OFFICE OF AUDIT REGION 4 ATLANTA, GA The Housing Authority of the City of Spartanburg Spartanburg, SC Public Housing Program 2014-AT-1016 SEPTEMBER 30, 2014 Issue Date: September 30, 2014 Audit Report Number: 2014-AT-1016 TO: Eric A. Bickley, Director of Public Housing, Columbia, SC, 4EPH Craig Clemmensen, Director, Departmental Enforcement Center, CV //signed// FROM: Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA SUBJECT: The Housing Authority of the City of Spartanburg, SC, Used HUD Program Funds for Ineligible Expenses 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 Housing Authority of the City of Spartanburg’s public housing 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 call David Butcher, Assistant Regional Inspector General for Audit, at 865-545-4400, extension 118. September 30, 2014 The Housing Authority of the City of Spartanburg, SC, Used HUD Program Funds for Ineligible Expenses Highlights Audit Report 2014-AT-1016 What We Audited and Why What We Found We audited the public housing program The Authority used HUD program funds for ineligible of the Housing Authority of the City of or unsupported expenses, and failed to maintain an Spartanburg, SC, because of a citizen’s accurate accounting and financial control system. This complaint. condition occurred because the Authority’s management and board disregarded HUD’s Our objective was to determine whether requirements for the proper use of program funds and the Authority’s performance in the areas failed to create an effective accounting and internal of financial operations, procurement, control environment. As a result, the Authority and inventory practices met HUD deprived its Public Housing program, and possibly requirements. other HUD programs, of needed funds and may have defaulted on its consolidated annual contributions What We Recommend contract with HUD. The Authority generally failed to follow HUD’s We recommend that the Director, procurement regulations or its own procurement Office of Public Housing, Columbia, policy. It failed to maintain required documentation, SC, require the Authority to repay its paid for services without required contracts, and failed public housing program for funds to perform cost analyses. This condition occurred diverted to other activities as identified because the Authority’s management and board failed in the Authority’s fiscal year 2013 audit to implement sufficient internal controls over the and over $28,000 for other ineligible procurement process. As a result, the Authority could program expenses, provide support not assure HUD that it procured its goods and services showing that it used almost $2.4 million at the lowest cost using full and open competition. For for eligible program expenses, and the procurements reviewed, the Authority had more determine whether the Authority is in than $1,100 in ineligible spending and was unable to substantial default of its consolidated support more than $2.2 million in spending. annual contributions contract. We also recommend that the Departmental Enforcement Center consider the need for administrative sanctions. TABLE OF CONTENTS Background and Objective 3 Results of Audit Finding 1: The Authority Used More Than $1Million in HUD Funds for 4 Ineligible or Unsupported Costs Finding 2: The Authority Failed To Comply With Federal or Its Own 11 Procurement Requirements Finding 3: The Authority Failed To Maintain an Adequate Inventory Control 15 System Scope and Methodology 18 Internal Controls 20 Appendixes A. Schedule of Questioned Costs and Funds To Be Put to Better Use 22 B. Auditee Comments and OIG’s Evaluation 23 C. Procurement Deficiencies 61 2 BACKGROUND AND OBJECTIVE The Housing Authority of the City of Spartanburg was established in 1938 by the State of South Carolina to provide safe and sanitary housing. The Authority is governed by a seven-member board of commissioners appointed by the city council of Spartanburg, SC, to 5-year terms. An executive director is responsible for daily operations. The Authority manages 1,129 conventional low-income public housing units and 2,158 Housing Choice Voucher program units. It has implemented project based budgeting and accounting under HUD’s asset management program. The Authority receives funds annually from the U.S. Department of Housing and Urban Development (HUD) to operate its programs and maintain its housing stock. It received operating subsidies and capital funds in the following amounts from fiscal year 2011 to fiscal year 2013. Fiscal year Operating subsidy Capital funds 2011 $4,091,798 $1,689,834 2012 $4,183,008 $1,506,817 2013 $3,641,647 $1,490,403 The Authority was designated as a “High Performer” with a score of 92 out of 100 on its most recent Public Housing Assessment System report. We received a confidential complaint from a concerned citizen. The complainant expressed numerous allegations or concerns regarding the procurement, financial operations, and inventory practices at the Authority. Our objective was to determine whether the Authority’s performance in the areas of financial operations, procurement, and inventory practices met HUD requirements. 3 RESULTS OF AUDIT Finding 1: The Authority Used More Than $1 Million in HUD Funds for Ineligible or Unsupported Costs The Authority used HUD program funds for ineligible or unsupported expenses, and failed to maintain an accurate accounting and financial control system. This condition occurred because the Authority’s management and board disregarded HUD’s requirements for the proper use of program funds and failed to create an effective accounting and internal control environment. As a result, the Authority deprived its public housing program, and possibly other HUD programs, of needed funds and may have defaulted on its consolidated annual contributions contract with HUD. 1 The Authority Improperly Used HUD Program Funds The Authority used program funds that HUD intended for low-income housing assistance for ineligible expenses. It improperly used program funds to support entities that it created to own and manage its office space and for other disbursements that were an ineligible or unsupported use of HUD funds. HUD Program Funds Used to Support Related Entities The Authority’s HUD financial data schedule reports and independent public accountant audit reports showed that the Authority used HUD funds for the ineligible expenses of related entities. The Authority received independent public accountant audit findings in 2010 and 2013 for the ineligible use of Federal funds. The last annual audit report, dated September 30, 2013, reported that the Authority misused $885,891 that HUD provided for the public housing program. The HUD financial data schedule showed that the Authority’s business activities were the primary beneficiary of these funds. Although the Authority owned its office building debt-free, during 2006, it engaged in a series of transactions with related entities that resulted in the loss of that space and the payment of excessive rent. 2 Without HUD approval, the Authority transferred ownership of its office building and maintenance warehouse to the Spartanburg Housing Authority Property Company, a nonprofit corporation that it had created for the purpose of owning and managing non-dwelling 1 A consolidated annual contributions contract is a written contract between HUD and a public housing authority in which the authority agrees to administer its public housing program in accordance with HUD regulations and requirements. 2 These transactions occurred under the administration of the previous executive director. 4 properties. Although the nonprofit subsequently leased the property in the private market, it never paid the Authority the $420,000 purchase price. After losing its office space, the Authority rented space in the former Mary H. Wright Elementary school that its nonprofit had purchased and transferred to another related entity, Mary Wright, LLC (Mary Wright). 