Issue Date
March 10, 2011
Audit Report Number
2011-NY-1006
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: Financial Management and Procurement Controls at Westbeth Artists Houses,
New York, NY, Did Not Always Comply With Regulations
HIGHLIGHTS
What We Audited and Why
We audited Westbeth Artists Houses (auditee) in response to a complaint
submitted to the Office of Inspector General (OIG) hotline alleging that project
funds were used to pay an executive director in violation of U.S. Department of
Housing and Urban Development (HUD) regulations. Our audit objectives were
to assess the merits of the complaint and determine whether project operations
generally complied with HUD regulations pertaining to financial, procurement,
and tenant certification processes.
What We Found
The complaint had merit because the duties of the executive director position for
which project funds were disbursed were not adequately supported. In addition,
although tenant certifications were properly performed, the project’s financial
management and procurement processes did not always comply with HUD
regulations. Specifically, project funds were used to pay expenses that were
inadequately supported, deemed unnecessary and unreasonable, and ineligible. In
addition, auditee officials did not always follow prudent procurement practices
when executing contracts. These conditions occurred because auditee officials
believed that the funds used to pay for the executive director’s position were not
subject to HUD regulation and weaknesses existed in the project’s financial and
procurement controls. As a result, auditee officials lacked assurance that (1)
$304,485 expended for an executive director’s position and $28,351 disbursed for
other expenses were properly supported, (2) $7,030 expended was for necessary
and reasonable project- or housing-related costs, (3) $37,650 expended was for
eligible expenses, and (4) services were obtained at the most economical price.
What We Recommend
We recommend that the Director of HUD’s New York Office of Multifamily
Housing instruct auditee officials to (1) provide justification for the $304,485
expended for the costs related to the executive director’s position so that HUD
can determine whether it is justified and provide documentation to substantiate
the $28,351 in unsupported expenses, (2) reimburse the project from non-federal
funds, $7,030 in expenses deemed unnecessary and unreasonable, along with the
ineligible expenses of $37,650, and (3) ensure that controls over financial
management and procurement processes are strengthened.
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 results of the audit with auditee officials during the audit and
provided a draft report on January 21, 2011, which was discussed at an exit
conference on January 31, 2011. Auditee officials provided written comments
and exhibits on February 14, 2011 as requested in which they disagreed with the
findings and recommendations. The complete text of the auditee’s response,
except for the exhibits, which were too voluminous to include in the report, along
with our evaluation of that response, can be found in appendix B of this report.
The exhibits will be provided to the HUD field office.
2
TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: Financial Management and Procurement Controls Did Not Always 5
Comply With Regulations
Scope and Methodology 11
Internal Controls 13
Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 15
B. Auditee Comments and OIG’s Evaluation 16
C. Analysis of Executive Director Responsibilities According to Employment 38
Agreement
3
BACKGROUND AND OBJECTIVES
Westbeth Artists Houses (auditee), which is located at 463 West Street, New York, NY, and is
the site of a former industrial building abandoned in 1966, opened in 1970 as the first federally
subsidized artists’ housing. In addition, there is an easement agreement relating to an abandoned
railway line running through the development. The development is a 384 residential and 106
commercial unit Section 221(d)(3) multifamily building owned by the Westbeth Corporation
Housing Development Fund Company, Inc., a not-for-profit housing company. The 384
residential units are to be provided at below-market rent to those performing or participating in a
wide range of artistic activities, and the 106 commercial units and artists’ studios are to be
provided at market rent. The development is governed by an uncompensated board of between 3
and 15 directors.
The U.S. Department of Housing and Urban Development (HUD) entered into a regulatory
agreement with the owners in 1968 in connection with a Section 221(d)(3)-insured mortgage.
The provisions of this regulatory agreement were extended to cover a supplemental insured
mortgage obtained on August 7, 1970. HUD’s financial interest in the property ended on August
26, 2009, when it entered into a loan sale agreement to sell the mortgage loan to the New York
City Housing Development Corporation. The development continues to be subject to a HUD
Section 8 housing assistance contract for which it provides project-based housing assistance for
77 apartment units.
