oversight

HUD's Oversight of the Wage Restitution and Deposit Account Needs Improvement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-04-16.

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

 OFFICE OF AUDIT
 HEADQUARTERS AUDIT DIVISION
 WASHINGTON, DC




          Office of Departmental Operations and
              Coordination, Washington, DC

                 Office of Labor Relations




2013-HA-0001                                 APRIL 16, 2013
                                                        Issue Date: April 16, 2013

                                                        Audit Report Number: 2013-HA-0001




TO:            Inez Banks-Dubose, Director, Office of Departmental Operations and
               Coordination, I

                //signed//
FROM:          Donna M. Hawkins, Acting Director, Inspections and Evaluations, Office of the
               Inspector General for Audit, Washington, DC, GAH


SUBJECT:       HUD’s Oversight of the Wage Restitution and Deposit Account Needs
               Improvement


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of HUD’s Office of Labor Relations deposit
program.

    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, and 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
202-402-8482.
                                           April 16, 2013
                                           HUD’s Oversight of the Wage Restitution and Deposit
                                           Account Needs Improvement




Highlights
Audit Report 2013-HA-0001


 What We Audited and Why                    What We Found

We audited the Office of Labor             Labor Relations violated the Miscellaneous Receipts
Relations deposit account based on a       Act when it retained liquidated damages, which should
request from the Acting Director of the    have been transferred to the U.S. Treasury. It also
Office Labor Relations. The Acting         indefinitely retained in its deposit account funds
Director was concerned with internal       categorized as unclaimed funds, unfound depositors,
controls over the deposit account. The     and unfound workers. As a result, more than $1.3
objective of our review was to             million in funds was withheld from use by various
determine whether (1) controls used to     programs within the Federal Government.
administer and distribute restitution
payments were adequate and (2) the         Labor Relations mismanaged project deposit funds;
correct workers received the restitution   specifically, it did not conduct a recurring
payments.                                  reconciliation of the deposit account. It also expended
                                           $20,000 to cover the Civic Lofts project payments,
                                           which was more than the actual balance for the project
 What We Recommend
                                           deposit. As a result, its deposit account balance did
                                           not reconcile with the balance maintained by the
We recommend that the Director of the      Office of the Chief Financial Officer and the Treasury.
U.S. Department of Housing and Urban
Development’s (HUD) Office of              Labor Relations did not (1) pay the Internal Revenue
Departmental Operations and                Service (IRS) 2010 taxes withheld from the
Coordination (1) properly dispose of the   employee’s wage restitution in a timely manner and (2)
more than $1.3 million in funds for        properly address the employer’s share of the taxes. As
liquidated damages, unclaimed funds,       a result, it delayed paying the IRS more than $200,000
unfound depositors, and unfound            for the 2010 employee’s share of the taxes and could
workers; (2) develop a policy for          owe the IRS an additional $40,000 for the employer’s
workers that are found to be deceased or   share of the taxes.
incarcerated and complete a monthly
reconciliation; (3) remit employees’       Labor Relations found workers that were deceased or
share of taxes quarterly; and (4) seek     incarcerated, and it paid wage restitution to individuals
recovery of $11,900 that Labor             other than these workers. As a result, it paid
Relations paid to individuals other than   approximately $11,900 to individuals who were not the
workers.                                   workers.
                            TABLE OF CONTENTS

Background and Objective                                                           3

Results of Audit
      Finding 1: Labor Relations Did Not Properly Dispose of Liquidated Damages and
      Deposited Funds                                                               4
      Finding 2: Labor Relations Mismanaged Project Deposit Funds                   8
      Finding 3: Labor Relations Did Not Pay Taxes in a Timely Manner              12
      Finding 4: Wage Restitution Was Paid to Individuals Other Than the Worker    15

Scope and Methodology                                                             17

Internal Controls                                                                 19

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use              21
B.    Auditee Comments and OIG’s Evaluation                                       22




                                            2
                                  BACKGROUND AND OBJECTIVE

The Director of the Office of Departmental Operations and Coordination has oversight of the
Office of Labor Relations. The Director of Labor Relations oversees the staff, which is located
in U.S. Department of Housing and Urban Development (HUD) headquarters and each HUD
region. The Labor Relations staff is responsible for oversight, administration, and enforcement
of HUD construction projects covered by the Davis-Bacon Act and other labor standards laws.
Davis-Bacon requires the payment of prevailing wage rates (which are determined by the U.S.
Department of Labor) to all laborers and mechanics working on Federal Government and District
of Columbia construction projects 1 that cost more than $2,000. Labor Relations staff directly
administers and enforces Davis-Bacon for Office of Housing multifamily development
programs.

