oversight

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)

                                                                   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