oversight

The Housing Authority of Whitesburg, Kentucky, Mismanaged Its Operations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-04-28.

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

                                                                 Issue Date
                                                                        April 28, 2010
                                                                 Audit Report Number
                                                                        2010-AT-1003




TO:        Don Clem, Director, Office of Public Housing, Kentucky State Office, 4IPH
            James Beaudette, Acting Director, Departmental Enforcement Center, CV

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

SUBJECT: The Housing Authority of Whitesburg, Kentucky, Mismanaged Its Operations


                                    HIGHLIGHTS

 What We Audited and Why

             We completed an audit of the Housing Authority of Whitesburg, Kentucky
             (Authority). We selected the Authority for review based on a request from the
             U.S. Department of Housing and Urban Development (HUD), Office of Public
             Housing for the Kentucky State Office. The request stated that the Authority had
             failed to adequately account for several months of rent collections, had failed to
             obtain required audits, and was not cooperating with either the HUD office or the
             Authority's fee accountant.

             Our objective was to determine whether the Authority properly accounted for cash
             receipts and disbursements, and made procurements in accordance with federal
             requirements.
What We Found


         The Authority badly mismanaged its operations. It did not properly account for
         rental receipts of about $134,889. It failed to prepare and file some quarterly tax
         returns and failed to deposit about $64,341 in federal withholding taxes with the
         Internal Revenue Service. It could not provide proper support for numerous
         disbursements totaling $264,229, and spent $29,347 for various unnecessary
         and/or unreasonable costs. The Authority failed to follow federal procurement
         regulations when awarding $446,918 in capital fund program contracts and
         change orders, and could not provide support for $275,282 in capital fund
         drawdowns. As a result, fewer funds were available for the Authority’s primary
         mission, and the Authority’s financial condition deteriorated to the extent that it
         was unable to fully meet its financial obligations. These deficiencies occurred
         because of ineffective management and lax internal controls, including
         insufficient oversight by the Authority’s board. Section 17 of the Annual
         Contributions Contract between the Authority and HUD provides that HUD may
         find a housing authority in substantial default for serious and material violation of
         any one or more contract covenants.

What We Recommend


         We recommend that HUD declare the Authority in substantial default in
         accordance with Annual Contributions Contract Section 17. HUD should then
         require the Authority take action necessary to

                Establish an effective system of internal controls for all aspects of
                Authority operations;
                Account for $134,889 in tenant rent receipts, provide support for $264,229
                in disbursements and $275,282 in drawdowns;
                Provide support that $446,918 in contracts were fairly and openly
                competed;
                File missing tax returns and make all required tax deposits; and
                Implement requested actions in the existing Memorandum of Agreement
                between HUD and the Authority.

         For each recommendation without a management decision, please respond and
         provide status reports in accordance with HUD Handbook 2000.06, REV-3.
         Please furnish copies of any correspondence or directives issued because of the
         audit.




                                           2
Auditee’s Response


           We provided the draft report to the Authority on March 29, 2010, and discussed
           the findings with Authority officials at an exit conference on April 1, 2010. The
           Authority provided its written comments on April 1, 2010, immediately following
           the exit conference. It agreed with the report and committed to work with HUD
           to clear the findings and recommendations.

           The complete text of the auditee’s response can be found in appendix B of this
           report.




                                           3
                           TABLE OF CONTENTS

Background and Objectives                                  5

Results of Audit
      Finding 1: The Authority Mismanaged Its Operations   6

Scope and Methodology                                      16

Internal Controls                                          18

Appendixes
   A. Schedule of Questioned Costs                         19
   B. Auditee Comments                                     20




                                           4
                      BACKGROUND AND OBJECTIVES

The Housing Authority of Whitesburg (Authority) was chartered on February 7, 1961, in the
Commonwealth of Kentucky. The Authority is governed by a five member board of
commissioners and has a mission to provide decent, safe, and sanitary housing to eligible
residents. In 2008 the Authority received $259,239 in federal operating subsidy to operate 104
units of public housing. The Authority also received total capital funding of $1,114,667 for
fiscal years 2002 through 2008 to help correct physical and management deficiencies and to keep
units in the public housing stock safe and desirable places to live.

