oversight

Five Star Services, Inc., Fargo, ND, Did Not Submit Monthly Accounting Reports and Section 236 Excess Income Reports to HUD

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-11-02.

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

                                                                 Issue Date
                                                                          November 2, 2011
                                                                  
                                                                 Audit Report Number
                                                                              2012-DE-1001




TO:         Marcie D. LaPorte, Director, Denver Multifamily Hub, 8AHML

            //signed//
FROM:       Ronald J. Hosking, Regional Inspector General for Audit, 8AGA


SUBJECT: Five Star Services, Inc., Fargo, ND, Did Not Submit Monthly Accounting
            Reports and Section 236 Excess Income Reports to HUD


                                   HIGHLIGHTS

 What We Audited and Why

             We audited Five Star Services, Inc., based upon a request from the U.S.
             Department of Housing and Urban Development’s (HUD) Denver Office of
             Multifamily Housing. The objective of our audit was to determine whether Five
             Star submitted the required monthly accounting and Section 236 excess income
             reports to HUD.

 What We Found
             Five Star did not submit required monthly accounting reports and Section 236
             excess income reports to HUD. It submitted monthly accounting reports only
             when it requested permission to use its reserve for replacement fund. In addition,
             it did not submit any Section 236 excess income reports to HUD for the 31
             months in our review period.

 What We Recommend
             We recommend that the Director of HUD’s Denver Office of Multifamily
             Housing require Five Star to submit the required monthly accounting reports and
             outstanding Section 236 excess income reports to HUD and if the required reports
           are not submitted, consider rescinding the privilege of retaining future excess
           income or taking other appropriate administrative action. We also recommend
           that HUD require Five Star to establish and implement sufficient controls to
           ensure submission of the required reports.

           The Denver Office of Multifamily Housing concurred with the recommendations
           and provided its management decisions on November 2, 2011.

Auditee’s Response
           We provided the discussion draft of the audit report to Five Star on October 19,
           2011, and requested its comments by November 2, 2011. Five Star did not
           provide a formal written response, but did concur with the finding and
           recommendations via e-mail on October 25, 2011.




                                            2
                           TABLE OF CONTENTS

                                                                                   4
Background and Objective

Results of Audit
                                                                                    
      Finding 1: Five Star Did Not Submit Monthly Accounting Reports and Section   5
                    236 Excess Income Reports to HUD

Scope and Methodology
                                                                                   7
 
                                                                                    
Internal Controls
                                                                                   8
 
                                                                                    




                                           3
                      BACKGROUND AND OBJECTIVE

Five Star Services, Inc., formerly Hendricks Property Management Corporation, was founded in
1972. It was established as a family corporation to develop, build, and manage government-
subsidized properties. The executive offices of Five Star are located in Fargo, ND. Five Star’s
mission is to address the housing needs and services of its applicants and residents through
affordable and competitive rental rates. It began managing the three projects owned by
Community Homes, Inc., on April 26, 1991.

Community Homes was established in 1970 as a 501(c)3 nonprofit corporation. Community
Homes is jointly owned by five public churches and is governed by a board of directors. Its
mission is to extend its joint ministry to care for people with low incomes by offering affordable
housing as a “stepping stone” that creates an opportunity to improve lives and families.
Community Homes consists of three projects, Phase I, Phase II, and Wahpeton (Phase III).
Phases I and II are located in Fargo, ND, and Phase III is located in Wahpeton, ND. Phase I has
88 units, Phase II has 96 units, and Phase III has 95 units. The projects are insured under Section
236 of the National Housing Act.

Community Homes receives subsidy assistance from the U.S. Department of Housing and Urban
Development (HUD) to provide housing to eligible low- to moderate-income households. In
2008, 2009, and 2010, Community Homes received more than $592,000, $662,000, and
$701,000, respectively, for its Section 8 project-based Housing Assistance Payments program.

The objective of our review was to determine whether Five Star submitted the required monthly
accounting and Section 236 excess income reports to HUD.




