oversight

The South Bronx Community Management Co., Inc., Bronx, New York, Had Weaknesses in Its Administration of the Project Maria Isabel

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-11-04.

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

                                                               Issue Date
                                                                     November 4, 2009
                                                               Audit Report Number
                                                                      2010-NY-1003




TO:        Teresa Bainton, Director, Office of Multifamily Housing, New York
                                       2AHMLAP



FROM:      Edgar Moore, Regional Inspector General for Audit, New York/New Jersey
                                     Region, 2AGA


SUBJECT: The South Bronx Community Management Co., Inc., Bronx, New York Had
         Weaknesses in Its Administration of the Project Maria Isabel


                                  HIGHLIGHTS

 What We Audited and Why

            We reviewed the management agent operations of the South Bronx Community
            Management Co., Inc. (agent), as they relate to the administration of the U.S.
            Department of Housing and Urban Development (HUD)-Section 202 direct loan
            for elderly and handicapped housing project Maria Isabel (project number 012-
            EH-473) at the request of the HUD New York City Office of Multifamily
            Housing. HUD officials were concerned about the management of the project.
            The objective of the review was to determine whether the agent complied with
            HUD’s financial and unit maintenance standards regulations in its management of
            the project Maria Isabel.

 What We Found


            The agent generally complied with HUD financial and unit maintenance standards
            regulations in its administration of the project. However, various issues warrant
            HUD’s attention to provide greater assurance that the project is managed in the
           most economical and efficient manner. Specifically, (1) tenant accounts
           receivable and vendor accounts payable were not properly reported, (2) prudent
           procurement practices were not always followed, (3) advances were made by and
           partially repaid to the agent without HUD approval, and (4) action to mitigate
           cash-flow problems was not addressed in a timely manner, but has since been
           taken. As a result, HUD was not made aware of the financial condition of the
           project, and the project experienced serious cash-flow problems.

What We Recommend


           We recommend that the Director of HUD’s New York Office of Multifamily
           Housing instruct the agent and property owners to

                     Determine the collectability of delinquent tenant accounts receivable and
                     request HUD approval to write off those accounts determined to be
                     uncollectible,
                     Strengthen procedures to ensure accurate reporting of accounts payable,
                     Establish procedures to request approval for receiving and paying agent
                     advances,
                     Strengthen procedures to provide greater compliance with HUD’s and its
                     own procurement procedures, and
                     Strengthen controls to ensure that late fees are minimized and that actions
                     to mitigate cash-flow problems are addressed in a timely manner.

           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 discussed the contents of this report with the auditee during the audit and
           provided it with a copy of the draft report on October 9, 2009. We held an exit
           conference and received the auditee’s written comments on October 20, 2009.
           The auditee agreed with our findings and has taken action to address the
           recommendations made.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                               2
                            TABLE OF CONTENTS


Background and Objective                                                      4

Results of Audit
      Finding 1: The Agent’s Administration of the Project Maria Isabel Had   5
      Weaknesses

Scope and Methodology                                                         10

Internal Controls                                                             11


Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use          13
   B. Auditee Comments                                                        14




                                             3
                       BACKGROUND AND OBJECTIVE

Maria Isabel (project number 012-EH-473) is a 99-unit Section 202 elderly and handicapped
project that received a U.S. Department of Housing and Urban Development (HUD) direct loan
for construction. The project is owned by the Maria Isabel HDFC, Inc. (Housing Development
Fund Corporation, Inc.), and the owner is overseen by a three member board of directors.

Maria Isabel was approved on April 10, 1987, under Section 202 of the Housing Act of 1959 for
a $7 million loan to construct an elderly housing and began renting to tenants in 1988. During
the 12-month period ending June 30, 2008, the most recent period for which certified financial
statements have been issued, Maria Isabel received housing assistance payments of $1.1 million
and reported a negative surplus cash position of $558,207. In its most recent HUD physical
inspection, conducted in June 2009, it received a passing score of 80.

Property owners are ultimately responsible for ensuring that HUD-subsidized properties are
operated in an effective and efficient manner. Thus, the regulatory agreement between the
project owner and HUD specifies that the responsibilities of the project owner are to maintain the
project and its records in accordance with HUD requirements. However, property owners may
contract with a management agent through a management agreement to oversee the day-to-day
operations of the property and maintain the financial and accounting records. The management
agent executes a management certification providing that it will comply with the property’s
regulatory agreement and other HUD requirements. The South Bronx Community Management
Co., Inc. (agent), serves as the management agent.

