oversight

Corrective Action Verification, City of Hawthorne, CA, Section 8 Program Audit Report 2011-LA-1008

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-02-15.

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

                                               U.S. DEPARTMENT OF
                              HOUSING AND URBAN DEVELOPMENT
                                       OFFICE OF INSPECTOR GENERAL




                                                    February 15, 2013



Memorandum
TO:           K.J. Brockington
              Director, Los Angeles Office of Public Housing, 9DPH


FROM:         Tanya E. Schulze
              Regional Inspector General for Audit, 9DGA

SUBJECT:      Corrective Action Verification, City of Hawthorne, CA, Section 8 Program Audit
              Report 2011-LA-1008



Enclosed is our audit memorandum report resulting from our recently completed corrective
action verification of U.S. Department of Housing and Urban Development’s closure of
recommendation 1A from a prior audit report 2011-LA-1008, City of Hawthorne’s Section 8
Program. If you have any questions, please contact me at (213) 534-2471 or Vincent Mussetter,
Assistant Regional Inspector General for Audit, at (213) 534-2280.




Enclosure




cc:    Sandra B. Henriquez, Assistant Secretary for Public and Indian Housing, P
       Milan Ozdinec, Deputy Assistant Secretary for Public Housing and Voucher Programs,
       PE
       Donald J. Lavoy, Deputy Assistant Secretary for Field Operations, PQ
       Peter Schmiedel, Financial management Specialist, PF
       Ray Brewer, Los Angeles Field Office Director, 9DMA
       Edward Moses, Regional Public Housing Director, 9DPH
       Rosanne Chavez, Deputy Director, Los Angeles Office of Public Housing, 9DPH
       Jennifer Lindsey, Audit Liaison Officer, FMA



                                               Office of Audit (Region 9)
                              611 W. Sixth Street, Suite 1160, Los Angeles, CA 90017
                                     Phone (213) 894-8016, Fax (213) 894-8115
                          Visit the Office of Inspector General Website at www.hudoig.gov
                                               U.S. DEPARTMENT OF
                              HOUSING AND URBAN DEVELOPMENT
                                       OFFICE OF INSPECTOR GENERAL


                 
                                            February 15, 2013
                                                                                              MEMORANDUM NO:
                                                                                                   2013-LA-0802



Memorandum
TO:           K.J. Brockington
              Director, Los Angeles Office of Public Housing, 9DPH



FROM:         Tanya E. Schulze
              Regional Inspector General for Audit, Los Angeles Region, 9DGA

SUBJECT:      Corrective Action Verification, City of Hawthorne, CA, Section 8 Program
              Audit Report 2011-LA-1008

                                          INTRODUCTION

We completed a corrective action verification of a recommendation made to the U.S. Department
of Housing and Urban Development’s (HUD) Office of Public and Indian Housing (PIH)
pertaining to our review of the City of Hawthorne, CA’s Section 8 program, Audit Report 2011-
LA-1008, which was issued March 28, 2011. The purpose of the corrective action verification
was to determine whether HUD officials appropriately closed audit recommendation 1A.

                               METHODOLOGY AND SCOPE

The corrective action verification focused on recommendation 1A from Audit Report 2011-LA-
1008: The Hawthorne Housing Authority Failed To Maintain an Adequate Financial
Management System, issued March 28, 2011. To accomplish our objective, we reviewed the
audit report and associated supporting documentation as well as the HUD management decision
and the supporting documentation used by HUD to close the recommendation. In addition, we
interviewed officials from PIH and HUD’s Office of Community Planning and Development
(CPD) and reviewed information from HUD’s systems. We did not obtain additional
information from the City.

                                            BACKGROUND

On March 28, 2011, we issued audit report 2011-LA-1008 on the Hawthorne Housing
Authority’s Section 8 Housing Choice Voucher program funds. The audit report noted that the
Authority and City failed to maintain an adequate financial management system to properly

                                              Office of Audit (Region 9)
                               611 West 6th Street, Suite 1160, Los Angeles, CA 90017
                                     Phone (213) 894-8016, Fax (213) 894-8115
                         Visit the Office of Inspector General Web site at www.hudoig.gov. 
administer the Authority’s Section 8 Housing Choice Voucher program according to HUD rules
and regulations. Specifically, the Authority did not properly document more than $1.4 million in
Section 8 investment and interfund activity, making the expended funds ineligible. Additionally,
the Authority accumulated Section 8 deficits due partly to the City’s failure to record portability
receivables in its accounting system. Lastly, the Authority and City failed to implement
adequate internal controls to safeguard and minimize the risk of operating a Section 8 program.
The report included seven recommendations, and recommendation 1A specifically addressed
$1.2 million of the ineligible Section 8 investment and interfund activity.

