oversight

The City of Detroit, MI, Lacked Adequate Controls Over Its Neighborhood Stabilization Program-Funded Demolition Activities Under the Housing and Economic Recovery Act of 2008

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-01-06.

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

OFFICE OF AUDIT
REGION 5
CHICAGO, IL




                  City of Detroit, MI

     Neighborhood Stabilization Program Under the
      Housing and Economic Recovery Act of 2008




2014-CH-1002                              JANUARY 6, 2014
                                                        Issue Date: January 6, 2014

                                                        Audit Report Number: 2014-CH-1002




TO: Keith E. Hernandez, Director of Community Development, 5FD

      //signed//
FROM: Kelly Anderson, Regional Inspector General for Audit, Chicago Region, 5AGA

SUBJECT: The City of Detroit, MI, Lacked Adequate Controls Over Its Neighborhood
            Stabilization Program-Funded Demolition Activities Under the Housing and
            Economic Recovery Act of 2008


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), results of our review of the City of Detroit’s Neighborhood
Stabilization Program-funded demolition activities under the Housing and Economic Recovery
Act of 2008.

    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
(312) 913-7832.
                                             January 6, 2014
                                             The City of Detroit, MI, Lacked Adequate Controls Over
                                             Its Neighborhood Stabilization Program-Funded
                                             Demolition Activities Under the Housing and Economic
                                             Recovery Act of 2008


Highlights
Audit Report 2014-CH-1002


 What We Audited and Why                      What We Found

We audited the City of Detroit’s             The City did not maintain records that adequately
Neighborhood Stabilization Program-          identified the source and application of funds provided
funded demolition activities under the       for its activities. Further, it inappropriately drew down
Housing and Economic Recovery Act            Program funds (1) when it had fire insurance funds and
of 2008. We selected the City based on       Program refunds available and (2) for duplicate
a request from the Office of Inspector       demolition costs. As a result, nearly $2.3 million in
General’s Office of Investigation to         Program funds was not available for eligible Program
work jointly with it on the assignment.      costs. Further, the U.S. Treasury paid more than
Our objectives were to determine             $76,000 in unnecessary interest on Program funds that
whether the City complied with Federal       the City inappropriately drew down when it should
regulations in its (1) maintenance of        have used available fire insurance funds.
accounting records for activities and (2)
drawing down of Program funds for
activities.

 What We Recommend

We recommend that the Director of
HUD’s Detroit Office of Community
Planning and Development ensure that
the City spent nearly $2.1 million in fire
insurance funds and Program refunds
for eligible Program costs. We also
recommend that the Director require the
City to (1) use nearly $204,000 in fire
insurance funds and duplicate Program
drawdowns for eligible Program costs,
(2) reimburse HUD from non-Federal
funds more than $76,000 in unnecessary
interest paid by the U.S. Department of
the Treasury, (3) maintian adequate
accounting records for activities, and
(4) implement adequate procedures and
controls to address the finding cited in
this audit report.
                            TABLE OF CONTENTS

Background and Objectives                                                                3

Results of Audit
      Finding: The City Did Not Administer Its Program-Funded Demolition Activities in
               Accordance With Federal Regulations                                        4

Scope and Methodology                                                                    11

Internal Controls                                                                        12

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                     14
   B. Auditee Comments and OIG’s Evaluation                                              15
   C. Federal Regulations                                                                17




                                             2
                      BACKGROUND AND OBJECTIVES

The Program. Authorized under Section 2301 of Title III of the Housing and Economic
Recovery Act of 2008, as amended, Congress appropriated $4 billion for the Neighborhood
Stabilization Program to provide grants to every State and certain local communities to purchase
foreclosed-upon or abandoned homes and rehabilitate, resell, or redevelop these homes to
stabilize neighborhoods and stem the decline in value of neighboring homes. The Act states that
amounts appropriated, revenues generated, or amounts otherwise made available to States and
units of general local government under Section 2301 will be treated as though such funds were
Community Development Block Grant funds under Title I of the Housing and Community
Development Act of 1974.

