OFFICE OF AUDIT REGION 3 PHILADELPHIA, PA Madison Park North Apartments Baltimore, MD Section 236 Multifamily Program 2013-PH-1003 1 APRIL 19, 2013 Issue Date: April 19, 2013 Audit Report Number: 2013-PH-1003 TO: Mary Ann Henderson, Director, Baltimore Multifamily Hub, 3BHMLAS //signed// FROM: John P. Buck, Regional Inspector General for Audit, Philadelphia Region, 3AGA SUBJECT: Madison Park North Apartments Generally Ensured That Procurement and Reserve for Replacement Requirements Were Met Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General’s (OIG) final results of our review of Madison Park North Apartments, Baltimore, MD. 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 215-430-6729. April 19, 2013 Madison Park North Apartments Generally Ensured That Procurement and Reserve for Replacement Requirements Were Met Highlights Audit Report 2013-PH-1003 What We Audited and Why What We Found We audited the procurement process of Madison Park generally ensured that procurement and Madison Park North Apartments, a reserve for replacement account requirements were Section 236 property, at the request of met. However, it did not obtain cost estimates from the Director of the U.S. Department of three contractors, as required, for $168,702 in repairs Housing and Urban Development’s of housing units. (HUD) Baltimore Office of Multifamily Housing Programs. We also reviewed Madison Park’s use of its reserve for replacement account. Our objective was to determine whether Section 236 procurement and reserve for replacement account requirements were met. What We Recommend We recommend that the Director of HUD’s Baltimore Office of Multifamily Housing Programs require Madison Park to implement and follow adequate controls to ensure that it obtains three cost estimates for services that exceed $10,000 per year. TABLE OF CONTENTS Background and Objective 3 Results of Audit Finding: Madison Park Generally Ensured That Procurement and Reserve for Replacement Account Requirements Were Met 4 Scope and Methodology 6 Internal Controls 7 Appendix A. Auditee Comments and OIG’s Evaluation 8 2 BACKGROUND AND OBJECTIVE The Madison Park North Apartments are located at 738 West North Avenue, Baltimore, MD. The project is owned by Madison Park North Limited Partnership, and its management agent is Tricap Management, Incorporated. The apartment complex has 202 housing units. The U.S. Department of Housing and Urban Development (HUD) entered into a regulatory agreement with Madison Park in 1985 for its Section 236-insured multifamily program. The program, established by the Housing and Urban Development Act of 1968, combined Federal mortgage insurance with interest reduction payments to the lender for the production of low-cost rental housing. Under this program, HUD provided interest subsidies to lower a project’s mortgage interest rate to as low as 1 percent. This program no longer provides insurance or subsidies for new mortgage loans, but existing Section 236 properties continue to operate under the program. The interest reduction payment results in lower operating costs and, thus, a reduced rent structure. Additionally, the project executed a housing assistance payments contract with HUD. Between fiscal years 2008 and 2012, the project received $1 million in interest reduction payments and $8.3 million in housing assistance payments. Our audit objective was to determine whether Section 236 procurement and reserve for replacement account requirements were met. 3 RESULTS OF AUDIT Finding: Madison Park Generally Ensured That Procurement and Reserve for Replacement Account Requirements Were Met Madison Park generally ensured that procurement and reserve for replacement account requirements were met; however, it did not obtain written or verbal cost estimates for the repair of its housing units. It paid one contractor without obtaining written cost estimates from at least three contractors as required. This condition occurred because Madison Park did not expect to pay the selected contractor more than $10,000 per year. As a result, the project paid at least $168,702 without adequate support to show whether the services were provided at a reasonable cost. Cost Estimates Were Not Obtained as Required Of the $2.9 million paid to nine contractors, Madison Park was unable to provide documentation showing that it obtained cost estimates for $168,702 paid for the repair of housing units. It paid one vendor yearly labor costs ranging from $21,958 to $92,369 for the repair of its housing units. HUD Handbook 4381.5, paragraph 6.50, states that the owner is to obtain written cost estimates from at least three contractors for services that exceed $10,000 per year. Although Madison Park did not obtain cost estimates for services rendered, it did maintain invoices, work order proposals, and copies of checks that adequately supported the repair cost paid. Madison Park Established, Maintained, and Expended Its Reserve for Replacement Account as Required Madison Park established and maintained a reserve for replacement account as required. Section 2(a) of its regulatory agreement required that a reserve for replacement account be established and maintained. Madison Park maintained documentation to support that it had established a reserve for replacement and made the monthly deposits as required. The documentation adequately supported Madison Park’s efforts. Madison Park also expended reserve for replacement account funds as required. Section 2(a) of its regulatory agreement and HUD Handbook 4350.1, REV-1, paragraph 4-15(A), required that the project obtain HUD’s approval to withdraw 4 from the account. Madison Park maintained documentation, such as HUD- approved funds authorization forms, certifications, and other documentation, to demonstrate its compliance with this requirement. Repair Costs Were Paid on a Case-by-Case Basis Madison Park stated that it did not obtain cost estimates because it paid the selected contractor on a case-by-case basis. Although the