The Authority came under increased HUD review in 2008. On January 1, 2008, the Authority
received a Financial Assessment score of zero and HUD declared it a troubled agency on
February 22, 2008. HUD’s Kentucky State Office issued a management review report on April
22, 2008, containing seven findings regarding deficiencies with cash receipts, disbursements, and
financial reporting. Subsequently, HUD entered into a Memorandum of Agreement with the
Authority in order to correct deficiencies in board oversight, cash management, check writing
authorization, financial reporting, and procurement procedures.

The executive director resigned on October 20, 2009, and the board of commissioners contracted
with Winterwood, Incorporated, a private property management company, to manage day-to-day
operations.

We audited the Authority based on a request from the HUD Office of Public Housing for the
Kentucky State Office. Our objective was to determine whether the Authority properly
accounted for cash receipts and disbursements and made procurements in accordance with
federal requirements.

The issues identified in our report deal with administrative and internal control activities that we
believe must be brought to the attention of HUD officials. Other matters regarding the
Authority’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 action by HUD and/or other authorities.




                                                 5
                                RESULTS OF AUDIT

Finding 1: The Authority Mismanaged Its Operations
The Authority badly mismanaged its operations. The Authority did not properly account for
rental receipts of about $134,889. It failed to prepare and file some quarterly tax returns and
failed to deposit about $64,341 in federal withholding taxes with the Internal Revenue Service.
It could not provide proper support for numerous disbursements totaling $264,229, and spent
$29,347 for various unnecessary and/or unreasonable costs. The Authority failed to follow
federal procurement regulations when awarding $446,918 in capital fund program contracts and
change orders, and could not provide support for $275,282 in capital fund drawdowns. As a
result, fewer funds were available for the Authority’s primary mission, and the Authority’s
financial condition deteriorated to the extent that it was unable to fully meet its financial
obligations. These deficiencies occurred because of ineffective management and lax internal
controls, including insufficient oversight by the Authority’s board.

Section 17 of the Annual Contributions Contract between the Authority and HUD provides that
HUD may find a housing authority in substantial default for serious and material violation of any
one or more contract covenants.


 Rent Collections Were Not
 Fully Deposited


              The Authority failed to properly account for about $134,889 in tenant collections
              received between April 2006 and September 2008. This failure placed the
              Authority in violation of Annual Contributions Contract Section 9 (Depository
              Agreement and General Fund), which requires all funds received by the Authority
              be deposited into the general fund in accordance with the general depository
              agreement. Also, regulations at 24 CFR [Code of Federal Regulations] Part 85.20
              required the Authority to maintain effective control and accountability of cash and
              other assets to assure they were used solely for authorized purposes.

              For fourteen months of the period, we compared funds received by the Authority
              according to its cash receipt records to bank deposit records and found that
              $90,315 had been collected but not deposited. Cash receipt records and other
              accounting records for the remaining sixteen months of the period were either
              missing or incomplete. For these months we estimated an additional deposit
              shortfall of $44,574. The table below shows the rental collections and deposits.




                                                6
                                                                               Over/under
            Month(s)                    Collected   Deposited    Difference     Deposit
            Cash Receipt Records
            April – August 2007
            October 2007 - June 2008     $283,196     $192,881     ($90,315)
            Total 14 Months                                                        ($90,315)


            General Ledgers/
            Rental Registers
            April 2006                    $15,217      $16,900       $1,683
            May 2006                      $21,933      $22,208         $275
            June 2006                     $23,147      $21,203      ($1,944)
            July 2006                     $23,330      $20,871      ($2,459)
            August 2006                   $21,769      $15,289      ($6,480)
            September 2006                $19,307      $14,861      ($4,446)
            October 2006                  $24,231       $6,973     ($17,258)
            November 2006                 $22,426      $26,136       $3,710
            December 2006                 $17,629      $17,834         $205
            January 2007                  $20,546      $22,583       $2,037
            February 2007                 $17,869      $24,403       $6,534
            March 2007                    $25,670      $16,565      ($9,105)
            September 2007                $21,237      $11,619      ($9,618)
            July 2008                     $31,129      $24,386      ($6,743)
            August 2008                   $25,858      $20,742      ($5,116)
            September 2008                $21,864      $26,015       $4,151
            Total 16 Months                                                        ($44,574)
             Total Under Deposit
             April 2006 – September
            2008                                                                  ($134,889)