We recommended that the Director of the Los Angeles Office of Public Housing

       1A. Require the City to repay the Section 8 program $1,288,455 for the ineligible
           expenditure of Section 8 investment funds from non-Federal funds.

The July 2011 management decision from the Los Angeles Office of Public Housing stated,
“The HACH [Authority] must submit supporting documentation reflecting that funds were
properly spent or repay $1,288,455.”

                                    RESULTS OF REVIEW

Our corrective action verification found that HUD officials inappropriately closed audit report
2011-LA-1008 recommendation 1A. The recommendation required the City to repay its Section
8 program from non-Federal funds; however, our review determined that at least $768,541 of the
funds used by HUD to offset the questioned costs came from the HOME program, a federally
funded HUD program.

The PIH staff conducted an extensive review of the City’s financial records and found that the
City had previously contributed more than $1.29 million in other funds to the Section 8 program,
which was slightly more than the questioned costs cited in recommendation 1A. When
recommendation 1A’s management decision was closed, PIH was aware that $840,741 of this
balance was CPD funds. PIH identified line item descriptions in the City’s general ledger listing
transfers of $768,541 (June 27, 2005) and $72,200 (June 30, 2006) as being Community
Development Block Grant and HOME funds, respectively. Although PIH informed CPD of this
matter in a written memorandum, dated September 8, 2011, PIH stated that it did not determine
whether this was an eligible use of the CPD funds, believing it was not PIH’s responsibility. PIH
held that since the contributions netted against the questioned costs, there was no loss to the
Section 8 program, and the recommendation could, therefore, be closed. PIH’s response
attached to HUD’s Audit Resolution and Corrective Action Tracking System (ARCATS) also
stated that the Office of Inspector General (OIG) “should decide on what further action should be
taken” on the transfer of CPD funds.

CPD Funding Used To Offset Questioned Costs
Our review of these additional funds, the Line of Credit Control System, and the Integrated
Disbursement and Information System found that the $768,541 transfer came from HOME
program funding, as opposed to Community Development Block Grant funding as identified in
the City’s general ledger. OIG has not been able to conclusively verify that the remaining




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$72,200 in funds came from the HOME program as described in the City’s general ledger,
although there were HOME withdrawals around the time of the transfer that may have included
that amount.

Using HOME funds for the Section 8 program is not an allowable use of HOME funds. Office
of Management and Budget Circular A-87 (2 CFR (Code of Federal Regulations) Part 225)
states, “…any cost allocable to a particular Federal award or cost objective under the principles
provided for in 2 CFR part 225 may not be charged to other Federal awards to overcome fund
deficiencies, to avoid restrictions imposed by law or terms of the Federal awards, or for other
reasons.” The OIG recommendation also called for the repayment of the questioned costs from
non-Federal funds.

Other Funding Used To Offset Questioned Costs
The remaining City contributions netted to $450,000 ($650,000 contributed less $200,000 in
subsequent repayments),1 made in December 2006 and March 2007. Since these were non-
Federal contributions to the Section 8 program, OIG agrees that HUD’s offset was acceptable.
Therefore, the questioned costs under recommendation 1A can be reduced by $450,000, leaving
a balance of $838,455 under recommendation 1A that the City must repay to its Section 8
program.

                                                                 CONCLUSION

We believe that PIH did a commendable job in performing an extensive review of the City’s
records and identifying the questionable use of CPD funds. However, the corrective action
verification found that PIH inappropriately closed recommendation 1A by offsetting questioned
costs against apparent ineligible transfers of Federal funds2. This error occurred because PIH did
not fully consider 2 CFR Part 225 requirements. As a result, recommendation 1A has not been
resolved in accordance with the management decision. However, we agree that the questioned
costs can be reduced to $838,455. A follow-up review of the City’s HOME program is also
warranted, given the City’s potential questionable use of funds, which we will address under a
separate assignment.

