oversight

The Philadelphia, PA, Housing Authority Did Not Comply With Several Significant HUD Requirements and Failed To Support Payments for Outside Legal Services

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)

                                                                Issue Date
                                                                     March 10, 2011
                                                                Audit Report Number
                                                                      2011-PH-1007




TO:        Dennis G. Bellingtier, Director, Office of Public Housing, Pennsylvania State
            Office, 3APH

           //signed//
FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Region, 3AGA

SUBJECT:   The Philadelphia, PA, Housing Authority Did Not Comply With Several
           Significant HUD Requirements and Failed To Support Payments for Outside
           Legal Services

                                  HIGHLIGHTS

 What We Audited and Why

           We audited the Philadelphia Housing Authority’s (Authority) payments for
           outside legal services based on a citizen’s complaint alleging misuse of these
           funds, our observations and concerns regarding the Authority’s use of outside
           attorneys on prior audits, and concerns over the large sums the Authority paid for
           outside legal services reported in the media. The Authority paid $30.5 million for
           outside legal services provided by 15 law firms during the period April 2007
           through August 2010 (see appendix C). The audit objective was to determine
           whether the Authority’s payments to outside legal firms could be supported and
           complied with U.S. Department of Housing and Urban Development (HUD)
           regulations and other applicable requirements.

 What We Found


           The Authority’s payments to outside attorneys did not comply with HUD
           regulations and other applicable requirements. Specifically, the Authority did not
           adequately support $4.5 million that it paid to outside attorneys during the period
           April 2007 to August 2010, virtually the entire amount we reviewed, raising
                questions about the propriety of the remaining $26 million in payments that we
                did not review. The Authority made unreasonable and unnecessary payments of
                $1.1 million to outside attorneys to obstruct the progress of HUD Office of
                Inspector General (OIG) audits. The Authority also did not obtain required HUD
                written concurrence before accepting all settlement offers arising out of its
                litigations and allowed an apparent conflict of interest situation to exist. Further,
                although a previous HUD OIG audit1 found some similar problems with the
                Authority’s payments to outside attorneys, the Authority failed to implement the
                recommendations made in the previous audit.

    What We Recommend


                We recommend that HUD require the Authority to provide adequate
                documentation to support $4.5 million in unsupported costs identified by the audit
                or reimburse the applicable programs from non-Federal funds for any costs that it
                cannot support. We recommend it provide documentation to support the
                remaining $26 million in payments to law firms, if the Authority cannot support
                the $4.5 million or reimburse the applicable programs from non-Federal funds for
                any costs that it cannot support. We also recommend that HUD require the
                Authority to implement adequate procedures and controls to ensure that its
                payments for outside legal services comply with relevant laws and regulations,
                develop and implement controls to ensure that invoices for legal services are
                adequately verified and payments are made in accordance with the terms of the
                related contracts, and implement appropriate measures to prevent and resolve
                conflict of interest situations.

                We recommend that the Authority implement controls to ensure that HUD is
                notified of pending litigation and that HUD’s written concurrence is obtained
                before accepting a settlement offer arising out of litigation and that it implement
                controls to ensure that the use of attorneys is restricted on HUD OIG audits and
                other HUD oversight activities. We also recommend it revise its contract
                provisions for future legal service contracts to reinstate sections that it removed,
                which required prior authorization for specific legal services, specifying work
                functions of various legal staff, and identifying activity descriptors needing
                additional explanation to be acceptable for payment. We further recommend that
                the Authority develop and implement a written policy and controls to ensure that
                contract requirements in its legal services contracts are enforced and have its OIG
                periodically audit a sample of current and future legal contracts and payments to
                ensure that the responsible personnel enforce the requirements and only reimburse
                law firms for allowable expenses.

                For each recommendation without a management decision, please respond and
                provide status reports in accordance with HUD Handbook 2000.06, REV-3.
1
 HUD OIG audit report #2003-PH-1002, Philadelphia Housing Authority Contracting and Purchasing Activity,
Philadelphia, Pennsylvania, dated January 27, 2003.
                                                     2
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response

          We provided a discussion draft audit report to the Authority on February 1, 2011,
          and discussed it with the Authority at an exit conference on February 14, 2011.
          The Authority provided written comments to the draft audit report on
          February 16, 2011. It disagreed with the conclusions and recommendations in the
          report. The complete text of the Authority’s response, along with our evaluation of
          that response, can be found in appendix B of this report.




                                            3
                              TABLE OF CONTENTS

Background and Objective                                                              5

Results of Audit
        Finding: The Authority Did Not Adequately Support $4.5 Million That It Paid   7
        to Outside Attorneys

Scope and Methodology                                                                 19

Internal Controls                                                                     21

Follow-up on Prior Audits                                                             23

Appendixes
   A.   Schedule of Questioned Costs                                                  24
   B.   Auditee Comments and OIG’s Evaluation                                         25
   C.   Net Payments to Law Firms                                                     105
   D.   Summary of Payments by Deficiency Identified                                  106
   E.   Example of Block Billing                                                      108
   F.   Example of Partial Invoice                                                    109
   G.   Example of Invoice Missing Description                                        110
   H.   Invoice Showing Apparent Conflict of Interest                                 114




                                              4
                      BACKGROUND AND OBJECTIVE

The U.S. Housing Act of 1937 initiated the Nation’s public housing program. That same year,
the City of Philadelphia established the Philadelphia Housing Authority (Authority) under the
laws of the Commonwealth of Pennsylvania to address housing issues affecting low-income
persons. Normally, a five-member board of commissioners governs the Authority. However, on
March 4, 2011, the Authority’s board of commissioners, including its chairman, announced their
resignations and the U.S. Department of Housing and Urban Development (HUD) took control
of the Authority. HUD Secretary Shaun Donovan appointed HUD’s Chief Operating Officer,
Estelle Richman, to serve as the sole member of the Authority’s board. Interim executive
director Michael P. Kelly, who will be appointed administrative receiver, continues to manage
the day-to-day operations of the Authority. The cooperative endeavor agreement formalizing
HUD’s takeover of the Authority expires on March 4, 2012, and is renewable in 1-year
increments thereafter, or until such time as mutually determined by the Deputy Secretary of
HUD and the mayor of Philadelphia that the Authority has built sufficient capacity to be self
supportive.

John F. Street served as the mayor of Philadelphia from January 3, 2000, to January 7, 2008. He
was first appointed to the Authority’s board on September 1, 1993, and he resigned March 18,
1999. He became board chairman on April 22, 2004. He reappointed himself to the board late
into his second term as mayor and remained board chairman until his resignation. The
Authority’s executive director at the beginning of our audit was Carl R. Greene. The Authority
terminated his employment effective September 23, 2010. It hired Mr. Kelly to serve as interim
executive director effective December 6, 2010. Between the termination of Mr. Greene and the
hiring of Mr. Kelly, three assistant executive directors managed the day-to-day operations of the
Authority. The Authority’s main administrative office is located at 12 South 23rd Street,
Philadelphia, PA.

The Authority is the Nation’s fourth largest public housing authority and owns and operates
more than 14,000 affordable housing units, serving about 81,000 people in Philadelphia. The
Authority employs 1,200 people and has an annual budget of approximately $345 million. It
receives most of its funding from HUD.

In 1996, Congress authorized the Moving to Work Demonstration program (Moving to Work) as
a HUD demonstration program. This program allowed certain housing authorities to design and
test ways to promote self-sufficiency among assisted households, achieve programmatic
efficiency, reduce costs, and increase housing choice for low-income households. Congress
exempted participating housing authorities from much of the Housing Act of 1937 and
associated regulations as outlined in the Moving to Work agreements. Participating housing
authorities have considerable flexibility in determining how to use Federal funds. In December
2000, the Authority submitted an application to HUD to enter the program, and in February
2002, HUD signed a 7-year agreement with the Authority that was retroactive to April 2001.
From April to October 2008, the Authority continued to operate under a HUD-developed plan to
transition back to traditional HUD program regulations because the term of its Moving to Work
agreement had expired. In October 2008, HUD entered into a new 10-year Moving to Work
                                                5
agreement with the Authority. The expiration date of the Authority’s new agreement is March
2018.

The Authority’s use of outside legal services has garnered the attention of Congress as well as
the local and national media. On January 11, 2011, Senator Charles E. Grassley sent a letter to
20 law firms in Philadelphia for information about their billing of the Authority as part of a
larger review to determine whether the Authority had potentially misused Federal tax dollars.
Senator Grassley stated that he was going directly to the firms for information about the amount
billed and the kind of work performed because HUD did not maintain those records and in the
case of the Authority, news organizations had reported how it structured settlements in at least
four sexual harassment cases and one case in which the failure to inspect a building before
demolition resulted in the death of a resident. The Senator also commented that the Authority
reportedly had a record of trying to cover its tracks when it spent tax dollars either
inappropriately or in a way that would embarrass its leadership, and that the situation was an
affront to taxpayers.

The audit objective was to determine whether the Authority’s payments to outside legal firms
could be supported and complied with HUD regulations and other applicable requirements.




                                                6
                                 RESULTS OF AUDIT

Finding: The Authority Did Not Adequately Support $4.5 Million That
It Paid to Outside Attorneys
The Authority’s established practice was to not maintain or provide adequate support for any of
its outside legal services. The Authority failed to provide adequate documentation supporting
the validity, accuracy, necessity, and reasonableness of $4.5 million in payments that it made for
outside legal services during our audit period. Because all but a minor amount of the payments
we reviewed were unsupported, this raises questions about the propriety of the remaining $26
million that the Authority paid for legal services during our audit period. The Authority paid
$1.1 million in unreasonable and unnecessary outside legal expenses to obstruct the progress of
HUD OIG audits. It used the $1.1 million for outside counsel who denied auditors’ access to
records, delayed providing information and records to the auditors, and imposed unreasonable
constraints on the auditors’ access to Authority personnel. The Authority further allowed an
apparent conflict of interest situation to exist when it entered into a contract with the law firm
that employed an immediate family member of the chairman of its board of commissioners.
Further, it failed to provide required HUD approval for most of its legal settlements. These
conditions occurred because the Authority’s leadership and executive management chose to
operate the Authority in this manner. The Authority needs to implement adequate procedures
and controls to ensure that its payments for outside legal services meet HUD regulations and
other laws and regulations. Otherwise it will continue to pay enormous sums for outside legal
services that are unsupported, unreasonable, and unnecessary.



 The Authority Did Not Provide
 Adequate Support for
 Payments for Outside Legal
 Services


               Regulations at 2 CFR (Code of Federal Regulations) Part 225 Appendix
               A(C)(1)(j), provide that to be allowable under Federal awards, costs must be
               adequately documented. The Authority failed to provide adequate support for its
               expenditures for outside legal services with accounting records detailing the
               expenditures and supporting documents such as invoices, receipts, canceled
               checks, or electronic transfers.

               The Authority paid $30.5 million for outside legal services provided by 15 law
               firms during the period April 2007 through August 2010 (see appendix C). We
               reviewed 472 invoices totaling $4.5 million in payments made by the Authority
               for legal services during the period, of which all but $11,800 was unsupported
               because the Authority did not provide adequate documentation to evidence that
                                                7
                  the services invoiced and payments made were in accordance with the contract
                  terms and HUD requirements. Appendix D shows the overall results of our
                  review. The Authority’s outside attorneys asserted that the documents provided
                  were responsive to our request, but also withheld some information, citing
                  attorney-client privilege.

