feature as part of its voucher use, which resulted in an
               additional $615,781 in unearned administrative fees.

               We also found weaknesses in the auditee’s administration of its voucher
               program. The auditee (1) did not properly use or maintain its waiting list, (2)
               improperly calculated subsidy amounts in 6 of 30 tenant files we reviewed,
               (3) did not perform tenant recertifications in a timely manner, and (4) failed
               to document that all units met housing quality standards.

               In addition, weaknesses in the auditee’s financial management need to be
               addressed. We found that (1) duplicate and ineligible housing assistance
               payments were made, (2) expenditures were inadequately supported, and (3)
               Housing Choice Voucher program funds were used for other programs.

      What We Recommend

               We recommend that the director of HUD’s New York Office of Public
               Housing (1) recoup through offset against future payments the more than one
               million in overpaid housing assistance payments and administrative fees
               received due to incorrect billing and reporting to HUD, (2) instruct the
               auditee to implement controls and procedures to maintain its waiting list and
               apply housing quality standards in accordance with HUD procedures, and (3)
               ensure the auditee develops and implements financial controls to adequately
               support expenditures, use Housing Choice Voucher program funds only for
               that program, and allocate vouchers to project-based units in accordance with
               an approved allocation plan.

               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 Response

               We discussed the results of our review with the auditee during the course of
               the audit and we provided a draft report to them on January 23, 2006. We
               held an exit conference on February 3, 2006, at which the auditee provided
               oral comments and additional documentation, and we adjusted the report
               where necessary. While the auditee agreed to provide written comments by
               February 9, 2006, officials subsequently requested an additional 30 days,
               however, it was agreed that they would respond to the HUD field office.

1
  Portability units represent vouchers that the auditee administers for another public housing agency for
tenants that have rented units within Mount Vernon but use the vouchers of the other agency. The other
agency bills HUD for the vouchers, and Mount Vernon bills the other agency for housing assistance
payments and a share of the administrative fee.


                                                     2
                   TABLE OF CONTENTS

Background and Objectives                                                4

Results of Audit
     Finding 1: Incorrect Billing by the Auditee Caused Overpayments     5

     Finding 2: Administrative Weaknesses Exist in the Auditee’s         9
                Section 8 Housing Choice Voucher Program

     Finding 3: Weaknesses Exist in the Auditee’s Financial Management
                Controls                                                 14

Scope and Methodology                                                    18

Internal Controls                                                        19

Appendixes
     A. Schedule of Questioned Costs and Funds to Be Put to Better Use   21




                                        3
                  BACKGROUND AND OBJECTIVES

The Mount Vernon Urban Renewal Agency (the auditee) was established to provide
decent, safe, and sanitary housing for eligible low-and moderate-income residents of
Mount Vernon, New York. The auditee administers various U.S. Department of Housing
and Urban Development (HUD) programs, including the Community Development Block
Grant, Section 8 Housing Choice Voucher, Home Investment Partnership, and Housing
Opportunities for People with AIDS programs. Each of these programs are accounted for
and reported separately in the financial statements of the auditee. In addition, the auditee
serves as a HUD contract administrator for the Sunnybrook Senior Home.

The auditee’s Section 8 program began in 1976, and its waiting list has been closed since
1997 when there were more than 1,000 people on the list. The annual contribution
contract for the program authorizes 1,039 units; however, the auditee has used
approximately 645 units, consisting of 437 tenant-based and 208 project-based units.
Additionally, approximately 260 families have been assisted under portable vouchers
administered by other housing authorities. The Auditee distributed more than $6.9
million and $6.7 million in housing assistance payments and earned $772,916 and
$737,130 in Section 8 administrative fees in calendar years 2003 and 2004, respectively.

The independent public accountant rendered an unqualified opinion on the Section 8
financial statements for fiscal years 2002 through 2004. However, the auditee received a
score of 54 in its Section 8 Management Assessment Program confirmatory review for
the fiscal year ending December 31, 2002, and the score declined to 27 in the 2003
review. At that time, HUD classified the auditee as troubled.

