oversight

The City of Memphis, TN, Did Not Have Effective Controls To Administer Its Housing and Rehabilitation Program Activities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-12-30.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




               The City of Memphis, Memphis, TN

           Community Planning and Development
            Housing and Rehabilitation Program




2014-AT-1003                                DECEMBER 30, 2013
                                                        Issue Date: December 30, 2013

                                                        Audit Report Number: 2014-AT-1003




TO:            Mary Wilson, Director, Office of Community and Planning Development,
               Knoxville, TN, 4JD

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

SUBJECT:       The City of Memphis, TN, Did Not Have Effective Controls To Administer Its
               Housing and Rehabilitation Program Activities

    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 City of Memphis Housing and
Rehabilitation 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 8M, 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.
                                            Date of Issuance: December 30, 2013
                                            The City of Memphis, TN, Did Not Have Effective
                                            Controls To Administer Its Housing and Rehabilitation
                                            Program Activities



Highlights
Audit Report 2014-AT-1003


 What We Audited and Why                     What We Found

We audited the City of Memphis’             The City’s administration of its HARP activities for
Community Development Block Grant           performing home repairs and resolving code violations,
(CDBG) and HOME Investment                  as related to its policies and procedures, was not
Partnerships Program-funded Housing         effective. Specifically, inspectors approved payments
and Rehabilitation Program (HARP) as        for home repairs that did not meet rehabilitation
part of the activities in our 2013 fiscal   standards or were not properly repaired as contracted.
year annual audit plan. We selected the     These conditions occurred because the City did not
City’s HARP activities based on a           properly write its rehabilitation specifications for
referral from the Office of Inspector       contractors and perform inspections as required. In
General’s Office of Investigation. Our      addition, the City did not follow its policies and
audit objective was to determine            procedures to ensure that the contractors performed
whether the City used its CDBG and          acceptable repairs. Consequently, it permitted more
HOME funds for eligible activities and      than $400,000 in CDBG and HOME funds to be used
complied with the U.S. Department of        contrary to program requirements for 61 rehabilitation
Housing and Urban Development’s             contracts for work that was either not completed or not
(HUD) and its own requirements when         completed correctly and placed undue hardships on the
administering its HARP activities.          property owners.

 What We Recommend

We recommend that the Director of
HUD’s Knoxville Office of Community
Planning and Development require the
City to (1) correct the deficiencies or
reimburse the more than $400,000 to
the City’s CBDG or HOME program
line of credit accounts from non-Federal
funds for the repairs not completed or
corrected and refrain from awarding
future contracts. Also, we recommend
that the Director reinspect the homes to
ensure that all deficiencies have been
corrected.
                                TABLE OF CONTENTS

Background and Objective                                                             3

Results of Audit
      Finding: The City’s Administration of Its HARP Activities Was Not Effective    4

Scope and Methodology                                                               14

Internal Controls                                                                   17

Appendixes
A.    Schedule of Questioned Costs                                                  18
B.    Auditee Comments and OIG’s Evaluation                                         19
C.    Schedule of Ineligible and Unsupported Costs                                  23
D.    Chart of Repair Violations                                                    25
E.    Number of Inspections Not Performed                                           27




                                                2
                              BACKGROUND AND OBJECTIVE

The City of Memphis, Division of Housing and Community Development, was established in 1977 to
address slums, blight, and deterioration in Memphis communities. It administers the City’s Housing and
Rehabilitation Program (HARP). HARP is a federally funded program offering financial assistance to
low- to moderate-income individuals and families with critical needs and code violations and home
repairs in the form of deferred-payment loans. HARP assistance requires a lien on the homeowner’s
property upon completion of the repairs for a period of up to 15 years, secured by a note and deed of
trust. The City solicits bids from licensed general contractors for the HARP repairs and receives
Community Development Block Grant (CDBG) and HOME Investment Partnerships Program funds
provided by the U.S. Department of Housing and Urban Development (HUD).

The City started or completed 153 HARP contracts totaling more than $3.9 million in CDBG and HOME
funds between January 1, 2010, and December 31, 2012. We reviewed 65 of the 153 contracts totaling
more than $1.6 million. HUD provided the following funds to the City.

                           Year                 CDBG funds                  HOME funds
                           2010                     $8,768,683                  $4,921,520
                           2011                     $7,320,374                  $4,342,245
                           2012                     $6,589,508                  $2,800,852
                           Total 1                 $22,678,565                 $12,064,617

HUD’s Tennessee State Office of Community Planning and Development in Knoxville, TN, is
responsible for overseeing the City’s program.

Our audit objective was to determine whether the City’s Housing and Community Development Division
used its CDBG and HOME funds for eligible activities and complied with HUD’s (CDBG and HOME) and
its own requirements when administering its HARP activities.