           The Authority’s executive director and staff failed to provide us a reasonable
           explanation for either the disposition of these funds or why the records were
           missing or incomplete.


Withholding Taxes Were Not
Properly Filed or Paid


           The Authority failed to prepare and file some quarterly employer tax returns, and
           failed to deposit about $64,341 of withholding taxes with the Internal Revenue



                                            7
Service. Section 14 (Employer Requirements) of the Annual Contributions
Contract required the Authority to comply with all federal laws applicable to
employee benefits. The Internal Revenue Service requires employers to quarterly
prepare and file Form 941 and deposit federal taxes withheld from employee pay,
plus the employer’s share for Social Security and Medicare, into an authorized
depository for federal taxes. For the period April 2006 through September 2008,
we confirmed with the Internal Revenue Service that the Authority filed only one
of the ten required quarterly employer tax returns, and failed to deposit about
$64,341 for federal taxes. Our review showed that the Authority should have
deposited $88,624 during the period, but actually deposited only $24,283.

The executive director provided us documentation for additional federal tax
payments and quarterly returns, but our review and the documentation provided
by the Internal Revenue Service did not support her claims. We found that the
Authority had documentation showing that three of the ten required Form 941s
had been prepared; however, the Internal Revenue Service reported receiving just
one Form 941.

                     Authority's Records -        IRS Report - Form
 Tax Period               Form 941                        941
 2006 2nd Qtr     Completed Form                  Received
 2006 3rd Qtr     Worksheet Only                  None Received
 2006 4th Qtr     Blank Form                      None Received
 2007 1st Qtr     Completed Form                  None Received
 2007 2nd Qtr     No Form Provided                None Received
 2007 3rd Qtr     No Form Provided                None Received
 2007 4th Qtr     Completed Form                  None Received
 2008 1st Qtr     No Form Provided                None Received
 2008 2nd Qtr     No Form Provided                None Received
 2008 3rd Qtr     No Form Provided                None Received

We also found the Authority’s claimed tax deposits for the three Form 941s were
only partially supported. The Authority reported that it made nine federal tax
deposits totaling $24,683.35, but the Internal Revenue Service reported it received
only two totaling $5,388.35. Our review of Authority disbursements found
support for only the two deposits.




                                 8
                             Authority Form      IRS Report -         OIG Review of
                              941- Deposits        Deposit              Authority
             Tax Period          Made              Received           Disbursements

            2006 2nd Qtr        $2,676.12          $2,676.12             $2,676.12
                                                                       No Matching
            2006 2nd Qtr        $4,105.66        Not Received       Disbursement Found

            2006 2nd Qtr        $2,712.23          $2,712.23             $2,712.23
                                                                       No Matching
            2007 1st Qtr        $2,644.98        Not Received       Disbursement Found
                                                                       No Matching
            2007 1st Qtr        $3,658.39        Not Received       Disbursement Found
                                                                       No Matching
            2007 1st Qtr        $2,507.76        Not Received       Disbursement Found
                                                                       No Matching
            2007 4th Qtr        $2,128.03        Not Received       Disbursement Found
                                                                       No Matching
            2007 4th Qtr        $2,078.19        Not Received       Disbursement Found
                                                                       No Matching
            2007 4th Qtr        $2,171.99        Not Received       Disbursement Found

           The Authority must file the missing tax returns and pay the taxes. The Internal
           Revenue Service may also subject the Authority to substantial penalties and
           interest, and Authority employees for whom the tax deposits should have been
           made may encounter difficulties with their tax filings.

