oversight

The Jersey City Housing Authority, Jersey City, NJ, Had Financial Control Weaknesses in Its Recovery Act Funded Public Housing Capital Fund Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-03-11.

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

                                                                                 Issue Date
                                                                                      March 11, 2011
                                                                                 Audit Report Number
                                                                                      2011-NY-1007




TO:            Edward T. De Paula, Director, Office of Public Housing, 2FPH



FROM:           Edgar Moore, Regional Inspector General for Audit, NY/NJ Region, 2AGA


SUBJECT: The Jersey City Housing Authority, Jersey City, NJ, Had Financial Control
         Weaknesses in Its Recovery Act Funded Public Housing Capital Fund Program

                                             HIGHLIGHTS

    What We Audited and Why

                  We audited the Jersey City Housing Authority’s (Authority) administration of its
                  public housing capital fund program funded under the American Recovery and
                  Reinvestment Act of 2009 (Recovery Act)1. This is the second audit report
                  regarding the Authority’s capital fund programs. We selected the Authority
                  because of the size of its capital fund programs and because of its U.S.
                  Department of Housing and Urban Development (HUD) risk rating. Our audit
                  objective was to determine whether the Authority obligated and expended its
                  Recovery Act Public Housing Capital funds in accordance with HUD regulations.

    What We Found
                  Authority officials generally complied with HUD regulations while obligating and
                  expending their Capital Fund Recovery Act funds; however, weaknesses existed in
                  the Authority’s financial management system. Specifically, (1) it was difficult to
                  trace the drawdowns of Recovery Act Capital funds to the source documentation, (2)
                  Authority officials charged their Recovery Act Capital Fund program with more
                  expenses than were incurred, and (3) costs were miscategorized. Consequently, (1)
1
 The Recovery Act of 2009 was instituted to stimulate the economy by providing funds to: (1) create new jobs and
save existing ones, (2) spur economic activity and invest in long-term growth, and (3) foster unprecedented levels of
accountability and transparency in government spending.
           HUD was precluded from effectively and efficiently monitoring and evaluating the
           Authority’s administration of its Recovery Act Capital funds, (2) more than $5,000
           was overcharged to the Recovery Act Capital Fund program, (3) more than $13,000
           in administrative costs was inadequately reported to HUD as dwelling structure
           expenses, and (4) there was a risk that administrative costs could exceed the 10
           percent limitation of the total grant amount. These deficiencies were due to the lack
           of adequate fiscal controls and accounting procedures in place and because
           Authority officials believed that their accounting system was adequate and complied
           with HUD regulations.


What We Recommend

           We recommend that the Director of HUD’s New Jersey Office of Public Housing
           instruct Authority officials to (1) improve their financial controls and accounting
           procedures to ensure that drawdowns can be traced to source documentation as
           required by HUD regulations; (2) develop procedures to ensure that drawdowns
           are made only on a reimbursement basis so that the specific costs paid are
           identified for each drawdown; (3) reimburse more than $5,000 from non-Federal
           funds to the Recovery Act Capital Fund program; (4) reimburse more than
           $13,000 to the dwelling structure line item from the administrative costs line item
           and correct the financial records in HUD’s Line of Credit Control System to
           ensure that the proper categories were charged; and (5) develop procedures to
           improve the accounting system and internal controls to ensure that funds are
           drawn down and used as budgeted and financial reports are accurate, current, and
           complete.

           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 our review during the audit and at an exit conference
           held on February 18, 2011. On February 18, 2011, Authority officials provided
           their written comments and generally disagreed with the draft report findings but
           their proposed corrective actions were responsive to the recommendations. The
           Authority official’s comments and associated appendixes were already forwarded
           to HUD Public Housing staff. The complete text of Authority officials’ response,
           along with our evaluation of that response, can be found in appendix B of this
           report. We did not incorporate the Authority officials’ appendixes to the
           comments into the report due to their significant volume.




                                             2
                           TABLE OF CONTENTS

Background and Objective                                                      4

Results of Audit

      Finding 1: Weaknesses Existed in The Authority’s Financial Management   5
                 System

Scope and Methodology                                                         9

Internal Controls                                                             10

Appendixes
   A. Schedule of Questioned Costs                                            12
   B. Auditee Comments and OIG’s Evaluation                                   13




                                           3
                       BACKGROUND AND OBJECTIVE

The Jersey City Housing Authority (Authority) is a nonprofit corporation organized under the
laws of the State of New Jersey to provide housing for qualified individuals in accordance with
U.S. Department of Housing and Urban Development (HUD) rules and regulations. The
Authority is governed by a board of commissioners, which is essentially autonomous but is
responsible to HUD and the State of New Jersey’s Department of Community Affairs. The
executive director is appointed by the board to manage the daily operations of the Authority.

