oversight

The Municipality of Arecibo Did Not Properly Administer Its HOME Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-12-03.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




               The Municipality of Arecibo, PR

         HOME Investment Partnerships Program




2014-AT-1001                                 DECEMBER 3, 2013
                                                        Issue Date: December 3, 2013

                                                        Audit Report Number: 2014-AT-1001




TO:            María Ortíz, Director, Community Planning and Development, San Juan Field
               Office, 4ND

               //signed//
FROM:          Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT:       The Municipality of Arecibo Did Not Properly Administer Its HOME Program

    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 Municipality of Arecibo’s HOME
Investment Partnerships 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, 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
404-331-3369.
                                            December 3, 2013
                                            The Municipality of Arecibo Did Not Properly
                                            Administer Its HOME Program




Highlights
Audit Report 2014-AT-1001


 What We Audited and Why                     What We Found

We audited the Municipality of              The Municipality did not ensure that home-buyer
Arecibo’s HOME Investment                   acquisition-only activities met housing standards and
Partnerships Program as part of our         that the principal residency requirement was met for
strategic plan based on the results of a    the duration of the period of affordability. In addition,
recent audit of the Municipality’s          it failed to return more than $26,000 in unexpended
Community Development Block Grant           drawdowns to HUD and did not support the eligibility
program. The objectives of the audit        of $30,000 in program charges. As a result, HUD had
were to determine whether dwelling          no assurance that more than $1 million disbursed was
units acquired under the home-              used solely for eligible purposes and that HOME-
ownership program complied with the         funded activities met program objectives and fully
U.S. Department of Housing and Urban        provided the intended benefits.
Development’s (HUD) housing
standards and affordability                 The Municipality failed to reprogram and put to better
requirements, whether the Municipality      use more than $3,900 in unexpended obligations
disbursed HOME funds within HUD-            associated with an activity that was terminated, did not
established timeframes, and reported        report more than $1,400 in program income, and in
accurate and supported information in       two activities it overstated the commitment amount by
HUD’s Integrated Disbursement and           $919. In addition, the Municipality reported other
Information System.                         inaccurate information concerning HOME-funded
                                            activities. As a result, HUD had no assurance that the
                                            Municipality met HOME program commitment and
 What We Recommend
                                            disbursement requirements.
We recommend that HUD require the
Municipality to (1) support that it spent
more than $1 million on eligible
activities, (2) remit $26,094 in
unexpended drawdowns, (3) reprogram
and put to better use $4,825 in
unexpended and overstated
commitments, and (4) develop and
implement an internal control plan to
ensure that only supported and accurate
information is reported to HUD.
                            TABLE OF CONTENTS

Background and Objectives                                                         3

Results of Audit
      Finding 1: The Municipality Did Not Always Comply With HOME                 5
                 Requirements
      Finding 2: The Municipality Did Not Have Adequate Controls Regarding       10
                 Information Entered Into HUD’s Information System

Scope and Methodology                                                            14

Internal Controls                                                                16

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use             18
B.    Auditee Comments and OIG’s Evaluation                                      19
C.    List of Activities Not Inspected                                           20
D.    List of Activities Not Meeting Principal Residency Requirement             21
E     List of Activities With Undated Signatures and Missing Agreement Clauses   22




                                            2
                          BACKGROUND AND OBJECTIVES

The HOME Investment Partnerships Program is authorized under Title II of the Cranston-
Gonzalez National Affordable Housing Act as amended. The U.S. Department of Housing and
Urban Development (HUD) allocates funds by formula to eligible State and local governments
for the purpose of increasing the supply of decent, safe, sanitary, and affordable housing to low-
and very low-income families. State and local governments that become participating
jurisdictions may use HOME funds to carry out multiyear housing strategies through acquisition,
rehabilitation, new housing construction, and tenant-based rental assistance.