Disbursements Were
Unsupported or Unnecessary

           We reviewed 1,609 checks valued at $1,458,343 and 49 bank debits valued at
           $8,281. The Authority could not provide supporting documentation for $264,229
           in disbursements, and disbursed $27,097 for unreasonable costs and $2,250 for
           unnecessary costs.

           The Authority did not follow regulations (24 CFR 85.20) that required it to
           maintain accounting records supported by source documentation. Also, it did not
           comply with the cost principles in Office of Management and Budget Circular A-
           87 that required costs to be necessary and reasonable for the proper and efficient
           performance and administration of federal awards. Section 5 (Covenant to
           Develop and Operate) of the Annual Contributions Contract required the
           Authority to operate its projects in compliance with HUD’s regulations.


                                            9
          The Authority did not have documents to support $166,444 in disbursements for
          labor, goods, services, and security deposit refunds as required by 24 CFR 85.20.
          It was unable to provide supporting invoices, receipts, timecards and contracts for
          $158,163 disbursed by checks and $8,281 through bank debits. In addition, it
          could not support $97,785 paid for contract labor to perform administrative and
          maintenance work. It was unable to provide contracts specifying the tasks and
          terms for the contract employees. We also found that the Authority made
          payments based on unsigned, non-descriptive, and sometimes blank timecards and
          timesheets. This was contrary to the Authority’s requirement that contract labor
          employees maintain, and the executive director or maintenance supervisor sign,
          work logs detailing the work performed.

          The Authority paid $29,347 for unnecessary and unreasonable costs that were not
          in accordance with Office of Management and Budget cost principles or the
          Annual Contributions Contract. We found unnecessary costs of $2,250 for cable
          television, food and florists. We also question the cost reasonableness for cell
          phones ($10,454), gasoline ($10,355), and office supplies ($6,288). We are not
          questioning the necessity of such expenses; however, we question the
          reasonableness of these amounts to run a 104 unit housing authority with only
          three administrative and two maintenance personnel.


Procurements Were Not
Properly Competed or
Documented

          The Authority did not comply with regulations (24 CFR 85.36) that required
          procurements be conducted in a manner providing full and open competition, and
          that records be maintained to document the significant history of each
          procurement. Section 5 (Covenant to Develop and Operate) of the Annual
          Contributions Contract, in part, requires the Authority to operate its projects in
          compliance with HUD’s regulations. It also did not follow HUD's procurement
          handbook 7460.8 that states change orders, such as to increase the number of
          items being purchased or other types of new work, are not to be considered within
          the scope of the existing contract.

          We evaluated 16 procurements for the 2002 through 2007 capital fund program
          years and found that 14 did not comply with federal requirements. For example,
          the Authority’s documentation did not support the awarding of $12,790 in
          architectural and consulting services contracts. We reviewed the bids and the
          Authority’s evaluations and question whether these were fair and open
          competitions. Bid documents did not support the scores on the evaluation sheets,
          and for one contract the evaluation sheet was blank. For other contracts, the



                                          10
           Authority did not provide required documentation detailing the expenditure of
           $39,323 for computer, architectural, and consulting services.

           The Authority issued eight out of scope change orders for additional work to a
           plumbing and stair rehabilitation contract. The Authority and the contractor
           agreed to a scope decrease bringing the bid within the cost estimate, but
           subsequently the Authority added back the deleted work plus additional changes
           which increased the original contract by $345,929, from $161,800 to $507,729.
           Without documentation supporting fair and open competition, the Authority
           cannot show $446,918 paid for contracts was fair and reasonable.


Capital Fund Reimbursements
Were Not Supported

           Regulations at 24 CFR [Code of Federal Regulations] 85.20 (b)(2)(3) require the
           Authority to maintain (1) accounting records that adequately identify the source
           and application of funds provided and must contain information pertaining to
           liabilities and expenditures and (2) effective control and accountability of cash
           and other assets to ensure that they are used solely for authorized purposes.