In response to a June 2004 HUD rental integrity management review, which required
submission of a corrective action plan, the auditee enlisted assistance from Westchester
County in its administration of the Section 8 program. In November 2004, Westchester
County assumed responsibility for administering the auditee’s Section 8 program.
Westchester County has been working with the auditee to improve its program
administration, including performing timely tenant recertifications. In June 2005, the
HUD field office requested that the auditee finalize a number of corrective actions,
including reorganizing the Section 8 staff and obtaining the services of a forensic auditor
to perform a complete financial audit of the Section 8 program from 1998 to the present.

The objectives of the audit were to determine whether the Auditee (1) correctly billed
HUD for housing choice vouchers used; (2) complied with HUD program requirements
for tenant admissions, rental subsidy calculations and housing quality standards, and (3)
implemented financial management controls to ensure that Section 8 Housing Choice
Voucher program funds were adequately safeguarded.




                                             4
                             RESULTS OF AUDIT

Finding 1: Incorrect Billing by the Auditee Caused Overpayments

Contrary to HUD requirements, the auditee incorrectly requisitioned funds from HUD,
which caused overpayments of Section 8 Housing Choice Voucher funds. The auditee
incorrectly requisitioned payments based upon fully leasing its contracted units when it
wasn’t and erroneously included portable voucher units in its billing. These deficiencies
occurred because the auditee did not have adequate controls over voucher billing and
reporting. As a result, the auditee was paid $1,165,138 in excess housing assistance
payments and accumulated a large housing assistance payment reserve through calendar
year 2004, and received $615,781 in unearned administrative fees in calendar years 2004
and 2005.


 Auditee Incorrectly Requisitioned
 Funds from HUD
               During calendar year 2003 and 2004 payments to the auditee were based
               upon requisitions submitted to HUD. During this time, the auditee
               requisitioned funds based upon fully leasing the 1,039 units in its annual
               contributions contract with HUD. However, the auditee actually leased at
               a rate of 82 percent and 62 percent in calendar years 2003 and 2004,
               respectively. Consequently, the auditee received excess housing
               assistance and administrative fees of $1,165,138.

               HUD Housing Choice Voucher Program Guidebook 7420.10G, paragraph
               20.11, provides that requisitions for payments during the year from HUD
               are based upon estimates of housing assistance payments and
               administrative fees needed. Federal regulations at 24 CFR [Code of
               Federal Regulations] 982.152, section C-3 (b), provide that administrative
               fees are requisitioned monthly based upon the number of units under
               housing assistance payment contract on the first day of each month and
               that the actual fees earned are determined at the end of the fiscal year as
               part of the year-end settlement process. Thus, amounts requisitioned
               would be reconciled with the actual amount earned during the year-end
               settlement process. Any requisitioned amounts in excess of amounts
               earned are considered reserves.

               The auditee has not been able to fully lease up all its contracted vouchers.
               While the auditee was funded for 1,039 units according to its annual
               contribution contract, it used approximately 645 vouchers in calendar
               years 2003 and 2004. Therefore, in using 1,039 units as their basis,
               $15,127,157 in funding was requisitioned in calendar years 2003 and


                                             5
           2004. However, the auditee actually earned $13,962,019 for these years,
           resulting in $1,165,138 in excess funding. HUD offset $604,976;
           however, there is still a balance of $560,162 that should be offset.

                                                                              Excess not
                     Amount          Amount        Amount        Amount       offset
             Year    requisitioned   earned        overpaid      offset
             2003    $ 6,982,953     $ 6,548,840   $ 434,113     $ 434,113    -0-
             2004    $ 8,144,204     $ 7,413,179   $ 731,025     $ 170,863 $ 560,162
             Total   $15,127,157     $13,962,019   $1,165,138    $ 604,976 $ 560,162

           HUD procedures required that the auditee compare actual program needs
           to the funds advanced, and revise its monthly advances if the scheduled
           payments were in excess of actual needs at year-end by more than five
           percent. In addition PIH Notice 94-64 required that the auditee review
           amounts requisitioned by 90 days after the beginning of its fiscal year. If
           it were determined that the amount requisitioned would exceed actual
           needs by more than five percent, a revised requisition should have been
           submitted no later than 45 days before the beginning of its third quarter.
           The auditee did not submit revisions during fiscal year 2003 and 2004.

