oversight

Housing Authority of The City of Mountain Grove, MO Did Not Comply with Procurement Requirements and Improperly Disposed of Property Assets

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-09.

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

                                                               Issue Date
                                                                        September 9, 2011
                                                                
                                                               Audit Report Number
                                                                            2011-KC-1004




TO:        Patricia Straussner, Coordinator, St. Louis Program Center, 7EPHO
           Craig Clemmensen, Departmental Enforcement Center, CACB

           //signed//
FROM:       Ronald Hosking, Regional Inspector General for Audit, Kansas City, Kansas,
               7AGA

SUBJECT: Housing Authority of The City of Mountain Grove, MO Did Not Comply with
           Procurement Requirements and Improperly Disposed of Property Assets


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Housing Authority of the City of Mountain Grove, MO in
             response to a citizen’s complaint received by our office. Our objective was to
             determine whether the Authority complied with contract procurement regulations
             and properly disposed of Authority assets.

 What We Found
             The Authority did not comply with U.S. Department of Housing and Urban
             Development (HUD) procurement regulations or its own procurement policies. It
             did not ensure a fair and competitive procurement process, selected the highest
             quotations without justification, and did not retain records pertinent to the
             procurement of three contracts. The Authority lacked detailed operational
             procedures to implement its existing procurement policies.

             The Authority also improperly disposed of an Authority vehicle and more than
             200 appliances without obtaining board approval, establishing fair value, and
             consistently documenting the disposal. Management disregarded existing asset
           management policies, and the Authority lacked detailed operational procedures to
           implement its policies.

What We Recommend


           We recommend that the coordinator of the St. Louis Public and Indian Housing
           Program Center ensure that the Authority develops and implements detailed
           operational procedures that fully implement its existing procurement and asset
           disposal policies. Further, we recommend that HUD require the Authority
           provide justification for the two awards given to the highest bidder or refund
           HUD. We also recommend that the Director of HUD’s Departmental
           Enforcement Center take appropriate administrative actions, up to and including
           debarment, against the Authority’s board member for her part in the procurement
           violations cited in this audit report.

           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


           The Authority agreed with the findings of the audit report. We provided the draft
           report to the Authority on August 3, 2011 and received its response on August 11,
           2011. The complete text of the auditee’s response can be found in appendix B of
           this report.




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                          TABLE OF CONTENTS

Background and Objectives                                                   4

Results of Audit
      Finding 1: The Authority Did Not Always Comply With HUD Procurement   5
                 Regulations or Its Own Procurement Policies
      Finding 2: The Authority Improperly Disposed of Property Assets       9


Scope and Methodology                                                       11

Internal Controls                                                           12



Appendixes
   A. Schedule of Questioned Costs                                          13
   B. Auditee Comments and OIG’s Evaluation                                 14




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                      BACKGROUND AND OBJECTIVES

The Mountain Grove Housing Authority (Authority) began operations in 1967 to provide decent,
safe, and sanitary housing to low income, elderly, and disabled people in Mountain Grove, MO.
The Authority receives funding from the U.S. Department of Housing and Urban Development
(HUD) to furnish rental assistance to low- and moderate-income individuals for safe and sanitary
housing. During the period of our audit, a four-member board of commissioners and an
executive director managed the daily operations of the Authority. The members of the board are
appointed by the mayor and confirmed by the city council. The executive director is appointed
by the board.

The Authority received $1.1 million in Federal grants and subsidies from HUD for the fiscal year
ending September 30, 2010 and more than $1.1 million for the fiscal year ending September 30,
2009. In administering its Federal grants, the Authority must follow Federal regulations
including those in the Code of Federal Regulations, Office of Management and Budget circulars,
HUD handbooks and the Authority’s policies and procedures.

The Office of Inspector General (OIG) received a citizen’s complaint containing allegations
related to asset misappropriations, a procurement violation, and conflict of interests. In May,
2011, we issued an audit memorandum addressing the specific allegations from the hotline
complaint. This audit report addresses additional issues identified during the audit.

