Issue Date
August 4, 2009
Audit Report Number
2009-BO-1009
TO: Joe Crisafulli, Director, Boston Multifamily Hub , Region 1, 1AHMLA
Miniard Culpepper, Regional Counsel for New England, Region 1, 1AC
Henry S. Czauski, Deputy Director, Departmental Enforcement Center, CV
FROM:
John A. Dvorak, Regional Inspector General for Audit, (Boston) Region 1, 1AGA
SUBJECT: Casa Otonal Multifamily Housing Project, New Haven, Connecticut, Was Not
Properly Managed in Accordance with HUD Regulations
HIGHLIGHTS
What We Audited and Why
We audited the Casa Otonal multifamily housing project, located in New Haven,
Connecticut, based on a referral received from the U.S. Department of Housing
and Urban Development’s (HUD) Hartford Program Center. The referral
disclosed compliance findings regarding the project’s audited financial
statements, including instances of unauthorized loans/disbursements to an
affiliate.
Our primary audit objective was to determine whether the project owner managed
and operated the project in accordance with HUD regulations and the project’s
regulatory agreement. Specifically, we wanted to (1) determine the extent of
unauthorized distributions made while the project was in a non-surplus-cash
position, (2) determine whether goods and services were properly procured, and
(3) ensure that the project’s cost allocation plan adequately prorated staff time and
shared office space.
What We Found
The project owner did not always use project funds in accordance with HUD
regulations or the regulatory agreement. We identified questioned costs totaling
$265,3501 while the project was in a non-surplus-cash position. Specifically, the
owner made $236,439 in unauthorized loans/distributions to an affiliate, Casa
Otonal, Inc. Additionally, the owner did not follow proper procurement
procedures due to a lack of written policies and procedures and the absence of a
contract log, contracts, purchase orders, or related bidding or source selection
evaluation documents. Later, the project incurred $18, 031 in ineligible costs,
$8,748 in unsupported costs, and $2,132 in unreasonable costs. Finally, the
owner did not prepare a formal written cost allocation plan to appropriately
allocate staff time spent on nonproject activity or the use of office space by
nonproject personnel. However, the nonproject staff time and office space used
appeared to be minimal.
What We Recommend
We recommend that the Director of the Office of Multifamily Housing, Boston
hub, require the project owner to (1) reimburse the project $254,4702 for the
ineligible disbursements and $2,132 for the unreasonable disbursements and (2)
provide documentation to support the $8,748 in unsupported disbursements or
reimburse the project. We also recommend that the Director require the project
owner to establish a written procurement policy that follows federal procurement
regulations and an adequate cost allocation plan to appropriately allocate staff
time at the project. Further, we recommend that HUD pursue (1) double damages
remedies against the responsible parties for the ineligible/inappropriate
unsupported disbursements that were used in violation of the project’s regulatory
agreement and (2) civil money penalties and administrative sanctions, as
appropriate, against the responsible parties for their part in the regulatory
violations.
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.
1
See appendix A - $254,470 ($236,439 + $12,559 + $5,472) + $8,748 ($7,337 + $1,411) + $2,132.
2
$236,439 + $18,031 ($12,559 + $5,472).
2
Auditee’s Response
We provided the draft audit report to the project owner on July 17, 2009, and
requested a response by July 31, 2009. We discussed the draft audit report at an
exit conference on July 22, 2009, and received the owner’s written comments on
July 31, 2009. The owner generally agreed with the report findings.
The complete text of the auditee’s response, along with our evaluation of that
response, can be found in appendix B of this report.