Over-Requisitions Generated a
Large Reserve
             The over-requisition of funds caused the accumulation of a large
             housing assistance payment reserve. As of July 30, 2005, the reserve
             was $3,116,705. HUD Housing Choice Voucher Program Guidebook
             7420.10G, section 20.4, provides that excess amounts accumulated
             above the approved reserve level are considered excess reserves and are
             subject to annual recapture. During the course of our audit, we
             discussed with HUD officials the accumulation of this reserve, and in
             response to our inquiries, HUD recaptured $2,385,680 of this reserve.
             As of December 2005, HUD has decided to allow the auditee to retain a
             reserve of $170,864, which is equal to approximately one week’s
             housing assistance payments.

Erroneous Portable Unit
Reporting Caused Unearned
Administrative Fees

             During calendar years 2003 and 2004, the auditee incorrectly reported in
             HUD’s Voucher Management System the number of vouchers it
             administered. It erroneously included portable vouchers of other
             agencies, thus increasing the reported number of vouchers under lease.
             As a result, it incorrectly received an administrative fee from HUD for



                                         6
           the portable vouchers when it was already receiving these fees from the
           agencies responsible for the vouchers.

           HUD procedures provide that when vouchers from another agency are
           accepted, that agency must be billed for housing assistance payments
           and a prorated administrative fee. By including portable vouchers from
           other agencies in its voucher count to HUD, the auditee received
           unearned administrative fees. As a result, it incorrectly received
           $401,166 in administrative fees during the period January 1, 2003,
           through October 2004 that should be returned to HUD.

           For fiscal year 2005, the Consolidated Appropriations Act of 2005 (the
           Act) changed the method of funding vouchers. In 2005, the funding
           methodology was changed from providing funding based on the units
           under contract to funding based on what the agency received in 2004.
           Funding for fiscal year 2005 housing assistance payments was based
           upon the monthly average housing assistance payments paid during
           May, June, and July 2004, and the administrative fee was based upon the
           units reported during this same period. While the auditee correctly
           reported housing assistance payments made during this three-month
           period, the number of reported units erroneously included the portable
           units of other agencies. Accordingly, the administrative fee received in
           2005 continues to be overstated due to the erroneous reporting of
           portable units. While the Act provides that adjustments to actual units
           leased will be made in March 2006, the auditee was overpaid $214,615
           for the period January through December 2005 and will be overpaid an
           additional $53,654 through March 31, 2006. However, if the basis for
           the erroneous housing assistance payment is corrected now, HUD will
           have less funds to recoup at year-end, and the effect upon the auditee to
           repay would be reduced.

Recommendations


           We recommend that the director of HUD’s New York Office of Public
           Housing

           1A. Recoup through offset the $560,162 in overpaid Section 8 funds in
               calendar years 2003 and 2004.

           1B. Determine the number of vouchers the auditee can realistically
               administer and amend the auditee’s annual contribution contract
               accordingly. Final action has been taken to reallocate $2,385,680 of
               reserves, thus releasing these funds to be put to better use.




                                       7
1C. Require the auditee to reimburse HUD the unearned administrative
    fees of $401,166 and $214,615, resulting from the inclusion of
    portable vouchers in its voucher count to HUD in calendar years 2004
    and 2005, respectively.

1D. Adjust the basis for the fiscal year 2006 funding to prevent additional
    overpayment of $53,654 in administrative fees through March 2006 so
    that these funds can be put to better use.