The Authority is responsible for the development, maintenance, and management of public
housing for low- and moderate-income families residing in Jersey City. Operating and
modernization subsidies are provided to the Authority by HUD. The Authority received capital
fund program formula grant subsidies from HUD of more than $5 million annually from 2006 to
2009 and obtained a $10 million loan under the Capital Fund Financing Program. We audited
the Authority’s administration of these capital fund programs and issued an audit report (Audit
Report No. 2011-NY-1001) on October 19, 2010.

Based on the issues identified during the above prior audit, we decided to review the Authority’s
capital fund program funded under the American Recovery and Reinvestment Act of 2009
(Recovery Act). On February 17, 2009, President Obama signed the Recovery Act into the law.
This legislation includes a $4 billion appropriation of capital funds for public housing agencies to
carry out capital and management activities as authorized under Section 9 of the United States
Housing Act of 1937. The Recovery Act requires that $3 billion of these funds be distributed as
formula funds and the remaining $1 billion through a competitive process. Housing agencies are
required to obligate 100 percent of the grant within one year and expend 100 percent of the grant
within 3 years from the date that funds are made available. On March 18, 2009, the Authority
received a capital fund formula grant of more than $7.87 million under the Recovery Act, all of
which had been properly obligated before the March 17, 2010, deadline. As of December 31,
2009, the Authority had disbursed $366,740 of the $7.87 million grant. As of January 13, 2011,
Authority officials disbursed approximately 82 percent of the total grant amount, which indicates
that they have complied with the requirement to expended 60 percent of the grant funds by
March 17, 2011.

The objective of this audit was to determine whether the Authority obligated and expended its
Recovery Act Public Housing Capital funds in accordance with HUD regulations.




                                                 4
                                     RESULTS OF AUDIT


Finding 1: Weaknesses Existed in the Authority’s Financial
           Management System
Authority officials generally complied with applicable HUD regulations while obligating and
expending Recovery Act Capital Funds; however, weaknesses existed in the Authority’s financial
management system. Specifically, (1) it was difficult to trace the drawdowns of Recovery Act
Capital funds to the source documentation, (2) Authority officials charged their Recovery Act
Capital Fund program with more expenses than were incurred, and (3) costs were miscategorized.
As a result, (1) HUD was precluded from effectively and efficiently monitoring and evaluating the
Authority’s administration of its Recovery Act Capital Fund program, (2) more than $5,000 was
overcharged to the Recovery Act Capital Fund program, (3) more than $13,000 in administrative
costs was inadequately reported to HUD as dwelling structure expenses, and (4) there was a
potential risk that administrative costs could exceed the 10 percent limitation of the total grant.
These deficiencies were due to the lack of adequate fiscal controls and accounting procedures in
place and because Authority officials believed that their accounting system was adequate and
complied with HUD regulations.


    Drawdowns Not Easily
    Traceable to Source
    Documentation
                 Contrary to the regulations at 24 CFR (Code of Federal Regulations) 85.20(a), it was
                 difficult to trace drawdowns to source documentation based on the Authority’s
                 financial system. Instead of implementing a mechanism to associate the drawdowns
                 with underlying expenses and supporting documents, Authority officials periodically
                 compared the costs, which had been incurred and recorded in the general ledger,
                 with the accumulated amount of Recovery Act Capital funds received through prior
                 drawdowns and then drew down the difference from HUD’s Line of Credit Control
                 System (LOCCS).2 Therefore, to test the eligibility and reasonableness of one
                 drawdown, all expenses recorded in the general ledger had to be reviewed up to the
                 date of the subject drawdown, and then the source of all of the documentation
                 associated with these transactions had to be verified. In 2009 Authority officials
                 made seven drawdowns, we were able to test and review each of these drawdowns
                 recorded in the general ledger, although all the seven drawdowns were not easily
                 traceable to the source documenation. However, if the program had existed for a
                 longer period and more drawdowns and financial transactions had been involved, it
                 would have been difficult to trace the drawdowns to the general ledger and,
                 ultimately, to the source documents.