Section 221(d)(3) of the National Housing Act allows HUD to insure mortgage loans to facilitate
new construction or substantial rehabilitation of multifamily rental or cooperative housing for
moderate-income families, the elderly, and the handicapped. Property owners are ultimately
responsible for ensuring that HUD-subsidized properties are operated in an effective and
efficient manner. The regulatory agreement between the property owner and HUD specifies that
the responsibilities of an owner are to maintain the development 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 property owner executed a project
owner’s/management agent’s certification in January 2008 with Phipps Houses Services to serve
as the management agent. The project owner’s/management agent’s certification provides that
the agent and owner will comply with HUD requirements and contract obligations, that all
expenses of the development are reasonable and necessary, and that the development’s accounts
and records are established and maintained in accordance with HUD requirements.
We initiated an audit in response to a complaint submitted to the Office of Inspector General
(OIG) hotline alleging that project funds were used to pay an executive director in violation of
HUD regulations. Our audit objectives were to assess the merits of the complaint and determine
whether project operations generally complied with HUD regulations pertaining to financial,
procurement, and tenant certification processes.
4
RESULTS OF AUDIT
Finding 1: Financial Management and Procurement Controls Did Not
Always Comply With Regulations
Tenant certifications complied with HUD regulations; however, auditee officials did not always
administer financial management and procurement controls in accordance with HUD regulations.
Specifically, project funds were used to pay compensation for an executive director’s position,
the duties of which were neither adequately supported nor considered necessary by HUD, and
other expenses that were inadequately supported, deemed unnecessary, and ineligible. In
addition, auditee officials did not always follow prudent procurement practices. These
conditions occurred because auditee officials believed that the funds used to pay expenses for the
executive director were not subject to HUD regulation and weaknesses existed in the auditee’s
financial and procurement controls. As a result, auditee officials lacked assurance that $304,485
expended for an executive director’s costs and $28,351 for other expenses were properly
supported, $7,030 expended was for necessary and reasonable project- or housing-related costs,
$37,650 expended was for eligible expenses, and services were obtained at the most economical
price.
Executive Director Position Not
Adequately Supported
Disbursements on behalf of an executive director were unsupported because the
duties assigned to that position were those normally expected of the management
agent or the board of directors or had not been performed. While the project was
reported to have been without an executive director since sometime in the 1970s, the
board of directors authorized filling such a position during its June 29, 2006, board
meeting. After conducting an executive search, auditee officials hired an individual
on September 11, 2006, to serve as executive director for 1 year but did not renew
the contract upon its expiration. On January 28, 2008, a member of the board of
directors resigned and was hired as the executive director under a 1-year term of
employment. Although the contract had not been renewed, the individual continued
to serve in that position. Auditee officials had expended $304,485 through August
26, 2009,1 for compensation and the reimbursement of expenses related to this
position as follows:
1
No exception is taken for payments related to the executive director’s position after this date because after HUD
executed the loan sale agreement, it had no further financial interest in the project. However, section 2.10 of the
agreement provides that assignment of the regulatory agreement does not affect any recourse HUD may have for
breach of the regulatory agreement that occurred before the closing date.
5
Table 1: Expenditures related to the executive director position
Calendar Salary and Bonus Other Grand total
year benefits
2006 $38,394 $1,000 $366 $39,760
2007 $85,775 $0 $1,920 $87,695
2008 $94,364 $5,000 $1,223 $100,587
2009 $69,521 $5,000 $1,922 $76,443
Total $288,054 $11,000 $5,431 $304,485
The auditee structured the executive director’s position as an employee of the
project, which operated under a 1-year employment contract, subject to renewal.2
The employment contract included an exhibit which detailed the duties expected of
the executive director. Auditee officials maintained that such a position was needed
due to the complex issues facing the development. However, analysis of these
duties (see appendix C) disclosed that most of them were responsibilities that might
normally be expected of the management agent and/or the board of directors and
were tasks for which the owners contracted with other entities or that were not
performed by the incumbent.
For instance, the functions assigned to the executive director to oversee the
management of all residential and commercial benefits, including admissions, in-
house moves, studio, gallery, and community spaces, as well as managing the day-
to-day operations of the development are functions normally expected of a
management agent. The Project Owner’s/Management Agent’s Certification (form
HUD-9839-B) provides that, among other duties, a management agent selects and
admits tenants, computes tenant rents and assistance payments, recertifies tenants,
and performs other subsidy contract administration responsibilities in accordance
with HUD regulations. In addition, while the executive director was expected to
develop and execute a strategic plan for the project’s future, auditee officials enlisted
a consultant to develop a detailed guide outlining future possibilities for the
development. Further, while fundraising was a duty assigned to the executive
director’s position, the current executive director said that he had not engaged in any
fundraising activity.