                            8
Finding 2: Administrative Weaknesses Exist in the Auditee’s
           Section 8 Housing Choice Voucher Program
Weaknesses in the auditee’s administration of its Section 8 Housing Choice Voucher
program need to be corrected. We found that the auditee (1) did not properly use or
maintain its Section 8 waiting list, (2) improperly calculated tenant subsidy amounts, (3)
did not perform tenant recertifications in a timely manner, and (4) incorrectly applied
and/or failed to document that all units met housing quality standards. These deficiencies
resulted from the auditee’s failure to follow HUD regulations related to use of the Section
8 waiting list, selection and certification of tenants, calculation of subsidy amounts, and
inspection of apartment units. As a result, the overall effectiveness of the auditee’s
Section 8 Housing Choice Voucher program has been diminished.


 Waiting List Was Not Properly
 Used or Maintained

               The auditee did not use or maintain the Section 8 waiting list in
               accordance with HUD requirements. We found that (a) tenants who were
               not on the Section 8 waiting list were selected for the program, (b) the
               Section 8 waiting list had not been routinely purged as required, and (c)
               the dates that tenants were placed on the waiting list were not accurate.

               HUD Housing Choice Voucher Program Guidebook 7420.10g, chapter
               4.11, provides that as vouchers become available, eligible applicants
               should be selected from the waiting list. We found that eligible tenants
               were not selected for the Section 8 program from the waiting list. In the
               year 2001, a previously state-operated housing development in Mount
               Vernon became privatized, and the auditee converted 208 of its 1,039
               contracted units to project-based vouchers for use at this development. In
               accordance with HUD regulations, 171 tenants, who had previously
               occupied apartments at the development, were given vouchers. However,
               contrary to HUD regulations, an additional 32 tenants, who had not
               previously resided at the development, were given vouchers. These
               tenants were not on the auditee’s Section 8 waiting list but were selected
               by the development from its own waiting list.

               We also found in our review of 30 tenant-based voucher files that 20 of
               the 30 tenants sampled were not listed on the auditee’s waiting list before
               selection and certification into the voucher program. Therefore, these
               tenants were not selected based upon Section 8 waiting list priority.
               Consequently, the auditee is not properly using its waiting list and cannot
               provide documentation that these tenants were properly selected.




                                            9
          In addition, the Auditee is not properly maintaining its Section 8 voucher
          waiting list. It has not purged its waiting list or updated its active tenant
          list in a timely manner in accordance with both HUD regulations and its
          own administrative plan. HUD Housing Choice Voucher Program
          Guidebook 7420.10g, chapter 4.5, provides that the waiting list should be
          kept as up-to-date as possible to minimize the number of “no-shows” and
          ineligible applicants. The auditee’s administrative plan provides for
          annual purging of the waiting list. Untimely purging of the waiting list
          can cause a delay in leasing activities because it can be difficult, if not
          impossible, to reach applicants selected, and an applicant’s status may
          have changed so that the applicant would no longer be eligible.

          The auditee closed its waiting list in 1997, and did not conduct a purge
          until March 2002. After assuming administration of the auditee’s
          program, Westchester County sent letters to more than 1,500 applicants in
          December 2004 and January 2005 to determine the applicants’ interest in
          the voucher program. More than 300 names were removed from the
          waiting list after their letters were returned undeliverable. Further, in
          April 2005, Westchester County reviewed the applicants who were purged
          and was not satisfied with the documentation in the file to support
          removing the applicants from the waiting list. A review of the files
          disclosed that 108 applicants had been erroneously purged because they
          identified themselves as being single; accordingly, these applicants had to
          be reinstated.

          The auditee was not accurately recording the date that applicants were
          placed on the waiting list. Many tenants were listed as having been placed
          on the waiting list on November 19, 2001, after the waiting list was
          closed. Auditee officials were unable to explain how these dates were
          determined. Without the accurate date the applicant was placed on the
          waiting list, the auditee cannot be assured that it is distributing vouchers in
          accordance with established waiting list priority. Auditee officials advised
          us that they expect to correct and finalize the update of the waiting list in
          early 2006.

