oversight

The Housing Authority of the City of Eloy, Arizona Did Not Have Adequate Internal Controls to Safeguard Assets and Ensure Compliance with HUD's Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-05-05.

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

                                                                   Issue Date
                                                                                May 5, 2008
                                                                   Audit Report Number
                                                                            2008-LA-1009




TO:         Paula O. Blunt, General Deputy Assistant Secretary for Public and Indian
              Housing, P

            K.J. Brockington, Director, Los Angeles Office of Public Housing, 9DPH



FROM:       Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: The Housing Authority of the City of Eloy, Arizona Did Not Have Adequate
           Internal Controls to Safeguard Assets and Ensure Compliance with HUD’s
           Requirements

                                    HIGHLIGHTS

 What We Surveyed and Why


      We audited the Housing Authority of the City of Eloy (Authority) because the U.S.
      Department of Housing and Urban Development’s (HUD) Office of Public Housing had
      rated the Authority as troubled since 2002. The Authority had significant problems with
      financial management and terminated the executive director.

      Our audit objectives were to (1) determine why the Authority had been rated troubled for
      the past five years and (2) assess the Authority’s internal controls over its public housing
      and Section 8 programs and identify areas at risk for noncompliance, waste, fraud, or
      abuse.

 What We Found


      The Authority was rated troubled because it had failed to submit its independent audit
      report to HUD within the required timeframe since 2002 and did not have adequate
      internal controls to reasonably ensure that HUD funds were used in accordance with
      program requirements or that its practices complied with HUD’s and other federal
      requirements.
     Because the Authority did not fully implement corrective actions required by HUD, it
     was not in compliance with HUD rules and regulations with respect to its annual
     contributions contracts with HUD, the Section 8 and public housing regulations, and
     Office of Management and Budget circulars. As a result, more than $2 million in federal
     funds was placed at risk, and the Authority incurred unnecessary expenses and struggled
     to meet its operating expenses.

What We Recommend


     We recommend that the Director of HUD’s Los Angeles Office of Public Housing
     require the Authority to immediately develop and implement effective policies and
     procedures that include sound internal controls for its operations in all areas and to
     immediately direct the Authority to negotiate with the Internal Revenue Service (IRS) to
     abate $81,537 in interest and penalties on employee withholding taxes owed. We further
     recommend that HUD closely monitor the Authority and its board of commissioners until
     management weaknesses have been resolved.

     In addition, we recommend that the General Deputy Assistant Secretary for Public and
     Indian Housing issue a proposed notice of the Authority’s default of its public housing
     contracts, and take appropriate actions that will result in better use of $168,263 in public
     housing funds. We also recommend that the General Deputy Assistant Secretary issue a
     proposed notice of the Authority’s default of its Section 8 contract, and take appropriate
     actions that will result in better use of $587,102 in Section 8 funds.

     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 provided our discussion draft report to the Authority on April 9, 2008, and held an
     exit conference on April 21, 2008. The Authority neither agreed nor disagreed with our
     report findings.

     The complete text of the auditee’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 Did Not Have Adequate Internal Controls to Safeguard   6
              Assets and Ensure Compliance with Public Housing and Section 8
              Program Requirements

Scope and Methodology                                                              16

Internal Controls                                                                  17

Appendixes
   A. Schedule of Funds to Be Put to Better Use                                    18
   B. Auditee Comments and OIG’s Evaluation                                        19
   C. Criteria                                                                     22




                                            3
                          BACKGROUND AND OBJECTIVES
The Housing Authority of the City of Eloy (Authority) is a small housing authority, incorporated
about 1952. It operates 50 public housing units, services 159 vouchers, and employs a staff of
four. The Authority’s authorized budgets for HUD programs in fiscal years 1 2006 and 2007
were $1,030,595 and $1,015,481, respectively.

           HUD Program                        FY 2006           FY 2007             Totals
    Public Housing Operating Fund               $124,449          $129,254           $253,703
    Public Housing Capital Fund                  $89,610           $91,726           $181,336
    Housing Choice Vouchers
    (Section 8)                                $816,536          $794,501         $1,611,037
    Totals                                   $1,030,595         $1,015,481        $2,046,076


The Authority’s board of commissioners consists of six members including one nonvoting
member who acts as a liaison between the City and the board. The Authority has a history of
funds misuse by management, and U.S. Department of Housing and Urban Development (HUD)
officials have identified apparent irregularities. Since June 2007, when the Authority faced a
cash shortfall, HUD has required the Authority to obtain HUD approval before all expenditures
(except for items involving emergency repairs that may affect the health and safety of the
residents).

