oversight

The Retreat at Church Ranch, Westminster, CO Did Not Submit the Management Agent Certification to HUD for Approval and Did Not Maintain Complete and Accurate Books of Account

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-10.

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

OFFICE OF AUDIT
REGION 8
DENVER, CO




       Retreat at Church Ranch, Westminster, CO

       Section 232/223(f) Refinanced HUD-Insured
                        Mortgage




 2013-DE-1003                             September 10, 2013
                                                                       Issue Date: September 10, 2013

                                                                       Audit Report Number: 2013-DE-1003



TO:            Tim Gruenes
               Director, Office of Healthcare Programs, Asset Management and Lender
               Relations Division, HI

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

SUBJECT:       The Retreat at Church Ranch, Westminster, CO Did Not Submit the Management
               Agent Certification to HUD for Approval and Did Not Maintain Complete and
               Accurate Books of Account


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the Retreat at Church Ranch’s refinanced
HUD-insured mortgage.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
913-551-5872.




                                                Office of Audit Region 8
                                    1670 Broadway, 24th Floor, Denver, CO 80202
                                      Phone (303) 672-5452, Fax (303) 672-5006
                           Visit the Office of Inspector General Website at www.hudoig.gov
                                         September 10, 2013
                                         The Retreat at Church Ranch, Westminster, CO Did Not
                                         Submit the Management Agent Certification to HUD for
                                         Approval and Did Not Maintain Complete and Accurate
                                         Books of Account


Highlights
Audit Report 2013-DE-1003


 What We Audited and Why                  What We Found

We audited the Retreat at Church         The owner did not submit the management agent
Ranch to determine whether the owner     certification to HUD for proper approval. He
submitted a management agent             disregarded HUD guidelines and HUD’s requests for
certification to HUD for proper          the approved certification. As a result, the owner
approval and to determine whether the    improperly paid more than $119,000 of management
books of account were complete and       fees.
accurate. We conducted this audit
mainly because of a referral from the    The project did not have accurate or complete books of
U. S. Department of Housing and          account. There were no written financial management
Urban Development’s (HUD)                policies and the owner had full control over the final
Departmental Enforcement Center,         books of account. As a result, the project management
requesting a financial review of the     and HUD lacked required information on the financial
transactions within the project’s        status of the project.
operating account.

 What We Recommend

We recommend that the HUD require
the Retreat to complete and submit the
required certification to HUD for
approval, repay any management agent
fees determined to be improperly
disbursed, and establish and implement
comprehensive financial policies and
procedures including the proper
maintenance of its books of account.
                           TABLE OF CONTENTS


Background and Objective                                                          3

Results of Audit
      Finding 1: The Owner Did Not Obtain HUD’s Approval for Its Management
                 Agent                                                            4
      Finding 2: The Project Did Not Have Accurate or Complete Books of Account   6

Scope and Methodology                                                             8

Internal Controls                                                                 9

Appendixes
A.    Schedule of Questioned Costs                                                10
B.    Auditee Comments and OIG’s Evaluation                                       11




                                           2
                       BACKGROUND AND OBJECTIVE

The Retreat at Church Ranch was the business name for a 47-unit assisted care project in
Westminster, CO. The owner formed Signature - The Retreat LLC, a Colorado limited liability
company, in 1998 to own and operate the project. The owner contracted with an independent
management agent to administer the daily operations of the project. He refinanced the project’s
mortgage in 2007 with an U. S. Department of Housing and Urban Development (HUD) insured
mortgage.

The mortgage was refinanced under Section 232/223(f) of the National Housing Act for purchase or
refinance of an Assisted Living Facility in September 2007. Section 232 provided mortgage
insurance for care facilities including assisted living facilities which applies to the Retreat. HUD
did not subsidize any of the units in the project. A regulatory agreement was signed by HUD and
the owner on September 26, 2007. The owner agreed to use project funds for the mortgage and
expenses necessary to properly maintain and operate the project and to maintain the books of
account in accordance with HUD requirements.

Our objective was to determine whether the owner submitted a management agent certification
to HUD for proper approval and to determine whether the books of account were complete and
accurate.