The owner and the agent executed a project owner’s/management agent’s certification in April
2004, in which the agent agreed to, among other things,

       Ensure that all expenses of the project are reasonable and necessary;
       Exert reasonable effort to maximize project income and to take advantage of discounts,
       rebates, and similar money-saving techniques;
       Obtain contracts, materials, supplies, and services, including the preparation of the annual
       audit, on terms most advantageous to the project; and
       Obtain the necessary verbal or written cost estimates and document the reasons for
       accepting other than the lowest bid.

Under the terms of the certification, which automatically renews annually, the agent is entitled to
a management fee of 4.25 percent of residential income collected.

The objective of the review was to determine whether the agent complied with HUD’s financial
and unit maintenance standards regulations in its management of the project Maria Isabel.




                                                 4
                                RESULTS OF AUDIT

Finding 1: The Agent’s Administration of the Project Maria Isabel Had
           Weaknesses

The agent generally complied with HUD financial and unit maintenance standards regulations in
its administration of the project. However, various issues warrant HUD’s attention to provide
greater assurance that the project is managed in the most economical and efficient manner.
Specifically, contrary to regulations, (1) tenant accounts receivable and vendor accounts payable
were not properly reported, (2) prudent procurement practices were not always followed, (3)
advances were made by and partially repaid to the agent without HUD approval, and (4) action
to mitigate cash-flow problems was not addressed in a timely manner, but has since been taken.
As a result, the financial condition of the project was not accurately reported, assurance was
lacking that procurements were executed at the most economical price, and late fees and high
vacancy rates were incurred. This condition occurred because of weaknesses in controls over
financial reporting, procurements, and cash management.


 Accounts Receivable and
 Payable Not Properly Reported


               Project tenant accounts receivable and vendor accounts payable were not properly
               reported. Section 6(b)(2) of the project owner’s/management agent’s certification
               requires that project accounts be maintained in accordance with HUD
               administrative requirements and generally accepted accounting principles.

               Project financial statements for the period ending June 30, 2008, reported tenant
               accounts receivable of $82,540 as a current asset. However, the agent
               acknowledged that $79,652, or 97 percent of the reported receivable, represented
               noncurrent and known uncollectible tenant receivables, some of which dated back
               to the inception of the project in 1988. This condition occurred because the agent
               had not established procedures to write off uncollectible tenant accounts
               receivable. In addition, vendor accounts payable were not recorded in a timely
               manner. Accounts payable of $20,765 were recorded from two to seven years
               after the invoice date. The agent stated that the vendor submitted invoices late,
               and, therefore, accounts payable were recorded and paid late. This condition
               occurred because the agent had not established controls to ensure that completed
               work orders were tracked to invoices to establish accounts payable. Further, an
               accounts payable accrual was made for $1,700 more than the authorized contract
               amount. As a result, HUD was unaware of the project’s financial position
               because current assets and liabilities were not accurately reported.




                                                5
Prudent Procurement Practices
Not Followed

         The agent procured professional services and awarded contracts without soliciting
         bids or obtaining oral or written cost estimates as required by HUD and/or its own
         regulations. HUD Handbook 4381.5, The Management Agent Handbook,
         paragraph 6.50(a), provides that a management agent should solicit written cost
         estimates from at least three contractors or suppliers for any contract for ongoing
         supplies or services expected to exceed $10,000 per year. Paragraph 6.50(b)
         provides that for any contract for ongoing supplies or services estimated to cost
         less than $5,000 per year, the agent should solicit verbal or written cost estimates
         to ensure that the project is obtaining services, supplies, and purchases at the
         lowest possible cost. The agent executed audit service contracts for $11,650 and
         $13,350 in 2007 and 2008, respectively, without soliciting bids. In addition, the
         agent executed legal and elevator service contracts for annual amounts of $4,200
         and $6,000, respectively, without obtaining cost estimates as required.

