oversight

The Housing Authority of the City of Terre Haute, Indiana, Failed to Follow Federal Requirements Regarding Its Turnkey III Homeownership Program Units' Sales Proceeds

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

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

                                                                  Issue Date
                                                                          September 29, 2009
                                                                  Audit Report Number:
                                                                           2009-CH-1017




TO:         Thomas S. Marshall, Director of Public Housing Hub, 5DPH


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

SUBJECT: The Housing Authority of the City of Terre Haute, Indiana, Failed to Follow
           Federal Requirements Regarding Its Turnkey III Homeownership Program
           Units’ Sales Proceeds

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Housing Authority of the City of Terre Haute, Indiana’s (Authority)
             Turnkey III Homeownership program (program). We selected the Authority for
             review based on the results of our audit of the Authority’s nonprofit development
             activities (see Office of Inspector General audit report #2009-CH-1011, issued on
             July 31, 2009). The audit was a part of the activities in our fiscal year 2009 annual
             audit plan. Our objective was to determine whether the Authority followed the U.S.
             Department of housing and Urban Development’s (HUD) requirements regarding
             the administration of its program.

 What We Found

             Under the direction of the former executive director and board of commissioners,
             the Authority did not comply with HUD’s requirements regarding the use of the
             program proceeds from the sale of its program units. The Authority did not
             maintain documentation to support that the sales proceeds were used in accordance
             with its approved program plan. As a result, the Authority and HUD lacked
             assurance that the sales proceeds benefitted low-income families.
 What We Recommend
           We recommend that the Director of HUD’s Cleveland Office of Public Housing
           require the Authority to maintain accurate books of record to account for the
           activities and expenditures under the program and provide adequate supporting
           documentation for the use of the program proceeds from the sale of its program
           units. If the Authority cannot determine the activities and expenditures under the
           program and/or provide supporting documentation, it should reimburse more than
           $579,000 in sales proceeds to the program from nonfederal 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 discussion draft audit report to the Authority’s executive director,
           its board chairperson, and HUD’s staff during the audit. We held an exit
           conference with the executive director on September 25, 2009.

           We asked the Authority’s executive director to provide comments on our discussion
           draft audit report by September 28, 2009. As of noon eastern time on September
           29, 2009, the Authority had not provided any written comments to our discussion
           draft audit report.




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                            TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
    Finding: The Authority Did Not Comply with HUD’s Requirements Regarding Its   5
             Program Sales Proceeds

Scope and Methodology                                                             7

Internal Controls                                                                 8

Appendixes
   A. Schedule of Questioned Costs                                                10
   B. Federal Requirements                                                        11




                                           3
                       BACKGROUND AND OBJECTIVE

The Housing Authority of the City of Terre Haute (Authority), Indiana, was established on April
28, 1960, as a municipal corporation under Section 36-7-18-4 of the Indiana Code to provide
decent, safe, and sanitary housing to low-income families under the United States Housing Act of
1937. The Authority is governed by a seven-member board of commissioners appointed by the
mayor of Terre Haute to four-year terms. The board serves in a fiduciary relationship with the
Authority and governs the business, policies, and transactions of the Authority. The executive
director has the overall responsibility for carrying out the board’s policies and managing the
Authority’s day-to-day operations. The Authority's books and records are located at 2001 North
19th Street, Terre Haute, Indiana. As of June 2009, the Authority had 868 low-rent housing units
and 916 Section 8 voucher units.

For fiscal year 2007, the Authority received an overall public housing assessment score of 63 out
of a maximum of 100. HUD designated the Authority as substandard financially. Based on the
Authority’s assessment score, HUD is drafting a memorandum of agreement with the Authority to
address its deficiencies. However, as of September 18, 2009, the agreement was not executed.
According to HUD’s Coordinator of the Indianapolis Public Housing Program Center, the
agreement would be amended, if necessary, to address the issues identified in the Office of
Inspector General’s audit reports of the Authority’s various programs. HUD expects to have the
agreement fully executed by October 30, 2009.

In 1995, the Authority requested a debt forgiveness waiver and a refund for the proceeds from the
sale of 41 Turnkey III Homeownership program (program) units. In 1995, the U.S. Department of
Housing and Urban Development (HUD) approved the Authority’s requests and its planned use of
the program proceeds from the sale of the units.

We selected the Authority for audit based on the results of our audit of its nonprofit development
activities. Our objective was to determine whether the Authority followed HUD’s requirements
regarding the administration of its program.