Under the public housing program, HUD administers federal aid to local housing agencies that
provide affordable housing for low-income residents. HUD furnishes technical and professional
assistance for planning, developing, and managing these developments. The housing agency is
responsible for establishing each participant’s eligibility and for the management and operation
of its public housing units.

HUD measures the performance of each public housing program through its Public Housing
Assessment System. HUD annually 2 scores the housing agency in four operational areas—
physical, financial, management, and resident satisfaction. Low scores result in a status rating of
troubled, which triggers certain corrective actions by HUD. Initially, HUD issues a
memorandum of agreement that includes performance targets, strategies in achieving
performance targets, and technical assistance from HUD. If a housing agency fails to improve,
HUD can exercise interventions and, if warranted, declare that the agency is in default with
regard to its contract with HUD and terminate the contract. In 2002, the Authority was
designated troubled due to its zero score under the financial component. It continued to be
troubled through the most recent rating period for the same reason.



1
  The Authority’s program year extends from July 1 through June 30.
2
  Small housing authorities, with fewer than 249 units, may be rated every other year if they are not designated
troubled.

                                                          4
HUD’s Section 8 program assists very low-income families, the elderly, and the disabled in
obtaining decent, safe, and sanitary housing in the private market. Eligible participants are
issued housing vouchers and are responsible for finding suitable housing of their choice where
the owner agrees to rent under the program. The housing agency pays a subsidy directly to the
owner on behalf of the participant. The participant pays any difference between the subsidy and
the rent charged by the owner. HUD provides the housing agencies with funding for the housing
subsidies and related administrative expenses. The agencies are also responsible for establishing
the eligibility of the participants and approving the selected housing units.

HUD annually assesses the performance of each housing agency’s Section 8 program based on
indicators measured under the Section Eight Management Assessment Program (Section 8
Assessment). As with the Public Housing Assessment System, low scores under the Section 8
Assessment can result in a status of troubled and trigger corrective actions by HUD. HUD may
require the housing agency to submit a corrective action plan if deficiencies are not corrected
within 45 days after HUD’s notification to the agency. In the case of the Authority, HUD did not
require it to submit a corrective action plan when it was rated troubled for Section 8 in 2006
because, according to HUD officials, the public housing memorandum of agreement addressed
overarching management problems that needed to be resolved first.

Our audit objectives were to (1) determine why the Authority had been rated troubled for the past
five years and (2) assess the Authority’s internal controls over its public housing and Section 8
programs and identify areas at risk for noncompliance, waste, fraud, or abuse.




                                                5
                                 RESULTS OF AUDIT

Finding 1: The Authority Did Not Have Adequate Internal Controls to
Safeguard Assets and Ensure Compliance with Public Housing and
Section 8 Program Requirements

The Authority did not create and implement adequate internal controls to reasonably ensure that
HUD funds were used and safeguarded in accordance with program requirements and its annual
contribution contract agreements with HUD. For example, there were no financial controls over
disbursements, and inadequate program policies and procedures allowed violations of public
housing and Section 8 regulations to occur. Internal controls were inadequate because the
Authority’s board of commissioners did not perform its fiduciary responsibility to provide
effective oversight. As a result, more than $2 million in federal funds was placed at risk, and the
Authority incurred unnecessary costs and struggled to pay its operating expenses.



 Financial Management Was
 Weak

       We identified significant financial management control weaknesses in the following
       areas: financial recordkeeping and reporting, budgeting, procurement, and safeguarding
       cash resources. United States Office of Management and Budget guidance for audits of
       federal grantees states that the auditee shall maintain internal controls over federal
       programs that provide reasonable assurance that the auditee is managing federal awards
       in compliance with laws, regulations, and provisions of contracts or grant agreements that
       could have a material effect on each of its federal programs (see appendix C, criterion
       number 1).

       The Authority had not had a financial manager for several years. At the time of our
       review, the Authority used a fee accountant for all of its financial management activities;
       however, the engagement letter did not require the accountant to perform significant
       control functions. The fee accountant processed payroll, paid bills, recorded accounting
       transactions, reconciled bank statements, and generated accounting/financial reports. The
       accountant did not identify and/or address significant deficiencies or material weaknesses
       in the Authority’s internal controls. For example, the accountant did not verify or check
       the accuracy of transaction information provided by management, including information
       used to adjust account balances.