3 Mary Wright renovated the building using construction loans totaling almost $4.8 million 4 and rented nearly 19,000 square feet to the Authority for office space. The Authority was paying nearly $220,000 annually for this space for three years until HUD notified it that it could only pay local market rates. The Authority subsequently lowered the rate but continued to pay Mary Wright for more space than it needed. Although Mary Wright rented some of the remaining office space to the City of Spartanburg, it was not able to generate income sufficient to cover operating expenses and debt service. One of the loans that Mary Wright obtained to renovate the building had a $3 million balloon payment due in February 2015. The Authority has no funds available for this payment and the executive director stated that there was no concrete plan for dealing with it. In addition to paying rent, the Authority used HUD program funds to pay Mary Wright’s operating expenses. It paid for all building maintenance, real estate taxes, utilities, major expenses for repairs of mechanical systems, and some debt service. The executive director stated that he would continue to use HUD funds to pay for other Authority activities because his other sources of funds were insufficient to cover recurring expenses. He stated that the Board was aware he used HUD funds to support the building but believed that they had no other option. The Authority’s misuse of funds intended to benefit the low-income participants of HUD’s public housing program represents violations of its contract with HUD. The contract states, in Section 9, 5 that the Authority must use public housing funds only for public housing projects under contract. Further, Section 17 6 states that HUD can find the Authority in substantial default of the contract for dispositions or encumbrances of any project, or portion of a project, without HUD approval. Other Cash Disbursements Were Ineligible or Unsupported The Authority used Federal funds to pay $24,594 in ineligible expenses, could not show that it had properly charged an additional $142,434 to HUD programs, and miscoded $1,687 in expenses. HUD regulations required the Authority to maintain detailed disbursement records to document eligible expenditures. 7 3 SHA Property Company is the managing member of Mary Wright, LLC. 4 The first loan has two notes. The senior note is $3,000,000, while the supplemental note is $750,000. The second loan is $1,010,029. 5 Consolidated Annual Contributions Contract, part A, section 9(C) 6 Consolidated Annual Contributions Contract, part A, section 17(B) 7 24 CFR 905.310(b) 5 Cash disbursements were ineligible or unsupported Eight of the 14 disbursements reviewed did not have adequate documentation, including four instances where the Authority paid for services without a valid contract. The Authority used $19,865 of Capital Fund money to pay its law firm for non-capital fund uses, a violation of the program regulations 8, and could not show that it had properly charged $14,737 9 to various HUD programs. This condition occurred because the Authority’s finance staff was not aware of the terms of the vendors’ contract agreements such as the amount to pay per unit for a repair. Capital fund draws were ineligible or unsupported The Authority paid ineligible expenses or could not provide support for five of the seven fund drawdowns reviewed. The five disbursements contained $4,230 in ineligible uses and $127,697 without proper support. Examples include using capital funds to pay for repairs at non-public housing developments, and lack of documentation supporting payments to consultants. This condition occurred, in part, because the Authority’s written procedures did not outline the specific document requirements needed to support each drawdown. Credit card purchases were ineligible or miscoded During our audit period, the Authority purchased $140,314 in goods and services with its Visa credit cards. We reviewed three credit card payments totaling $17,590, or about 13 percent, of the total charges. The Authority had $499 in ineligible costs and $1,687 in miscoded costs. There were ineligible purchases of zoo tickets, a professional membership, food, and a gift card. The Authority charged these purchases to the Resident Opportunities and Self Sufficiency (ROSS) grant, a grant that it used to fund supplies, equipment, furniture, salaries, and local travel for program staff. Additionally, the Authority miscoded the cost of a job posting to the capital fund program’s administration budget line item instead of the management improvement budget line item. The Authority had insufficient procedures in place for the use of its credit cards and review of transactions. The Authority Failed To Maintain Auditable Records The Authority’s records for establishing the proper use of HUD funds were not auditable. This condition occurred because the Authority failed to maintain accounting records showing the sources and uses of funds for its various 8 24 CFR 905.202(a) – Costs not associated with a public housing project or development are ineligible activities and costs for the Capital Fund Program. 9 Total questioned cost of $53,514 was reduced to $14,737 to avoid double counting of $38,777 in questioned costs in Finding 2. 6 activities. This failure may have placed the Authority in default of Section 15 10 of its contract because it failed to maintain an accounting system that included auditable records showing the source and proper use of program funds. The Authority pooled funds from numerous sources and paid most of its obligations from one general fund account. HUD permits this type of system but only if the accounting system can track the sources and uses of funds in sufficient detail to maintain an adequate audit trail. 11 When funds are pooled, the contract prohibits an entity from withdrawing more funds from the pool than it has deposited. 12 Since balances between programs indicate that funds belonging to a program were used for another activity, interfund balances must be promptly cleared with a cash payment to the program that provided the funds. The Authority’s accounting was inadequate to show the sources and uses of funds for all transactions, and the staff was unable to explain why this was so. The staff stated it was unable to provide reconciled interfund balances that included all financial activity since the last independent audit in September 2013. Staff told us that accurate interfund balances would not be determined until the end of the fiscal year. Without interfund balances, it was not possible to determine how the Authority had used HUD funds provided for operation of public housing or its other programs, or how the interfund balances may have changed since the last audit report. Staff attributed the problem to issues with the Authority’s computer system that dated back to the implementation of the system in October 2011. The financial and accounting staff’s inability to explain how their system worked indicated that their management had not provided them with the information or direction they needed to perform their jobs. The Authority’s policies and procedures were not always written, which made it difficult to maintain consistency. In addition, the chief financial officer position had experienced excessive turnover. The most recent chief financial officer resigned during our review and had not been replaced at the end of fieldwork. Accounting entries were unapproved or unsupported Some accounting entries to adjust account balances lacked either proper explanation, support, or evidence of approval. All seven journal vouchers 13 10 Consolidated Annual Contributions Contract, part A, section 15(A) The Housing Authority (HA) must maintain complete and accurate books of account for the projects of the HA in such a manner as to permit the preparation of statements and reports in accordance with HUD requirements, and to permit timely and effective audit. 11 HUD Guidebook 7510.1G, paragraph II-15 and Consolidated Annual Contributions Contract, part A, sections 9 and 15. 12 Consolidated Annual Contributions Contract, part A, section 10(C) The HA shall not withdraw from any of the funds or accounts authorized under this section amounts for the projects under ACC, or for the other projects or enterprises, in excess of the amount then on deposit in respect thereto. 13 Journal vouchers are accounting records used to note the details of a financial transaction for recordkeeping and auditing purposes. 