oversight

HUD's Receivership Did Not Ensure That the Housing Authority of New Orleans Properly Accounted for Its Fungibility Funding, Monitored and Paid Two of Its Contractors, and Paid Its Accounts Payable Disbursements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-01-29.

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

                                                                  Issue Date
                                                                           January 29, 2009
                                                                  Audit Report Number
                                                                               2009-AO-0002




TO:         Deborah Hernandez, Deputy Assistant Secretary, Office of Field Operations, PQ


FROM:       Rose Capalungan, Regional Inspector General for Audit, New Orleans, Gulf
              Coast Region, GAH

SUBJECT: HUD’s Receivership Did Not Ensure That the Housing Authority of New
           Orleans Properly Accounted for Its Fungibility Funding, Monitored and Paid
           Two of Its Contractors, and Paid Its Accounts Payable Disbursements

                                    HIGHLIGHTS

 What We Audited and Why

             At the request of two United States senators, we initiated an audit of the U.S.
             Department of Housing and Urban Development’s (HUD) administration of the
             Housing Authority of New Orleans (Authority) to determine the effect of HUD’s
             receivership on the Authority’s performance in its contracting activities and
             financial functions. Specifically, we wanted to determine whether HUD’s
             receivership ensured that the Authority properly (1) accounted for its fungibility
             funds, (2) monitored and paid its contractors, and (3) disbursed its accounts
             payable.

             This report is the second of three reports to be issued regarding the HUD
             receiver’s management of the Authority.

 What We Found
             HUD’s receiver did not ensure that the Authority



                                              1
           (1) Correctly supported, expensed, or reported its expensed fungible funds in
               accordance with HUD requirements, resulting in at least $3.5 million in
               unsupported expenses and $2.3 million in ineligible expenses that were
               unreported in its annual progress report and at least $1.4 million in additional
               unsupported expenses that were reported in the report;

           (2) Monitored and/or paid two of its contractors in accordance with contract
               terms and the Authority’s procurement policy, resulting in $97,193 in
               ineligible costs and $1,153 in unsupported costs paid on one of the contracts;
               and

           (3) Supported 10 of 20 accounts payable disbursements in accordance with the
               Authority’s financial policy, resulting in at least $15,000 in unsupported costs
               for those 10 disbursements.

What We Recommend
           We recommend that HUD require the receiver to ensure that the Authority
           provides support or repays the ineligible and unsupported costs. We further
           recommend that the Authority provide an accurate annual progress report,
           including all eligible fungibility funds expensed in its 2006 annual report, and
           develop and implement the appropriate controls to ensure that the Finance
           Department (1) maintains adequate financial records for the accounts payable
           disbursements and (2) properly authorizes its accounts payable disbursements to
           safeguard the accounts payable funding.

           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 a copy of the draft report to the Deputy Assistant Secretary, Office
           of Field Operations, on November 19, 2008, for official comments and discussed
           the report with her at an exit conference held on December 2, 2008. She provided
           a written response on December 19, 2008.

           The Deputy Assistant Secretary disagreed with some of the findings and provided
           73 pages of additional documentation to support her disagreements. We reviewed
           the additional documentation and made changes to the report as appropriate.

           With the exception of the supporting documentation, the complete text of the
           written response, along with our evaluation of that response, can be found in
           appendix B of this report.


                                             2
                            TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
      Finding 1: The Receiver Did Not Ensure That the Authority Properly          6
                 Supported, Expensed, or Reported at Least $7.2 Million in
                 Fungibility Funds

      Finding 2: The Receiver Did Not Always Ensure That the Authority Properly   11
                 Monitored and/or Paid Contractors

      Finding 3: The Receiver Did Not Ensure That the Authority Supported         16
                 10 of 20 Disbursements Totaling $15,203, Properly Processed 6
                 of the 10 Remaining Disbursements, and Corrected Long-Standing
                 Internal Control Weaknesses

Scope and Methodology                                                             19

Internal Controls                                                                 20

Follow-up on Prior Audits                                                         22

Appendixes
   A. Schedule of Questioned Costs                                                23
   B. Auditee Comments and OIG’s Evaluation                                       24
   C. Financial Operations Contract Invoices Reviewed                             32




                                             3
                               BACKGROUND AND OBJECTIVE

The Housing Authority of New Orleans (Authority) is a state-created public agency governed by
a board of commissioners. The Authority’s mission is to provide safe, sanitary, and affordable
housing for low-income residents in the New Orleans, Louisiana, area. Although its primary
goal is to provide housing, the Authority also provides programs to empower residents to
become self-sufficient by providing social services, education, job training, and employment
opportunities.

The U.S. Department of Housing and Urban Development (HUD) took control of the Authority
in 2002 because it had performed poorly almost continuously since 1979. Before the takeover,
HUD had been involved in the Authority’s administration since the mid-1990s. To accomplish
the takeover, HUD replaced the Authority’s governing body with two HUD managers. HUD’s
administrative receiver (receiver) replaced the Authority’s executive director to control the day-
to-day operations of the Authority, and HUD’s one-member board of commissioners replaced
the Authority’s board of commissioners for reviewing and approving policies, procedures, and
contracts. Since 2002, there have been eight HUD receivers and four HUD commissioners.
Therefore, HUD controls all of the Authority’s operations, including the contracting and finance
functions, through the two managers.