When contractors or employers do not meet the prevailing wage rates, 2 underpayments occur,
and the employer is required to pay wage restitution to the affected employees. The employer
must submit a list of workers who could not be found and paid. At the end of the project, the
employer is required to make a deposit in the amount equal to the total amount of restitution that
could not be paid because the employee(s) could not be located. The contract administrator 3
must continue attempts to locate the unfound workers for 3 years after the completion of the
project. After 3 years, HUD and the contractors are no longer required to keep payroll and other
basic records for the project.

Civic Lofts project. During our review of the Chief Financial Officer deposit account files, we
found documentation on a settlement that occurred between HUD and the contractor associated
with the Civic Lofts (LR-06435380-DT-SW10-2) project. On May 14, 2010, the previous
Director of Labor Relations wrote a memorandum for the Federal Housing Administration
(FHA) comptroller about the Civic Lofts wage restitution. According to the memorandum, Civic
Lofts was rehabilitated in 2004-2006 with an FHA-insured loan and was, thus, subject to Davis-
Bacon prevailing wage rates. It was determined that the incorrect wage decision was used and
most of the workforce was underpaid. Under the terms of the settlement agreement, HUD
committed to pay $774,237 of the wage restitution, and the owner and contractor acknowledged
a liability for total back wages of $5,028. Labor Relations requested that FHA transfer $500,000
to the deposit account. Also, $5,028 was deposited for the contractor’s share of wage restitution
owed. Thus, Labor Relations was given a total deposit of $505,028 for Civic Lofts wage
restitution.

The objective of our review was to determine whether (1) controls used to administer and
distribute restitution payments were adequate and (2) the correct workers received the restitution
payments.



1
  Construction includes alteration or repair, including painting and decorating, of public buildings or public works.
2
  Prevailing wage rates are the wage rates listed on the wage decision for the project. The wage decision will list a minimum basic hourly rate of
pay for each work classification.
3
  The contract administrator could be a HUD employee or agent for HUD (such as a city, county, or public housing agency).


                                                                        3
                                RESULTS OF AUDIT



Finding 1: Labor Relations Did Not Properly Dispose of Liquidated
Damages and Deposited Funds
Labor Relations violated the Miscellaneous Receipts Act when it retained liquidated damages,
which should have been transferred to the U.S. Treasury. It also indefinitely retained in its
deposit account funds categorized as unclaimed funds, unfound depositors, and unfound workers.
This violation occurred because Labor Relations did not have procedures to deposit liquidated
damages into the Treasury miscellaneous receipts account. It also did not establish a disposition
plan for funds that remained after the search for workers and depositors was complete. As a
result, more than $1.3 million in funds was withheld from use by various programs within the
United States Government.


 Liquidated Damages

              During our review, Labor Relations reported that it had more than $46,450 in
              liquidated damages in its deposit account. These liquidated damages were from
              deposits made as far back as 2005. The Miscellaneous Receipts Act requires that
              these funds be provided to the Treasury. By not providing these funds to the
              Treasury, Labor Relations violated the Miscellaneous Receipts Act. In addition,
              the General Counsel advised Labor Relations to provide the liquidated damages to
              the Treasury.

              The Miscellaneous Receipts Act requires that

                      An official or agent of the Government receiving money for the
                      Government from any source shall deposit the money in the Treasury as
                      soon as practicable without deduction for any charge or claim.

              Liquidated damages are collected pursuant to the Contract Work Hours and
              Safety Standards Act. The Contract Hours Act sets overtime requirements with
              respect to most contracts covered by Davis-Bacon and other wage standards.
              Violations of the Contract Hours Act carry liquidated damages penalties. The
              liquidated damages are “to be withheld for the use and benefit of the United States
              Government.” Since liquidated damages are for the use of the United States
              Government, they should be provided to the Treasury pursuant to the
              Miscellaneous Receipts Act.

              HUD’s Office of the General Counsel’s legal opinion, Wage Restitution and
              Liquidated Damage Accounts, dated June 1982, stated that liquidated damages

                                               4
          should be provided to the Treasury pursuant to the Miscellaneous Receipts Act.
          The legal opinion further stated that the General Counsel had been advised that
          the liquidated damages were being held in a Treasury receipt account and the
          funds in that account were withdrawn at the end of each fiscal year by the
          Treasury. General Counsel concluded that Labor Relations should continue to
          transfer liquidated damages to the Treasury.

          The condition described above occurred because Labor Relations did not have
          procedures to provide the liquidated damages to the Treasury. Labor Relations
          Handbook 1344.1, REV-1, addresses only assessing and collecting liquidated
          damages.

Unclaimed Funds, Unfound
Workers, and Unfound
Depositors

          Deposits received by Labor Relations are generally assigned to a regional Labor
          Relations office for processing and disposition. The regional offices are
          responsible for managing the funds in their active inventory until fully disbursed.
          In some instances, regional offices manage deposited funds until all of their
          resources to locate the intended recipient(s) have been exhausted. Once the
          regional offices have exhausted all resources to locate recipients, responsibility
          for the remaining deposited funds is transferred to Labor Relations headquarters.