7 reviewed (totaling $2,490,236) had some type of deficiency. The entries lacked sufficient descriptions or had not been approved by the senior accountant, as required by the Authority’s procedures. In some cases, the financial staff could not explain the purpose of the entries. For example, one journal voucher, an adjusting entry of $891,635 for the fiscal year 2013 audit, could not be located or explained. The Authority’s management and board failed to establish an adequate accounting system or internal control environment for its financial transactions. HUD regulations 14 state that effective control and accountability must be maintained for all grant and sub-grant cash, real and personal property, and other assets. The Authority’s accounting system and its related controls failed to provide information for making sound financial decisions and failed to provide HUD assurance that public housing funds, or other HUD provided funds, were properly used to benefit program participants. Recent Developments On July 11, 2014, HUD’s Columbia field office, Office of Public Housing, put the Authority on a “zero dollar review threshold” until further notice. This action required the Authority to submit copies of all invoices, bills, and receipts to the field office prior to expending or obligating any HUD funds by check, cash, or promissory note. Additionally, HUD required the Authority to submit all procurement documents for HUD’s approval prior to awarding and executing contracts. Conclusion The Authority’s misuse of Federal funds and failure to provide an accurate accounting for its use of Federal funds has placed it in default of multiple provisions of its contract and other program requirements. As such, the consolidated annual contributions contract states that HUD may determine that the Authority is in substantial default of the contract and take possession of the projects under the contract to obtain proper management. Recommendations We recommend that the Director, Office of Public Housing, Columbia, SC, 1A. Require the Authority’s management and board to immediately cease using HUD program funds for unauthorized purposes. 14 24 CFR 85.20(b)(3) 8 1B. Require the Authority to repay its public housing program the amount identified in the Authority’s fiscal year 2013 audit report and any additional HUD program funds misused since the last audit report. 1C. Ensure that all board members obtain HUD-approved training that explains their overall roles and responsibilities, including those related to internal control and financial matters. 1D. Require the Authority to procure an accounting firm to identify sources and uses of funds disbursed since October 1, 2013, and quantify the interfund balances. Once determined, the Authority should reconcile and eliminate the interfund balances. Any ineligible funds should be repaid from non-Federal funds. 1E. Require the Authority to reimburse the appropriate capital fund grant $24,095 using non-Federal funds. 1F. Require the Authority to provide proper support for $14,737 15 in operating disbursements or repay the affected programs from non-Federal funds. 1G. Require the Authority to provide support for $127,697 in other capital fund drawdowns or repay the affected capital fund grant from non-Federal funds. 1H. Require the Authority to provide proper support for $1,687 in unsupported credit card payments or repay the affected programs from non-Federal funds. 1I. Require the Authority to repay the appropriate programs $499 from non- Federal funds for the improper use of the Authority’s credit cards. 1J. Require the Authority to establish and implement proper accounting, including adequate written policies and procedures, for staff to follow. 1K. Require the Authority to ensure that central office and asset management staff with accounting and finance responsibilities, have received adequate training for performance of their duties. 1L. Prepare a memorandum to the Deputy Assistant Secretary for Field Operations disclosing the activities potentially causing a breach or default of sections 9(C) and 15(A) of the consolidated annual contributions contract. 15 The actual amount for unsupported disbursements was $53,514. To avoid double counting, the amount was reduced for the $38,777 in recommendation 2A. 9 We also recommend that the Director of the Departmental Enforcement Center, in coordination with the Director of HUD’s Columbia Office of Public Housing, 1M. Consider administrative sanctions against the Executive Director and board for misuse of HUD program funds. 10 Finding 2: The Authority Failed To Comply With Federal or Its Own Procurement Requirements The Authority generally failed to follow HUD’s procurement regulations or its own procurement policy. It failed to maintain required documentation, failed to provide for full and open competition, paid for services without required contracts, and failed to perform cost analyses. This condition occurred because the Authority’s management and board failed to implement sufficient internal controls over the procurement process. As a result, the Authority could not assure HUD that it procured its goods and services at the lowest cost using full and open competition. For the procurements reviewed, the Authority had more than $1,100 in ineligible spending and was unable to support more than $2.2 million in spending. The Authority Failed To Follow Procurement Requirements The Authority’s management did not consistently follow HUD’s procurement regulations 16 or its own procurement policy. Authority records were insufficient to identify the total universe of contracts procured for the review period. The Authority did not maintain a centralized contract register or other documents listing its procurement activity and did not keep its procurement documents filed with the procurement officer or another central location. We selected and reviewed 12 17 procurements, 7 from the 74 procurements listed on the contract list compiled by the audit team with assistance from Authority staff, and 5 selected for review by auditors during the performance of the assignment. Each of the procurements had at least one deficiency, and 10 had multiple deficiencies, resulting in $2,227,249 in unsupported costs and $1,102 in ineligible costs. See Appendix C for a list of procurements and deficiencies. The Authority Failed To Maintain Required Documentation Regulations required the Authority to maintain a complete history for all procurements. 18 Documentation provided to support the history of 10 of the 12 procurements reviewed was generally incomplete. Neither the staff nor management could explain whether missing documentation had been discarded, misplaced, or had never existed. 16 24 CFR (Code of Federal Regulations) 85.36 17 There were originally 13 procurements reviewed. One procurement was removed after it was determined that nonfederal funds were used with this contract resulting in only 12 procurements reviewed. Three of the 12 procurements resulted in 3 vendor selections for each. 18 24 CFR 85.36(b)(9) 11 The Authority Failed to Provide Full and Open Competition The regulations required the Authority to conduct its procurement transactions in a manner providing full and open competition. 19 The Authority could not provide sufficient documentation showing this for 8 of the 12 contracts. Instead of performing the required advertising20, the Authority targeted vendors for two procurements. For the architecture and engineering procurement, the Authority only requested quotes from five firms or individuals that it chose. For a grading contract, the Authority allowed a contractor to perform the advertising and the only documentation the contractor provided was a listing of individuals that it had selectively contacted. The Authority Paid For Services Without Required Contracts In several cases, the Authority obtained and paid for services without executing contracts or continued to use contractors after their contracts had expired. The Authority failed to execute contracts The Authority hired and paid vendors without following procurement requirements or executing a contract. The Authority used three vendors to provide temporary staff without entering into a contract or following any procurement requirements. This action resulted in $450,435 in unsupported expenditures. The Authority obtained services from expired contracts The Authority has had the same independent public accountant since 2007. The 2007 contract was a one-year contract to audit the Authority’s fiscal year 2006 records. Although the contract did not have an option for extensions, the Authority continued to use the firm’s services for six years past the end date. The January 2012 board minutes stated that they would continue to use the firm because it knew the Authority’s unwritten rules. The Authority’s records showed that it had paid the firm $47,522 from public housing funds during 2014. The source of funds used for prior year payments was unclear. The Authority contracted for accounting services. The contractor provided the auditors with contracts for 2010 and 2012 along with subsequent change orders and addenda. Although the 2010 contract and change orders ended November 2011, the Authority continued to use the contractor until it signed a new contract in 2012. The Authority paid the contractor $98,125 during our audit period, $41,466 after the 2011 contract expired and $56,659 after it failed to properly procure the 2012 contract. 