The Authority has a history of problems in its contracting and finance functions. Office of
Inspector General (OIG) audits in 2001 found that the Authority did not properly procure
services or expend funds. Further, the Authority’s independent auditors found that the Authority
did not comply with contract terms related to Resident Management Corporation’s financial
reporting between 2002 and 2006, and the Authority’s disbursements lacked proper approval and
verification procedures in 2005 and 2006. Finally, the Authority’s Public Housing Assessment
System score1 in 2005, the last reporting period available, was “troubled,” the lowest rating
available.

The Authority’s Contracting and Compliance Department’s goal is to maintain a continuous
supply of goods and services necessary to support site development, production, and service
schedules. There are 107 post-Hurricane Katrina contracts2 totaling more than $42.6 million.3

The Finance Department’s responsibility is to develop an accounting system of policies,
processes, and procedures for maintaining effective control and accountability to safeguard the
Authority’s cash and other assets. From January 2006 to March 2008, the Authority disbursed
more than $145 million in accounts payable. Further, HUD approved the Authority to expend
more than $97 million in combined fungibility funding for fiscal year 2006.

1
  The Public Housing Assessment System is a management tool that HUD’s Real Estate Assessment Center uses to measure a housing agency’s
performance through its physical condition, financial condition, management operations, and resident service and satisfaction.
2
  Excludes all cancelled and pending contracts and those contracts that did not receive proposals or responses.
3
  Does not include leases and indefinite service type contracts.




                                                                   4
Our audit objective was to determine whether HUD’s receivership ensured that the Authority
properly accounted for its fungibility funds, monitored and paid its contractors, and disbursed
funds for its accounts payable.




                                                5
                                                RESULTS OF AUDIT


Finding 1: The Receiver Did Not Ensure That the Authority Properly
           Supported, Expensed, or Reported at Least $7.2 Million in
           Fungibility Funds
HUD’s receiver did not ensure that the Authority properly supported, expensed, or reported at least
$7.2 million in voucher and public housing funds spent between October 2006 and September 2007
that were combined under fungibility. This condition occurred because the Authority’s chief
financial officer neither maintained sufficient records to support the funds reported as expensed nor
provided an accurate report of expensed funds in accordance with HUD’s rules and the Authority’s
policies. As a result, the receiver and HUD lacked assurance that the funding reported by the
Authority was supported, accurate, or spent for eligible activities.



    HUD Allowed the Authority to
    Combine Funding under
    Fungibility


                      Following Hurricane Katrina, HUD allowed the Authority to combine its funding
                      under fungibility pursuant to Section 901 of the Emergency Supplemental
                      Appropriations to Address Hurricanes in the Gulf of Mexico, and Pandemic
                      Influenza Act, 2006. The Act allowed participating public housing agencies to
                      use the combined funds wherever necessary.4 HUD required the Authority to
                      submit a fungibility plan, detailing how it intended to spend the funds. HUD
                      approved the Authority’s 2006 fungibility plan, allowing the Authority to
                      combine $97 million, including $81 million in voucher funds and $16 million in
                      public housing funds. HUD’s intent was to use the combined fungibility funds to
                      provide replacement housing. In addition, the funds were to be used with
                      available unobligated capital funds and to cover building construction costs, site
                      improvements, and related capital fund project-eligible expenses including mixed-
                      finance development costs.

                      HUD further required that the Authority submit annual progress reports5 detailing
                      how it used the funds during each fiscal year and how it expected to use
4
  Public and Indian Housing (PIH) Notice 2006-29.
5
  HUD PIH Notice 2007-22 required the Authority to provide an annual progress report to its HUD field office. The report was to include (1) the
amount of funds, by source program, being combined under Section 901 fungibility; (2) the proposed uses of those combined funds; (3) the
amount of funds obligated during the year from each source program; (4) the cumulative total amount of funds obligated; (5) the total amount of
funds expended during the year from each source; and (6) the cumulative total amount of funds expended.




                                                                      6
                      fungibility funds in the future. HUD required that the first reporting period
                      include October 1, 2006, through September 30, 2007.

                      The Authority’s 2006 annual progress report showed that the Authority spent $29
                      million of the $81 million combined voucher funds for construction tax credit
                      properties and rehabilitation work on existing units. The report also showed that
                      the Authority did not spend any of the $16 million in combined public housing
                      funds during the reporting period.


The 2006 Fungibility Annual
Progress Report Included $1.4
Million in Unsupported Costs

                      The Authority’s chief financial officer could not provide support for $1.4 million
                      of the $29 million in fungibility funds that the Authority reported as expensed in
                      the first progress report covering the period October 2006 through September
                      2007. There was no supporting documentation attached to the progress report.
                      The chief financial officer explained that the $29 million was expensed for
                      predevelopment loans for new construction tax credit projects at the B.W Cooper,
                      St. Bernard, Lafitte, and C.J. Peete developments.

                      A review of the fungibility funds bank statements designated for fungibility funds
                      expenditures6 and the supporting documentation for the bank transactions
                      between October 2006 and September 2007 showed wire transfers totaling $27.5
                      million expensed for the B.W Cooper, St. Bernard, and C.J. Peete developments
                      but did not show transfers for the Lafitte development. The chief financial officer
                      could not support the $1.4 million difference.

