oversight

Housing Authority of McKinney, McKinney, Texas, Inappropriately Advanced Funds and Transferred Real Estate to Its Not-for-Profit Affiliate

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-01-07.

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

                                                                    Issue Date
                                                                           January 7, 2008
                                                                    Audit Report Number
                                                                           2008-FW-1005




TO:         Justin R. Ormsby
            Director, Office of Public Housing, 6APH


FROM:

            Gerald R. Kirkland
            Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: The Housing Authority of the City of McKinney, Texas, Inappropriately
         Advanced Funds and Transferred Real Estate to Its Not-for-Profit Affiliate


                                     HIGHLIGHTS

 What We Audited and Why

              Based on a hotline complaint, we audited the Housing Authority of the City of
              McKinney (Authority). Our objective was to determine whether the Authority’s
              transactions with its affiliated nonprofit, the McKinney Housing Opportunity
              Corporation (Corporation), complied with U.S. Department of Housing and Urban
              Development (HUD) requirements.


 What We Found


              In violation of its annual contributions contract, the Authority inappropriately
              provided $915,487 in funds and real estate to its not-for-profit affiliate. Further,
              the Authority did not follow requirements when it made $79,059 in housing
              assistance payments to the Corporation between January 1, 2005, and June 15,
              2007. Specifically, the Authority did not obtain independent determinations of
fair market rents or compliance with housing quality standards for properties
owned by the Corporation.




                                 2
What We Recommend


           We recommend that HUD require the Authority to (1) repay $915,487 to its low-
           income accounts, (2) support $79,059 in housing assistance payments to the
           Corporation by obtaining independent determinations of fair market rents and
           compliance with housing quality standards, and (3) implement policies and
           procedures to ensure that it complies with HUD requirements.

           For each recommendation without 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 provided our draft report to the Authority on December 7, 2007, and held an
           exit conference on December 18, 2007. We requested a written response by
           December 28, 2007. The Authority agreed with our recommendations and
           provided a written response on December 28, 2007. We have included the
           Authority’s response and our evaluation of it as Appendix B.




                                            3
                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
   Finding 1: The Authority Inappropriately Provided $915,487 in Funds and Real   5
              Estate to Its Not-for-Profit Affiliate
   Finding 2: The Authority Did Not Comply with Requirements When It Made         7
              Housing Assistance Payments on the Corporation’s Rental Units

Scope and Methodology                                                             9

Internal Controls                                                                 10

Appendixes
   A. Schedule of Questioned Costs                                                11
   B. Auditee Comments and OIG’s Evaluation                                       12




                                             4
                     BACKGROUND AND OBJECTIVES

The City of McKinney established the Housing Authority of the City of McKinney (Authority)
to provide housing to low-income persons. A five-member board of commissioners (board),
appointed by the mayor of McKinney, governs the Authority. The board appoints an executive
officer to administer the operations of the Authority. The Authority’s main office is located at
1200 North Tennessee Street, McKinney, Texas.

The Authority receives U.S. Department of Housing and Urban Development (HUD) funding for
201 low-rent units and 345 housing choice vouchers. The Authority was required to use its
low-rent funds in accordance with its annual contributions contract. Under its Section 8 Housing
Choice Voucher program, the Authority receives HUD funds to provide housing assistance so
that eligible families can afford decent, safe, and sanitary housing.

The Authority created the McKinney Housing Opportunity Corporation (Corporation) on July
18, 1996, to further affordable housing and provide charitable services. The Corporation is an
affiliated nonprofit entity.

The Authority received adverse opinions on its Office of Management and Budget (OMB)
Circular A-133 audits for fiscal years 2004, 2005, and 2006. The adverse opinions cited the
exclusion of the Corporation in the Authority’s financial statements and internal control
weaknesses. We did not observe any action taken by the Authority to correct the deficiencies.
In September 2007, HUD entered into a memorandum of agreement with the Authority to correct
deficiencies.

Our objective was to determine whether the Authority’s transactions with the Corporation
complied with HUD requirements.




                                                5
                                        RESULTS OF AUDIT

Finding 1: The Authority Inappropriately Provided $915,487 in Funds
           and Real Estate to Its Not-for-Profit Affiliate
The Authority inappropriately used more than $915,000 in low-rent funds without HUD
approval and inappropriately advanced and transferred more than $71,000 in real property to the
Corporation. The Authority was aware of the transfers based on its adverse audit opinions.1 In
addition, the Authority did not allocate costs, including salary costs, between its HUD-funded
housing and the Corporation. This condition occurred because the Authority did not follow
requirements. As a result, the funds were not available to operate its public housing programs.
The Authority should reimburse its low-rent programs $915,487.



    The Authority Transferred
    $844,168 to the Corporation


                   According to the Corporation’s financial statements and records, the Authority
                   had advanced $729,496 in low-rent funds to the Corporation as of June 30, 2006.2
                   Further, the Authority paid $114,672 to the Corporation on April 25, 2006.3

                   The Authority’s annual contributions contract allows it to use general fund cash
                   only for (1) the payment of the costs of development and operation of projects
                   under contract with HUD, (2) the purchase of investment securities approved by
                   HUD, and (3) such other purposes as may be specifically approved by HUD. The
                   Authority did not obtain HUD approval for the transactions and did not provide
                   evidence that the Corporation had reimbursed it for the advances. The Authority
                   should repay $844,168 to its low-rent programs.