3
TABLE OF CONTENTS
Background and Objective 5
Results of Audit
Finding 1: The Project Owner Made Unauthorized Loans/Distributions and 6
Incurred Questioned Costs in Violation of its Regulatory Agreement
Finding 2: The Project Owner Did Not Follow Proper Procurement Procedures 11
When Acquiring Goods and Services
Finding 3: The Project Owner Did Not Establish an Adequate System for 14
Allocating Staff Costs
Scope and Methodology 16
Internal Controls 18
Appendixes
A. Schedule of Questioned Costs 20
B. Auditee Comments and OIG’s Evaluation 21
4
BACKGROUND AND OBJECTIVE
Casa Otonal (project) is a multifamily, 104-unit elderly housing complex located in New Haven,
Connecticut. The project receives Section 8 rental assistance from the U.S. Department of
Housing and Urban Development (HUD) for each of its 104 units. It is owned and managed by
Casa Otonal Housing Corporation (owner). The project owner and an affiliate, Casa Otonal,
Inc., share a board of directors.
In August 2007, the project owner refinanced the project under Section 207/223(f) of the
National Housing Act. At that time, the project underwent a number of renovations, including
replacing the roof, upgrading the heating system, installing a new security gate and fence, and
replacing the front and back entry doors. Section 223(f) insures lenders against loss on mortgage
defaults, facilitating the purchase or refinancing of existing multifamily rental properties. The
program allows for long-term mortgages (up to 35 years) that can be financed with Government
National Mortgage Association mortgage-backed securities.
In October 2008, the HUD Hartford Program Center referred the project to the Office of
Inspector General (OIG) due to several referrals to the Departmental Enforcement Center for
compliance findings regarding the project’s audited financial statements. The compliance
findings included instances of unauthorized loans/distributions that the project owner
acknowledged were due from an affiliate, Casa Otonal, Inc.
Our primary audit objective was to determine whether the project owner managed and operated
the project in accordance with HUD regulations and the project’s regulatory agreement.
Specifically, we wanted to (1) determine the extent of unauthorized distributions made while the
project was in a non-surplus-cash position, (2) determine whether goods and services were
properly procured, and (3) ensure that the project’s cost allocation plan adequately prorated staff
time and shared office space.
The issues identified in our report deal with administrative and internal control activities that we
feel are necessary to bring to the project owner’s attention now. Other matters regarding the
owner’s management may remain of interest to our office as well as other federal agencies.
Release of this report does not immunize any individual or entity from future civil, criminal, or
administrative liability or claim resulting from future action by HUD and/or other federal
agencies.
5
RESULTS OF AUDIT
Finding 1: The Project Owner Made Unauthorized Loans/Distributions
and Incurred Questionable Costs in Violation of its Regulatory
Agreement
The project owner made unauthorized loans/distributions to an affiliate and incurred additional
ineligible, unsupported, and unreasonable expenses while the project was in a non-surplus-cash
position, violating HUD requirements and the project’s regulatory agreement. Specifically, the
owner (1) made $236,439 in unauthorized loans/distributions to an affiliate, Casa Otonal, Inc.;
(2) incurred $18, 031 in ineligible and $8,748 in unsupported costs; and (3) incurred
unreasonable costs totaling $2,132 for excessive cell phone charges related to minute overages
and text messaging. These cost exceptions occurred due to weak internal controls and the
owner’s disregard of HUD regulations and regulatory agreement requirements governing the use
of funds. As a result, $265,350 was diverted from the project, contributing to the project’s non-
surplus-cash position, and may subject the project owner to sanctions under federal equity
skimming statutes.
Unauthorized Loans/
Distributions Were Made to an
Affiliate
For the period July 1, 2005, through May 14, 2009, the project owner made
unauthorized loans/distributions totaling $376,846 to an affiliate, Casa Otonal, Inc
(corporation). The majority of these loans/distributions were for payment of the
corporation’s health insurance costs ($179,512), other types of insurance, various
loans, and other cost allocations. During that same period, however, the corporation
reduced the amount owed by $140,407 through various payments, loans, and other
reclassifications, resulting in $236,4393 being owed. These costs were not eligible
project costs and must be repaid to the project because the owner’s regulatory
agreement with HUD clearly restricts the use of project funds to only project-related
purposes and prohibits distributions while in a non-surplus-cash position.4
3
See appendix A. As of May 14, 2009, the corporation owed the project a net amount of $236,439 ($376,846 –
$140,407).