                  The Authority’s in-house counsel responsible for approving a great majority of
                  the invoices acknowledged that the copies of the invoices that we were given
                  were incomplete. Consequently, in most cases, we were unable to determine
                  whether the payments were accurate, reasonable, and necessary because of the
                  lack of documentation needed to evidence the vendors’ compliance with various
                  contract provisions (see appendixes F and G). The documentation provided by
                  the Authority and relating to the invoices that we reviewed lacked one or more of
                  the following elements as required by the respective contracts:

                           General description of service or goods provided;
                           Detailed description of service or goods provided;
                           Detailed date(s) of performance;
                           Name and title of person performing the work;
                           Prior approval of personnel performing the work;
                           Time charged by date, by personnel;
                           Prior approval of the use of consultants;
                           Prior approval for legal research hours and cost;
                           Prior approval of more than one legal professional representing the
                           Authority at meetings;
                           Charges for time used in making telephone calls and correspondence to
                           copy services providers; and
                           Charges for time used in making travel arrangements.

                  The Authority’s special contract requirements,2 which are part of each individual
                  contract for legal services, also included a provision that the “contractor will be
                  asked to provide the Authority with a written, step-by-step consultation and
                  litigation plan, with estimated costs, before beginning each case assignment.” We
                  found no evidence of such plans and cost estimates in any of 15 contract files
                  reviewed. Authority in-house counsel and the Authority’s outside counsel both
                  acknowledged that this contract provision was not enforced. They both
                  acknowledged that estimates were not submitted by outside law firms before work
                  commenced on an assignment for the Authority.



2
 The Authority’s Legal Department Guidelines for Outside Counsel is included as part V of each contract for legal
services that it issues. It provides the guidelines under which the Authority will agree to be billed. The guidelines
are designed to ensure that firms are only paid for allowable and reasonable expenses and prohibit payments for
certain normal overhead expenses such as facsimile charges, local travel, and local phone calls. In addition, the
guidelines state that the Authority will not pay for fees or expenses that are contained within a block billing
description. That is, each line of a bill for legal services must contain the description of one task per time entry.
                                                          8
The Authority Paid for Legal
Services Based on Prohibited
Block Billing

            Contrary to its special contract requirements, the Authority made payments
            to law firms based on invoices in prohibited block billing format despite
            this issue’s having been addressed in our previous audit1 and the
            Authority’s assurance that it would update its procedures to ensure that
            contract requirements would be enforced. Law firms submitted invoices
            for prohibited block billing in 142 of 472 invoices (30 percent) reviewed
            (see appendix D). The block billing on the 142 invoices totaled $2.4
            million. Block billing is the act of billing more than one activity in a single
            line item while billing only one aggregate amount for multiple activities.
            Examples of block billing are invoices that include only a general
            description of services (i.e., provide legal advice with no detailed
            description of services performed) or include only a summary of time
            charged for each attorney (i.e., only attorney name, rate, and total hours and
            amount billed). Block billing does not identify the nature of the work
            performed. Because block billing provides little or no description of the
            work performed, it is impossible to tell how much time was spent on an
            activity and determine the reasonableness, necessity, and accuracy of the
            work performed. An example of prohibited block billing can be found in
            appendix E. In this example, the firm of Schnader Harrison Segal & Lewis
            LLP, was paid $67,856 based on an invoice that simply stated “For
            Professional Services Rendered through September 30, 2008.”

The Authority Made
Unreasonable and Unnecessary
Payments for Outside Attorneys


            We estimated that at least $1.1 million in costs were not reasonable and
            necessary. These fees were for routine matters dealing with our audits that are
            typically performed by lower level staff at other housing authorities that we’ve
            audited. Documents that were routinely provided on similar audits often were
            requested by the auditors and then not provided by the attorneys. When the
            documents were provided, it often took an inordinate amount of time to
            coordinate the delivery and acceptance of the documents from the outside
            attorneys. Such interference obstructed the efficient conduct of our audits without
            benefiting the Authority’s housing programs. Further, in many cases, work was
            duplicated by more than one law firm, an excessive number of personnel from a
            single law firm performed the same tasks, and work performed by attorneys was
            clerical in nature. The “assistance” rendered by the outside attorneys included
            such tasks as (1) monitoring and forwarding to Authority staff all HUD OIG
            requests for information and data, (2) monitoring and scheduling all HUD OIG
                                              9
                  interviews with Authority staff, (3) monitoring and attending all HUD OIG
                  interviews of Authority staff, (4) requiring multiple attorneys and consultants to
                  accompany HUD OIG and Authority inspectors on all housing quality standards
                  inspections, (5) contracting of duplicative consulting services, and (6) monitoring
                  and attending all meetings between HUD OIG and Authority officials.

                  The duplicative and unnecessary nature of these legal fees was vividly illustrated
                  during our recent audit of the Authority’s Housing Choice Voucher program.3
                  During this audit, we inspected 67 rental units to determine whether the
                  Authority’s program units met housing quality standards. We inspected the
                  selected units between November 30 and December 11, 2009. The Authority had
                  one employee, one outside public housing consultant, and up to three outside
                  attorneys accompany our auditor and appraiser on every inspection. The outside
                  attorneys were typically paid on average $330 per hour to observe the auditor and
                  our certified HUD inspector as they performed every inspection for up to 8 hours
                  a day for about 2 weeks. The amount the Authority paid for only 1 hour for one
                  outside attorney could have been used to help house a low-income family for a
                  month. At the audit entrance conference for another recent audit,4 the Authority
                  had one program employee present, accompanied by its chief of staff and four
                  outside attorneys.5 We saw no need for any of the outside attorneys to be present.

                  Regulations at 2 CFR Part 225 Appendix A(C)(1) state that to be allowable under
                  Federal awards, a cost must be necessary and reasonable for proper and efficient
                  performance and administration of Federal awards. While we do not question
                  whether the Authority is entitled to procure outside legal and consulting services
                  when it is justified, in the cases cited, the Authority failed to follow these
                  requirements and incurred $1.1 million in legal fees in connection with HUD OIG
                  audits that were unnecessary and were counterproductive to helping the Authority
                  achieve its overall mission to provide decent, safe, and sanitary housing to low-
                  income persons.

    The Authority Did Not Provide
    Evidence of HUD Concurrence
    With Settlement Agreements


                  In accordance with paragraph 5-3c of HUD Handbook 1530.01, REV-5,
                  Litigation Handbook, a public housing authority is required to notify HUD of
                  pending litigation and obtain written concurrence before accepting a settlement

3
  HUD OIG audit report #2010-PH-1011, The Philadelphia Housing Authority, Philadelphia, PA, Did Not Ensure
That Its Section 8 Housing Choice Voucher Program Units Met Housing Quality Standards, dated July 8, 2010.
4
  HUD OIG audit report #2010-PH-1002, The Philadelphia Housing Authority, Philadelphia, Pennsylvania, Needs to
Improve Its Controls over Housing Assistance Payments, dated October 6, 2009.
5
  The Authority’s former executive director did not participate in this meeting although our audit notification letter
was sent to him. It was standard practice for the former executive director to not attend any audit-related meetings
until the audit exit conference.
                                                         10
            offer arising out of litigation. The handbook states that no settlement arising out
            of litigation shall be accepted by a housing authority without the prior written
            concurrence of HUD. The terms of any such offer shall be communicated in
            writing to the HUD Regional Counsel, together with the recommendations of the
            Authority for disposition and the arguments in support of those recommendations.
            We asked the Authority to provide us a current listing of any settlements or
            lawsuits filed against it. Through one of its outside attorneys, the Authority told
            us to look for this information on its Web site because it was posted there in
            August 2010. We expressed concern that the list on the Authority’s Web site
            might not be complete and accurate and requested this information independent of
            the Web site. While the Authority had not provided us with a current list
            independent of its Web site, we noted that the Web site showed that the Authority
            had settled 33 cases. Our review of the Web site indicated that it referenced a
            HUD approval letter on only 13 of the settlements (39 percent). On
            December 10, 2010, we served the Authority with a subpoena for these and other
            records and in response to the subpoena, the Authority provided us with a list of
            234 claims settled since March 1998. These 234 claims are in addition to the 33
            cases shown on its Web site. After the exit conference, the Authority provided
            evidence of HUD approval of 4 of the 33 settlements listed on its Web site. In
            addition, after the exit conference, HUD Regional Counsel provided copies of
            approval letters for 22 (which includes the 4 letters that the Authority provided
            after the exit conference) of the 33 cases. HUD Regional Counsel did not have
            any record of approving any of the other 234 cases. The Authority did not
            provide documentation to demonstrate that HUD concurred with settlements in
            245 cases (11 from the Web site plus 234) or that the costs of litigation, settlement
            and judgment were entirely covered by an insurance policy.

The Authority Allowed an
Apparent Conflict of Interest
To Exist With an Outside Law
Firm


            The Authority allowed an apparent conflict of interest situation to exist when it
            entered into a contract with a law firm that employed a member of the immediate
            family of its board chairman. The Authority paid the firm approximately $7
            million during the 41-month period from April 2007 through August 2010. John
            F. Street was first appointed to the Authority’s board on September 1, 1993, and
            he resigned March 18, 1999. He was later appointed to the board as chairman on
            April 22, 2004. He reappointed himself to the board late into his second term as
            mayor and has remained board chairman since that time. His appointment expires
            September 20, 2011. The Authority’s consolidated annual contributions contract
            prohibits it from entering into any contract or arrangement in connection with any
            project under the contract in which several classes of people have an interest,
            direct and indirect, during their tenure or for 1 year thereafter. These classes
            would include any member of a governing board member’s immediate family.
                                             11
           Sharif Street, the son of the chairman of the board of the Authority, was an
           associate in the affordable housing group of Wolf Block Schorr & Solis-Cohen,
           LLP (Wolf Block), until March 2008. We reviewed 185 invoices/payments for
           Wolf Block from 5 contracts totaling approximately $923,000. Sharif Street’s
           name was included in each of the five contracts. We could not determine the full
           extent of his billings to the Authority because of the Authority’s overall failure to
           provide support for its payments to its outside law firms. However, the audit
           identified one invoice that included hours charged directly by Mr. Street. The
           charge was for 37.6 hours at $250 per hour for a total of $9,400 (see appendix H).
           It should be noted that 45 of the firm’s 185 invoices contained prohibited block
           billing and, therefore, did not include the names, hours, or amount attributed to
           specific individuals charging time to the case(s). Additionally, the payment
           documentation provided by the Authority to support the payments to this firm did
           not include 108 invoices. This omission precluded us from determining whether
           Sharif Street charged additional time to cases.

The Authority’s Outside
Counsel Obstructed the Audit
Process

           The Authority failed to provide the auditors with data, information, and
           documents requested as far back as August 2010. The requested records were
           needed to assess the completeness, reliability, and accuracy of other data that the
           Authority selectively provided. The Authority’s outside counsel repeatedly
           questioned the auditors’ purpose and necessity for certain records and responded
           that the Authority would provide what it thought was sufficient without regard to
           the auditors’ request. In other cases, the Authority’s outside counsel provided
           little or no meaningful response to the auditors’ repeated requests for records.
           After many weeks and repeated requests, the Authority provided a listing of legal
           contracts in effect during the audit period and represented that the listing was
           complete in that it included all contracts for legal services related to specific
           Authority payments in our sample. However, as a result of our review and
           analysis of the selected payments, we discovered that the list was incomplete.
           Hence, we question the completeness and reliability of all data and information
           that the Authority provided that were not original documents.

           The Authority’s outside counsel finally responded to our repeated requests for a
           download of the Authority’s accounts payable ledger by stating that the limited
           payments listing that the Authority provided to the auditors would suffice and
           that, since such was adequate for the purposes of the Authority’s independent
           auditors, it should suffice for our audit. The requested ledger was not provided.
           Requests for other documents went unanswered. The Authority responded to our
           request for a listing of settlements of claims and lawsuits against it only after we
           served it a subpoena for the information on December 10, 2010. The information,
           however, was incomplete.

                                            12
The Authority’s outside counsel continued to assert that the Authority’s payments
for legal services were eligible and supported but refused to provide the majority
of the supporting documentation that we requested, citing attorney-client
privilege. The Authority, however, gave no reason why it had not responded to
the auditors’ repeated requests for other data and information, some of which
dated back to August 2010. These records were included in our subpoena for
records. The Authority provided limited additional information in response to the
subpoena, but continued to assert that it had provided all information and data
access that we had requested.