          Funds can be transferred to Labor Relations headquarters under three categories,
          which explain why the regional office was unable to disburse all of the deposited
          funds. The categories are as follows:

              •   Unclaimed funds - There are no records showing the purpose of the
                  deposit or the identity of the depositor.
              •   Unfound workers - The workers could not be located and paid.
              •   Unfound depositor - A refund to the depositor is deemed appropriate, but
                  the refund cannot be made because the depositor cannot be located.

          During our review, Labor Relations reported $1.6 million in headquarters funds
          under the three categories. We found Labor Relations headquarters funds that
          dated back as far as 1992. These funds remained in the deposit account
          indefinitely, although after 3 years, neither Labor Relations nor the contractor is
          required to retain documentation pertaining to the deposit. The following table
          shows the categories and the amount of funds Labor Relations reported in each
          category.




                                            5
                               Fund categories             Amount of funds
                               Unclaimed funds                   $771,175
                               Unfound depositors                 $87,935
                               Unfound workers                   $782,021
                               Total                           $1,641,131

             These funds remained in the deposit account because Labor Relations had not
             established a disposition plan for the funds that remained after the search for
             workers and depositors was complete. Funds deposited for wage restitution are
             held for payment to underpaid workers, not for use by the United States
             Government. However, if Labor Relations no longer has documentation to
             support the proper disposition of the funds, because they are unclaimed funds or
             the record retention period has passed, Labor Relations should not hold onto the
             funds indefinitely, and the funds should be made available for use by the United
             States Government. Further, the General Counsel’s legal opinion determined that
             if wage restitution funds were to be used by the United States Government, they
             would have to be provided to the Treasury pursuant to the Miscellaneous Receipts
             Act. Of the more than $1.6 million remaining under the three fund categories, we
             determined that $380,244 should not yet be returned to the Treasury since Labor
             Relations was still within the time allowed to search for workers or return funds to
             the depositors. Therefore, $1,260,887 needs to be returned to Treasury under the
             three fund categories.

Conclusion

             Labor Relations violated the Miscellaneous Receipts Act by not providing
             $46,450 in liquidated damages to the Treasury. It also did not establish a
             disposition plan for $1,260,887 in funds that remained after the search for
             depositors and workers was complete. As a result, Labor Relations had
             $1,307,337 in funds for which the proper disposition could not be determined or
             the depositor or workers could not be located.

Recommendations

             We recommend that the Director of HUD’s Office of Departmental Operations
             and Coordination

             1A.    In accordance with the Office of the General Counsel’s legal opinion,
                    properly dispose of the $1,260,887 million in funds categorized as
                    liquidated damages, unclaimed funds, unfound depositors, and unfound
                    workers.




                                              6
1B.   Establish policies and procedures to transfer all liquidated damages to the
      Treasury, at a minimum, annually.

1C.   Develop and establish a policy for a disposition plan for funds that remain
      after the timeframe and the process for finding workers has been
      completed.




                                7
Finding 2: Labor Relations Mismanaged Project Deposit Funds

Labor Relations mismanaged project deposit funds; specifically, it did not conduct a recurring
reconciliation of the deposit account, and it expended more funds to cover the Civic Lofts
payments than the actual balance for the project deposit. Also, Labor Relations’ tracking system,
LR2000, could not manage the deposit account. This condition occurred because the senior
policy advisor had control of most of the deposit account functions with little oversight from
management and believed that a recurring reconciliation was being performed. Additionally, the
LR2000 system’s deposit module did not separately account for taxes and wage restitution. As a
result, Labor Relations did not know the project deposit balances that made up the overall
deposit account balance. Also, approximately $20,000 in unidentified project deposit funds was
used to pay for Civic Lofts expenses.



    Recurring Reconciliation


                      Labor Relations did not perform an ongoing reconciliation, nor did it have
                      guidance to ensure that its deposit balance reconciled with the Office of the Chief
                      Financial Officer’s balance. Labor Relations attempted to perform reconciliation;
                      however, its staff did not have the accounting knowledge to adequately complete
                      a reconciliation.

                      The advisor controlled most of the deposit account functions, to include the CFO
                      file verification function 4 in LR2000’s deposit module. 5 The advisor used the
                      CFO verification function weekly to match transactions within the deposit module
                      to transactions reported on the Office of the Chief Financial Officer’s Datamart 6
                      report.

                      For the CFO file verification function to be considered a reconciliation, Labor
                      Relations would need to have controls in place to ensure that the records being
                      compared were in agreement. These controls would include comparing balances
                      to ensure that they are equal, ensuring that all of the transactions are matched, and
                      resolving any discrepancies.