                      The progress report stated that the Authority would maintain a full accounting of
                      all expenditures and would provide reports upon request. In addition, both the
                      annual contributions contract and the finance policy required the Authority and
                      the chief financial officer to maintain records to support the Authority’s expensed
                      funds.7 However, since this was not done, the receiver and HUD had no
                      assurance that the Authority could properly support $1.4 million of the $29
                      million it reported to HUD as expensed. HUD should ensure that the receiver
                      requires the Authority to either support or repay the $1.4 million in unsupported
                      costs to its program funds.




6
  The chief financial officer created bank accounts to hold the $81 million that was combined from the voucher funding.
7
  The Authority’s annual contributions contract required that the Authority maintain records that identified the source and application of funds in
such a manner as to allow HUD to determine that all funds had been expended in accordance with each specific program regulation and
requirement. Further, the Authority’s finance policy required the chief financial officer to maintain the books of account showing receipts and
expenditures and to oversee the administration of the Finance Department in accordance with policies and other laws, regulations, rules, and
practices applicable to the Authority.


                                                                         7
     The 2006 Fungibility Annual
     Progress Report Underreported
     Expenses by $5.8 Million


                       The Authority’s chief financial officer did not include in the annual progress
                       report at least $5.8 million in combined voucher and public housing funds that the
                       Authority spent during the 2006 reporting period. Of the $5.8 million, the chief
                       financial officer did not include in the progress report (1) $672,956 because he did
                       not know how to report it; (2) $2.3 million because the Authority intended to
                       reimburse these funds from its capital account; and (3) $2.89 million because the
                       Authority did not have the available supporting documentation and time to
                       reconcile before the chief financial officer submitted the progress report. The
                       following statements provide more details about the funds that were excluded
                       from the Authority’s 2006 annual progress report.

                            •    The chief financial officer did not know how to report the $672,956 in
                                 voucher funding that was accumulated as interest income from the initial
                                 $81 million combined from voucher funds. This was later expensed to
                                 replenish the general funds. The chief financial officer provided
                                 documentation showing a wire transfer to the general funds account but
                                 did not provide documentation to show how the funds were ultimately
                                 spent.

                            •    The chief financial officer explained that the $2.3 million in voucher
                                 funding was not included in the report because the Authority intended to
                                 reimburse the expensed fungibility funds from its capital funds account.
                                 However, as of September 24, 2008, the Authority had not reimbursed the
                                 fungibility funds account. It paid two transactions to a contractor via a
                                 wire transfer with insufficient supporting documentation and did not
                                 report the expensed funding because it planned to reimburse the funding
                                 from its capital funds. According to the annual contributions contract, the
                                 Authority could not withdraw from any of the funds or accounts for
                                 projects under the contract or for other projects or enterprises in excess of
                                 the amount then on deposit. The reasoning behind the unreported funding,
                                 the insufficiently supported wire transfers, and the loan between accounts
                                 did not follow this requirement. Therefore, HUD should seek repayment
                                 to its Section 901fungibility program funds for the $2.3 million the
                                 Authority expensed and did not report in the progress report to HUD.

                            •    The chief financial officer excluded from the report $2.89 million in
                                 public housing funds that the Authority spent. The 2006 annual progress
                                 report stated that the Authority did not spend any public housing funds.
                                 According to the Authority’s reconciliation, it expensed public housing
                                 funds totaling $1.4 million for rehabilitation costs8 and $1.4 million on
                                 security for vacant sites.9 The chief financial officer explained that the
8
    Between October 24, 2006, and September 26, 2007.
9
    Between January 5 and September 26, 2007.



                                                           8
                                  Authority excluded these expensed funds from the progress report because
                                  it did not have time to gather the available information and perform the
                                  reconciliation before submitting the progress report. Further, he explained
                                  that the $16 million in public housing funding used for fungibility was
                                  located in various bank accounts holding various funding which was not
                                  specific to fungibility and was, therefore, combined with other funding
                                  and expenditures. As a result, we could not verify the expenditures in the
                                  bank accounts and determined that the expenditures were insufficiently
                                  supported.

                       HUD should ensure that the receiver requires the Authority to either support or
                       repay the $672,956 in combined voucher funding and the $2.8 million in
                       combined public housing funding and provide an accurate annual report to
                       include the funding deemed supported. In addition, HUD should ensure that the
                       receiver requires the Authority to repay to its program funds the $2.3 million
                       deemed ineligible.


Conclusion

                       HUD allowed the Authority to combine its voucher and public housing funds
                       under fungibility but required it to report the fungibility funds expensed annually.
                       The 2006 annual progress report contained $1.4 million in unsupported expenses
                       and underreported $5.8 million of the fungibility funds expensed during the
                       reporting period. Of the $5.8 million unreported, $3.5 million10 was deemed
                       unsupported because the Authority could not provide sufficient documentation,
                       and the remaining $2.3 million was ineligible because it was not spent in
                       accordance with the fungibility plan. As a result, the receiver and HUD lacked
                       assurance that the funding reported by the Authority was supported, accurate, or
                       spent for eligible activities.

                       HUD should ensure that the receiver requires the Authority to (1) either support
                       or repay $1.4 million in unsupported expenses that were reported on the progress
                       report, (2) concerning the $5.8 million that was not reported on the progress
                       report, support or repay the $3.5 million in unsupported expenditures and repay
                       $2.3 million in ineligible expenses to its program funds, and (3) amend the
                       fungibility report to accurately reflect the fungibility funds expensed.


