oversight

The Housing Authority of the County of Beaver, Beaver, Pennsylvania, Needed to Improve Controls over HUD Assets

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-10-31.

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

                                                                Issue Date
                                                                    October 31, 2006
                                                                Audit Report Number
                                                                    2007-PH-1001




TO:        James D. Cassidy, Director, Office of Public Housing, Pittsburgh Field
            Office, 3EPH




FROM:



SUBJECT:   The Housing Authority of the County of Beaver, Beaver, Pennsylvania, Needed
            to Improve Controls over HUD Assets


                                 HIGHLIGHTS

 What We Audited and Why


           We audited the Housing Authority of the County of Beaver (Authority) as part of
           our fiscal year 2006 annual audit plan. Our audit objective was to determine
           whether the Authority properly used and maintained control of U.S. Department
           of Housing and Urban Development (HUD) assets.


 What We Found


           For the most part, the Authority used and maintained control of HUD assets
           properly. It properly supported its drawdowns of HUD funds through the Line of
           Credit Control System, made purchases of goods and services in accordance with
           HUD and federal requirements, and appropriately used excess funds from an
           Authority-owned Section 8 new construction project for its nonfederal projects
           and other accounts. However, it did not properly support allocations of salary and
           benefit costs to its HUD-funded programs and did not properly monitor
           disbursements. As a result, the Authority made unsupported expenditures for
           salary and employee benefit costs of $292,576 and made ineligible disbursements
           totaling $46,917. This occurred because the Authority did not have adequate
           internal controls in place to ensure that it properly supported allocations of salary
           and benefit costs to its HUD programs, require all employees to complete
           personnel activity reports or equivalent documentation to account for their time,
           and properly monitor disbursements to ensure that the costs were consistent with
           contractual requirements and federal regulations.

What We Recommend


           We recommend that HUD direct the Authority to provide documentation to
           support the $292,576 in questioned costs or reimburse that amount from
           nonfederal funds. Additionally, we recommend that HUD direct the Authority to
           repay $46,917 for the ineligible costs identified during the audit. We further
           recommend that HUD direct the Authority to develop and implement procedures
           to ensure that salary and benefit allocations are properly supported, thereby
           putting $146,288 to better use over a one-year period, and disbursements of HUD
           funds are consistent with the terms of its annual contributions contracts and other
           federal regulations, thereby putting $15,639 to better use over a one-year period.

           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 October 10, 2006. The Authority provided written comments to our draft report
           on October 19, 2006. The Authority disagreed with our conclusion that it needed to
           improve its internal controls over HUD assets. 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’s Controls over HUD Funds Were Inadequate   5

Scope and Methodology                                                      10

Internal Controls                                                          12

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use       13
   B. Auditee Comments and OIG’s Evaluation                                14




                                            3
                      BACKGROUND AND OBJECTIVES

The Housing Authority of the County of Beaver (Authority) was established in 1937 under the
provisions of the Housing Authorities Law of the Commonwealth of Pennsylvania to provide
affordable housing for qualified individuals. A five-member board of commissioners governs
the Authority. The commissioners are appointed by the County of Beaver and have complete
control over the operations and administration of the Authority’s activities subject to the rules
and regulations of the U.S. Department of Housing and Urban Development (HUD). The
Authority’s executive director is Carl DeChellis. Its main administrative office is located at 300
State Avenue, Beaver, Pennsylvania.

The Authority owned and operated 1,804 low-income public housing units and administered 639
housing choice vouchers under annual contributions contracts with HUD during the audit. The
annual contributions contract defines the terms and conditions under which the Authority agrees
to develop and operate all projects under the agreement. HUD authorized the Authority the
following financial assistance for fiscal years 2003 to 2005:

   •   $7.5 million to provide housing assistance through tenant-based Section 8 housing choice
       vouchers,

   •   $7.9 million in operating subsidies to operate and maintain its low-income housing
       developments, and

   •   $10.8 million in Public Housing Capital Fund program funding to modernize its low-
       income public housing units.

The Authority is a management agent for six independently owned nonfederal housing
complexes and a homeless shelter. It also manages apartments located in Ambridge and West
Mayfield, Pennsylvania, for the Beaver County Community Development Organization,
Incorporated. The Authority also owns and operates three housing projects under a state
program and an additional three housing projects under its locally owned program. The purpose
of these programs is to provide decent, safe, and sanitary housing to low-income families.