Participating jurisdictions are required to commit HOME funds within 24 months and expend
them within 5 years after the last day of the month in which HUD notifies the participating
jurisdiction of HUD’s execution of the HOME agreement. 1 In addition to the HOME program’s
regulatory 5-year disbursement requirement, the National Defense Authorization Act of 1991
(Public Law 101-510, dated November 5, 1990) requires that on September 30 of the fifth year
after the period of availability for obligation of a fixed-appropriation account ends, the account
be canceled and thereafter not be available for obligation or expenditure for any purpose. 2
Participating jurisdictions are required to expend, for eligible costs, HOME funds drawn down
from the treasury account within 15 days. Any unexpended drawdowns must be returned to the
treasury account. HUD also requires that HOME funds in the participating jurisdiction’s local
bank account, including program income and recaptured funds, 3 be disbursed before additional
grant funds are requested.

Participating jurisdictions draw down HOME funds through HUD’s Integrated Disbursement and
Information System (IDIS). HUD’s information system is also used to monitor and track HOME
commitments, program income, repayments, and recaptured funds, among other things. In
addition, HUD uses the data that the participating jurisdiction provides in HUD’s information
system to report on the performance of the HOME program to Congress and other program
stakeholders.

The Municipality of Arecibo was founded in 1616, and its governing system consists of an
executive and legislative body: a mayor and 16 members of the municipal legislature elected for
4-year terms. The Municipality is the seventh largest local participating jurisdiction in Puerto
Rico, for which HUD has approved more than $1.7 million in HOME funds during the past 3
fiscal years. HUD’s information system reflected HOME drawdowns exceeding $1.28 million
during the 24-month period ending December 31, 2012.




1
  For purposes of determining compliance with commitment and disbursement requirements, HUD considers the
sum of commitments and expenditures from the fiscal year allocation being examined and later allocations.
2
  Fiscal year 2006 HOME funds that are not spent by September 30, 2013, would be subject to recapture by the
United States Treasury.
3
  Program income and recaptured funds may result from the resale and recapture requirements imposed by HUD and
the participating jurisdiction on the participants to ensure affordability during predetermined periods, depending on
the assistance amount provided.

                                                         3
The Municipality’s Department of Municipal Development is responsible for administering the
HOME program. Its books and records are maintained at Vidal Street, Arecibo, PR. We audited
the Municipality’s HOME program as part of the HUD Office of Inspector General’s (OIG)
strategic plan. The Municipality was selected for review based on the results of a recent OIG
audit of the Municipality’s Community Development Block Grant program. 4

The objectives of the audit were to determine whether dwelling units acquired under the home-
ownership program complied with the HUD’s housing standards and affordability requirements,
whether the Municipality disbursed HOME funds within HUD-established timeframes, and
reported accurate and supported information in HUD’s Integrated Disbursement and Information
System.




4
    Audit report number 2013 AT 1003 issued on March 22, 2013.

                                                       4
                                RESULTS OF AUDIT


Finding 1: The Municipality Did Not Always Comply With HOME
Requirements
The Municipality did not ensure that home-buyer acquisition-only activities met housing
standards and that the principal residency requirement was met for the duration of the period of
affordability. In addition, it failed to return more than $26,000 in unexpended drawdowns to
HUD and did not support the eligibility of $30,000 in program charges. These deficiencies
occurred because the Municipality was not fully familiar with HOME requirements, followed
incorrect advice from its consultant, and disregarded HUD’s requirements. As a result, HUD
had no assurance that more than $1 million disbursed was used solely for eligible purposes and
that HOME-funded activities met program objectives and fully provided the intended benefits.


 Property Standards
 Requirements Not Supported


               The Municipality disbursed more than $749,000 in HOME funds for 32 home-
               buyer acquisition-only activities without supporting whether the dwelling units
               met HOME property standards requirements in 24 CFR (Code of Federal
               Regulations) 92.251(a)(2). Neither the Municipality nor a party contracted by the
               Municipality inspected the 32 homes. The table in appendix C of this report
               shows the activities for which the Municipality did not have appropriate
               documentation supporting that homes met HUD’s property standards
               requirements.

               Contrary to HUD’s requirements, the Municipality relied on inspections
               performed by Federal Housing Administration (FHA) appraisers. HUD’s
               HOMEfires, volume 6, number 2, states that participating jurisdiction must
               perform inspections of units purchased with HOME funds. Participating
               jurisdictions may not rely on independent inspections performed by any party not
               under contract with the participating jurisdiction. Third parties such as consumer
               inspectors or FHA appraisers are not contractually obligated to perform the
               participating jurisdictions’ duties. Their inspections cannot be used to determine
               compliance with HOME property standards requirements.

