oversight

The Housing Authority of the City of Milwaukee, Wisconsin, Did Not Adequately Maintain a Separate Identity for Commingled Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-17.

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

                                                                   Issue Date
                                                                            September 17, 2009
                                                                   Audit Report Number
                                                                                2009-CH-1013




TO:         Lucia Clausen, Director of Public Housing Hub, 5KPH


FROM:       Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The Housing Authority of the City of Milwaukee, Wisconsin, Did Not
           Adequately Maintain a Separate Identity for Commingled Funds

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Housing Authority of the City of Milwaukee’s (Authority)
             nonprofit development activities. The audit was part of the activities in our fiscal
             year 2009 annual audit plan. We selected the Authority because it had high-risk
             indicators of nonprofit development activity. Our objective was to determine
             whether the Authority maintained complete and accurate books of record for its
             funds subject to its annual contributions contract, other agreement, or the U.S.
             Department of Housing and Urban Development (HUD) regulations.

 What We Found

             The Authority lacked documentation to support that funds, totaling more than
             $1.4 million, disbursed from its general fund were not federal funds. The funds
             were used to pay nonfederal expenses incurred by the Redevelopment Authority
             of the City of Milwaukee (City). Further, the Authority could not provide
             documentation to support that it did not use federal funds to pay $38,445 in City
             expenses.
What We Recommend

           We recommend that the Director of HUD’s Minneapolis Office of Public Housing
           require the Authority to provide documentation to support that funds, totaling
           more than $1.4 million, disbursed from its general fund were not federal funds
           and City expenses, totaling $38,445, were not paid with federal funds.

           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 our review results and supporting schedules to the Director of
           HUD’s Minneapolis Office of Public Housing, the Coordinator of HUD’s
           Milwaukee Office of Public Housing Program Center, and the Authority’s
           executive director during the audit. We provided our discussion draft audit report
           to the Authority’s executive director, its board chairman, and HUD’s staff during
           the audit. We held an exit conference with the Authority’s associate director on
           September 8, 2009.

           We asked the executive director to provide written comments on our discussion
           draft audit report by September 14, 2009. The Authority’s accounting supervisor
           provided written comments, dated September 11, 2009, and he agreed with our
           finding and recommendations. The complete text of the auditee’s response, along
           with our evaluation of that response, can be found in appendix B of this report.




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                           TABLE OF CONTENTS

Background and Objective                                                        4

Results of Audit
      Finding: The Authority Did Not Maintain Complete and Accurate Books of
               Record Before 2007                                               6

Scope and Methodology                                                           8

Internal Controls                                                               9

Appendixes
   A. Schedule of Questioned Costs                                             11
   B. Auditee Comments and OIG’s Evaluation                                    12
   C. Federal Requirements                                                     15




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                       BACKGROUND AND OBJECTIVE

The Housing Authority of the City of Milwaukee (Authority) was chartered in 1944 under Section
66 of the Wisconsin State Statutes. It is responsible for the construction, management, and
provision of safe, affordable, and quality housing with services that enhance residents’ self-
sufficiency. The Authority is governed by a seven-member board of commissioners who are
appointed by the City of Milwaukee’s (City) mayor and confirmed by the common council. The
commissioners are appointed to staggered five-year terms. The Authority’s executive director,
appointed by the board of commissioners, is responsible for carrying out the mission and vision of
the Authority and assuring that the Authority’s programs comply with the applicable federal, state,
and local regulations, ordinances, and policies adopted by the board of commissioners. As of
December 31, 2008, the Authority managed 4,364 public housing units and had 5,182 Section 8
vouchers.

Due to the Authority’s close association with the City, many of its functions were originally
performed by City employees. The Authority also shared a general depository account with the
Redevelopment Authority of the City, an agency separate from the Authority. The Redevelopment
Authority was created by state statute in 1958 with a mission to eliminate blighting conditions that
inhibit neighborhood reinvestment, to foster and promote business expansion and job creation, and
to facilitate new business and housing development. The City and Authority share office space and
shared accounting staff before 2006.

From approximately 2003 to late 2006, the City’s cash receipts and expenses were commingled in
the Authority’s treasury fund checking account (general fund). The general fund contained the
Authority’s federal funds, including its public housing operating, Public Housing Capital Fund, and
HOPE VI programs, as well as its nonfederal funds. The general fund is open and used only by the
Authority.