       The Authority previously neglected its tax obligations to meet its operating budgets. The
       former financial officer deferred payment of employee withholding taxes from September
       2000 through December 2003 by failing to mail them although they were prepared and
       signed. As a result, the Authority owed the Internal Revenue Service (IRS) at least
       $199,907 as of its October 18, 2006 statement. In November 2006, the IRS approved a

                                                 6
         repayment plan with monthly installments of $6,000, and filed a tax lien against the
         Authority’s property. As of July 2007, the balance owed was $163,784 (including
         $51,447 in interest and $30,089 in penalties).

         The Authority was unable to provide us with its procurement policy and procedures and
         had inadequate controls over purchases. For example, there were no purchase orders and
         no procedures to verify delivery of goods and/or services before vendors were paid.
         HUD’s Procurement Handbook states that housing agencies must establish appropriate
         internal controls to ensure the proper expenditure of funds.

         The rent receipts procedure was at risk for misappropriation of cash and application of
         rent to the wrong unit. Specifically, the procedures for rent deposits had no separation of
         duties. No individual monitored the rent accounts receivables or reconciled the rent
         receipts with a rent schedule. According to the independent auditor, the Authority did not
         adequately track tenant security deposits.

         Financial Audits and Reviews Had Reported Problems since 2004

         In March 2004, HUD conducted a financial review and determined that the Authority did
         not maintain records and was not financially sound because there was no oversight of the
         Authority’s financial operations. The review also found that the Authority’s board relied
         on the former executive director to manage the Authority. In turn, the former executive
         director relied on accounting staff that did not perform their duties. 3

         The independent audit for 2006 found that the Authority's adjusting journal entries lacked
         adequate backup and evidence of supervisory review and management approval. In both
         2005 and 2006, the independent auditor reported that the Authority did not have a current
         listing of security deposits, by tenant.

         The independent audit report for 2007 was not issued at the time of our review; however,
         the auditor stated that potential findings include unsupported journal entries and poor
         recordkeeping.


    Personnel Policies Were
    Inadequate to Prevent Abuse


         The Authority did not ensure that its organization and staffing served the best interests of
         its low-income public housing and Section 8 programs. Section 4 of the annual
         contributions contract with HUD states that the Authority shall, at all times, develop and
         operate each project solely for the purpose of providing decent, safe, and sanitary housing

3
  The 2004 financial review was conducted by a different HUD field office and resulted in a memorandum of
agreement that prescribed corrective actions. HUD later transferred oversight of the Authority to the Phoenix HUD
field office, but officials were unable to provide the Office of Inspector General (OIG) with records to document the
Authority’s compliance/noncompliance with the 2004 agreement.

                                                          7
     for eligible families in a manner that promotes serviceability, economy, efficiency, and
     stability of the projects and the economic and social well-being of the tenants (see
     appendix C, criterion number 2). Abuse of the Authority’s leave-sharing program
     occurred because the leave policies lacked adequate controls and specificity. Records
     showed that the former executive director received a significant number of donated sick
     leave hours which were then cashed instead of being used for medical reasons. The
     independent audit for 2006 also reported excessive compensation for sick and vacation
     leave.

     Other deficiencies in personnel policies and practices included the following:

         •   The personnel policy did not contain procedures for qualifying or hiring
             employees. Our review of the personnel files determined that employees were not
             evaluated on a regular basis. Further, the personnel policy required probationary
             performance evaluations, which we did not find in the files.

         •   The Authority violated HUD’s conflict-of-interest requirements by employing an
             immediate relative of a member of the board without obtaining a waiver. The
             personnel policy contained a provision for hiring individuals that were relatives of
             the Authority’s employees, but it did not specifically address hiring individuals
             related to members of the board of commissioners. Section 19 of the public
             housing annual contributions contract stated that the Authority was not allowed to
             hire an employee in connection with a project if the prospective employee was an
             immediate family member of any person belonging to any present or former
             member or officer of the governing body of the Authority. This requirement
             could be waived by the board, provided that such waiver was permitted by state
             and local law (see appendix C, criterion number 3). We found no waiver during
             our review.

         • The Authority's job descriptions for its employees were inadequate. For example,
           the job descriptions did not clearly describe responsibilities or performance
           standards. The Authority was unable to provide us with the executive director’s
           position description as well as some of the employee personnel records.


Public
   PoorHousing
         controlProgram
                 over Public
   Housing
Controls    program
         Were  Weak


     The Authority’s controls over its public housing program did not ensure compliance with
     HUD’s requirements for property maintenance, health and safety, or resident admissions
     standards. The public housing policies and procedures were inadequate and failed to
     include HUD requirements for exigent health and safety (emergency) conditions and the
     uniform physical condition standards. HUD requires housing agencies to adopt
     admission policies which meet all applicable laws and regulations, and to post copies of


                                              8
the admission policies in each office where applications are received (see appendix C,
criterion number 4).

