oversight

The Texas Department of Housing and Community Affairs Generally Ensured That Its Program Management Firm Complied With Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-01-26.

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

                                                                     Issue Date
                                                                              January 26, 2011
                                                                     Audit Report Number
                                                                              2011-FW-1006




TO:             Yolanda Chavez, Deputy Assistant Secretary for Grant Programs, DG

                //signed//
FROM:           Gerald R. Kirkland
                Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: The Texas Department of Housing and Community Affairs Generally Ensured
           That Its Program Management Firm Complied With Requirements


                                           HIGHLIGHTS

    What We Audited and Why

                  We audited the U. S. Department of Housing and Urban Development (HUD)
                  Community Development Block Grant (CDBG), Supplemental II Disaster
                  Recovery program funds, administered by the Texas Department of Housing and
                  Community Affairs (TDHCA). Specifically, we wanted to determine whether
                  TDHCA monitored its program management firm 1 (the Firm) to ensure
                  compliance with Federal and State regulations and to ensure costs reimbursed for
                  the Housing Assistance Program (HAP) and the Sabine Pass Restoration Program
                  (SPRP) were adequately supported. This is the fourth audit of the Disaster
                  Recovery funds awarded to the State of Texas, and it was conducted as part of the
                  Office of Inspector General’s (OIG) commitment to HUD to implement oversight
                  of Disaster Recovery funds to prevent fraud, waste, and abuse.




1
     ACS State and Local Solutions, Inc.
What We Found

           TDHCA’s monitoring activities provided assurance that the Firm generally
           complied with Federal and State regulations. Further, TDHCA’s reviews and
           monitoring generally ensured that program costs submitted for reimbursement by
           the Firm were adequately supported. However in a minor instance of
           noncompliance, TDHCA allowed the Firm to budget and receive reimbursement
           for a $71,691 mark-up for “Admin Fees on Subcontractors” calculated using a
           “cost plus a percentage of cost method” that is not allowed under CDBG rules.
           TDHCA had originally questioned the costs but subsequently allowed them
           because contractor staff provided support that made the expenditures seem
           plausible to TDHCA.

What We Recommend

           We recommend that HUD’s Deputy Assistance Secretary for Grant Programs
           require TDHCA to recover from the Firm all “Admin Fees on Subcontractors”
           costs, reimburse its HUD Disaster Recovery program accounts for those costs,
           and continue to monitor and review program disbursements for the ineligible cost
           plus a percentage of cost payments.

           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 TDHCA our draft report on January 4, 2011, and requested its
           comments by January 20, 2011. We held an exit conference on January 18, 2011,
           with TDHCA and HUD. TDHCA provided its response to the draft report on
           January 19, 2011. It generally concurred. 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 Objectives                                                        4

Results of Audit
                                                                                 5
      Finding: The Texas Department of Housing and Community Affairs Generally
               Ensured Its Program Management Firm Complied With Requirements

Scope and Methodology                                                            8

Internal Controls                                                                9

Follow-up on Prior Audits                                                        10

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




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                     BACKGROUND AND OBJECTIVES

Congress authorized two supplemental funding appropriations to assist the Gulf Coast States in
recovering from the destruction of Hurricanes Katrina, Rita, and Wilma. Public Law 109-148
authorized $11.5 billion (Supplemental I), and Public Law 109-234 (Supplemental II) authorized
$5.2 billion in Disaster Recovery program funding. Of the $16.7 billion, the State of Texas
(State) received $503 million through the U. S. Department of Housing and Urban Development
(HUD) Community Development Block Grant (CDBG) program to address areas most impacted
by Hurricanes Rita and Katrina.

The Governor of Texas selected the Texas Department of Housing and Community Affairs
(TDHCA) as the lead agency to administer the Disaster Recovery funds. TDHCA was
established in 1991 as the State’s primary agency to provide essential public service and housing
needs for extremely low to moderate income individuals and families in Texas. TDHCA in
conjunction with the State’s Council of Governments distributed the Supplemental I funds for
housing. TDHCA allocated $232 million in Supplemental II funds to aid eligible homeowners to
repair or replace their hurricane damaged homes. The Supplemental II funds were distributed for
housing using a procured program management firm (Firm).

In December 2007, TDHCA contracted with the Firm, which subcontracted with Shaw
Environmental, Inc. (Shaw), and Reznick, Mississippi, L.L.C. (Reznick), to administer the
Housing Assistance Program (HAP) and the Sabine Pass Restoration Program (SPRP). The Firm
was to be responsible for the distribution of $232 million in Supplemental II housing aid to
homeowners affected by the hurricanes. As of September 2010, the Firm reported that it had
constructed or rehabilitated more than 2,000 homes with Supplemental II Disaster Recovery
funds.

Our objective was to determine whether TDHCA monitored its program management firm to
ensure compliance with Federal and State regulations and to ensure costs reimbursed for the
HAP and the SPRP were adequately supported.




