oversight

Elders Place, Incorporated, Philadelphia, Pennsylvania, Did Not Administer Project Operating Funds in Accordance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-03-28.

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

                                                               Issue Date
                                                                March 28, 2008
                                                               Audit Report Number
                                                                2008-PH-1005




TO:        Encarnacion Loukatos, Director, Philadelphia Multifamily Hub, 3AHMLA

           Henry S. Czauski, Deputy Director, Departmental Enforcement Center, CV



FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Regional
            Office, 3AGA

SUBJECT:   Elders Place, Incorporated, Philadelphia, Pennsylvania, Did Not Administer
            Project Operating Funds in Accordance with HUD Requirements


                                 HIGHLIGHTS

 What We Audited and Why

           We audited Elders Place, Incorporated (Elders Place, Inc.), at your request, based
           upon your concern that Greater Germantown Housing Development Corporation
           (the project’s sponsor and former management agent), a nonprofit community
           development corporation, may have misappropriated project operating funds. Our
           objective was to determine whether Elders Place, Inc., administered project
           operating funds in accordance with U.S. Department of Housing and Urban
           Development (HUD) requirements.

 What We Found

           Elders Place, Inc., did not administer project operating funds in accordance with
           HUD requirements. It made more than $309,900 in unsupported disbursements and
           more than $73,400 in ineligible disbursements and, thereby, did not sufficiently
           protect HUD’s and the residents’ interests in the project.
What We Recommend


           We recommend that HUD direct Elders Place, Inc., to provide documentation to
           support $309,929 in unsupported costs or reimburse the project for any
           unsupported costs from nonfederal funds. Additionally, we recommend that HUD
           direct Elders Place, Inc., to repay the project $73,447 from nonfederal funds for
           the ineligible costs identified by the audit. We also recommend that HUD direct
           Elders Place, Inc., to develop and implement controls to ensure that project
           operating funds are administered in compliance with applicable HUD and federal
           regulations, thereby preventing $13,155 from being disbursed improperly over the
           next year. We further recommend that HUD take administrative sanctions against
           Greater Germantown Housing Development Corporation, the project’s sponsor
           for violations of the regulatory agreement.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We discussed the report with Elders Place, Inc., during the audit and at an exit
           conference on March 4, 2008. Elders Place, Inc., provided written comments to
           our draft report on March 7, 2008. The complete text of the auditee’s response,
           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: Elders Place, Inc., Did Not Administer Project Operating Funds in   5
      Accordance with HUD Requirements

Scope and Methodology                                                              8

Internal Controls                                                                  10

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use               12
   B. Auditee Comments and OIG’s Evaluation                                        13




                                             3
                     BACKGROUND AND OBJECTIVES


Elders Place (project) is a 47-unit housing project funded under the Section 202 program and is
located at 53 East Wister Street, Philadelphia, Pennsylvania. The Section 202 Supportive
Housing for the Elderly program serves very low-income senior citizens that have few housing
options. These projects provide very low-income elderly persons with options that allow them to
live independently but in an environment that provides support activities such as cleaning,
cooking, transportation, etc. The U.S. Department of Housing and Urban Development (HUD)
also provides project rental assistance funds to cover the difference between the HUD-approved
operating cost for the project and the tenants’ contribution toward rent.

The project owner may enter into a management agreement with a firm to manage the project on
its behalf. The management agreement shall conform to the pertinent requirements of the
regulatory agreement, the rental assistance contract, and directives issued by HUD. The project
owner shall not without the written approval of HUD enter into a management agreement. When
the project owner delegates duties to a management agent, the project owner remains responsible
for all aspects of management, including duties delegated to the management agent.

The owner of the project is Elders Place, Incorporated (Elders Place, Inc.), a nonprofit
corporation formed by the sponsoring organization, Greater Germantown Housing Development
Corporation (Corporation). Germantown Settlement is the parent organization of the
Corporation. Emanuel V. Freeman is the president of the Corporation and Germantown
Settlement. Ernest J. Covington, Jr., is the chairman of the board of directors for Elders Place,
Inc. Mr. Covington is also the executive director of the Corporation. The construction of the
project was completed in February 1994. In May 1994, HUD approved Elders Place, Inc., the
owner of the project, to manage the project. During our period of review, the Corporation was
the management agent for the project until July 2006 when Multifamily Management of
Philadelphia, LLC, became the management agent for the project. HUD approved Multifamily
Management of Philadelphia, LLC, as the management agent for the project. Our audit only
covered the period when the Corporation was the management agent for the project.