                      The CFO verification function did not have the necessary controls in place. It did
                      not provide a balance for the deposit module; therefore, it could not ensure that its

4
  According to the LR2000 user manual, this function is used to reconcile LR2000 deposit accounts module records with HUDCAPS (HUD
Central Accounting Processing System) records. However, through our analysis, it was evident that the CFO file verification function did not
reconcile balances with HUDCAPS or the Office of the Chief Financial Officer. The CFO file verification function is the title of the function as
specified by the Office of Labor Relations.
5
  LR2000 is the Labor Relations system that records, tracks, updates, and generates reports relative to the implementation of the Davis-Bacon Act
in HUD and for HUD projects. The deposit accounts module processes and tracks deposits from contractors, refunds (disbursements) to
contractors, and vouchers (disbursements) to employees.
6
  The Datamart report is the deposit account transaction report sent from the Chief Financial Officer to Labor Relations weekly.


                                                                       8
                balance agreed with the Datamart report. Additionally, it did not have controls in
                place to ensure that all transactions were matched. An example of such a control
                would be not allowing a payment to be made from a deposit recorded in the
                deposit module before the deposit has been verified through the CFO verification
                function.

                The condition described above occurred because the advisor did not have the
                knowledge to perform a reconciliation and mistakenly believed that by
                completing the CFO verification function, she was performing a reconciliation.
                This problem persisted because the advisor was given autonomy over the CFO
                verification function and did not receive oversight or guidance from management.

    Civic Lofts Project

                In May 2010, FHA deposited $500,000 of the almost $800,000 settlement into the
                Labor Relations deposit account. An additional $5,000 was deposited by the
                contractor from Civic Lofts, bringing the total balance to $505,000. However,
                Labor Relations expended $525,000 to pay Civic Lofts’ employees wage
                restitution and pay the Internal Revenue Service (IRS) withheld taxes. The
                $20,000 difference ($525,000 - $505,000) came from another unknown project
                deposit.

                This mismanagement of project deposit funds was significant because Labor
                Relations did not realize that it had paid more funds than were available for Civic
                Lofts or which funds were erroneously disbursed. Because the taxes were not
                accounted for in the deposit module, the Civic Lofts balance appeared to be
                higher than the actual balance.

                The condition described above occurred because the deposit module could not
                segregate taxes from wage restitution funds; instead, the funds were comingled.
                Because funds were not properly segregated, the entire balances appeared to have
                been available for wage restitution.


    LR2000 Enhancements

                In October 2011, Labor Relations established a steering committee for the sole
                purpose of identifying the shortcomings of the LR2000 7 system. The steering
                committee recommended 47 enhancements to LR2000. However, 27 of the 47
                enhancements 8 could not be completed within the scope of the contract. Our
                review disclosed problems in LR2000 with the deposit module and the CFO

7
  We did not audit the LR2000 system deposit module or the CFO verification function.
8
  There were 16 enhancements that could not be completed and 11 for which it needed to be determined whether
they could be completed. We decided to group them together because no more changes were being made to LR2000
or the deposit module, only maintenance.

                                                     9
             verification function. Most significantly, the system was unable to perform basic
             functions, such as identifying transactions for a specific timeframe or date,
             providing total balances for all deposits remaining in the deposit account,
             separately identifying wage restitution owed to workers from taxes that were
             withheld on the individual projects, and interfacing with other HUD systems.
             Additionally, the LR2000 deposit module was unable to provide ad hoc reports to
             Labor Relations staff detailing only the specific information needed for analysis.
             This type of reporting might prove helpful in that it would allow the staff to
             customize the information provided on reports specific to project balances,
             vouchers paid, deposits received, or transactions that occurred within a specific
             period.

             Reportedly, the major inhibitor to implementing the enhancements of LR2000
             was funding. Labor Relations had requested funding from the Chief Information
             Officer to improve the system; however, LR2000 had been overlooked due to
             other departmental priorities. Most recently, the contract awarded to make
             LR2000 a Web-based system was not fully funded. The contract was funded only
             to provide maintenance to the system.
             Labor Relations will continue to encounter difficulties when attempting
             reconciliation of its deposit account unless LR2000 is adequately updated.

Conclusion

             Labor Relations’ balance did not reconcile with the Office of the Chief Financial
             Officer’s balance, and Labor Relations did not know which project deposits
             accounted for the total deposit account balance. Also, approximately $20,000 in
             unidentified project deposit funds was used to pay for Civic Lofts expenses. This
             condition occurred because the advisor had too much control of the deposit
             module and management did not oversee the advisor’s actions. Labor Relations
             attempted a reconciliation from 2006 to 2012; however, the reconciliation was not
             adequate, nor did it equal the Office of the Chief Financial Officer’s balance. In
             addition, the deposit module was unable to support Labor Relations in basic
             functions that would allow for timely and ongoing reconciliations of individual
             project balances as well as an overall recurring reconciliation of the deposit
             account.