         Paragraph 4 of the project owner’s/management agent’s certification requires that
         the agent document the reasons for accepting other than the lowest bid, and the
         agent’s procedures require that the reasons for selection of other than the lowest
         bidder be documented via internal memorandum and attached to the disbursement
         documentation. However, a $31,470 contract for roof repairs was awarded to
         other than the lowest bidder without documenting the reasons for the selection.
         These conditions occurred because the agent failed to comply with the project
         owner’s/management agent’s certification and its procurement procedures. As a
         result, assurance was lacking that the most economical price was obtained for
         these services.


Receipt and Repayment of
Advances without HUD
Approval

         Section 7(a) of the regulatory agreement prohibits an owner from encumbering
         personal property of the project without written approval from HUD. The
         management agent made two interest-free advances of $117,448 and $17,000 on
         May 5, 2003, and July 8, 2004, to the project for the payment of past-due real
         estate taxes and water and sewer charges, respectively. These advances were
         made without HUD approval. In addition, $72,000 of the advance amount was
         repaid to the agent from project funds without HUD approval while the project
         was in a non-surplus-cash position. During the period in which this was repaid,
         the project also had not made payments in a timely manner to the reserve for
         replacement account and had not yet fully repaid a $50,000 advance from the
         reserve for replacement account approved by HUD (which was paid in full in




                                          6
        May 2008). This condition occurred because of the agent’s unfamiliarity with
        HUD regulations and resulted in less cash being available for project use.

Cash-Flow Problems Not
Addressed in a Timely
Manner
        The project experienced significant cash-flow problems. As a result, late fees
        were incurred, and as noted previously, advances were obtained from the
        management agent to continue operations. However, action to mitigate cash-flow
        problems was not always taken in a timely manner. Specifically, the agent did not
        address its reported excessive vacancy rate in a timely manner or ensure that its
        housing assistance payments contract was renewed on time. HUD Handbook
        4381.5, REV-2, CHG-3, The Management Agent Handbook, chapter 2, section
        2.5, provides that the owner and HUD must be assured that the project will be
        managed in a prudent, efficient, and cost-effective manner in accordance with
        applicable laws and HUD rules, contracts, and procedures.

        Paragraph 4(a) of the project owner’s/management agent’s certification requires
        the agent to ensure that all expenses of the project are reasonable in amount and
        necessary to the operation of the project. Nevertheless, the project incurred late
        payments and interest charges on utility and tax bills. Finance charges of $13,043
        were paid in March 2009 for late payments to an oil company, $37,222 in interest
        was factored into an installment agreement entered into in December 2008 for late
        payments of real estate taxes, and $266 in late payment charges was paid to a
        utility company. In addition, a $305 deposit imposed due to late utility payments
        was misclassified as interest and penalties. These charges could have been
        avoided if adequate controls had been established to address the cash-flow
        problems that resulted in the excessive finance and interest charges in a timely
        manner.

        For example, the project’s fiscal years 2007 and 2008 financial statements
        reported vacancy losses of $81,961 (6 percent) and $139,937 (10 percent),
        respectively. In addition, the contract administrator’s review of the project in
        both 2008 and 2009 noted that the vacancy and turnover rate for rentals was
        excessive. Agent officials stated that these losses resulted from a roof leak that
        prevented renting units on the upper floor and difficulty in renting its studio
        apartments. The officials also stated that the leak had existed from the project’s
        inception and the first work order to repair it in 2006, for which $22,800 was
        spent, was not adequate and was unsuccessful. Thus, an additional $31,470 was
        spent in 2008 to correct the leak. While the agent stated that it took two years to
        order the second repair in 2008 because funds were not available, project bank
        statements reported that $91,000 and $147,000 were available in the reserve for
        replacement account in January and December 2007, respectively. Therefore,
        funds were available that could have been used to address the needed repairs and,
        possibly, the cash-flow problems.



                                         7
             Further, although HUD’s Section 8 Renewal Policy, chapter 2, paragraph 2-2C,
             requires that owners submit required documentation for a Section 8 housing
             assistance contract renewal at least 120 days before expiration of the contract, the
             project experienced delays in submitting the renewal for its housing assistance
             contract that expired on February 22, 2009. Consequently, the project did not
             receive four months of housing assistance payments of $394,637 in a timely
             manner. This condition worsened the project’s cash-flow problems and required
             the agent to request HUD approval for advances from the reserve for replacement
             account in April and June 2009 for $51,345 and $68,217, respectively. The
             project was fully leased and had repaid the most recent HUD-approved advance
             from the reserve for replacement account when housing assistance payments were
             received in May and July 2009. However, if adequate controls had been in place,
             the agent could have avoided these cash-flow problems and unnecessary late fees
             and finance charges.