During our review, we noted the following deficiencies regarding the condition and
maintenance of public housing units:

   •   Maintenance work order data entered into the Authority’s automated system were
       unreliable. Also, work orders were not prioritized to ensure that the emergency
       work orders were completed within 24 hours as required, and the Authority did
       not follow its own policy regarding preventative maintenance.

   •   The Authority’s procedure for tenant emergency calls after business hours placed
       public housing tenants and property at risk. Specifically, the tenant was to call the
       police station, which then called the executive director’s phone number. This
       procedure became ineffective upon the executive director’s departure in July 2007
       because the Authority did not update the contact number/individual.

   •   The overall condition of the public housing units we observed was not decent,
       safe, and sanitary. We visited 10 units and noted that nine were not decent, six
       were not safe, and two were not sanitary. Some of the safety issues included a
       broken kitchen window, obstructed bedroom windows, and a broken back
       doorknob. In one unit, we observed continuously running water in the bathroom.
       The tenant stated that he had reported the situation to the Authority two weeks
       earlier. The maintenance person from the Authority was with us at that time and
       did not dispute the tenant’s account.

We questioned whether the applications for public housing were properly processed
because the housing specialist was not aware of the Authority’s written admission
policies until July 2007, despite having been in the job for four years. The housing
specialist stated that she needed training and expressed concerns about the Authority’s
noncompliance.

Finally, the Authority was designated troubled under HUD’s Public Housing Assessment
System from 2002 through 2007 because it scored zero under the financial section for
failing to submit its independent public accountant audit reports. In 2006 and 2007, the
Authority’s Public Housing Capital Fund program was also designated troubled.
According to HUD public housing officials, the Authority routinely used its capital grant
funds to cover operating expenses—a practice HUD allows for small agencies. In 2007,
the Authority’s public housing score was zero in two rating areas, financial and
management.




                                         9
Problems Persisted Despite
Corrective Actions


     HUD’s Office of Public Housing field staff addressed the Authority’s troubled status and
     other management deficiencies by conducting a financial review and providing on-site
     technical assistance. As a result, HUD and the Authority signed a memorandum of
     agreement on July 28, 2006, that contained the following corrective actions:

       (1) Provide ongoing training to current and future commissioners;
       (2) Design board reports to include more factual information on activities of the
           Authority;
       3) Improve financial status by developing a plan using available capital funds that
           balances capital needs with an obligation to eliminate the amount due to the IRS as
           quickly as possible, and by producing and monitoring year-to-date budget variance
           reports for the low-rent program on a monthly basis beginning with the period
           ending June 30, 2006;
       4) Reduce outstanding tenant receivables;
       5) Reduce the occupancy loss; and
       6) Submit the Authority’s audited and unaudited financial statements to HUD
           electronically.

     According to HUD officials, the Authority failed to complete all corrective actions within
     the timeframes required in the July 28, 2006, agreement. Our review of HUD field office
     records determined that the Authority did not comply with required monthly
     reports/actions for five of the six months from January through June 2007. Further, many
     of the corrective actions addressed the same issues raised in a 2004 memorandum of
     agreement executed between the Authority and the San Francisco HUD office. In
     particular, the 2004 agreement called for training of the board of commissioners and
     improved financial reporting.

     In May 2007, HUD field office officials met with the mayor of the City of Eloy and
     presented possible HUD actions that included remedies for substantial default of the
     annual contributions contract. Paragraph 8 of the agreement stated that, if HUD
     determined that the housing agency had failed to meet the terms of or to make reasonable
     progress to execute or meet requirements in the agreement, the agency would be in
     substantial default with the agreement. Paragraph 10 further stated: “Notwithstanding
     anything to the contrary, upon occurrence of events or conditions that constitute a
     substantial default by the [housing agency] with respect to its obligations under the
     Annual Contributions Contract and applicable regulations to which the housing agency is
     subject or this MOA,” HUD may petition for the appointment of a receiver (which may
     be another public housing agency or a private management corporation) or take other
     actions available.




                                             10
Section 8 Program Controls
Were Weak


      Many of the management problems discussed in this report also impacted the Authority’s
      administration of its Section 8 program. To assess control risk, we conducted a limited
      review regarding compliance with Section 8 program requirements. Observations of
      Section 8 units and reviews of tenant voucher files identified deficiencies regarding rent
      reasonableness, verification of eligibility, and applicant processing procedures.

