oversight

Corrective Action Verification Housing Authority of the City of Cutbert, Georgia Public Housing Programs Audit Report 2004-AT-1001

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-30.

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

                                                     U.S. Department of Housing and Urban Development
                                                     District Office of the Inspector General
                                                     Office of Audit
                                                     Richard B. Russell Federal Building
                                                     75 Spring Street, SW, Room 330
                                                     Atlanta, GA 30303-3388
                                                     (404) 331-3369



                                                            Issue Date
                                                                 September 30, 2008
                                                            Audit Report Number
                                                                  2008-AT-0803


MEMORANDUM FOR: Ron Larkin, Acting Director, Office of Public Housing, 4APH



FROM:         James D. McKay, Regional Inspector General for Audit, 4AGA

SUBJECT:      Corrective Action Verification
              Housing Authority of the City of Cuthbert, Georgia
              Public Housing Programs
              Audit Report 2004-AT-1001

We completed corrective action verification for audit recommendation 1A as requested by your
office. The purpose of the corrective verification was to determine whether the Housing
Authority of the City of Cuthbert (Authority) implemented recommendation 1A and expended its
funds in accordance with HUD regulations.

                                   Scope and Methodology

Our corrective action verification focused on recommendation 1A from audit report 2004-AT-
1001, issued January 15, 2004. We reviewed the audit report and associated supporting
documentation, as well as the U.S. Department of Housing and Urban Development (HUD)
management decisions and the supporting documentation used by HUD to monitor the
recommendation. We interviewed the staff of the Atlanta Office of Public Housing and the
Authority. We also reviewed Authority files, general ledgers, cash receipt and disbursement
records, journal vouchers, and applicable HUD regulations. Our review of expenditures was
limited to determining that the Authority used the funds provided by HUD under its contract
with the Authority to fund contract-related projects. Our review covered the period January 1,
2004, through May 31, 2008.
                                          Background

On January 15, 2004, we issued audit report 2004-AT-1001 on the Authority’s public housing
programs. Finding 1 of the report noted that the Authority advanced $792,802 of its low-income
funds to the Southwest Georgia Housing Development Corporation (Development Corporation)
to pay development expenses. As of June 2003, the Development Corporation still owed the
Authority $327,326. These transactions occurred because the executive director served in
conflicting roles and the board of commissioners did not establish controls to monitor the
nonprofit and ensure transactions complied with Federal regulations. The report included six
recommendations. At the request of the Office of Public Housing, we focused our verification
on recommendation 1A. We recommended that the Atlanta Office of Public Housing

       1A.     Require the Authority to collect $327,326 due from the Development Corporation
               and discontinue advancing funds.

The May 12, 2004, proposed management decision from the Atlanta Office of Public Housing
stated that for recommendation 1A,

               A repayment agreement shall be prepared between the two agencies, approved by
               the board of commissioners, stating the final amount due the Authority. The
               repayment agreement must state the amount, terms, and conditions. The final
               amount shall be determined from the single audit for the fiscal year ending
               December 31, 2003, subject to adjustment by HUD, if applicable. The target date
               will be July 31, 2004, with a final action date of December 1, 2004. The
               repayment agreement will be for a three-year period ending December 31, 2006.

               The Authority’s board shall adopt a resolution stating that the Authority has
               discontinued the practice of advancing funds without prior written approval from
               HUD. The target date will be July 31, 2004, with a final action date of December
               1, 2004.

On May 14, 2004, our office concurred with the proposed management decision; however, we
changed the final action date for task one to December 31, 2006, to coincide with the three-year
repayment plan. On December 20, 2006, our office agreed to an extension of the final action
date to December 31, 2008.

                                       Results of Review

The Authority did not comply with its HUD-approved agreement to obtain repayment of
$327,326 advanced to one of its affiliates, the Development Corporation, and did not stop
advancing funds until November 2004, although it agreed it would stop by June 2004. The
Authority collected sporadic payments from the Development Corporation after the agreement
was executed, leaving a current balance of $224,494. Based on the payment history, the
Authority’s agreement to have the balance paid off by December 31, 2008, does not appear
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feasible. The executive director stated that an assisted living facility was the Development
Corporation’s main source of funds to pay off its debts, but the facility was only 50 percent
occupied. We examined the revenue and expenses of the assisted living facility for the period
January 1 to May 31, 2008, and noted that the facility averaged a net loss of $5,600 per month.
Therefore, the Authority cannot pay the $224,494 as agreed.

