oversight

The Franklin Redevelopment and Housing Authority, Franklin, Virginia, Did Not Adequately Administer Its Section 8 Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-11-30.

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

                                                                Issue Date
                                                                      November 30, 2005
                                                                Audit Report Number
                                                                      2006-PH-1003




TO:        William D. Tamburrino, Director, Baltimore Public Housing Program Hub,
            3BPH
           Robert Jennings, Director, Richmond Office of Public Housing, 3FPH


FROM:


SUBJECT:   The Franklin Redevelopment and Housing Authority, Franklin, Virginia,
            Did Not Adequately Administer Its Section 8 Program



                                  HIGHLIGHTS

 What We Audited and Why

           We audited the Franklin Redevelopment and Housing Authority’s (Authority)
           Section 8 Housing Choice Voucher program as part of our fiscal year 2005 annual
           audit plan. Our audit objective was to determine whether the Authority
           adequately administered its Section 8 program according to U.S. Department of
           Housing and Urban Development (HUD) requirements.

 What We Found

           The Authority did not adequately administer its Section 8 program according to
           HUD requirements. The Authority often made incorrect housing assistance
           payments and did not perform required quality control reviews of its Section 8
           tenant files. Additionally, the Authority did not verify rent reasonableness and it
           allowed an apparent conflict of interest situation to exist. These problems
           occurred because the Authority did not have adequate internal controls in place to
           ensure it adequately administered its Section 8 program. As a result, the
           Authority made housing assistance overpayments of $9,662 and underpayments
           of $1,520, and it had no assurance its housing assistance payments were
           reasonable.

What We Recommend

           We recommend that HUD require the Authority to repay $9,662 in housing
           assistance overpayments and reimburse tenants $1,520 in housing assistance
           underpayments. Further, we recommend that HUD require the Authority to
           strengthen its internal controls to ensure it adequately administers its Section 8
           program and prevents apparent conflict of interest situations.

           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 discussed the report with the Authority during the audit and at an exit
           conference on November 16, 2005. The Authority provided written comments to
           our draft findings on November 23, 2005. The Authority generally agreed with
           the report and our recommendations to strengthen internal controls, and to resolve
           and prevent apparent conflict of interest situations. The complete text of the
           Authority’s response, along with our evaluation of that response, can be found in
           appendix B of this report.




                                             2
                            TABLE OF CONTENTS


Background and Objectives                                                            4

Results of Audit
      Finding 1: The Authority Did Not Adequately Administer Its Section 8 Program   5

Scope and Methodology                                                                9

Internal Controls                                                                    10

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                 11
   B. Auditee Comments and OIG’s Evaluation                                          12




                                            3
                      BACKGROUND AND OBJECTIVES


The Franklin Redevelopment and Housing Authority (Authority) was established in 1963. The
Authority is responsible for operating low-rent housing for eligible families, for operating
redevelopment and conservation programs, and for the delivery of services to citizens of low-rent
housing and urban renewal areas through the encouragement and development of social and
economic opportunities. The Franklin City Council appoints a seven-member board of
commissioners to govern the Authority. The Authority is located at 601 Campbell Avenue in
Franklin, Virginia.

The Authority administered 315 Section 8 vouchers to families in the city of Franklin and the
surrounding county of Southampton under its consolidated annual contributions contract with the
U.S. Department of Housing and Urban Development (HUD). The consolidated annual
contributions contract defines the terms and conditions under which the Authority agrees to manage
its Section 8 Housing Choice Voucher program. HUD authorized the Authority the following
Section 8 assistance from fiscal years 2002 to 2004:

                                Fiscal year      Authorized funds
                                   2002             $1,177,537
                                   2003             $1,108,326
                                   2004             $1,288,330
                                   Total            $3,574,193

The Authority had other financial assistance from fiscal years 2002 to 2004 as follows:

   •   $1.7 million operating fund to operate public housing units.

   •   $1.2 million Public Housing Capital Fund program funding to modernize public housing
       units.

HUD rated the Authority as a troubled agency based on its Section 8 Management Assessment
Program scores since fiscal year 2003. Our audit objective was to determine whether the
Authority is adequately administering its Section 8 program according to HUD requirements.