Recommendations

             We recommend that the Director of HUD’s Office of Departmental Operations
             and Coordination

             2A.    Complete a reconciliation of the deposit account balance with the assistance
                    of an individual with the required skill set. Future reconciliations should be
                    completed by the same individual.


                                              10
2B.   Establish a policy to reconcile LR2000’s transactions and balance for the
      deposit account at least monthly.

2C.   Work with the Office of the Chief Information Officer to improve the
      deposit module’s reporting capabilities so that Labor Relations staff is able
      to report and analyze the deposit account transactions and taxes or replace
      the system.




                                11
Finding 3: Labor Relations Did Not Pay Taxes in a Timely Manner
Labor Relations has the authority to make wage restitution payments and prepare and issue IRS
Forms W-2 for those payments. Labor Relations did not (1) pay the IRS 2010 taxes withheld
from the employee’s wage restitution in a timely manner and (2) properly address the employer’s
share of the taxes. This condition occurred because Labor Relations did not follow Labor
Relations Handbook 1344.1. As a result, it delayed paying the IRS more than $200,000 for the
2010 employee’s share of the taxes and could owe the IRS an additional $40,000 for the
employer’s share of the taxes.



 Taxes Not Paid in a Timely
 Manner

              In 2010, Labor Relations withheld more than $200,000 in taxes from wage
              restitution payments. There was no evidence that this practice had been followed
              in the past. However, Labor Relations Handbook 1344.1, REV-1, chapter 3,
              paragraph c, states, “… a check payable to the Internal Revenue Service for the
              total of the amount of the wages withheld from the employees who have received
              payment shall be prepared.” Before 2010, Labor Relations’ practice was to pay
              the workers the gross amount and send workers the IRS Forms 1099 for tax
              purposes. However, Labor Relations policy states that the net amount of wages
              found due must be computed and IRS Forms W-2 should be prepared and mailed
              to the employees.

              Labor Relations sent the 2010 IRS Forms W-2 to the IRS; however, it had not
              paid the taxes withheld. When asked why the taxes were not paid, the Acting
              Director of Labor Relations reported not knowing how the taxes should be paid,
              how much was owed, and whether Labor Relations should return to using the IRS
              Forms 1099 for tax purposes.

              In September 2011, representatives from Labor Relations, the Office of the
              General Counsel, and the Office of the Chief Financial Officer met with the IRS.
              During this meeting, Labor Relations was told to pay the taxes that were withheld.
              However, the Labor Relations Acting Director did not pay the taxes until June
              2012. The Labor Relations Acting Director paid the employee’s share of the
              taxes, which totaled approximately $200,000, to the IRS late because Labor
              Relations was waiting for the General Counsel to request forgiveness from the
              IRS for the employer’s share of the taxes. Although, Labor Relations did not get
              a response from the General Counsel regarding the employer’s share, the Acting
              Director decided to pay the employee’s share of the taxes. Labor Relations was
              awaiting a response from the General Counsel regarding the employer’s share of
              the taxes.



                                              12
     Employer’s Share of Taxes

                        In May 2010, FHA entered into a settlement with the contractors on the Civic
                        Lofts project to pay back wages to workers. HUD used the wrong wage
                        determination for the workers, and most of the workers were underpaid. As a
                        result of the settlement, HUD acted as the employer and, thus, became responsible
                        for paying back wages due.

                        Labor Relations did not properly address the employer’s share of the taxes. In the
                        settlement, Labor Relations calculated that approximately $774,000 would be
                        paid to the workers for wage restitution. Although Labor Relations withheld
                        taxes for the employee’s share of the taxes, it did not account for sufficient funds
                        to pay the employer’s share of the taxes.

                        Labor Relations Handbook 1344.1, REV-1, chapter 3, paragraph c, provides that
                        IRS Form 941, 9 Employer’s Quarterly Federal Tax Return, should be prepared.
                        In 2010, the IRS Form 941 instructions stated, “Federal law also requires you
                        [employer] to pay any liability for the employer’s portion of the social security
                        and Medicare taxes.” In the instance in which HUD entered into the settlement
                        for Civic Lofts, it was acting as the employer; thus, HUD is responsible for the
                        employer’s share of the taxes. Based on the wage restitution that was paid for the
                        Civic Lofts project workers, approximately $40,000 should have been paid for the
                        employer’s share of the taxes.

                        The condition described above occurred because Labor Relations did not follow
                        the Handbook 1344.1, REV-1, requirement to prepare the IRS Form 941. Labor
                        Relations should have been paying taxes quarterly, to include the employer’s and
                        employee’s share of the taxes. Before 2010, Labor Relations did not pay taxes to
                        the IRS.

     Conclusion

                        Labor Relations did not pay the taxes withheld from 2010 in a timely manner, nor
                        did it know whether it should pay the employer’s share of taxes. As a result, it
                        paid the IRS more than $200,000 for the 2010 withheld taxes late. Since Labor
                        Relations did not know whether it should pay the employer’s share of the taxes, it
                        could owe an additional $40,000 10 to the IRS.