19 24 CFR 85.36(c) 20 HUD Handbook 7460.8, section 7.1 states that any of the following solicitation methods can be used, as long as it provides for full and open competition: advertising in newspapers, advertising in various trade journals, or e- procurement. 12 The Authority entered into three $80,000 contracts for unit turnarounds on May 3, 2011. The Authority continued to pay the contractors to turn around units after the initial contract year ended and above the $80,000 per contract threshold. The $531,758 that the Authority paid the vendors without a valid contract was unsupported. In November 2011, the Authority signed a one-year contract for refuse removal services for its public housing developments. Although the contract had a not-to- exceed limit of $77,808, and expired in November 2012, the Authority continued to use the contractor and, as of May 31, 2014, paid $229,230, or $151,422 over its maximum limit. In addition, the bid documents showed that the winning contractor had bid only $35,688. The contract documents contained no justification as to why the Authority signed the contract for more than the bid amount and the procurement officer could not explain why this occurred. The Authority procured a pest control contract for January 2011 through January 2012. The Authority could provide no support that it signed an option or completed a new procurement and continued to pay the contractor a total of $114,599 for more than two years after the contract had expired. The Authority Failed To Perform Cost Analyses The regulations required the Authority to perform a cost or price analysis for all procurements before it received bids or proposals. 21 Eight of the 12 procurements lacked evidence that the Authority prepared the required cost analyses. As a result, the Authority had no support for the reasonableness of the cost. The Authority Lacked Sufficient Internal Controls Although the Authority had a procurement policy and some procedures, management did not ensure that staff followed the requirements. The staff indicated that they had received little direction from management regarding how to handle procurements. Management had not provided staff the detailed written guidance needed for their daily procurement responsibilities. Asset management staff stated they handled procurements based on their past experiences. Each asset manager interviewed provided a different amount when asked what their purchase threshold was. Further, the Authority had experienced excessive turnover for the procurement manager position. There had been three different people in this position, and periods of vacancy, since October 2011. 21 Regulations at 24 CFR 85.36(f) read in part, “Grantees and subgrantees must perform a cost or price analysis in connection with every procurement action including contract modifications.” 13 Conclusion Because of its failure to comply with HUD’s procurement regulations or its own policies, the Authority used $1,102 in HUD program funds for ineligible costs and could not provide support for another $2,227,249. This condition occurred because the Authority’s board and the executive director failed to implement adequate or enforce existing controls. After the Authority makes needed improvements, it will be able to assure HUD that its procurements are made at a reasonable cost and obtained using fair and open competition as required by Federal regulations. Recommendations We recommend that the Director, Office of Public Housing, Columbia, SC, require the Authority to 2A. Repay the applicable program(s) $1,102 for ineligible expenditures from non-Federal funds. 2B. Provide support for $2,227,249 in unsupported payments or repay the appropriate program from non-Federal funds. 2C. Determine how much it paid the independent public accountant from HUD program funds after the contract expired and repay any ineligible amounts from non-Federal funds. 2D. Ensure that procurement staff are adequately trained and have detailed written guidance for performing their responsibilities. 2E. Ensure that the Authority’s board and management understand their procurement responsibilities and consider whether additional procurement training would be appropriate. 14 Finding 3: The Authority Failed To Maintain an Adequate Inventory Control System The Authority failed to implement sufficient written policies and procedures for inventory control. The Authority did not have accurate inventory records, could not account for some assets, and had not completed required physical inventories. As a result, the Authority could not assure HUD that program funds it expended for equipment and supplies were properly used for program activities or that the values reflected in its inventory records were accurate. The Authority Failed To Develop and Implement Adequate Inventory Controls Although regulations 22 required the Authority to maintain effective control and accountability over all assets and keep detailed property records, management failed to implement effective written policies or procedures for inventory. Staff used informal unwritten procedures but failed to apply them in a consistent or effective manner to ensure that the Authority maintained accurate inventory records, safeguarded inventory, or completed the required periodic physical inventories. Inventory Records Had Errors and Omissions The Authority’s inventory records contained numerous errors and omissions. Review of the inventory listing showed deficiencies, such as incorrect or missing equipment purchase or installation dates and missing serial numbers. HUD’s regulations 23 required the Authority to maintain complete property records, including such information as acquisition date, location, serial numbers, cost, etc. A review of a September 2011 purchase of 115 stoves showed that staff had not entered stoves into the Authority’s inventory records and could not tell us where the stoves were located. They were also unable to tell us how the old stoves, which the Authority had presumably replaced, had been disposed. At our request, the Authority staff attempted to locate the new stoves but was only successful in locating 16 of them. Authority staff later determined that, although the Authority had purchased the stoves with 2011 public housing capital funds, it had placed 12 of the 16 stoves, valued at $2,779, in the Authority’s Section 8 project-based development. The placement of stoves purchased with public housing funds in a Section 8 project based development is an ineligible use of funds and must be repaid. 24 The Authority paid $25,445 for the 99 stoves that it could not locate. 22 24 CFR 85.32 (d)(1) 23 24 CFR 85.32 (d)(1) 24 See footnote 7 15 No Physical Inventories Were Performed The Authority staff was unable to provide documentation for a complete physical inventory of its assets. Staff provided documents that showed that the Authority had performed limited inventories about 4 years ago but the date of the last complete physical inventory was unknown. HUD’s regulations 25 required the Authority to perform a physical inventory of all assets and reconcile to the property records at least once every two years. Since there were no official procedures, the employees with responsibility for Authority assets were handling inventory in different ways. Some of the site managers were trying to devise systems to establish accountability at their sites and some were not. None of the site managers were properly accounting for appliances. One stated that the maintenance workers were trusted to do the right thing. Conclusion The Authority failed to develop, document, and implement an adequate inventory control system, including procedures for conducting and documenting periodic physical inventory counts and adjusting the asset records. If the Authority makes needed improvements, it will be able to more reliably and consistently account for the assets it has, their correct locations, and account for any assets that may have been lost, stolen, or disposed of. It will also be able to assure HUD that program funds spent on equipment and supplies were properly used for Authority activities and that the values in its inventory records are accurate. Recommendations We recommend that the Director, Office of Public Housing, Columbia, SC, require the Authority to 3A. Develop and implement an improved inventory control system, including procedures for conducting and documenting periodic physical inventory counts and adjusting its asset records. 