The Authority required that the scheduling of all interviews between the auditors
and Authority staff be done by the Authority’s outside counsel. In this regard, the
Authority’s outside counsel demanded that any communication by the auditors
with the interviewee or requests for information from Authority employees be
processed through them. The Authority’s outside counsel attended all interviews
of Authority personnel. Consequently, not only did the interviewee have to be
available, but the attorney also had to be available on a mutually agreeable date.
In some cases, interview scheduling took up to 3 weeks to accomplish. Such
needlessly imposed conditions caused delays in the progression of the audit.

The Authority’s actions were contrary to the Inspector General Act of 1978 (Act),
HUD regulations at 24 CFR 982.158(c), the Authority’s consolidated annual
contributions contract, and the Authority’s Moving to Work agreement. The Act
authorizes the Inspector General access to all records, documents, papers, or other
materials available to the applicable establishment which relate to programs and
operations with respect to that which the Inspector General has responsibilities
under the Act.

HUD regulations at 24 CFR 982.158(c) state, in part, that HUD shall have full
and free access to all public housing authority offices and facilities and to all
accounts and other records of the public housing authority that are pertinent to
administration of the program, including the right to examine or audit the records,
and to make copies. The public housing authority must grant such access to
computerized or other electronic records and to any computers, equipment, or
facilities containing such records and shall provide any information or assistance
needed to access the records.

Section VII.C of the Authority’s Moving to Work agreement requires the
Authority to give access to all requested sources of information including access
to files, access to units, and an opportunity to interview agency staff and assisted
residents.

Section 15(C) of the Authority’s low-rent consolidated annual contributions
contract requires the Authority to provide full and free access to all its books,
documents, and records relevant to the administration of the projects under the
contract.
                                 13
            Likewise, section 14.c of the Authority’s housing choice voucher consolidated
            annual contributions contract requires the Authority to provide full and free
            access to all books, documents, and records of the Authority relevant to
            administration of the program, including the right to audit.

            The Authority’s unwarranted denial of the auditors’ access to records and other
            conditions imposed by the Authority caused needless delays in the audits and
            obstructed our ability to effectively carry out our statutory responsibilities.

The Authority Did Not Have
Controls to Adequately Verify
Receipt of Outside Legal
Services

            During our interviews with the Authority’s in-house legal staff, we were told that,
            with specific limited exceptions, only one Authority senior counsel person was
            responsible for review and approval of invoices submitted by legal service
            providers. This individual stated that the Authority did not have a desk procedure
            or other operating guide for invoice approval but that she used her interpretation
            of the respective legal services contracts as the basis of her decisions to approve
            invoiced fees and costs. She stated that she determined whether the invoiced
            hours and costs were reasonable based on her experience. While she stated that
            she contacted the department receiving the benefit of the legal service if she had
            questions regarding an invoice, we found no evidence of such communications
            regarding the invoices reviewed. When questioned as to the control benefits of
            verifying charges through users who were directly involved in the work that was
            invoiced, she stated that the managing partner of the billing law firm attested to
            the accuracy of the invoice and that practice provided adequate control.

            The individual stated that at one time, invoices for legal services related to human
            resources and labor relations were referred to the Authority’s general counsel for
            labor relations but they currently came to her for approval. She believed that they
            should go to general counsel for labor relations. Another Authority senior
            counsel stated that she was concerned that she was not asked by anyone to verify
            work performed by outside counsel related to her areas of responsibility. She
            stated that before about a year ago, she routinely received such invoices but she
            once questioned an invoice from Ballard Spahr Andrews & Ingersoll, LLP,
            because she thought it was a duplicate billing. She further stated that it was the
            last legal services invoice she received. Others on the Authority’s in-house legal
            staff stated that they were not asked to verify legal services received.

            The Authority needs to establish controls that ensure the adequate verification and
            approval of invoices. The verification and approval process should be structured,
            defined, and documented to ensure that payments are not only in accordance with
                                             14
           terms of the contract and the Authority’s policies, but are also made only for those
           services and goods, the receipt of which is verified by person(s) having adequate
           knowledge of such. Lack of verification and approval procedures and related
           reimbursement rate schedules can result in the Authority’s payment for services
           that have not been received or are not reasonable and necessary.

The Authority Did Not Correct
Deficiencies Identified in a
Previous HUD OIG Audit for
Legal Service Contracts


           In a previous audit,1 we determined that the Authority did not always pay for
           legal services in accordance with its special contract requirements and made
           payments for costs that were specifically prohibited by the requirements. In
           response to the recommendations, the Authority agreed to hire an outside law firm
           to assist in the process of updating its contract requirements for legal service
           contracts. Additionally, the Authority stated that it would update its procedures to
           ensure that the new requirements were enforced. It also agreed to have its Office
           of General Counsel periodically audit a sample of current legal contracts and
           payments to ensure that the responsible personnel enforced its contract
           requirements. However, although the Authority had updated its contract
           requirements, it had also weakened them; it could not demonstrate that it had
           implemented a written policy to ensure the enforcement of the contract
           requirements; and it could not demonstrate that its Office of General Counsel
           periodically audited a sample of contracts and payments on an ongoing basis. As
           a result, the Authority made $2.4 million in payments to law firms based on
           invoices that included prohibited block billing and for costs that were specifically
           prohibited by the contract requirements. The following paragraphs provide
           additional details.

           The Authority Weakened Its Contract Requirements for Legal Service Contracts

           We compared the contract requirements that the Authority revised in response to
           our previous audit to the contract requirements it had in force during that audit.
           Notable changes included the omission of several sections which required prior
           authorization for specific legal services, sections specifying work functions of
           various legal staff, and a section identifying activity descriptors needing
           additional explanation to be acceptable for payment. These changes weakened
           the internal controls that were otherwise contained in the earlier version of the
           requirements.




                                            15
             The Authority Continued To Pay for Legal Services That Were Block Billed

             During our review, we found that law firms submitted invoices that included
             prohibited block billing in 142 of 472 invoices (30 percent) reviewed. The block
             billing on the 142 invoices totaled $2.4 million.

             The Authority Reimbursed Law Firms for Prohibited Expenses

             The Authority could not demonstrate that it had implemented a written policy to
             ensure that it was enforcing its contract requirements. As a result, although the
             majority of the supporting documentation the Authority provided for the invoices
             that we reviewed was missing, incomplete, and insufficient, we noted that the
             Authority continued to pay for costs that were specifically prohibited by the
             contract requirements.

             The Authority Could Not Demonstrate That Legal Service Contracts and
             Payments Were Periodically Reviewed

             The Authority agreed to have its Office of General Counsel periodically review a
             sample of current legal contracts and payments to ensure that the responsible
             personnel enforced its contract requirements. However, during the current audit,
             the Authority provided no documentation to demonstrate that this quality control
             task was completed during our audit period. After the exit conference, the
             Authority provided a copy of a May 24, 2005, memorandum audit report from its
             OIG addressing compliance of contract billings for legal services with its legal
             department’s contract requirements. This internal audit identified no material
             problems. Nonetheless, the Authority could not demonstrate that it periodically
             conducted reviews to ensure continued compliance of contract billings for legal
             services with contract requirements.

Conclusion


             The Authority failed to provide adequate documentation supporting the validity,
             accuracy, necessity, and reasonableness of $4.5 million in payments that it made
             for outside legal services during our audit period. The Authority also allowed an
             apparent conflict of interest situation to exist when it entered into a contract with
             the law firm that employed an immediate family member of the chairman of its
             board of commissioners and it did not obtain required HUD approval for all of its
             legal settlements. Further, the Authority did not implement corrective action that it
             had agreed to take in response to recommendations made in a previous HUD OIG
             audit report. These conditions occurred because the Authority’s leadership, board
             of commissioners and executive management chose to operate the Authority in
             this manner. In particular, the Authority’s board of commissioners failed to meet
             its fiduciary responsibility to ensure that the Authority complied with all Federal
             laws and regulations as well as fully cooperate with HUD OIG. The Authority
                                              16
           needs to implement adequate procedures and controls to ensure that its payments
           for outside legal services meet applicable laws and regulations and that HUD
           approves its legal settlements. The Authority also needs to implement appropriate
           measures to prevent and resolve conflict of interest situations, revise its contract
           requirements, and develop and implement controls to ensure that the contract
           requirements are enforced, including a quality control function. Without these
           improvements, it will continue to pay enormous sums for outside legal services
           that are unsupported, unreasonable, and unnecessary.

Recommendations


           We recommend that the Director of HUD’s Pennsylvania State Office of Public
           Housing direct the Authority to

           1A.    Implement adequate procedures and controls to ensure that its payments
                  for outside legal services comply with applicable laws and regulations.

           1B.    Immediately provide documentation to support the $4,496,120 in
                  unsupported costs identified by the audit or reimburse the applicable
                  programs from non-Federal funds for any costs that it cannot support.

           1C.    Immediately provide documentation to support the remaining $25,981,001
                  in payments to law firms during the audit period of April 2007 to August
                  2010, if the Authority cannot support the costs referenced in
                  recommendation 1B or reimburse the applicable programs from non-
                  Federal funds for any costs that it cannot support.

           1D.    Develop and implement controls to ensure that invoices for legal services
                  are adequately verified and payments are made in accordance with the
                  terms of the related contracts.

           1E.    Require its board of commissioners to implement appropriate measures to
                  prevent and resolve conflict of interest situations.

           1F     Implement controls to ensure that HUD is notified of pending litigation and
                  that HUD’s written concurrence is obtained before accepting a settlement
                  offer arising out of litigation.

           1G.    Revise its contract provisions for future legal service contracts to reinstate
                  sections that it removed, which required prior authorization for specific
                  legal services, specifying work functions of various legal staff, and
                  identifying activity descriptors needing additional explanation to be
                  acceptable for payment.


                                            17
1H.   Develop and implement a written policy and controls to ensure that its
      legal services contract provisions are enforced.

1I.   Task its Office of Inspector General to periodically audit a sample of
      current and future legal contracts and payments to ensure that the
      responsible personnel are enforcing contract requirements and only
      reimbursing law firms for allowable expenses.

1J.   Restrict the use of outside attorneys when dealing with HUD OIG and
      HUD program officials who are conducting oversight activities.




                               18
                         SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

       Applicable laws; regulations; the Authority’s administrative plan; HUD’s program
       requirements at 2 CFR Part 225, and 24 CFR Parts 85 and 135; HUD Handbook 7460.8,
       REV-2; HUD Handbook 2210.18; and HUD Litigation Handbook 1530.01, REV-5.

       The Authority’s contract files and related payment records, computerized database
       information including disbursement data and contract data, organizational chart, board
       meeting minutes, policies and procedures, Moving to Work agreement and amendments,
       and consolidated annual contributions contract.

We also interviewed the Authority’s employees and HUD staff.

To achieve our audit objective, we relied, in part, on computer-processed data in the Authority’s
databases. The Authority, however, denied our requests for read-only access to its computerized
data and contract and invoice files. It provided us with only selected portions of original contract
and invoice files that we requested. Because of these limitations imposed by the Authority, we were
prevented from assessing the reliability and completeness of the data to which the Authority
allowed us access. Consequently, for our purposes, we used the data and files that the Authority
provided without a complete data reliability assessment.

We used an automated data file of disbursements that the Authority provided and determined that
the Authority paid 15 law firms $30.5 million during the period April 1, 2007, to August 31,
2010. We selected a nonstatistical sample of 48 payments for a detailed review. The 48
payments were associated with 433 invoices. We selected the sample to include disbursements
to vendors that had high dollar payments over the audit period. Additionally, we included in our
sample all invoices which represented legal services related to the Authority’s monitoring of OIG
audits during the audit period, in response to which the Authority provided 39 invoices associated
with 34 contracts. In total, we reviewed 472 invoices associated with 15 contracts and
representing $4.5 million in payments for legal services during the period. The payments and
invoices were selected to determine whether the Authority’s payments to outside legal firms
could be supported and complied with HUD regulations and other applicable requirements.