The City. The City of Detroit is governed by a mayor and a nine-member council elected to 4-
year terms. The City’s Planning and Development Department administers its Program. Further,
its Buildings, Safety Engineering, and Environmental Department is responsible for
implementing Program-funded demolition activities. The mission of the Planning and
Development Department is to strengthen and revitalize the City’s neighborhoods and
communities and to stabilize and transform its physical, social, and economic environment. The
Buildings, Safety Engineering, and Environmental Department provides for the safety, health,
welfare, and improvement of the quality of life of the general public relative to buildings and
their environments in an efficient, cost-effective, user-friendly, and professional manner. The
City’s records are located at 65 Cadillac Square and 2 Woodward Avenue, Detroit, MI.

On March 19, 2009, HUD awarded the City more than $47 million in Program funds. The City
initially budgeted $14 million for demolition activities. However, the City amended its budget,
and as of March 8, 2013, its allocation for demolition activities totaled more than $19.9 million.

The City has participated in the State of Michigan’s Fire Insurance Withholding program since
July 1982. The State’s program provides participating municipalities with some financial
protection against the cost of repairing, replacing, or demolishing a damaged structure following
a loss from fire, explosion, vandalism, malicious mischief, wind, hail, riot, or civil commotion.
A municipality may receive a portion of a policyholder’s final insurance settlement, which is to
be held in a specified escrow account until the structure is repaired, replaced, or demolished. If
the structure is not repaired, replaced, or demolished, the municipality must use the funds to
repair, replace, or demolish the structure.

Our objectives were to determine whether the City complied with Federal regulations in its (1)
maintenance of accounting records for activities and (2) drawing down of Program funds for
activities.




                                                 3
                                      RESULTS OF AUDIT
Finding 1: The City Did Not Administer Its Program-Funded
     Demolition Activities in Accordance With Federal Regulations
The City did not maintain accounting records that adequately identified the source and
application of funds provided for its Program-funded demolition activities. Further, it
inappropriately drew down Program funds (1) when it had fire insurance funds and Program
refunds available and (2) for duplicate demolition costs. These weaknesses occurred because the
City lacked adequate procedures and controls in the administration of its activities to ensure
compliance with Federal regulations. As a result, (1) nearly $2.3 million in Program funds was
not available for eligible Program costs and (2) the City inappropriately transferred more than
$893,000 in fire insurance funds into its Program account. Further, the U.S. Department of the
Treasury paid more than $76,000 in unnecessary interest on Program funds that the City
inappropriately drew down when it should have used available fire insurance funds.


    The City Did Not Maintain
    Adequate Records for Its
    Activities

                 The City did not maintain records that adequately identified the source and
                 application of funds provided for its activities as required by HUD’s regulations at
                 24 CFR (Code of Federal Regulations) 85.20(b)(2). We requested the amount of
                 Program funds the City drew down for each of its activities. The City provided
                 data from its Tidemark Advantage system. However, when we assessed the
                 reliability of the data, we determined that the data from the system did not always
                 match the supporting invoices in the vouchers.1 Since there were a significant
                 number of discrepancies, we determined that we could not rely on the data from
                 the system. Therefore, to determine the amount of Program funds the City drew
                 down for each of its activities, we had to review all 144 vouchers processed as of
                 March 21, 2013.2

    The City Inappropriately Drew
    Down More Than $1.2 Million
    in Program Funds When It Had
    Fire Insurance Funds Available

                 Contrary to HUD’s regulations at 24 CFR 85.21(f)(2) and Federal regulations at
                 appendix A, section C.1, of 2 CFR Part 225, the City inappropriately drew down

1
  For example, five of the six invoices in one of the vouchers included (1) amounts for demolition-related work for
25 activities that did not match the data from the system and (2) demolition-related work for three addresses that
were not included in the data.
2
  The vouchers totaled more than $16.8 million and included more than 800 invoices for more than 3,700 addresses.