The objective of our review was to determine whether the Authority (1) complied with all
procurement regulations and (2) properly disposed of Authority assets.




                                                 4
                                RESULTS OF AUDIT

Finding 1: The Authority Did Not Always Comply with HUD
           Procurement Regulations or Its Own Procurement Policies

The Authority did not comply with HUD procurement regulations or its own procurement
policies. It did not ensure a fair and competitive procurement process in three separate instances
and selected the highest quotations without justification in two instances. The Authority also did
not retain records pertinent to the procurement of three contracts. It lacked detailed operational
procedures to implement its existing procurement policies. As a result, HUD lacked assurance
that the Authority received the best value for nearly $64,000 spent on procurement contracts.



 Authority Did Not Ensure a
 Fair and Competitive Process


               The Authority did not ensure a fair and competitive procurement process in three
               separate instances. In all three instances a member of the Authority’s board, who
               was also employed as the executive director of the local chamber of commerce,
               did not impartially discharge her duties or foster the public’s confidence in the
               procurement process. In addition, the board members participation in each of the
               instances violated the Authority’s and HUD’s conflict- of- interest provisions.

               HUD regulations at 24 CFR (Code of Federal Regulations) 85.36(b) (3) require
               public housing authority employees, officers, or agents to discharge their duties
               impartially to ensure fair competitive access to procurement opportunities by
               responsible contractors. The employees, officers, and agents are required to
               conduct themselves in such a manner as to foster the public’s confidence in the
               integrity of the Authority’s procurement organization and process.

               During fiscal year 2008, the Authority ended a business relationship with a
               gasoline services company it believed did not support the local community. The
               Authority then directed its gasoline business to a supplier who was a member of
               the local chamber of commerce. The board member did not recuse herself from
               the vote to award the contract to the new business.

               During fiscal year 2009, the Authority ended a 15 year business relationship with
               an automobile maintenance service company following a personal disagreement
               between the company and the Authority’s board member. The board member
               asked the maintenance supervisor to stop conducting Authority business with the
               contractor.




                                                5
            During fiscal year 2010, the board member was involved in a bidding irregularity
            related to the purchase of maintenance trucks. The board member brought copies
            of the three original bids to the chamber of commerce. Although we could not
            fully substantiate the board member shared bid information with any of the
            bidders, later that day, the second highest bidder, who was also a member of the
            chamber of commerce, submitted a new bid that was less than the original lowest
            bid. After being contacted by other board members, the Authority’s legal counsel
            advised the board not to consider the new bid when making their selection. The
            board later awarded the contract to the original lowest bidder.

Authority Selected Highest
Bidders

            The Authority selected the highest quotations without justification in two
            instances. During fiscal year 2009, the Authority improperly awarded contracts to
            lease a Security System for $6,797 from one company and purchased computer
            equipment for $4,776 from another company.

            The Authority’s procurement policy required it to award contracts to the offeror
            providing the lowest acceptable quotation unless justified in writing based on
            price and other specified factors.

            HUD regulations at 24 CFR 85.36(f) required the Authority to determine whether
            the proposed price was fair and reasonable. HUD regulations at 24 CFR 85.36(b)
            (9) also required the Authority to maintain records sufficient to detail the
            significant history of each procurement action. These records included, but were
            not necessarily limited to the rationale for the method of procurement, contractor
            selection or rejection, and the basis for the contract price.

            In each of these instances, the Authority’s board selected the highest quotations
            without justifying the reasonableness of the contracts selected or if the quotations
            selected were of the most benefit to the Authority. Further, the Authority did not
            maintain all records sufficient to detail the significant history of each procurement
            action.

Authority Did Not Retain All
Records Pertinent to
Procurement

            The Authority did not retain all records pertinent to the procurement of three
            contracts. Available records showed that during fiscal year 2009, the Authority
            contracted to replace the roofs at its Heritage Heights Complex for approximately
            $35,000. It also purchased water heaters, stoves and refrigerators for its
            apartments on two separate occasions under the small purchase procedures.