majority of the repairs were less than $5,000 each, the yearly costs exceeded $10,000. The yearly costs paid to the contractor over a 3-year period ranged from $21,958 to $92,369. Based on the costs paid in 2009, Madison Park should have planned accordingly to ensure that cost estimates were obtained from three contractors since there was a pattern established which showed that the repair cost would exceed $10,000 per year. When we informed Madison Park about this deficiency, it implemented additional controls to ensure that it obtains cost estimates from three contractors as required. Madison Park now obtains three cost estimates for each repair needed for a housing unit to ensure that the procurement requirements are met. Conclusion The project did not always obtain cost estimates as required. As a result, it paid at least $168,702 to one contractor without adequate support showing that services were obtained at a reasonable cost. However, since it appeared that the prices paid were reasonable, we did not recommend that the project be required to demonstrate the reasonableness of the cost to HUD. However, we do recommend that the project implement and follow adequate controls to ensure that it obtains three cost estimates for services that exceed $10,000 per year. Recommendations We recommend that the Director of HUD’s Baltimore Office of Multifamily Housing Programs direct Madison Park to 1A. Implement and follow adequate controls to ensure that it obtains three cost estimates for goods or services that exceed $10,000 per year. 5 SCOPE AND METHODOLOGY We conducted the audit from July 2012 to March 2013 at Madison Park’s office located at 738 West North Avenue, Baltimore, MD, and at our offices located in Pittsburgh, PA, and Baltimore, MD. The audit covered the period April 2008 through September 2012. To achieve our audit objective, we reviewed • Applicable HUD guidance at 24 CFR (Code of Federal Regulations) Part 236 and other directives that govern the program. • Madison Park’s regulatory agreement, audited financial statements, and other program records. • A nonstatistical sample of $2.9 million awarded to nine contractors during the audit period. We reviewed the procurement files of the costs paid. • Reserve for replacement account documentation including Madison Park’s requests and certifications and HUD’s approval to release the funds. We conducted interviews with responsible employees of Madison Park, its management agent, and responsible HUD staff. We reviewed the procurement files for goods and services totaling $2.9 million. We reviewed invoices, checks, and other documentation to determine whether procurement requirements were followed. We also reviewed documentation related to the use of the reserve for replacement account. To achieve our audit objective, we relied in part on computer-processed data. The data included Madison Park’s expenditures, procurement records, and other computer-generated data. Although we did not perform a detailed assessment of the reliability of the data, we did perform a minimal level of testing and found the data to be adequate for our purposes. 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. 6 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 control was relevant to our audit objective: • Compliance with laws and regulations – Policies and procedures that management has implemented to reasonably ensure that the program meets its objectives. We assessed the relevant control 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. We evaluated internal controls related to the audit objective in accordance with generally accepted auditing standards. Our evaluation of internal controls was not designed to provide assurance regarding the effectiveness of the internal control structure as a whole. Accordingly, we do not express an opinion on the effectiveness of Madison Park’s internal control. 7 APPENDIX Appendix A AUDITEE COMMENTS AND OIG’S EVALUATION Comment 1 Comment 2 8 Comment 3 Comment 4 Comment 5 Comment 6 9 OIG Evaluation of Auditee Comments Comment 1 We are pleased that Madison Park generally agrees with the finding and recommendation in the audit report. Comment 2 The audit finding is based upon HUD Handbook 4381.5, which states that a management agent is expected to obtain cost estimates. The guidance in the handbook applies to management agents of HUD-insured properties. Additionally, the management agent certified that it would comply with HUD handbooks and obtain verbal or written cost estimates. Thus, the cost estimates should have been obtained to ensure compliance with the Section 236 program requirements. Comment 3 We agree that obtaining three cost estimates provides a safe harbor for reasonableness of cost. Comment 4 Madison Park paid $168,702 to one contractor without obtaining cost estimates as required. The services were provided over a 3-year period in which yearly cost ranged from $21,958 to $92,369. Due to the fact that the cost paid for the repair of its housing units exceeded the previous year’s repair costs, Madison Park should have obtained costs estimates to ensure compliance with Section 236 requirements. HUD Handbook 4381.5, paragraph 6.50, required that the owner obtain written cost estimates from at least three contractors for services that exceed $10,000 per year. Comment 5 The recommendation to implement and follow controls is appropriate and should help ensure future compliance. Comment 6 We revised the internal control section of the report to state that our evaluation of internal controls was not designed to provide assurance regarding the effectiveness of the internal control structure as a whole. Accordingly, we do not express an opinion on the effectiveness of Madison Park’s internal control. 10
Madison Park North Apartments Generally Ensured That Procurement and Reserve for Replacement Requirements Were Met
Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-04-19.
Below is a raw (and likely hideous) rendition of the original report. (PDF)