The Authority has entered into other contracts with the Commonwealth of Pennsylvania’s
Department of Community and Economic Development for weatherization assistance, funded
through the U.S. Department of Energy, and low-income home energy assistance, funded
through the U.S. Department of Health and Human Services. The purpose of the programs is to
provide eligible low-income individuals with specific energy-saving improvements to their
homes.

The overall objective of our audit was to determine whether the Authority properly used and
maintained control of HUD assets.




                                                4
                                      RESULTS OF AUDIT


Finding 1: The Authority’s Controls over HUD Funds Were Inadequate

The Authority did not properly support allocations of salary and benefit costs to its HUD-funded
programs and did not properly monitor disbursements, contrary to its annual contributions
contracts and federal regulations. This occurred because the Authority did not have adequate
internal controls in place to ensure that it properly supported allocations of salary and benefit
costs to its HUD programs, require all employees to complete personnel activity reports or
equivalent documentation to account for their time, and properly monitor disbursements to
ensure that the costs were consistent with contractual requirements and federal regulations. As a
result, the Authority made unsupported expenditures for salary and employee benefit costs of
$292,576 in fiscal years 2004 and 2005 and made ineligible disbursements totaling $46,917 over
the period 2003 to 2005. By creating and implementing procedures to properly support salary
and benefit allocations and ensure that disbursements are consistent with HUD requirements, the
Authority will put $161,927 1 to better use over a one-year period.



    The Authority Did Not Support
    Its Allocation of Salary and
    Benefit Costs


                 The Authority did not develop an adequate cost allocation plan or maintain
                 personnel activity reports, formal accounting, or other records to support its
                 allocations of salary and benefit costs. The Authority’s consolidated annual
                 contributions contracts 2 with HUD require it to maintain records that identify the
                 source and allocation of its funds. The contracts also require the Authority to
                 maintain complete and accurate books of account and records that allow HUD to
                 determine that all funds are expended in accordance with program regulations and
                 requirements.

                 We requested the Authority’s cost allocation plan during the audit. The Authority
                 provided a one-page cost allocation plan that addressed the assignment of direct
                 and indirect costs. The plan included a statement indicating that costs would be
                 allocated based on a weighted average unit count and that the low-income
                 program’s unit count would be increased by 25 percent due to higher unit
                 turnaround and increased administrative restraints. We asked the Authority to
                 provide support for the additional weight assigned to the low-income program,
                 but none was provided.
1
 $161,927 = $146,288 + $15,639.
2
 Low-income housing annual contributions contract, part A, section 9(C), and Section 8 rental voucher annual
contributions contract, section 14a.


                                                        5
                   The Authority also provided four different versions of cost allocation tables used
                   to allocate costs. The tables contained inconsistencies in the data and did not
                   express, in terms of a quantitative measure, the basis used to explain the
                   allocation method. We analyzed the allocation tables and found that, contrary to
                   the methodology in the cost allocation plan, they assigned a 50 percent weight to
                   the low-income housing program for fiscal years 2004 and 2005. Also, contrary
                   to the cost allocation plan, one version of the tables showed a 50 percent weight
                   for 2003 to the low-income housing program. Moreover, although the cost
                   allocation plan did not address a weight factor for the Section 8 Housing Choice
                   Voucher program, two versions of the cost allocation tables showed a 25 percent
                   weight for 2004 and 2005 to the program.

                   In addition, the Authority did not maintain personnel activity reports or equivalent
                   documentation for all employees to account for their time. The Authority’s
                   comptroller provided an employee listing that included the method the Authority
                   used to charge the employees’ salary costs to its various programs. The listing
                   showed the Authority had 69 employees. However, only 39 employees used a
                   personnel activity report or similar document to record the time they spent
                   working on the Authority’s activities. For the 30 other employees, the Authority
                   either allocated their salaries based on the cost allocation tables (discussed above)
                   or used weekly work schedules to allocate salary costs. Federal regulations 3
                   require distributions of salaries and wages to be supported by personnel activity
                   reports or equivalent documentation. The documentation standards in the federal
                   regulation state that the documentation must reflect an after-the-fact distribution
                   of the actual activity of each employee, account for the total activity, be prepared
                   at least monthly, and be signed by the employee.