1
The City’s HARP activities accounted for only $3,948,733 of the total funding received from HUD.


                                                           3
                                     RESULTS OF AUDIT


Finding: The City’s Administration of Its HARP Activities Was Not
Effective
The City’s administration of its HARP activities for performing home repairs and resolving code
violations, as related to its policies and procedures, was not effective. Specifically, inspectors
approved payments for home repairs that did not meet rehabilitation standards or were not completed
as contracted for 61 rehabilitation properties that were inspected. These conditions occurred because
the City did not properly write its rehabilitation specifications for contractors and perform inspections
as required. In addition, the City did not follow its policies and procedures to ensure that the
contractors performed the required repairs. Consequently, the City paid contractors more than
$19,000 in ineligible costs for work that was not completed and more than $381,000 in unsupported
costs for work that was not properly repaired as contracted and placed undue hardships on property
owners.


 Rehabilitation Work Did Not
 Meet Contract Requirements

               City inspectors did not ensure that HARP home repairs met HOME program
               rehabilitation code standards and local county requirements, or that rehabilitation work
               was completed before contractors were paid. Of the 65 properties statistically selected
               for inspection, 61 had instances of incomplete home repairs or poor workmanship.
               The City paid more than $19,000 in ineligible costs from CDBG and HOME funds to
               contractors for repairs that were not completed. For example, the rehabilitation
               contract for property 4 required shoe molding that was not installed, property 22
               required baseboards and shoe molding that was not installed, and property 36 required
               new flooring and paving that was not completed. Also, the City paid more than
               $381,000 in unsupported costs from CDBG and HOME funds to contractors for work
               that was not properly repaired as contracted. For example, property 1 continued to
               have a severe sink leak after repairs were made, property 50 had an electrical service
               panel that was not properly secured, and for property 59 the living door frame was
               termite infested after being replaced (see appendix C).

               The City required liens to be placed on the homes of program participants for an
               affordability period of up to 15 years. Due to the improper home repairs and the City’s
               policies, the City placed undue hardships on the 61 property owners with excessive
               amounts from the liens placed against their properties. Hence, the liens on the properties
               with unfinished work should be adjusted for the actual amount of the work completed on
               the property.




                                                     4
                      We identified home repairs that did not meet HOME program rehabilitation code
                      standards or were not completed as required by 24 CFR (Code of Federal Regulations)
                      92.251(a)(1) 2 for work items such as (1) plumbing; (2) electric services; (3) water heaters;
                      (4) toilet repairs; (5) vinyl siding; (6) molding; (7) doors; (8) kitchen cabinets; (9)
                      flooring; (10) heating, venting, and air conditioning (HVAC) systems; (11) roofing; (12)
                      drywall and painting; (13) cut tree limbs; (14) gutters; (15) door framing; (16) bathroom
                      sinks/walls; (17) windows and (18) other (see appendix D). Also, the home repairs were
                      not properly completed or did not meet the City’s local county rehabilitation code
                      standards 3. Examples of the repair deficiencies and violations are shown below.

                      Work Was Not Properly Repaired As Contracted




                      Property number 1 – The sink had a severe leak that damaged the wood in the
                      cabinet.




2
 24 CFR 92.251(a)(1) states, “Housing that is constructed or rehabilitated with HOME funds must meet all applicable local codes, rehabilitation standards,
ordinances, and zoning ordinances at the time of project completion, except as provided in paragraph (b) of this section. The participating jurisdiction must
have written standards for rehabilitation that ensure that HOME-assisted housing is decent, safe, and sanitary.”
3
  The City is required to meet Shelby County Building Codes in order to conform to its local zoning regulations and safety
standards.


                                                                              5
Property number 50 – The electrical service panel was not properly secured by
screws to the house studs. The panel was being held in place by duct tape.




Property number 40 – Drywall was removed to access the water heater; however,
after reinstallation of the water heater, the contractor did not repair the damaged
exposed wall.




                                         6
Property number 59 – The living room door frame was replaced with a termite
infested door frame.




Property number 65 – The roof still leaked after being replaced.




                                        7
Property number 36 – The double deadbolt lock was a violation.

Memphis Housing Code, article 4, section 14-4-52 (I), requires that every door available
as an exit be capable of being opened from the inside, easily and without the use of a key.
City officials stated that they allowed the contractors to install security doors with the
double deadbolt lock because they were unaware of the code violation.




Property number 54 – The new bathroom vanity sink cabinet with double doors did not
allow wheelchair access.

The City executed two HARP contracts for homeowners with accessibility requirements
for people with disabilities. The repairs were required to comply with 24 CFR Part 8,
which implements Section 504 of the Rehabilitation Act of 1973. However, repairs were
not completed to meet the required Section 504 standards. Property owner 54 required
wheelchair accessibility and the bathroom repairs did not meet the Section 504 standards
for a disabled individual in a wheelchair. The original contract specifications required the
contractor to reframe the half bathroom door to make it wheelchair accessible; however,
the work item was deleted from the contract, and the homeowner was not able to access

                                       8
the bathroom in her wheelchair. The double doors blocked the use of the sink and the
water valves.

Work Was Not Completed




Property number 4 – The shoe molding was not installed.




