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
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)