                                                         4
                  more than $1.2 million in Program funds from November 2009 through March
                  2013 for 227 activities when it should have used available fire insurance funds
                  from the State’s Fire Insurance Withholding program for the associated
                  properties. Therefore, the U.S. Treasury paid at least $76,750 in unnecessary
                  interest on the Program funds.3

                  On October 31, 2011, the City transferred more than $1.5 million from its fire
                  insurance escrow account into its Program account.4 Further, as of June 19, 2012,
                  it had transferred nearly $526,000 in additional fire insurance funds into its
                  Program account.5 Of the nearly $2.1 million, the City transferred (1) $470,573
                  for 84 addresses for which the City did not draw down Program funds for
                  activities and (2) $364,493 for 140 addresses that exceeded the amount of
                  Program funds drawn down for the activities. As a result of our audit, the City
                  transferred $20,944 from its Program account into its fire insurance escrow
                  account on April 12, 2013, to correct a duplicate transfer of fire insurance funds
                  for three addresses.

                  Further, the City provided a report it used to track the fire insurance funds. The
                  report included addresses for which the City received fire insurance funds.
                  However, it did not contain complete information.6 Therefore, we reviewed the
                  City’s fire insurance escrow files for the addresses associated with the nearly $2.1
                  million in fire insurance funds it transferred into its Program account to determine
                  whether the amounts transferred were appropriate. The City (1) did not transfer
                  $51,981 in additional fire insurance funds into its Program account for 21
                  activities and (2) transferred $131,643 for 28 activities that exceeded the amount
                  of fire insurance funds available for the properties.7

                  The City’s report also contained 334 addresses that corresponded with the City’s
                  activities, for which it did not transfer any fire insurance funds into its Program
                  account. We randomly selected 10 of the 334 addresses to determine whether fire
                  insurance funds were available when the City drew down Program funds for
                  demolition costs. The City inappropriately drew down $20,733 in Program funds
                  from November 2009 through March 2013 for 7 of the 10 addresses, although it
                  had received fire insurance funds for the properties. The City did not receive fire
                  insurance funds for two of the addresses. For the remaining address, it received
                  $7,443 in fire insurance funds on October 22, 2008, and drew down $3,833 in
                  Program funds from October 2011 through August 2012. However, it transferred



3
  See scope and methodology.
4
  This transfer included $4,878 for which the City appropriately drew down Program funds because it had not
received the fire insurance funds at the time of the drawdown.
5
  The City had not used the nearly $2.1 million as of June 20, 2013.
6
  For example, the report did not include the amount of fire insurance funds that (1) the City transferred from its fire
insurance escrow account or (2) was available to be used to repair, replace, or demolish damaged structures.
7
  The nearly $132,000 included $73,625 that was also included in the more than $364,000 that exceeded the amount
of Program funds drawn down for activities.

                                                           5
                  the more than $7,000 in fire insurance funds into its Block Grant program account
                  on May 16, 2012.8

                  The following table shows the calculation of the City’s inappropriate drawdowns
                  of Program funds when fire insurance funds were available.

                    $1,545,791    Initial fire insurance funds transferred into the Program account
                       525,558    Additional fire insurance funds transferred into the Program account
                    $2,071,349    Total fire insurance funds transferred into the Program account
                                  Fire insurance funds transferred for addresses for which the City did not draw
                     (470,573)    down Program funds for activities
                                  Fire insurance funds transferred for addresses that exceeded the amount of
                     (364,493)    Program funds drawn for activities
                                  Fire insurance funds transferred for addresses that exceeded the amount of fire
                     (131,643)    insurance funds available for properties
                                  Fire insurance funds transferred for which Program funds were appropriately
                        (4,878)   drawn
                                  Transferred fire insurance funds added due to being included in both the more
                        73,625    than $364,000 and nearly $132,000 reduced above
                        72,714    Fire insurance funds available but not transferred into the Program account 9
                    $1,246,101    Program funds inappropriately drawn when fire insurance funds were available

                  On July 2, 2013, as a result of our audit, the City transferred $604,312 in fire
                  insurance funds associated with 147 of the remaining 324 addresses into its
                  Program account. The general manager of the Administration Division within the
                  City’s Buildings Department stated that the City’s staff reviewed the fire
                  insurance escrow files for the 147 addresses and the fire insurance funds were
                  available for the addresses when it drew down Program funds to pay for the
                  demolition costs.