      The rent for one of two Section 8 units that we observed was not reasonable. We
      performed external inspections of the Section 8 units as well as the comparable units used
      by the Authority to establish rent reasonableness. We observed the units’ outside
      structures, surroundings, and neighborhood and identified significant differences in
      condition and size. Specifically, the Section 8 unit, a three bedroom which rented for
      $830, was in an old subdivision and appeared small and dilapidated. In contrast, the two
      comparables were in better subdivisions and appeared significantly newer or larger,
      despite rents of $839 and $939.

      File reviews determined that the Authority did not have adequate procedures to ensure
      that the Section 8 landlords/owners were eligible to participate in the program. Two of
      the five owners’ files that we reviewed did not have follow-up documentation regarding
      proof of ownership. HUD’s guidance requires proper approval/disapproval by the
      housing authority and generally prohibits owners who are related to the assisted family.
      Additionally, one of five Section 8 tenant files reviewed did not contain documentation of
      the required criminal background check.

      The housing specialist who processed Section 8 voucher applications (the same
      individual who processed applications for public housing discussed above) had
      inadequate training and guidance. She was not familiar with the Authority’s Section 8
      administrative plan until July 2007. The administrative plan states that the Authority
      must establish local policies for program administration and that the Authority is
      responsible for ensuring that the staff operates according to the policies spelled out in the
      plan (see appendix C, criterion number 5). The Authority did not have any other Section
      8 program policies and procedures.

      The Authority’s independent audit for 2005 reported the following findings pertaining to
      Section 8:

           •   HUD Form 52681 (Voucher for Payment of Annual Contribution and Operating
               Statement for Section 8 HCV [Housing Choice Voucher] Program) was not
               submitted for fiscal year 2005. The report noted that this failure would result in
               reduced HUD funding for the program.
           •   Two utility allowance errors were noted in the Section 8 tenant files.
           •   Three of twenty files tested contained citizenship documentation errors.

                                               11
        HUD designated the Authority’s status under the Section Eight Assessment as troubled in
        2006 and 2007. 4 HUD determined that, for both years, the Authority received failing
        scores for indicators regarding expanding housing opportunities, annual housing quality
        standards inspections, and lease-up. After the 2007 troubled rating the HUD Phoenix
        Office of Public Housing requested the Authority to develop a corrective action plan.

The Board’s Oversight of the
Authority Was Ineffective


        The Authority’s board of commissioners failed to provide effective oversight of the
        Authority. The board allowed the former executive director to have full control over the
        operations of the Authority and failed to ensure that internal controls were in place.

        HUD OIG’s Program Integrity Bulletin states that the commissioners have ultimate
        responsibility for housing agency operations including establishing policies such as
        personnel and procurement, reviewing and monitoring budgets and other financial
        documents to ensure that expenditures comply with federal and local laws, and ensuring
        that the housing agency is acting legally and with integrity. The bulletin also states that
        commissioners should ensure the establishment of sound management controls to protect
        against fraud and abuse. Further, the bulletin states that quality control systems should
        monitor petty cash disbursements and resident rent and accounts. To function properly,
        the bulletin states that the commissioners must have knowledge of the financial status and
        quality of the housing agency’s operations and an understanding of the program
        requirements (see appendix C, criterion number 6). Our review of the Authority’s board
        of commissioners’ records and actions determined that it did not fulfill these
        responsibilities. For example,

              •    The board did not have bylaws or policies and procedures to direct its members
                   and to oversee the Authority. The board members were uncertain of their
                   authority over the executive director and their responsibilities to the Authority.

              •    The board did not participate in adopting or reviewing the Authority’s policies
                   and procedures and did not review the Authority’s financial reports on a regular
                   basis.

              •    The board minutes and agenda showed that the Authority’s problems were
                   discussed; however, in general, there were no resolutions or rulings from the
                   board that corresponded to the problems. It appeared that the board did not pay
                   serious attention to problems or other indications of the Authority’s failing
                   performance.



4
  The Authority’s Section 8 Assessment scores were 59 percent for 2006 and 55 percent for 2007. HUD designates
any Section 8 program that receives a score of less than 60 percent as being troubled.


                                                      12
                 •   In response to our questions regarding the lack of board action to ensure the
                     Authority’s interests, members stated that the board relied on the executive
                     director to present important issues during board meetings.

                 •   The board signed checks presented by the former executive director without
                     requesting or examining supporting documents.