We performed our onsite audit work from September through December 2010 at the Authority’s
office located at 12 South 23rd Street, Philadelphia, PA. The audit covered the period April 2007
to August 2010 but was expanded when necessary to include other periods.

Except for those instances in which the Authority imposed limitations, we conducted the audit in
accordance with generally accepted government auditing standards. Those standards require that
we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objective. We believe that the
evidence obtained provides a reasonable basis for our findings and conclusions based on our

                                                19
audit objective. The audit included tests of internal controls that we considered necessary under
the circumstances.




                                               20
                              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:

                      Policies and procedures that the Authority has implemented to reasonably
                      ensure that resource use is consistent with applicable laws and regulations.

                      Policies and procedures that the Authority has implemented to reasonably
                      ensure that resources are safeguarded against waste, loss, and misuse.

               Except for those instances in which the Authority imposed limitations, we
               assessed the relevant controls identified above.

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

 Significant Deficiencies


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


                                                 21
The Authority did not ensure compliance with applicable laws and
regulations concerning record-keeping requirements and documentation to
support payments for legal services.

The Authority violated its Moving to Work agreement, its consolidated
annual contributions contracts, and HUD regulations when it denied and
obstructed the HUD OIG auditors access to its records and documentation.

The Authority lacked sufficient procedures and controls to ensure that
services invoiced by law firms were adequately verified before payment.

The Authority allowed an apparent conflict of interest situation to exist.

The Authority did not implement corrective action that it agreed to take in
response to recommendations made in a previous HUD OIG audit report.




                          22
                    FOLLOW-UP ON PRIOR AUDITS


Philadelphia Housing Authority
Contracting and Purchasing
Activity, Philadelphia,
Pennsylvania, 2003-PH-1002,
dated January 27, 2003


           In this audit, we found that the Authority made payments to law firms based on
           invoices in block format, which was contrary to contract requirements. The
           Authority also paid the firms for other prohibited charges without questioning
           them. We recommended that HUD require the Authority to update its contract
           requirements for legal services contracts to reflect more current conditions and
           draft and implement a written policy to ensure that the new requirements would
           be enforced and have the Authority’s OIG periodically audit a sample of current
           legal services contracts and payments to ensure that the responsible personnel
           enforced the contract requirements and only reimbursed law firms for allowable
           expenses. The finding starting on page 15 provides details of our follow-up on
           these issues.

           During this previous audit we also found that the Authority issued 18
           modifications over a 10-year period to 3 legal service contracts. Although the
           modifications to these three legal services contracts increased the original contract
           values by $3.2 million, the Authority did not compete any of the additional work
           as required by Federal regulations. Due to time constraints and the failure of the
           Authority’s outside attorneys to cooperate on this current audit, we did not follow
           up on these issues. The following information pertains to the three legal contracts
           reviewed on the prior audit.

            Contract Date of     Original Amount of         Adjusted   Percent Number of
            Number Award         Amount Modifications        Value     Increase Modifications
              353     11/21/90 $150,000 $2,228,762        $2,378,762 1486%             11
              378      5/23/91 $100,000 $175,000            $275,000 175%               2
              464      7/14/92 $125,000 $830,550            $955,550 664%               5




                                            23
                                   APPENDIXES


Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                    Recommendation
                        number                     Unsupported 1/
                           1B                     $ 4,496,120




1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             24
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION




                      25
Comment 1




Comment 2



Comment 3




            26
Comment 4




Comment 5




Comments 6
and 7




Comment 7




             27
Comment 7



Comment 2




Comment 8




Comment 8




            28
Comment 8




Comments 7
and 8




Comment 7




Comment 9




             29
Comment 9




Comments 9
and 10




Comment 10




             30
Comment 10




             31
Comment 10




             32
Comment 10




             33
34
Comment 10




             35
Comment 10




             36
Comment 10




             37
Comment 10




Comment 10




Comment 10




             38
Comments 9
and 10




             39
Comment 11




Comment 11




Comment 11




             40
Comment 11



Comment 11




Comment 12




             41
Comment 12




Comment 13




Comment 14




             42
Comment 10




Comment 10




Comment 15




             43
Comments 15
and 16




Comment 15




Comment 17



Comment 16




              44
Comment 17




Comment 18




Comments 18
and 19




Comments 18
and 19




              45
Comment 19




Comment 19




             46
Comment 19


Comment 18




Comment 20




Comment 20




             47
Comment 20




Comment 20




Comments 20
and 21




Comment 22




              48
Comment 22




Comment 22




             49
Comment 22




Comment 22




             50
Comment 22




             51
Comment 22




             52
Comment 22




             53
Comment 22




Comment 22




             54
Comment 22




Comment 22




Comment 22




             55
Comment 22




Comment 23




Comment 23




Comment 23




             56
Comments 15
and 23




              57
Comments 15
and 23




              58
Comments 15
and 23




              59
Comment 24




             60
Comment 24




             61
Comment 24




             62
Comment 24




             63
Comment 24




             64
Comment 24




Comment 24




             65
Comment 24




             66
Comment 24




Comment 24




Comment 24




             67
Comment 24




Comment 24




Comment 24




Comment 24




             68
Comment 24




Comment 25




Comment 26




             69
Comment 26




Comment 26




Comment 27




             70
Comment 27



Comment 27




Comment 7




             71
Comment 7




Comment 28




Comment 28




             72
Comments 9,
26, 7 and 27




Comment 8




               73
Comment 8




Comments 9
and 7


Comments 9
and 26




Comment 8




             74
Comments 7,
9 and 26




Comments 7,
8, 9 and 26




              75
Comments 7,
8, 22 and 26




Comments 7,
8, 20 and 26




Comments 7,
8 and 26




               76
Comment 8




Comments 7,
26 and 27



Comment 8




              77
Comment 8




Comments 7,
8 and 10




Comments 7
and 9




              78
Comments 7,
9, 26 and 27




Comments 7,
9, 15, 22 and
23




                79
Comments 7,
9, 15, 22 and
23




Comment 23




Comments 7,
20, 22 and 29




Comment 25




                80
Comments 7,
22 and 23




Comment 26




Comment 22




Comment 27




              81
Comments 4
and 7




Comment 20




Comment 30




             82
Comment 8




Comments 5
and 10




Comments 2,
18 and 19




Comment 8




              83
Comment 8




            84
                         OIG Evaluation of Auditee Comments

Comment 1   The Authority’s contention that it has had “years of undisputed success at
            revitalizing Philadelphia’s public housing and improving conditions for residents”
            was not the subject of this audit. However, its operations have in fact been
            questioned by HUD OIG in eight audits conducted over the last 9 years. Some
            examples follow:

               In audit report 2010-PH-1011, HUD OIG reported that the Authority did not
               ensure that its Section 8 Housing Choice Voucher program units met HUD’s
               housing quality standards. The audit found that 62 of the 67 units (93 percent)
               statistically selected for review did not meet HUD’s minimum standards and
               29 units (47 percent) were seriously noncompliant. The Authority’s Moving
               to Work agreement (Section II.E.) and HUD regulations require the Authority
               to provide public housing that is safe, decent, sanitary, and in good repair.

               In audit report 2002-PH-1803, HUD OIG reported that the former executive
               director failed to follow the Authority’s personnel policies and promoted
               employees or raised their salaries without justification, hired staff without
               allowing for competition, and created a conflict of interest by hiring the
               daughter of a member of the board of commissioners, although she was
               unqualified, to fill a senior position. The Authority’s Moving to Work
               agreement requires it to follow 24 CFR Part 85, which prohibits conflicts of
               interest and requires competition for obtaining services (Section I.C.).

               Audit report 2003-PH-1002 disclosed that the Authority did not always
               comply with Federal procurement requirements or its own procurement policy
               when awarding service contracts, processing and approving contract
               modifications, approving contract payments, and determining which
               purchases should be under contract. In addition, the Authority split purchases
               to avoid competing contracts under the competitive award process, all in
               violation of 24 CFR Part 85.

               In audit report 2003-PH-1803, an audit that straddled pre- and post- Moving
               to Work participation by the Authority, HUD OIG reported that the Authority
               failed to fully utilize its Section 8 funding although it had about 18,000
               families on its waiting list, and otherwise poorly managed its Section 8
               program. Since entering the Moving to Work program, the Authority was
               allowed to combine its Section 8 funds with operating and capital funds.

               Lastly, in audit report 2010-PH-1002, HUD OIG reported that the Authority
               improperly overpaid Section 8 housing assistance and utility allowances.

Comment 2   In accordance with the HUD OIG Audit Operations Manual, in an exceptional
            case, such as if substantial revisions to the draft are required based on the exit
            conference, the Regional Inspector General for Audit (RIGA), at his discretion,
                                             85
            may provide a revised draft to the auditee for formal comment. However, only
            minor changes needed to be made to the draft audit report based on the exit
            conference.

            With the exception of Board Chairman John Street’s reading of a prepared
            statement at the beginning of the meeting, and asking some questions later in the
            meeting, the Authority’s objections to the audit report were presented solely by its
            outside counsel. The outside attorney’s comments at the exit conference are
            consistent with the Authority’s written reply to the audit report. The Authority
            did provide some additional documentation on February 16, 2011, along with its
            written reply and on February 18, 2011. We reviewed this material and made
            only minor revisions to the report after considering the additional documentation.
            Since the changes did not affect our overall conclusions, there was no need to
            provide a revised draft report to the Authority for formal comment. The
            Authority provided additional invoices via e-mail on February 25, 2011, however,
            since the audit was completed, we provided the documentation to HUD officials
            for a final determination and their consideration in formulating a proposed
            management decision for recommendation 1B.

Comment 3   We included the Authority’s reply in its entirety in this final report as appendix B.

Comment 4   The very broad and vague allegations in this paragraph are without merit. No
            credible example of the alleged violations is presented in the Authority’s
            response. We conducted the audit in accordance with generally accepted
            government auditing standards.

Comment 5   The Authority states that it is common knowledge that HUD OIG has had a
            contentious relationship with the former executive director going back over a
            decade. We are unclear as to what support it has for this statement or what
            exactly this means. In reality, during all of our prior audits there was little or no
            interaction with the former executive director because he insisted that we interact
            instead with his outside attorneys. On several audits, the outside attorneys
            presented the Authority’s official objections to our audit recommendations on
            their own letterhead, and signed the Authority’s official written reply to the draft
            audit report as a substitute for the former executive director.

Comment 6   HUD OIG has performed numerous audits in accordance with generally accepted
            government auditing standards and made numerous recommendations for
            improvement to the Authority’s operations. The Authority’s vague claim of
            wanting to “put old disputes behind it” certainly does not relieve it of its
            responsibility to make the operational improvements recommended in this and
            other previous HUD OIG audits. These are problems which, unfortunately in
            many cases, continue to exist and put significant sums of taxpayer funds at risk.

Comment 7   We conducted the audit in accordance with generally accepted government
            auditing standards. Those standards require that we plan and perform the audit to
                                             86
                  obtain sufficient, appropriate evidence to provide a reasonable basis for our
                  findings and conclusions based on our audit objective. We believe that the
                  evidence obtained provides a reasonable basis for our findings and conclusions
                  based on our audit objective. The audit included tests of internal controls that we
                  considered necessary under the circumstances.

                  On January 14, 2010, Board Chairman John F. Street signed the annual Moving to
                  Work Certification of Compliance on behalf of the Authority’s Board of
                  Commissioners. In signing the certification, Chairman Street certified that all the
                  information stated therein, “is true and accurate.” 6 Among the certifications
                  made by the chairman on behalf of the Authority in the document in question are
                  the following:

                           The Authority will keep records in accordance with 24 CFR 85.20 and
                           facilitate an effective audit to determine compliance with program
                           requirements.