     Recommendations

                        We recommend that the Director of HUD’s Office of Departmental Operations
                        and Coordination

9
    IRS Form 941 is the tax return used to pay the employer’s and the employee’s share of the taxes on gross wages earned.
10
     The calculation for the $40,000 is explained in the Scope and Methodology section.


                                                                        13
3A.   Remit the employee’s share of the taxes quarterly according to the IRS Form
      941 instructions.

3B.   Coordinate with the Office of the General Counsel to determine whether
      Labor Relations is required to pay the $40,000 employer’s share of the taxes
      for the Civic Lofts project and if so, determine how and when the employer’s
      share of the taxes will be paid.

3C.   Determine a process for paying the employer’s share of the taxes if, in the
      future, HUD is found to be responsible for paying back wages to workers.




                                14
Finding 4: Wage Restitution Was Paid to Individuals Other Than the
Worker
Labor Relations paid wage restitution to individuals other than the workers. This condition
occurred because Labor Relations management did not oversee the senior policy advisor who
made the decisions to pay the individuals and the Labor Relations Handbook had not been
updated to allow payments on behalf of deceased or incarcerated workers. As a result, Labor
Relations paid approximately $11,900 in wage restitution against HUD policy, and these
individuals may not have been the legal recipients.


Specifically, we found four workers who were sent IRS Forms W-2, whose relatives claimed that
they were entitled to wage restitution. Three of these workers were deceased, and one had no
bank account. We found one more worker, who was incarcerated, through a discussion with the
advisor. Labor Relations Handbook 1344.1, REV-1, does not address making wage restitution
payments to anyone except the workers themselves.

 Deceased Workers

              We found three deceased workers whose wage restitution payments were given to
              individuals claiming to be relatives. Two of the individuals claiming to be the
              wives of the deceased males received a total of $1,086 in wage restitution. The
              third individual, who provided a death certificate stating that the worker was
              married, with the individual’s name on the death certificate, was paid $499. The
              advisor accepted copies of the death certificates as evidence to provide the wage
              restitution to these individuals. Labor Relations has no policy that allows
              individuals other than the worker to be paid.

 Incarcerated Worker

              Not only did the advisor pay wage restitution to individuals claiming to be the
              deceased workers’ relatives, the advisor also made a payment to an incarcerated
              worker’s sibling for approximately $8,604 in wage restitution.

              The advisor issued a voucher for payment, and the individual was paid based on a
              written statement signed by the incarcerated worker. The statement consisted of
              one sentence, which stated, “I, [worker name], authorize H.U.D. to make my
              restitution check payable to my sister [her name].” There was no additional
              identification or documentation provided to verify the identity of the sister, nor
              does the Labor Relations Handbook allow for anyone other than the worker to be
              paid wage restitution.




                                              15
No Bank Account

             The advisor made a direct deposit payment of approximately $1,708 to an
             underpaid worker’s mother’s bank account based on a telephone conversation
             between the worker and the advisor. According to the advisor, the worker did not
             have a bank account and requested that the payment be deposited into the
             worker’s mother’s bank account. If the worker did not have a bank account,
             Labor Relations should have sent the worker a check.

             The payments occurred because Labor Relations management did not oversee the
             advisor’s decisions, and these issues were not discovered until we reviewed the
             payment vouchers and the IRS Forms W-2. Labor Relations did not have a policy
             for determining what should be done if a worker was found to be deceased or
             incarcerated. Regarding the worker that did not have a bank account, Labor
             Relations could have sent the worker a check.

Conclusion

             The advisor made wage restitution payments to individuals other than the
             workers. As a result, Labor Relations paid approximately $11,900 in wage
             restitution against Labor Relations Handbook guidance, and the recipients may
             not have had a legal claim to these funds. Labor Relations should follow the State
             laws regarding the recipient of the deceased and incarcerated workers’ wage
             restitution.

Recommendations

             We recommend that the Director of HUD’s Office of Departmental Operations
             and Coordination

             4A.    Update Handbook 1344.1 to include procedures for identifying and verifying
                    next of kin eligible to receive restitution payments and outlining
                    circumstances (death, incarceration, or hospitalization) in which the next of
                    kin can be paid.

             4B.    Based on the policy developed in recommendation 4A, determine whether
                    the individuals who received the wage restitution were legitimately entitled
                    to that restitution and when applicable, seek recovery of any of the $10,189
                    found to be unauthorized funds.

             4C.    Verify whether the worker received the $1,708 in restitution payments and
                    if not, seek recovery of the payment.




                                              16
                                    SCOPE AND METHODOLOGY

We performed our audit from October 2011 through October 2012. The audit was suspended
from December 2011 through April 2012 due to an Office of Inspector General (OIG), Office of
Investigation, review. Our audit generally covered the period October 2006 through September
2011.

