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
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)