4
Regulatory Agreement for Multifamily Housing Projects, Form HUD-92466, approved on August 29, 2007
(current), and Regulatory Agreement Housing for the Elderly – Nonprofit, FHA [Federal Housing Administration]
Form 2466-EH, approved on December 7, 1984.
6
The Owner Was Notified
Regarding Unauthorized
Distributions
In July 2008, the project owner was notified by HUD’s Departmental
Enforcement Center of the compliance findings related to its audited financial
statements. The project’s executive director responded to the compliance findings
on September 23, 2008, and with respect to compliance findings 4 (unauthorized
loan from project funds) and 5 (unauthorized distribution of funds), she
acknowledged that the two findings dealt with incorrectly prorating insurance
bills and staff time between the project and the corporation. The executive
director went on to say that the project was taking steps to ensure that this
problem did not occur again and that she was aware that project funds may only
be used for project-related expenses. She further stated that the project’s business
manager would review all such charges to ensure compliance with HUD
requirements in the future.
Despite these assurances, the project owner continued making unauthorized
loans/distributions to the corporation throughout our audit engagement, although
the owner was again reminded by OIG that these unauthorized loans/distributions
were in violation of the project’s regulatory agreement. The executive director
did not explain why the project continued to pay for costs of the corporation and
offered no plan for eliminating future unauthorized distributions other than to say
that she would need to think about it and that the corporation might need to take
out a line of credit.
Ineligible and Unsupported
Costs Were Charged to the
Project
In addition to the unauthorized loans/distributions, the project owner did not
always obtain goods and services for the project that were eligible and/or
supported. A review of all available credit card statements and cell phone bills
between January 2007 and approximately April/May 2009, identified $26,7795 in
ineligible and unsupported costs charged to the project that included credit card
activity for multiple related projects and cell phone charges for nonproject
employees, former employees, and/or cell phone equipment for which we could
not establish for whom the equipment was purchased.
5
See appendix A.
7
Type of charge Ineligible Unsupported Total
Credit card charges $12,559 $7,337 $19,896
Cell phone charges $5,472 $1,411 $6,883
Total $18,031 $8,748 $26,779
The project used four primary credit cards to purchase various goods and services
for the project, the corporation, and at least two other related projects: Casa
Familia, a related project located adjacent to the project, and Casa Latina, another
related project. The purchases for all entities were commingled on the project’s
credit cards. Without proper internal controls to ensure that the project only
purchased project-related goods and services, payments for non-project-related
goods were routinely made. In instances in which the supporting
invoice/purchase order clearly identified a nonproject entity as the recipient, we
classified these expenses as ineligible ($12,559). In instances in which the
invoice/purchase order did not identify the recipient or intended recipient, we
classified these purchases as unsupported ($7,337).
Additionally, a review of all cell phone bills between January 13, 2007, and May
12, 2009, identified a total of 12 different cell phones in use, three of which were
assigned and used by nonproject employees. We further indentified cell phone
charges for the cell phone of a former employee that was still being charged to the
project eight months after termination of her employment, although the
whereabouts of the cell phone was unknown. We questioned these charges as
ineligible project expenses ($5,472). Lastly, we identified cell phone equipment
purchases for which the documentation available was not sufficient to determine
who used the equipment. Therefore, we classified these costs as unsupported
($1,411).
Unreasonable Costs Were
Charged to the Project
We identified unreasonable and unnecessary cell phone costs totaling $2,132.
Although these costs were associated with employees of the project, the costs
were unnecessary and unreasonable because they were for minute overages and
text messaging, in some cases for hundreds of dollars more than the typical
monthly charge according to the cell phone contract. Although we recognize that
the use of cell phones may facilitate the project’s operations and make them more
efficient, the project is not responsible for paying the costs associated with
personal calls and/or text messaging. The executive director stated that she would
seek reimbursement for these charges.