Costs of the Executive Director
Not Accurately Classified
HUD Handbook 4370.2 provides that office salaries should be recorded under
administrative expenses; however, $85,775 of the $304,485 in costs associated with
the executive director’s position were misclassified in the calendar year 2007
2
This arrangement complies with HUD regulations because, while the regulatory agreement, paragraph 7(i),
prohibits the owners from paying any compensation or making any distribution of income or other assets to any of
its officers, directors, or stockholders, such prohibition does not extend to an employee, which was the status of the
executive director.
6
financial statements filed with HUD. This statement did not present an accurate
accounting to HUD of how project funds were being expended and may have caused
HUD to not be aware of the extent to which expenses were being paid for an
executive director. For instance, the $85,775 paid in 2007 as executive director
compensation was reported as an operating and maintenance expense. In addition,
the bonuses paid to the current executive director in 2008 and 2009 were reported as
miscellaneous office expenses. When HUD became aware, through disclosure in
the project’s 2009 budget-based rent application, that funds were being allocated to
the executive director’s position, it disallowed the expense as a factor in determining
the allowed rent because the development already had a management agent.
Costs of the Executive Director
Paid From Arbitration Funds
The costs for the subject expenses were paid from funds awarded through arbitration
relating to an easement through the project property. The award was compensation
for damage to property owned by the project due to the failure of the easement
grantee to meet certain maintenance obligations. The project owners deposited these
funds into a segregated bank account administered by the owners and not the
management agent. Auditee officials believed that these funds were not subject to
HUD regulation because the funds were neither generated from the project’s
business of providing housing nor from property subject to the project mortgage.
However, guidance from HUD’s Regional Counsel concluded that the award of
these funds did relate to the project, which is subject to the HUD-insured mortgage
and, therefore, should be regarded as project income.
Funds Expended for
Inadequately Supported Costs
Section 10(c) of the regulatory agreement provides that the books, contracts, records,
documents, and other related papers must be maintained in reasonable condition for
proper audit and subject to examination and inspection by HUD or its duly
authorized agents. However, auditee officials lacked adequate support to
substantiate $28,351 disbursed from project funds for legal and consulting costs.
For example, auditee officials expended $12,445 for legal services without an
invoice or written documentation of the service performed and $9,501 for consulting
services related to mission and planning work, for which there was no written report
or other documentation of the benefits received. This condition occurred due to
weaknesses in financial management controls. As a result, auditee officials lacked
assurance that $28,351 in project funds was properly supported in accordance with
HUD regulations.
7
Funds Expended for
Unnecessary Costs
Section 7(b) of the regulatory agreement requires that project funds be used only
for reasonable operating expenses and necessary repairs. Auditee officials
expended $7,030 for three events that were deemed unreasonable and
unnecessary. In the first instance, $5,773 was expended for food and liquor at a
reception held for the executive director hired in 2006; in the second instance,
$1,110 was expended for food, liquor, and a gift for a security guard’s retirement
party; and in the third instance, $147 was expended for food for a board meeting.
This condition occurred because of auditee official’s unfamiliarity with HUD
regulations. As a result, $7,030 in project funds was unnecessarily used for
nonproject- or housing-related expenses.
Ineligible Expenses
Auditee officials expended $37,650 from project funds for the following
ineligible expenses:
$31,840 for commercial leasing brokerage commissions,
$5,000 for legal fees associated with the selling/refinancing of the
property,
$510 for legal fees associated with establishing a related nonprofit
fundraising entity, and
$300 to purchase a personal item from a tenant.
Auditee officials explained that the $31,840 brokerage commission was
compensation for leasing the project’s commercial space. However, paragraph
1(b) of the project owner’s/management agent’s certification requires that the
agent manage the project for the term and fee described on the certification and
that fee changes be made only with HUD approval. HUD officials further stated
that a fee for commercial space leasing can be earned but only if approved by
HUD as a special fee documented in the project owner’s/management agent’s
certification. Nevertheless, no such approval was requested. The legal fees and
personal item are not project-related expenses but are owner and tenant expenses,
respectively. These conditions occurred due to auditee official’s unfamiliarity
with HUD regulations. Consequently, the project was deprived of $37,650 that
was spent on these ineligible items.
8
Prudent Procurement Practices
Not Followed
Auditee officials did not always solicit written or verbal cost estimates or execute
written contracts as required by HUD regulations and the auditee’s own policy.