                                              6
           For purchases above the micro purchase level, HUD’s regulations at 24 CFR
           85.36(b) (9) required the Authority to document its procurement decisions
           including information regarding contractor selection or rejection, cost and price
           analysis and any pre- and post award discussions and negotiations.

           In each of these instances, the Authority did not maintain records sufficient to
           detail the procurement decision. The Authority generally documented the
           quotations received and kept separate contract files for each of the purchases.
           However, it could not provide documentation of its independent cost analysis for
           the July 2009 roof replacement at its Heritage Heights Complex.

           Further, the Authority did not retain all records pertinent to the procurement of
           230 appliances in February and March 2009. It could only provide the quotations
           summation sheet and not the copies or originals of the actual quotations used to
           make these procurement decisions. Additionally, for the first purchase, it did not
           retain copies or originals of the documentation required to support its contractor
           selection or rejection, including cost and price analysis process.

Authority Lacked Operational
Procedures

           The Authority lacked detailed operational procedures to implement its
           procurement policies and ensure the Authority’s staff retained all required
           documentation. The Authority's existing procurement policy required its
           executive director to issue operational procedures to implement its procurement
           policy and comply with HUD Handbook 7460.8.

Best Value for Procurement
Activities Not Ensured

           The Authority did not always comply with HUD regulations or its own policies
           for the procurement of security services, computer equipment, gasoline purchases,
           maintenance services, construction, and appliances. As a result, HUD lacked
           assurance that the Authority received the best value for nearly $64,000 spent on
           procurement contracts. For example, by selecting the highest quotations for the
           security system and computer equipment purchases, the Authority spent
           approximately $2,900 more than it would have had it selected the lowest
           quotations received.

           In addition, if the Authority does not maintain the required procurement
           documents it might not be prepared if a protest is lodged against it. Also, having
           the required documents could facilitate future purchases of similar supplies or
           services since it would not be necessary to recreate solicitation documents.

Recommendations


                                            7
We recommend that the coordinator of the St. Loius HUD’s Public and Indian
Housing Program Center

1A. Ensure the Authority develops and implements detailed operational
    procedures that fully implements its existing procurement policies

1B. Require the Authority to provide justification for the two awards given to
    the highest bidder totalling $11,573. For any portion the Authority cannot
    support, require the Authority to refund HUD with non-federal funds.

We also recommend that the Director of HUD’s Departmental Enforcement Center

1C. Take appropriate administrative actions, up to and including debarment,
    against the Authority’s board member for her part in the procurement
    violations cited in this audit report.




                                8
Finding 2: The Authority Improperly Disposed of Property Assets
The Authority improperly disposed of an Authority vehicle and more than 200 appliances
without obtaining board approval, establishing fair value, and consistently documenting the
disposal. Management disregarded existing asset management policies, and the Authority lacked
detailed operational procedures to implement its existing policies. As a result, HUD lacked
assurance that the Authority received the best value, and greatest overall benefit for the assets
sold.


 Authority Improperly Disposed
 an Authority Vehicle


              In August 2010, the Authority improperly disposed of an Authority vehicle
              without the required board approval and without establishing the fair value of the
              vehicle. The Authority’s former executive director sold the vehicle for $1,000 to
              the Authority’s financial coordinator.

              The Authority’s disposition policy required the executive director to obtain
              appropriate board approval and establish fair value for sales of unnecessary,
              surplus or unusable personal property from $1,000 to $10,000. Further, the
              executive director was required to solicit informal bids by telephone, or in writing
              from known prospective purchasers, and a tabulation of all bids received was to
              be prepared and retained as part of the permanent record of the Authority. The
              policy also required a bill of sale.

              The Authority could not provide the required documentation related to the sale,
              including the bill of sale, documentation of informal bids solicited, and a
              tabulation of bids received. In addition, the Authority’s board did not authorize
              the sale of the vehicle.

 Authority Improperly Disposed
 of Appliances


              During fiscal years 2009 and 2010, the Authority improperly disposed of 230
              appliances labeled as scrap metal, including 84 stoves, 86 refrigerators, and 60
              water heaters.