2
 The Line of Credit Control System (LOCCS) is a HUD grant disbursement system that provides disbursement
controls for over 100 HUD grant programs. Each year over $20 billion is disbursed to thousands of HUD business
partners through LOCCS.

                                                       5
           This weakness existed because Authority officials did not have adequate fiscal
           controls and accounting procedures in place to ensure that funds could be
           sufficiently traced to expenditures. As result, HUD was precluded from
           efficiently and effectively monitoring and evaluating the Authority’s
           administration of its Recovery Act Capital Fund program.


Overcharge to the Recovery Act
Capital Fund Program

           Authority officials charged their Recovery Act Capital Fund program with more
           expenses than were incurred. Following asset management accounting rules,
           Authority officials drew down funds from their recovery grant for work
           conducted by employees on projects funded by this program based on the hourly
           rates approved by HUD, which included the employee fringe benefit expenses.
           However, Authority officials mistakenly made a duplicate charge of $4,674 to the
           Recovery Act Capital Fund program related to employee benefit costs for April
           2009, which had already been included in the hourly labor rates that had been
           billed to the program for these employees.

           In addition, Authority officials mistakenly overcharged $381 to the Recovery Act
           Capital Fund program, which was more than the actual costs incurred by two
           electricians who worked on recovery grant-funded projects.

           Both deficiencies were due to human error and although the total monetary
           amount was not material compared to the total Recovery Act capital funds
           received by the Authority; Authority officials made corrective adjustments after
           we notified them of the deficiencies.

Expenses Miscategorized

           Regulations at 24 CFR 85.20(b)(1) and (2) provide that housing authorities must
           provide accurate, current, and complete disclosure of financial results of
           financially assisted activities and must maintain records that adequately identify
           the source and application of funds provided for the activities. However,
           Authority officials inappropriately categorized the expenses when reporting to
           HUD. For example, $80,164 was drawn down from the Authority’s Recovery
           Act Capital funds as reimbursement for dwelling structure expenses; however,
           $13,519 of this amount was used for administrative costs, and information
           recorded in LOCCS did not reflect the actual use of these funds. Authority
           officials said that it was their common practice to draw down funds from one
           budget category, but use the funds for other purposes. Therefore, $13,519 in
           administrative expenses was inadequately reported to HUD as dwelling structure
           costs. As a result, there was a risk that administrative costs could exceed the 10
           percent administrative cost limitation as imposed by the regulations at 24 CFR

                                            6
             968.112(n)(2)(ii), as HUD was not aware of this issue due to Authority officials’
             improper recording and reporting in LOCCS.

             We attribute this deficiency to the lack of proper accounting controls to ensure
             that accounting records were accurate and properly supported, and to Authority
             officials’ belief that their accounting system was adequate and complied with
             HUD regulations

Conclusion

             Authority officials generally complied with HUD regulations while obligating and
             expending their Recovery Act Capital funds; however, weaknesses existed in the
             Authority’s financial management system. Specifically, (1) it was difficult to trace
             the drawdowns of Recovery Act Capital funds to the source documentation, (2)
             Authority officials charged their Recovery Act Capital Fund program with more
             expenses than were incurred, and (3) costs were miscategorized. Consequently, (1)
             HUD was precluded from effectively and efficiently monitoring and evaluating the
             Authority’s administration of its Recovery Act Capital Funds, (2) more than $5,000
             was overcharged to the Recovery Act Capital Fund program, (3) more than $13,000
             in administrative costs was inadequately reported to HUD as dwelling structure
             expenses, and (4) there was a risk that administrative costs could exceed the 10
             percent limitation of the total grant amount. These deficiencies were due to the lack
             of adequate fiscal controls and accounting procedures in place, and because
             Authority officials believed that their accounting system was adequate and complied
             with HUD regulations.

Recommendations

             We recommend that the Director of the New Jersey Office of Public Housing
             instruct Authority officials to

             1A. Improve their financial controls and accounting procedures to ensure that
                 drawdowns can be traced to source documentation as required by HUD
                 regulations.

             1B. Develop procedures to ensure that drawdowns are made only on a
                 reimbursement basis so that the specific costs paid are identified for each
                 drawdown.

             1C. Reimburse $5,055 from non-Federal funds to the Recovery Act Capital
                 Fund program.

