oversight

The Housing Authority of the City of Winston-Salem, North Carolina, Needs to Improve Financial Controls

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-29.

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

                                                                 Issue Date
                                                                       September 29, 2009
                                                                 Audit Report Number
                                                                        2009-AT-1014




TO:         Michael A. Williams, Director, Office of Public Housing, Greensboro, NC,
             4FPH


            //signed//
FROM:       James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT: The Housing Authority of the City of Winston-Salem, North Carolina, Needs to
          Improve Financial Controls

                                    HIGHLIGHTS

 What We Audited and Why

             We reviewed the Housing Authority of the City of Winston-Salem (Authority)
             because it will receive $3.9 million for capital fund projects under the American
             Recovery and Reinvestment Act of 2009 (ARRA). In addition, the Secretary of
             the U. S. Department of Housing and Urban Development (HUD) received a
             citizen’s complaint alleging that the Authority used unethical procurement
             practices.

             Our objectives were to (1) evaluate the Authority’s capacity in the areas of
             internal controls, eligibility, financial controls, procurement, and output/outcomes
             in administering funds and (2) determine whether the Authority followed federal
             procurement regulations.


 What We Found

             The Authority was generally prepared to properly administer the ARRA capital
             funds, but it did not have adequate financial controls to achieve the ARRA
             objective of transparency and accountability. ARRA contains five crucial
           objectives to ensure transparency and accountability, one of which is that funds
           are spent for authorized purposes and not wasted. The Authority had successfully
           completed projects with 2005, 2006, and 2007 capital fund grants and complied
           with requirements in preparation for receiving the ARRA capital funds.
           However, the Authority’s policies and procedures were not sufficient to ensure
           that previous capital funds were properly spent. This condition resulted in more
           than $2 million in unsupported and $81,869 in ineligible capital fund expense
           reimbursements.

           The Authority generally followed federal procurement regulations. We reviewed
           4 capital fund construction contracts for the 2005, 2006 and 2007 grants, 4
           contracts from the 62 shown on the contract log, and 4 purchase order
           procurements not included on the contract log. We did not find deviations from
           the federal procurement regulations.

What We Recommend

           We recommend that HUD increase oversight of the Authority’s administration of
           ARRA funds and require it to implement appropriate financial policies,
           procedures, and controls. In addition, the Authority must provide support for
           more than $2 million in unsupported capital fund reimbursements or repay the
           funds and repay $81,869 in ineligible capital fund expense reimbursements.

           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 the draft report to the Authority on September 24, 2009, and
           discussed the findings with Authority officials at an exit conference on September
           24, 2009. The Authority provided its written comments on September 24, 2009.
           It agreed with the $2 million in unsupported costs but expressed disagreement
           with the need for increased HUD oversight as well as some of the ineligible costs.

           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 Financial Controls    5


Scope and Methodology                                                      8

Internal Controls                                                          9

Appendixes
   A. Schedule of Questioned Costs                                        10
   B. Auditee Comments and OIG’s Evaluation                               11




                                           3
                     BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Winston-Salem (Authority) was formed in 1941 pursuant
to the North Carolina Housing Authorities Law. Its primary objective is to provide low-income
housing to the citizens within Winston-Salem, North Carolina, and the surrounding area in
compliance with its annual contributions contract with the U.S. Department of Housing and
Urban Development (HUD). It is governed by a nine-member board of commissioners
appointed by the mayor of Winston-Salem. The Authority’s records are located at 500 West
Fourth Street, Suite 300, Winston-Salem, North Carolina.

In addition to its regular 2008 capital fund allocation of $1.8 million, HUD allocated the
Authority an additional $3.9 million in formula-based capital funds under the American
Recovery and Reinvestment Act of 2009 (ARRA). Enacted as Public Law 111-5 on February
17, 2009, Division A, Title XII of ARRA provides $3 billion in formula-based and $1 billion in
competitive capital funds to public housing authorities to carry out capital and management
activities, as authorized under Section 9 of the United States Housing Act of 1937. On March 3,
2009, HUD amended the annual contributions contract with the Authority to include the formula-
based capital funds to ensure that public housing developments continue to be available to serve
low-income families. HUD approved the Authority’s planned use of the funds to include
appliances ($241,000), air conditioning/heating units ($441,000), and upgrades ($2,570,000) at
Cleveland Avenue Homes, Sunrise Towers, Crystal Towers, and the Townview Apartments,
along with more than $609,000 for planning and administration costs. As of August 13, 2009,
the Authority had obligated about 60 percent of the ARRA funds but had not spent any of the
funds. The Authority plans to apply for additional competition-based capital funds available
under ARRA.