8
Security Costs Appear to Be
Excessive
Although proper procurement procedures were not followed, our review of the
project’s 48 goods/services procurements (see finding 2) disclosed that a majority
appeared reasonable or necessary with the exception of the security provided to
the project. During the period July 1, 2005, through April 8, 2009, the project
expended $356,773, including more than $100,000 in two of the years reviewed.
For a 104-unit, five-story building, that cost appeared excessive. However, the
executive director stated that as of December 2008, the project reduced the
number of hours during which security was provided and, based on those revised
hours, we estimate a savings of approximately $26,000 per year. Nonetheless, the
project owner should evaluate the need and extent of security required because
recent renovations to the project included a rear parking lot entry that is enclosed
by an iron gate with coded access and a front building entry that is locked after
dark and is only accessible with a key.
Conclusion
The project owner did not always use project funds in accordance with HUD
regulations or the regulatory agreement. We identified questioned costs totaling
$265,350 while the project was in a non-surplus-cash position, including
unauthorized loans/distributions to an affiliate, ineligible and unsupported costs
for the purchase of goods and services for related projects, and unreasonable costs
associated with the misuse of cell phones by project employees. These cost
exceptions occurred due to weak internal controls. Also, the owner’s disregard of
HUD regulations and regulatory agreement requirements governing the use of
funds may lead to sanctions under federal equity skimming statutes.
Recommendations
We recommend that the Director of the Office of Multifamily Housing, Boston hub,
require the project owner to
1A. Deposit $254,470 for the ineligible disbursements6 cited in this report into the
project’s reserve for replacement or a restricted capital account that requires
HUD approval for the release of the funds.
1B. Deposit $2,132 for the unreasonable/unnecessary disbursements cited in this
report into the project’s reserve for replacement or a restricted capital account
6
$236,439 + $12,559 + $5,472.
9
that requires HUD approval for the release of the funds.
1C. Provide documentation to support the $8,748 in unsupported disbursements7
cited in this report or reimburse the project’s reserve for replacement or
restricted capital account that requires HUD approval for the release of the
funds for the applicable portion.
1D. Develop procedures to ensure that only project-related goods and services are
acquired with project funds.
1E. Evaluate the need and extent of security required given the recent
renovations to the project, and and submit documentation to HUD showing
that the service was properly procured.
1F. Implement procedures and controls to ensure that future disbursements for
project expenses comply with the regulatory agreement and HUD’s
requirements.
We also recommend that the Director
1G. Evaluate the project owner’s capacity to effectively manage the project as an
owner/management agent and consider the need for professional management
services.
We recommend that HUD’s Regional Counsel, in coordination with the Director of
the Office of Multifamily Housing, Boston hub, and HUD’s Office of Inspector
General,
1H. Pursue double damages remedies against the responsible parties for the
ineligible/inappropriate and applicable portion of the unsupported
disbursements that were used in violation of the project’s regulatory
agreement.
We recommend that the Director of HUD’s Departmental Enforcement Center
1I. Pursue civil money penalties and administrative sanctions, as appropriate,
against the owner, operator, and/or their principals/owners for their part in
the regulatory violations cited in this report.
7
$7,337 + $1,411.
10
RESULTS OF AUDIT
Finding 2: The Project Owner Did Not Follow Proper Procurement
Procedures When Acquiring Goods and Services
The project owner did not follow proper procurement procedures when acquiring goods and
services. This condition occurred due to the lack of written policies and procedures regarding
procurement and the absence of
• A contract log,
• Contracts and/or purchase orders available for review, and
• Related bidding and source selection evaluation documents.
Therefore, HUD had no assurance that contracted services were properly bid, resulted in
adequate competition, or resulted in reasonable costs to the project.