The Authority received the following U.S. Department of Housing and Urban Development
(HUD) funding from 2003 through 2006:

                                                    Capital
                      Year      Operating            Fund        HOPE VI
                      2003      $9,104,646        $2,120,040     $16,579,189
                      2004      10,010,108         1,284,728               0
                      2005       9,583,186         8,375,344               0
                      2006      10,491,650         5,278,792               0
                      Totals    $39,189,590      $17,058,904     $16,579,189

We reviewed the Authority’s nonprofit development activities. The objective of the nonprofit
development activities review was to determine whether the Authority diverted or pledged
resources subject to its annual contributions contract, other agreement, or regulation for the
benefit of non-HUD developments without specific HUD approval. The Authority’s nonprofit
developments were approved by HUD and did not warrant additional review. When we
determined that the City’s cash receipts and expenses were at one time commingled in the

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Authority’s treasury fund checking account, it was necessary to audit this account. Our objective
was to determine whether the Authority maintained complete and accurate books of record for its
funds subject to its annual contributions contract, other agreement, or HUD regulations.




                                               5
                               RESULTS OF AUDIT

Finding: The Authority Did Not Maintain Complete and Accurate
                   Books of Record Before 2007
The Authority lacked documentation to support that funds, totaling more than $1.4 million,
disbursed from its general fund were not federal funds. The funds were used to pay nonfederal
expenses incurred by the Redevelopment Authority of the City. Further, the Authority could not
provide documentation to support that it did not use federal funds to pay $38, 455 in City
expenses. These problems occurred because the Authority pooled its federal funds with the
City’s funds contrary to the requirements of its annual contributions contract with HUD. As a
result, HUD lacked assurance that its funds were used only for the benefit of the Authority’s
low-income households.


 A Separate Identity for
 Nonfederal Funds Was Not
 Maintained

              The Authority inappropriately pooled its funds with those of a nonfederal entity.
              Section 10(A) of the annual contributions contract between HUD and the
              Authority states that the Authority may deposit into an account covered by the
              terms of the general depository agreement any funds received or held by the
              Authority in connection with any project operated by the Authority under the
              provisions of the contract.

              According to the Authority’s accounting supervisor, cash receipts and expenses
              from the Redevelopment Authority of the City, an agency separate from the
              Authority, were pooled in the Authority’s general fund from approximately 2003
              to late 2006. The general fund contained the Authority’s federal funds, including
              its public housing operating, Public Housing Capital Fund, and HOPE VI
              programs, and its nonfederal funds.

              According to the Authority’s records, the City deposited nearly $18 million of its
              funds into the general fund. The deposits were made to reimburse the Authority
              for City expenses that were paid from the general fund. According to the
              Authority’s records, adjusting entries totaling $1,406,820 were made to the
              general fund ledger to reflect a reimbursement to its general fund. However, the
              Authority lacked records to support that the entries were actually made and that
              any reimbursement was from City funds.

              The Authority’s accounting supervisor said that the Authority changed accounting
              systems in late 2006. When the information under the Authority’s prior


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             accounting system was converted into an electronic format, some information was
             corrupted. He believed that the $1.4 million was a year end adjustment.

             We also determined that City expenses, totaling $38,455, were paid from the
             general fund and were not charged to the City. Vendor invoices supported these
             expenses as being the City’s. However, adequate documentation to support that
             the expenses were not paid with federal funds was not available.

Conclusion

             Contrary to its annual contributions contract with HUD, the Authority did not
             maintain complete and accurate books of record. HUD and the Authority lacked
             assurance that funds, totaling more than $1, 445,275 ($1,406, 820 plus $38, 455),
             disbursed from its general fund were not federal funds.

Recommendations

             We recommend that the Director of HUD’s Minneapolis Office of Public Housing
             require the Authority to

             1A.    Provide documentation to support that funds, totaling $1,406,820,
                    disbursed from its general fund were not federal funds. If documentation
                    cannot be provided, the Authority should reimburse its general fund from
                    nonfederal funds.

             1B.    Provide documentation to support that City expenses, totaling $38, 455,
                    were not paid with the Authority’s federal funds. If documentation cannot
                    be provided, the Authority should reimburse its general fund from
                    nonfederal funds.

             1C.    Implement adequate procedures and controls to ensure that it maintains
                    complete and accurate books of record for its general fund.




                                             7
                         SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

 •     Applicable laws and regulations and the Authority’s annual contributions contract with
       HUD.

 •     The Authority’s cash receipt slips; bank statements; check register; vendor invoices; check
       requests; annual audited financial statements for 2005, 2006, and 2007; and general ledgers.

 •     HUD’s files for the Authority.

We also interviewed HUD’s staff and the Authority’s employees.

We performed our on-site audit work from April to August 2009 at the Authority’s offices
located at 809 North Broadway Avenue, Milwaukee, Wisconsin, and HUD’s Chicago regional
and Milwaukee field offices. The audit covered the period January 1, 2007, through February
28, 2009. The period was adjusted as determined necessary.

We performed our 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 finding and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusions based on our audit objective.




                                                8
                              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:

              •       Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

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

              •       Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed the relevant controls identified above.

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




                                                9
Significant Weakness


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

           •   The Authority lacked adequate procedures and controls to ensure that it
               maintained complete and accurate books of record for its general fund (see
               finding).