In addition to the $224,494, we verified two other receivables of $148,305 and $126,609
advanced by the Authority to the Development Corporation. The first receivable represents the
sale to the Development Corporation of three houses that the Authority purchased. The
Authority purchased three houses that it planned to renovate and sell as affordable housing. As a
result of the prior audit, the Authority realized that it could not operate this type of enterprise and
sold the houses to the Development Corporation. The Authority previously sold one of the
houses to the Development Corporation, establishing a receivable of $39,171 at the time of the
prior audit. The subsequent sale of the remaining two houses increased the receivable to
$148,305 as of July 2004. Although the Development Corporation received rental income from
the houses, it did not use the income to reduce the payable to the Authority.

The second receivable represents advances to the Development Corporation for salaries and
payroll taxes of the Development Corporation’s assisted living facility, The Willows, during its
initial operation. From October 2003 to November 2004, the Authority advanced $388,479 to
the assisted living facility. The Development Corporation reimbursed the Authority $261,870,
leaving a balance owed to the Authority of $126,609.

The Authority made the advances after the issuance of the audit report informing the Authority
that it could not advance funds without prior HUD approval. The Authority advanced $36,657
after its board of commissioners passed a resolution on June 21, 2004, stating that the Authority
would advance no more funds. The Development Corporation has not made any payments to
reduce the Willows balance since November 2004.

Also, the Authority paid a law firm $9,000 to lobby the Georgia state legislature to eliminate
barriers to developing affordable housing in rural Georgia. These expenditures violated section
C.1 of Office of Management and Budget Circular A-87 since they were not reasonable and
necessary for the operation of the Authority. We found the other expenditures and their
allocations to be appropriate.

Because the Authority did not implement the agreed-upon actions, we will revise
recommendation 1A from our previous audit report 2004-AT-1001 to reflect the current
outstanding balance. We recommend your office continue to work with the Authority to collect
$224,449 from the Development Corporation and reimburse its operating fund.

We will open recommendations 1A, 1B, and 1C under this report for the additional advances and
improper expenditure as follows:



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       1A.     Require the Authority to collect $274,914 from the Development Corporation and
               reimburse its operating fund.

       1B.     Apply appropriate sanctions if the Authority does not comply with its payback
               agreement.

       1C.     Require the Authority to reimburse its operating fund $9,000 from nonfederal
               sources.

                                      Auditee’s Response

We discussed our results with the Authority and HUD officials during the review. We provided
a copy of the draft report to the Authority on September 9, 2008, for its comments and discussed
the report with the Authority officials at the exit conference on September 18, 2008. The
Authority provided written comments on September 18, 2008. The Authority agreed with the
amount of receivables due from the Development Corporation and stated it would work with the
HUD office to establish a repayment plan. However, the Authority did not agree that the
contract with the legal firm was a lobbying contract. The Authority stated that the contract was a
consultant contract and was necessary and reasonable for its operations.

The complete text of the Authority’s response and our evaluation of the response are included in
the appendix to this report.

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 review.




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Appendix


            OIG Evaluation of Auditee Comments




Comment 1



Comment 2




Comment 3




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Comment 4



Comment 5




            Comment




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                          Auditee Comments and OIG's Evaluation


Refer to OIG Evaluation

      Comment 1    The Authority agreed with the amount owed from the Development
                   Corporation and has agreed to work with HUD in developing a repayment
                   plan. We concur with the Authority’s position to develop a repayment
                   plan with HUD.

      Comment 2    We concur with the Authority’s position that it hired a Chief Financial
                   Officer and an audit firm, and put measures in place to prevent advances
                   from happening in the future.

      Comment 3    The Authority referred to the contract as a consultant contract, however,
                   the statement of work is to specifically influence legislation on the state
                   level. At our request, HUD’s Region IV Office of General Counsel
                   confirmed the contract was a lobbying contract. Regardless, any expense
                   associated with the issuance of bonds would not be an allowable expense
                   because it is not necessary for the operation of the project. Expenses
                   associated with the issuance of bonds are usually paid for from bond
                   proceeds.

      Comment 4    The Authority’s request for permission to use capital funds for
                   development activities and the effect on the residents of using operating
                   funds for these activities was not part of our review.

      Comment 5    HUD’s position that the Authority’s use of funds did not provide uplift to
                   the residents and did not promote self-sufficiency was not part of our
                   review.




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