oversight

The Akron Metropolitan Housing Authority, Akron, Ohio, Lacked Adequate Controls over Its 5(h) Homeownership Proceeds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-01-09.

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

                                                                 Issue Date
                                                                          January 9, 2008
                                                                 Audit Report Number
                                                                          2008-CH-1002




TO:        Thomas Marshall, Director of Public Housing Hub, 5DPH


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The Akron Metropolitan Housing Authority, Akron, Ohio, Lacked Adequate
           Controls over Its 5(h) Homeownership Proceeds

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Akron Metropolitan Housing Authority’s (Authority) 5(h)
             homeownership program (program). We selected the Authority based on a risk
             analysis showing that it may have improperly used program funds. Our
             objectives were to determine whether the Authority properly accounted for and
             used its program’s proceeds in accordance with the U.S. Department of Housing
             and Urban Development’s (HUD) requirements.

 What We Found

             The Authority failed to maintain a separate identity for $196,247 of its program’s
             proceeds because it commingled the proceeds with monies in its general public
             housing fund account. The $196,247 consisted of $90,764 in program sales
             proceeds from 11 properties sold between April 1993 and June 1995, and
             $105,483 in earned interest on the sales proceeds. It also did not use its program
             sales proceeds in a timely manner. As a result, the program’s proceeds were not
             used to assist low-income families.
What We Recommend

           We recommend that the Director of HUD’s Cleveland Office of Public Housing
           require the Authority to reimburse its appropriate account the 5(h) sales proceeds
           plus earned interest, submit a proposal for HUD’s approval on how the program’s
           proceeds will be used, and implement adequate procedures and controls to ensure
           that the proceeds are used to provide housing assistance for low-income families
           in accordance with HUD’s requirements.

           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 issued because of the audit.

Auditee’s Response


           We provided our discussion draft audit report to the Authority’s executive
           director, its board chairman, and HUD’s staff during the audit. The Authority’s
           executive director declined our offer for an exit conference. We asked the
           executive director to provide written comments on our discussion draft audit
           report by January 4, 2008.

           The executive director provided written comments, dated January 4, 2008, and
           agreed with our recommendations. The auditee’s complete comments, along with
           our evaluation of that response, can be found in appendix B of this report.




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                            TABLE OF CONTENTS

Background and Objectives                                                    4

Results of Audit
      Finding: The Authority Lacked Adequate Controls over Its 5(h)
               Homeownership Proceeds                                        5

Scope and Methodology                                                        7

Internal Controls                                                            8

Appendixes
   A. Schedule of Funds to Be Put to Better Use                              10
   B. Auditee Comments and OIG’s Evaluation                                  11
   C. Federal Requirements and the Authority’s 5(h) Implementing Agreement   14




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                     BACKGROUND AND OBJECTIVES

The Akron Metropolitan Housing Authority (Authority) was established in 1938 under Section
3735.27 of the Ohio Revised Code to provide low-income persons with safe and sanitary
housing. The Authority is governed by a five-member board of commissioners. The
commissioners are appointed to five-year staggered terms, except the tenant board member who
has a four-year term. The Authority’s executive director, appointed by the board of
commissioners, is responsible for coordinating established policy and carrying out the
Authority’s day-to-day operations. As of November 30, 2007, the Authority owned and/or
managed 4,380 Public Housing units and had 4,343 Section 8 Housing Choice Voucher units.

The Section 5(h) homeownership program (program) offers housing authorities a flexible way to
sell Public Housing units to low-income families. The program helps low-income families
purchase homes through an arrangement that benefits both the buyer and the public housing
authority that sells the unit. It gives the buyer access to an affordable homeownership
opportunity and to the many tangible and intangible advantages it brings. Homeownership can
be an important part of self-sufficiency for low-income families, providing a way of building
wealth as well as increasing self-esteem and security. The program was authorized by Section
5(h) of the United States Housing Act of 1937.

Our objectives were to determine whether the Authority properly accounted for and used its
program’s proceeds in accordance with the U.S. Department of Housing and Urban
Development’s (HUD) requirements.




                                               4
                                RESULTS OF AUDIT

Finding: The Authority Lacked Adequate Controls over Its
                      Homeownership Proceeds
The Authority failed to maintain a separate identity for $196,247 of its program proceeds and did
not use $384,691 of proceeds in a timely fashion. This occurred because the Authority’s staff did
not have knowledge of the requirements to accrue and separate program interest earnings,
believed it was appropriate to move program funds from the restricted accounts, and was not
aware of the requirement to expend the program funds in a timely manner. As a result, $384,691
in program proceeds was not used to provide housing assistance for low-income families.



 Sales Proceeds from Program
 Properties

              The Authority received sales proceeds of $279,208 from 11 program properties
              sold between April 1993 and June 1995. The proceeds were put into restricted
              cash investment accounts. As of August 31, 2007, these accounts had a balance
              of $188,444, $90,764 less than the proceeds received. Of that $90,764, $88,412
              was moved to an unrestricted general public housing fund account and the
              Authority is unable to track those funds. The Authority cannot account for the
              remaining $2,352 of sales proceeds. Additionally, $105,483 of earned interest on
              the sales proceeds was not maintained or accounted for in a separate account. The
              $384,691 ($279,208 in sales proceeds and $105,483 earned interest) of program
              funds has not been used for housing assistance to low-income families as required
              by the Authority’s program implementing agreement.