HUD Handbook 4381.5, REV-2, section 6.50(a), provides that when an
owner/agent contracts for goods or services, an agent is expected to solicit written
cost estimates from at least three contractors or suppliers for any contract or
ongoing supply or service that is expected to exceed $10,000 per year. Section
6.50(b) provides that for any contract or ongoing supply or service estimated to
cost less than $5,000 per year, the agent should solicit verbal or written cost
estimates, to ensure that the project obtains services, supplies, and purchases at
the lowest possible cost, and should make a record of any verbal estimates
obtained. Additionally, section 6.50(c) prescribes that documentation of all bids
should be retained as part of the project records for 3 years following the
completion of the work. In addition, the management agent’s bidding procedures
require the purchasing department to bid purchase requisitions for all
services/materials in excess of $2,000 and any individual item costing more than
$1,000.
Of 18 procurement actions reviewed, there was no evidence of written
solicitations or verbal cost estimates for 15 actions or that a written contract had
been executed in 3 cases. For instance, an architect was hired for $1,540, and
services were procured to perform lead paint clearance testing for $21,658
without evidence that written or verbal cost estimates were obtained or that a
written contract was executed. Without soliciting cost estimates and documenting
work expected via a written contract, auditee officials lacked assurance that the
most economical and efficient price was obtained for these services.
Conclusion
While the project is a complex operation that faces major challenges which may
warrant approval of special management fees, the use of project funds for an
executive director was not adequately supported as not being duplicative of other
services obtained. In addition, weaknesses existed in the financial management
and procurement controls of the project. These weaknesses occurred because of
the project owners’ unfamilarity with HUD regulations. Consequently, the
project owners incurred unsupported, unnecsssary, and ineligible expenses and
did not administer procurement controls in accordance with HUD regulations.
Therefore, the auditee lacked assurance that project funds were expended for
reasonable and necessary costs, thus depriving the project of funds to pay for
necessary expenses.
9
Recommendations
We recommend that the Director of the HUD New York Office of Multifamily
Housing instruct auditee officials to
1A. If the arbitration award funds are deemed subject to HUD regulation, provide
justification for the $304,485 expended for an executive director’s position
and, if adequate justification is not provided, reimburse the project from
non-Federal funds.
1B. Provide adequate documentation for the $28,351 in unsupported expenses
and, if adequate documentation cannot be provided, reimburse the project
from non-Federal funds.
1C. Reimburse the project from non-Federal sources the $7,030 in expenses
deemed unreasonable and unnecessary.
1D. Reimburse the project from non-Federal sources the $37,650 expended for the
ineligible costs.
10
SCOPE AND METHODOLOGY
The review focused on addressing whether the project inappropriately used funds to pay an
executive director and generally complied with HUD regulations pertaining to financial and
procurement processes. To accomplish the objectives, we
Reviewed the regulatory agreement executed between HUD and the project owners
in 1968; HUD Handbooks 4350.3, REV-1, 4370.2, REV-1, 4381.5, REV-2, which serve
as guidance for the administration of projects such as the auditee; the loan sales
agreement executed by HUD in 2009; and the project owner’s/management agent’s
certifications approved by HUD on March 17, 2006, May 2, 2007, and April 18, 2008.
Reviewed the project’s corporate by-laws, board meeting minutes, executive director’s
employment contract, and procurement policy for the audit period to determine whether
project policies complied with HUD regulations.
Interviewed HUD Office of Multifamily Housing field office, Enforcement Center, and
Regional Counsel staff to identify and obtain guidance on issues pertaining to the project.
Interviewed management agent and independent public accountant officials to obtain an
understanding of the project’s management controls and procedures.
Analyzed the project’s audited financial statements and applicable financial records,
including general ledgers, check registers, bank statements, expenditure vouchers, and
supporting documentation for the audit period, to gain an understanding of the project’s
financial operations.
Obtained an understanding of the management agent’s structure and reviewed the
organizational chart and duties of the project staff.
Selected a sample of five Section 8 program tenant files to test whether the project
properly recertified and determined tenant eligibility in accordance with HUD
regulations.
Selected a sample totaling $281,536, or 32 percent, of reported expenditures for
professional fees and administrative, operating, and maintenance supply costs incurred
during the audit period to assess compliance with HUD regulations.
The audit period was from January 1, 2006, through June 30, 2008, and was expanded
when necessary. We performed audit fieldwork from June through October 2010 at the
project located at 463 West Street, New York, NY, and at the management agent’s office
located at 902 Broadway, New York, NY.