3B. Promptly perform a complete physical inventory and adjust the accounting records, as needed. 3C. Locate and properly record the 99 new stoves or repay its 2011 Capital Fund program $25,445 from non-Federal funds. 25 24 CFR 85.32 (d) 2 16 3D Repay the 2011 Capital Fund program $2,779 for the ineligible placement of 12 stoves from its project based Section 8 development. 17 SCOPE AND METHODOLOGY We performed our fieldwork at the Authority’s main offices located at 201 Caulder Avenue, Spartanburg, SC, the HUD field office in Columbia, SC, and at our office in Greensboro, NC. We performed our audit work from January through July 2014. Our audit period was October 2011 through December 2013. We expanded the audit period as needed to accomplish our objective. To accomplish our objective, we • Reviewed relevant laws, regulations, and HUD guidance; • Reviewed the Authority’s policies and procedures; • Reviewed the Authority’s board of commissioners meeting minutes from October 2011 through December 2013; • Reviewed the Authority’s audited financial statements for fiscal years 2008 - 2013; • Analyzed the Authority’s financial records; • Reviewed a list of Authority contracts; and • Interviewed Authority and HUD Columbia, SC, field office staff. We reviewed the Authority’s general ledger interfund reports, financial data schedule, and independent public accountant reports to determine whether the Authority maintained large interfund balances during our audit period. We also attempted to reconcile these balances to those reported to HUD. We selected a non-statistical sample of 14 (out of 245) cash disbursements over $1,500 (totaling $243,376 out of $2,015,748) from 4 months in the Authority’s check register during our audit period. Checks for standard charges such as utilities and benefit payments were excluded from the sample. We reviewed the disbursements to determine whether they complied with HUD and Authority requirements. We selected a non-statistical sample of 7 (out of 31) Line of Credit Control System payment vouchers totaling $757,467 out of $1,305,203, to review for accuracy and eligibility. The sample included each Capital Fund program grant drawdown during the audit period. We reviewed a non-statistical sample of three Visa credit card payments for questionable charges. The three payments reviewed accounted for $17,590, or about 13 percent, of the $140,314 in goods and services charged to the credit card during our audit period. We reviewed a non-statistical sample of seven journal vouchers totaling $2,490,236 between October 2011 and December 2013 to determine whether each had an adequate description, approval, and justification. We were not able to identify a complete universe since the Authority could not provide one. We selected vouchers based on high dollar amounts and nonrecurring entries like payroll. 18 We selected a non-statistical sample of 12 26 procurements for compliance with HUD and Authority requirements. Three of the 12 procurements resulted in 3 vendor selections for each. Of the 12 procurements reviewed, 7 were selected from the 74 procurements that we compiled with the assistance of Authority staff. The remaining five procurements selected were listed in the check register or initially reviewed during the cash disbursement review. We selected our sample to ensure we included procurements from the current procurement manager’s work, concerns raised by the complainant, and our review of the Authority’s board minutes. We were unable to compile a complete list of procurements or contract amounts due to the state of the Authority’s procurement records. We selected a purchase of 115 stoves, totaling $31,490, to determine whether the items were properly accounted for. This purchase was one of three bulk purchases of appliances purchased during our audit period. The results of the non-statistical samples apply only to the items reviewed and cannot be projected to the universe as a whole. We tested electronic data that we relied upon during the performance of the various review steps. We conducted tests and procedures to ensure the integrity of computer-processed data that were relevant to our audit objective. The tests included, but were not limited to, comparisons of computer-processed data to invoices and other supporting documentation. We found the data to be generally reliable for our purposes. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 26 There were originally 13 procurements reviewed. One procurement was removed after it was determined that nonfederal funds were used with this contract resulting in only 12 procurements reviewed. 19 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: • Effectiveness and efficiency of operations – Policies and procedures that have been implemented to reasonably ensure that procurement, expenditure, and financial reporting activities are conducted in accordance with applicable laws and regulations. • Compliance with applicable laws and regulations – Policies and procedures that have been implemented to reasonably ensure that payments to vendors and procurement activities comply with applicable laws and regulations. • Safeguarding of resources – Policies and procedures that management has implemented to reasonably ensure that resources are safeguarded against waste, loss, and misuse. 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. 20 Significant Deficiencies Based on our review, we believe that the following items are significant deficiencies: • The Authority lacked controls over the use of HUD program funds and failed to maintain an adequate accounting system and financial controls (finding 1). • The Authority did not have adequate controls in place to ensure that procurement activities complied with applicable laws and regulations (finding 2). • The Authority failed to implement written policies and procedures for inventory control and the Authority’s informal system was inadequate (finding 3). 21 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Unsupported Ineligible 1/ number 2/ 1E $ 24,095 1F $ 14,737 1G 127,697 1H 1,687 1I 499 2A 1,102 2B 2,227,249 3C 25,445 3D 2,779 _________ Total $28,475 $2,396,815 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. 22 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 23 Comment 2 Comment 3 Comment 4 Comment 5 Comment 4 24 Comment 4 Comment 4 Comment 4 Comment 6 Comment 4 25 Comment 7 Comment 6 Comment 2 Comment 6 Comment 6 26 Comment 6 Comment 6 Comment 8 Comment 2 Comment 9 Comment10 27 Comment 11 Comment 2 28 Comment 12 Comment 13 29 Comment 14 Comment 15 30 Comment 2 Comment 6 Comment 16 Comment 8 31 Comment 11 Comment 6 32 Comment 2 Comment 6 Comment 6 33 Comment 14 Comment 14 Comment 14 Comment 14 Comment 14 Comment 3 34 Comment 6 Comment 17 Comment 2 Comment 18 Comment 19 35 Comment 20 Comment 11 Comment 2 Comment 7 Comment 21 36 Comment 22 Comment 23 Comment 24 Comment 23 Comment 23 37 Comment 6 Comment 24 Comment 25 Comment 26 38 39 Comment 27 Comment 28 40 Comment 29 41 Comment 30 Comment 31 42 Comment 32 Comment 21 43 Comment 33 Comment 34 44 45 Comment 35 46 Comment 14 Comment 6 47 Comment 6 Comment 9 Comment 9 48 Comment 9 Comment 9 Comment 9 49 50 OIG Evaluation of Auditee Comments Comment 1 The Authority’s comments state that it appreciates and agrees with the OIG’s recommendations with regard to improving its recordkeeping and updating policies and procedures related to interfund transfers, procurement, and inventory control. However, it adamantly disagrees with the scope and magnitude of certain of the draft audit’s findings and recommendations. It stated that it believes its very detailed responses together with the documentation provided to the OIG constitutes sufficient and appropriate evidence that addresses many, if not all, of the OIG’s findings in the draft audit. We commend the Authority for recognizing the need for improving recordkeeping and updating its various policies and procedures as recommended in the draft audit report. As we explained to the Authority during the exit conference, we will correct any errors in the draft report; however, we will provide to HUD, for assistance in clearing the audit findings, any documentation the Authority has recently located that was unavailable to us during the audit. Comment 2 The Authority’s comments state that it has already repaid the full $885,891 identified in its fiscal year 2013 financial audit as being owed to the Public Housing Program. The documentation provided only supports $338,039 of the $885,891 was repaid. Of this $338,039, $164,890 was taken from JC Bull, the Authority’s project based Section 8 development, as a loan