           The Authority could not support some HUD reimbursement requests for capital
           fund program costs. We reviewed reimbursement requests totaling $837,478 and
           found that drawdowns of $275,282 could not be traced to specific expenditures.
           We attempted to trace the reimbursement requests to vendor payments, but the
           Authority did not have documentation for some vendors. The $275,282 includes
           a check (check number 17968) for $7,898 the Authority used to support two
           reimbursements, and a check (check number 18223) for $4,000 that was never
           processed by the Authority’s bank. Consequently, the Authority could not
           identify the expenses for which the $275,282 was used.

Complete and Accurate
Accounting Records Were Not
Maintained

           Because of its failure to maintain complete and accurate accounting records, the
           Authority violated Annual Contributions Contract Section 15 (Books of Account,
           Records, and Government Access). As described above, many of the documents
           supporting rental receipts, disbursements, and procurements were incomplete or
           missing. In addition, the Authority’s tenant security deposit liability was unclear
           because the records had not been kept current. As of the last independent audit in
           March 2006, the tenant security deposit liability was reported as $14,388. As of



                                           11
           September 2008, tenant security deposits are shown as only $4,052 with
           numerous current tenants showing zero balances. In addition, the Authority did
           not maintain a separate bank account for security deposits as required by
           Kentucky law.

           Despite our numerous requests, the Authority did not provide the missing records.
           Due to the lack of records, the fee accountant has been unable to maintain the
           general ledger or prepare financial statements since June 2007. In addition, the
           Authority also has not obtained an annual audit since fiscal year end March 31,
           2006. Fiscal years 2007 and 2008 were not auditable due to missing/incomplete
           records.

Ineffective Management and
Internal Controls

           The deficiencies detailed in this report occurred because of ineffective
           management and lax internal controls, including insufficient oversight by the
           Authority’s board. The Authority did not have policies and procedures that
           assigned responsibilities and assured clear segregation of duties over the
           collection, deposit, and reconciliation of cash receipts. Authority personnel
           described a process of weak controls such as confusion over who was responsible
           for reconciling rents collected to bank deposits. The Authority often did not make
           daily deposits; for fourteen months of our review period there were three or fewer
           deposits per month. Although the Authority should have collected and deposited
           an average of $21,212 each month, some month’s deposits totaled less than half
           that amount.

           Authority staff stored cash and checks not yet deposited in unsecure containers
           and did not reconcile the daily on hand balances. One employee stored funds not
           yet deposited in a cubby hole in an unlocked vault. The cubby hole had a pad
           lock but the key was kept in an unlocked drawer. Another employee stored her
           funds in a locked drawer, but the key was maintained by other Authority staff.
           We also found that the Authority often did not follow internal control procedures
           in place. The accounting system required passwords to control access to the
           financial records; however, Authority staff reported they shared their passwords
           with contract labor employees.

           In addition to the executive director, there were two other administrative
           personnel to operate only 104 housing units. Also, the Authority spent $18,730
           during the audit period for contract labor employees to provide extra
           administrative help. Still, the Authority did not maintain adequate records for rent
           collections, cash disbursements, and other functions.



                                            12
          The board of commissioners did not exercise sufficient oversight of the
          Authority’s management. One board member said the executive director
          provided a financial report to the board showing total rent collections and checks
          written, but the board did not compare the amount of expected rent to that
          deposited. Another board member said the financial reports prepared by the
          executive director were not useful because they did not disclose the Authority’s
          indebtedness. The board chairman admitted that he did not always review the
          supporting documents when signing checks. Although the board required
          competitive procurements, it allowed the executive director and consultants to
          make award decisions without apparent oversight. For one contract, a consultant
          informed the board a contract was extended to preclude the Authority from having
          to perform a new competitive procurement. If the board had provided better
          oversight, the Authority’s history of mistakes, missing supporting documents, and
          questionable decisions could have been addressed and corrected.

Management Depleted Cash
Reserves

          Management depleted the Authority’s cash reserves since the last independent
          audit in March 2006. At that time the Authority had $11,032 in the general fund
          and two certificates of deposit valued at $40,317. Included in those amounts was
          approximately $15,000 the Authority was holding in trust for the tenants’ security
          deposits.