                   Since the Authority could not provide automated data summarizing the allocation
                   of salary costs among its various programs on an employee basis, we used another
                   approach to quantify an effect. We reviewed the Authority’s Schedule of All
                   Positions and Salaries 4 for fiscal years 2004 and 2005. We compared the total
                   budgeted salary allocations for the Authority’s HUD programs to workman’s
                   compensation data the Authority provided. The salary costs exceeded the budget
                   in four instances. The following chart shows the details.




3
    Office of Management and Budget Circular A-87, attachment B, section h (4).
4
    Form HUD-52566.


                                                         6
                                                    Authority Amount of salary costs
                             HUD program            fiscal year that exceeded the budget
                   Low-income housing                  2004             $ 30,979
                   Section 8 Housing Choice Voucher    2004             $ 79,467
                   Public Housing Capital Fund         2004             $ 7,678
                   Section 8 Housing Choice Voucher    2005             $ 69,425
                   Subtotal                                             $187,549
                   Employee benefits 5                                  $105,027
                   Total                                                $292,576

                  We analyzed the workman’s compensation data and determined that the
                  Authority’s rate for employee benefits during the period 2003 to 2005 was about
                  56 percent. According to the Authority’s cost allocation plan, fringe benefits are
                  allocated based on the salary allocation for direct and indirect costs. Therefore,
                  we included a calculation of fringe benefit costs in our analysis. The Authority’s
                  annual contributions contracts 6 and federal regulations 7 require the Authority to
                  prepare an operating budget and for the Authority’s board of commissioners to
                  review and approve the budget by resolution. The annual contributions contracts
                  state that operating expenditures may not be incurred except pursuant to an
                  approved operating budget. Therefore, we consider the salary and benefits
                  totaling $292,576 to be unsupported.

                  The unsupported costs occurred because the Authority did not have adequate
                  internal controls in place to ensure that it properly supported allocations of salary
                  and benefit costs to its HUD programs. Further it did not require all employees to
                  complete personnel activity reports or equivalent documentation in accordance
                  with the terms of its annual contributions contracts and federal regulations. The
                  Authority needs to develop and implement procedures to ensure that allocations
                  of salary and benefit costs are properly supported. By properly supporting
                  allocations of salary and benefit costs, the Authority will put $146,288 8 to better
                  use. This will be a recurring benefit. However, our calculation reflects only one
                  year of these benefits.




5
  The Authority’s rate for employee benefits during the period 2003 to 2005 was about 56 percent. According to the
Authority’s cost allocation plan, fringe benefits are allocated based on the salary allocation for direct and indirect
costs.
6
  Low-income housing annual contributions contract, part A, sections 11(A) and 11(D), and Section 8 rental voucher
annual contributions contract, section 11.b.
7
  24 CFR [Code of Federal Regulations] 990.111(a)(1) and 990.111(c)(2).
8
  $292,576/2 = $146,288 annually.


                                                          7
     The Authority Did Not
     Adequately Monitor
     Disbursements


                 The Authority did not adequately monitor disbursements to ensure that
                 expenditures of HUD funds were consistent with the terms of its annual
                 contributions contracts and federal regulations. We reviewed 75 disbursements
                 valued at $1.5 million that the Authority made during the period 2003 though
                 2005 from its general checking-revolving account. Of those, 56 disbursements
                 totaling $1.3 million involved HUD funds, and the Authority made 17 ineligible
                 expenditures with HUD funds totaling $46,917. 9 The Authority’s annual
                 contributions contracts limit the use of funds provided under the contracts to pay
                 only costs related to the operation of the projects under the contract. 10 The
                 Authority used Section 8 funds to make ineligible payments of $8,000 to local
                 colleges or universities 11 for scholarships and $14,365 for an after-school
                 program. The Authority used low-income housing funds to make an ineligible
                 donation of $1,500 to the local volunteer fire department. The Authority needs to
                 reimburse $23,865 to its Section 8 and low-income housing programs for the
                 ineligible payments identified.