Conclusion

             While the agent generally complied with HUD regulations in its management of
             the project, various issues warrant HUD’s attention to provide greater assurance
             that the project is managed in the most economical and efficient manner and to
             ensure that the project’s financial condition is accurately reported. In addition,
             while the project had addressed issues that contributed to its continually needing
             to apply for advances and to incur late fees and finance charges, attention needs to
             be given to ensuring that the project will remain financially viable going forward.

Recommendations

             We recommend that the Director of the New York Office of Multifamily Housing
             instruct the agent to

             1A.    Determine the collectability of the $79,652 delinquent tenant accounts
                    receivable and write off any amounts determined to be uncollectible.

             1B.    Establish procedures to write off uncollectible receivables to ensure
                    accurate reporting of the project’s financial position.

             1C.    Strengthen controls to ensure that accounts payable are recorded in a
                    timely manner to ensure that the project’s financial position is accurately
                    reported.

             1D.    Obtain board approval or otherwise deobligate the $1,700 accrued expense
                    payable in excess of the authorized contract amount.




                                              8
1E.   Strengthen controls over obligation of funds to ensure that obligations do
      not exceed authorized amounts.

1F.   Strengthen procedures to ensure compliance with HUD Handbook 4381.5,
      paragraph 6.50(a), regarding soliciting cost estimates, and the agent’s own
      procedures that require soliciting bids, obtaining and retaining written cost
      estimates, and documenting the reasons for the selection of other than the
      lowest bidder.

1G.   Implement controls to ensure that management agent advances are repaid
      only when in a surplus cash position, and if not, only after approval by
      HUD.

1H.   Reclassify the $305 reported as interest and penalties as a deposit.

1I.   Strengthen controls to ensure that all bills are paid in a timely manner to
      avoid unnecessary late payment charges, finance charges, and interest
      charges.

1J.   Strengthen procedures to ensure that housing assistance payments
      contracts are renewed and vacancies are addressed in a timely manner.

1K.   Provide an analysis of ongoing and projected future income and expenses
      to document that the project will continue to be financially viable.




                                9
                        SCOPE AND METHODOLOGY
Our review generally covered the period July 1, 2006, to June 30, 2008, and was performed
between May and July 2009 at the agent’s office located in the Bronx, New York.

To accomplish the objectives, we

              Reviewed the project regulatory agreement, project owner’s/management agent
              certification, and applicable HUD handbooks and regulations to document the
              responsibilities of the project owner and management agent.

              Documented the project’s policies and procedures to ensure that they complied
              with HUD requirements.

              Analyzed the project’s audited financial statements and financial records,
              including general ledgers, bank statements, check registers, expenditure
              vouchers, and supporting documentation for the audit period.

              Reviewed the three most recent contract administrator reviews and Real Estate
              Assessment Center (REAC) inspection reports. We did not conduct housing
              quality standards inspections because a score of 80 was received from the most
              recent (July 2009) REAC inspection.

              Interviewed HUD multifamily hub and management agent officials.

              Confirmed selected invoices with a third-party vendor.

              Reviewed the project’s fidelity bond policy.

              Reviewed tenant rent collection procedures.

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.




                                              10
                              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.

                  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.

                  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.

               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.




                                                11
Significant Weaknesses


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

           The agent lacked adequate controls to ensure that the project was managed in the
           most economical and efficient manner in compliance with HUD regulations (see
           finding).




                                            12
Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE

                    Recommendation                          Funds to be put
                           number                           to better use 1/
                                   1D                                  1,700
                                   1H                                    305
                                                                     ______
                                                                      $2,005
                                                                    ======


1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, if the improper accrued expense is
     corrected, an additional $1,700 will be deobligated and made available to the project, and
     if the $305 deposit is reclassified, it will be appropriately reported as a restricted asset.




                                              13
Appendix B

             AUDITEE COMMENTS




                    14
AUDITEE COMMENTS




       15
AUDITEE COMMENTS




       16