                 •   The five voting board members had spent enough time in their positions to
                     know their responsibilities and/or to obtain training available for
                     commissioners. The chairperson joined the board more than 20 years ago, and
                     all but one of the others had been on the board five to eight years before this
                     review. The newest member joined more than a year ago. Two board members
                     took training for commissioners in 2002, but members stated that funds were
                     not available to send everyone. Nevertheless, a Nan McKay 5 board of
                     commissioner’s guide for public housing agencies was provided to the members
                     around April 2006. The guide explained the board’s responsibilities and
                     provided references for public housing and Section 8 programs. It also stated
                     that the board members were responsible for their own performance and
                     professional development. According to officials from the HUD field office,
                     the Authority also purchased Nan McKay training modules, but officials
                     thought that the training material had not been used.

           Efforts to Correct Problems Were Slow

           Although the Authority and HUD had been working to correct the reported problems,
           most of the conditions described above remained at the time of this report. During our
           discussions with board members regarding the draft finding, the members noted that
           since the former executive director departed in July 2007, the Authority had made an
           effort to improve its management controls. One board member volunteered as the acting
           executive director 6 until the Authority hired a new one in November 2007. However, the
           substantial effort required to run the daily operations and correct problems left by the
           former executive director impeded progress in developing/revising and implementing
           needed policies and procedures. Further, the Authority continued to need financial
           expertise.


    The Board’s Inaction Damaged
    the Authority’s Financial
    Position


           As a result of the board’s failure to ensure effective management and financial controls,
           including the implementation of policies and procedures over finances, personnel, and
           program compliance, over $2 million in HUD funds were at risk for waste, fraud and
5
    Nan McKay provides public housing training and consulting services.
6
    HUD approved the action, and the member did not vote during the time.

                                                         13
         abuse during the program years 2006 and 2007. The Authority continued to experience
         serious financial difficulties, and there were allegations of program violations and/or
         misappropriation of funds. A conflict of interest was allowed and individual staff
         members were given significant responsibility with minimal training and oversight.

         The Authority incurred unnecessary expenses because the board failed to ensure the
         former executive director responded to IRS notices regarding the unpaid employment
         taxes owed. Board minutes disclosed that the commissioners were aware of the IRS debt
         as early as March 2003; however, an IRS letter dated October 2006 referred to an earlier
         notice to enforce collection and stated that the debt remained unpaid. Meanwhile,
         interest and penalties on the unpaid employment taxes continued to accrue. As of
         December 31, 2003, the amount of IRS interest and penalties accrued was $65,548.
         Although the Authority began installment payments in December 2006, by July 2007 the
         accrued interest and penalties totaled $81,537. Moreover, according to HUD officials the
         Authority’s monthly installment of $6,000 to the IRS made it extremely difficult for the
         Authority to meet its operating expenses. The Authority remained viable only by using
         the HUD capital grant funds for its daily operations. Consequently, maintenance on
         public housing was deferred, and insufficient funds were available to hire qualified
         financial staff.

         If the Authority continues to operate without financial and management controls and
         under the IRS debt burden (and the associated property lien), then current HUD funds
         totaling $755,365 7 will be at risk for waste, fraud, and abuse.

                    HUD Program               Authorized 2008 Amount
           Public Housing Operating Fund                           $ 76,537
           Public Housing Capital Fund                         $91,726 (a)
           Housing Choice Vouchers
           (Section 8)                                            $587,102
           Total                                                  $775,365
          (a) 2007 amount used because the 2008 capital grant authorized amount is not available

    Recommendations



         We recommend that the Director of HUD’s Los Angeles Office of Public Housing

         1A.      Require the Authority to immediately develop and implement effective policies
                  and procedures that include internal controls for its operations in all areas.




7
 The Authority’s fiscal year is July 1st to June 30th. It is currently operating under fiscal year 2008; therefore we
used the 2008 HUD authorized grant amounts (when available).

                                                           14
1B.    Immediately direct the Authority to negotiate with the IRS to abate interest and
       penalties on employee withholding taxes owed, thereby eliminating unnecessary
       costs of $81,537 (funds to be put to better use), and to reduce monthly
       installment payments.

1C.    Conduct on-site monitoring of the Authority’s operations until HUD determines
       that

       • Τhe Authority is operating with adequate management and financial controls,
       • Τhe members of the board of commissioners are fully performing their
         fiduciary responsibilities, and
       • Τhe Authority’s financial condition is sound.