Our objectives were to (1) evaluate the Authority’s capacity in the areas of internal controls,
eligibility, financial controls, procurement, and output/outcomes in administering funds and (2)
determine whether the Authority followed federal procurement regulations.




                                                4
                                RESULTS OF AUDIT

Finding 1: The Authority Did Not Have Adequate Financial Controls
The Authority was generally prepared to properly administer the ARRA capital funds, but it did
not have adequate financial controls to achieve the ARRA objective of transparency and
accountability. ARRA contains five crucial objectives to ensure transparency and accountability,
one of which is that funds are spent for authorized purposes and not wasted. The Authority had
successfully completed projects with 2005, 2006, and 2007 capital fund grants and complied
with requirements in preparation for receiving the ARRA capital funds. However, its policies
and procedures were not sufficient to ensure that previous capital funds were properly spent.
This condition resulted in more than $2 million in unsupported and $81,869 in ineligible capital
fund expense reimbursements.




 The Authority Had
 Unsupported/Ineligible Capital
 Fund Expense Reimbursements

              The Authority’s capital fund program was operated on a reimbursement basis. It
              would incur expenses and then submit reimbursement requests through HUD’s
              Line of Credit Control System. We reviewed more than $4.7 million of the
              Authority’s more than $5.7 million in capital fund expense reimbursements for
              the 2005, 2006, and 2007 capital fund grants to determine whether the expenses
              were supported by source documents. For the reimbursed expenses supported by
              source documents, we reviewed the documents to determine whether the expenses
              were eligible for the capital fund program. The Authority could not provide
              supporting documentation for more than $2 million in reimbursed capital fund
              expenses.

              HUD regulations (24 CFR (Code of Federal Regulations) 85.20(b)(2)(6)) required
              the Authority to maintain accounting records that adequately identified the
              application of funds and were supported by such source documentation as
              cancelled checks, paid bills, payrolls, time and attendance records, contract
              documents, etc. We found reimbursement requests having few or no supporting
              documents and others that were well supported by contracts, invoices, and checks.
              Because the Authority did not maintain consistent supporting documentation, it
              could not show whether the $2 million represented eligible capital fund expenses.




                                               5
           Grant
           year      Grant number    Authorized       Reimbursed     Tested      Supported    Unsupported
           2005     NC19P012501-05   $2,499.802        $2,499,802   $2,499,802   $1,532,828      $966,974
           2006     NC19P012501-06    2,363,348         2,363,348    1,555,812      641,726       914,086
           2007     NC19P012501-07    2,633,868           852,740      703,105      539,851       163,254
           Totals                    $7,497,018        $5,715,890   $4,758,719   $2,714,405    $2,044,314



          For more than $2.7 million in reimbursements supported by source documents,
          the Authority was reimbursed $81,869 for ineligible capital fund expenses.
          Federal cost principles in OMB Circular A-87 require that expenses be necessary
          and reasonable for efficient grant administration, and HUD Handbook 7485.3
          contains specific capital fund expense limits and eligibility restrictions. The
          Authority was twice reimbursed for the same payroll expenses. It was reimbursed
          $43,090 for payroll expenses under the 2006 grant and again for the same
          expenses after transferring the $43,090 to the 2007 grant. Further, the Authority
          was reimbursed $38,779 for operating expenses, such as car washes and plumbing
          repairs, charged to grant administration and site improvement that were not
          eligible capital fund expenses.

          These deficiencies occurred because the Authority did not have adequate controls
          over the capital fund expense reimbursement process. The Authority had a grants
          administration policy, but it did not provide guidance regarding what was needed
          to support capital fund reimbursement requests. The grant accountant was not
          aware of this policy. She said that each director of finance processed
          reimbursements differently and she was not always sure what the reimbursements
          were for because there was nothing attached. We noted that the Authority had
          improved its reimbursement procedures by having the grant accountant maintain
          the invoices. However, it needs to make additional improvements because March
          2009 reimbursement requests did not have a clear audit trail tying the invoices to
          the specific reimbursed expenses they were meant to support. Without improved
          controls, the Authority cannot provide the transparency and accountability
          required for the ARRA capital funds.

Recommendations



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

          1A. Increase oversight of the Authority’s administration of the ARRA capital
              funds in the area of financial controls.