Tenant Subsidy Amounts Were
Inaccurately Computed

          We learned that tenant subsidy amounts were not always calculated
          properly. We found that the housing assistance payments in 6 of 30 cases
          we sampled were not calculated in accordance with HUD Housing Choice
          Voucher Program Guidebook 7420.10g, chapter 5, section 5.5. The errors
          were caused by an inaccurate calculation of income resulting from (1)
          failure to deduct medical expenses from the tenant’s Social Security
          income, (2) use of an incorrect/incomplete pay stub to determine the
          tenant’s income, and (3) using 2003 income instead of 2004 income to



                                        10
            process the tenant’s 2004 recertification. Thus, the annual impact on
            housing assistance payments for these six cases was an excess subsidy
            amounting to $1,188.

Tenant Recertifications Were
Not Always Performed in a
Timely Manner

            Tenant recertifications were not always performed in a timely manner.
            HUD Housing Choice Voucher Guidebook 7420.10G, chapter 12, section
            12.2, provides that annual examination for recertification must occur for
            every family within a 12-month period. We found that 4 out of the 30
            cases we sampled were not certified in a timely manner. In each of the
            cases, although the tenant had submitted the proper recertification
            documents in a timely manner and the unit had passed the housing quality
            standard inspection, the recertification was not completed. As a result, we
            attribute this error to the auditee’s administrative oversight. Nevertheless,
            since we determined that the tenants were eligible and properly recertified
            during the next recertification period, we are not taking a monetary
            exception.

Inspections Not Performed in
Accordance with Housing
Quality Standards

            During on-site inspections of eight units with auditee inspectors, we found
            that the inspectors did not properly apply HUD’s housing quality
            standards. For instance, five of seven units failed by the inspectors failed
            primarily because there was no smoke detector outside of each bedroom.
            HUD Housing Choice Voucher Program Guidebook 7420.10(G), chapter
            10, section 3, provides that there must be at least one battery-operated or
            hard-wired smoke detector in proper operating condition on each level of
            the unit including basements, but excluding spaces and unfinished attics.
            Since there was a working smoke detector near the three bedrooms,
            although not in front of each room, these five units should have passed
            inspection. Two of the units also failed because of ceiling and wall cracks
            and peeling paint; however, these conditions did not meet the threshold for
            failure according to HUD Housing Choice Voucher Program Guidebook
            7420.10(G). We discussed the results of these inspections with HUD
            officials, who concurred that the housing quality standards were
            incorrectly applied in these five cases.

            Our review of 30 tenant files disclosed two cases with insufficient
            documentation that prior conditions that caused the units to fail had been
            rectified. The units failed inspection during tenant certification in 2004,



                                         11
          and while there was no evidence that the conditions causing the failure had
          been rectified, we noted that the units passed inspection before the tenant
          certifications in 2005. However, during our on-site inspection of these
          units in October 2005, one of these units failed the inspection for the same
          conditions (defective kitchen outlets and a defective bathroom flush) for
          which the unit had previously failed. Accordingly, we question whether
          the unit was properly inspected in 2004 and 2005. Therefore, the $13,779
          in housing assistance payments made for this unit during the period
          August 2004 through October 2005 is considered improperly paid.
          Consequently, the auditee should abate the housing assistance payments
          for this unit until there is a certification that the deficiency is properly
          corrected. Thus, the $5,512 in housing assistance payments that are
          scheduled to be paid before the next tenant certification and unit
          inspection should be considered funds to be put to better use.

Recommendations

          We recommend that the director of HUD’s New York Office of Public
          Housing require the auditee to

          2A.     Establish controls and procedures to ensure that tenants are
                  properly selected from the waiting list.

          2B.     Implement procedures to ensure that the waiting list is properly
                  maintained and purged in accordance with HUD regulations and
                  the auditee’s administrative plan.

          2C.     Reimburse HUD for the improper $1,188 in housing assistance
                  payments that resulted from incorrect subsidy calculations.

          2D.     Implement procedures to ensure the proper use of tenant income in
                  calculating subsidy payments.