                                                 4
                                      RESULTS OF AUDIT


Finding 1: The Authority Did Not Adequately Administer Its Section 8
Program
The Authority often made incorrect housing assistance payments, did not perform required
quality control reviews of its Section 8 tenant files, and did not verify rent reasonableness. In
addition, the Authority allowed an apparent conflict of interest to exist by allowing its Section 8
occupancy clerk to process her own Section 8 housing assistance payment. These problems
occurred because the Authority did not have adequate internal controls in place to ensure it
adequately administered its Section 8 program. As a result, the Authority made housing
assistance overpayments of $9,662 and underpayments of $1,520, and it had no assurance its
housing assistance payments were reasonable.



    The Authority Made Incorrect
    Housing Assistance Payments
    and Performed Inadequate
    Quality Control Reviews


                   The Authority incorrectly calculated income and utility allowances when
                   computing rent and subsidy for some of its Section 8 recipients, resulting in
                   overpayments of $9,662 1 and underpayments of $1,520. HUD Handbook
                   7420.10g, chapter 6, describes the guidelines for calculating rent and subsidy.
                   Chapter 22 of the handbook describes the quality control procedures necessary for
                   ensuring the correct calculation of rent and subsidy. Our review of the Authority’s
                   calculations and documentation contained in the tenant files (for example, paycheck
                   stubs and employment verification forms) showed the Authority’s procedures were
                   not always effective in ensuring it correctly calculated rent and subsidy.

                       •   In 5 of the 15 files reviewed (33 percent), the Authority incorrectly
                           calculated income, resulting in $9,662 in housing assistance overpayments.

                       •   In 3 of the 15 files reviewed (20 percent), the Authority incorrectly
                           calculated income and utility allowances, resulting in $1,520 in housing
                           assistance underpayments.

                   The Authority officials agreed with the calculation errors noted in our review but
                   they stated that quality control reviews were performed. To comply with Section 8
                   Management Assessment Program requirements, Authority officials stated they
1
    Overpayments of $10,614 less $952 repayment from a repayment agreement


                                                       5
           selected a sample of Section 8 files to determine whether the rent being paid by the
           recipients was correctly calculated.

           According to Authority officials, quality control reviews were performed. However,
           the Authority could not provide a listing of files they reviewed. Additionally, the
           Authority could not provide other documentation supporting quality control reviews
           of tenant files. Further, it was apparent by the deficiencies noted in our review that
           the Authority needed to strengthen its quality control program. The Authority’s
           Section 8 administrative plan contained provisions that if implemented would have
           strengthened the Authority’s quality control program. The plan required the Section
           8 director to review 10 percent of all rent reexamination files and 10 percent of new
           application files. The Authority should sample files in an unbiased manner, leaving
           a clear audit trail. However, the Authority could not provide evidence or an audit
           trail to show it had performed these reviews.

           The Authority can correct the errors noted in calculating rent and subsidy by
           following its own administrative plan and preparing periodic reports showing the
           results of file reviews and any actions taken. Additionally, the Authority can
           perform periodic reviews of staff to ensure they correctly calculate income and
           utility allowances according to requirements.

The Authority Did Not
Determine Rent Reasonableness

           Contrary to HUD and federal regulations, the Authority did not determine rent
           reasonableness before approving Section 8 lease contracts. Our review of 15
           randomly selected tenant files showed that in 15 (100 percent) instances, the
           Authority did not determine rent reasonableness. In addition, the HUD confirmatory
           review performed in July 2005 showed that the Authority did not determine rent
           reasonableness. This review stated that the Authority staff was not familiar with
           HUD requirements in determining rent reasonableness. Further, the Authority
           established its Section 8 payment standards at 110 percent of HUD’s established fair
           market rents, and it did so without determining that the higher amounts were
           justified.

           According to 24 CFR [Code of Federal Regulations] 982.507, the Authority may not
           approve a lease until it determines that the initial rent to the owner is reasonable. In
           addition, HUD Handbook 7420.10g, chapter 9, requires housing authorities to
           ensure that rents charged by owners to Housing Choice Voucher program
           participants are reasonable. This determination involves two comparisons. First, the
           Authority must compare the rent for the voucher unit to rents for similar unassisted
           units in the marketplace. Second, the Authority must compare the rent to rents for
           similar units on the premises. Since the Authority set a payment standard higher
           than the fair market rent and did not determine rent reasonableness, it had no




                                              6
                 assurance that HUD funds were used to assist the maximum number of eligible
                 families.