              The Authority's disposition policy required the executive director to obtain
              appropriate board approval, and to establish the fair value for sales of
              unnecessary, surplus or unusable personal property of less than $1,000. Further,
              the executive director was required to negotiate the sale in the open market after
              such informal inquiry as he considered necessary to ensure a fair return to the



                                               9
            Authority. The disposition policy also required sales to be documented through a
            bill of sale.

            The Authority’s former executive director authorized the disposal of the
            appliances without obtaining board approval and establishing fair value of the
            items through informal inquiries and open market negotiation. The Authority’s
            maintenance department then sold the appliances to various parties, receiving
            approximatley $20 per unit for the 99 appliances, the disposal of which was
            documented in some form. We were unable to confirm disposal details for the
            remaining 131 appliances.

Authority Disregarded Policies
and Lacked Operational
Procedures

            The Authority’s management disregarded its asset management policies requiring
            board approval and fair value documentation for the sale of assets. In addition,
            the Authority lacked sufficiently detailed operational procedures to ensure its staff
            obtained and retained proper support when disposing of assets, including bills of
            sale. For example, the former executive director’s failure to obtain board
            approval and establish fair value went undetected because the Authority did not
            have procedures requiring employees to check for these items prior to disposal.

Best Value for Assets Was Not
Ensured

            As a result of the issues discussed above, HUD could be assured the Authority
            received the best value, and greatest overall benefit for the vehicle and appliances
            sold. For example, using the Authority's conservative selling price of $20 per
            unit, the 131 unaccounted for appliances would have a total dollar value of
            $2,620.

Recommendations

            We recommend that the coordinator of the St. Louis HUD Public and Indian
            Housing Program Center require the Authority to

            2A. Develop and implement detailed operational procedures to ensure that it
                fully implements its policy to dispose of Authority assets by obtaining board
                approval, establishing fair value, and documenting the disposal.




                                             10
                        SCOPE AND METHODOLOGY

Our audit generally covered the period January 1, 2009, through November 30, 2010, and was
expanded as necessary. We performed our work at the Authority’s administrative offices located
at 301 West 1st Street, Mountain Grove, MO.

To achieve our audit objective, we conducted interviews with

      The complainant;
      HUD’s Office of Public and Indian Housing management and staff located in its St.
       Louis, MO, office;
      The Authority’s management, attorney, and staff;
      External parties mentioned in the complaint; and
      An independent accountant who prepared the Authority’s 2009 and 2010 audited
       financial statements.

We also reviewed the following documents:

      Federal regulations and HUD requirements,
      Annual contributions contract and amendments,
      Initial citizen complaint and later allegations,
      The Authority’s audited financial statements and other accounting records,
      The Authority’s bank statements and cancelled check copies obtained directly from
       financial institutions, and
      City of Mountain Grove council meeting minutes.

We did not rely on computer-processed data or select samples for our audit purposes. We traced
or verified information to supporting documentation to draw our conclusions.

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




                                               11
                              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
               objectives:

                     Controls over procurement of goods and services.
                     Controls over the disposal of Authority assets.

               We assessed the relevant controls identified above.

               A deficiency in internal control 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 Deficiencies


               Based on our review, we believe that the following items are significant deficiencies:

                     The Authority lacked detailed operational procedures to implement its
                      procurement policies and ensure the Authority’s staff retained all required
                      documentation. (Finding 1)
                     The Authority lacked sufficiently detailed operational procedures to
                      ensure its staff obtained and retained proper support when disposing of
                      assets, including bills of sale. (Finding 2)


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                                   APPENDIXES

Appendix A
                 SCHEDULE OF QUESTIONED COSTS

             Recommendation                          Unsupported 1/
                 number

                    1B                                       $11,573

                                                                                    

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.




                                             13
Appendix B
     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment




                         14
                      OIG Evaluation of Auditee Comments

Comment   The Authority agreed with the findings and suggested ways for implementing the
          recommendations. The steps being taken should help correct the problems.




                                         15