          2E.     Implement controls and procedures to ensure that tenant
                  recertifications are conducted in a timely manner.

          2F.     Implement a training program for its inspectors to ensure that units
                  are properly inspected for compliance with housing quality
                  standards and that controls are implemented to document that
                  annual and follow-up inspections are conducted.




                                       12
2G.   Reimburse the $13,779 in housing assistance payments that were
      improperly paid in 2004 and 2005 for the unit lacking
      documentation that the housing quality standard violations were
      corrected, and ensure that the unit complies with housing quality
      standards, thus resulting in $5,512 in funds to be put to better use
      for the remainder of the contract period.




                            13
Finding 3: Weaknesses Exist in the Auditee’s Financial
           Management Controls
Weaknesses in the auditee’s financial management controls need to be addressed. We
found that (1) duplicate and ineligible housing assistance payments were made, (2)
expenditures were inadequately supported, (3) Housing Choice Voucher program funds
were used for other programs, and (4) documentation was lacking for the allocation of
vouchers to project-based units. These deficiencies resulted from the auditee’s failure to
comply with HUD regulations, errors, and its lack of controls over financial transactions.
Consequently, the auditee made $2,290 in duplicate payments, inadequately supported
expenditures of $699,934 and did not maintain complete and accurate records.


 Duplicate and Ineligible
 Housing Assistance Payments
 Were Made
               The Auditee made erroneous and duplicate housing assistance payments to
               one landlord amounting to $2,290. In a January 2004 payment request,
               which was submitted to recover back payments related to 74 tenants in a
               project based development, payments totaling $1,084 ($542 and $542)
               were made on behalf of a tenant representing rental subsidy for May and
               June 2003; however, the tenant in question did not move into the
               apartment unit July 2003. Therefore, this payment is considered
               ineligible. In addition, on the same request the auditee erroneously made
               duplicate payments for two additional tenants for the month of August
               2003 totaling $1,206 ($463 and $743). Since payments for these tenants
               were already made in the initial voucher request, these amounts are also
               considered ineligible. Consequently, $2,290 represents erroneous
               payments that should be repaid to the Section 8 Housing Choice Voucher
               program.
Expenditures Were
Inadequately Supported

               Our review also revealed that expenditures charged to the Section 8
               Housing Choice Voucher program were not adequately supported. For
               calendar year 2004, we examined the supporting documentation for 87
               transactions that were in excess of $5,000. Supporting documentation for
               11 transactions amounting to $479,138 was not available, and the auditee
               was unable to provide evidence to support the nature of theses expenses or
               whether the payment of these expenses were necessary and reasonable.
               Therefore, these payments are considered unsupported.

               We also found that there was inadequate documentation to properly
               allocate costs to the Section 8 Housing Choice Voucher program. The


                                            14
           auditee lacked an allocation plan or written procedures to support the basis
           for $185,796, which represented the allocation of 12 employees’ salaries
           to the Section 8 Voucher program. In addition, $35,000 allocated to the
           Section 8 Voucher program for technical and legal services lacked
           documentation for the basis of the allocation. HUD Housing Choice
           Voucher Program Guidebook 7420.10(G) section 20.2 provides that
           Section 8 funds should be expended only for allowable program costs.
           Without a proper basis for the allocation of costs, we consider these
           expenses unsupported.

           Furthermore, we found five housing assistance payments that lacked a
           voucher and/or backup from the landlord. However, since these payments
           are recurring, we are not taking an exception to them. Nevertheless, the
           auditee should maintain proper documentation to support these
           disbursements. We attribute these weaknesses to inadequate management
           controls in the safeguarding of the auditee’s assets.