                                               4
                                RESULTS OF AUDIT

Finding: TDHCA Generally Ensured its Program Management Firm
Complied With Requirements
TDHCA reviews and monitoring activities generally ensured that the Firm complied with
Federal and State regulations and that program costs submitted for reimbursement were
adequately supported. However, in a minor instance of noncompliance, TDHCA reimbursed the
Firm $71,691 for administrative costs that included a subcontractor’s mark-up cost, which was
based on a cost plus a percentage of cost payment type that is not allowed under CDBG rules.
TDHCA had originally questioned the costs but subsequently allowed them because contractor
staff provided support that made the expenditures seem plausible to TDHCA.


  TDHCA’s Monitoring
 Functions Were Independent
 and Organized


              TDHCA had a well organized and independent Office of Oversight and Asset
              Division (Compliance Division) that ensured the CDBG Disaster Recovery
              programs were administered in compliance with contract provisions and Federal and
              State rules, regulations, policies, and related statutes. TDHCA also established and
              implemented adequate oversight and monitoring procedures to ensure program and
              financial compliance. Onsite monitoring visits were scheduled based on risk
              assessments. TDHCA's Compliance Division had the primary role of monitoring
              the Firm’s contract to ensure compliance with State and Federal requirements. The
              Compliance Division was independent of the Disaster Recovery Division and had
              conducted four formal monitoring reviews of the Firm and the HAP and SPRP. In
              addition, the Internal Audit Division had conducted a formal independent audit of
              some aspects of the Firm’s contract. Further, the Disaster Recovery Division staff
              maintained daily communication with the Firm and had also conducted various
              reviews and monitoring visits.


 TDHCA Monitoring Activities
 Generally Ensured Compliance

              TDHCA’s monitoring goals were to provide reasonable assurance that the Firm
              complied with Federal, State, and CDBG program requirements. Since the inception
              of the contract, the Compliance Division, Internal Audit Division, and Disaster
              Recovery Division have conducted at least 20 monitoring reviews resulting in 11
              monitoring reports or letters, which included at least 12 findings, 28 issues or
              problems, and 8 observations. TDHCA also monitored the corrective actions taken



                                               5
                  by the Firm. In addition, TDHCA and the Firm established invoice and payment
                  procedures that generally provided adequate assurance that payment draws were
                  supported, properly authorized, approved, and accurately reported in the accounting
                  systems.

    Cost Submitted for
    Reimbursement Were Generally
    Supported

                  Eight separate draw downs totaling $8.4 million, of the $232 million allocated to
                  the HAP and SPRP programs, were reviewed. About $7.4 million of the draw
                  downs consisted of administrative costs paid to the Firm. The review showed that
                  the Firm’s draw downs and TDHCA reimbursements were generally adequately
                  supported; except for the payment of the ineligible mark-up costs of $71,691 2 for
                  “Admin Fees on Subcontractors.”

                  In 2009, TDHCA's Compliance Division identified the “Admin Fees on
                  Subcontractors” as unsupported. However, it later allowed the costs because they
                  were included in the Firm’s contract and budgeted as a subcontractor’s costs. 3
                  Yet, the subcontractor’s explanation clearly showed that mark-up for “Admin
                  Fees on Subcontractors” was calculated using a cost plus a percentage of cost
                  method. Although State policy allows a cost plus a percentage of cost payment
                  type method, 4 HUD’s State CDBG program regulations do not. 5


    Conclusion


                  TDHCA reviews and monitoring activities generally ensured that the Firm
                  generally complied with Federal and State regulations and that program costs
                  submitted for reimbursement were adequately supported. In most cases,
                  TDHCA’s reviews detected and corrected problems, except in the minor case of
                  the ineligible mark-up.




2
     This amount represents less than .01% of the total draws reviewed ($71,691/$8.4 million = .009)
3
     Reznick, Mississippi, L.L.C.
4
     Texas Contract Management Guide, chapter 3, Preparing the Solicitation, Payment Types
5
     24 CFR (Code of Federal Regulations) 570.489(g)


                                                         6
Recommendations



          We recommend that HUD’s Deputy Assistant Secretary for Grant Programs
          require TDHCA to

          1A. Recover from the Firm, $71,629 for the “Admin Fees on Subcontractors”
              costs, and reimburse the appropriate HUD Disaster Recovery Program
              accounts.

          1B. Continue to monitor and review program disbursements for ineligible cost
              plus a percentage of cost payment types.