Property number 22 – The baseboard and shoe molding had not been installed.

City officials accompanied us on 46 of the 65 inspections. We provided the City copies of
our inspection results on August 19 and 20, 2013, to ensure that they were aware of the
repair deficiencies identified. The City began taking corrective action; however, since the
corrections were completed after our inspections, we were unable to verify that the repairs
had been properly completed.




                                       9
    Specifications Were Poorly
    Written

                 The City’s rehabilitation specifications were poorly written and did not include the
                 product pricing, materials or models to be used to ensure price consistency and quality
                 products as required by its contractor’s policies and procedures. 4 Due to the poorly
                 written specifications, we had difficulty determining the repairs to be performed for some
                 work items and the quality of materials. For example, the specifications for the HVAC
                 systems did not specify the unit size. The specification stated that units must be sized to
                 efficiently heat and cool the structure. We identified problems with the HVAC systems
                 installed in 14 homes because they were not properly sized to cool the units. For example,
                 during one inspection, the air conditioner was on but was not cooling the house. The
                 interior was 95 degrees, and the exterior was 100 degrees. We encountered this situation
                 on 14 of our inspections. We informed the construction manager of the homes requiring
                 air conditioning repairs, and instructed that he request the contractors perform service
                 calls immediately. Another contract had a specification addendum that stated, “bring
                 electrical up to code.” The requirements were not specific since they did not reference
                 which year’s code to use, the work to be performed, or the location of the work.

                 The City’s construction manager used a project management software program named
                 RSMeans, which was created specifically for housing rehabilitation projects. The
                 program has the ability to create written specifications and cost estimates, manage bids
                 and contracts, track construction draws and change orders, and generate reports for each
                 step of the rehabilitation project. However, the City’s construction manager stated that he
                 did not use the program’s main features, which provided a guideline for job cost pricing
                 per each job category and total contract calculation costs. He stated that he used a
                 combination of the RSMeans software 5 and manuals, Internet pricing, and his own
                 working knowledge for the specifications. He also stated that he was not concerned with
                 the category item pricing from the contractor as long as the bids were within the City’s
                 total contract estimates. As a result, the City did not pay consistent costs per category
                 item for the repairs or have knowledge of the price changes per category item. For
                 example, one contractor charged $400 to repair a security door, while another charged
                 only $200 for the same work item.

    Inspections Were Not
    Performed as Required


                 City inspectors did not perform HARP inspections as required for 65 of the 65 homes
                 inspected (see appendix E). The City’s HARP policies and procedures manual states that

4
  Construction and Rehabilitation Specifications- H.A.R.P. Department, Division of Housing and Community Development,
Memphis, TN
5
  RSMeans software is a web-based service that provides accurate and up-to-date cost information to help build competitive
estimates.


                                                            10
HARP inspectors will perform inspections at least three times weekly to ensure that the
work performed meets HARP quality workmanship standards. Inspectors must update an
action sheet after each visit and notate the work in progress and any issues identified with
a resolution. Also, a final inspection is required once all work outlined in the work
writeups and change orders are completed and all equipment manuals and training have
been provided to homeowners.

For one of the rehabilitated properties which required Section 504 standards repairs, the
work was conducted from February 2011 through January 2012, totaling 47 weeks, and
the file documented only six inspection field reports. The inspections were conducted
during March, April, and May 2011. For another rehabilitation contract, the repairs were
completed from July 2012 through February 2013, totaling 32 weeks, and the file
documented only five inspection field reports. The inspections were conducted during
September, October, and November 2012. City officials stated that due to the weather,
inspectors may not have performed the required inspections but they should have prepared
field inspection reports documenting the reasons. The construction files did not document
reasons for not performing the required inspections.

In addition, for another rehabilitation contract, the repairs were performed from October 8,
2012, through May 13, 2013, totaling 31 weeks, and the file documented only seven
inspection field reports. The inspections were conducted between January and May 2013.
Although the City terminated its contract with the contractor on June 25, 2013, for failure
to substantially perform the obligations established in the contract, the City paid the
contractor for 50 percent of the contract amount without an invoice. Because the City
failed to obtain invoices, we could not determine the work completed when we inspected
the home.

As a result of the final inspections not having been performed as required, the City paid
contractors in full, although they had not finalized the required electrical permits with the
County.

In one home, several outlets did not work, and there were rooms with no electricity. Since
the contractor did not come back to repair the electrical problems, the homeowner hired an
electrician. A signed letter from the electrician, dated December 12, 2012, stated that the
electrical work completed in the home was a fire hazard and dangerous.

In another home, a contractor was paid to install a new wiring system. The system was
installed but failed to pass inspection. The certificate of completion, signed by the City
inspector, certified that the work had been completed and conformed to generally accepted
standards of workmanship quality and that the installed equipment and components
operated and functioned properly. However, the City code enforcement building inspector
placed a failed red sticker on the electrical box to show that the electrical work in the
house was not up to code as shown below.