Section 8 Funds Used to Fund
Other Programs


           The auditee deposited Housing Choice Voucher program funds into a
           general revolving account. However, as discussed in finding 1, because
           the auditee received excess funds due to over-requisitioning and incorrect
           billings for portable vouchers, the auditee was able to use these excess
           funds to pay expenses of other programs contrary to program regulations.
           The Housing Choice Voucher Program Guidebook 7420.10(G) section
           20.2 provides that Section 8 funds should be expended only for allowable
           program costs. During the review we were unable to specifically
           determine from the auditee’s records the programs for which these funds
           were used; however, auditee officials advised that the funds were used
           primarily for payroll-related expenses of other programs. As such, the
           auditee needs to cease this practice of using Section 8 funds for other
           programs, and as discussed in finding 1, we are requesting that the auditee
           repay the excess Section 8 program funds that have not yet been recouped.

  HUD Approval for Project-
  Based Units Is Lacking


           The fiscal year 2001 Department of Veterans Affairs and Housing and
           Urban Development and Independent Agencies Appropriations Act (Pub.
           Law 106-377, 114 Stat. 1441), section 232, limited an agency’s project-
           based vouchers to 20 percent of the agency’s baseline vouchers. As noted
           in finding 2, when a local state-operated development became privatized,
           the auditee converted 208 of its contracted Section 8 vouchers to project-



                                        15
         based, which represented 20 percent of the auditee’s 1,039 contracted
         vouchers.

         However, the auditee lacked documentation for the proper execution and
         HUD approval for its use of 208 vouchers as project-based. In a
         November 4, 2003 memorandum, officials of HUD’s Office of Public
         Housing notified the auditee that there was no record of HUD approval for
         the award of project-based units at the development. During our audit,
         neither the auditee nor the owners of the development could document a
         HUD-approval letter or a housing assistance payment contract between the
         auditee and the development for the establishment and operation of the
         project-based vouchers/units. The auditee did provide a contract at the exit
         conference, however, there is no evidence that the contract was issued
         competitively and with HUD approval in accordance with 24CFR (Code
         of Federal regulations) Chapter IX, Subpart B, Section 983.51. As such,
         the auditee is inappropriately providing Section 8 assistance to 208 project
         based tenants without an allocation plan that complies with the above
         criteria to support the number of units assigned and HUD’s approval of the
         plan to competitively select units. The annual housing assistance subsidy
         for these 208 units amounts to $2,423,869. Accordingly, not until the
         auditee develops an allocation plan for project based vouchers and obtains
         HUD approval to use these vouchers as project based will these funds
         be appropriately used.

         In addition, although the above appropriations act allows for 20 percent of
         an entity’s vouchers to be used as project based, HUD needs to consider
         that as previously noted in finding 1, the auditee has only used an average
         of 645 of its allocated 1,039 vouchers per month, therefore, officials have
         advised that the allocated 1,039 vouchers is not a realistic number. As
         such, if HUD reduces the baseline number of vouchers in the annual
         contributions contract, the number of vouchers that can be designated as
         project-based must also be reduced, which would impact the auditee’s
         ability to continue to allocate 208 of its vouchers as project-based.


Recommendations

         We recommend that the director of HUD’s New York Office Public
         Housing require the auditee to

         3A.      Reimburse HUD from nonfederal funds for the $2,290 in
                  erroneous and duplicate housing assistance payments.

         3B.      Provide proper support for the $479,138 in unsupported costs and
                  direct that if these costs cannot be supported, the auditee should
                  reimburse the unsupported amount to HUD from nonfederal funds.



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3C.   Develop and implement procedures that will ensure that all costs
      allocated to the Housing Choice Voucher Program is properly
      supported.

3D.   Provide HUD with documentation for the unsupported $185,796 in
      salary costs and $35,000 in technical and legal service costs that
      was allocated to the Housing Choice Voucher program, so that
      HUD can determine the eligibility of this cost. If any of these
      costs are determined to be ineligible, the auditee should be
      required to reimburse HUD the ineligible amounts from nonfederal
      funds.

3E.   Develop and implement controls and procedures that will ensure
      that Housing Choice Voucher program funds are not used for other
      programs.

3F.   Obtain HUD approval and develop an allocation plan to designate
      and distribute the 208 vouchers as project-based, thereby putting
      the annual subsidy payments amounting to $2,423,869 to better
      use.