until it receives its Rental Assistance Demonstration development fees and predevelopment loan. Additionally, the documentation shows that the Authority paid the funds to its Central Office Cost Center and not to Public Housing as required. The Authority should provide proper documentation to the HUD Columbia Field Office to clear the recommendation. Comment 3 The Authority’s comments state that its board of commissioners met on September 22, 2014, to implement updated policies and procedures related to interfund transfers, procurement, and inventory control. We appreciate the Authority’s efforts to implement updated policies and procedures based on our audit results. The HUD Columbia field office will review the actions taken by the Authority to clear the applicable report recommendations. Comment 4 The Authority’s comments voiced concern regarding the amount of time provided to respond to the draft report. They state that they were only provided one week to respond to the draft report, less than 24 hours to review the revised draft sent 51 on September 22, 2014, and we were unreasonable in denying their request for a one-week extension to provide a final response. The deficiencies outlined in the draft report should not have been new to the Authority. We worked with the Authority over several months to obtain the information on which the report is based. During that time, on several occasions, we discussed deficiencies with Authority’s management including the executive director and the chief financial officer. We provided the draft findings by email to the Authority’s executive director on September 11, 2014, and suggested that the Authority use them to begin drafting comments. We followed up with the complete draft report containing these findings with minor revisions on September 16, 2014. The revised draft provided to the Authority on September 22, 2014, only recategorized the majority of the ineligible costs to unsupported costs contained in the original draft report. This was to the benefit of the Authority, since it provided it the opportunity to provide HUD support for the costs, and should not have resulted in any additional evaluation or response. At the September 23, 2014, exit conference we granted the Authority an additional day to modify its response but advised the Authority that the final report would contain few changes from the draft and subsequently denied the requested one week extension. Thus, in total, we provided the Authority thirteen days to respond to the findings and believe that should have been more than adequate time. Comment 5 The Authority also remarked that at the exit conference the OIG staff seemed to acknowledge the unreasonableness of their inflexible timing schedule by stating they had not had time to review our draft responses to the draft audit in detail. The Authority stated that this caused the need for them to walk through their comments for nearly two hours. The Authority submitted its comments to us late in the day on Wednesday, September 24, 2014, and the exit conference occurred Thursday morning at 11:00am. We informed the Authority that we did not have time for a detailed analysis but that we had read the comments and were aware of the contents. As was the case here, the discussion draft is meant to encourage feedback at the exit conference and provide OIG the latitude to adjust report wording, tone, or findings. Due to the number and complexity of the audit issues, a two-hour exit conference is not unusual. While we appreciated getting the Authority’s written comments prior to the exit conference, the discussion draft is intended to serve as the document to solicit formal comments after the issues are formally discussed at the exit conference. Comment 6 The Authority’s comments state that it is making management changes, implementing key management improvements, providing training for staff, and establishing proper accounting policies and procedures. 52 We appreciate the Authority’s effort to make the necessary changes to ensure the Authority is managed in the most efficient and effective way. The HUD Columbia field office will review the actions taken by the Authority to clear the applicable report recommendations. Comment 7 The Authority’s comments state that it has been designated by HUD as a “High Performer” since fiscal year end 2012. The Authority’s status as a high performer refers to a designation under HUD’s Public Housing Assessment System (PHAS) and is based largely on the integrity of data the Authority submits to HUD. PHAS is also limited in its ability to detect misuse of funds as was explained in a 2009 United States Government Accountability Office report: “…PHAS is limited in its ability to identify housing agencies that may be at greater risk of inappropriate use or mismanagement of funds because it was not designed to detect inappropriate use, and in some cases has not detected housing agencies showing signs of housing fund mismanagement.” 27 Comment 8 The Authority’s comments state that it switched to a fee-for-services approach in lieu of cost allocation beginning in FY2013. It further states that this approach is permissible under HUD’s requirements. We agreed, and removed all references to the lack of a cost allocation plan from the report. Comment 9 The Authority’s comments state that it will ensure going forward that it conducts physical inventories at least once every two years and has recently completed a fixed asset inventory. It also states that it has located 99 missing stoves and recorded them in its inventory log. We appreciate the Authority’s effort to complete a fixed asset inventory, its plans to conduct the required inventories in the future, and its effort to locate the missing stoves. After the final report is issued, the Authority should work with HUD to confirm the proper documentation of the stove inventory. Comment 10 The Authority’s comments state that it has learned some valuable lessons through its internal assessment and the OIG’s audit process, recognizes the need to update its policies and procedures, improve its recordkeeping, and ensure it employees are knowledgeable regarding such policies and procedures. It also states that there are a number of very serious mistakes in the draft audit and that the conclusions in the draft audit should be management improvement suggestions as opposed to audit findings against the Authority. 27 United States Government Accounting Office, GAO-09-33, June 2009 53 We acknowledge the Authority’s recognition that it needs to update its policies and procedures, improve its recordkeeping, and ensure its employees are knowledgeable regarding the policies and procedures is a very positive first step. It must now follow through with the development and implementation for these very important elements of internal control. Regarding the Authority’s comment that the draft audit contains very serious mistakes, we adjusted the report where needed and disclosed them in our response to these comments. The information in this report includes a possible default of the Annual Contributions Contract. The OIG has a responsibility to report serious matters. Comment 11 The Authority’s comments are unclear as to when it learned of the misuse of public housing funds. It states that the Authority itself identified the ineligible use of funds and took action but the timing is not stated. In other locations in the comments, it states that it took action after learning of the misuse of funds in June 2014 when the audit report was issued. Had the Authority maintained an accurate ongoing record of the interfund accounts, it would have known of the pending audit results long before the fiscal year 2013 report was issued in June 2014. It should also have immediately ceased funding nonfederal uses with Federal funds at that time. It should also have provided information on interfund transfers board meetings. Comment 12 The Authority objected to our statement in the report saying that it had transferred its former office space to its related nonprofit without HUD approval. Its comments state that HUD has made it clear to housing authorities that instrumentalities, such as its nonprofit, are considered the housing authority and, as such, the Authority’s conveyance of ownership of its office building to its instrumentality is not a disposition and does not trigger the need for HUD approval. The Authority cannot transfer or dispose of a public housing property to itself, including its instrumentalities. Public housing grant funds cannot be used for development without following 24 CFR Part 905 and placing the building under the Annual Consolidated Contract and having a Declaration of Trust. Even if the Authority obtained a Declaration of Trust, there is a constructive use restriction on the former office building by that same statute. 