                  The principal accountant of the Financial Resources Management Division within
                  the City’s Planning Department stated that as of August 9, 2013, the City had
                  used for Program costs $1,718,420 of the fire insurance funds that it transferred
                  into its Program account. This amount included $1,114,108 in fire insurance
                  funds transferred from October 2011 through June 2012 and the more than
                  $604,000 in fire insurance funds it transferred into its Program account in July
                  2013. The principal accountant also stated that as of August 30, 2013, the City
                  had not used any additional fire insurance funds for Program costs. Therefore, as
                  of August 30, 2013, the City had not used the remaining $131,993 in fire




8
  As of October 31, 2013, the City had not provided sufficient documentation to support that the more than $7,000
in fire insurance funds had been appropriately transferred into its Block Grant program account.
9
  The nearly $73,000 included the nearly $52,000 for addresses associated with the nearly $2.1 million in fire
insurance funds transferred and the nearly $21,000 for additional addresses associated with activities for which fire
insurance funds were not transferred.

                                                          6
                  insurance funds for which it inappropriately drew down Program funds when it
                  had fire insurance funds available.10

     The City Did Not Use More
     Than $332,000 in Program
     Refunds Before Drawing Down
     Program Funds

                  In June 2012, a gas company refunded the City nearly $529,000 for gas cut and
                  cap fees. Although the refund included demolition costs associated with
                  activities, the City deposited the funds into its general account. In April 2013 and
                  after we notified the City of the situation, it transferred $346,590 from its general
                  account into its Program account. The City then used the funds for Program
                  costs. However, $10,800 of the transferred amount for 12 addresses did not
                  correspond with its activities. Further, $3,450 of the transferred amount for five
                  addresses exceeded the amount of Program funds drawn down for the activities.
                  On September 5, 2013, the administrative assistant III of the Demolition Division
                  within the City’s Buildings Department stated that the City should not have
                  transferred the $14,250 into its Program account since the gas cut and cap fees for
                  these 17 addresses were paid for with Program funds under the American
                  Recovery and Reinvestment Act of 2009. Therefore, the City did not follow
                  HUD’s regulations at 24 CFR 85.21(f)(2) when it drew down $332,34011 in
                  Program funds from July 2012 through March 2013.

     The City Drew Down Nearly
     $72,000 in Program Funds for
     Duplicate Demolition Costs

                  The City drew down nearly $144,000 in Program funds from August 2010
                  through September 2012 for 35 activities. However, contrary to Federal
                  regulations at 2 CFR Part 225, section C.1 of appendix A, $71,809 of the amount
                  was for duplicate demolition costs. The City drew down Program funds for (1)
                  the same invoices twice and (2) different invoices that included the same
                  addresses and work performed.




10
   The nearly $132,000 is the more than $1.2 million in Program funds the City inappropriately drew down when it
had fire insurance funds available less the more than $1.1 million in fire insurance funds transferred from October
2011 through June 2012 that it had used as of August 9, 2013.
11
   The more than $332,000 is the nearly $347,000 in Program refunds the City transferred from its general account
into its Program account less the more than $14,000 associated with Program funds under the Recovery Act.

                                                         7
     The City Lacked Adequate
     Procedures and Controls

                  These weaknesses occurred because the City lacked adequate procedures and
                  controls in the administration of its activities to ensure compliance with Federal
                  regulations. The buildings supervisor for the Demolition Division within the
                  City’s Buildings Department stated that (1) data from the City’s old system did
                  not transfer properly to its Tidemark Advantage system and (2) there was
                  insufficient oversight to ensure that data entered into the system was accurate.
                  Further, the system did not identify the source of funding for the demolition costs.

                  The former deputy director of the City’s Buildings Department stated that the
                  number of demolition jobs that the Buildings Department processed increased by
                  approximately 600 percent after the City was awarded Program funds. The
                  director of the City’s Planning Department stated that the Buildings Department
                  was not structured and its staff did not have the necessary knowledge, experience,
                  and training to be able to handle the increase in demolition jobs. Further, a lack
                  of communication and coordination between the two departments prevented the
                  Planning Department from being able to sufficiently monitor the Buildings
                  Department.