The Project Owner Did Not
Follow HUD Procurement
Regulations
The project owner failed to ensure that proper procurement procedures were
followed when contracting for goods and services. The project lacked written
policies and procedures governing the purchase of goods and services, a contract
log identifying the services contracted for, and the majority of contracts and
related bidding and evaluation documents that would normally be associated with
contracted services. In accordance with HUD requirements, when contracting for
goods and services, written cost estimates from at least three sources must be
solicited for any contract or ongoing supply or service expected to exceed
$10,000 per year or the threshold established by the local HUD office with
jurisdiction over the project.8
For the period July 1, 2005, through April 8, 2009, we identified 48
goods/services procurements that required written cost estimates. As illustrated in
the table below, in the majority of instances, the owner failed to maintain the
bidding/evaluation documents or the applicable contract.
8
The HUD Hartford Multifamily Program Center established a threshold of $5,000.
11
Period Number of Bidding and Contract/agreement
contracts evaluation provided
documents
provided
July 1, 2005, to June 30, 2006 11 0 4
July 1, 2006, to June 30, 2007 11 0 4
July 1, 2007, to June 30, 2008 13 0 5
July 1, 2008, to Apr. 8, 2009 13 1 3
Although proper procurement procedures were not followed, our review of the
project’s 48 goods/services procurements disclosed that a majority appeared
reasonable or necessary with the exception of the security provided to the project
(see finding 1). Our review of the goods/services procurements also disclosed
that invoices were maintained on site, supporting the costs charged to the project.
However, without conducting a complete analysis of similar goods/services
offered in the area, we could not be certain whether the project received the
goods/services at the best possible price.
The Executive Director
Expressed Skepticism about the
Bidding Process
After repeated requests during our audit, the project’s executive director
eventually provided a two-page memorandum detailing how goods and services
were procured. The memorandum, however, was informal, was not very
descriptive, and lacked clear direction regarding how goods and services were to
be procured and who had the applicable authority. More importantly, within the
memorandum, the executive director essentially admitted that federal
procurement regulations were not followed, including stating that she had
“professional skepticism” about bidding, that bidding was quite expensive and too
often failed to ensure the best quality of product or work, and that she found it
more efficient and effective to do what she referred to as “comparison shopping.”
Conclusion
The project owner did not follow proper procurement procedures due to a lack of
written policies and procedures and did not have a contract log, contracts or
purchase orders, or related bidding or source selection evaluation documents
available for review to support project procurements. As a result, HUD had no
assurance that contracted services were properly bid, resulted in adequate
competition, or resulted in reasonable costs to the project.
12
Recommendations
We recommend that the Director of the Office of Multifamily Housing, Boston hub,
require the project owner to
2A. Establish a written procurement policy that follows federal procurement
regulations and provide training to its staff regarding the new policy.
2B. Evaluate existing services provided to the project and submit documentation to
HUD showing that the service was properly procured and, if not, establish a
timeframe for reprocuring the applicable service.
13
RESULTS OF AUDIT
Finding 3: The Project Owner Did Not Establish an Adequate System
for Allocating Staff Costs
The project owner did not establish a formal cost allocation plan to appropriately allocate the
time spent by the executive director and the business manager on nonproject activities. This
condition occurred because the executive director did not believe that a formal allocation plan
was required, considering the amount of office space used by nonproject employees and that
only her and the business manager worked on nonproject activities. Instead, an arbitrary
allocation rate with no documented basis was set each year. As a result, the project incurred and
may continue incurring costs that should be allocated to other entities.
An Allocation Plan Was Not
Established Despite the Advice
of an Independent Public
Accountant
The project owner did not develop a formal written cost allocation plan to
appropriately allocate the time spent by staff on nonproject activities despite
being informed by its independent public accounting firm that one was needed.
As part of the audited financial statements for the fiscal year ending June 30,
2005, the project owner received a recommendation that it assess all costs shared
and document proper allocations based on actual time spent and space used. The
executive director stated that she did not recall responding to that
recommendation and indicated that the project owner had begun informally
allocating staff time.