                           The Authority will comply with the policies, guidelines, and requirements
                           of OMB Circular No. A-87 (Cost Principles for State, Local, and Indian
                           Tribal Governments) and 24 CFR Part 85 (Administrative Requirements
                           for Grants and Cooperative Agreements to State, Local and Federally
                           Recognized Indian Tribal Governments)…

                  Pennsylvania State law also provides elaboration on what is expected of the board
                  of directors of a nonprofit corporation operating within the Commonwealth. For
                  example, 15 Pa.C.S. §5712 “Standard of care and justifiable reliance” states in
                  part that, (a) DIRECTORS.—A director of a nonprofit corporation shall stand in a
                  fiduciary relationship to the corporation and shall perform his duties as a director,
                  including his duties as a member of any committee of the board upon which he
                  may serve, in good faith, in a manner he reasonably believes to be in the best
                  interests of the corporation and with such care, including reasonable inquiry,
                  skill and diligence, as a person of ordinary prudence would use under similar
                  circumstances. In performing his duties, a director shall be entitled to rely in
                  good faith on information, opinions, reports or statements, including financial
                  statements and other financial data…”7 Therefore, under Pennsylvania State law
                  the members of the Authority’s board of commissioners owe a fiduciary duty to
                  the Authority.8


6
  The certification included the warning that “HUD will prosecute false claims and statements. Conviction may
result in criminal and/or civil penalties. (18 USC 1001, 1010, 1012; 31 USC 3729, 3802)”
7
  Italics are not original.
8
  See also 15 Pa.C.S. §5715, “In discharging the duties of their respective positions, the board of directors,
committees of the board and individual directors of a nonprofit corporation may, in considering the best interests of
the corporation, consider to the extent they deem appropriate: (1) The effects of any action upon any or all groups
affected by such action… (2) The short-term and long-term interests of the corporation… (4) All other pertinent
factors.”

                                                         87
Comment 8     The Authority ultimately came to a realization that it needed to hire a new
              executive director and then did so. In this regard, the new interim executive
              director has publicly stated that a number of steps are needed to correct many
              serious existing problems. We completely agree with him on this. The three
              areas the new interim executive director mentions are: (1) creating a culture of
              respect, (2) back to basics, and (3) transparency and accountability. These are
              indeed areas that are deficient and extremely serious problems that the Authority
              needs to immediately correct. HUD OIG audits have attempted to assist the
              Authority in acknowledging and accomplishing these very same goals over the
              years.

Comment 9     The Authority paid $30.5 million for outside legal services provided by 15 law
              firms during the period April 2007 through August 2010 (see appendix C). We
              reviewed 472 invoices totaling $4.5 million in payments made by the Authority
              for legal services during the period, of which all but $11,800 was unsupported
              because the Authority did not provide adequate documentation to evidence that
              the services invoiced and payments made were in accordance with the contract
              terms and HUD requirements. Appendix D shows the overall results of our
              review. The Authority’s outside attorneys asserted that the documents provided
              were responsive to our request, but also withheld some information, citing
              attorney-client privilege. The information provided was not sufficient to ascertain
              if the legal services were legitimate, necessary, reasonable expenses to be paid for
              with Federal funds. Critical information such as the attorney’s name, the billing
              rate, the number of hours, and the date and time that the services were provided
              were missing. This information is not considered privileged information. We
              estimated that at least $1.1 million in costs were not reasonable and necessary.
              These fees were for routine matters dealing with our audits that are typically
              performed by lower level staff at other housing authorities that we’ve audited.
              Documents that were routinely provided on similar audits often were requested
              for this audit by the auditors and then not provided by the attorneys. When the
              documents were provided, it often took an inordinate amount of time to
              coordinate the delivery and acceptance of the documents from the outside
              attorneys. Such interference obstructed the efficient conduct of our audits without
              benefiting the Authority’s housing programs.

Comment 10 HUD OIG does not question the Authority’s right to obtain outside legal services
           or to invoke attorney-client privilege when warranted. However, as a HUD
           spokesperson has also recently similarly articulated, these legal services must be
           reasonable, necessary and supported when taxpayer dollars are at stake. The
           Authority’s claims of attorney-client privilege must be adequately justified and
           supported. Attorney billing statements and time records do not enjoy carte
           blanche protections of attorney-client or attorney-work product protections. An
           excellent article on the subject of attorney-client privilege appeared in the
           American Bar Association Law Practice Management Section’s Law Practice
           TODAY in December 2006. The article, authored by Ballard Spahr Andrews &
           Ingersoll, LLP partner Carl Roberts, of the Philadelphia office, makes the point
                                               88
that only communications pertaining to legal advice, not the underlying facts, are
protected by the privilege. “Attorney billing statements and time records are
protected by the attorney-client privilege only to the extent that they reveal
litigation strategy of/or the nature of services performed” (citation omitted). We
requested from the Authority the underlying facts related to its use of outside law
firms, not anything even remotely protected by attorney-client privilege.

Also, regarding an assertion of privilege to attorney billing statements, the United
States District Court for the Eastern District of Pennsylvania held:

       For example, a typical time sheet may contain several
       different pieces of information, such as the attorney’s
       name, the client’s name, the general matter being
       worked on if the attorney has represented the client on
       more than one matter, the date and time the services
       were provided as well as a description of the actual legal
       services performed. In this example only the last item of
       information would generally be protected under the
       attorney-client privilege.

       Leach v. Quality Health Svs., et al, 162 F.R.D. 499, 501
       (E.D. Pa. 1995)

The information bolded above is exactly the nature of the information required to
ascertain if the legal services billed for were legitimate, necessary, and reasonable
expenses to be paid for with Federal funds. What is privileged is information that
divulges strategy, work product or other confidential information. It is for these
reasons that the auditor did not respond to counsel’s suggestion. Counsel had
made it clear that the Authority would not provide any additional documentation
to support payments.

HUD OIG has reviewed all correspondence and other documentation the
Authority provided both during the audit and after the audit exit conference, and
has correctly categorized the $4.5 million reviewed as unsupported costs in
appendix A to this audit report. 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. To the extent HUD officials believe that
the correspondence and other statements included in the Authority’s official
response to this audit report are relevant to HUD’s proposed management
decision on the eligibility of the $4.5 million in unsupported payments the audit
identified, they will duly consider them. It is important for responsible HUD
officials to also consider in their proposed management decision, that the
Authority paid 142 of 472 invoices (30 percent) using block billing which is
                                 89
              prohibited by its contracts with the law firms, and paid 134 invoices, but did not
              provide the HUD OIG with even redacted or incomplete copies of the invoices to
              support its payments. As stated above, we reviewed 472 invoices totaling $4.5
              million in payments made by the Authority for legal services during the period, of
              which all but $11,800 was unsupported because the Authority did not provide
              adequate documentation to evidence that the services invoiced and payments
              made were in accordance with the contract terms and HUD requirements. The
              Authority’s outside attorneys asserted that the documents provided were
              responsive to our request, but also withheld some information, citing attorney-
              client privilege. Appendix D shows the overall results of our review of these
              payments.

Comment 11 The audit survey is the initial phase of an audit for quickly gathering information
           pertaining to an organization, program, activity, or function to satisfy the general
           audit objective without performing detailed audit verification. The survey is
           directed at identifying areas of materiality and sensitivity; identifying key aspects
           and features of the entity or program targeted for audit; and disclosing controls
           and areas that are susceptible to error, illegal acts, or abuse. The results of the
           survey work are used to refine the general audit objectives, establish the scope of
           the audit work to be performed, develop an audit program, and determine whether
           an audit is necessary or to suspend the assignment. As the Authority states,
           although the survey included payments for professional, consulting and legal
           services, we refined our objective to include only fees for outside legal services
           and did not pursue a detailed review of the fees for professional or consulting
           services in the audit. We did so because the survey disclosed controls and areas
           related to payments to outside attorneys that in the professional judgment of the
           OIG were immediately susceptible to error and/or abuse. This is standard practice
           and is consistent with generally accepted government auditing standards. HUD
           OIG reserves the right to audit the Authority’s fees for other professional and
           consulting services in the future.

              Due to the fact that the Authority continued to use outside attorneys to obstruct
              the progress of the audit, we were unable to communicate in a constructive and
              timely manner with responsible Authority officials. We requested complete
              documentation to support payments for legal services. Counsel asserted that the
              Authority’s payments for outside legal services were eligible and supported, but
              refused to provide documentation to demonstrate that the legal services were
              legitimate, necessary, and reasonable, citing attorney-client privilege. Therefore,
              HUD OIG served the Authority with a subpoena on December 10, 2010, which
              clearly identified to the Authority and its outside attorneys the focus of the audit.
              The Authority’s outside counsel unfortunately did not comply with the subpoena
              and continued to assert that the Authority’s payments for outside legal services
              were eligible and supported, but refused to provide the majority of the supporting
              documentation that we requested, citing attorney-client privilege. The Authority,
              however, gave no reason why it had not responded to the auditors’ repeated
              requests for other data and information, some of which dated back to August
                                               90
                  2010. A demand for these records was included in our subpoena. The
                  Authority’s outside counsel provided only limited additional information in
                  response to the subpoena, but continued to assert that it had provided all
                  information and data access that we had requested.

Comment 12 The Authority contends that if it chooses not to enforce its own contract
           provisions contained in Part V that are designed to ensure that its payments for
           outside legal services are supported, reasonable and necessary, it does not have to
           do so. HUD OIG considers this apparent disregard for contractual requirements
           to be a material internal control weakness. Part V is included as part of each legal
           contract issued by the Authority. Title 24 CFR 85.36 (b)(2), requires that the
           Authority ensure each vendor perform in accordance with its contract
           requirements. Further, the Philadelphia Housing Authority Legal Department
           Guidelines for Outside Counsel (Contract Part V) provides guidelines under
           which the Authority will agree to be billed. The guidelines are designed to ensure
           that firms are only paid for allowable and reasonable expenses and prohibit
           payments for certain normal overhead expenses such as facsimile charges, local
           travel, and local phone calls. In addition, the guidelines state that the Authority
           will not pay for fees or expenses that are contained within a block billing
           description. That is, each line of a legal bill must contain the description of one
           task per time entry.

Comment 13 The Authority represented to the auditors that the block-billed invoices were
           complete support for the outside legal payments and did not inform the auditors
           that the invoices it provided were “summary pages” subject to attorney-client
           privilege. In either case however, subject to further support or justification, the
           outside legal payments shown on these invoices are considered unsupported at
           this point in time.

Comment 14 Although the Authority’s normal practice was to heavily redact and remove all
           private and confidential information from documentation it provided to HUD
           OIG, it appears it may have inadvertently left sensitive information9 on one of the
           invoices that it provided. We have removed that information from the example of
           prohibited block billing that was in the draft audit report that was presented to the
           Authority strictly for discussion and comment only. We informed the Authority
           in the letter transmitting the draft report that we require officials who receive draft
           audit reports for review and comment to exercise due care to avoid premature or
           otherwise improper disclosure of the information contained in such reports. Draft
           reports may not be released without the express written approval of the Assistant


9
  The Authority references the Privacy Act in its response. However, that statute does not apply in this instance.
The Privacy Act defines an “individual” as a citizen of the United States or an alien lawfully admitted for permanent
residence. The term “individual” is used in the Privacy Act instead of the term “person” in order to distinguish
between rights which are given to citizens as individuals under the Act and rights of proprietorships, businesses and
corporations which are not intended to be covered by the Act. OKC Corp. v Williams (1978, ND Tex) 461 F Supp
540, CCH Fed Secur L Rep P 96745.
                                                         91
              Inspector General for Audit. We informed the Authority that reproduction of the
              report without our knowledge or consent was prohibited.