Recommendations


                       We recommend that the Deputy Assistant Secretary, Office of Field Operations,
                       require the receiver to ensure that the Authority
10
     $672,956 + 2,896,963 = $3,569,919 or $3.5 million.



                                                           9
1A.   Supports or repays to its fungibility funds $1,482,181 in unsupported
      costs.

1B.   Supports or repays $672,956 to its fungibility funds for voucher funds not
      reported on the 2006 fungibility annual progress report and not supported
      by the Authority.

1C.   Repays $2,311,913 to its fungibility funds for voucher funds not reported
      on the 2006 fungibility annual progress report and deemed an ineligible
      expenditure.

1D.   Supports or repays $2,896,963 to its fungibility funds for public housing
      funds not reported on the 2006 fungibility annual progress report and not
      supported by the Authority.

1E.   For the amounts in recommendations 1B and 1D determined to have
      adequate support, amends its 2006 annual progress report on fungibility to
      accurately account for voucher and public housing funds that it spent but
      did not report during the 2006 reporting period.




                               10
                                   RESULTS OF AUDIT

Finding 2: The Receiver Did Not Always Ensure That the Authority
           Properly Monitored and/or Paid Contractors
The receiver did not ensure that the Authority monitored and/or paid its contractors in accordance
with its procurement policy or the contract’s terms for two of the three contracts reviewed. This
condition occurred because the receiver did not assign a contract monitor for the financial
operations contract until late in its term and did not assign a contract monitor for the independent
auditor contract. As a result of the lack of dedicated oversight, the Authority (1) did not receive all
of the deliverables under the financial operations contract, while it paid at least $98,346 in ineligible
and unsupported costs for that contract, and (2) received its financial statement audit results late for
fiscal years 2005 and 2006 under the independent auditor contract.



 The Authority’s Procurement
 Policy Outlined Contract
 Policies and Procedures


                According to Authority management, the Authority’s procurement policy was the
                only official policy that outlined contract policies and procedures that the Authority
                was required to follow. It required the receiver to ensure that all department
                directors and staff complied with the established policies and procedures. It further
                required the department directors to

                    •   Establish a contract system to ensure that contractors performed in
                        accordance with contract terms, conditions, and specifications;
                    •   Create and maintain documentation evidencing effective contract
                        administration and oversight; and
                    •   Ensure that contract invoices were consistent with terms of the contract.

 Two Contractors Were Not
 Properly Monitored or Paid

                The Authority did not properly monitor contractors for two of three sample
                contracts as required by its procurement policy and/or each contract’s terms. One
                contractor, for the Lafitte demolition contract, was properly monitored by a
                separate contractor and properly paid by the Authority, but the two remaining
                contractors, for a financial operations contract and an independent auditor
                contract, were not properly monitored or paid.



                                                   11
     The Financial Operations
     Contractor Was Neither
     Properly Monitored nor Paid

                        For a period of 20 months, the receiver did not ensure that the Authority
                        monitored the financial operations contractor to enforce contract terms,
                        conditions, and specifications.

                        The Authority’s April 2003 procurement policy requires the executive director to
                        manage all procurements and hold department directors accountable for
                        compliance with the Authority’s procurement policies and procedures.
                        Department directors such as the finance director are responsible for establishing
                        a contract administration system that ensures that contractors perform in
                        accordance with the terms, conditions, and specifications of their contracts. They
                        are further responsible for creating and maintaining documentation evidencing
                        effective contract administration and oversight.

                        When the Authority entered into a contract to manage its finance department, it
                        did not identify an independent monitor for the contract. Based upon the
                        Authority’s procurement policy, the finance department director was responsible
                        for monitoring the contract. However, in this case, since a contractor official
                        served as the finance department director, he was placed in the position of
                        monitoring his own contract. The Authority needs to revise its procurement
                        policy to ensure there is an independent monitor for all of its contractors.

                        As a result of the Authority not independently monitoring the contract, the
                        contractor failed to provide 9 of 18 monthly status reports between September
                        2006 and March 2008 as required by the contract. In addition, a review of 4 of the
                        41 financial operations contract invoices showed that the Authority overpaid the
                        contractor at least $97,193 and paid at least $1,153 for unsupported expenses from
                        its capital funds account.11 It made the overpayments and paid the unsupported
                        expenses because it did not properly monitor the contract to ensure that contract
                        invoices were consistent with terms of the contract.




11
     See appendix C for dates and amounts of the invoices.



                                                             12
             The following table shows the types of deficiencies found in the invoices.


                        Types of deficiencies                           Unsupported   Ineligible
                                                                           costs        costs
 The expense reports for the invoices did not include appropriate         $1,153         $0
 receipts to support expenditures. The contract required the
 invoices to include documentation of actual expenses incurred.
 Some employees listed on the invoice were not in positions                 $0        $94,620
 approved under the contract. The contractor charged for these
 positions without first obtaining approval from the Authority.
 The contractor overcharged for negotiated profit. The contract             $0         $2,573
 limited negotiated profit to a fixed 5 percent of the hourly rate;
 however, invoices charged as much as 10 percent of the hourly
 rates. Further, the contractor charged higher hourly rates for some
 of the positions under the contract without first obtaining approval
 from the Authority. Finally, totals for some expenses on the
 overall invoice did not match the amounts charged on the invoice.
 Some timesheets and expense reports in the invoices had not been           $0           $0
 approved by supervisors.
                                 Totals                                   $1,153      $97,193


The Independent Auditor
Contractor Was Neither
Properly Monitored nor Paid

             The receiver did not designate a contract monitor for the independent auditor
             contract. However, according to the chief financial officer, he maintained
             communication with the contractor through electronic mail concerning the
             contractor’s progress. He further explained that the Authority could not
             specifically monitor the contract activities, since the contractor had to maintain a
             certain level of independence.