                 In addition, the Authority inappropriately charged $51,227 for computer
                 maintenance agreements and training for the Authority’s computer operator to its
                 low-income housing program. As stated above, the Authority’s annual
                 contributions contracts limit the use of funds provided under the contracts to pay
                 only costs related to the operation of the projects under the contract. Federal
                 regulations 12 state that indirect costs incurred for a common cost objective should
                 be distributed equitably to the benefited cost objectives based on the relative
                 benefits derived. Therefore, since all of the Authority’s programs benefited from
                 this service, they should share in paying a fair and reasonable portion of the
                 expense. We used an unweighted percentage-of-units methodology and
                 determined that $28,175 of the $51,227 should have been allocated to the low-
                 income housing program. The difference of $23,052 is an ineligible cost. The
                 Authority needs to reimburse its low-income housing program this amount from
                 the other programs the Authority did not charge for these services.

                 These ineligible costs occurred because the Authority did not properly monitor
                 disbursements to ensure that expenses were incurred consistent with the terms of
                 annual contributions contracts and federal regulations. The Authority needs to
                 develop and implement procedures to ensure that disbursements of HUD funds

9
  $46,917 = $24,552 (low-income housing program) plus $22,365 (Section 8 Housing Choice Voucher program).
10
   Low-income housing annual contributions contract, part A, section 9(C), and Section 8 rental voucher annual
contributions contract, section 11a.
11
   The Authority informed us that these costs were charged to the Section 8 Housing Choice Voucher program in
error and that the accounting error would be corrected.
12
   Office of Management and Budget Circular A-87, attachment C, section A.1.


                                                        8
                   are consistent with the terms of its annual contributions contracts and applicable
                   HUD and federal regulations. By ensuring that disbursements are consistent with
                   the annual contributions contract requirements and applicable regulations, the
                   Authority will put $15,63913 to better use. This will be a recurring benefit.
                   However, our calculation reflects only one year of these benefits.

     Recommendations


                   We recommend that the director of the Pittsburgh Office of Public Housing direct
                   the Authority to

                   1A.      Provide documentation to support the $292,576 in questioned costs
                            identified and, if the costs cannot be supported, reimburse the appropriate
                            HUD programs for any unsupported costs from nonfederal funds.

                   1B.      Repay its low-income housing program $24,552 and its Section 8 Housing
                            Choice Voucher program $22,365 from nonfederal funds for the ineligible
                            costs identified by the audit.

                   1C.      Develop and implement procedures to ensure that salary and benefit
                            allocations are properly supported, thereby putting $146,288 to better use
                            over a one-year period.

                   1D.      Develop and implement procedures to ensure that disbursements of HUD
                            funds are consistent with the terms of the Authority’s annual contributions
                            contracts and applicable HUD and federal regulations, thereby putting
                            $15,639 to better use over a one-year period.




13
     $46,917/3 = $15,639 annually.


                                                      9
                        SCOPE AND METHODOLOGY


We performed the audit at the Authority in Beaver, Pennsylvania, from January through September
2006. The audit was performed in accordance with generally accepted government auditing
standards and included tests of internal controls that we considered necessary.

The audit covered transactions representative of operations current at the time of the audit and
included the period January 2003 through December 2005. We expanded the scope of the audit
as necessary. We reviewed the Authority’s consolidated annual contributions contracts with
HUD and applicable program regulations and guidance. We discussed operations with
management and staff personnel at the Authority and key officials from HUD’s Pittsburgh,
Pennsylvania, field office.

To determine whether the Authority properly administered its HUD-funded programs, we

    •   Reviewed the Authority’s internal control structure.

    •   Reviewed the Authority’s independent auditor’s reports for fiscal years 2003, 2004, and
        2005.

    •   Reviewed minutes of the Authority’s board of commissioners meetings.

    •   Interviewed Authority personnel.

    •   Reviewed all documentation provided by the Authority related to our audit objective,
        including partnership agreements, legal documents, financial statements, general ledgers,
        bank statements, bank loan agreements, related correspondence, payment vouchers,
        weighted cost allocation tables, payroll distribution reports, and spreadsheets containing
        workman’s compensation, employer-paid taxes, and fringe benefit data.

    •   Reviewed HUD and Authority correspondence related to the audit and results of monitoring
        reviews conducted by HUD’s Pittsburgh Office of Public Housing.