              It is worth noting that on another recent audit, HUD OIG was compelled to
              enforce a subpoena in the United States District Court for the Eastern District of
              Pennsylvania to obtain Privacy Act information from the Authority, so it is quite
              surprising that it inadvertently left this type of information on an invoice that it
              provided to us. On this other audit, the Authority’s outside attorney refused to
              provide 28 partial Social Security numbers requested by the auditor to perform
              public record searches to perform a common audit test. This common audit test is
              designed to detect apparent conflict of interest situations involving responsible
              Authority officials and contractors doing business with the Authority. We
              requested the information in our audit notification letter dated April 9, 2010, and
              reiterated the need for the information during a May 19, 2010, audit status
              meeting, and several additional communications with the outside attorney
              throughout the audit. Since the Authority’s outside attorney continued to refuse
              to provide the information, on November 9, 2010, the United States Attorney’s
              Office petitioned for summary enforcement of the subpoena on behalf of HUD
              OIG. After a court hearing, in a written opinion, the court ordered that the
              petition for summary enforcement of the subpoena be granted on February 4,
              2011. The Authority’s unwarranted denial of access to records and other
              conditions imposed by the Authority caused needless delays and required HUD
              OIG to enforce the subpoena in court to effectively carry out its statutory
              responsibilities.

Comment 15 The tasks and items that the Authority lists were commonly handled by in-house
           staff on other HUD OIG audits much more efficiently and effectively than we
           experienced with the Authority’s outside attorneys. Additionally, based on our
           review of the invoices the Authority provided for the audit period of April 2007
           through August 2010, we determined that the Authority paid the firm of Schnader
           Harrison Segal & Lewis LLP at least $672,000 for services it performed on our
           two recent audits of the Authority’s Housing Choice Voucher program. It also
           paid this same firm at least $91,000 for work it did on our ongoing audit of
           Recovery Act capital funds used to rehabilitate its scattered site housing. Invoices
           from Ballard Spahr Andrews & Ingersoll, LLP showed that it was paid $326,000
           for work on HUD OIG audits during the audit period April 2007 until August
           2010, but the invoices did not identify costs to the specific audit. In contrast,
           salary and benefit costs for the HUD OIG staff that worked on the audits of the
           Authority’s Housing Choice Voucher program totaled about $321,000. The
           Authority paid one of the law firms more than twice as much to assist it on the
           two audits as it cost HUD OIG to perform the audits. This excessive cost was
           certainly not reasonable or necessary for the taxpayer.

Comment 16 Our auditor and appraiser were sometimes accompanied by up to three outside
           attorneys on housing quality inspections. The Authority acknowledges that this
           occurred in “only a few instances” and implies that therefore it was not a problem.
                                               92
              During those inspections, the Authority also had its in-house housing experts,
              non-attorneys, accompany our staff and it was these individuals who made
              comments and answered questions from our staff. At $330 per hour for each
              attorney, the cost for outside counsel to participate in the inspections was nearly
              $8,000 for just one day. The attorneys had no expertise in housing inspections,
              asked no questions, and did nothing but occasionally take notes. Further, the
              sheer number of persons involved with the inspections, entering and walking
              through the homes, became difficult for tenants to tolerate. In the view of HUD
              OIG, a single occurrence was a problem and an unreasonable and unnecessary
              cost to the taxpayer. These taxpayer dollars could have been much better spent
              housing low-income families rather than spent on outside attorneys to simply tour
              the homes of low-income families.

Comment 17 The Authority states that the total potential funds at risk for recapture during these
           two audits were $490 million and that it has repaid $9,000. We do not know how
           the Authority arrived at these figures, and the Authority has not shared its
           methodology with us. We are confident however, that if the Authority reasonably
           complies with all applicable HUD regulations, it is not in danger of having HUD
           recapture its funds, and has absolutely no need to spend huge sums on expensive
           outside attorneys to assist it on HUD OIG audits.

Comment 18 The allegations in this paragraph are without merit. The HUD OIG senior auditor
           who was in charge of this audit has performed numerous audits of the Housing
           Choice Voucher program at this and other housing authorities in an objective,
           efficient, and effective manner. He has more than 15 years of auditing experience
           in the Federal government and more than 14 years of auditing experience in the
           private sector, and performed countless audits objectively, efficiently and
           effectively. He is a certified information systems auditor and a certified public
           accountant. The fact that the senior auditor led other recent audits at the
           Authority only served to sharpen his keen knowledge and insight into the
           Authority’s operations and in no way impaired his objectivity.

Comment 19 The RIGA and the Assistant Regional Inspector General (ARIGA) have more
           than 50 combined years of auditing experience in the Federal government. They
           have accomplished and managed many successful and objective audits throughout
           their long Federal auditing careers. The allegation from 2002 that the HUD OIG
           auditor mishandled alleged privileged information is simply unfounded and
           blatantly false. The former RIGA appropriately responded to this allegation at the
           time by informing the outside counsel that there was no ethical or any other type
           of violation and that the records in question were not subject to privilege. No one
           at the Authority had even asserted a privilege with respect to any attorney
           invoices. The former RIGA reminded the outside attorney that the attorney-client
           privilege “belongs to the client, not the attorney.” Moreover, in light of the
           Federal Government’s right of access to the records, we questioned whether a
           privilege would be applicable if one even existed.


                                               93
                  Additionally, even if a privilege had existed with respect to the invoices or billing
                  records, such privilege was waived by the Authority’s actions. The Authority’s
                  director of finance provided the auditors with full access to all accounts payable
                  information in order to facilitate the disbursement review of the contracts. In fact,
                  the finance director was fully aware that the auditors were copying attorney
                  billings for one of the contracts being reviewed and at no time did the finance
                  director raise any objections to our obtaining the records.

                  The additional implication that the former RIGA left office shortly thereafter
                  because of this alleged improper incident is obviously patently false and again not
                  relevant to this audit. Tactics of this type are illustrative of those employed over
                  the years by the Authority’s outside counsel and served only to obstruct our
                  ability to carry out lawful audit activities and to cloud the serious issues at hand.
                  Unfortunately, such tactics divert significant energy and scarce resources away
                  from fixing the Authority’s current serious problems. The Authority states that
                  the RIGA and ARIGA have worked on audits with the Authority that were
                  “contentious.” There have been disagreements over the years between HUD OIG
                  and the Authority on audit related matters as there are on many HUD OIG audits
                  involving entities that receive HUD funds. The main difference between the
                  Authority and the other entities we have audited is its excessive use of outside
                  attorneys which have obstructed the progress of our audits. The fact that the
                  RIGA and the ARIGA worked on prior audits at the Authority served to help
                  them develop a very clear and objective insight into the Authority’s operations.

Comment 20 The overall HUD OIG conclusion that the Authority failed to provide evidence
           that it obtained required HUD approval for most of its legal settlements did not
           change based on the additional documentation provided by the Authority after the
           exit conference. The Authority provided evidence of HUD approval of 6
           settlements, however, only 4 of the 6 corresponded to settlements included in the
           list of the 33 settlements listed on its Web site. The other two settlements were
           not listed on the Authority’s Web site. In addition, after the exit conference,
           HUD Regional Counsel provided copies of approval letters for 22 (which includes
           the 4 letters that the Authority provided after the exit conference) of the 33 cases.
           HUD Regional Counsel did not have any record of approving any of the 234
           additional cases identified by the Authority during the audit. The Authority states
           that it does not need HUD approval for cases covered by its insurance carrier.
           This is correct. However, the Authority did not provide documentation to
           demonstrate that in 245 cases (11 from the Web site plus the other 234) the costs
           of litigation, settlement and judgment were entirely covered by an insurance
           policy.

                  Also, there is also some question as to whether or not the HUD Regional Counsel
                  was even provided with any notice of these matters while they remained
                  pending.10 We believe that the Authority violated the terms of its Moving to
10
   The apparent failure of the Authority to inform the HUD Regional Counsel of the threat of litigation, of ongoing
litigation, and of the settlement of such litigation also impacted the U.S. Department of Justice’s (DOJ) and HUD
                                                         94
                  Work Agreement by failing to follow the guidelines established by HUD
                  Handbook 1530.01, REV-5.11

Comment 21 The Authority’s outside counsel either misunderstood or perhaps did not hear the
           entire discussion. HUD OIG repeatedly informed her during the meeting that in
           accordance with the HUD OIG Audit Operations Manual (a document from
           which counsel often quotes), in an exceptional case, such as if substantial
           revisions to the draft are required based on the exit conference, the RIGA may
           provide a revised draft to the auditee for formal comment. HUD OIG informed
           her that based on what we had heard at the exit conference we did not believe that
           the finding would be removed from the report. We informed her that our normal
           procedure required that all supporting documentation provided by the Authority
           immediately after the exit conference would be reviewed by the auditors and
           considered in the final audit report. We did in fact consider the additional
           documentation provided immediately after the exit conference and made
           necessary revisions to the audit report. However, only minor revisions were
           needed. Since the revisions were minor, there was no need to provide a revised
           draft report to the Authority for formal comment. The allegation that HUD OIG
           made a statement that it would include blatantly false information in the report is
           not true. Again, the allegations of personal impairments are blatantly false.

Comment 22 Documentation provided by the Authority in its letter of April 19, 2004, showed
           that Mr. Street was granted a waiver of the conflict of interest provision of
           Section 19 A (iii) of the Public Housing annual contributions contract for him to
           serve as an Authority board commissioner. HUD never received a request for a
           conflict of interest wavier for the Authority to hire his son, Sharif Street, or any
           law firm with which he was associated. HUD did not issue a waiver to the
           Authority in connection with its engagement of legal services by Wolf Block
           while Sharif Street was employed by the firm.

                  Section 19 of the annual contributions contract that the Authority signed with
                  HUD addresses conflicts of interest. It states in part at (A)(1) that,

                      In addition to any other applicable conflict of interest requirements, neither
                      the housing agency nor any of its contractors or their subcontractors may enter
                      into any contract, subcontract, or arrangement in connection with a project

Office of General Counsel’s authorities. As an example, Handbook Section 2-4, which addresses defensive
litigation, states at (h)(4) that “It is both HUD’s and DOJ’s policy to enter a settlement agreement or consent decree
only where it is consistent with HUD’s authority, and in the Government’s interest to do so.” Additionally, “All
settlements of Federal Party Litigation must be approved by DOJ.” Furthermore, at subparagraph (b) this section
provides that “When other parties propose settlement, the Litigating Associate or Regional Counsel shall consult
appropriate Program Officials and Program Counsel regarding their recommendations for the Department’s position
on the offer…” In short, it seems per the HUD Handbook that HUD has rights which may not have been protected
in these matters.
11
   See Moving to Work Agreement VIII.B.4. It is also possible that the Authority also concurrently violated section
VIII (B)(3) for using Federal funds subject to the Moving to Work Agreement for the unauthorized purpose of
providing the monies for settlement.
                                                         95
                     under this annual contributions contract in which any of the following classes
                     of people has an interest, direct or indirect, during his or her tenure or for one
                     year thereafter.

                 Among the classes of people covered are “Any present or former member or
                 officer of the governing body of the Authority, or any other member of the
                 officer’s immediate family.”12 Furthermore, the annual contributions contract
                 provides that a member of the covered classes must disclose the member’s interest
                 or prospective interest to the housing authority and HUD, and that the
                 requirements of the section “may be waived by HUD for good cause, if permitted
                 under State and local law.” Although, the annual contributions contract goes on
                 to caution that, “No person for whom a waiver is required may exercise
                 responsibilities or functions with respect to the contract to which the wavier
                 pertains.”13

                 Departmental regulations also address conflicts of interest in procurement matters
                 in strong terms at 24 CFR 85.36. That section at (b)(3) states in part that,

                     No employee, officer or agent of the grantee or subgrantee shall participate in
                     selection, or in the award or administration of a contract supported by Federal
                     funds if a conflict of interest, real or apparent, would be involved. Such a
                     conflict would arise when:

                            (i)     The employee, officer or agent,
                            (ii)    Any member of his immediate family,
                            (iii)   His or her partner, or
                            (iv)    An organization which employs, or is about to employ any of the
                                    above, has a financial or other interest in the firm selected for
                                    award…

                 Furthermore, HUD directs grantees and subgrantees to punish any violators of the
                 above: “To the extent permitted by State and local law or regulations, such
                 standards or conduct will provide for penalties, sanctions, or other disciplinary
                 actions for violations of such standards by the grantee’s and subgrantee’s officers,
                 employees, or agents, or by contractors or their agents.”14

                 John F. Street was elected to be the 97th mayor of the City of Philadelphia and
                 took office on January 3, 2000. Mayor Street was elected to a second term and

12
   The annual contributions contract defines “immediate family member” at 19(D) as “the spouse, mother, father,
brother, sister, or child of a covered class member…”
13
   Without any doubt, voting in favor of a contract with which an immediate family member has an interest would
violate the quoted language.
14
   24 CFR 85.36(b)(3).