               The Municipality’s HOME program coordinator informed us that she was not
               familiar with this restriction and that she followed the advice of the
               Municipality’s former HOME program consultant who instructed to use the FHA
               appraisals to document compliance with HOME property standards. Therefore,
               the Municipality lacked sufficient documentation to support that it used $749,954


                                                5
          in HOME funds for eligible homes that met HUD’s property standards
          requirements.

Principal Residency
Requirement Not Supported

          The Municipality disbursed more than $307,000 for home-buyer acquisition-only
          activities without making appropriate monitoring efforts to ensure that home
          buyers met the HOME principal residency requirement in 24 CFR 92.254(a)(3).
          Two internal monitoring reports, dated February 2010 and 2012, identified 21
          home-buyer activities that did not comply with HOME’s primary residency
          requirement for the duration of the period of affordability. Appendix D provides
          details on the 21 activities.

          Contrary to requirements in 24 CFR 92.504(a), the Municipality did not ensure
          that home buyers complied with all program requirements and did not take
          appropriate measures when performance issues arose. In eight activities, more
          than 3 years had elapsed since the Municipality became aware that the intended
          benefits had not occurred without making appropriate monitoring efforts. The
          Municipality’s HOME program coordinator informed us that she was aware of the
          home-buyer activities that did not comply with the principal residency
          requirement and that notification letters were sent to the participants. She also
          stated that no further action was taken because the Municipality wanted to allow
          the home buyers an opportunity to sell the dwelling units. This was not an
          acceptable explanation for not performing an integral component of the
          Municipality’s HOME program responsibilities. Section VII of HOME Notice
          12-003 provides that it is the Municipality’s responsibility to ensure that the
          HOME-assisted housing qualifies as affordable housing during the period of
          affordability. If the original home buyer no longer occupies the unit as his or her
          principal residence, the Municipality, as the entity responsible for the day-to-day
          operations of its HOME program, must repay its Investment Trust account with
          non-Federal funds. The Municipality did not enforce the residency requirement
          and did not reimburse the HOME program when they became aware of the
          noncompliance. Thus, the Municipality did not adequately manage these
          activities to ensure that $307,537 in HOME funds disbursed met program
          objectives and fully provided the intended benefits.

Unexpended Drawdown Not
Returned to HUD

          The Municipality withdrew from its treasury account more than $1.2 million in
          HOME funds between January 1, 2011, and December 31, 2012. Contrary to
          HUD’s regulations at 24 CFR 92.502(c)(2), the Municipality failed to disburse
          two drawdowns totaling $46,094 in HOME funds within 15 days. Further, it did
          not return $26,094 in unexpended drawdowns to HUD. A Municipality official

                                           6
                   informed us that she was not aware that unexpended funds had to be returned and
                   that the Municipality planned instead to reassign the funds to another activity.
                   Any unexpended drawdowns must be returned to the treasury account in
                   accordance with HUD’s instructions. A HUD memorandum, dated April 5, 2011,
                   provides additional guidance to participating jurisdictions on returning funds
                   drawn down from the treasury account in advance or excess of need instead of
                   revising vouchers in HUD’s information system.

                  The following table shows the voucher and activity number, date of drawdown,
                  and HOME funds for the drawdowns that were not disbursed within 15 days.

                                                                                                 Days elapsed
                                                                                                    between
                                                      Date of                                     deposit and
                   Voucher    Activity               drawdown        Amount         Date of      disbursement
                   number     number     Amount       deposit       disbursed    disbursement        dates
                                                                      $17,190     June 8, 2012         49
                   5414943     1174      $20,000   Apr. 20, 2012
                                                                        2,810    Oct. 23, 2012       186
                   5516527     1186      26,094     Jan. 14, 2013           0    Not disbursed        107 5
                         Total           $46,094                       $20,000


    Unsupported Home-Buyer
    Activity


                   The Municipality did not properly document the eligibility and assistance level of
                   one home-buyer activity (number 1184). Regulations at 24 CFR 92.217 require
                   that with respect to home-ownership assistance, HOME funds invested in
                   dwelling units be occupied by households that qualify as low-income families.
                   Therefore, the Municipality must determine whether each family is income
                   eligible by determining the family’s annual income. Annual income must include
                   income from all family members as required by 24 CFR 92.203(d)(1). The
                   Municipality adopted additional requirements and procedures for determining the
                   assistance level of the participant.