To accomplish our objective, we

     •     Reviewed applicable HUD guidance; specifically, HUD’s Federal Labor Standards
           Compliance Handbook 1344.1, REV-1. We also reviewed Making Davis-Bacon Work -
           A Contractor’s Guide to Prevailing Wage Requirements for Federally Assisted
           Construction Projects and A Practical Guide for States, Indian Tribes, and Local
           Agencies; the LR2000 manual; and other applicable guidance.
     •     Reviewed IRS guidance, such as Publication 15 (Circular E), Publication 559,
           Instructions for IRS Form 941, and IRS Form 941.
     •     Conducted interviews with Labor Relations staff members to determine their roles and
           responsiblities regarding wage determination and the deposit account functions.
     •     Conducted interviews with Office of the Chief Financial Officer staff members to
           determine their roles and responsibilities regarding Labor Relations’ deposit account.
     •     Conducted interviews with IRS staff members to determine Labor Relations’ tax
           liabilities, reporting requirements, and payment processes.
     •     Conducted interviews with the Office of the General Council’s staff members to
           determine HUD’s tax liability and proper disposition of liquidated damages and wage
           restitution funds.
     •     Reviewed HUD’s settlement agreement with Civic Lofts, LLC; Gibbs Construction; and
           Capmark Bank.
     •     Reviewed Labor Relations’ and the Office of the Chief Financial Officer’s voucher
           documentation for 30 payments.
     •     Reviewed the Final Report of the Office of Labor Relations’ Reconciliation of the
           Office’s Deposit Account and other documentation related to the report. 11

To achieve our objective, we relied in part on records maintained by the senior policy advisor for
liquidated damages, unclaimed funds, unfound workers, and unfound depositors. We were
unable to test the reliability of these records due to a lack of documentation. We also relied on
computer data from the LR2000 system; this system was not audited. We used the data to
validate payments reported on IRS Forms W-2 and by the Office of the Chief Financial Officer.
Although, we were not able to determine the reliability of the data, our objective was to illustrate
the issue of having funds from liquidated damages, unclaimed funds, etc., that were not being
properly disposed of.



11
   We could not conduct a reconciliation due to the lack of documentation needed to verify transactions in the LR2000 system against the Office
of the Chief Financial Officer’s transactions report or Datamart.


                                                                      17
We reviewed 274 IRS Forms W-2 for wage restitution payments made in 2010. As we were
reviewing the Office of the Chief Financial Officer’s voucher to verify payments, we noticed
payments made to individuals; however, there were no IRS Forms W-2 for these individuals.
When we inquired why these individuals were paid, we learned that the advisor paid them
because the workers themselves were either deceased or had no bank account. The advisor
showed us a payment made to an incarcerated worker’s sister.

We determined that HUD owed $40,169 for the employer’s share of taxes by calculating the
percentage of payments made in 2010 that were for Civic Lofts. In 2010, Labor Relations made
$625,336 in wage restitution payments, and $525,834 of that amount was for Civic Lofts. Civic
Lofts accounted for 84 percent of the wage payments ($525,834/$625,336).

We determined that the employer’s share of taxes for the 2010 wage restitution payments was
$47,820. We calculated the employer’s share of the wage restiution payments based on the 2010
tax rate for Social Security tax (6.2 percent) and Medicare tax (1.45 percent) for each employee.
Civic Lofts’ portion of those taxes was $40,169 ($47,820 * .84).

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(s). We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objective.




                                               18
                              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 program operations
               •      Controls over the relevance and reliability of information
               •      Controls over compliance with laws and regulations

               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:

               •   Labor Relations did not have adequate controls to transfer the liquidated
                   damages to the Treasury; instead, the funds remained in the HUD deposit
                   account indefinitely (finding 1).
               •   Labor Relations did not have adequate controls to conduct a recurring
                   reconciliation (finding 2).


                                                 19
•   Labor Relations did not have adequate controls to reconcile the LR2000 balance
    with the Office of the Chief Financial Officer’s balance (finding 2).
•   Labor Relations did not have adequate controls to pay withheld 2010 taxes until
    2012 (finding 3).
•   Labor Relations did not have adequate controls and paid individuals who were
    not the workers who earned the wage restitution (finding 4).




                                 20
                                   APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

                   Recommendation       Unsupported      Funds to be put
                       number               1/           to better use 2/
                         1A                                $1,307,337
                         4B                $10,189
                         4C                 $1,708
                       TOTAL               $11,897          $1,307,337

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.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. In accordance with the
     Office of General Counsel’s legal opinion, the more than $1.3 million in funds
     categorized as liquidated damages, unclaimed funds, unfound depositors, and unfound
     workers should be returned to the U.S. Treasury to be available for use by the United
     States Government.