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SCOPE AND METHODOLOGY

Our review focused on the auditee’s Section 8 Housing Choice Voucher
program. To accomplish our objectives, we

•      Reviewed applicable HUD requirements and regulations.

•      Obtained an understanding of the auditee’s management
       controls as they related to our objectives.

•      Reviewed financial statements, general ledgers, and year-end
       settlement statements for calendar years 2003 through 2005 as
       applicable.

•      Reviewed calendar year 2004 expenses for all expenditures in
       excess of $5,000 for appropriateness and adequate support.

•      Reviewed administrative controls for the selection, certification,
       and recertification of tenants.

•      Reviewed the controls over the maintenance and use of the waiting
       list.

•      Sampled 30 tenant files to verify the accuracy and completeness of
       the auditee’s use of its waiting list, certification procedures, and
       rental assistance calculations.

•      Reviewed the certification for the 32 project-based tenants not
       selected from the waiting list.

•      Reviewed the controls over unit inspections, examined inspection
       records and tenant complaints for 30 tenants, and inspected eight
       units for compliance with housing quality standards and resolution
       of prior deficiencies.

•      Interviewed HUD field office staff as well as employees of the
       auditee.

The review covered the period between January 1, 2004, and February 28,
2005; however, it was extended as necessary. We performed our audit
work from March through October 2005. The review was conducted in
accordance with generally accepted government auditing standards.




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                           INTERNAL CONTROLS

Internal controls are an integral component of an organization’s management that
provides reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the
systems for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls

           We determined the following internal controls were relevant to our audit
           objectives:

           •      Program operations - Policies and procedures that management has
                  implemented to reasonably ensure that a program meets its objectives.

           •      Controls over the validity and reliability of data - Policies and
                  procedures that management has implemented to reasonably ensure
                  that valid and reliable data are obtained, maintained, and fairly
                  disclosed in reports.

           •      Compliance with laws and regulations - Policies and procedures that
                  management has implemented to reasonably ensure that resource use
                  is consistent with laws and regulations.

           •      Safeguarding of resources - Policies and procedures that management
                  has implemented to reasonably ensure that resources are safeguarded
                  against waste, loss, and misuse.

           We assessed the relevant controls identified above.

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




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Significant Weaknesses


       Based on our review, we believe the following items are significant
       weaknesses:

              •   The auditee did not have adequate controls over the validity and
                  reliability of data in its procedures to bill and report voucher use to
                  HUD (see finding 1).

              •   The auditee did not have adequate controls to ensure that
                  maintenance of the waiting list, calculation of rental subsidy,
                  tenant certifications, housing quality standards inspections and
                  allocation of vouchers to project-based units were performed in
                  compliance with applicable laws and regulations (see finding 2 and
                  3).

              •   The auditee did not have a system to safeguard resources when it
                  did not ensure that costs were properly allocated and Section 8
                  funds were appropriately spent for allowable purposes. (see finding
                  3).




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                               APPENDIXES


Appendix A

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

Recommendation         Ineligible 1/           Unsupported 2/         Funds to be put
     number                                                           to better use 3/
     1A                $ 560,162
     1B                                                               $ 2,385,680
     1C                $ 615,781
     1D                                                               $    53,654
     2C                 $ 1,188
     2G                 $ 13,779                                      $     5,512
     3A                 $ 2,290
     3B                                         $479,138
     3D                                         $220,796
     3F                                                               $ 2,423,869

Total                 $1,193,200                $699,934              $ 4,868,715


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/      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. The decision, in
        addition to obtaining supporting documentation, might involve a legal
        interpretation or clarification of departmental policies and procedures.

3/      “Funds to be put to better use” are quantifiable savings that are anticipated to
        occur if the Office of Inspector General (OIG) recommendation is implemented,
        resulting in reduced expenditures at a later time for the activities in question. This
        includes costs not incurred, deobligation of funds, withdrawal of interest,
        reductions in outlays, avoidance of unnecessary expenditures, loans and
        guarantees not made, and other savings.




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