                   The Municipality did not verify discrepancies found associated with the income
                   of the family. The Municipality’s HOME program coordinator informed us that
                   she was aware of the discrepancies and they were not verified because she
                   believed that lenders tend to overestimate the income of participants to qualify
                   them for a mortgage loan. This was not an acceptable explanation for not
                   performing an integral component of the Municipality’s HOME program
                   responsibilities. As a result, HUD lacked assurance that all of the family’s annual
                   income was considered and whether participants qualified as low-income families
                   as required by HUD. HOME funds totaling $30,000 disbursed for the acquisition
                   of the dwelling unit was unsupported.


5
    As of May 1, 2013, funds remained unexpended and had not been returned to HUD.

                                                        7
    Conclusion

                   The Municipality did not implement adequate procedures and controls to ensure
                   that it appropriately followed HUD’s requirements. It did not (1) inspect
                   properties to ensure compliance with property standards, (2) ensure that activities
                   met the affordability requirements, (3) ensure that unexpended drawdowns were
                   returned to HUD, and (4) properly verify the income eligibility of a participant.
                   As a result, HUD had no assurance that funds were used solely for eligible
                   purposes and that HOME-funded activities met program objectives and fully
                   provided the intended benefits.

    Recommendations

                   We recommend that the Director of the San Juan Office of Community Planning
                   and Development

                   1A.      Require the Municipality to submit appropriate inspection reports showing
                            that the 32 home-buyer acquisition-only activities met HOME property
                            standards requirements or reimburse its HOME program from non-Federal
                            funds the $719,954 disbursed. 6

                   1B.      Require the Municipality to submit all supporting documentation showing
                            that 21 home-buyer activities met the principal residency requirement for
                            the duration of the period of affordability or reimburse the HOME
                            program from non-Federal funds the $307,537 disbursed.

                   1C.      Require the Municipality to return to its line of credit and put to better use
                            $26,094 associated with unexpended funds drawn from its treasury
                            account.

                   1D.      Require the Municipality to submit supporting documentation evidencing
                            the income eligibility and level of assistance of the participant assisted
                            with $30,000 in HOME funds or reimburse the program from non-Federal
                            funds.

                   1E.      Require the Municipality to develop and implement controls and
                            procedures to ensure that (1) HOME-funded dwelling units meet
                            applicable property standards, (2) assisted activities meet applicable
                            affordability requirements, (3) HOME funds are disbursed within HUD-
                            established timeframes and unexpended drawdowns are returned to HUD,
                            and (4) program participants’ income eligibility is properly verified and
                            determined.



6
    Total disbursements of $749,954 were adjusted to consider $30,000 questioned in recommendation 1D.

                                                         8
1F.   Provide training and increase monitoring of the Municipality’s
      performance in the administration of its HOME program.




                               9
Finding 2: The Municipality Did Not Have Adequate Controls
Regarding Information Entered Into HUD’s Information System
The Municipality failed to reprogram and put to better use more than $3,900 in unexpended
obligations associated with an activity that was terminated, did not report more than $1,400 in
program income, and in two activities it overstated the commitment amount by $919. In
addition, the Municipality reported other inaccurate information and omitted information
concerning HOME-funded activities. These deficiencies occurred because the Municipality did
not properly monitor the accuracy of commitments and other information reported in HUD’s
information system. As a result, HUD had no assurance that the Municipality met HOME
commitment and disbursement requirements.


 Unexpended Commitments Not
 Reprogrammed

              The Municipality did not reprogram and put to better use $3,906 in unexpended
              obligations associated with a terminated home-buyer activity (number 1186).
              HUD’s regulations at 24 CFR 92.205(e) provide that a HOME assisted project
              that is terminated before completion, either voluntarily or otherwise, constitutes
              an ineligible activity. Therefore, HOME funds invested in the project must be
              repaid and unexpended funds deobligated. On March 14, 2013, the participant
              informed the Municipality that she was no longer interested in taking part in the
              home-buyer program. Therefore, the activity was terminated. As of May 1, 2013,
              the activity remained open, and unexpended obligations had not been
              reprogrammed. As a result, obligations in HUD’s information system were
              overstated, and more than $3,000 in HOME funds was not available for other
              eligible efforts. The Municipality should reprogram these funds and put them to
              better use.