As of December 2007, Elders Place, Inc., had not submitted to HUD audited financial statements
for years 2002 through 2005.

Our objective was to determine whether Elders Place, Inc., used project operating funds in
accordance with HUD requirements.




                                                4
                                  RESULTS OF AUDIT

Finding: Elders Place, Inc., Did Not Administer Project Operating
Funds in Accordance with HUD Requirements
Elders Place, Inc., made more than $309,900 in unsupported disbursements and more than $73,400
in ineligible disbursements. This occurred because Elders Place, Inc., lacked standard operating
procedures to ensure that project operating funds were administered in accordance with HUD
requirements. As a result, it did not sufficiently protect HUD’s and the residents’ interests in the
project. Elders Place, Inc., should provide documentation to support $309,929 in unsupported
disbursements or reimburse the payments from nonfederal funds, repay $73,447 from nonfederal
funds for the ineligible disbursements made, and develop and implement controls to ensure that
project operating funds are administered in compliance with applicable HUD and federal
regulations.




    Elders Place, Inc., Could Not
    Support $309,929 in Project
    Operating Fund Disbursements


                Elders Place, Inc., did not adequately monitor disbursements made from its
                project operating account to ensure that expenditures of HUD funds were
                consistent with the requirements of the regulatory agreement and HUD
                requirements. 1 We reviewed $458,259 of $943,735 that Elders Place, Inc.,
                disbursed from its project operating account during the period January 2001 to
                July 2006 and determined that $309,929 was unsupported. This amount includes
                $34,257 disbursed from the project’s replacement reserve account.
                Approximately $202,262, or 65 percent, of the disbursements were made to the
                Corporation for payroll and employees’ salaries. However, Elders Place, Inc.,
                could not provide supporting documentation for employee time allocations to the
                project, which would include time sheets and payroll records. Staff we
                interviewed stated that the charges for payroll and salaries were based upon an
                allocation that was made by a former employee of the Corporation and could not
                provide any documentation to support the allocation.

                Elders Place, Inc., also could not provide adequate support for $28,006 in
                disbursements made to a local utility company. We were provided the billing
                statements from the utility company; however, some of the statements showed
                that the Elders Place, Inc. account was charged for the bills of another project

1
 Capital Advance Program Regulatory Agreement (HUD-92466-CA), sections 3 and 11(d) and (e); HUD Handbook
4370.2, REV-1, CHG-1, Financial Operations and Accounting Procedures for Insured, paragraph 2-6E.


                                                   5
                managed by the Corporation, indicating that some of the utility expenses may not
                have been related to Elders Place, Inc. Because of the lack of adequate supporting
                documentation, there was no assurance that the funds disbursed were reasonable,
                necessary, and used for the appropriate project-related purposes. In addition,
                Elders Place, Inc., could not provide adequate supporting documentation for
                disbursements of $16,030 for accounting-related services, $14,857 for project
                insurance, and $14,517 for miscellaneous credit card and vendor payments.

                Elders Place, Inc., also could not support $34,257 disbursed from its replacement
                reserve account and did not ensure that the account was consistently funded with
                the required monthly deposit of $1,195. 2 Elders Place, Inc., should have
                deposited approximately $78,900 into the account between January 2001 and June
                2006. Our review of bank statements indicated that only $8,400 was deposited
                during that time. In addition, Elders Place, Inc., could not provide support to
                show how it used $34,257 it disbursed from the account. The amount disbursed
                included $20,000 to the Corporation, $7,757 to contractors, and $6,500 to an
                accounting firm. Because of the lack of documentation, there is no assurance that
                the project funds were used for project-related purposes.

    Elders Place, Inc., Made
    $73,447 in Ineligible
    Disbursements of Project
    Operating Funds


                Contrary to HUD requirements, 3 Elders Place, Inc., made $73,447 in ineligible
                disbursements from project operating funds. The ineligible disbursements
                included $35,100 loaned to the Corporation and Germantown Settlement, 4
                $31,739 paid to the Corporation for management fees, and $6,608 paid to
                vendors. Elders Place, Inc., could not provide any documentation to show that
                HUD approved the Corporation to manage the project as stipulated by the
                regulatory agreement and HUD requirements. 5 Appropriate documentation
                would include a HUD-approved management agreement between Elders Place,
                Inc., and the Corporation. The purpose of HUD’s approving the management
                agent is to protect HUD’s and the residents’ interest in the project. During the
                approval process, HUD reviews the management agent’s performance,
                experience, and capabilities to manage a project. Since Elders Place, Inc., did not
                ensure that the Corporation was approved by HUD to manage the project, the
                $31,739 in management fees paid to the Corporation was ineligible. The $6,608