     Conclusion

                  The City lacked adequate procedures and controls in the administration of its
                  activities to ensure compliance with Federal regulations. As a result, (1) nearly
                  $2.3 million in Program funds was not available for eligible Program costs 12 and
                  (2) the City inappropriately transferred $893,084 in fire insurance funds into its
                  Program account.13 Further, the U.S. Treasury paid more than $76,000 in
                  unnecessary interest on Program funds that the City inappropriately drew down
                  when it should have used available fire insurance funds.

     Recommendations

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

12
   The nearly $2.3 million included the (1) more than $1.2 million in Program funds inappropriately drawn down
when fire insurance funds were available, (2) more than $604,000 in fire insurance funds transferred into the
Program account in July 2013, (3) more than $332,000 in Program refunds transferred from the general account into
the Program account in April 2013, and (4) nearly $72,000 in Program funds drawn down for duplicate demolition
costs.
13
   The more than $893,000 included the (1) nearly $471,000 the City transferred for addresses for which the City did
not draw down Program funds for activities, (2) more than $364,000 that exceeded the amount of Program funds
drawn down for activities, and (3) more than $58,000 that exceeded the amount of fire insurance funds available for
properties (nearly $132,000 transferred less the nearly $74,000 that was also included in the more than $364,000 that
exceeded the amount of Program funds drawn down for activities).

                                                         8
                 1A. Ensure that the City used the $2,050,760 in fire insurance funds
                     ($1,718,420) and Program refunds ($332,340) for eligible Program costs.

                 1B. Determine whether the U.S. Treasury paid unnecessary interest on the
                     Program funds associated with the more than $604,000 in fire insurance
                     funds the City transferred into its Program account in July 2013. If the U.S.
                     Treasury paid unnecessary interest, the City should reimburse HUD, for
                     transmission to the U.S. Treasury, from non-Federal funds for the
                     unnecessary interest the U.S. Treasury paid on the Program funds that the
                     City inappropriately drew down for activities when it had fire insurance
                     funds for the properties associated with the activities.

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

                 1C. Use for eligible Program costs, before drawing down additional Program
                     funds, $203,802 in (1) the remaining fire insurance funds for which it
                     inappropriately drew down Program funds when it had fire insurance funds
                     available (nearly $132,000) and (2) Program funds drawn down for
                     duplicate demolition costs (nearly $72,000).

                 1D. Reimburse HUD, for transmission to the U.S. Treasury, $76,750 from non-
                     Federal funds for the unnecessary interest the U.S. Treasury paid on the
                     Program funds that the City inappropriately drew down for activities when it
                     had fire insurance funds for the properties associated with the activities.

                 1E. Determine whether the $872,140 in fire insurance funds that it
                     inappropriately transferred into its Program account are associated with
                     demolition costs paid with other Federal program funds. If the fire
                     insurance funds are associated with demolition costs paid with other
                     program funds, the City should transfer the fire insurance funds into the
                     applicable program account and use the funds for eligible program costs
                     before drawing down additional program funds.14

                 1F. Support that the more than $7,000 in fire insurance funds transferred into its
                     Block Grant program account in May 2012 for an address was appropriate
                     or reimburse its Program $3,833 from non-Federal funds, as appropriate, for
                     the nearly $4,000 in Program funds that it drew down for the address.

                 1G. Determine for the remaining 177 addresses in its report whether fire
                     insurance funds were available when it drew down Program funds for the



14
  The more than $872,000 is the more than $893,000 in fire insurance funds the City inappropriately transferred
into its Program account less the nearly $21,000 it transferred from its Program account into its fire insurance
escrow account in April 2013 to correct a duplicate transfer of fire insurance funds.

                                                         9
                         demolition costs.15 If fire insurance funds were available, the City should
                         (1) use the fire insurance funds for eligible Program costs before drawing
                         down additional Program funds and (2) reimburse HUD, for transmission to
                         the U.S. Treasury, from non-Federal funds any unnecessary interest the U.S.
                         Treasury paid on the Program funds that it drew down for activities when it
                         had fire insurance funds for the properties associated with the activities.16

                  1H. Support that the more than $14,000 in refunded gas cut and cap fees that
                      was inappropriately transferred into its Program account and used for
                      Program costs was an eligible Program use under the Recovery Act or
                      reimburse its Program under the Recovery Act $14,250 from non-Federal
                      funds and use the funds for eligible Program costs under the Recovery Act.