11
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 objectives.
12
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:
Effectiveness and efficiency of operations: Policies and procedures that
management has implemented to reasonably ensure that a program meets
its objectives.
Reliability of financial reporting: Policies and procedures that management
has in place to reasonably ensure that valid and reliable data are obtained,
maintained, and fairly disclosed in reports.
Compliance with applicable laws and regulations: Policies and procedures
that management has implemented to reasonably ensure that resource use
is consistent with laws and regulations and its procurement practices
comply with HUD requirements.
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.
13
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:
Auditee officials lacked adequate controls to ensure the reliability of
financial reporting and compliance with HUD regulations when they did not
maintain documentation to support expenses and disbursed funds for
unsupported, unnecessary and unreasonable, and ineligible expenses. In
addition, auditee officials did not comply with HUD’s and its own
procurement regulations.
14
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Unsupported Unreasonable or
number 2/ unnecessary 3/
1A $304,485
1B 28,351
1C $7,030
1D $37,650 _______ _______
Total $37,650 $332,836 $7,030
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.
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 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.
3/ Unreasonable/unnecessary costs are those costs not generally recognized as ordinary,
prudent, relevant, and/or necessary within established practices. Unreasonable costs
exceed the costs that would be incurred by a prudent person in conducting a competitive
business.
15
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
16
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 3
Comment 2
17
Ref to OIG Evaluation Auditee Comments
Comment 4
Comment 5
Comment 4
18
Ref to OIG Evaluation Auditee Comments
Comment 5
Comment 6
Comment 7
19
Ref to OIG Evaluation Auditee Comments
Comment 7
Comment 8
Comment 6
Comment 9
20
Ref to OIG Evaluation Auditee Comments
Comment 9
Comment 10
21
Ref to OIG Evaluation Auditee Comments
Comment 11
22
Ref to OIG Evaluation Auditee Comments
Comment 11
Comment 12
23
Ref to OIG Evaluation Auditee Comments
Comment 1
24
Ref to OIG Evaluation Auditee Comments
Comment 13
25
Ref to OIG Evaluation Auditee Comments
Comment 9
26
Ref to OIG Evaluation Auditee Comments
Comment 11
Comment 9
27
Ref to OIG Evaluation Auditee Comments
Comment 14
Comment 15
28
Ref to OIG Evaluation Auditee Comments
Comment 16
Comment 17
Comment 18
Comment 19
29
Ref to OIG Evaluation Auditee Comments
Comment 20
Comment 11
Comment 21
Comment 11
Comment 22
Comment 23
30
Ref to OIG Evaluation Auditee Comments
Comment 23
Comment 3
Comment 24
31
Ref to OIG Evaluation Auditee Comments
Comment 11
Comment 25
Comment 5
Comment 16
to 20
Comment 21
Comment 22
to 23
OIG Evaluation of Auditee Comments
32
OIG Evaluation of Auditee Comments
Comment 1 The issue is not whether the board of directors was within its rights to create an
executive director position but, rather, whether the costs incurred for the
executive director position were adequately supported and complied with section
7(b) of the Regulatory Agreement for Non Profit and Public Mortgagors Under
Section 221(d)(3) of the National Housing Act, As Amended (FHA Form No.
1733), which provides that the project owners “shall not without the prior written
approval of the Commissioner … pay out any funds, except for reasonable
operating expenses and necessary repairs.” Therefore, payment of other than
reasonable operating expenses or necessary repairs without prior HUD approval
would violate the regulatory agreement executed between HUD and the project.
Comment 2 Section 221(d)(3) of the National Housing Act insures mortgage loans to facilitate
the new construction or substantial rehabilitation of multifamily rental or
cooperative housing for moderate-income families, the elderly, and the
handicapped, and the terms of the regulatory agreement executed between HUD
and the project owners provide that project funds must be used to maintain the
project and for reasonable and necessary expenses. Expenses incurred that are
determined to not be reasonable and necessary are to be repaid to the project
from nonfederal funds unless previously approved by HUD.
Comment 3 Section 2.10 of the loan sale agreement provides that the assignment of the
regulatory agreement from the seller (HUD) to the purchaser (Housing
Development Corporation) shall not affect any right that the seller has to seek
recourse for a breach of the regulatory agreement, which occurred before the
closing date. Accordingly, after the closing date, the seller may pursue claims
against any person who violated or caused a violation of the regulatory
agreement, and any funds recovered in settlement of any such claim will be
retained by the seller. In this case, any recovered funds should be repaid to the
project from nonfederal funds.