          When the Executive Director resigned on October 20, 2009, the general fund had
          a negative balance of $11,210 and only $8,946 remained on one certificate of
          deposit. Management had steadily depleted the certificates of deposits as a source
          of funds. For example, during August 2007, at a time when the general fund was
          overdrawn by $11,345, management cashed in a certificate of deposit valued at
          $20,166 and deposited the proceeds into the general fund. This was done without
          the board’s approval or knowledge, and the executive director’s subsequent
          financial reports to the board incorrectly showed the certificate of deposit still
          existed.

          Following the executive director’s resignation, the new management redeemed
          the last $8,946 from the remaining certificate of deposit on October 22, 2009, in
          order to partially restore the general fund. After this deposit the general fund had
          a balance of only $6,499 and no immediate source of cash to satisfy outstanding
          obligations. The Authority owed at least $205,969 to various parties including the
          City of Whitesburg, the internal revenue service, and various vendors including
          the local power company. In addition, it needed to restore approximately $15,000
          in tenant security deposits which was supposed to have been held in trust but was


                                           13
             instead used for unknown purposes. The Authority had been making only partial
             payments for some obligations, including utilities, and the bank statements
             showed numerous overdraft charges. The Authority’s records were in such
             disarray that the new management had to contact vendors in order to determine
             some amounts owed.


Conclusion


             The Authority mismanaged its operations in violation of multiple Annual
             Contributions Contract sections. It did not properly account for cash collected
             from tenants, file and pay federal taxes, support payments it made, or justify
             contracts it awarded. Its records were missing, inaccurate, or in disarray, and it
             had not obtained required annual audits. These deficiencies occurred due to
             ineffective management and lax internal controls, including insufficient oversight
             by the Authority’s board. We believe these serious and material Annual
             Contributions Contract violations support strong action to protect HUD’s
             interests.

Recommendations



             We recommend that the Director, Office of Public Housing, Kentucky State
             Office

             1A.    Declare the Authority to be in substantial default of its Annual
                    Contributions Contract in accordance with Section 17 and obtain
                    appropriate management.

             1B.    Take appropriate action to obtain effective board oversight of the
                    Authority.

             1C.    Require the Authority to establish an effective system of internal controls
                    for all aspects of its operations.

             1D.    Require the Authority to account for $134,889 in tenant rent receipts or
                    repay any unsupported amounts to its public housing operating program
                    from nonfederal funds.

             1E.    Require the Authority to file missing tax returns and make all required tax
                    deposits.



                                             14
1F.    Require the Authority to provide support for $264,229 in disbursements or
       repay any unsupported costs to its public housing operating and capital
       improvement program from nonfederal funds.

1G.    Require the Authority to reimburse its public housing program $2,250 for
       ineligible costs using non-federal funds.

1H.    Require the Authority to support the $27,097 in unreasonable costs or
       reimburse its public housing and capital improvement program from
       nonfederal funds.

1I.    Require the Authority to provide support that $446,918 in contracts were
       fairly and openly competed or reimburse its public housing and capital
       improvement program from nonfederal funds.

1J.    Require the Authority to provide support for the $275,282 in capital fund
       drawdowns or reimburse its capital improvement program from nonfederal
       funds.

1K.    Require the Authority to bring the general ledger current and accurate,
       prepare all financial statements and obtain independent audits.

1L.    Require the Authority to implement required actions in the existing
       Memorandum of Agreement between HUD and the Authority. This
       includes measures to establish effective board oversight.

We also recommend that the Acting Director of the Departmental Enforcement
Center in coordination with the Director, Office of Public Housing

1M.    Take appropriate administrative action against the Authority officials
       responsible for badly mismanaging its operations.