 Program Income and
 Recaptured Funds Not
 Reported

              Contrary to HUD requirements, the Municipality did not report proceeds of
              $1,473 in program income and recaptured funds in HUD’s information system.
              HUD’s regulations at 24 CFR 92.503 provide that program income, recaptured
              funds, and repayments received must be deposited into the participating
              jurisdictions’ HOME account to carry out eligible activities. These receipts must
              be reported in HUD’s information system and used before additional HOME
              withdrawals are made, as required at 24 CFR 92.50(c)(3). More than 6 months
              had elapsed since the Municipality received these funds, but it had not reported
              them in HUD’s information system. Consequently, HUD had no assurance of the
              accuracy of the amount that the Municipality received and its compliance with
              HOME disbursement requirements.
                                               10
    Inaccurate Commitment
    Amount

                 HUD’s information system reflected that the Municipality committed more than
                 $1.2 million in HOME funds (89 activities) between January 1, 2011, and
                 December 31, 2012. We examined 15 commitments totaling more than $290,000.
                 The Municipality reported inaccurate commitment amounts in 5 of the 15
                 commitments reviewed. Three activities had understated commitments, and in
                 two the committed amounts were overstated by $919. 7 The overstated
                 commitments were unsupported, and the Municipality must deobligate the funds
                 and put them to better use for other eligible activities.

                                 Committed amount
                    Activity          in HUD’s              Amount per           Understated          Overstated
                    number       information system         agreement            commitment          commitment
                     1161              $7,440                 $7,445                 $5
                     1162              $8,467                   $8,473                   $6
                     1163              $8,643                   $8,649                   $6
                     1160              $8,932                   $8,925                                     $7
                     1207              $6,036                   $5,124                                   $912


    Inaccurate Commitment Date


                 The Municipality reported in HUD’s information system 9 commitments of more
                 than $159,000 between 5 and 64 days after the grant agreement was executed.
                 Therefore, the actual commitment data were entered into HUD’s information
                 system with delays and inaccurate commitment dates.7

                                                                                              Days elapsed between
                   Activity    Committed                                 Grant                  agreement and
                   number       amount          Funding date         agreement date              funding dates
                    1172         $30,000         Feb. 3, 2012         Dec. 1, 2011                     64
                    1202           5,694        Aug. 16, 2012            June 26, 2012                 51
                    1161           7,440        Jan. 12, 2012            Dec. 14, 2011                 29
                    1160           8,932        Jan. 12, 2012            Dec. 15, 2011                 28
                    1163           8,643        Jan. 12, 2012            Dec. 15, 2011                 28
                    1162           8,467        Jan. 12, 2012            Dec. 15, 2011                 28
                    1219          30,000        Mar. 11, 2013            Feb. 21, 2013                 18
                    1184          30,000         Apr. 9, 2012            Mar. 30, 2012                 10
                    1182          30,000        Mar. 26, 2012            Mar. 21, 2012                  5
                    Total       $159,176


7
  HOMEfires, volume 2, number 5, states that HUD requires reliable IDIS information for various purposes,
including reporting to Congress, monitoring financial information, tracking program performance, and identifying
grantee and program needs. The reliability of the HOME IDIS data centers on participating jurisdictions reviewing,
updating, and correcting their HOME program information.

                                                       11
    Other Deficiencies

                    The Municipality did not comply with additional HUD requirements when
                    committing HOME funds.

                    Undated signatures in agreements - The Municipality did not implement adequate
                    controls by not requiring that the signatures of all parties be dated in 12 written
                    agreements reviewed to show the execution date as required by HUD in section
                    VII of HOME Notice 07-06. As a result, HUD had no assurance of the actual
                    commitment date and Municipality’s compliance with HUD’s commitment
                    requirements.