Comment 4 While no specific documentation was provided for the existence or removal of an
executive director, it is reported in an oral history of Westbeth that the executive
director position was eliminated in the 1970s based upon HUD’s conclusion that
it was an unnecessary project expense. No documentation was found to evidence
that the project had later sought HUD’s approval for an executive director
position.
Comment 5 While we acknowledge that Westbeth is a complex, if not unique, project, the
project owners did not request that HUD reconsider its previous denial of an
executive director position as being unnecessary, nor have any special fees or
add-on fees been requested from HUD as allowed by HUD Handbook 4381.5,
REV-2, sections 3.6 and 3.7, respectively. Analysis of the 15 functions assigned
to the executive director position, as detailed in the incumbent’s employment
contract, disclosed that many of the duties are those normally expected of others.
For instance, while overseeing the management of all residential and commercial
benefits, including admissions, in-house moves, studio space, gallery space, and
community space, as well as managing the day-to-day operations of the
33
development, are functions assigned to the executive director position, these are
functions expected to be carried out by the management agent. Further, a
consultant was reportedly hired to develop a detailed guide outlining future
possibilities for the project’s development; however, the specifics of this plan or
any other outcomes of this procurement were not provided during the audit. In
addition, the incumbent stated that 5 of the 15 expected functions had not been
performed. While no attempt was made to identify how much of the annual
salary is attributable to each function, the costs incurred for the executive director
position are considered unsupported since adequate justification for such a
position has not been provided to HUD.
Comment 6 Analysis of the duties assigned the executive director position disclosed that many
are functions assigned by contract or internal project operating procedures to
other officials. For instance, the project owner’s/management agent’s
certification provides that, among other duties, a management agent selects and
admits tenants, computes tenant rents and assistance payments, recertifies tenants,
and performs other subsidy contract administration responsibilities in accordance
with HUD regulations. In addition, Westbeth’s by-laws assign the president
general supervision over the affairs of the project. Accordingly, OIG’s analysis
was not based upon the possibility that others might perform duties assigned to
the executive director position but, rather, that others were officially tasked with
these duties. Consequently, the potential duplication of duties and prior and
current HUD disapproval of an executive director position as unnecessary leads to
a conclusion that the position is inadequately supported.
Comment 7 As mentioned previously, section 2.10 of the loan sale agreement, dated August
26, 2009, between HUD (the seller) and the New York City Housing
Development Corporation (the purchaser) specifies that “the assignment of the
Regulatory Agreement from the Seller to the Purchaser shall not affect any right
that the Seller may have to seek recourse for a breach of the Regulatory
Agreement, which occurred prior to the Closing date.” The OIG review was
initiated under this authority, and that is why any findings or recommendations
from that review do not extend beyond August 26, 2009, the date of the sale, at
which time HUD’s financial interest in the property ended.
Comment 8 Project and management agent officials were advised of the nature and specifics
of the complaint at the May 14, 2010, entrance conference. At that time, OIG
stated that the review was initiated as a result of a complaint to the OIG hotline
and a HUD field office request, both of which related to payment for an executive
director, and that the complainant’s name would remain anonymous. Further,
auditee officials have a fiduciary responsibility to address the complaint
allegation.
Comment 9 The OIG analysis was based upon and supported by a review and comparison of the
duties assigned to the executive director’s position as documented in the
employment contract for the position, the functions assigned to the management
agent according to the project owner’s/management agent’s certification, and the
board of directors’ responsibilities as noted in Westbeth’s by-laws. These three
documents are the authority upon which the analysis was based. Further, the
34
regulatory agreement, as mentioned in comment 2, gives HUD the authority to
declare a breach of agreement as a result of any unreasonable and unnecessary
expenses incurred without prior HUD approval.
Comment 10 While the board of directors has the authority to delegate its responsibilities, section
7(b) of the Regulatory Agreement for Non Profit and Public Mortgagors Under
Section 221(d)(3) of the National Housing Act, As Amended (FHA Form No. 1733),
provides that the project owners “shall not without the prior written approval of the
Commissioner … pay out any funds, except for reasonable operating expenses and
necessary repairs.” HUD reportedly determined in the 1970s that the costs of an
executive director were an unnecessary expense, and when HUD became aware
through disclosure in the project’s 2009 budget-based rent application that funds
were being allocated to the executive director’s position, it disallowed the expense as
a factor in determining the allowed rent. For this reason and our analysis that
disclosed possible duplication among and nonperformance of duties assigned the
executive director, we have recommended that the project provide HUD
documentation to properly support the need for and costs associated with the
executive director’s position.