                                      11
           Property number 18 – The electrical rejection tag was placed on the box by the building inspector.

           The City’s HARP contractors’ policies and procedures stated that at the final inspection,
           copies of the final City code enforcement signed permits were required. Also, the City
           contractor’s policies and procedures for work standards state that the finished product
           must be an example of good workmanship. The City construction manager stated that
           because of his workload, he did not follow up to ensure that the inspectors obtained the
           final permits.

           The City’s construction department staff was not sufficient to perform the required
           inspections. As of June 2013, the City had no inspectors, and the construction manager
           performed all HARP inspections. The construction manager was responsible for
           managing all of the City’s housing construction programs (HARP; HUD’s Neighborhood
           Stabilization Program; and downpayment assistance, lead-based paint, and tenant-based
           rental assistance programs). City officials stated that the City did not plan to hire new
           inspectors. The City had 18 HARP contracts ready for bidding with no inspectors to
           oversee the rehabilitation work.

The City Failed To Impose
Liquidated Damages

           The City did not enforce its policies and procedures for imposing liquidated damages on
           contractors for failing to complete the repairs by the executed completion date.
           Contractors missed their contract completion dates for 46 of the 65 contracts reviewed.
           The number of days beyond the executed contract dates ranged from 3 to 273. The
           delayed timeframes placed undue hardships on the homeowners.

           The City’s HARP contractors’ policies and procedures stated that upon acceptance of the
           contract, the contractor agreed to pay the City $100 per day for liquidated damages for
           every calendar day that the work remained incomplete beyond the required completion
           date. However, the City did not include the clause in its contracts. City officials stated
           that they did not enforce the liquidated damages policy because they did not want to place
           a financial burden on the small business contractors. However, the missed completion

                                                  12
                    dates placed burdens on the property owners. Because of the missed completion dates, a
                    homeowner did not have access to the only bathroom with shower facilities for 8
                    months, which was a health and safety violation. The contractor took an extra 240 days
                    to complete the contracted repairs. Another homeowner had to endure sewage backing
                    up in the tub for more than a month because the contractor took an extra 50 days to
                    complete the contracted repairs.

     Projections


                    In projecting the 61 HARP contracts with repair deficiencies to the universe of 153 HARP
                    contracts, we estimate that the City spent at least $801,000 in CDBG and HOME funds
                    without adequate support to show whether the rehabilitation repairs were provided for
                    eligible work and according to HUD and City regulations. Specifically, for 24 of the 61
                    rehabilitation contracts with disbursements for work not completed, in projecting these to
                    the universe of 153 contracts, we estimate a deficiency in at least 47 rehabilitation
                    contracts for at least $28,000 in CDBG and HOME funds. For 56 of the 61 rehabilitation
                    contracts with disbursements for poor workmanship, in projecting these to the universe of
                    153 contracts, we estimate a deficiency in at least 132 rehabilitation contracts for at least
                    $773,000 in CDBG and HOME funds. 6

    Conclusion

                    The City did not follow Federal regulations and its own requirements to ensure that its
                    HARP contractors performed required repairs. Consequently, it permitted CDBG and
                    HOME funds to be used contrary to program requirements for 61 rehabilitation contracts.
                    The City paid contractors more than $19,864 in ineligible costs and more than $381,855 in
                    unsupported costs for improper repairs and placed undue hardships on the 61 property
                    owners with excessive amounts from the liens placed against their properties for the
                    improper home repairs.


    Recommendations


                    We recommend that the Director of HUD’s Knoxville Office of Community Planning and
                    Development require the City to

                    1A.      Reimburse $9,293 in CBDG funds and $10,571 in HOME funds, totaling $19,864,
                             to its program line of credit accounts from non-Federal funds for the ineligible
                             costs of repairs not completed.



6
    Our methodology for this estimate is explained in the Scope and Methodology section of this audit report.


                                                                13
1B.   Correct all deficiencies identified from non-Federal funds or reimburse $160,051
      in CDBG funds and $221,804 in HOME funds, totaling $381,855, to program line
      of credit accounts from non-Federal funds.

1C.   Adjust program participants’ lien amounts for items not completed or corrected in
      recommendations 1A and 1B.

1D.   Review the remaining 88 HARP contracts that were not part of our sample to
      ensure that the City paid contractors for contracted repairs according to HUD and
      City regulations. For any contract with ineligible or unsupported costs, the City
      should include the contract amounts in recommendation 1A or 1B for
      reimbursement.

1E.   Implement its policies and procedures for writing specifications, performing
      inspections, obtaining signed final permits, and imposing liquidated damages.

1F.   Refrain from awarding any future HARP contracts until it has adequate personnel
      to monitor rehabilitation work and ensure that federal funds are properly expended.

We also recommend that the Director of HUD’s Knoxville Office of Community Planning
and Development

1G.   Reinspect the homes to ensure that identified deficiencies have been properly
      corrected.