             1D. Reimburse $13,519 to the dwelling structure line item from the
                 administrative costs line item and correct the financial records in LOCCS
                 accordingly to ensure that the proper categories were charged.

                                               7
1E. Develop procedures to improve the accounting system and internal controls
    to ensure that funds will be drawn down and used as budgeted, and financial
    reports are accurate, current, and complete.




                               8
                        SCOPE AND METHODOLOGY

Our review focused on whether the Authority obligated and expended Recovery Act Capital
Fund program funds in accordance with HUD requirements. To accomplish our objective, we

       Reviewed relevant HUD regulations, program requirements, and applicable laws.

       Obtained an understanding of the Authority’s management controls and procedures.

       Interviewed appropriate personnel of HUD and the Authority.

       Reviewed reports from HUD systems, such as LOCCS.

       Reviewed HUD’s monitoring report and independent accountant audit reports.

       Traced financial data reported to HUD to the general ledgers and supporting
       documentation.

       Tested 100 percent of the drawdowns disbursed in 2009, which amounted to $366,740.

The audit covered the period March 18, 2009, the inception of the Recovery Act Capital Fund
program, through December 31, 2009. We performed the audit fieldwork from January through
October 2010 at the Authority’s office located at 400 U.S. Highway #1, Jersey City, NJ. We also
performed additional verification of documentation provided by Authority officials from October
through December 2010 at HUD’s Newark, New Jersey field office.

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.




                                               9
                              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:

                      Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                      Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

                      Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

                      Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

               We assessed the relevant controls identified above.

               A 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.


                                                 10
Significant Deficiency


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

                   Authority officials did not implement effective controls to safeguard assets
                   and ensure that the financial information related to their Recovery Act
                   Capital Fund activities were complete, accurate, and current (see finding).




                                             11
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS


                      Recommendation number            Ineligible 1/

                                 1C                         $5,055
                                 1D                        $13,519

                                Total                      $18,574


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.




                                            12
  Appendix B

            AUDITEE COMMENTS AND OIG’S EVALUATION


  Ref to OIG Evaluation     Auditee Comments




Comment 1




                             13
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




                         14
Ref to OIG Evaluation   Auditee Comments




Comment 4




                         15
                         OIG Evaluation of Auditee Comments

Comment 1   Authority officials believed that their existing system was workable. In addition,
            Authority officials stated that they had substantially increased the documentation
            related to each payment requisition, and provided samples of documentation. We
            reviewed these samples and concluded that the new recording methodology can
            improve the Authority’s financial controls and address concerns regarding the
            tracing of drawdowns to source documentation. Thus, since the Authority
            officials’ actions are responsive to recommendations 1A and 1B, a final action
            will be recorded into HUD’s audit resolution and corrective action tracking
            system for these recommendations after the report is issued.

Comment 2   Authority officials believed that the $5,055 overcharge was not material in
            relation to the total Recovery Act capital funds received by the Authority.
            Nevertheless, Authority officials corrected this error upon being notified by HUD
            OIG auditors in April 2010. However, the adjustment was inappropriately back
            dated to February 2010. This issue of back dating adjusting journal entries was
            previously reported along with other financial management deficiencies in our
            previous audit report (Audit Report No. 2011-NY-1001). However, since the
            actions taken by Authority officials’ are responsive to recommendation 1C, a final
            action will be recorded into HUD’s audit resolution and corrective action tracking
            system for this recommendation after the report is issued.

Comment 3   Authority officials stated that they routinely ensure that administrative expenses
            are within permitted caps; nevertheless, they agreed that there had been instances
            when funds were not correctly spread in LOCCS. Authority officials indicated
            that they were putting procedures into place to ensure that funds are correctly
            spread at the outset rather than through the annual reporting process. As a result,
            Authority officials have prospectively agreed to modify their accounting
            procedures, but did not show that the questioned amount had been reclassified and
            reimbursed to the appropriate account. Thus, the documentation provided should
            be further verified by the HUD Public Housing staff as part of the audit resolution
            process to ensure that $13,519 has been refunded to the appropriate account, and
            that the new procedures are in compliance with HUD regulations.

Comment 4   Authority officials wanted another opportunity to review any adjustments to the
            draft report. However, since only minor changes were made to the draft report
            Authority officials will have a chance to respond further to the report during the
            audit resolution process with the HUD Public Housing field office.




                                             16