28 Comment 13 The Authority’s comment state that the Executive Director did not make a statement that “there was no plan for dealing with” the refinancing. We did not state that the Authority did not have a plan for dealing with the refinance of the $3 million balloon payment. We stated that there was no 28 24 C.F.R. § 905.505(a) states that a PHA shall obtain written HUD approval for all Capital Fund financing transactions that pledge, encumber, or otherwise provide a security interest in public housing assets or other property, including Capital Funds, and use Capital Funds for the payment of debt service or other financing costs. 54 concrete plan for dealing with the matter. During our fieldwork, the executive director informed us of at least three potential plans for dealing with the refinancing of the $3 million balloon payment – none of those plans included bond refinancing as an option. Comment 14 The Authority’s comments state that it acknowledges that certain cash disbursements were ineligible or unsupported. For any unsupported amounts, the Authority should provide the HUD Columbia field office the necessary supporting documentation when requested as part of the audit resolution process. Comment 15 The Authority disagreed that its records were not auditable. As stated in the report, the Authority was unable to provide records establishing the proper use of HUD funds; thus, the records were not auditable. Comment 16 The Authority’s comments state that it did not have sufficient time, two business days, to respond to our concerns with seven journal vouchers. During the audit, we attempted to obtain an explanation for these journal vouchers from the Authority’s management, the chief financial officer, and the senior accountant. They were not able to explain the journal vouchers or provide the missing voucher. Journal vouchers should be self-explanatory and all journal vouchers should be retained. The Authority provided no information to contradict the journal voucher deficiencies in the report. Comment 17 The Authority stated that it had disclosed its ineligible use of public housing funds to the HUD Columbia field office well prior to the draft audit report being issued. However, the Authority does not state when this occurred. We met with the HUD Columbia field office staff on April 21, 2014, and asked if they were aware of the finding in the pending FY 2013 audit report. The Staff that we spoke with told us that they were not aware of the finding or what was in the report since it had not been submitted at that time. In order to prevent possible miscommunication, in the future it may be better to provide written documentation regarding such matters to the HUD field office. Comment 18 The Authority state that it does not believe that HUD Columbia should declare a breach of Section 9C of the Consolidated Annual Contributions Contract. If HUD Columbia believes it needs to declare such a breach, then it should deem the breach cured by the actions of the Authority in disclosing this issue previously to HUD Columbia and then correcting and reimbursing theses ineligible expenditures. 55 Only the HUD Assistant Secretary for Public and Indian Housing, in consultation with the HUD Office of General Counsel, can declare a breach of the Consolidate Annual Contributions Contract, not the field office. HUD will consider all the facts, including those cited by the Authority, before making such a determination. Comment 19 The Authority’s comments state that HUD OIG’s concern that a possible violation of the ACC may have occurred due to the inability of the Authority to provide reconciled interfund balances since September 30, 2013, was based upon conversations with certain unidentified staff of the Authority. Our concern that a possible violation of the ACC may have occurred was based upon the inability of the interim Chief Financial Officer and the Senior Accountant to provide us with reconciled interfund account balances since the end of fiscal year 2013. Comment 20 The Authority’s comments state that the findings in the draft audit do not warrant a recommendation to pursue administrative sanctions against the executive director and the board for misuse of HUD program funds. We acknowledge that the issues with the Mary Wright Center were inherited by the current Executive Director. However, as noted in our report, the Authority received a finding for ineligible use of federal funds (Section 8) in its FY 2010 audit report and then again in FY 2013 (Public Housing funds) under the current management. Furthermore, the Executive Director informed us during the review that the Authority would continue to use federal funds to pay nonfederal expenses because there was no other viable option for the Authority. We believe that the contents of the report justify the recommendation. Comment 21 The Authority’s comments state that OIG greatly overstated the Authority’s procurement deficiencies and made a number of mistakes in analyzing the Authority’s compliance with applicable procurement requirements. Specifically, it states that the roof repair contract was for certain of the Authority’s project based Section 8 developments and not subject to procurement regulations. We based our results on the documents as provided by the Authority, and not what the Authority is now saying these documents intended to mean. In its invitation for bids for the roofing contract, the Authority clearly stated the contract would be for public housing units as follows: “This IFB is to help SHA in the up keep of our Roof Systems in our Public Housing Communities. One of our top priorities is to maintain the conditions of our roofs in all our Public Housing units and to ensure the quality and craftsmanship in the Roofing Replacement Services.” However, although the invitation for bid erroneously specified public housing, upon further review of the accounting records we determined that the repairs were actually paid for from the Section 8 project based 56 account and not public housing. As such, we removed the contract from the report. Comment 22 The Authority’s comments state that the OIG failed to recognize that a number of contracts followed small purchase procedures that have different requirements. This led the OIG to vastly overstate the number of procurement deficiencies, the number of expired contracts, and the level of unsupported and ineligible amounts. We determined that all but three of the procurements, including expenditure of non-federal funds, were above the $100,000 threshold. However, the limited documentation provided for two of the three procurements under the small purchase threshold (fire damage and grading) show the Authority either issued an Invitation for Bids or requested proposals from vendors. Therefore, small purchase threshold rules do not apply. Additionally, the Authority did not conduct a cost analysis for the design contract. This is required regardless of what procurement method is used. Comment 23 The Authority’s comments state that it was able to locate nearly all of the procurement files that the OIG identified as missing and provided nearly all such documentation to the OIG at the exit conference. The Authority’s staff was unable to provide sufficient procurement documentation while the audit team was onsite. In an effort to obtain procurement files or other documentation, we spoke with the procurement officer and senior staff on several different occasions. During the exit conference, we informed the Authority that we would provide the information they were able to locate, and provide to us, to the HUD Columbia field office to assist in clearing the report recommendations. Comment 24 The Authority’s comments state that we did not provide them with detailed information regarding the specific procurements we reviewed. During the entrance conference, we were told that the procurement officer would be our point of contact for anything procurement related. While onsite, we were in constant communication with the procurement officer regarding our procurement sample, and while looking for documentation. When the procurement officer was unable to provide us with the documentation we requested, we spoke with senior management about what we needed. After taking notes on several occasions, management provided us with everything they said was available after reviewing their files. Comment 25 