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                         SCOPE AND METHODOLOGY

We conducted our audit work at the TDHCA’s office in Austin, TX, at its Firm’s office, in San
Antonio, TX, and the HUD OIG’s office in San Antonio, TX. We performed our audit work
between August and November 2010. The audit generally covered the period December 2007
through August 2010. To accomplish our objective we:

           •   Reviewed the Federal Register, CDBG, Disaster Recovery grant for hurricane
               recovery.
           •   Reviewed HUD's community development block grant regulations.
           •   Reviewed HUD’s and TDHCA’s Disaster Grant agreement.
           •   Reviewed TDHCA’s and the Firm’s policies, guides, and action plans for the
               Disaster Recovery program, monitoring process, and payment processing.
           •   Reviewed the contract between TDHCA and the Firm and other documents
               concerning monitoring, payment, and reimbursement processing.
           •   Reviewed TDHCA's monitoring reports.
           •   Interviewed TDHCA’s and the Firm's managers and staff.
           •   Reviewed eight separate draw requests totaling $8.4 million and verified
               supporting documentation from source documents provided by TDHCA and the
               Firm.
           •   Performed tests of the computer-processed data obtained from the TDHCA and
               the Firm. We determined the data to be sufficiently reliable to meet our objective.

To accomplish our objective, we reviewed the Firm’s costs submitted for reimbursement to
verify that costs were adequately supported and included in the contract budgets. We selected
and reviewed eight separate draw downs totaling $8.4 million of the $232 million allocated to
HAP and SPRP, of which $7.4 million included draws paid to the Firm for administrative costs.
A statistical sampling method was not used to select the draw downs; instead, the selection was
based on the results of a risk assessment and prior audit findings. Thus, any results or
conclusions stated in this report, only apply to the draws reviewed and cannot be projected to the
entire $232 million allocated to the programs. The draws, supporting documentation, and
invoices are maintained by the Firm. According to TDHCA staff, a complete or effective review
of the draw down documentation was not possible or practical when processing administrative
draws for the Firm and construction draws for over 2,500 planned homes in a timely manner.
TDHCA’s main justification was that the draw down documentation was voluminous. TDHCA's
Disaster Recovery Division required the Firm to keep the hardcopies of the draws and supporting
invoices on-site and reviewed them on a test basis during monitoring visits or when 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 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.




                                                8
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals and objectives. Internal controls 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:

                  •   Monitoring review process
                  •   Invoice and payment review process
                  •   Proper execution and recording of transaction
                  •   Appropriate documentation of transactions

               We assessed the relevant controls identified above.

               A deficiency in internal controls exists when the design or operation of a control
               does not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiency


               We evaluated internal controls related to the audit objective in accordance with
               generally accepted government auditing standards. Our evaluation of internal
               controls was not designed to provide assurance regarding the effectiveness of the
               internal control structure as a whole. Accordingly, we do not express an opinion
               on the effectiveness of the TDHCA’s internal controls.



                                                 9
                       FOLLOW-UP ON PRIOR AUDITS


 The Texas Department of
 Housing and Community
 Affairs Did Not Fully Follow
 Requirements or Best Practices
 in the Acquisition of Its Disaster
 Recovery-Funded Program
 Management Firm,
 2010-FW-1005

We issued an audit report on the CDBG Supplemental II Disaster Recovery program funds in
July 2010. The audit found that TDHCA did not follow requirements or best practices in the
acquisition of its Disaster Recovery-funded program management firm. Specifically, it accepted
and approved the only proposal received when the proposal’s cost exceeded the request for
proposals’ specification by $3.68 million. TDHCA made material changes to the contract that
increased the maximum cost by $1.99 million, budgeted $210,000 in prohibited costs, and
contracted to pay the Firm using multiple payment types including $2.23 million for a cost plus a
percentage of cost type, which is prohibited by Federal regulations. In addition, TDHCA’s
contract with the Firm lacked sufficient detail tying construction management services and
oversight to the payment and budget section costs for the proper identification and allocation of
$14.33 million in costs. As a result, TDHCA could not ensure it received the best value to the
State, and its contract included ineligible and unsupported costs of almost $18.76 million. We
recommended that HUD’s Disaster Recovery Assistance and Special Issues Division Director
require TDHCA to (1) adopt sound agency business procedures for Disaster Recovery-funded
procurements in accordance with State policy, (2) train its staff members to ensure that they
follow its policies, (3) reimburse its Disaster Recovery account for $2.44 million in ineligible
costs, (4) provide support for or reimburse $16.32 million in unsupported costs, and (5) modify
its contract language.

HUD agreed with all of the finding recommendations in the audit report. Based on the
information provided by TDHCA, HUD indicated it would continue to work with TDHCA to
ensure program compliance and to oversee the recommended actions for each finding. As of
December 20, 2010, the recommendations are still in open status.




                                               10
                                          APPENDIXES

Appendix A

                     SCHEDULE OF QUESTIONED COSTS


                      Recommendation             Ineligible 1/
                             number
                                     1A           $71,691




1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local policies
     or regulations.


                                                  11
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         12
                        OIG Evaluation of Auditee Comments

Comment 1   TDHCA generally agreed with the audit report and is in the process of recovering
            the $71,691 from the Firm. We acknowledge TDHCA’s positive monitoring
            efforts and timely action in this matter.




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