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                             RESULTS OF AUDIT

Finding: The Authority Did Not Comply with HUD’s Requirements
                Regarding Its Program Sales Proceeds
Under the direction of the former executive director and board of commissioners, the Authority did
not comply with HUD’s requirements regarding the use of the program proceeds from the sale of
its program units. The Authority did not maintain documentation to determine whether the sales
proceeds were used in accordance with its approved plan. The problem occurred because the
Authority lacked adequate procedures and controls to ensure that it complied with HUD’s
requirements and maintained accountability of program funds and related expenses. Further, the
Authority’s former board did not provide adequate oversight and/or guidance regarding the
Authority’s operations. As a result, the Authority and HUD lacked assurance that the sales
proceeds were used to benefit low-income families.



 The Authority Requested a
 Waiver and Refund from HUD

              In February 1995, the Authority requested a debt forgiveness waiver and refund for
              the program proceeds from the sale of 41 program units. The waiver included a
              request to waive all future available program proceeds for the sale of program units.
              In June 1995, HUD approved the Authority’s refund and its planned use of the
              program proceeds from the sale of the units. Therefore, HUD returned more than
              $200,000 in sales proceeds to the Authority from the sale of eight of the nine
              program units sold between 1984 and 1989.

 The Authority Could Not
 Provide Documentation for the
 Use of Sales Proceeds

               The Authority did not comply with its program agreement with HUD regarding the
               use of proceeds from the sale of its program units. From 1995 to 2000, the
               Authority sold the remaining 32 units (41 minus 9) and received more than
               $379,000 in program proceeds. In October 2007, the Authority closed its program
               reserve account and posted the transfer of more than $579,000 in sales proceeds to
               its account for its public housing program in 2008.

              The Authority lacked documentation to support whether it used or expended the
              sales proceeds in accordance with its program agreement with HUD. According to
              the administrative use agreement for proceeds of sales of homeownership projects,
              the Authority must maintain in good condition books, accounts, reports, files,



                                                5
             records, and reports relating to its activities and expenditures under the agreement,
             which will be separate from the Authority’s books of record for its annual
             contributions contract. However, the Authority did not maintain accurate books of
             record to determine whether it used the sales proceeds in accordance with its
             approved program plan.

             The Authority lacked adequate procedures and controls to ensure accountability of
             program funds and related expenditures and compliance with its agreement with
             HUD. Further, the Authority’s former board did not provide adequate oversight
             and/or guidance regarding the Authority’s program operations.

Conclusion


             The Authority did not comply with HUD’s requirements regarding the program
             proceeds from the sale of its program units because it lacked adequate procedures
             and controls to ensure accountability of funds and related expenses and compliance
             with its agreement with HUD. Further, the Authority’s former board did not
             provide adequate oversight to ensure that Authority program income and expenses
             were separated and properly identifiable.

Recommendation

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

             1A.    Provide documentation to support that the use of $579,914 in program sales
                    proceeds met federal requirements or reimburse its program from nonfederal
                    funds for the applicable amount.




                                                6
                         SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

•   Applicable laws, regulations, the Authority’s contract with HUD, the loan forgiveness
    amendment to the annual contributions contracts, and the administrative use agreement for
    proceeds of sales of homeownership projects.

•   The Authority’s financial and accounting records, annual audited financial statements from
    1995 through 2008, general ledgers from 2006 through 2008, and the County of Vigo,
    Indiana’s records.

•   HUD’s files for the Authority.

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

We performed our on-site audit work during July and August 2009. The audit covered the period
October 1, 2007, through June 30, 2009. We extended this period as necessary.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our 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.




                                                7
                               INTERNAL CONTROLS

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

   •   Program operations,
   •   Relevance and reliability of financial reporting,
   •   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 internal controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.
 Significant Weakness




                                                  8
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
       complied with HUD’s requirements regarding the use of program proceeds
       from the sale of its program units (see finding).




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                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                  Recommendation       Unsupported
                      number               1/
                        1A              $579,914
                       Total            $579,914


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

                            FEDERAL REQUIREMENTS

HUD’s regulations at 24 CFR 85.42(1) apply to all financial and programmatic records, supporting
documents, statistical records, and other records of grantees or subgrantees as follows:

(b) Length of retention period. (1) Except as otherwise provided, records must be retained for three
years from the starting date specified in paragraph (c) of this section.

(c) Starting date of retention period. (1) General. When grant support is continued or renewed at
annual or other intervals, the retention period for the records of each funding period starts on the
day the grantee or subgrantee submits to the awarding agency its single or last expenditure report
for that period.

Section 7 of the administrative use agreement for proceeds of sales of homeownership projects
between the Authority and HUD states that the Authority shall keep and maintain in good
condition books, accounts, reports, files, records, and other documents relating to its activities and
expenditures under the agreement, which shall be separated from the Authority’s books of account
and records for the annual contributions contract.




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