The Allocation Lacked Basis or
Support
At the onset of our audit, we were informed by the executive director that 90
percent of her and the business manager’s time was allocated to the project. She
went on to say that the percentage allocated over the years had varied depending
on workload. Nonetheless, she was unable to show how the allocation was
determined and could not provide documentation to support its basis.
Regardless, we reviewed the total dollar amount allocated for the fiscal years
ending June 30, 2007, and June 30, 2008. We learned that both the executive
director and business manager had 11 percent of their wages and benefits
14
allocated to an affiliate, Casa Otonal, Inc., for the fiscal year ending June 30,
2007. For the year ending June 30, 2008, however, those percentages decreased
to 5 percent for the executive director and 7.5 percent for the business manager.
Although some charges were allocated, it was difficult to determine whether those
amounts were actually allocated to the corporation as there were a number of
entries and reclassifications.9 However, there was no clear basis for the allocation
to support the costs charged.
Two nonproject employees and the Hospital of Saint Raphael used office space at
the project’s location. The space used was minimal and appeared to directly
benefit the residents.
Conclusion
The project owner did not prepare a formal written cost allocation plan to
appropriately allocate costs for staff time spent on nonproject activity or the use
of office space by nonproject personnel. A formal allocation plan was not
developed because the executive director did not believe one was required, given
the small amount of office space used by nonproject employees and that only her
and the business manager worked on nonproject activities. As a result, the project
incurred and may continue incurring costs that should be allocated to other
entities.
Recommendations
We recommend that the Director of the Office of Multifamily Housing, Boston hub,
require the project owner to
3A. Establish an adequate cost allocation plan to appropriately allocate staff time
and office space at the project.
9
Our review of unauthorized loans/distributions disclosed that the some amounts were allocated to the corporation
by the project over the years, but with the number of transactions and reclassifications, it was difficult to determine
the exact amount, and it was not worth the time required to pursue further as the amount questioned was appropriate
(see finding 1).
15
SCOPE AND METHODOLOGY
Our audit generally covered the period July 1, 2005, through June 30, 2008, but was expanded when
necessary. We conducted our fieldwork between December 2008 and June 2009. We carried out
our audit work at the project’s location in New Haven, Connecticut, and the local HUD Hartford
field office in Connecticut.
To accomplish our audit objective, we
• Reviewed federal laws and multifamily housing regulations to determine applicable HUD
requirements governing the operation of the Casa Otonal project. Reviewed the owners’
regulatory agreement with HUD and the project management files at the local HUD field
office for applicable HUD requirements.
• Obtained an understanding of the project owner’s corporate structure and reviewed the
organizational chart, identifying lines of authority and functional control of staff as it
relates to the project.
• Reviewed the available audited financial statements for our audit period to determine
management and internal control weaknesses and reportable conditions identified
previous to our audit.
• Reviewed and evaluated financial and operational controls identified through an internal
control questionnaire and interviews regarding procedures applicable to our audit period.
• Reviewed project accounting records for the audit period to determine the extent the
project owner made unauthorized distributions (loans or transfers) to related parties
(individuals, related projects, or other businesses) while the project was in a non-surplus-
cash position.
• Evaluated the project’s procurement practices for the period July 1, 2005, through April
8, 2009, by selecting for review 48 goods/services procurements. In addition, we
evaluated whether the project owner obtained only goods and services that were
reasonable and necessary for the project and whether costs were adequately supported.
• Determined whether the project owner/management agent followed proper procurement
procedures.
• Reviewed the accounting records for the audit period to evaluate whether the auditee had
a formal system for allocating salaries and costs among related companies/projects.
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,
16
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.
17
INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls 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
objective:
• Use of project funds.
• Ensuring that project costs are eligible, supportable, necessary, and reasonable.
• Procurement of goods and services.