                                                 3
                               RESULTS OF AUDIT


Finding 1: The Owner Did Not Obtain HUD’s Approval for Its
           Management Agent
The owner did not submit the management agent certification to HUD for proper approval. This
condition occurred because the owner disregarded HUD guidelines and HUD’s requests for the
approved certification. As a result, the owner improperly paid more than $119,000 of
management fees.




 The Management Agent Was
 Not Properly Approved

            The owner did not submit the management agent certificate to HUD for proper
            approval. HUD required that the owner submit Form HUD-9839-B, titled “Project
            Owner’s/Management Agent’s Certification for Multifamily Housing Projects for
            Identity-of-Interest or Independent Management Agents,” for approval. The owner
            had his own management contract that he signed each year with the management
            agent, but this contract did not meet HUD requirements.

            The owner was aware of the certification since he submitted a copy with the
            mortgage application in 2007. However, he did not submit a copy to HUD for
            approval. On the copy in the application, the owner selected a 1 year renewal. He
            did not submit a copy to HUD any of the following years. The owner stated that he
            had never submitted a certification for approval to HUD.

            The certification included a requirement that the owner disburse management fees
            from project income only after he submitted this certification to HUD and HUD
            approved the agent to manage the project.

 The Owner Disregarded HUD
 Requirements

              The owner disregarded HUD guidelines and HUD’s requests for the approved
              certification. HUD officials issued various correspondence that included requests
              for a copy of the approved certification. The owner’s response to HUD’s April 6,
              2012, request was that he was unable to find a certification between the Retreat
              and the management agent effective on or about December 7, 2007.



                                              4
                                                
Management Agent Fees Were
Improperly Disbursed

          Without a properly approved certification, the owner improperly disbursed
          $119,218 of management fees during our audit period of January 2011 through
          October 2012.

Recommendations

          We recommend that the Director of HUD’s Office of Healthcare Programs, Asset
          Management and Lender Relations Division

          1A. Require the owner to complete and submit a current version of the required
              certification to HUD for approval. If the owner does not submit the required
              certification for HUD approval, consider seeking administrative sanctions.

          1B. Determine whether any portion of the $119,218 of improperly disbursed
              management agent fees are ineligible. For any portion determined to be
              ineligible, require the owner to repay the fees from non-project funds.




                                          5
                                            
Finding 2: The Project Did Not Have Accurate or Complete Books of
           Account
The project did not have accurate or complete books of account. This occurred because there
were no written financial management policies and the owner had full control over the final
books of account. As a result, the project management and HUD lacked required information on
the financial status of the project.


 The Owner Prepared
 Inaccurate and Incomplete
 Books of Account


              The owner prepared inaccurate and incomplete books of account which did not
              comply with the regulatory agreement. The project used QuickBooks for its
              accounting system. The management agent and staff members made entries into
              QuickBooks for funds collected and disbursed at the project. The owner made
              entries for funds he disbursed at his residence and often did not use the correct
              accounting codes. He also made changes to entries made by the management
              agent team.

              The Certified Public Accountant (CPA) contracted to conduct the annual financial
              audit for 2011 was given read-only access to the Retreat’s QuickBooks during the
              audit. He identified enough changes to the entries made by the owner that the
              CPA was not willing to provide an opinion on the financial statements. He
              discussed the changes with the owner, who then changed the entries back to the
              original content. This action also put the owner in noncompliance with the
              regulatory agreement which required him to maintain books and records at all
              times in reasonable condition for proper audit and to submit a complete annual
              financial report certified by a CPA within 60 days of the end of the fiscal year.

 There Were No Written
 Financial Policies and
 Inadequate Controls

              There were no written financial management policies and the owner had full
              control over the final books of account. The owner did not establish written
              financial management policies. The management agent team had informal
              procedures for the financial functions they performed. The owner did not follow
              those procedures and made changes to the accounting entries made by the
              management agent team. He had final control over the books of account and
              made entries that were inaccurate or incomplete. He also maintained control over
              some disbursements including the mortgage payments.