             The independent auditor contract gave the independent auditor deadlines by
             which to submit the Authority’s audited financial statements. HUD issued a
             waiver to extend financial reporting deadlines for the Authority. However, the
             Authority did not amend the contract to reflect the waiver. Therefore, the
             contractor was obligated to meet those deadlines prescribed in the contract but did
             not do so.

             Further, a review of three independent auditor contract invoices showed that,
             while they did not include ineligible or unsupported costs, they also did not
             include details required by the contract. For example, the contract required that
             the invoices include detailed descriptions of the services provided and the names
             of the employees who provided them. None of the three invoices included such
             information.


                                                 13
  The Receiver Had Addressed
  Contract Monitoring and
  Payment Issues and Made
  Improvements

           The current receiver had addressed some of the contract monitoring and payment
           issues and begun to make improvements after advising her of our concerns
           regarding the chief financial officer’s monitoring his own contract. Specifically,
           the receiver assigned a contract monitor for financial operations in May 2008.
           The monitor had identified some of the overpayments and unauthorized
           payments, and the Authority had taken steps to recover some of the money.

           Further, the Authority agreed that the independent auditor contractor did not
           provide the three invoices according to the contract terms and stated that it would
           contact the contractor to have it honor the contract terms for current and future
           invoices.

The Authority Did Not Recover
All of the Overpayments


           In her response, the Deputy Assistant Secretary, Office of Field Operations,
           claimed that the Authority had reviewed all of the contract invoices since the
           inception of the contract and had recovered the overpayments. As a result of the
           Authority’s review, the Deputy Assistant Secretary stated that the finding had
           been resolved and provided supporting documentation to support her claim.

           After reviewing the supporting documentation, however, we determined that the
           Authority had not recovered all of the overpayments because

              •   The Authority’s determination of overpayments only included the amounts
                  for overcharged negotiated profit and overcharged hourly rates. It did not
                  include the payments made for unapproved job positions or unsupported
                  reimbursable expenses. Therefore, the contractor’s overcharges were
                  more significant than the Authority determined.

              •   The Authority’s review period did not include all invoices since the
                  inception of the contract (September 15, 2006) as the Deputy Assistant
                  Secretary claimed in her response. The Authority’s review covered an
                  eight-month period (from September 28, 2007, through May 30, 2008)
                  and, therefore, would not have identified any overcharges occurring
                  outside that period.

              •   The Authority did not provide any documentary evidence to show that it



                                            14
                    had recovered or intended to recover what it determined as overpayments
                    totaling $58,038 for 26 contractor invoices covering the period from
                    October 2, 2006, through September 14, 2007. As a result, we added
                    recommendation 2D.

Conclusion

             The receiver did not ensure that the Authority properly monitored or paid two of
             three sample contractors in accordance with the contract terms or the Authority’s
             procurement policy. As a result, the Authority overpaid and paid for unsupported
             expenses totaling $98,346 for one contract and received services late under the other
             contract for fiscal years 2005 and 2006.

             The Authority should seek support or repayment for the ineligible and unsupported
             costs identified. Further, the receiver should ensure that the Authority follows its
             procurement policy and monitors and pays its contractors accordingly.

Recommendations
             We recommend that the Deputy Assistant Secretary, Office of Field Operations,
             require the receiver to

             2A.    Ensure that the Authority seeks repayment to the capital funds from the
                    contractor for the $97,193 in unauthorized payments and overpayments
                    identified in the four invoices reviewed.

             2B.    Ensure that the Authority provides support for or repays the capital funds
                    for the $1,153 in unsupported costs identified in the four invoices
                    reviewed.

             2C.    Ensure that the Authority revises its procurement policy to include a
                    requirement for an independent monitor to adequately monitor or oversee
                    all contractors, and that the independent monitors’ duties include but are
                    not limited to ensuring (1) that contractors meet contract deadlines,
                    specifications, and requirements, and (2) that the Authority’s finance
                    department makes contract payments consistent with the contract terms
                    and/or procurement policy.

             2D.    Ensure that the Authority (1) determines the unauthorized payments and
                    overpayments since the inception of the contract (September 15, 2006) by
                    not only including the overcharged negotiated profit and overcharged
                    hourly rates but also including the payments made for job positions that
                    were not approved under the contract, as well as the reimbursable
                    expenses that were unsupported or ineligible, and (2) recovers all of the
                    unauthorized payments and overpayments, including the $58,038 in
                    ineligible payments that it has already identified but not yet recovered.