                                                       96
                  left office on January 7, 2008. During Mr. Street’s time serving as mayor the
                  former executive director of the Authority, Carl Greene, submitted a request to
                  HUD to waive the annual contributions contract’s prohibitions on conflicts of
                  interest, in order for then-Mayor Street to join the Authority’s board of
                  commissioners. Mr. Greene submitted the request for waiver on April 19, 2004.
                  Mayor Street’s son, Sharif Street, was at that time employed as an associate
                  attorney by the law firm of Wolf Block Schorr & Solis-Cohen (Wolf Block).15
                  Wolf Block had at the time of the request several current and active contracts for
                  the provision of legal services to the Authority.

                  Appended to Mr. Greene’s conflict of interest waiver request was a memorandum
                  on the matter authored and signed by the Authority’s General Counsel Leigh A.
                  Poltrock and addressed to HUD. The memorandum sought to demonstrate, in
                  part, that a waiver by HUD would be permitted under State and local law.16 The
                  General Counsel noted that the Pennsylvania Public Official and Employee Ethics
                  Act regulates conflicts of interest of this nature within the Commonwealth of
                  Pennsylvania. Turning to that statue, 65 Pa. C.S.A. §1102 defines a “conflict of
                  interest,” in part, as the use by a public official of the authority of his office for
                  the pecuniary benefit of: (1) himself; or (2) a member of his immediate family; or
                  (3) a business with which he or a member of his immediate family is associated.17

                  The General Counsel’s memorandum continued advising that Section 1103 of
                  Title 65 lists 10 specifically restricted activities, 2 of which could be applicable to
                  the (then) mayor’s activities on the board of commissioners. First, 65 Pa. C.S.A.
                  §1103(f) states in relevant part that:

                      (f) Contract.- No public official or public employee or his spouse or child or
                      any business in which the person or his spouse or child is associated shall
                      enter into any contract valued at $500 or more with the governmental body
                      with which the public official or public employee is associated or any
                      subcontract valued at $500 or more with any person who has been awarded a
                      contract with the governmental body with which the public official or public
                      employee is associated, unless the contract has been awarded through an
                      open and public process, including prior public notice and subsequent public
                      disclosure of all proposals considered and contracts awarded…18

                  The General Counsel noted that if any issues pertaining to the ongoing Wolf
                  Block contracts were to come before the board of commissioners the above would
                  not prohibit the mayor from engaging in related activities of the board, he would

15
   It is the understanding of HUD OIG that on March 23, 2009, the firm’s partners voted to dissolve the partnership.
16
   HUD’s waiver did not extend to provisions of State law. Obviously, HUD lacks the authority to waive State law.
Rather, HUD’s waiver was of Section 19 of the Authority’s annual contributions contract and only addressed then
Mayor Street’s ability to serve on the board as mayor.
17
   Italics not original.
18
   Italics not original.

                                                         97
                  simply be prohibited from having any supervisory role or other responsibility for
                  the implementation of such contracts. The other relevant section from 65 Pa.
                  C.S.A. §1103 discussed by the Authority’s General Counsel addressed voting
                  conflicts. The relevant portion states that:

                       (j) Voting conflict.- … Any public official or public employee who in the
                       discharge of his official duties would be required to vote on a matter that
                       would result in a conflict of interest shall abstain from voting and, prior to the
                       vote being taken, publicly announce and disclose the nature of his interest as a
                       public record in a written memorandum filed with the person responsible for
                       recording the minutes of the meeting at which the vote is taken…19

                  As the Authority’s general counsel noted in her memorandum, this section would
                  prohibit Mr. Street from voting on any issue relating to Wolf Block’s contracts
                  with the Authority, as well as voting on any other matter where a conflict of
                  interest might exist.20 Mr. Street would be compelled to abstain on any such vote.

                  However, based on board minutes, on five occasions during our audit period, Mr.
                  Street voted to approve Wolf Block’s contracts with the Authority.21 These votes
                  occurred between December 16, 2004, and January 31, 2007. At each and every
                  board meeting wherein a contract for Wolf Block was part of the agenda,
                  Authority Board Chairman Street voted “aye,” or yes, on all five of these
                  contracts.22 Furthermore, at each and every such vote Mr. Street was concurrently
                  serving as the chairman of the board of commissioners.

19
   Italics not original.
20
   Note that 24 CFR 85.36(b)(1) would apply 65 Pa. C.S.A. §1103 to Federal monies, and would similarly prevent
Mr. Street from voting on the contracts in question. That section states that “(1) Grantees and subgrantees will use
their own procurement procedures which reflect applicable State and local laws and regulations, provided that the
procurements conform to applicable Federal law and the standards identified in this section.”
21
   HUD OIG understands that Chairman Street’s son was an associate in the affordable housing group of Wolf Block
until March 2008. In reviewing 185 invoices/payments for Wolf Block, from 5 contracts totaling approximately
$923,000, Chairman Street’s son was included in each of the 5 contracts. Unfortunately, HUD OIG was unable to
determine the full extent of the son’s billings to the Authority because the Authority failed to provide support for its
payments to its outside law firms. However, the HUD OIG audit did identify one invoice that included hours
charged directly by the family member. The charge was for 37.6 hours at $250 per hour, for a total of $9,400. HUD
OIG also notes that 45 of the firm’s 185 invoices contained prohibited block billing, and therefore, did not include
the names, hours, or amount attributed to the specific individuals charging time.
22
   The relevant contracts Chairman Street voted on are:
      1) PHA Contract 003281B, with a maximum contract amount of $5,000,000, approved by board resolution
           11017 on December 16, 2004;
      2) PHA Contract 003459D, with a maximum contract amount of $4,500,000, approved by board resolution
           11060 on June 16, 2005;
      3) PHA Contract 003486A, with a maximum contract amount of $7,500,000, approved by board resolution
           11073 on September 15, 2005;
      4) PHA Contract 003486H, with a maximum contract amount of $5,000,000, approved by board resolution
           11084 on October 24, 2005; and,
      5) PHA Contract 003598B, with a maximum contract amount of $7,500,000, approved by board resolution
           11154 on January 31, 2007.

                                                          98
                  Mr. Street’s role as chairman of the board of commissioners for the Authority
                  makes his actions more egregious. The five contracts Chairman Street voted in
                  favor of had a combined total maximum contract amount of $29.5 million. In
                  voting on these contracts, and in particular by voting in favor of these contracts,
                  Chairman Street and the Authority violated Section 19 of its annual contributions
                  contract with HUD, as well as Pennsylvania State law.23 Consequently, for all of
                  the reasons above, Chairman Street and the Authority may have violated Article
                  III of the Moving to Work agreement which became active on April 1, 2001.24

                  HUD’s Office of Regional Counsel reviews all litigation services contracts to
                  assure that they contain adequate protection against fraud and abuse and all
                  mandatory provisions required for personal services contracts for the program or
                  activity giving rise to the litigation, and that the legal fees charged are reasonable
                  for the services rendered.

                  On February 14, 2011, HUD’s Assistant Secretary for Public and Indian Housing
                  sent a letter to Chairman Street restating the Department’s position that it granted
                  a waiver of the conflict of interest provision of Section 19 A (iii) of the Public
                  Housing Annual Contributions Contract for then-Mayor Street to serve as a
                  member of the Authority’s board of commissioners. HUD OIG exerted no
                  pressure for the letter to be sent.

                  We initially did not have the correct date that Chairman Street’s son ended his
                  employment with the firm in the draft audit report. We have revised the date from
                  the draft report that was initially presented to the Authority strictly for discussion
                  and comment only. This change did not impact the conclusion on this matter in
                  any way however because Chairman Street voted to award all five contracts
                  during the period December 2004 to January 2007 while his son was employed by
                  the firm.

Comment 23 The Authority states that “there is not a scintilla of evidence” that it did not work
           cooperatively with the auditor. HUD OIG disagrees. The Authority’s lack of
           cooperation through its outside legal counsel came in many forms and was
           manifested in many ways. The outside counsel mainly obstructed the audit by
           refusing to provide HUD OIG auditors with “full and free” access to responsible
           employees and officials and the billing records that the outside law firms had
           submitted to the Authority, and then suggested that the auditors’ interest in such
           records evidenced their alleged bad faith. The Authority’s claim that all of the
           missing support for outside legal payments is somehow related to its yet

23
  Chairman Street’s appointment to the board of commissioners will expire on September 20, 2011.
24
  The Authority’s Moving to Work Agreement of April 1, 2001 (signed on February 28, 2002), Article III, Default”
provides that default is defined as “Use of funds subject to this Agreement for a purpose other than as authorized by
this Agreement; noncompliance with legislative, regulatory, or other requirements applicable to this Agreement;
other material breach…” This language mirrors that found in the current Moving to Work Agreement at VIII(B)(3),
(B)(4) and (B)(5).

                                                         99
unsupported claim of “attorney client privilege” is not supported by the audit
evidence. In this regard, it is important to consider that the Authority paid 142 of
472 invoices (30 percent) using block billing which is prohibited by its contracts
with the law firms, and paid at least 134 invoices, without providing HUD OIG
even redacted or incomplete copies of the invoices to support the payments. It
appears that counsel expects HUD OIG to accept its verbal assurance that millions
of Federal tax dollars were paid to them with little or no documentation provided
to support the payments.

For a specific example to disprove the Authority’s claim that there was not a
“scintilla of evidence” that it did not work cooperatively with the auditor, we
present an e-mail from the auditor to responsible Authority officials and their
outside counsel on November 30, 2010, with which the Authority never fully
complied. The e-mail states:

   Previously, we requested PHA to provide various data, documentation, and
   scheduling of interviews with PHA personnel. (Additional detail is contained
   in my prior emails regarding the various data/information requests listed
   below). Our requests and repeated follow-ups, both verbal and by email,
   have been, in all cases, directed to you, in accordance with PHA imposed
   restrictions regarding such requests. However, regarding the items requested
   in the following list, PHA has provided little or no meaningful response.

   Once again, please provide me with a date(s) as to when the OIG can meet
   with the individuals indicated and when the OIG can expect to receive the
   previously requested data/information or a detailed explanation as to why
   PHA will not provide the requested data/information.

   November 17, 2010:

       Meeting requested with Ms. Helen Ferris.

       Meeting with someone from finance who can discuss/explain certain of
       PHA’s general ledger descriptions taken from data download provided by
       PHA.

   November 12, 2010:

       Explanation of the basis for invoices from Flaster Greenberg, PC, to the
       Housing Authority Risk Retention Group being included in the invoices
       that Flaster Greenberg sent to PHA in response to Ms. Shelly James’s
       request.




                                100
                 November 9, 2010:

                    HUD Office of the Regional Counsel, in a letter dated December 05, 2005
                    regarding contracts 003459, and in a letter dated January 25, 2006
                    regarding contracts 003486 urged the inclusion of the Addendum to
                    Engagement Agreement found in HUD Notice 2003-24 (HA). We
                    requested an explanation as to why such addendum was not included as
                    part of the contracts.

                 November 8, 2010:

                    Copy of the PHA travel reimbursement policy and guidelines applicable to
                    travel of persons providing contracted professional and consulting
                    services during the period of April 1, 2007 through August 31,
                    2010 including all changes made to the policy and guidelines during that
                    time period.