Comment 11 The authority of the board of directors is not being challenged, but, rather,
additional support is requested for the necessity of incurring costs from project
funds subject to section 7(b) of the Regulatory Agreement for Non Profit and
Public Mortgagors Under Section 221(d)(3) of the National Housing Act, As
Amended (FHA Form No. 1733), for the payment of the expense for an executive
director’s position. Further, the specific compensation package is not being
challenged but, rather, the need to adequately support the costs incurred to ensure
compliance with the regulatory agreement. This is all the more imperative due to
HUD’s prior and more recent determination in its review of a rent increase
request that such a position is not warranted.
Comment 12 In light of HUD’s prior and continued disapproval of costs incurred for an
executive director position and our analysis of the position’s duties, which
disclosed duplication with other officials’ duties, the project owners have not
adequately supported the need or obtained the approval of HUD as required for an
executive director’s position. Thus, this expense does not appear to be reasonable
or necessary according to section 7(b) of the regulatory agreement.
Comment 13 While the functions listed may be actual functions carried out by the executive
director, these functions were not enumerated in the current employment contract
for the position (which had expired and not been renewed), and our analysis was
limited to the 15 tasks enumerated in the incumbent’s employment contract and
confirmed by the incumbent as duties of the position. If these additional tasks are
being conducted by the incumbent, the auditee should present them to HUD to
further support its opinion that an executive director’s position may be needed.
However, based upon the analysis of the employment contract, it is our position
that there is a duplication of duties, which, absent further support, results in an
unnecessary expense.
35
Comment 14 HUD Handbook 4370.2 provides that office salaries should be recorded under
administrative expenses; however, $85,775 paid in 2007 as executive director
compensation was reported as an operating and maintenance expense, and bonuses
of $10,000 were misclassified as miscellaneous office expenses; therefore, as
discussed with auditee officials during the audit and at a preexit conference on
October 25, 2010, these expenses were misclassified; nevertheless, auditee officials
acknowledge the misclassification and have offered to properly classify the
expenses.
Comment 15 The auditee disagrees with HUD regional counsel’s opinion on the classification
of funds from the arbitration award as project funds; however, the auditee has not
provided additional information to refute counsel’s opinion. Therefore, this issue
will need to be addressed from a legal standpoint during the audit resolution
process.
Comment 16 During the audit and at a preexit conference on October 25, 2010, we discussed
with auditee officials the tentative observations based upon our review, which
included $177,745 in costs considered inadequately supported. After this
conference, we reclassified $3,570 as costs associated with the executive
director’s position, and auditee officials provided support for $141,082 but were
unable to provide supporting documentation for the $33,093 cited in the draft
report. Consequently, auditee officials were provided the detail of the $33,093
before the exit conference. Documentation submitted after the exit conference on
February 14, 2011, with the auditee’s official comments provided additional
support for $4,742 in costs, leaving $28,351 still being considered unsupported.
Comment 17 Auditee officials did not provide support for $12,444 in legal fees paid on June
23, 2006. In their response to the draft audit report, auditee officials provided a
copy of the May 25, 2006 board of directors’ minutes, annexed as exhibit B, as
support of the approval to pay the $12,444, as well as a detailed time slip
documenting the hours billed that totaled $12,444 during October 2005.
However, while the detailed time slip accounts for the hours billed, the board of
directors’ minutes document approval to pay $13,941 in legal fees incurred in
March and April 2006, not October 2005. Therefore, the costs will continue to be
regarded as unsupported.
Comment 18 Auditee officials explained that the $4,233 represented the remaining balance of a
February 2007 invoice and was part of a $14,000 payment made on January 22,
2008 to pay off the February 2007 invoice, full payment of a $9,059.41 March
2007 invoice, and partial payment of $707.16 for an April 2007 invoice; however,
the February 2007 invoice was not provided. Therefore, the $4,233 is still
considered unsupported.
Comment 19 The documentation annexed as exhibit C supports $4,740 of the $5,373 OIG
considered to be unsupported costs. Accordingly, we have revised the report to
reflect that $4,740 is considered supported, but, absent further supporting
documentation for the remaining $632 ($206 and $426 from the February 2008
invoice), this amount is still considered unsupported.