                                              15
                                                  RESULTS OF AUDIT

Finding 3: The Receiver Did Not Ensure That the Authority Supported
           10 of 20 Disbursements Totaling $15,203, Properly
           Processed 6 of the 10 Remaining Disbursements, and
           Corrected Long-Standing Internal Control Weaknesses

HUD’s receiver did not ensure that the Authority could provide supporting documentation for 10 of
20 randomly selected accounts payable disbursements. Further, the Authority processed six of the
remaining nine supported disbursements without proper payment authorization, demonstrating that
the receiver had not corrected internal control weaknesses that independent auditors had reported
since 2002. The unsupported and unauthorized payments occurred because although the
Authority’s Finance Department was aware of the established departmental policy, it did not follow
the policy. As a result, the Authority spent $15,203 on 10 unsupported disbursements and put its
assets at risk by not correcting internal control weaknesses identified in 2002.



     The Authority Made
     Unsupported and Unapproved
     Disbursements

                        The Authority could not support 10 of 20 randomly selected accounts payable
                        disbursements totaling $15,203 that were paid between January 2006 and
                        December 2007 after Hurricane Katrina. Six of the disbursements, totaling
                        $12,035, were unsupported because the Authority could not locate any
                        documentation. For the other four disbursements totaling $3,168, the supporting
                        documentation was not complete. The chief financial officer said that either the
                        documentation for the six disbursements had been misplaced or the originals had
                        been provided to other parties. However, in both cases, the Authority could not
                        provide copies of the documentation. The other four disbursements did not have
                        sufficient documentation to support the full disbursement.

                        Of the 10 supported disbursements, six disbursements totaling $28,604 had not
                        been properly authorized in accordance with the Authority’s policy.

                        The policy required the Finance Department to ensure that the appointed
                        approving official provided proper authorization before payment. However, these
                        six payments contained at least one of the following problems: the check
                        request12 was not approved by either the Finance Department or the receiver, the
                        disbursement lacked approval signatures on the purchase order, or the
12
     A check request is a form used by the Authority’s Finance Department to approve invoices for disbursement.




                                                                        16
                      “certification of review and approval for contract payment” form13 was not
                      approved for payment.


     The Independent Auditor
     Reported the Same Conditions


                      Independent auditor reports for 2002 through 200614 confirmed that the Authority
                      lacked documentation of approval and verification on the check request and/or
                      invoice for many disbursements. The Authority agreed to correct the finding in
                      2005, but the independent auditor report for 2006 stated that no corrective action
                      had been taken. Based on our review of the disbursements, the Authority had not
                      corrected the findings.

                      The unapproved and/or unverified and/or unsupported payments occurred because
                      although the Finance Department was aware of the departmental policy, it did not
                      follow the policy.15 The policy required the Finance Department to ensure that (1)
                      proper authorization was received from the appointed approving official before
                      release of payment and (2) all payments were issued based upon original invoices
                      or vendor certified copies.

     Conclusion


                      The Authority could not provide documentation to support 10 of 20 randomly
                      selected accounts payable disbursements and paid 6 of 10 disbursements without
                      proper authorization. These problems occurred because the Authority’s Finance
                      Department did not follow established finance policies and procedures.

                      Independent auditor report findings from 2002 through 2006 show that this had
                      been an ongoing problem at the Authority. The Authority needs to provide
                      support for the $15,203 in unsupported disbursements, develop an appropriate
                      filing system to ensure that it maintains supporting documentation for
                      disbursements, and develop and implement appropriate controls to ensure that
                      disbursements are properly authorized before payment.


13
   The form requires the manager and a contract representative to certify the contractor-provided services according to contract terms and
conditions. This document also requires a signature for payment approval.
14
   The 2006 report was the most recent independent auditor report issued related to the Authority. 
15
   The Authority’s finance policy, dated March 23, 2005.




                                                                       17
Recommendations

          We recommend that the Deputy Assistant Secretary, Office of Field Operations,
          require the receiver to ensure that the Authority

          3A.     Supports or repays its operating funds the $15,203 for the 10
                  disbursements that lacked documentation.

          3B.     Develops and implements an organized and efficient filing system to
                  ensure that the Finance Department adequately safeguards financial
                  records and documentation.

          3C.     Develops and implements proper controls to ensure that disbursements
                  receive proper approval before payment.




                                           18
                         SCOPE AND METHODOLOGY

We conducted our audit at the Authority and the HUD OIG office in New Orleans, Louisiana.
We performed our audit work between April and October 2008.

To accomplish our objectives, we selected and reviewed a nonrepresentative sample of 3 of the
107 contracts the Authority executed after January 2006. We reviewed the scope of work and
those contract terms that related to monitoring and invoices. We obtained and reviewed contract
monitoring information and invoices provided by the contractor, the contract monitor, and the
Finance Department.

The scope of the contract review was limited. We only reviewed three contracts due to other
federal agency interest in the Authority’s procurement activities. Also, one of the three contracts
was the Lafitte demolition contract, which covered only a three-month period because it had
been recently executed.

For the fungibility review, we obtained and reviewed applicable Office of Public and Indian
Housing notices, the Authority’s approved 2006 fungibility plan, and the 2006 annual report to
determine the amount of fungibility funds HUD approved for expenditure and the amount
reported as expensed. Further, we obtained and reviewed bank statements and available support
for expenses from the fungibility bank accounts for the period October 2006 to September 2007.