                                15
                         SCOPE AND METHODOLOGY

Our audit objective was to determine whether the Authority properly accounted for cash receipts
and disbursements, and made procurements in accordance with federal requirements. To
accomplish our objective, we

       Reviewed relevant HUD regulations and guidance;

       Interviewed HUD, Authority, fee accountant, and bank officials;

       Reviewed a HUD management review, prior independent public accounting audit report,
       financial statements from the fee accountant, bank documents, Internal Revenue Service tax
       report, and correspondence;

       Reviewed relevant Authority policies and procedures, rent collection records and
       documents, accounting records like checks and invoices, and capital fund program contracts.

For reviewing cash accountability, we compared funds collected by the Authority to funds
deposited into their bank account for the audit period of April 2006 through September 2008.
We found that the Authority could provide to us only their collection receipts for April through
August 2007 and October 2007 through June 2008. Therefore we performed the comparison in
two parts: the first was of the actual rent, deposit and other charges the Authority collected
according to their receipts; the other was an estimation of rents collected according to the
Authority’s rental registers and general ledgers. The Authority did not have collection receipts,
financial statements or a rental register for September 2007; therefore we estimated the collected
amount based on the number of tenants and rental rates.

We reviewed the Authority’s disbursements and noted that it was not making periodic federal tax
deposits. We sent a request signed by the Authority to the Internal Revenue Service for the
Authority’s tax records. The Internal Revenue Service responded with a report on Authority tax
returns received and federal taxes deposited. We then reviewed the Authority’s payrolls from
April 1, 2006, through September 30, 2008, in order to estimate the Authority’s tax liability. We
reviewed four Forms 941 provided by the Authority to show additional tax deposits. We
compared the Forms 941 to the Internal Revenue Service report and our review of the
Authority’s disbursements to determine if the claimed deposits had been made.

For our overall review of disbursements, we reviewed 1,609 checks valued at $1,458,343
(including capital improvement funds) and 49 bank debits valued at $8,281 for April 2006
through November 2008. We identified 266 checks valued at $97,785 written to 38 contract
labor employees. We verbally asked the Authority’s executive director several times for the
contracts signed by the contract labor employees and again in writing, but she never provided
them. We compared contract labor employee timecards and timesheets to the Authority’s
payment requirements. We reviewed the disbursements and developed a list of disbursements

                                                16
for which we could not find adequate support in the Authority’s files. We provided this to the
Authority so that it could provide us with the needed documentation. After reviewing the
additional documents, we determined there were still unsupported costs. While reviewing the
1,609 checks for support we also noted disbursements that were either for unreasonable amounts
or not necessary for operating a housing authority.

We evaluated 16 procurements for the 2002 through 2007 capital fund programs for compliance
with federal procurement regulations and reviewed Line of Credit Control System draws totaling
$837,478. We compared the reimbursed amounts to vendor payments by check or bank debit,
and to payments cleared through the Authority’s bank.

We determined that we did not need to test data reliability because computer processed data was
not an important or integral part of this audit, and that the Authority’s data reliability was not
crucial to accomplishing our audit objectives. For reviewing rental collections we primarily used
the cash receipt documents prepared by Authority staff and provided to tenants. Some were
computer processed summaries of these cash receipt documents, but we determined these were
supported by the individual cash receipts. We also used general ledgers prepared by the fee
accountant and to a limited extent computer processed rental registers. For reviewing
disbursements we used Authority check stubs and bank statements to identify any debits. We
used the contract documents provided by the Authority for our review of procurements.

The audit generally covered the period April 2006 through September 2008. We extended the
period as needed to accomplish our objective. We conducted our fieldwork from August 2008
through January 2009 at the Authority’s office located in Whitesburg, Kentucky.

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

       Program operations,
       Relevance and reliability of information,
       Compliance with applicable laws and regulations.
       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 the following internal controls were relevant to our audit objectives:

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

              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 the following is a significant weakness:

              The Authority’s internal controls over operations were inadequate. (See finding 1)




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                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS



                Recommendation
                    number              Ineligible 1/     Unsupported 2/
                      1D                                       $134,889
                      1F                                        264,229
                      1G                      $2,250
                      1H                                           27,097
                      1I                                          446,918
                      1J                          ____            275,282

                      Total                   $2,250           $1,148,415


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
     polices 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 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




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