                                   14
                                   SCOPE AND METHODOLOGY
We performed the review from April through August 2013 at the City’s Housing and Community
Development Department and at HARP-assisted properties in Memphis, TN. Our review generally
covered the period January 1, 2010, through December 31, 2012, and was extended as necessary to
accomplish our objective.

To accomplish our objective, we

    •    Reviewed applicable laws, HUD regulations, the Code of Federal Regulations, and other program
         requirements.
    •    Reviewed applicable City controls and policies and procedures used to administer HARP
         activities.
    •    Interviewed HUD officials, City and county personnel, and HARP recipients.
    •    Reviewed monitoring, independent public accountant, and HUD information system reports.
    •    Reviewed the City’s rehabilitation contract files and records, including construction and financial
         files.
    •    Traced information reported in HUD’s information system to City records.
    •    Performed physical inspections of the selected rehabilitation repairs.

The City received more than $22.6 million in CDBG funds and $12 million in HOME funds from
January 1, 2010, through December 31, 2012. We statistically selected 65 of the 153 HARP contracts, 42
percent, that were either started or completed from January 1, 2010, through December 31, 2012. Twelve
of the original 65 contracts which were selected for review were replaced with other contracts in the
universe due to scheduling conflicts with the homeowners. These additional contracts were selected
using a stratified random sample and were used to meet our statistical sample size of 65. During April,
May and June 2013, we inspected the rehabilitation repairs of the 65 properties to determine whether the
City complied with Federal regulations and its own policies in its use of CDBG and HOME funds for
HARP repairs. The City’s staff accompanied us on 46 of the 65 inspections.

The 65 contracts totaled more than $1.6 million in CDBG and HOME program funds. The results of our
modeling efforts indicated that a stratified random sample was the most effective method to sample the
data. A stratified random sample of 65 rehabilitation contracts was determined to be more than sufficient
for auditing among the audit universe of 153. The data were sampled using a computer program written
in SAS®7 using the survey select procedure with a random-number seed value of 7.

The sample design table details the breakdown of audited rehabilitation contracts by strata as it compares
to the original sample design for this audit.




7
 A widely accepted platform for statistical calculations, which was specifically designed to evaluate cluster samples, to
project the overall percentage of properties with problems based on the audit results.


                                                              15
                                                     Sample Design
                                               Quantity in                     Quantity Used      Sampling
                               Quantity in                    Amount Range for
              Strata Name                       Original                       for Projections Weights Used
                                Universe                          Strata
                                                Sample                            by Strata    for Projections
                dom1_1              27             12            $0 - $17,215            12            2.250
                dom1_2              24             10          $17,216 - $23,377          8            3.000
                dom1_3              24             10          $23,378 - $31,871          9            2.667
                dom1_4              26             11          $31,872 - $49,394         11            2.364
                dom2_1              17              7            $0 - $26,621             7            2.429
                dom2_2              17              7          $26,622 - $33,089          7            2.429
                dom2_3              18              8          $33,090 - $51,532          7            2.571
                 Total             153             65                N/A                 61             N/A


The measures provided in this report were projected based on traditional means or proportions and their
standard errors, and we used the survey means and survey frequency procedures provided by SAS®. A
traditional Taylor series 8 was used to estimate the variance. For stratification purposes, we split the 153
contracts into two groups – 101 contracts that had HOME funds and 52 contracts that had CDBG funds.
The group with HOME funds was separated into four strata, and the group with CDBG funds was
separated into three strata, yielding a total of seven strata. We reduced the average amount of
unsupported or ineligible rehabilitation expense by the margin of error (that is, the standard error)
associated with this sample design and then extended that to the 153 audit universe.

In regard to our projection, we determined that 24 of the 61 statistically selected rehabilitation contracts
with deficiencies had ineligible rehabilitation funds disbursed. This amounts to an average of $306 per
contract. Deducting for statistical variance to accommodate the uncertainties inherent in statistical
sampling, we can state, with a one-sided confidence interval of 95 percent, that the average amount per
contract was $187. Projecting this amount to the 153 audit universe, we can state that at least $28,000 in
funds was paid on contracts for ineligible rehabilitation expenses. Additionally, this defect was found
across many rehabilitation contracts, and we can also say, with a one-sided confidence interval of 95
percent, that at least 47 contracts in our universe were affected.

Also in regard to our projection, we determined that 56 of the 61 statistically selected rehabilitation
contracts with deficiencies had insufficient supporting documentation for the rehabilitation funds
disbursed. This amounts to an average of $5,980 per contract. Deducting for statistical variance to
accommodate the uncertainties inherent in statistical sampling, we can state, with a one-sided confidence
interval of 95 percent, that the average amount per contract was $5,056. Projecting this to the 153 audit
universe, we can state that at least $773,000 in funds was paid on contracts with insufficient supporting
documentation, and it could be more. Additionally, this defect was found across many rehabilitation
contracts, and we can also say, with a one-sided confidence interval of 95 percent, that at least 132
activities in our universe were affected.




8
  The Taylor Series method obtains a linear approximation for the estimator and then uses the variance estimate for this
approximation to estimate the variance of the estimate itself.