    Apparent Conflict of Interest
    Existed


                 The Authority allowed an apparent conflict of interest to exist by allowing its
                 Section 8 occupancy clerk to process her own Section 8 housing assistance payment.
                 The audit showed that from September 2001 to September 2004, the Section 8
                 occupancy clerk processed her own Section 8 payment and benefited from an
                 overpayment of $7,941 (included in total overpayments of $9,662) during this
                 period. The housing assistance payment contract signed by the Authority and its
                 Section 8 landlords prohibits a covered individual from having any direct or indirect
                 interest in the housing assistance payment contract or in any benefits or payments
                 under the contract while such person is a covered individual or during one year
                 thereafter. A covered individual includes any employee of the Authority or any
                 contractor, subcontractor, or agent of the Authority who formulates policy or who
                 influences decisions with respect to the program.

                 To preclude this from occurring in the future, the Authority should implement
                 appropriate measures to prevent and resolve apparent conflict of interest situations.

    Recommendations



                 We recommend that the director, Baltimore Public Housing Program Hub 2

                 1A.      Reduce the amount of housing assistance payments by $9,662 less
                          amounts recaptured from landlords or tenants on the Authority’s next
                          Section 8 year-end settlement statement to account for net overpayments.

                 1B.      Reimburse applicable tenants $1,520 for the housing assistance
                          underpayments, thereby putting these funds to better use.

                 1C.      Require the Authority to implement its Section 8 administrative plan and
                          to prepare periodic reports showing the results of file reviews and any
                          actions taken.

                 1D.      Require the Authority to develop and implement policies and procedures to
                          ensure rent reasonableness before approving all housing assistance payments
                          contracts.


2
 We also addressed this audit report to the director, Richmond Office of Public Housing at the request of the
director, Baltimore Public Housing Program Hub.


                                                         7
1E.   Require the Authority to resolve the current conflict of interest and develop
      and implement policies and procedures to ensure conflict of interest
      situations do not occur.




                                8
                         SCOPE AND METHODOLOGY


We performed the audit

   •   From May through November 2005 in accordance with generally accepted government
       auditing standards.

   •   At the Authority, located in Franklin, Virginia.

The audit covered transactions representative of operations current at the time of the audit and
included the period January 2002 through May 2005. We expanded the scope of the audit as
necessary.

To determine whether the Authority adequately administered its Section 8 program according to
HUD requirements, we

   •   Reviewed applicable guidance and federal regulations and discussed operations with
       management and staff personnel at the Authority,

   •   Used audit software to randomly select and review 15 Section 8 tenant files,

   •   Reviewed Section 8 Management Assessment Program confirmatory reviews performed
       by HUD at the Authority in 2003 and 2005,

   •   Reviewed the Authority’s Section 8 year-end settlement statements for years 2003
       through 2004,

   •   Reviewed the Authority’s independent auditor’s reports for fiscal years 2002 through
       2004,

   •   Reviewed minutes of the Authority's board of commissioners meetings, and

   •   Reviewed the Authority’s internal control structure.




                                                 9
                             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, 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:

                  •   Policies, procedures, and controls implemented to administer the Section 8
                      program properly.

              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.

 Significant Weaknesses


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

              The Authority did not have controls to ensure

                  •   Quality control reviews were implemented and documented and periodic
                      reports were prepared showing the results of file reviews and any actions
                      taken.

                  •   Rents were reasonable before approving all housing assistance payments
                      contracts.

                  •   Conflicts of interest were identified and avoided.


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                                     APPENDIXES


Appendix A

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

             Recommendation number             Ineligible 1/      Funds to be put
                                                                  to better use 2/
                          1A                        $9,662
                          1B                                           $1,520



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     polices or regulations.

2/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     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.




                                               11
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 1




                         12
13
                        OIG Evaluation of Auditee Comments


Comment 1   We are encouraged that the Authority agrees with the report and is taking needed
            action to correct the problems the audit identified. However, the fact that the
            Authority is currently under new management does not negate the fact that it
            made incorrect housing assistance payments in the past. Additionally, the report
            does in fact recommend for HUD to reduce the amount of the Authority’s housing
            assistance payments less amounts recaptured from landlords or tenants.




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