36
Comment 20 The documentation annexed as exhibit D refers to various invoices amounting to
$9,500 for “mission and planning work with Board and ED [executive director],
admin support, and food for retreat.” However, since there was no contract that
detailed what was to be provided by this procurement or any written report or
other product to evidence the services received, these costs are still considered
unsupported.
Comment 21 The attached November 16, 2006, board of directors’ minutes support board
approval of $5,000 to be spent for a holiday reception but do not document
approval of the $7,030 expended for the three events questioned in the report.
Accordingly, absent further supporting documentation, the $7,030 is still
considered an unnecessary expense.
Comment 22 The management agreement, section 6 - Leasing and Renting, provides that the
agent use all reasonable effort to keep the project rented by procuring tenants
using resident selection criteria and leasing guidelines approved by the owner.
Further, the project owner’s/management agent’s certification, paragraph 1(b),
requires that the agent manage the project for the term and fee described on the
certification and that fee changes be made only with HUD approval. Further,
while the management fee being charged is a flat fee, as opposed to a percentage
of rents collected as stipulated in the certification, there is no mention of a
commercial leasing brokerage fee. Therefore, the $31,840 is still questioned as
unsupported and should be repaid unless auditee officials request and receive
HUD’s retroactive approval for a special fee, which can be allowed in special
circumstances.
Comment 23 Adequate support has not been provided to conclude that $5,000 of legal fees
associated with selling/refinancing the property, $510 of legal fees for
establishing a nonprofit fundraising entity, and a $300 purchase of a personal item
for a tenant are reasonable and necessary project expenses in accordance with
Section 7(b) of the Regulatory Agreement for Non Profit and Public Mortgagors
Under Section 221(d)(3) of the National Housing Act, As Amended (FHA Form
No. 1733). Therefore, these costs are still questioned.
Comment 24 Since the funds expended for unsupported, unnecessary and ineligible costs
deprived the project of the use of these funds, we have changed recommendations
1A through 1D to read that reimbursement be made to the project so that the
funds may be spent for the benefit of the tenants.
Comment 25 We sought the advice of HUD’s regional counsel, who concluded that the New
York State Business Judgment Rule is not applicable to the condition questioned.
As noted in comment 11, the authority of the board of directors is not being
questioned but, rather, whether there is a breach of the regulatory agreement
between HUD and the auditee. Therefore, this issue will be addressed during the
audit resolution process with the HUD field office.
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Appendix C
ANALYSIS OF EXECUTIVE DIRECTOR RESPONSIBILITIES
ACCORDING TO EMPLOYMENT AGREEMENT
Duties assigned to the executive Duties Duties Duties Duties not
expected of a expected of expected performed
director’s position
management the board of of
agent directors consultants
1) Manage day-to-day operations:
planning and oversight of
operational activities, human
resources, fundraising, financial
management, internal systems,
and external relations.
2) Develop and execute a strategic
plan.
3) Liaison between onsite and
offsite property management
office and board of directors.
4) Receive/review property
management and fiscal reports.
5) Oversee property manager’s
compliance with regulatory and
licensing authorities.
6) Oversee the development and
adherence to operational and
capital improvement budgets
with fiscal officer, property
management office, and finance
committee.
7) Oversee management of all
residential and commercial
benefits amenities: admissions,
in-house moves, studio, gallery,
community spaces.
8) Liaison with tenant organizations
and oversight of contractual
obligations, risk management,
and communications
38
Duties assigned to the executive Duties Duties Duties Duties not
director’s position expected of a expected of expected performed
management the board of of
agent directors consultants
9) Represent and promote Westbeth
Corp., Housing Development
Fund Company, Inc., to external
stakeholders.
10) Ensure that all materials
representative of Westbeth
Corp., HDFC, Inc., reflect a
high level of professionalism.
11) Develop the organization’s
annual fundraising strategy.
12) Hire and oversee staff and
consultants to execute
fundraising activities.
13) Identify funding trends;
cultivate potential funders; and
solicit grants, contracts, gifts,
and other resources.
14) Plan and execute fundraising
activities; e.g., fundraising
events, newsletters, press
releases, etc.
15) Develop and expand
relationships with nonprofit,
private, and public sectors to
attract resources.
39
Financial Management and Procurement Controls at Westbeth Artists Houses, New York, NY, Did Not Always Comply With Regulations
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-03-10.
Below is a raw (and likely hideous) rendition of the original report. (PDF)