                                                              16
We relied in part on data maintained by the City for HARP and data in HUD’s system. Although we did
not perform detailed assessments of the reliability of the data, we performed minimal levels of testing
and found the data to be adequately reliable for our purposes. Testing for reliability included the
comparison of computer-processed data to payment requests and other supporting documentation.

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 finding and conclusions based on our audit objectives. We believe that the
evidence obtained provides a reasonable basis for our finding and conclusions based on our audit
objective.




                                                    17
                                   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:

               •   Program operations – Policies and procedures that management has implemented to
                   provide reasonable assurance that a program meets its objectives, while considering cost
                   effectiveness and efficiency.
               •   Compliance with laws and regulations – Policies and procedures that management has
                   implemented to reasonably ensure that program implementation is consistent 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 Deficiency

               Based on our review, we believe that the following item is a significant deficiency:

               •   The City did not follow Federal regulations and its own requirements to ensure that its
                   HARP contractors performed acceptable repairs (see finding).




                                                     18
                                       APPENDIXES

Appendix A

                     SCHEDULE OF QUESTIONED COSTS


                     Recommendation
                             number            Ineligible 1/     Unsupported 2/
                          1A                   $19,864
                          1B                                       $381,855


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the
     auditor believes are not allowable by law; contract; or Federal, State, or local policies or
     regulations.

2/   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. In this case, the City needs to support that the contractors corrected the repairs as
     contracted.




                                                 19
Appendix B

            AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation     Auditee Comments




Comment 1




                               20
21
Comment 2




            22
                             OIG Evaluation of Auditee Comments

Comment 1   The City’s comments state that it is in complete agreement with the audit report and is
            fully committed to strengthening its policies and procedures to come into full compliance
            with the HARP regulations. We commend the City for its commitment to strengthening
            its HARP activities. In addition, the City must implement corrective actions to clear all
            the report recommendations. The Knoxville Office of Community Planning and
            Development will be responsible for reviewing and approving these corrective actions.

Comment 2   We agree with the City’s comment to cancel all current cases to receive program
            assistance and have them reapply and meet requirements under the new program.
            However, the City should refrain from awarding any future HARP contracts until it has
            adequate personnel to monitor rehabilitation work and ensure that federal funds are
            properly expended.




                                                23
Appendix C

         SCHEDULE OF INELIGIBLE AND UNSUPPORTED COSTS

              Property              Type of             Funding              Ineligible         Unsupported
              number                 funds              amount 9              amount              amount
                  1                 CDBG                 $30,385                    $0             $18,535
                  2                 HOME                 $18,152                    $0              $5,960
                  3                 HOME                 $24,400                    $0              $3,956
                  4                 HOME                 $23,680                  $400              $1,735
                  5                 HOME                 $25,145                  $350              $6,175
                  6                 CDBG                 $19,710                    $0              $6,615
                  7                 HOME                 $15,505                    $0                $350
                  8                 HOME                 $28,465                  $720              $2,400
                  9                 HOME                 $32,005                    $0              $6,900
                 11                 CDBG                 $35,000                  $250              $7,725
                 12                 HOME                 $30,396                    $0             $10,840
                 14                 HOME                 $18,433                    $0              $4,525
                 15                 HOME                 $15,945                    $0                $125
                 16                 HOME                 $18,530                  $500             $12,200
                 17                 CDBG                 $33,740                   $50                  $0
                 18                 HOME                 $29,902                    $0              $4,600
                 19                 HOME                 $15,176                  $450                $480
                 20                 HOME                 $15,850                  $900              $5,530
                 21                 HOME                 $14,700               $2,000               $9,100
                 22                 CDBG                 $34,316               $3,264               $9,680
                 23                 HOME                 $10,329                    $0              $1,665
                 24                 HOME                 $16,900                  $200              $6,350
                 25                 HOME                 $13,813                  $404              $7,154
                 27                 HOME                 $16,454                    $0             $11,995
                 28                 CDBG                 $11,012                    $0             $11,012
                 29                 CDBG                  $7,770                    $0                $375
                 30                 CDBG                 $24,545                    $0                $300
                 31                 CDBG                 $12,665                    $0              $1,575
                 32                 CDBG                 $23,006                    $0              $2,094
                 33                 HOME                 $15,555                    $0              $6,780
                 34                 HOME                 $14,465                    $0              $1,783
                 35                 HOME                 $25,920                  $150              $8,135
                 36                 CDBG                 $27,234               $3,784              $11,450

9
 The Funding Amount column is calculated using the amounts of the rehabilitation costs shown in the IDIS reports. Soft
costs were not included in the amounts.