                                                4
                                RESULTS OF AUDIT


Finding: Five Star Did Not Submit Monthly Accounting Reports and
          Section 236 Excess Income Reports to HUD
Five Star did not submit monthly accounting reports and Section 236 excess income reports to
HUD. It did not implement controls to ensure compliance with the reporting requirements. As a
result, HUD could not effectively monitor changes or improvements in the financial and
management status of the three HUD-insured projects.



 Five Star Did Not Submit
 Required Reports


              Five Star did not submit monthly accounting reports and Section 236 excess income
              reports to HUD. It submitted monthly accounting reports only when it requested
              permission to use its reserve for replacement fund. Five Star did not submit the
              monthly accounting reports despite requests by HUD to do so since December 2009.
              In addition, it did not submit any Section 236 excess income reports to HUD for the
              31 months in our review period.

              The Five Star’s Project Owner’s/Management Agent’s Certification (form HUD-
              9839-B) with HUD requires it to comply with HUD handbooks, notices, or other
              policy directives that relate to the management of the project. HUD Handbook
              4370.1, Reviewing Annual and Monthly Financial Reports, requires the submission
              of monthly accounting reports whenever annual financial statement reviews, onsite
              management reviews, or other information indicates that the project is experiencing
              financial or management difficulties. HUD Office of Assest Management
              Memorandum, dated June 16, 2008, Changes of S,ubmission Process for Form
              HUD-93104, Monthly Report of Excess Income, Effective September 1, 2008,
              requires owners and agents to provide copies of each monthly report to the
              appropriate HUD field office.

 Five Star Did Not Implement
 Controls


              Five Star did not implement controls to ensure compliance with reporting
              requirements. Management officials thought that assigned staff members were
              completing and submitting the required reports; however, they were not doing so.




                                               5
HUD Could Not Identify
Financial and Management
Difficulties

           HUD could not effectively monitor changes or improvements in the financial and
           management status of the three HUD-insured projects. Monthly accounting reports
           and Section 236 excess income reports are useful tools in evaluating a project’s
           performance and monitoring compliance. They allow HUD to identify questionable
           disbursements or performance problems in a timely manner so that necessary
           clarifications or corrective actions can be undertaken to resolve the discrepancies.

Recommendations

           We recommend that the Director of HUD’s Denver Office of Multifamily Housing
           require Five Star to

           1A. Submit the required monthly accounting reports and outstanding Section 236
               excess income reports to HUD. If the reports are not submitted as required,
               HUD should consider rescinding the privilege of retaining future excess
               income or taking other appropriate administrative action.

           1B. Establish and implement sufficient controls to ensure that Five Star submits
               the required reports to HUD.




                                             6
                        SCOPE AND METHODOLOGY

Our audit covered the period September 1, 2008, through March 31, 2011. We performed our
onsite work from May through July 2011 at Five Star’s office located at 3255 43rd Street SW,
Fargo, ND, and the project offices located at 702 23rd Street S, Fargo, ND.

To accomplish our objectives, we obtained and became familiar with applicable HUD
regulations and guidance, along with Five Star’s operations manual and pertinent policies and
procedures it used to manage the HUD-insured multifamily projects owned by Community
Homes.

To determine whether Five Star was submitting its monthly accounting reports and Section 236
excess income reports to HUD, we interviewed applicable HUD, Five Star, and Community
Homes staff. We reviewed related documentation maintained by HUD and Community Homes
to verify the submission status of the required reports.

We did not use computer-generated data as audit evidence or to support our audit conclusions.
We used source documentation maintained by Five Star in its management, financial, and tenant
files for background information and in selecting our samples. All conclusions were based on
source documentation reviewed during the audit.

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




                                               7
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
               We determined that the following internal controls were relevant to our audit
               objectives:

                     Controls over the accounting and collecting of its tenant accounts receivable.
                     Controls over the accounting and tracking of its excessive bad debts.
                     Controls to ensure compliance with monthly accounting and Section 236
                      excess income reporting requirements.

               We assessed the relevant controls identified above.

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

 Significant Deficiency


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

                     Five Star did not implement controls to ensure that it complied with monthly
                      accounting and Section 236 excess income reporting requirements.




                                                 8