The Authority’s comments state that it does not believe that $54,997 it spent for the independent public accountant contract is unsupported because it received value commensurate with the cost. 57 Although we acknowledge that the Authority may have received value, it still needs a properly executed contract. A written contract specifies the responsibilities of the parties to the contract, protects their interests if there is a dispute, and specifies the payment terms. Comment 26 The Authority’s comments state that we did not provide them with specific contract information for the accounting services contract as promised. The Authority was aware that we were looking at the 2012 accounting services procurement. During our review, we met with senior management several times to get documentation concerning the accounting services. We were in constant communication with the former chief financial officer to get the complete procurement file. The Authority eventually provided a stack of documentation, including spreadsheets and emails, not in any order. We received the 2012 contract only after we contacted the contractor directly. Comment 27 The Authority’s comments provided further information regarding the contract for fire damage repair services. It contends that the contract should be considered a micro-purchase contract since the Authority only utilized $1,000 of public housing money. It further contends that even if the OIG analyzed this as a small purchase, the Authority met the small purchase procurement requirements. The information the Authority provided in its comments regarding the fire damage contract was not made available during the audit. In response to our questions for this contract during the audit, the Authority was only able to provide us with the scope of work, two bids, a pre-bid meeting write up, and a contract. No other information, such as the Invitation for Bid mentioned in the comments, was provided. Further, since the Authority issued an invitation for bids, the small purchase procedures mentioned by the Authority would not apply. Comment 28 The Authority’s comments contain numerous details regarding procurement of public relations contracts. This information was not made available during the audit despite numerous requests. In response to our questions for more information about this procurement during the audit, the Authority could only provide a copy of the 2013 contract. Comment 29 The Authority’s comments state that it is unaware of details regarding the security contract because it occurred during the previous authority administration. It is irrelevant that the contract occurred during the previous Authority administration because the record retention rule in 24CFR85.42 require that the Authority maintain procurement records for three years after the final expenditure report. This procurement was active since the most recent financial records 58 showed check numbered 225137 was disbursed on July 2, 2014. Based upon this latest payment date, the regulations required the Authority to maintain the security contract procurement records until at least July 2017. Comment 30 The Authority’s comments state that it is not true that it used three vendors to provide temporary staff without entering into a contract or following any procurement requirements. During our audit, the Authority could provide no documentation to support their selection of these vendors. We contacted the three vendors referenced in the report and verified that they had no contracts. Comment 31 The Authority’s comments state that the pest control contract was only expired for 2014 because it had executed a renewal option contained in the 2011 contract that covered 2012 and 2013. It further states that amounts paid without a contract should not be unsupported because it received value for the payments. Although we agree that the 2011 contract allowed for the possibility of the option period, no information we were provided during the audit showed that an option had been exercised. In addition, although the Authority may have received value associated with payments it made when it had no contract in force that does not negate the requirement to document the exercising of an option. Comment 32 The Authority’s comments claim that the unit turnaround contracts were only expired for 2014 because it had renewed them for 2012 and 2013 as provided for in the contracts. We based our conclusion on the documents provided by the Authority. Its contracts required the Authority to execute a written change if the time period or dollar threshold were exceeded. Each of the three contracts was originally for one year and was not to exceed $80,000. The Authority did not have the written documentation to show the contracts were renewed, as was its option, or that the contractors could exceed the $80,000 per contract threshold. Comment 33 The Authority’s comment state that the refuse contract was not expired because it had exercised an option to renew the contract. It also provided an explanation of why the final contract was over twice the bid price. Like the unit turnaround contracts, its refuse contract required the Authority to execute a written change if the contract period or dollar threshold was exceeded. Again, the Authority did not comply with the requirement for documenting the extension of the time or the dollar threshold. In addition, during the audit, the Authority was unable to provide any explanation or documentation as to why it awarded the refuse contract at over twice the bid price. 59 Comment 34 The Authority’s comments state that the OIG failed to note that the grading contract was entered into pursuant to a small purchase procurement and contains a lengthy explanation of why it believes that it properly procured the grading contract. The Authority’s explanation of what occurred during this procurement may be correct; however, this information was not provided to us during the audit, either through file documentation or by explanation by Authority staff. We were provided a contract, copies of four proposals, and little else. As such, without a clear history, we could not determine the type of procurement the Authority had performed and whether it had followed the applicable requirements. Comment 35 The Authority’s comments state that the architect and engineering contract was properly procured because it was a small purchase and some requirements, such as the advertising requirement, did not apply. While we understand the fact that the current amount spent on the contracts would qualify as a small purchase, the Authority procured three contracts within this procurement, and signed indefinite quantities contracts not to exceed $100,000. If the Authority had given all of the work in this procurement to one vendor, it would have clearly been above the $100,000 threshold, in total. HUD Handbook 7460.8 Rev 2 Chapter 5.3(C) states, “the Contracting Officer shall not break down requirements aggregating more than the small purchase threshold into multiple purchases that are less than the applicable threshold merely to permit use of the small purchase procedures or avoid any requirements that apply to purchases that exceed those thresholds. However, larger requirements may be broken into smaller ones to afford small and minority businesses the opportunity to participate in the PHA’s procurements. The Contracting Officer should document in the contract file the reasons for breaking down larger requirements into smaller ones.” There was no such documentation in the Authority’s files. 60 Appendix C PROCUREMENT DEFICIENCIES Procurement Deficiencies Type of Unsupported Ineligible Lack of Insufficient Lack of Expired Lack of contract amount amount history advertising executed contract cost documentation contract analysis Independent $47,522 X X X X public accountant contract Accounting $98,125 X X X X services Fire damage $1,000 X X contract Public $61,621 X X X relations Security $691,584 X X X contract Temporary $450,435 X X X X services contract Pest control $114,599 X X contract Unit $531,758 $1,102 X turnaround Refuse $151,422 X X contract Grading $46,880 29 X X X contract Architect $25,902 X X X and engineering Design $6,400 X contract Total $2,227,249 $1,102 10 8 1 5 8 29 The Authority charged this amount to the Central Office Cost Center. However, the Authority had plans to reimburse the Central Office Cost Center when it received Choice Neighborhood Initiative funds. 61
The Housing Authority of the City of Spartanburg, SC, Used HUD Program Funds for Ineligible Expenses
Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)