                 October 29, 2010:

                    List of legal settlements during the audit period (April 1, 2007 through
                    August 31, 2010) on behalf of PHA.

                    Copy of recent legal contracts submitted by PHA to HUD for approval
                    along with related requests and authority response(s) to any related HUD
                    correspondence.

                 August 27, 2010:

                    Download of PHA accounts payable records.

             The Authority claims that responsive information was always provided to HUD
             OIG. However, this was not always the case. We requested complete
             documentation to support payments for legal services. The Authority’s outside
             counsel asserted that the documents provided were responsive to our request, but
             also withheld some information, citing attorney-client privilege. Counsel asserted
             that the Authority’s payments for outside legal services were eligible and
             supported, but refused to provide documentation to demonstrate that the legal
             services were legitimate, necessary, and reasonable. The information provided
             was not sufficient to ascertain if the legal services were legitimate, necessary,
             reasonable expenses to be paid for with Federal funds.

Comment 24 The Authority has provided copies of written correspondence and e-mails and
           makes other claims that it asserts indicated that it worked cooperatively with
           HUD OIG to fulfill its document requests. There was, of course, by necessity,
           some communication between HUD OIG and the Authority’s outside attorneys as
                                            101
              the auditors attempted to perform the audit. Ultimately the responses from the
              attorneys simply served to delay the progress of the audit and on December 10,
              2010, HUD OIG had to serve the Authority with a subpoena to obtain information
              and documentation.

              We requested an automated download of the Authority’s accounts payable file
              (subsidiary ledger) for the audit period. The documents that the Authority
              provided were not responsive to this request. The Authority’s outside counsel
              stated that the Authority does not maintain a separate accounts payable file. This
              is contrary to generally accepted accounting principles for an entity on the accrual
              basis of accounting and is contradicted by the Authority’s general ledger trial
              balances for such accounts. An accounts payable subsidiary ledger contains the
              detail transaction history and amounts of individual customer accounts which tie
              into the control account and the general ledger. The Authority’s disbursement
              file, or register, is not the equivalent of an accounts payable file. The
              disbursements file shows only payments that were generated, not the individual
              transactions and amounts.

              We requested read-only access to the Authority’s computer system, specifically,
              its general ledger, contracts register/database, accounts payable records, and its
              disbursement register. The documents that the Authority provided were not
              responsive to this request. The Authority opted to provide selected listings in lieu
              of the requested access. Because of the Authority’s refusal to provide the
              requested access and because of the limitations imposed by its decision to provide
              only selected information/data, we were unable to determine the completeness
              and reliability of information/data that the Authority provided and whether an
              adequate audit trail existed.

              During the audit, the Authority’s outside counsel repeatedly stated that it would
              provide only those documents and information that it unilaterally determined
              would satisfy our requests for information/documentation. For example,
              regarding payments for legal services, we requested original invoices including
              all supporting documentation. The copies of invoices that the Authority provided
              were not responsive to this request. Moreover, although the Authority provided
              some documentation such as contracts and related documents, we could not verify
              the completeness and reliability of the information provided because the
              Authority denied the auditors access to the filing cabinets and office areas where
              the files were stored.

Comment 25 Based on our review of the invoices the Authority provided for the audit period of
           April 2007 through August 2010, we determined that the Authority paid the firm
           of Schnader Harrison Segal & Lewis LLP at least $672,000 for services it
           performed on our two recent audits of the Authority’s Housing Choice Voucher
           program. In contrast, salary and benefit costs for the HUD OIG staff that worked
           on the audits of the Authority’s Housing Choice Voucher program totaled about
           $321,000. The Authority paid just one of the two law firms working on these
                                              102
              audits more than twice as much to assist it on the two audits as it cost HUD OIG
              to perform the audits. Invoices from the firm Ballard Spahr Andrews & Ingersoll,
              LLP showed it was paid $326,000 for work on HUD OIG audits during the audit
              period April 2007 until August 2010, but the invoices did not identify costs to the
              specific audit. This excessive duplicative cost was certainly not reasonable or
              necessary. In this regard, the reference to the Housing Choice Voucher program
              regulation is relevant because the costs for these legal services were related to the
              program. Moreover, the regulations at 24 CFR 982.158(c) provide another
              example of the Authority’s obligation to provide HUD OIG full and free access to
              all accounts, records, computerized or other electronic records and to any
              computers, equipment, or facilities containing such records and to provide any
              information or assistance needed to access the records.

Comment 26 The Authority’s statements in this written response were also presented by its
           outside counsel at the February 14, 2011, exit conference. It is worth noting that,
           as shown in appendix C, the outside counsel’s firm received $8.7 million from the
           Authority during the 41-month audit period. As shown in appendix D, HUD OIG
           reviewed $1.1 million in payments to this firm and concluded that the Authority
           has yet to adequately support nearly all of the payments. The outside counsel
           elaborated in greater detail on the comments that she made at the exit conference
           regarding the Authority’s controls for verifying receipt and supportability of
           outside legal services (the same type of legal services she was also paid to
           perform) in the Authority’s written response.

              As stated in the audit report, the Authority did not have written procedures for
              approving invoices submitted by law firms. The audit results showed that the
              Authority made payments to law firms based on invoices in prohibited block
              billing format and, although the majority of the supporting documentation the
              Authority provided for the invoices that we reviewed was missing, incomplete,
              and insufficient, we noted that the Authority continued to pay for costs that were
              specifically prohibited by the contract requirements. The senior in-house counsel
              person who was responsible for reviewing and approving invoices submitted by
              law firms stated that she contacted the departments receiving the benefits of the
              legal services if she had questions regarding an invoice, but we found no evidence
              of such communications in the documentation the Authority provided. We could
              not perform any additional verification because the Authority denied the auditors
              access to the filing cabinets and office areas where the payment files were stored.
              Moreover, contrary to counsel’s assertion that the Authority consolidated the
              invoice review process several years ago, another Authority senior counsel person
              stated during the audit that before about a year ago she reviewed invoices from
              law firms. She expressed concern that she has not been asked to verify work
              performed by outside counsel related to her areas of responsibility. She stated she
              no longer received invoices for review after questioning an invoice from Ballard
              Spahr Andrews and Ingersoll, LLP.



                                               103
Comment 27 According to generally accepted government auditing standards, auditors should
           evaluate whether the audited entity has taken appropriate corrective action to
           address findings and recommendations from previous engagements that are
           significant within the context of the audit objectives. The audit report should
           disclose the status of known but uncorrected significant or material findings and
           recommendations that could affect the current audit objective(s). If the findings
           with incomplete action are significant and planned action is not adequate, the
           auditor should present this information in the reported findings. The fact that a
           HUD management decision was achieved does not preclude HUD OIG from
           determining whether or not the audited entity continued to take corrective action
           to address findings and recommendations from previous engagements. Since we
           identified significant and material findings that had not been corrected from a
           prior audit, we had a responsibility to report it.

Comment 28 As stated in the audit report, due to time constraints and the failure of the
           Authority’s outside attorneys to cooperate on this current audit, we did not follow
           up on these issues. However, HUD OIG reserves the right to review this area of
           concern on a future audit engagement.

Comment 29 Section VII.C of the Authority’s Moving to Work agreement does in fact require
           the Authority to give access to all requested sources of information including
           access to files, access to units, and an opportunity to interview agency staff and
           assisted residents to HUD. This provision would of course include HUD OIG.
           We are very concerned that the Authority continues to question HUD OIG’s
           statutory authority to access its records.

Comment 30 The Authority has provided these statements in an effort to justify large sums it
           paid to outside attorneys and has provided no support for these statements to
           HUD OIG. HUD OIG does not question the Authority’s right to obtain outside
           legal services when warranted. However, as a HUD spokesperson has also
           similarly articulated, these legal services must be reasonable, necessary and
           supported when taxpayer dollars are at stake. HUD OIG has reviewed all
           correspondence and other documentation the Authority provided both during the
           audit and immediately after the audit exit conference, and have correctly
           categorized $4.5 million reviewed as unsupported costs in appendix A to this
           audit report. The audit showed that the Authority paid $30.5 million for outside
           legal services provided by 15 law firms during the period April 2007 through
           August 2010 (see appendix C). The audit objective was to determine whether the
           Authority’s payments to outside legal firms could be supported and complied with
           HUD regulations and other applicable requirements. The audit concluded that the
           Authority’s payments to outside attorneys did not comply with HUD regulations
           and other applicable requirements.




                                             104
Appendix C

                NET PAYMENTS TO LAW FIRMS



                       Law firm                Net payments
      Ballard Spahr Andrews & Ingersoll, LLP   $ 8,697,998
      Wolf Block Schorr & Solis-Cohen, LLP       7,056,703
      Duane Morris LLP                           4,177,734
      Schnader Harrison Segal & Lewis LLP        3,137,900
      Fox Rothschild LLP                         3,089,427
      Cozen O’Conner                             1,066,283
      Flaster Greenberg PC                         936,952
      Cohen & Grigsby, P.C.                        818,813
      Kolber and Freiman & Randazzo                709,053
      Blank Rome LLP                               530,670
      Law Offices of Denise Joy Smyler             112,151
      Kelly, Monaco and Naples                     102,314
      Greenberg Traurig LLP                         28,780
      Hangley, Aronchick, Segal & Pudlin            20,181
      Margaret R. Brogan, Esq.                       4,000
      Total payments                           $30,488,959




                                       105
Appendix D

      SUMMARY OF PAYMENTS BY DEFICIENCY IDENTIFIED




                                                                                                                                       Redacted information (2)
                                                                                              Unsupported amount
                                                                  Total dollar amount
                                         Number of invoices




                                                                                                                                                                                      Missing invoice (4)
                                                                                                                                                                  documentation (3)
                                                                                                                   Block billing (1)




                                                                                                                                                                     Insufficient
                                            reviewed25
              Law firm




 Ballard Spahr Andrews &
                                          183                 $1,073,240                  $1,071,569               29                  154                           25               23
 Ingersoll, LLP
 Wolf Block Schorr &
                                          185                   922,566                     920,606                45                  71                            42               108
 Solis-Cohen, LLP
 Flaster Greenberg PC                       17                  248,475                     248,366                 3                  17                             0                0
 Duane Morris LLP                           45                  614,598                     613,398                35                   8                            19                0
 Fox Rothschild LLP                         14                  616,266                     609,368                 4                   7                             8                3
 Schnader Harrison Segal &
                                            28                 1,032,813                   1,032,813               26                  10                              1               0
 Lewis LLP
 Totals                                   472                 $4,507,958                  $4,496,120               142                 267                           95               134

(1) Block Billing:

       1.   Includes only general description of services (e.g., legal advice with no detailed description of services
            performed) or
       2.   Includes only a summary of time charged for each attorney (e.g., only attorney name, rate, and total hours
            and amount billed).

(2) Redacted Information:

       1.   Evidence in the documentation provided that specific information on one or more pages of the invoice was
            omitted/redacted or
       2.   Evidence in the documentation provided that complete page(s) was/were omitted.


(3) Insufficient Documentation:

       1.   Invoice was provided, but there was no documentation to support the amount invoiced/paid for services
            and/or costs or


25
     Some invoices had more than one deficiency.
                                                                                    106
    2.   Invoice was provided, but the accompanying documentation did not adequately support the amount
         invoiced/paid.

(4) Missing Invoice:

Purchase order(s), remittance record(s), or disbursement record, etc., indicated that a payment was made against the
contract on a specific date, but no invoice was provided to support the payment.




                                                        107
Appendix E

             EXAMPLE OF BLOCK BILLING




                        108
Appendix F

             EXAMPLE OF PARTIAL INVOICE




                         109
Appendix G

     EXAMPLE OF INVOICE MISSING DESCRIPTION




                       110
111
112
113
Appendix H

 INVOICE SHOWING APPARENT CONFLICT OF INTEREST




                      114