We also recommend that the General Deputy Assistant Secretary for HUD’s Office of
Public and Indian Housing

1D.    Issue a proposed notice of the Authority’s substantial default of its annual
       contributions contracts for public housing and impose appropriate remedies in
       accordance with section 17 of the annual contributions contract to ensure better
       use of $76,537 in public housing operating funds authorized for 2008 and $91,726
       in capital grant funds authorized for 2007.

IE     Issue a proposed notice of the Authority’s default in accordance with section 15
       of the annual contributions contract for the rental certificate and rental voucher
       programs and take appropriate administrative sanctions to ensure better use of the
       $587,102 in section 8 funds authorized for 2008.




                                       15
                         SCOPE AND METHODOLOGY

Our audit generally covered the period July 1, 2005, through June 30, 2007, although we
expanded the period as necessary to include significant events. To accomplish our objectives,
we

   •   Reviewed relevant HUD regulations and guidance, Office of Management and Budget
       circulars, and other applicable laws and references.
   •   Reviewed the Authority’s policies and procedures for financial management,
       procurement, and personnel.
   •   Reviewed the Authority’s Section 8 policies and procedures, rent reasonableness,
       landlord eligibility, and tenant admission and occupancy. We also observed selected
       Section 8 units.
   •   Reviewed the Authority’s public housing polices and procedures, work orders, unit
       inspections, and tenant admission and occupancy. We visited selected units to observe
       conditions and interview residents.
   •   Interviewed the HUD field office staff, one former and all current Authority staff
       members, several members on the Authority’s board of commissioners, and former and
       current fee accountants.
   •   Reviewed files for tenants, landlords, and employees; board minutes; work orders; and
       payroll records.
   •   Reviewed the auditee’s employee tax arrears.
   •   Obtained program funding and monitoring information from the HUD Phoenix Office of
       Public Housing.
   •   Contacted the third party training consultant to verify commissioner training.

Because our objective was to assess the existence and implementation of internal controls, we
limited our testing and observations to the number of files, records, and properties necessary to
make a reasonable assessment.

We performed our field work from September 4 through December 7, 2007, at the Authority’s
offices at 100 West Phoenix Avenue in Eloy, Arizona. We performed our review in accordance
with generally accepted government auditing standards.




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                                 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 survey objectives:

            •       Policies and procedures to ensure that the management and use of resources
                    provided by HUD are consistent with laws and regulations.

            •       Implementation of policies and procedures to ensure that resources and/or assets
                    are safeguarded against waste, loss, and misuse.

            •       Policies and procedures for Section 8 and public housing programs to ensure
                    that the Authority’s operations comply with HUD’s regulations, the annual
                    contributions contract, and other applicable laws.

       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 item is a significant weakness:

                •    The Authority did not have adequate internal controls to reasonably ensure
                     compliance with Section 8 and Public Housing programs requirements.



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                                   APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

              Recommendation                        Funds to be put to better use 1/
                  number
                    1B                                          $81,537
                    1D                                          $86,726
                    1E                                         $587,102
                   Total                                       $755,365


1/   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. The $81,537 in IRS interest and penalties was based on the July 2007 balance
     provided by HUD officials. For 2008, HUD authorized $76,537 for low-rent and
     $587,102 for Section 8 programs. The 2008 capital fund grant figure was not available at
     the time of our report, therefore we used the 2007 grant amount of $91,726. To avoid
     double counting, we deducted $81,537 recorded under recommendation 1B for IRS
     penalties and interest from $168,263 in total funding authorized for public housing
     programs, and computed $86,726 for funds put to better use.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         19
Comment 3




Comment 4

Comment 5




            20
OIG Evaluation of Auditee Comments

Comment 1    The Authority stated they neither agree nor disagree with the findings. However,
             we note that they have taken the findings under advisement and made changes
             within the organizational structure.

Comment 2    Our report recognizes that the Authority has recently taken steps, including the
             hiring of a new executive director, to correct its problems. We also note that the
             Authority’s problems cannot be completely resolved by the new executive
             director, and that the Authority continues to need financial expertise. We support
             the effort to implement new policies and procedures and strengthen controls. The
             Board of Commissioners must approve the policies and procedures and ensure
             that they include adequate internal controls. During the audit resolution phase,
             the Authority must provide the HUD program office with its finalized policies and
             procedures for all areas of its operations.

Comment 3    See response to comment 2

Comment 4    As soon as the meeting with the IRS has taken place, the Authority must provide
             HUD with the results.

Comment 5    We support the Authority’s efforts to correct deficiencies cited in the report. We
             agree that Authority officials should continue to seek advice from the HUD
             Phoenix Office of Public Housing, and note that other resources are available
             such as: professional organizations for public housing officials, the HUD website,
             and officials from nearby housing authorities that are functioning at a standard
             level of performance.