                                                            24
          37                HOME                 $18,060                    $0               $2,000

      Property             Type of             Funding              Ineligible         Unsupported
      number                funds              amount                amount              amount
         38                CDBG               $31,345                    $150             $10,650
         39                HOME               $11,610                    $400                $400
         40                HOME               $20,308                      $0              $2,155
         42                HOME                $19,325                     $0              $4,400
         43                CDBG                $32,965                     $0             $10,600
         44                CDBG                $13,200                     $0              $6,800
         45                CDBG                $30,744                     $0              $7,540
         46                HOME                $35,475                     $0                $675
         47                CDBG                $21,010                   $800              $2,100
         48                CDBG                $28,040                     $0              $1,725
         49                HOME                $23,065                     $0             $10,165
         50                CDBG                $17,080                   $570              $8,975
         51                HOME                $22,075                     $0             $13,175
         53                HOME                $32,352                   $400                $442
         54                HOME                $32,356                $1,897              $20,374
         55                HOME                $34,370                   $400             $16,650
         56                CDBG                $36,335                   $300                $200
         57                HOME                $35,000                     $0              $9,200
         58                HOME                $31,525                     $0              $5,000
         59                HOME                $35,000                   $800              $5,600
         60                HOME                $34,175                     $0              $4,080
         61                CDBG                $34,217                     $0              $5,600
         62                CDBG                $36,900                     $0              $9,450
         63                HOME                $22,446                     $0              $2,050
         64                HOME                $32,550                   $600              $6,700
         65                CDBG                $39,017                   $125             $27,050
                            Total           $1,459,648               $19,864             $381,855

Note: CDBG funds for questioned costs totaled $165,894 ($9,293 ineligible, $160,051 unsupported).
HOME funds used for questioned costs totaled $235,825 ($10,571 ineligible, $221,804 unsupported).




                                                   25
Appendix D

                                                                    CHART OF REPAIR VIOLATIONS
                                   Water heaters




                                                                                                                                                                  Cut tree limbs



                                                                                                                                                                                             Door framing
                                                   Toilet repairs




                                                                                                                                                    Drywall and
                                                                                                                           venting, and
                                                                    Vinyl siding




                                                                                                                                                                                                            sinks/walls
                                                                                                                                                                                                            Bathroom
           Plumbing
                      Electrical




                                                                                                                                                                                                                          Windows
Property




                                                                                                                             Heating,
                                                                                                                Flooring
                                                                                   Molding




                                                                                                                                                     painting
Number




                                                                                                     cabinets




                                                                                                                                          Roofing
                                                                                                     Kitchen
                       services




                                                                                                                                                                                   Gutters




                                                                                                                                                                                                                                    Other 10
                                                                                                                             HVAC
                                                                                             Doors




                                                                                                                                                                                                                                               Total
  1        1             2                         1                                         3         1         1              1         1          14                                                        2                               27
  2                      1                                                                                                      1                                                                                                               2
  3                                                                                                              4                                     2                                                                                        6
  4                      3                                                         2         2                   1                                                                                                                              8
  5        1                                       1                                                                            1                                                                                                               3
  6                      1                         1                1                        1                                                                                                                                                  4
  7                                                                                                                                                                                                            1                                1
  8                      2                                                                   1                                                                                                                                                  3
  9                      1                                                                                                      1                                                                                                               2
 11                      2                                                                   1                                  1                      1                                                                                        5
 12                      1                         1                1                                                                                                                                                     1                     4
 13                      1                                                                             1                                  1                                                                                                     3
 14                                                                                                                             1                                                                                                     1         2
 15                                                                                          1                                                                                                                                                  1
 16                      1                                          1              1                   1         6                                                                                                                    1        11
 17                                                                                                                                                    1                                                                                        1
 18        1             3                                                                   1                                                                                                                                                  5
 19                                                                                                                             1                                                                                         1           1         3
 20                                                                                          2                                            1            1                                                                              1         5
 21                                                                                                                             1         1            1                             1                                                          4
 22                      1                                          1              6                   1         6              1         1            1                                                                                       18
 23        2                                                                                 2                                            1            1                                                                              1         7
 24                      1                                                                                       1              1                      1                                                                                        4
 25        1             1                                          1              3                                            1                                                                                                               7
 27        1                                                                                                     1                        1                                                                                                     3
 28                                                                                                                                                                                                                                   1         1
 29                                                                                                                                                                                                                       1                     1
 30                                                                                          1                                                                                                                                                  1
 31        1             1                                                                                                                                                                                                                      2
 32        1                                                                                           1         1                                     2                                                                                        5
 33                                                                                                    1                                  1            1                                                                                        3



10
     Other violations consist of an extermination, final clean-up, a set of folding attic stairs, permits, warranty and a doorbell.