                    Missing agreement clauses - The Municipality did not ensure that five grant
                    agreements reviewed included the following clauses required by HUD at 24 CFR
                    92.504(c)(5) and 92.254(a)(3) for home-buyer activities:

                        •    Value of property to be acquired,
                        •    Principal residency requirement,8
                        •    Period of affordability,8 and
                        •    Resale or recapture provisions. 8

                    The table in appendix E of this report shows the activities for which the
                    Municipality did not require that signatures of all parties in written agreements be
                    dated and that agreements contain all HUD-required clauses.

    Inadequate Monitoring

                    The Municipality did not properly monitor the accuracy of commitments and
                    other information reported in HUD’s information system. The Municipality’s
                    HOME program coordinator informed us that the most recent reconciliation
                    between HUD’s information system and its records was performed in 2008. In
                    addition, the Municipality did not have written procedures providing guidance to
                    its personnel regarding the monitoring of information reported to HUD and
                    establishing responsibility among its personnel. Therefore, the Municipality had
                    not established and implemented a system to verify the accuracy of data reported
                    to HUD on a regular basis.

    Conclusion

                    Because the Municipality did not properly monitor, it did not ensure the accuracy
                    of commitments and other information entered into HUD’s information system.
                    There was no assurance that the Municipality met HUD commitment and

8
    The clause was included in the mortgage note but not in the grant agreement.

                                                          12
          disbursement requirements. The inaccurate data compromised the integrity of
          HUD’s information system and the degree of reliability HUD could place on the
          data for monitoring commitments and compiling national statistics on the HOME
          program.

Recommendations

          We recommend that the Director of the San Juan Office of Community Planning
          and Development require the Municipality to

          2A.     Deobligate and put to better use $3,906 in unexpended commitments
                  associated with the terminated activity.

          2B.     Correct any inaccurate information in HUD’s information system,
                  including but not limited to the receipt of $1,473, associated with program
                  income and recaptured funds not reported, and inaccurate commitment
                  amounts and dates.

          2C.     Deobligate and put to better use $919 in overstated commitments.

          2D.     Develop and implement controls and procedures to ensure that (1)
                  accurate information on HOME-funded activities is reported in HUD’s
                  information system in a timely manner, (2) program income and
                  recaptured funds are properly reported, and (3) grant agreements contain
                  all HUD-required clauses and signatures are properly dated.




                                           13
                          SCOPE AND METHODOLOGY

The objectives of the audit were to determine whether dwelling units acquired under the home-
ownership program complied with the U.S. Department of Housing and Urban Development’s
(HUD) housing standards and affordability requirements, whether the Municipality disbursed
HOME funds within HUD-established timeframes, and reported accurate and supported
information in HUD’s Integrated Disbursement and Information System.

To accomplish our objectives, we

           •   Reviewed applicable HUD laws, regulations, and other HUD program
               requirements;

           •   Interviewed HUD and Municipality officials;

           •   Obtained an understanding of and reviewed the Municipality’s controls and
               procedures related to our objectives;

           •   Reviewed monitoring, independent public accountant, and HUD’s information
               system reports;

           •   Reviewed the Municipality’s files and records, including grant agreements and
               bank statements; and

           •   Traced information reported in HUD’s information system to the Municipality’s
               records, including grant agreements, program income and recaptured funds
               receipts, and disbursement records.

We reviewed a sample of transactions based on the dollar amount, and/or on nature of the
expenditure; examining 100 percent of the transactions were not feasible. All of the transactions
associated with property standards and program income were reviewed because of the small size
of the universe. The results of the audit apply only to the items selected and cannot be projected to
the universe or population.

HUD’s information system reflected that the Municipality committed more than $800,000 in
HOME funds between January 1, 2011, and December 31, 2012, associated with 36 home-buyer
acquisition-only activities. We selected all of these activities for review. We reviewed one
additional activity with a funding date of March 11, 2013, because of the large amount
committed. The 37 activities were reviewed to determine whether the Municipality performed
the required inspections to ensure that the dwelling unit was eligible and complied with HOME’s
property standards requirements.

The Municipality issued two monitoring reports in February 2010 and 2012. The reports
identified 23 home-buyer activities that did not comply with HUD’s principal residency
requirement for the duration of the period of affordability. For these activities, the Municipality

                                                  14
disbused $324,895 in HOME funds. We reviewed the 23 activities to determine whether the
Municipality made proper monitoring efforts to ensure that activities met program objectives and
fully provided the intended benefits.