The Authority did not comment on recommendations 1C, 1D and 1E.




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Appendix C

                                       CRITERIA
  1. Office of Management and Budget Circular A-133, subpart C300(b), states that the
     auditee shall maintain internal control over federal programs that provides reasonable
     assurance that the auditee is managing federal awards in compliance with laws,
     regulations, and provisions of contracts or grant agreements that could have a material
     effect on each of its federal programs.

  2. Section 4 of the annual contributions contract states that the Authority shall at all times
     develop and operate each project solely for the purpose of providing decent, safe, and
     sanitary housing for eligible families in a manner that promotes serviceability, economy,
     efficiency, and stability of the projects and the economic and social well-being of the
     tenants.

  3. Section 19 of the public housing annual contributions contract states that the Authority
     may not hire an employee if the prospective employee is an immediate family member of
     any person belonging to any present or former member or officer of the governing body
     of the Authority. This requirement may be waived by the board, provided that such
     waiver is permitted by state and local law.

  4. HUD Directive 7465.1, REV-2 (Public Housing Occupancy Handbook), paragraph
     1(a)(1), states that public housing authorities must adopt admission policies which
     comply with HUD regulations at 24 CFR (Code of Federal Regulations) Parts 912, 913,
     942, and 960; Title VI of the Civil Rights Act of 1964; 24 CFR Part 1; all other civil
     rights requirements (paragraph 1-3(c)); the annual contributions contract; and state and
     local laws. Paragraph 1(a)(6) also states that the public housing authority must post
     copies of the admission policies in each office where applications are received.

  5. Housing Choice Voucher Program Administrative Plan, section 3.1, states that the public
     housing authority must adopt a written administrative plan that establishes local policies
     for program administration. It also states that the public housing authority is responsible
     for insuring that the staff operates under the policies spelled out in the plan.

  6. HUD OIG’s Program Integrity Bulletin states that the commissioners have ultimate
     responsibility for public housing authority operations including establishing policies such
     as personnel and procurement, reviewing and monitoring budgets and other financial
     documents to ensure that expenditures are in compliance with federal and local laws, and
     ensuring that the public housing authority is acting legally and with integrity. The
     bulletin also states that commissioners should ensure the establishment of sound
     management controls to protect against fraud and abuse. Further, the bulletin states that
     quality control systems should monitor petty cash disbursements and resident rent and
     accounts. To function properly, the bulletin states that the commissioners must have
     knowledge of the financial status and quality of public housing authority operations and
     an understanding of the program requirements.

                                              22
7. Regulations at 24 CFR 985.109 state that HUD may determine that a public housing
   authority’s failure to correct identified Section 8 Assessment deficiencies or to prepare
   and implement a corrective action plan required by HUD constitutes a default under the
   annual contributions contract.

8. Regulations at 24 CFR 85.20(3) state that effective control and accountability must be
   maintained for all grant and subgrant cash, real and personal property, and other assets.
   Grantees and subgrantees must adequately safeguard all such property and must ensure
   that it is used solely for authorized purposes.

9. Housing Act of 1937, section 2(a)(1)(C), states that it is the policy of the United States to
   promote the general welfare of the nation by employing the funds, consistent with the
   objectives of this title, to vest in public housing agencies that perform well the maximum
   amount of responsibility and flexibility in program administration with appropriate
   accountability to public housing residents, localities, and the general public.

10. HUD Directive 7460.8, REV-2 (Procurement Handbook), paragraph 3.5, states that
    public housing authorities must establish appropriate internal controls to ensure the
    proper expenditure of funds.

11. Paragraph 8 of the memorandum of agreement states that, if HUD determines that the
    housing agency has failed to meet the terms of or to make reasonable progress to execute
    or meet requirements in the agreement, the agency is in substantial default with the
    agreement. Paragraph 10 further states: “Notwithstanding anything to the contrary, upon
    occurrence of events or conditions that constitute a substantial default by the [housing
    agency] with respect to its obligations under the Annual Contributions Contract and
    applicable regulations to which the housing agency is subject or this MOA, HUD may, in
    its discretion,” take various actions to replace management.

12. Section 17 of the consolidated annual contributions contract states that upon the
    occurrence of a substantial default by the Authority, as determined by HUD, HUD shall
    be entitled to any or all of the remedies set forth in the contract. Substantial default
    includes failure to maintain and operate the projects in decent, safe, and sanitary manner.




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