                                               6
                                                
HUD Did Not Know the Actual
Financial Status of the Project


            The books of account were inaccurate because of no established policies and
            inadequate controls. Therefore, the project management and HUD lacked
            required information on the actual financial status of the project. Additionally,
            the owner was consistently slow making the mortgage payments so the mortgage
            was in rolling default since March 2008.

Recommendations

            We recommend that the Director of HUD’s Office of Healthcare Programs, Asset
            Management and Lender Relations Division,

            2A. Require the owner to establish and implement comprehensive financial
                policies and procedures including the proper maintenance of the books of
                account.

            2B. Provide the necessary technical assistance and confirm that the procedures
                have been implemented.




                                             7
                                              
                        SCOPE AND METHODOLOGY

We performed our onsite audit work at the project at 10190 Wadsworth Boulevard, Westminster,
CO, between November and December 2012. The audit generally covered the period January 1,
2011, through October 31, 2012.

To accomplish our objective, we interviewed pertinent Retreat and HUD staff and reviewed

      Applicable Federal regulations, HUD requirements, and the regulatory agreement;
      The Retreat’s available policies and procedures relating to management of the project;
      The mortgage company’s underwriting file for the Retreat’s HUD-insured mortgage;
      The Retreat’s disbursements and receipts records and books of account and available
       supporting documents;
      The Retreat’s bank account records; and
      HUD’s monitoring reviews and the Retreat’s responses to the findings and other pertinent
       correspondence.

We reviewed all available Retreat accounting records and bank documents. The owner did not
provide supporting documents for all of the disbursements he made.

We did not rely on computer-processed data for our audit purposes. We traced to or verified the
supporting documentation to draw our conclusions.

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 audit objective.




                                               8
                                                 
                              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:

                     Controls over the management of the project.
                     Policies and controls over the financial functions and books of account.

               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:

                     The owner did not obtain HUD approval of the management agent and
                      improperly paid management agent fees.
                     The owner did not establish and implement written financial policies and
                      procedures or ensure that the books of account were accurate and complete.




                                                 9
                                                   
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                 Recommendation number                      Unsupported 1/

                           1B                                   $119,218


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.




                                             10
                                               
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                   Auditee Comments

Comment 1
             The owner e-mailed the following comments on August 29, 2013:

             Cindy Avery’s management company, Care Support, LLC was approved by
             HUD in 2007 when the loan was closed by Greystone. Please see attached
Comment 2    management certification. However, Cindy did incorrectly pay herself by
             using other identities such as AL Management and The Retreats, LLC. We
             have corrected this going forward (see attached 2012 audit report) and all
             management fees will be paid to the approved management agent – Care
             Support, LLC. Cindy has been the operator since 2005 and although payments
             were made to other entities that she owed – all management fees were paid to
             Cindy who was approved by HUD via Care Support, LLC.

Comment 3    The Auditor for 2011 finally completed the audit and submitted to HUD –
             please see attached 2011 HUD submission report

             Thanks

             Jeff Williams




                                           11
                                             
                         OIG Evaluation of Auditee Comments

Comment 1   The owner also attached six documents to his comments e-mail: the Management
            Entity Profile (form HUD-9832) from 2007; the copy of form HUD-9839-B
            discussed in finding 1; the audited financial statements report for 2011; the
            electronic submission to HUD report for the 2011 audited financial statements
            report; the audited financial statements report for 2012; and the owner’s Previous
            Participation Certification (form HUD-2530) from 2007. None of these
            documents directly impacted information in the audit report.

Comment 2   The form HUD-9839-B provided by the owner in his e-mail is not approved by
            HUD, which is the problem identified in finding 1. Therefore, the requirement
            still applies that management fees cannot be paid until the form is approved by
            HUD. We included all transactions to the management fee account, regardless of
            the payee on individual checks. None of the other attached documents show
            HUD approval of the management agent. Also, the owner indicates the
            management agent is acting as the operator of the property. If the management
            agent is also acting as the operator, the owner and the operator should complete
            the required paper work with HUD to properly record the operator of the property.

Comment 3   The 2011 audited financial statements report was issued on July 17, 2013 which is
            over one year and three months past the required submission date. The issuance
            of the report does not change the reason why the CPA would not certify to the
            original financial reports discussed in finding 2.




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