For the accounts payable disbursements review, we selected a nonstatistical random sample of 20
accounts payable disbursements from a universe of 12,447 disbursements paid from January
2006 to March 2008. During the review, we determined that the available data were generally
reliable for the purposes of the review. We reviewed canceled checks and all other available
supporting documentation associated with the disbursements.

During the audit, we interviewed various senior HUD and Authority officials, contractor staff,
and other Authority staff. We also reviewed the Authority’s procurement policy, financial
policy, and annual contributions contract; applicable federal regulations; Federal Register
waivers; independent auditor reports; and other documentation relevant to the Authority’s
contracting and/or financial operations.

Our audit period covered January 1, 2006, through April 30, 2008. We expanded this period as
necessary. Except for the limitation in scope of our contract review, we conducted the audit in
accordance with generally accepted government auditing standards. Those standards require that
we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objective. We believe that the
evidence obtained provides a reasonable basis for our findings and conclusions based on our
audit objective.




                                                19
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are 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. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.



 Relevant Internal Controls
              We determined that the following internal controls were relevant to our audit
              objectives:

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

                  •   Compliance with laws and regulations - Policies and procedures that
                      management has implemented to reasonably ensure that fungibility fund
                      use is consistent with HUD’s laws and regulations.

                  •   Safeguarding resources - Policies and procedures that management has
                      implemented to reasonably ensure that the Authority’s funds are
                      safeguarded against waste, loss, and misuse.

              We assessed the relevant controls identified above.

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




                                               20
Significant Weaknesses


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

           While under control the of HUD’s receivership,


               •   The Authority did not properly support or report its fungibility
                    expenditures during the period October 2006 to September 2007 (finding
                    1).

               •   The Authority did not monitor and/or pay its contractors in accordance
                   with its procurement policy or the contract terms (finding 2).

               •   The Authority could not adequately support accounts payable
                   disbursements with documentation (finding 3).

               •   The Authority put its assets at risk because it had not corrected conditions
                   reported in independent auditor reports since 2002, which cited its failure
                   to maintain sufficient documentation or ensure that disbursements were
                   properly authorized before payment (finding 3).




                                            21
                       FOLLOW-UP ON PRIOR AUDITS

This audit report is the second OIG audit report issued at the request of the two United States
senators, regarding the HUD receiver’s management of the Authority. Our first audit report,
issued on December 12, 2008, is discussed below.


 Report Number: 2009-AO-0001


               Our audit report (2009-AO-0001) disclosed that HUD’s receiver did not provide
               adequate management oversight to ensure that the Authority complied with
               HUD’s requirements when operating its voucher program and public housing
               operations. Specifically, HUD’s receiver (1) did not ensure that 8 of 10 randomly
               selected voucher program units complied with HUD’s housing quality standards;
               (2) did not ensure that six of nine public housing units were in good repair; and
               (3) did not ensure that the Authority used a rent reasonableness system to avoid
               excessive payments to landlords, properly calculated or paid voucher program
               tenant rents, and maintained a proper waiting list for its Section 8 program.

               We recommended that the Deputy Assistant Secretary, Office of Field Operations,
               require the receiver to ensure that the Authority (1) conducts not only annual
               inspections on all of its voucher program units but also all of the supervisory quality
               control inspections required by its administrative plan, (2) implements an inspection
               process to routinely review the physical condition of public housing units to ensure
               compliance with HUD’s requirements, (3) develops and implements a method for
               assessing rent reasonableness to owners, (4) properly calculates and pays rental
               assistance, and (5) maintains a proper waiting list that complies with HUD’s
               requirements for its Section 8 applicants. The recommendations were still open at
               the time this report was issued.




                                                 22
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

         Recommendation             Ineligible 1/ Unsupported/2
                number
                        1A                            $1,482,181
                        1B                               672,956
                        1C           $2,311,913
                        1D                             2,896,963
                        2A               97,193
                        2B                                  1,153
                        2D               58,038
                        3A                                15,203
                                     _________        _________
                    Totals           $2,467,144        $5,068,456

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 the 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.




                                             23
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION




             OIG Evaluation of Auditee Comments




                            24
Comment 1




Comment 2




            25
Comment 3




            26
Comment 4




Comment 5




Comment 6




            27
28
                         OIG Evaluation of Auditee Comments

Comment 1   The Deputy Assistant Secretary, Office of Field Operations, claimed that the
            Authority had recaptured $164,810 for all Chief Financial Officer contractor
            invoices since the inception of the contract and that the issue (finding 1) was
            resolved and should be removed from the report. Note that we re-numbered
            finding 1 to finding 2 in this final audit report.

            We determined that the additional documentation only supported $8,370, which is
            a small part of the ineligible expenses that we questioned. As a result, we reduced
            the ineligible expenses under finding 1 from $105,564 to $97,193.

            We also included our detailed analysis of the additional documentation under the
            text box “Authority Did Not Recover All of the Overpayments” on page 14 of this
            report. As a result of our analysis, we added another recommendation, which is
            recommendation 2D.

Comment 2   In her response, the Deputy Assistant Secretary, Office of Field Operations, stated
            that the Authority reorganized its Procurement Department and hired a
            compliance and monitoring specialist to develop contract administrative
            procedures, train staff in the procedures, and oversee user departments. She
            further stated that the reorganization and new procedures would not be fully
            implemented until December 30, 2008.

