oversight

Orange City Housing Authority, Low-Rent Housing Program, Orange, New Jersey, Incorrectly Paid the City's Stree Lighting Cost and Improperly Wrote-off a Receivable

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-20.

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

                                                               Issue Date
                                                                September 20, 2006
                                                               Audit Report Number
                                                                2006-NY-1011




TO:         Edward De Paula, Director, Office of Public Housing, 2FPH


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

SUBJECT: Orange City Housing Authority, Orange, New Jersey, Incorrectly Paid the
         City’s Street Lighting Costs and Improperly Wrote-off a Receivable




                                HIGHLIGHTS

 What We Audited and Why


             We audited the Orange City Housing Authority’s (Authority) payments to
             and on behalf of the City of Orange (City) and the write-off of an account
             receivable from the City. We reviewed payments to the City because a
             review of the financial statements, which was done during our audit of the
             Housing Choice Voucher program, indicated a questionable write-off of
             an account receivable that was due to the low-rent housing program.

             Our audit objective was to determine whether payments to the City for
             street lighting and a write-off of an account receivable from the City were
             proper.

 What We Found
                                    .
             The Authority paid for street lighting expenses, which should have been
             furnished by the City at no cost to the Authority. The Authority also
             wrote off an account receivable pertaining to the cost of the lights without
           obtaining board approval. As a result, from April 2003 through March
           2006, the Authority paid for the City’s street lighting costs and was
           deprived of funds from a $156,409 receivable, which could be used to pay
           for necessary operating expenses if collected.

What We Recommend

           We recommend that the director of the U.S. Department of Housing and
           Urban Development’s (HUD) New Jersey Office of Public Housing
           instruct the Authority to record an account receivable for the $156,409 due
           from the City and notify the City to pay for street lighting costs, which are
           the City’s responsibility under the cooperation agreement.

           For each recommendation without a management decision, please respond
           and provide status reports in accordance with HUD Handbook 2000.06,
           REV-3. Also, please furnish us copies of any correspondence or
           directives issued because of the audit.

Auditee Response

           We discussed the finding with Authority and HUD officials during the
           audit. We provided a copy of the draft report to Authority officials and
           discussed the report with them at the exit conference held on September 6,
           2006. The Authority provided its written comments to our draft report on
           September 7, 2006. The complete text of the auditee’s response, along
           with our evaluation of that response, can be found in appendix B of this
           report.




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                         TABLE OF CONTENTS


Background and Objectives                                                              4



Results of Audit
      Finding 1. The Authority Incorrectly Paid the City’s Street Lighting Costs and   5
                 Improperly Wrote-off a Receivable

                                                                                       9
Scope and Methodology


Internal Controls                                                                      10

   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                   12
   B. Auditee Comments and OIG’s Evaluation                                            13




                                          3
                 BACKGROUND AND OBJECTIVES

The Orange City Housing Authority (Authority) is located at 340 Thomas Boulevard,
Orange, New Jersey. The Authority is headed by an executive director and governed by
a board of commissioners made up of seven members. It has 390 low-rent housing units
and received $1.66 million in operating subsidies for the year ending March 31, 2006.

Our audit objective was to determine whether payments to the City of Orange (City) for
street lighting and a write-off of an account receivable from the City were proper.




                                           4
                             RESULTS OF AUDIT



Finding 1: The Authority Incorrectly Paid the City’s Street
           Lighting Costs and Improperly Wrote-off a Receivable

The Authority paid for street lighting expenses, which should be furnished by the City at
no cost to the Authority. The Authority also wrote off an account receivable pertaining to
the cost of the lights without obtaining board approval. We attribute these deficiencies to
the Authority’s failure to follow the terms of its cooperation agreement with the City. As
a result, from April 2003 through March 2006, the Authority continued to pay for the
City’s street lighting costs and was deprived of funds from a $156,409 receivable, which
could be used to pay for necessary operating expenses if collected.


 The Authority Paid the City’s
 Street Lighting Costs
               The Authority paid a local utility company for street lighting expenses that
               should have been provided at no cost by the City under the terms of a
               cooperation agreement between the Authority and the City. From April
               2003 to March 2006, the Authority paid a local utility company a total of
               $74,261 for the City’s street lighting expenses related to public streets and
               common areas around the Authority.

               According to the cooperation agreement, entered into in 1950, the City of
               Orange is required to “furnish or cause to be furnished to the Local
               Authority and the tenants of such Project the public services and facilities,
               which are at the date hereof being furnished without cost or charge to
               other dwellings and inhabitants in the city, including but not limited to:
               street lighting on public streets and roads within such Project and the
               boundaries thereof.” In 1969, the cooperation agreement was amended to
               further state that “if by reason of the Local Government’s failure or refusal
               to furnish or cause to be furnished any public services or facilities, which
               it has agreed hereunder to furnish or cause to be furnished to the Local
               Authority or the tenants of any Project, and the Local Authority incurs any
               expense to obtain such services or facilities, then the Local Authority may
               deduct the amount of such expense from any payments in lieu of taxes
               due, or to become due to the Local Government in respect to any Project
               or any other low-rent housing Projects owned or operated by the Local
               Authority.”

               While paying the local utility company for the City’s street lighting costs,
               the Authority continued to calculate its annual payment in lieu of taxes;


                                             5
            however, it accrued the balance instead of making payments to the City.
            Accordingly, as of March 2006, the Authority’s accrued payments in lieu
            of taxes amounted to $21,034. As a result, the Authority disbursed
            $53,227 more for street lighting costs than its accrued payments in lieu of
            taxes.

            For fiscal year 2006 the Authority paid $20,164 for street lighting costs
            that were in excess of the amount of its accrued payment in lieu of taxes.
            The Authority did not record this amount as an account receivable and had
            not taken any action to recover these costs from the City.