    The Authority Transferred
    Real Property to the
    Corporation

                   The Authority purchased property with low-rent funds or seized properties
                   through eminent domain and transferred the properties to the Corporation.
                   According to the Collin County, Texas, tax assessor’s office, the fair market value

1
     Independent audits for fiscal years 2004, 2005, and 2006.
2
     The latest audited financial statements.
3
     The Corporation transferred a certificate of deposit to the Authority’s housing choice voucher account to pay a
      contractor that worked on the Authority’s maintenance building. The Authority reimbursed the Corporation
      from its low-rent account.


                                                          6
           of the properties at the time of transfer was $71,319. The Authority’s annual
           contributions contract required it to obtain HUD approval to transfer the
           properties.

The Authority Did Not Allocate
Costs



           The Authority did not allocate direct and indirect costs to the Corporation as
           required by OMB Circular A-87. OMB Circular A-87 establishes principles for
           determining allowable costs. In general, the Authority was required to allocate
           indirect cost between its programs and affiliates. Specifically, while the
           Corporation used Authority staff and office space, the Authority did not require
           the Corporation to reimburse it for its share of these costs. Further, the Authority
           did not collect information to calculate the proper allocation. The Authority
           should ensure that future costs are properly allocated.

Recommendations



           We recommend that the Director of the Office of Public Housing require the
           Authority to

           1A. Reimburse its low-rent housing programs $915,487.

           1B. Implement internal control policies to ensure that program funds are used
               only for eligible program activities.




                                             7
Finding 2: The Authority Did Not Comply with Requirements When It
           Made Housing Assistance Payments on the Corporation’s
           Rental Units
The Authority did not comply with requirements when it made $79,059 in housing assistance
payments to the Corporation4 between January 1, 2005, and June 15, 2007. HUD regulations
allowed the Authority, with HUD approval, to make the payments if an independent entity
determined the fair market rent and inspected the units for compliance with housing quality
standards. The Authority was unaware of the requirements. The Authority should support the
housing assistance payments to the Corporation and comply with HUD requirements.




    Housing Assistance Payments
    Were Not in Accordance with
    Requirements

                 Violating requirements, the Authority made $79,059 in housing assistance
                 payments to the Corporation between January 1, 2005, and June 15, 2007. HUD
                 prohibited the Authority from using its personnel to determine the reasonableness
                 of the rents charged by the Corporation and to inspect the Corporation’s units for
                 compliance with housing quality standards.5 The requirements prevent a potential
                 conflict of interest between the Authority’s administration duties and its interest
                 as a landlord.

                 The Authority should have hired an independent entity6 to make the determination
                 of fair market rent and to inspect the units. The Authority was not aware of the
                 requirements. The Authority should obtain support for the $79,059 and
                 independently confirm that the units meet housing quality standards. Further, the
                 Authority should implement procedures to ensure future compliance with
                 requirements when its units are used in its Housing Choice Voucher program.

    Recommendations


                 We recommend that the Director of the Office of Public Housing require the
                 Authority to



4
     The property that the Corporation built using the inappropriately transferred funds would be considered
     Authority-owned property according to 24 CFR [Code of Federal Regulations] 983 due to the Corporation’s
     being an affiliate.
5
     24 CFR 983.59.
6
     HUD must approve of the entity.


                                                       8
2A. Support or repay the $79,059 to its programs for housing assistance
    payments made to the Corporation.

2B. Implement internal control policies to ensure future compliance with HUD
    requirements when using Corporation-owned units in its Housing Choice
    Voucher program.




                                9
                        SCOPE AND METHODOLOGY

Our objective was to determine whether the Authority’s transactions with the Corporation
complied with HUD requirements. To accomplish our objective, we

   •   Reviewed background information on the Authority and the Corporation, applicable
       regulations, and legal documents;
   •   Reviewed and analyzed reports, databases, and documents to determine existing
       conditions at the Authority, including fiscal years 2004, 2005, and 2006 independent
       audit reports and HUD monitoring reports;
   •   Analyzed available data in the Authority’s accounting and operations systems;
   •   Reviewed and analyzed the Authority’s relationships with its nonprofit Corporation to
       determine whether the Authority inappropriately supported the nonprofit operations with
       federal funds; and
   •   Interviewed Authority staff, the Authority’s independent public accountant, and HUD
       personnel.

We conducted our audit from April through October 2007 at the Authority and our office in Fort
Worth, Texas. Our audit period was from January 1, 2005, through March 31, 2007. We
expanded the scope as necessary to accomplish our objective. We performed our audit in
accordance with generally accepted government auditing standards.




                                              10
                             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:

              •   Compliance with laws and regulations—policies and procedures that
                  management has implemented to reasonably ensure that resource use is
                  consistent with laws and 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 Weakness


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

              •   The Authority did not have effective policies, procedures, or controls to
                  reasonably ensure that it complied with laws and regulations.




                                               11
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS


                      Recommendation         Ineligible 1/    Unsupported 2/
                          number
                             1A                   $915,487
                             2A                                        $79,059




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.




                                            12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         13
Comment 2




            14
            OIG Evaluation of Auditee Comments

Comment 1   We commend the Authority for trying to address the finding. The
            improvements in internal controls should prevent future deficiencies.
            However, HUD will need to determine the appropriateness of transferring
            assets to the Authority to resolve the finding.


Comment 2   We agree with the Authority’s willingness to correct the deficiencies.




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