                                                               RECOMMENDATION

We recommend that the director of HUD’s Office of Public and Indian Housing

              1A. Reopen the audit report (2011-LA-1008) recommendation 1A in ARCATS. OIG
                  will reduce the ineligible amount remaining due from non-Federal funds to the
                  Section 8 program from $1,288,455 to $838,455.




                                                            
1
  These amounts were also identified in OIG audit report 2011-LA-1008 and included under recommendations 1B
and 1C.
2
  We have not yet followed up with the City to determine if it can otherwise justify the appropriateness of the
transfers.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION
 
 
 
Ref to OIG Evaluation               Auditee Comments
 

 

 

 

 

 

 

 

 

	
 

 

Comment 1
 

 

Comment 2
 

 

Comment 3
 
 
 
 
 
                        * Names redacted for privacy reasons



                                       4
 
 
 
 
 
 
 
 

Comment 3
 
 

Comment 4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




                     

             




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                         OIG Evaluation of Auditee Comments

Comment 1   The body of the report included a discussion acknowledging that the Los Angeles
            Office of Public Housing notified CPD on September 8, 2011. The OIG is not
            questioning the adequacy of the notification. To help clarify this, we have
            removed discussion of the HOME criteria and a portion of the conclusion
            concerning PIH following up with CPD. We have determined those points are not
            material since 2 CFR part 225 would not allow for federal funds to be used for
            this purpose in any event, and PIH therefore did not need CPD’s assistance to
            make that determination.

Comment 2   The OIG acknowledges that PIH was the first to identify the City of Hawthorne’s
            use of CPD funds for the Section 8 Housing Choice Voucher Program. The OIG
            also acknowledges that PIH met with OIG staff; however, the OIG has a different
            recollection of the meeting. PIH indicated to the OIG staff that it was possible
            that CPD funds made up a portion of the initial funds in the Local Agency
            Investment Fund (LAIF) account, noting a 1998 transfer of $600,000 from the
            City’s community redevelopment agency account to the authority. PIH stated it
            would set up a meeting with CPD to discuss the funds, and it would attempt to
            determine whether CPD had records indicating CPD funds were ever transferred
            or used for Hawthorne’s Section 8 program. If so, PIH was going to discuss the
            eligibility of such a transfer. The OIG staff asked if PIH wanted them present at
            that meeting and were told it would not be necessary at the time but the OIG was
            welcome to attend. The OIG requested to be informed of how the meeting went
            and notified of the results. PIH also provided a flowchart it had prepared from its
            analysis of the City’s records that also included notation of the 2005 and 2006
            general ledger transfers to Section 8 accounts. However, the OIG has no
            recollection of this being a significant topic during the meeting or that the OIG
            stated it would independently follow up on the matter. Subsequent discussions
            with PIH and revised management decisions submitted by PIH (rejected by the
            OIG) dated November 29, 2011, December 19, 2011, and February 22, 2012,
            focused on the source of the LAIF funds.

Comment 3   The OIG is not questioning the manner in which PIH informed either CPD or the
            OIG of the transfers. The OIG takes issue with PIH closing recommendation 1A
            by using the $840,541 in CPD funds as an offset to the original $1,288,455 in
            questioned costs that were to be repaid to the Section 8 investment funds with
            non-Federal funds. As a result of the recommendation being closed in this
            manner, it was necessary for the OIG to conduct a corrective action verification
            review. Although we agree the monitoring and review of CPD funds is outside of
            PIH’s authority and scope, this is not relevant to the appropriateness of PIH using
            Federal funds from another program as an offset to close the recommendation.

            The OIG office of audit has initiated a separate external review of the City’s
            actions.




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Comment 4   PIH previously submitted this position as part of proposed revised management
            decisions on December 19, 2011 and February 22, 2012, both of which were
            discussed and ultimately rejected by the OIG due to disagreement concerning
            which entity holds the burden of proof. As part of HUD’s audit resolution
            process, when a revised management decision is rejected the previously agreed
            upon management decision (July 2011) remains in effect. In addition, the source
            of the LAIF funds is not the reasoning PIH used to close recommendation 1A so it
            is irrelevant to the conclusions reached in the corrective action verification
            review. After reopening the recommendation, PIH may revisit or propose
            alternative revised management decisions.




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