            We recognize that the Authority is taking steps to correct the deficiencies in its
            administration of the contract. However, we cannot reasonably test the adequacy
            of the Authority’s implementation of contract administration that included
            monitoring or overseeing of user departments and contract administrative
            procedures because the Authority’s full implementation was not until December
            30, 2008, which is a very short implementation period. Therefore, we cannot
            conclude that the Authority’s reorganization and new procedures are adequate to
            resolve the issues we found. And as a result, we did not remove our initial
            recommendation 1C. Note that we re-numbered recommendation 1C to 2C in this
            final audit report.

Comment 3   The Deputy Assistant Secretary, Office of Field Operations, disagreed with
            finding 2 (now finding 1 in this final audit report) and asked that it be removed
            from the report. She said it is her belief that the Authority properly accounted for
            all of the 2006 Section 901 fungibility funds. She stated that HUD headquarters
            staff instructed the Authority to report all activity to date in the annual statement
            that was due on November 14, 2008. The Authority then made a revision to its
            fiscal year 2006 annual statement, which included the combined activities for both
            fiscal years 2006 and 2007.

            We determined that the Authority did not comply with HUD PIH Notice 2007-22,


                                             29
            which required it to provide the first annual progress report covering the 12-
            month period from October 1, 2006, through September 30, 2007. Since the
            Authority’s revised report covered multiple-year activity and the supporting
            documentation did not separate activity for each year, we could not determine the
            accuracy of expenditures in the revised report. Additionally, based on the results
            of our review of the additional documentation, we found neither any waiver of the
            PIH Notice 2007-22 requirements to report first period activity for October 1,
            2006, through September 30, 2007, nor a document showing who at headquarters
            waived such reporting requirements. Therefore, we stand by our original finding
            conclusions and recommendations.

Comment 4   The Deputy Assistant Secretary, Office of Field Operations, provided us
            supporting documentation for 1 of the 11 disbursements that we questioned in our
            report. The invoice for this disbursement totaled $42,602.75. She also included a
            schedule showing vendor names, check numbers, invoice numbers, amounts, and
            descriptions of services for the 11 disbursements in a table and claimed that they
            were all eligible operating fund expenses. The Deputy Assistant Secretary, Office
            of Field Operations, indicated that the 10 remaining invoices were missing
            because the payments may have been approved verbally (by telephone) during the
            emergency periods following Hurricanes Katrina and Rita. She also said that the
            Authority was working on a disaster recovery policy that would adequately
            address transaction processing for future disasters.

            We reviewed the supporting documentation for the invoice totaling $42,602.75.
            The documentation included copies of checks, invoices, purchase orders, and a
            contract. We agreed that the documentation was sufficient to show that the
            disbursement was fully supported. We adjusted the finding to account for the
            supported disbursement.

            We disagreed, however, that the schedule alone was sufficient documentation for
            the remaining 10 disbursements. Also, 7 of the 10 unsupported disbursements
            were well after the immediate emergency periods because they occurred more
            than one year following the hurricanes. Further, the Authority did not provide
            any evidence of approvals via telephone logs during the audit.

Comment 5   The Deputy Assistant Secretary, Office of Field Operations, stated that the
            Authority's Finance Department has developed and implemented a file room and a
            tracking system to safeguard financial records.

            We recognize that the Authority, as the Deputy Assistant Secretary stated, has
            developed and implemented a file room and tracking system to safeguard
            financial records. The Authority’s file room and tracking system have not been
            implemented long enough for us to assess their adequacy. Therefore, we cannot
            reasonably conclude whether they have resolved the issues we found under
            finding 3. As a result, we did not remove or change our recommendation 3B.



                                            30
Comment 6 The Deputy Assistant Secretary, Office of Field Operations, stated that the
          Authority had existing controls to ensure proper approval before making
          payments and reiterated that it was working on a disaster recovery policy that
          would adequately address the processing of transactions for future disasters.

              We disagree with the Deputy Assistant Secretary’s assertion that the Authority
              had existing controls for ensuring that proper approval was made before
              payments. We found that the Authority’s controls lacked proper payment
              approval, which is a significant control weakness. In addition, the independent
              auditors determined that such a control weakness has been ongoing since at least
              2002. Thus this weakness existed long before the August 2005 disaster because
              the Authority has not taken any corrective actions.

              The Deputy Assistant Secretary of Field Operations indicated her agreement with
              our recommendation 3C when she stated that the Authority would implement a
              disaster recovery policy for proper processing of expenditures or disbursements.
              Such a mechanism would implement our recommendation 3C. A target
              completion date, however, is needed to reach a management decision under
              HUD’s Audits Management System.




                                              31
Appendix C

          FINANCIAL OPERATIONS CONTRACT INVOICES
                         REVIEWED

Invoice   Invoice     Invoice      Total        Unauthorized      Overpayments      Total
           date       amount    unsupported      payments –        – ineligible   ineligible
                        ($)        costs       ineligible costs       costs          costs
                                    ($)               ($)              ($)            ($)
  1       Mar. 2,     126,998       142             16,840            1,336         18,176
           2007
  2       Jan. 10,     71,096      466              19,270              0          19,270
           2008
  3       Sept. 2,    127,850      331              30,520              0          30,520
           2007
  4       Apr. 17,    122,287      214              27,990            1,237        29,227
           2007
Totals               $448,231    $1,153            $94,620           $2,573       $97,193




                                              32