                                             21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 2




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 5




                         24
Ref to OIG Evaluation   Auditee Comments



Comment 6




                         25
Ref to OIG Evaluation   Auditee Comments




                         26
Ref to OIG Evaluation   Auditee Comments




                         27
Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 8




                         28
Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 10




Comment 11




                         29
Ref to OIG Evaluation   Auditee Comments

Comment 12




                         30
                         OIG Evaluation of Auditee Comments

Comment 1   We agree with the return of the $1,307,336.93 to the U.S. Treasury. However,
            this amount includes $277,490.83 of the employees’ share of payroll taxes
            associated with the Civic Lofts project. Labor Relations used unclaimed funds to
            make the $277,490.83 payment of the taxes instead of using funds specific to
            Civic Lofts and other projects. OIG has advised Labor Relations to seek recovery
            of Civic Lofts’ portion of the taxes from FHA to restore and recategorize the
            funds to unclaimed funds. Labor Relations should also recategorize the taxes that
            were withheld for other projects as unclaimed funds. The funds to be put to better
            use in Recommendation 1A have been reduced from $1,687,581 to $1,307,337,
            leaving a remaining amount of $380,244. Labor Relations did not return the
            remaining $380,244.07 to the U. S. Treasury because the time needed to find the
            workers, or return the funds to the depositors had not yet expired.

Comment 2   We agree with Labor Relations’ planned action.

Comment 3   We agree with Labor Relations’ planned action.

Comment 4   We agree with the planned action. Labor Relations must provide evidence of the
            service level agreement with the Office of the Chief Financial Officer for the
            management decision to be closed.

Comment 5   We agree with Labor Relations’ proposed handbook changes for section 9-16,
            subpart F, as detailed in its comment 3. However, Labor Relations did not fully
            address how LR2000 or HEMS will support the monthly reconciliation.

Comment 6   OIG is concerned that the implementation of the planned departmentwide
            enforcement system may not fulfill the needs of the Office of Labor Relations as a
            replacement for LR2000. The five other systems that are being consolidated are
            all systems that track, monitor, and support departmental investigations to find
            efficiencies and cost savings. While LR2000 allows Labor Relations to track the
            deposits made, the system also requires the functionality to generate vouchers for
            payments to underpaid workers and 941 payments to the IRS, generate IRS Forms
            W-2 for the workers that receive restitution payments, and interface with
            electronic payroll review systems as well as Office of the Chief Financial Officer
            systems. The system should also be configured to allow for reconciliation of the
            overall deposit account balance as well as reconciliations of individual project
            balances. LR2000 is a markedly different system from the other departmental
            enforcement systems, and as of now, we are not sure that consolidating LR2000
            into HEMS will provide Labor Relations with the necessary capabilities for its
            activities.

Comment 7   We agree with Labor Relations’ plans to ensure that the employee’s share of taxes
            is paid quarterly. Labor Relations used unclaimed funds to make the $277,490.83

                                            31
              payment of the taxes instead of using funds specific to Civic Lofts and other
              projects. OIG has advised Labor Relations to seek recovery of Civic Lofts’
              portion of the taxes from FHA to restore the funds to unclaimed funds.

Comment 8     We agree with Labor Relations’ request for a ruling from the Office of the
              General Counsel regarding its duty to pay the employer’s share of the taxes. OIG
              understands that the $40,000 employer’s share of taxes was included in the
              $277,490.83 transfer to the U.S. Treasury. Labor Relations used unclaimed funds
              to make the $277,490.83 payment of the taxes instead of using funds specific to
              Civic Lofts and other projects. OIG has advised Labor Relations to seek recovery
              of Civic Lofts’ portion of the taxes from FHA to restore the funds to unclaimed
              funds.

Comment 9     Labor Relations’ stated plan to work with the Office of the Chief Financial
              Officer and the Office of General Counsel to develop a process for paying the
              employer’s share of the taxes, if in the future, HUD is found to be responsible for
              paying back wages to workers, appears to be an appropriate start to satisfy
              Recommendation 3C. The department will need to input the process developed
              into the system for audit resolution.

Comment 10 Labor Relations’ plan to update the Handbook 1344.1 as stated, appears adequate
           to resolve Recommendation 4A. The department will need to submit the updated
           Handbook revision to support the closure of this recommendation during audit
           resolution.

Comment 11 Labor Relations’ preliminary review of whether the individuals that received the
           $10,189 in wage restitution on behalf of the workers were legitimately entitled
           appears to be an adequate start in satisfying Recommendation 4B. The
           department will need to input the proposed management decision along with any
           supporting documentation in the system for audit resolution.

Comment 12 Labor Relations’ initiated review of the $1,708 in restitution payment is an
           adequate start to satisfy Recommendation 4C. The department will need to input
           the proposed management decision along with the results of the review into the
           system for audit resolution.




                                               32