2
  Capital Advance Program Regulatory Agreement (HUD-92466-CA), section 5(a).
3
  Capital Advance Program Regulatory Agreement (HUD-92466-CA), section 11(d) and (e); HUD Handbook
4370.2, REV-1, CHG-1, Financial Operations and Accounting Procedures for Insured, paragraph 2-6 E.
4
  Germantown Settlement is the parent organization of the management agent.
5
  Capital Advance Program Regulatory Agreement (HUD-92466-CA), section 7(e); HUD Handbook 4381.5, The
Management Agent Handbook, paragraph 2.2.


                                                   6
                    paid to vendors was also ineligible because the payments were made to cover
                    purchases made for the Corporation and other properties it managed.

    Elders Place, Inc., Did Not Have
    Adequate Controls in Place

                    Elders Place, Inc., did not establish and implement adequate controls to ensure that it
                    administered project operating funds in accordance with applicable HUD
                    requirements. During the audit, we requested copies of any written policies and
                    procedures related to project operations but found that there were none. By
                    implementing controls in the form of written policies and procedures for project
                    operations, Elders Place, Inc., will ensure that disbursements from its project
                    operating funds are supported and eligible, thereby ensuring that HUD’s and the
                    residents’ interests in the project are protected. Further, by improving controls over
                    project operations, Elders Place, Inc. will ensure that $13,155 6 will only be
                    disbursed for costs that are eligible over a one-year period.

    Recommendations



                    We recommend that the Director, Philadelphia Multifamily Hub, direct Elders
                    Place, Inc., to

                    1A.      Provide documentation to support the $309,929 in unsupported costs
                             identified by the audit and, if the costs cannot be supported, reimburse the
                             project for any unsupported costs from nonfederal funds.

                    1B.      Repay the project $73,447 from nonfederal funds for the ineligible costs
                             identified by the audit.

                    1C.      Begin funding the replacement reserve account with the monthly deposit
                             as required by the regulatory agreement.

                    1D.      Develop and implement written procedures to ensure that disbursements of
                             HUD funds are eligible and consistent with applicable HUD and federal
                             regulations and, thereby, put $13,155 to better use over a one-year period.

                    We also recommend that the Director of the Departmental Enforcement Center

                    1E.      Take appropriate administrative sanctions against the project’s sponsor,
                             Greater Germantown Housing Development Corporation, for violations of
                             the regulatory agreement.


6
    $73,447 divided by 67 months (period audited) multiplied by 12 (to annualize) equals $13,155 for one year.


                                                           7
                         SCOPE AND METHODOLOGY


We performed the audit at Elders Place, Inc., in Philadelphia, Pennsylvania, from June through
December 2007. The audit was performed in accordance with generally accepted government
auditing standards and included tests of internal controls that we considered necessary. During
the audit, we assessed the reliability of computer-processed data relevant to our audit by
comparing the data to hard-copy information. We found the computer-processed data were
sufficiently reliable to meet our audit objectives.

The audit covered transactions representative of operations current at the time of the audit and
included the period January 2001 through July 2006. We expanded the scope of the audit as
necessary. We discussed operations with staff from Elders Place, Inc., Greater Germantown
Housing Development Corporation, Multifamily Management of Philadelphia, LLC, and key
officials from HUD’s Philadelphia Multifamily Housing Hub.

To determine whether Elders Place, Inc., administered project operating funds in accordance
with HUD requirements, we reviewed

   •   Applicable HUD regulations.

   •   The internal control structure for Elders Place, Inc.

   •   The 2001 audit report from the independent auditors for Elders Place, Inc. We also
       reviewed the draft financial statements submitted to HUD for the period 2002 to 2005.

   •   The project rental assistance contract and subsidy funds provided by HUD to the project
       from January 2001 to July 2006.

   •   All documentation provided by Elders Place, Inc., and the Corporation related to our
       audit objective, including the capital advance agreement, capital advance program
       agreements and certification, regulatory agreement, related correspondence, bank
       statements, cancelled checks, and documentation supporting disbursements.