              The Authority’s executive director said his staff did not have any knowledge of
              the requirements to accrue and separate interest earnings on the program restricted
              accounts over the years, and to expend the funds in a timely manner. Also, the
              Authority’s director of finance thought it was proper to move program funds from
              the restricted accounts.

              The Authority failed to maintain a separate identity of $196,247 ($90,764 in sales
              proceeds and $105,483 of earned interest) of its program’s sales proceeds and did
              not obligate the sales proceeds in a timely manner as required by its implementing
              agreement. As a result, the program’s proceeds were not used to assist low-
              income families.

 Conclusion

              The Authority failed to maintain a separate identity of $196,247 ($90,764 in sales
              proceeds and $105,483 of earned interest) of its program sales proceeds and did not

                                                5
          obligate the sales proceeds in a timely manner as required by its program
          implementing agreement. As a result, the program’s proceeds were not used to
          assist low-income families.

Recommendations

          We recommend that the Director of HUD’s Cleveland Office of Public Housing
          require the Authority to

          1A.     Reimburse the appropriate account $196,247 ($90,764 in sales proceeds
                  and $105,483 of earned interest) in related proceeds and earned interest
                  from the 11 program properties sold.

          1B.     Submit a proposal(s) for HUD’s approval on how the program proceeds
                  will be used.

          1C.     Implement adequate procedures and controls to ensure that $188,444
                  ($279,208 in program sales proceeds plus $105,483 of earned interest
                  minus the $196,247 cited in Recommendation 1A) in program proceeds is
                  used to provide housing assistance to low-income families.




                                           6
                        SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed:

              •   Applicable laws; regulations; HUD’s program requirements at 24 CFR [Code
                  of Federal Regulations] Part 906; the Authority’s annual contributions
                  contract with HUD; the Authority’s 5(h) homeownership plan proposal and
                  implementing agreement; bank statements; check register; annual audited
                  financial statements for 2005 and 2006; general ledgers; homeownership files;
                  documentation pertaining to their affiliated entities; and organizational chart.

              •   HUD’s files for the Authority.

We also interviewed HUD’s Cleveland Office of Public Housing staff, the Authority’s
employees, and an attorney from Davis, Eoff and Elliott LLC, the Authority’s contracted legal
counsel.

We performed the survey work at the Authority’s offices located at 100 West Cedar Street,
Akron, Ohio, and HUD’s Cleveland Field Office. The review covered the period July 1, 2005,
through August 31, 2007. The period was adjusted as determined necessary.

We performed our audit in accordance with generally accepted government auditing standards.




                                               7
                             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,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

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 objectives:

              •       Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              •       Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet an organization’s objectives.




                                                8
Significant Weakness


           Based on our review, we believe the following item is a significant weakness:

           •   The Authority lacked adequate procedures and controls over its program
               proceeds (see finding).




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                                  APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                           Recommendation       Funds to be put
                               number            to better use 1/
                                  1A                  $196,247
                                  1C                  $188,444
                                 Totals               $384,691


1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (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 use its program proceeds to assist low-income families.




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Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         11
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         12
                         OIG Evaluation of Auditee Comments

Comment 1   We agree and revised page 1 of this audit report.

Comment 2   We agree that HUD’s requirements do not expressly define timely.

Comment 3   We commend the Authority for recognizing the importance of using its funds for
            future low-income housing opportunities.




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Appendix C

      FEDERAL REQUIREMENTS AND THE AUTHORITY’S
         SECTION 5(h) IMPLEMENTING AGREEMENT

Section 9(C) of the Authority’s annual contributions contract states the Authority shall maintain
records that identify the source and application of funds in such a manner as to allow HUD to
determine that all funds are and have been expended in accordance with each specific program
regulation and requirement.

Section 15(A) of the Authority’s annual contributions contract requires the Authority must
maintain complete and accurate books of account for the projects in such a manner as to permit
the preparation of statements and reports in accordance with HUD requirements, and to permit
timely and effective audits.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 906.15 require program sale
proceeds be retained by the housing authority and used for housing assistance to low-income
families. Part 906.17 states that the public housing authority shall be responsible for the
maintenance of records (including sales and financial records) for all activities incident to
implementation of the HUD-approved program plan. The receipt, retention, and use of the sales
proceeds shall be covered in the regular independent audits of the public housing authority's
public housing operations.
Section 3.2 of the Authority’s program implementing agreement requires sales proceeds to be
used in an economical and efficient manner so as to provide the maximum housing assistance at
a reasonable cost to low-income families. Section 3.3 of the agreement states that the Authority
shall obligate sales proceeds in a timely fashion in accordance with the project implementation
schedule set forth in the plan. Section 4 of the agreement states the Authority shall establish and
maintain a separate account for any project or program to be funded with sales proceeds under
this agreement. Such sales proceeds may be commingled with funds contributed to the project or
program from other sources, so long as the Authority maintains the separate identity of the sales
proceeds covered by this agreement.




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