                                                                                                                           26
                                   Water heaters




                                                                                                                                                                   Cut tree limbs
                                                   Toilet repairs




                                                                                                                                                                                              Door framing
                                                                                                                                                     Drywall and
                                                                                                                            venting, and
                                                                    Vinyl siding




                                                                                                                                                                                                             sinks/walls
                                                                                                                                                                                                             Bathroom
           Plumbing
                      Electrical




                                                                                                                                                                                                                           Windows
Property




                                                                                                                Flooring

                                                                                                                              Heating,
                                                                                   Molding




                                                                                                                                                      painting
Number




                                                                                                     cabinets




                                                                                                                                           Roofing
                                                                                                     Kitchen
                       services




                                                                                                                                                                                    Gutters
                                                                                                                              HVAC
                                                                                             Doors




                                                                                                                                                                                                                                     Other

                                                                                                                                                                                                                                             Total
 34                      1                                            1                                1                                                1                                                                                      4
 35        1                                                          1                                                                                            1                                                                           3
 36                                                                                          2         1        4               1          3                                                                    1            1                13
 37                                                                                                                             1                                                                                                              1
 38                                                                                          2                  1                          1            2                                                                                      6
 39                      1                          2                                                                                                                                                                                          3
 40                      1                                                                                                      1                       1                                     1                                                4
 42                                                                   1                                                         1                                                                               1                              3
 43                                                                                 1        3                                                                                                                               1                 5
 44                      1                                                                             1                                   1                                                                                 1                 4
 45                                                                                                                             1                                                                                                              1
 46        1                                                                                 1                                                                                                                                                 2
 47                      1                                                                   1                  1                                                                   1                                                1         5
 48                      2                                                                                                                                                                                                                     2
 49        1             1                          1                                        1         1        1               1                       2                                                       2            1       1        13
 50                      1                                                                   1                                  1                       4                                                                                      7
 51                      1          2                                                        2         1        2               1          2            2                                                                    1                14
 53                                                                                 2        1                  1                                                                             2                 1                              7
 54                      2                                                                   1         2        5               1                       1                                     4                 3                             19
 55                      1          1                                 1                      2                                  1          1            1                                                       1                    1        10
 56                      1                                                                                                                              2                                                                                      3
 57                                                                                                                             1          1                                                                                                   2
 58                                                                   1                                                                                                                                                                        1
 59        1             2          1                                                        1                  1                                                                                                                    1         7
 60                                                 1                                                                                      1                                                                                                   2
 61                                                                                                                                        1                                                                                                   1
  11

 62                      2                                                                                                      1                       3                                                                                      6
 63        1                                                                                           1        1                                       2                                                                                      5
 64                                                                                                                             1                       3                                                       2                              6
 65                      3          1                                                                                           2           1           5                                                                                     12
           14           43          5               8               10             15        33       14        38              26         20          55          1                2         7                14            8       10      323




11
  The homeowner restricted our inspection. Therefore, we were not able to determine if the City properly completed all
required work items for the property. There may have been additional deficiencies for this property.


                                                                                                                           27
Appendix E

                  NUMBER OF INSPECTIONS NOT PERFORMED
                     Property               Length of               Number of 12             Number of
                     number              rehabilitation in             required              inspections
                                             weeks                   inspections              performed
                          1                     18                        54                      11
                          2                     10                        30                       2
                          3                     18                        54                       0
                          4                      7                        21                       1
                          5                      7                        21                       5
                          6                     12                        36                       1
                          7                     20                        60                       0
                          8                     16                        48                       2
                          9                      6                        18                       0
                         10                     27                        81                      11
                         11                     12                        36                       9
                         12                     28                        84                       3
                         13                     27                        81                       3
                         14                     21                        63                       4
                         15                      7                        21                       1
                         16                     31                        93                       4
                         17                     10                        30                       2
                         18                     11                        33                       3
                         19                      5                        15                      11
                         20                      9                        27                       4
                         21                      4                        12                       3
                         22                     56                       168                       6
                         23                      4                        12                       0
                         24                      8                        24                       5
                         25                     32                        96                       5
                         26                      3                         9                       1
                         27                     15                        45                       1
                         28                     35                       105                       7
                         29                      7                        21                       2
                         30                      5                        15                       6
                         31                      4                        12                       6
                         32                      6                        18                       8
                         33                      8                        24                       6
                         34                      5                        15                       3
12
  The length of rehabilitation weeks multiplied by 3 equals the number of required inspections. Three is the number of
inspections that the City should have conducted each week according to its policy.



                                                             28
Property number      Length of             Number of     Number of
                  rehabilitation in          required    inspections
                      weeks                inspections    performed
      35                 23                     69            11
      36                 52                    156             9
      37                 12                     36             3
      38                 26                     78             8
      39                  4                     12             0
      40                  5                     15             3
      41                  4                     12             3
      42                  3                      9             0
      43                 16                     48             7
      44                 13                     39             3
      45                  5                     15             8
      46                 70                    210             3
      47                  6                     18            10
      48                 10                     30             5
      49                 20                     60             3
      50                  2                      6             0
      51                 35                    105            10
      52                 65                    195             2
      53                  6                     18            15
      54                 47                    141            13
      55                 12                     36             6
      56                  9                     27             6
      57                 23                     69             0
      58                  8                     24             0
      59                 12                     36             4
      60                 18                     54            19
      61                 10                     30             3
      62                 25                     75             1
      63                 39                    117             8
      64                 26                     78            31
      65                 51                    153             0




                                      29