   •   $458,259 of the $943,735 (49 percent) Elders Place, Inc., disbursed from its operating
       account from January 2001 to July 2006. We nonstatistically selected the disbursements
       for review by isolating disbursements to Greater Germantown Housing Development
       Corporation in excess of $500, disbursements to utility companies, and some randomly
       selected disbursements to other companies and individuals. Based on our work, we
       estimate that Elders Place, Inc., will not spend $13,155 on ineligible expenses over the
       next year by implementing our recommendations. The calculation for the $13,155 is as
       follows: $73,447 (the ineligible costs identifed by the audit) divided by 67 months (the
       period audited) multiplied by 12 (to annualize) equals $13,155 for one year.




                                                 8
•   Correspondence related to the failure of Elders Place, Inc., to provide audited financial
    statements and the results of a monitoring review conducted by the HUD Philadelphia
    Multifamily Hub.




                                             9
                             INTERNAL CONTROLS


Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit
              objectives:

                  •   Policies, procedures, and other management controls implemented to
                      ensure that Elders Place, Inc., administered project funds in accordance
                      with the terms of its agreements with HUD and HUD regulations.

              We assessed the relevant controls identified above.

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

 Significant Weaknesses


              Based on our review, we believe the following items are significant weaknesses:

              Elders Place, Inc., did not

                  •   Establish policies and procedures to ensure that it made disbursements of
                      project funds that were eligible, supported, and consistent with applicable
                      HUD requirements.




                                               10
•   Establish policies and procedures to ensure that its replacement reserve
    account was funded as required, and that withdrawals from the account
    were approved by HUD and used for eligible purposes.




                             11
                                   APPENDIXES


Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

        Recommendation           Ineligible 1/    Unsupported 2/     Funds to be put
               number                                                 to better use 3/
                       1A                              $309,929
                       1B            $73,447
                       1D                                                    $13,155

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
     polices or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD insured program
     or activity when we cannot determine eligibility at the time of audit. Unsupported costs
     require a decision by HUD program officials. This decision, in addition to obtaining
     supporting documentation, might involve a legal interpretation or clarification of
     departmental policies and procedures.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an 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. If the auditee implements our recommendations, it will
     cease making ineligible disbursements from its operating account. Once the auditee
     improves its controls, this will be a recurring benefit. Our estimate reflects only the
     initial year of this benefit.




                                             12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1



Comment 1


Comment 1




                         13
Comment 2

Comment 3

Comment 4
Comment 5

Comment 6




            14
                           OIG Evaluation of Auditee Comments

Comment 1    Greater Germantown Housing Development Corporation (Corporation), the
             sponsor for Elders Place, Inc., acknowledges that it failed to request rent increases
             and that it lacked experience in property management, but maintains that it
             devoted significant resources to Elders Place, Inc. We do not believe that the
             Corporation’s failure to request rent increases and its lack of property
             management experience justify the fact that it did not manage project operating
             funds in accordance with HUD requirements as evidenced by our audit results.
             We can not attest to the Corporation’s statement on improvements of operations
             resulting from engaging the services of an outside property manager because we
             did not audit the new property manager. As stated in the report, our objective for
             this audit was to determine whether Elders Place, Inc., administered project
             operating funds in accordance with HUD requirements between January 2001 and
             July 2006 when the Corporation managed the project.

Comment 2    We provided the Corporation an opportunity to submit additional documentation
             during the audit. Also, at our exit conference, the Corporation expressed that it
             provided us all the documentation it had with regards to the transactions we
             reviewed. However, if the Corporation has additional documentation, the
             information can be provided to HUD during the audit resolution process. At that
             point, if HUD approves any additional documentation provided and we determine
             the documentation to be satisfactory, we will close the recommendation
             pertaining to the unsupported costs.

Comment 3 As stated above, we provided the Corporation an opportunity to submit additional
          documentation during the audit and the Corporation expressed at our exit
          conference that it provided all the documentation it had with regards to the
          transactions we reviewed. Further, during the exit conference, we explained that
          the ineligible costs represent charges to the project funds that were simply not
          allowable based on HUD requirements. Therefore, additional documentation will
          not make the costs eligible.

Comment 4    Recommendation 1C will be closed once we receive evidence that the
             Replacement Reserve Fund account is being funded in accordance with HUD
             requirements.

Comment 5    Recommendation 1D will be considered closed once we receive evidence that
             HUD has received and approved the new and improved written procedures
             regarding disbursements of project funds.

Comment 6    During the discussion of our draft audit report at our exit conference, we notified
             the Corporation that we inadvertently switched positions for the ineligible and
             unsupported costs in our schedule on page 12, and that we would make a
             correction prior to issuing a final report. This final report reflects the correction.




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