HUD’s information system reflected that the Municipality drew down from its treasury account
more than $1.2 million (758 withdrawals) in HOME funds between January 1, 2011, and
December 31, 2012. We reviewed all 21 withdrawals greater or equal to $20,000 totaling more
than $550,000. We also reviewed a withdrawal of $26,094 made on January 10, 2013. A total
of 22 withdrawals totaling more than $580,000 were reviewed to determine whether the
Municipality expended HOME funds within HUD-established timeframes.

HUD’s information system reflected that the Municipality committed more than $1.2 million in
HOME funds between January 1, 2011, and December 31, 2012, associated with 89 activities.
We reviewed the seven highest commitments of the home-buyer and tenant-based rental
assistance activities in 2012. The sample resulted in 14 activities with commitments totaling
more than $260,000. We reviewed one additional activity totaling $30,000 that was committed
out of our audit period. We reviewed these 15 activities to determine whether the information
the Municipality reported to HUD, including commitments, was accurate and supported.

The Municipality’s records showed that between October 7, 2010, and December 4, 2012, it
received program income and recaptured funds in the amount of $23,058. We reviewed all of
the receipts to determine whether funds were properly reported in HUD’s information system.

To achieve our audit objectives, we relied in part on computer-processed data contained in
HUD’s information system. Although we did not perform a detailed assessment of the reliability
of the data, we performed a minimal level of testing and found the data adequate for our
purposes. We did not rely on computer-processed data contained in the Municipality’s database.

The audit generally covered the period January 1, 2011, through December 31, 2012, and we
extended the period as needed to accomplish our objectives. We conducted our fieldwork from
February through July 2013 at the Municipality’s offices in Arecibo, PR.

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




                                               15
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

               •   Program operations - Policies and procedures that the audited entity has
                   implemented to provide reasonable assurance that a program meets its
                   objectives, while considering cost effectiveness and efficiency.

               •   Relevance and reliability of information - Policies and procedures that
                   officials of the audited entity have implemented to provide themselves with
                   reasonable assurance that operational and financial information that they use
                   for decision making and reporting externally is relevant, reliable, and fairly
                   disclosed in reports.

               •   Compliance with applicable laws, regulations, contracts, and grant agreements
                   - Policies and procedures that the audited entity has implemented to provide
                   reasonable assurance that program implementation complies with provisions
                   of laws, regulations, contracts, and grant agreements.

               •   Safeguarding of assets and resources - Policies and procedures that the audited
                   entity has implemented to reasonably prevent or promptly detect unauthorized
                   acquisition, use, or disposition of assets and resources.

               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

                                                 16
             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 Municipality did not implement adequate controls and procedures to
                 ensure that (1) home-buyer acquisition-only activities met property standards
                 and affordability requirements, (2) funds were disbursed within HUD-
                 established timeframes, and (3) the eligibility of program charges was
                 supported (see finding 1).

             •   The Municipality did not implement adequate controls and procedures to
                 ensure that accurate information on HOME activities was reported to HUD
                 (see finding 2).




                                              17
                                    APPENDIXES

Appendix A

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

                Recommendation                               Funds to be put
                    number              Unsupported 1/       to better use 2/
                      1A                     $719,954
                      1B                      307,537
                      1C                                            $26,094
                      1D                          30,000
                      2A                                               3,906
                      2C                    _________                    919
                     Total                  $1,057,491               $30,919


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. These amounts include
     reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
     implementing recommended improvements, avoidance of unnecessary expenditures
     noted in preaward reviews, and any other savings that are specifically identified. In this
     instance, if the Municipality implements recommendations 1C, 2A, and 2C, funds will be
     available for other eligible activities consistent with HOME requirements.




                                             18
Appendix B

         AUDITEE COMMENTS AND OIG’S EVALUATION

The Municipal Development Department director informed us that the Municipality was not
going to submit a written response to the audit report and recommendations. Therefore, the
report was issued without auditee comments and OIG’s evaluation.