    •   Reviewed 10 Line of Credit Control System drawdowns valued at $1.5 million from
        2005 and 2006.

    •   Reviewed four contracts valued at $3.2 million to determine whether the Authority’s
        procurement process complied with HUD and federal regulations.

    •   Obtained a legal opinion from the Office of Inspector General’s (OIG) Office of General
        Counsel regarding the Authority’s actions to obtain a line of credit and mortgage to
        renovate a donated building. Counsel opined that the Authority did not encumber HUD
        assets or violate its annual contributions contract.



                                               10
•   Obtained a legal opinion from OIG’s Office of General Counsel regarding the
    Authority’s use of excess funds from an Authority-owned Section 8 new construction
    project for its nonfederal projects and other accounts. Counsel opined that the Authority
    could use these funds as it saw fit, including the uses to which it put the funds in this
    instance.




                                           11
                             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, control systems, and other management tools
                      implemented to ensure that the Authority properly managed HUD funds in
                      accordance with the terms of its annual contributions contracts and
                      applicable HUD and federal regulations.

              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

                  •   Properly support salary and benefit costs charged to HUD programs.

                  •   Properly monitor disbursements to ensure that expenses incurred were
                      consistent with the terms of annual contributions contracts and applicable
                      HUD and federal regulations.



                                               12
                                   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                                 $292,576
                  1B            $46,917
                  1C                                                   $146,288
                  1D                                                   $ 15,639

                   Total        $46,917              $292,576          $161,927



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

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. This includes
     reductions in outlays, deobligation of funds, withdrawal of interest subsidy costs not
     incurred by implementing recommended improvements, avoidance of unnecessary
     expenditures noted in preaward reviews, and any other savings which are specifically
     identified. In these instances, if the Authority implements our recommendations, it will
     cease making unsupported allocations of salary and benefit costs to its HUD-funded
     programs and ineligible expenditures. Once the Authority improves its controls, this will
     be a recurring benefit. Our estimate reflects only the initial year of these benefits.




                                              13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1
Comment 2

Comment 3

Comment 3

Comment 3
Comment 4




                         14
Comment 3




            15
                               OIG Evaluation of Auditee Comments


Comment 1         The audit evidence showed the Authority did not have adequate internal controls
                  in place to ensure it properly supported allocations of salary and benefit costs to
                  its HUD programs. In this regard, the Authority did not develop an adequate cost
                  allocation plan or maintain personnel activity reports, formal accounting, or other
                  records to support its allocations of salary and benefit costs. The Authority’s
                  consolidated annual contributions contract 14 with HUD specifically requires it to
                  maintain records that identify the source and allocation of its funds. This key
                  management control is critical in order to ensure the Authority spends federal
                  funds in accordance with the regulatory requirements of each specific federal
                  program. The Authority’s annual contributions contract also requires it to
                  maintain complete and accurate books of account and records that allow HUD to
                  determine that all funds are expended in accordance with program regulations and
                  requirements. The audit evidence showed the Authority did not do so.

Comment 2         The Authority’s annual contributions contract 15 and federal regulations 16 require
                  it to prepare an operating budget and for the Authority’s board of commissioners
                  to review and approve the budget by resolution. The annual contributions
                  contract prohibits the Authority from incurring operating expenditures unless the
                  expenses are pursuant to an approved operating budget. It further requires that if
                  unbudgeted expenditures are incurred in emergencies to eliminate serious hazards
                  to life, health, and safety, the operating budget should be amended accordingly.
                  As such, the approved operating budget is in fact a proper analytic tool.

Comment 3         We agree that public housing agencies must follow regulations that private
                  housing entities are not required to follow. In this regard, HUD established these
                  regulations to ensure that the Authority is properly using HUD funds to meet its
                  mission of providing decent, safe, and sanitary housing to eligible families. The
                  matrix the Authority provided does not support the weight added to its cost
                  allocation table.

Comment 4         We do not question the need for a properly supported weighted cost allocation
                  table. The audit evidence showed however, that the Authority’s cost allocation
                  table contained significant inconsistencies in the data. Further, the Authority did
                  not properly support the weight added to the table.




14
   See footnote 2 on page 5.
15
   See footnote 6 on page 7.
16
   See footnote 7 on page 7.


                                                   16