Error!
 A $156,000 Receivable Was
 Written Off
            As a result of the above overpayments related to the City’s street lighting
            expenses, the Authority set up an account receivable due from the City for
            the fiscal years that were prior to fiscal year 2006. However, in its fiscal
            year 2005 financial statements, the Authority’s accountant wrote off an
            account receivable due from the City totaling $156,409. This balance
            represented the amount expended by the Authority for the City’s street
            lighting expenses, which were in excess of the Authority’s annual
            payments in lieu of taxes as of fiscal year end 2005. The Authority’s
            auditors wanted to be certain that the lighting expenses were indeed the
            City’s responsibility so they recommended that Authority officials
            determine whether the City was responsible for the street light payments.
            However, there was no evidence that the Authority followed up with the
            City to resolve this matter or that attempts were made to collect this
            balance from the City.




                                          6
            The above picture represents one of sixteen lights at the Thomas Street
            Project, which illuminates the Authority’s parking lot. The Authority paid
            for these lights, despite a cooperation agreement stating that the City is
            responsible for paying for these lights.

Board Approval Was Not
Obtained for the Write-Off
            Board approval was not given for the write-off of the $156,409 receivable
            from the City. Therefore, the Authority did not comply with its annual
            contributions contract and U.S. Department of Housing and Urban
            Development (HUD) regulations when it wrote off the $156,409
            receivable from the City. The annual contributions contract provides that
            the Authority may only use the general fund for the operation and
            development of the projects and other purposes that are specifically
            approved by HUD.

            Regulations at 24 CFR [Code of Federal Regulations] 85.20 provide that
            effective control and accountability must be maintained for cash and other
            assets. Further, grantees are required to safeguard such assets. Since the
            Authority could not provide documentation to substantiate the write-off of
            the receivable, such as attempts to collect the receivable, or resolve the
            responsibility of the City to pay for the street lights, it did not properly
            safeguard the Authority’s assets.

            Authority officials believe that the board was made aware of the write-off
            due to the issuance of the audited financial statements. However, approval
            of the audited financial statements does not equate to approval of the
            write-off. The write-off deprived the Authority of funds that could be
            used to pay for operating expenses. Therefore, the receivable should be


                                          7
             re-recorded on the Authority’s books.

Conclusion
             The Authority did not ensure that the City complied with the terms of the
             cooperation agreement or that its assets were properly safeguarded. As
             utility costs increase, payments for street lighting will also increase. If the
             Authority continues to pay for street lighting in violation of its cooperation
             agreement, it faces a continued burden on its financial operations. The
             Authority should notify the city to pay for the street lighting costs and
             enforce its rights under the cooperation agreement. In addition, the
             $156,409 receivable needs to be placed back on the Authority’s books.
             During fiscal year 2006, the Authority has expended $20,164 in street
             lighting/utility expenses that are in excess of its annual payment in lieu of
             taxes. This balance should also be recorded as an account receivable and
             recovered from the City.


Recommendations

             We recommend that the director, New Jersey Office of Public Housing,
             direct the authority to


             1A. Record the account receivable of $156,409 due from the City on its
                 books to cover costs that should have been paid by the City under the
                 cooperation agreement as of its fiscal year 2005 and take action to
                 collect the receivable from the City.

             1B. Record and recover funds amounting to $20,164 from the City for
                 street lighting expenses paid in excess of payment in lieu of taxes in
                 fiscal year 2006.




                                           8
                    SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed applicable laws, regulations, and other HUD
program requirements. We analyzed the Authority’s administrative plan, cooperative
agreements, and procurement policies. We also reviewed independent public accountant
reports, board minutes and resolutions, and interviewed HUD and Authority management
and staff.

We conducted our audit work from February through June 2006 at the Authority’s offices
in Orange, New Jersey. Our audit covered the period April 1, 2003, through March 31,
2006.
We performed our review in accordance with generally accepted government auditing
standards and included tests of management controls that we considered necessary.




                                          9
                          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.

               •   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 assets – 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 an organization’s objectives.




                                             10
Significant Weaknesses

       Although the audit did not disclose any major significant weakness in the
       Authority’s management controls, we found deficiencies in its write off of
       an account receivable from the City and the payment of street lighting
       costs which are the City’s obligation under the cooperation agreement.
       The deficiencies are discussed in the finding section of the report.




                                   11
                                APPENDIXES

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

                Recommendation           Ineligible        Funds to be put to
                   number                    1/              better use 2/
                     1A                  $156,409
                     1B                                         $20,164

                     Total               $156,409               $20,164


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: or federal, state, or
     local policies or regulations.

2/   “Funds to be put to better use” are quantifiable savings that are anticipated to
     occur if an 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, reduction in outlays,
     avoidance of unnecessary expenditures, loans and guarantees not made, and other
     savings. In this instance, if the Authority implements our recommendations and
     requires the City to comply with the requirements of the cooperation agreement it
     will result in an annual saving of $20,164 for unnecessary expenditures. Our
     estimate only reflects the initial year of these recurring benefits.




                                          12
Appendix B
     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        13
Appendix B
     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        14
Appendix B
     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 1


Comment 2




                        15
                     OIG Evaluation of Auditee Comments

Comment 1   Authority officials concur with our recommendations and have agreed to
            place a $156,409 accounts receivable back on the books.

Comment 2   Authority officials question whether the light shown in the report was the
            City’s since the light is on the Authority’s property. As such, we changed
            the picture in the report, which now accurately displays a light owned and
            maintained by the City of Orange, but paid for by the Authority. We also
            confirmed with the local utility company that the lights are owned and
            maintained by the City of Orange. Accordingly, the Authority needs to
            contact the City of Orange to resolve any disputes.




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