                                              19
Appendix C

             LIST OF ACTIVITIES NOT INSPECTED

               Activity number    Funding date     Amount
                     1096         Feb. 23, 2011     $20,000
                     1099         Mar. 30, 2011      30,000
                     1100         Mar. 30, 2011      20,000
                     1103         Apr. 28, 2011      30,000
                     1104         Apr. 28, 2011      20,000
                     1105         Apr. 28, 2011      30,000
                     1107          May 4, 2011       30,000
                     1112         May 20, 2011       30,000
                     1135         Aug. 19, 2011      19,645
                     1136         Aug. 19, 2011      29,258
                     1142         Sept. 19, 2011     30,000
                     1143         Sept. 23, 2011     30,000
                     1157          Dec. 8, 2011      29,176
                     1158         Dec. 19, 2011      20,000
                     1159         Jan. 11, 2012      12,238
                     1165         Jan. 27, 2012      19,127
                     1169          Feb. 3, 2012      20,000
                     1170          Feb. 3, 2012      19,298
                     1171          Feb. 3, 2012      10,453
                     1172          Feb. 3, 2012      30,000
                     1173          Feb. 3, 2012      17,040
                     1174         Feb. 10, 2012      17,190
                     1178         Feb. 14, 2012      29,296
                     1181         Mar. 20, 2012      20,000
                     1183         Mar. 29, 2012      29,684
                     1184          Apr. 9, 2012      30,000
                     1185         Mar. 29, 2012      20,000
                     1187         Apr. 23, 2012      30,000
                     1204         Aug. 27, 2012      11,790
                     1206         Oct. 29, 2012      20,000
                     1212         Nov. 29, 2012      15,759
                     1219         Mar. 11, 2013      30,000
                            Total                  $749,954




                                      20
Appendix D

           LIST OF ACTIVITIES NOT MEETING PRINCIPAL
                    RESIDENCY REQUIREMENT


               Activity          Affordability        Affordability                       Monitoring
               number               period             period end           Amount        report date
                                                           date
                  11                20 years          June 29, 2013           $5,000       Feb. 2012
                  17                20 years          Nov. 10, 2013           18,721       Feb. 2012
                  18                20 years          Nov. 10, 2013           18,721       Feb. 2012
                  20                20 years          Nov. 10, 2013           18,721       Feb. 2012
                  34                20 years           July 5, 2014           14,400       Feb. 2012
                  35                20 years          Sept. 19, 2014           5,600       Feb. 2012
                  45                20 years           July 5, 2014            5,000       Feb. 2012
                  88                30 years          Apr. 30, 2026            9,153       Feb. 2012
                  89                30 years          Apr. 30, 2026            9,746       Feb. 2012
                 483                10 years          Mar. 26, 2012           15,000       Feb. 2012
                 653                10 years          Nov. 12, 2014           20,000       Feb. 2010
                 654                10 years          Aug. 19, 2014           19,485       Feb. 2010
                 778                10 years          Mar. 29, 2016            9,407       Feb. 2010
                 793                10 years          July 19, 2016           18,583       Feb. 2010
                 795                10 years          Aug. 29, 2017           30,000       Feb. 2010
                 819                10 years          Oct. 19, 2016           20,000       Feb. 2010
            Not available 9         10 years          Mar. 31, 2010           15,000       Feb. 2010
            Not available9          10 years           July 6, 2010           15,000       Feb. 2010
            Not available9          10 years           Apr. 1, 2013           20,000       Feb. 2010
            Not available9          10 years          May 19, 2010            15,000       Feb. 2010
            Not available9          20 years           July 2, 2013            5,000       Feb. 2012
                                     Total                                  $307,537




9
 The activity was part of a global payment for several home buyer activities. The Municipality records did not
contain sufficient information to trace the individual activity in HUD’s information system.

                                                        21
Appendix E

 LIST OF ACTIVITIES WITH UNDATED SIGNATURES AND
           MISSING AGREEMENT CLAUSES


             Activity   Undated signatures in   Missing agreement
             number         agreement                clauses
              1160               X
              1161               X
              1162               X
              1163               X
              1172               X                     X
              1184               X                     X
              1187               X                     X
              1202               X
              1207               X
              1212               X                     X
              1213               X
              1219               X                     X
              Total              12                    5




                                        22