                                                  6
1B. Require the Authority to implement financial policies, procedures, and
    controls to ensure that its reimbursements of ARRA capital fund expenses
    are adequately supported by source documents and are for eligible expenses.

1C. Require the Authority to provide the supporting source documents to show
    that the $2,044,314 was for eligible capital fund expenses. If the Authority
    cannot provide adequate support, it should be required to reimburse the U.S.
    Treasury $1,881,060 from nonfederal funds for the closed 2005 and 2006
    capital fund grants and either provide $163,254 in eligible capital fund
    expenses for the open 2007 grant or reimburse its 2007 capital fund grant
    using nonfederal funds.

1D. Require the Authority to reimburse the U.S. Treasury $38,779 from
    nonfederal funds for ineligible capital fund expenses pertaining to the closed
    2006 capital fund grant and either provide another $43,090 in eligible
    capital fund expenses for the open 2007 grant or reimburse that grant using
    nonfederal funds.




                                 7
                         SCOPE AND METHODOLOGY

Our objectives were to (1) evaluate the Authority’s capacity in the areas of internal controls,
eligibility, financial controls, procurement, and output/outcomes in administering funds and (2)
determine whether the Authority followed federal procurement regulations.

To accomplish our objectives, we reviewed

       ARRA; federal financial management and procurement regulations at 24 CFR 85.20 and
       85.36; federal cost principles in OMB Circular A-87; HUD Handbook 7485.3,
       Comprehensive Grant Guidebook, on capital fund grants; the supplement to HUD
       Handbook 7475.1, REV-1, CHG-1, Financial Management Handbook; HUD guidance on
       use of capital funds authorized by ARRA; Office of Inspector General (OIG) audit
       reports numbers 2005-AT-1802, 2006-AT-1005, and 2006-AT-1007; HUD’s amended
       annual contributions contract with the Authority; and HUD’s Greensboro Office of
       Public Housing’s correspondence and files pertaining to the Authority.

       The Authority’s policies and procedures manuals; planned use of the capital funds
       authorized by ARRA; previous capital fund budgets and reimbursements from HUD’s
       Line of Credit Control System; contracts awarded for 2005, 2006, and 2007 capital fund
       grants; service and supply contracts; check registers; credit card statements; staffing
       assignments; job descriptions; and organization charts.

We also interviewed the Authority’s employees and HUD’s Greensboro staff involved with
oversight of the Authority.

We performed our on-site audit work from May through July 2009 at the Authority’s office
located at 500 West Fourth Street, Suite 300, Winston-Salem, North Carolina. The audit covered
the period January 2007 through April 2009 and was expanded as determined necessary.

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
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                8
                              INTERNAL CONTROLS

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

       Program operations,
       Relevance and reliability of information,
       Compliance with applicable laws and regulations, and
       Safeguarding of assets and resources.

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:

                   Controls over the safeguarding of resources against waste, loss, and misuse.
                   Controls over compliance with laws and regulations.

              We assessed the relevant controls identified above.

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


 Significant Weaknesses

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

                   The Authority’s internal controls over financial management were inadequate
                   (see finding 1).




                                                9
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS



                  Recommendation
                         number          Ineligible 1/     Unsupported 2/
                       1C                                     $2,044,314
                       1D                    $81,869
                                            _______            _________
                        Total                $81,869           $2,044,314

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.




                                             10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Authority Comments




                         11
Ref to OIG Evaluation   Authority Comments




Comment 1




Comment 1



Comment 1



Comment 2




                         12
                          OIG Evaluation of HUD Comments


Comment 1   We found and included in the report that the Authority had made some
            improvement to its reimbursement procedures. However, some of the latest
            reimbursements we tested (March 2009) were not adequately supported. We did
            not find that other auditors, HUD staff, or OIG tested or found the
            reimbursements to be in compliance with the requirement that they be supported
            by the source documentation. Since 2006, OIG has issued 2 reports and 1
            memorandum on the Authority, but none of these included a review of capital
            fund reimbursements. HUD staff said that they reviewed and approved contract
            actions and the payment of expenses as a result of the OIG audits but did not
            review capital fund reimbursements to determine whether the requested amounts
            were supported by source documents. The Greensboro HUD general engineer
            stated that he reviewed construction progress payments and approved those to be
            reimbursed with capital funds. During the audit we tested some reimbursements
            of construction progress payments and found these to be supported.

Comment 2   Descriptions of the supporting documents did not show that they were eligible
            capital fund expenses. If the Authority locates documentation that it believes
            clearly shows that these were eligible, it should provide the documents to HUD
            for consideration.




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