• Proper allocation of staff time and office space.
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 items are significant weaknesses:
• The project owner did not have adequate procedures for use of funds to ensure
that distributions were made only when the project was in a surplus-cash
position (see finding 1).
• The project owner did not have adequate procedures to ensure that resources
were properly safeguarded when it charged ineligible, unsupported, and
18
unreasonable expenditures to the project (see finding 1).
• The project owner did not establish adequate procedures to ensure that goods
and services were properly procured (see finding 2).
• The project owner did not establish and adequate system for allocating staff time
spent on nonproject activities (see finding 3).
19
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation Ineligible 1/ Unsupported Unreasonable or
number 2/ unnecessary 3/
1A $254,470
1B $2,132
1C $8,748
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.
3/ Unreasonable/unnecessary costs are those costs not generally recognized as ordinary,
prudent, relevant, and/or necessary within established practices. Unreasonable costs
exceed the costs that would be incurred by a prudent person in conducting a competitive
business.
20
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
Comment 3
21
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 4
Comment 5
Comment 6
22
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 6
Comment 6
Comment 7
23
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 8
24
OIG Evaluation of Auditee Comments
Comment 1 The report was amended to refer to the Casa Otonal Housing Corporation
(project) and Casa Otonal, Inc. (corporation) as affiliates of the project, since they
are two separate and distinct entities and no parental relationship exists.
Comment 2 HUD will need to review any corrective action/implementation with respect to the
recommendations of this report. It should be noted that recommendation 1B
incorrectly referred to the $2,132 as unsupported disbursements. The amount was
correctly referred to as unreasonable /unnecessary in appendix A, and the wording
to recommendation 1B was corrected to reflect this also.
Comment 3 We disagree that all loans and disbursements were used to operate programs and
provide services, since a large portion of the disbursements went directly toward
paying the health insurance costs of an affiliate, Casa Otonal, Inc. In addition,
the regulatory agreement governs the operations of the project and any loan or
disbursement made while the project was in a non-surplus cash position was a
violation of the regulatory agreement.
Comment 4 It is unclear what the owners are trying to clarify with their comments. The
owners were initially notified of the compliance findings in July 2008 and at
numerous times subsequent to that during our audit engagement, including the
May 2009 meeting referred to. We cannot confirm that the executive director
verbally instructed the business manager to cease all loans/disbursements to its
affiliate in September 2008. Regardless, the practice continued until at least May
14, 2009. Also, we are not aware of or were not given any written instructions
that were supposedly provided to the business manager. We agree that the owners
should take steps to ensure proper oversight should the executive director be
absent for any period of time in the future. The statements made in the report are
factually correct based on the evidence gathered during the audit.
Comment 5 The owner’s efforts only address one instance of inappropriate cell phone use by
one of their employees. The comments did not address the ineligible and
unsupported cell phone costs related to nonproject employees, a former employee,
or the misuse of cell phones by other employees. HUD will need to review any
corrective action/implementation with respect to the recommendations of this
report.
Comment 6 HUD will need to review any corrective action/implementation with respect to the
recommendations of this report.
Comment 7 As stated in the report, there is no documented basis for a cost allocation of the
time the director and the business manager spent on nonproject activities.
Without such a documented basis, the allocation established was arbitrary in
25
nature. HUD will need to review any corrective action/implementation with
respect to the recommendations of this report.
Comment 8 Although, the office space used was minimal and appeared to directly benefit the
residents of the project, HUD will need to review the practice of providing cost
free space to non- project employees and make a determination of whether to
require a cost allocation in this instance or any space provided in the future. HUD
will also need to review any corrective action/implementation with respect to the
cost allocation plan to appropriately allocate staff time.
26
Casa Otonal Multifamily Housing Project, New Haven, Connecticut, Was Not Properly Managed in Accordance with HUD Regulations
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-08-04.
Below is a raw (and likely hideous) rendition of the original report. (PDF)