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                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                            Recommendation
                                number            Unsupported 1/
                                   1A              $1,406,820
                                   1B                  38,455
                                  Totals           $1,445,275


1/   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.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                       Auditee Comments

             Mr. Ronald Farrell
             Assistant Regional Inspector General for Audit
             U.S. Department of HUD-Office of Inspector General
             200 North High Street, Room 334
             Columbus Ohio, 43125

             September 11, 2009

             Re: DISCUSSION DRAFT AUDIT REPORT ON OIG’S AUDIT OF THE
                 HOUSING AUTHORITY OF THE CITY OF MILWAUKEE’S NON-
                 PROFIT DEVELOPMENT ACTIVITIES.

             Dear Mr. Farrell,

                    Thank you for the opportunity to respond to your September 8, 2009
             discussion draft regarding the Housing Authority’s Non-Profit Development
             Activities. We are proposing changing the language of the finding per our previous
             e-mail to The Authority could not produce complete supporting documentation for its
Comment 1    Books of Record prior to the 2nd quarter of 2006. I am enclosing our response to your
             finding.

Comment 2    The Housing Authority of the City of Milwaukee would like 90 days to complete
             additional research that is needed to determine whether sufficient evidence can be
             compiled to identify the source of funds for the adjusting entries totaling $1,407,260
             and city expenses of $38,455. It should be noted that $1,171,491 of these amounts are
             from 2003, over 6 ½ years ago, and the lead staff responsible for responsible for the
             Housing Authority’s accounting records in 2003 are no longer available (retired,
             deceased, or moved out of state). Additionally, the Housing Authority converted to a
             new computer system in 2006, so electronic files from 2003 are incomplete, so these
             (2003) records have to be reconstructed.

             In 1960 the Housing Authority decided to contract with the City of Milwaukee-
             Department of City Development for its day-to-day operations, which included
             budgeting, accounting, and financial management staff, all of whom were city
             employees that provided services for both the city of Milwaukee-Department of City
             Development and the Housing Authority. The City of Milwaukee staff functioned as
             contractors to the Housing Authority; however, the Housing Authority had no control
             over the work assignments. With the Hope VI redevelopment, which began in the mid
             1990s, the Housing Authority’s operations and management systems became more


                                               12
Ref to OIG Evaluation                    Auditee Comments


             complex requiring specialized staff who understood the public housing and
             Section 8 requirements and dedicated systems to support the unique day-to-day
             operations of the Housing Authority. The Housing Authority worked with the
             City of Milwaukee-Department of City Development staff for a number of
             years to create a separate and distinct budget and accounting division for the
             Housing Authority. The lead staff responsible for the Housing Authority’s
             accounting records have retired, died, or moved out of state.




                                            13
                         OIG Evaluation of Auditee Comments

Comment 1   We adjusted the title of the finding.

Comment 2   As discussed at the exit conference and reiterated by HUD’s Coordinator of the
            Milwaukee Public Housing Center, the Authority will have additional time to
            provide the documentation to HUD during the audit resolution process.




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Appendix C

                           FEDERAL REQUIREMENTS

Section 9(C) of the annual contributions contract between HUD and the Authority states that the
Authority shall maintain records that identify the source and application of funds in such a
manner as to allow HUD to determine that all funds are and have been expended in accordance
with each specific program regulation and requirement. Funds may only be withdrawn from the
general fund for (1) the payment of the cost of development and operation of the projects under
annual contributions contract with HUD, (2) the purchase of investment securities as approved
by HUD, and (3) such other purposes as may be specifically approved by HUD.

Section 10(A) of the annual contributions contract states that the Authority may deposit into an
account covered by the terms of the general depository agreement any funds received or held by
the Authority in connection with any project operated by the Authority under the provisions of
the contract.

Section 10(B) of the annual contributions contract states that the Authority may deposit into an
account covered by the general depository agreement, by lump-sum transfers of funds from the
depositories of other projects or enterprises of the Authority in which HUD has no financial
interest, amounts necessary for current expenditures of items chargeable to all projects and
enterprises of the Authority.

Section 10(C) of the annual contributions contract states that the Authority shall not withdraw
from any of the funds or accounts authorized under this section amounts for the projects under
the contract, or for the other projects or enterprises, in excess of the amount then on deposit in
respect thereto.

Section 15(A) of the annual contributions contract states that the Authority must maintain
complete and accurate books of account for the projects of the Authority in such a manner as to
permit the preparation of statements and reports in accordance with HUD requirements and to
permit timely and effective audit.

HUD’s Public and Indian Housing Low-Rent Technical Accounting Guide, 7510.1G, chapter 2,
states that all program funds received for projects under an annual contributions contract are
considered to be part of the general fund. The housing authority should take care to maintain
supporting documentation for pooled fund transactions in enough detail to provide an adequate
audit trail.




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