                  1I.    Maintain accounting records that adequately identify the source and
                         application of funds provided for its activities.

                  1J.    Implement adequate procedures and controls to ensure that it (1) uses
                         available fire insurance funds and refunded Program funds before drawing
                         down Program funds and (2) does not draw down Program funds for
                         duplicate demolition costs.




15
   The 177 addresses are the 334 addresses in the City’s report that corresponded with the City’s activities, for which
it did not transfer any fire insurance funds into its Program account less the 10 addresses that we reviewed and the
147 addresses that the City’s staff reviewed.
16
   Any unnecessary interest the U.S. Treasury paid would be determined by HUD.

                                                          10
                         SCOPE AND METHODOLOGY

We performed our onsite audit work from November 2012 through June 2013 at the City’s offices
located at 65 Cadillac Square and 2 Woodward Avenue, Detroit, MI. The audit covered the
period March 2009 through October 2012 and was expanded as determined necessary.

To accomplish our objectives, we reviewed

              Applicable laws; the Federal Register, dated October 6, 2008, June 19, 2009, and
               April 9, 2010; Federal regulations at 2 CFR Part 225; HUD’s regulations at 24
               CFR Parts 85 and 570; HUD’s grant agreement with the City for Program funds;
               and HUD’s Detroit Office of Community Planning and Development’s
               monitoring reports for the City’s Program and Block Grant program in 2011.

              The City’s 2008 action plan substantial amendment for the Program; action plan
               amendments, dated December 14, 2010, August 10, 2012, and March 8, 2013;
               annual reports and audited financial statements for 2010 through 2012; financial
               records; policies and procedures; fire insurance escrow files; and Program data
               from the City’s Tidemark Advantage system and Detroit Resources Management
               System and HUD’s Disaster Recovery Grant Reporting system.

In addition, we interviewed the City’s employees and HUD’s staff.

We reviewed all 144 vouchers processed as of March 21, 2013, which totaled more than $16.8
million in Program funds. We also reviewed the nearly $2.1 million in fire insurance funds the
City transferred from its fire insurance escrow account into its Program account. Further, we
randomly selected and reviewed 10 of the 334 addresses in the City’s report that corresponded
with the City’s activities, for which it did not transfer any fire insurance funds into its Program
account.

We were conservative in our determination of the amount of unnecessary interest that the U.S.
Treasury paid. We based our calculation on the 10-year U.S. Treasury rate using simple interest
on the inappropriately drawn down Program funds from the date that the funds were deposited
into the City’s Program account through June 20, 2013.

We did not rely on data from the City’s Tidemark Advantage system for its activities. We
performed a detailed assessment of the reliability of the data and found the data was not
adequately 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 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 objectives.


                                                 11
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

                     Effectiveness and efficiency of operations – Policies and procedures that
                      management has implemented to reasonably ensure that a program meets
                      its objectives.

                     Reliability of financial reporting – Policies and procedures that
                      management has implemented to reasonably ensure that valid and reliable
                      data are obtained, maintained, and fairly disclosed in reports.

                     Compliance with applicable laws and regulations – Policies and
                      procedures that management has implemented to reasonably ensure that
                      resource use 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.




                                                 12
Significant Deficiency

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

               The City lacked adequate procedures and controls to ensure that Federal
                regulations were followed in its (1) maintenance of accounting records for
                activities and (2) drawing down of Program funds for activities.




                                             13
                                   APPENDIXES

Appendix A

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

        Recommendation                                                Funds to be put
            number              Ineligible 1/        Unsupported 2/   to better use 3/
              1A                                                          $2,050,760
              1C                      $203,802
              1D                        76,750
              1F                                            $3,833
              1H                                            14,250
             Totals                   $280,552             $18,083        $2,050,760

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.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, implementation of our recommendation
     will ensure that the City used fire insurance funds and Program refunds for eligible
     Program costs.




                                                14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 1




                         15
                        OIG’s Evaluation of Auditee Comments

Comment 1   The City’s commitment to working with HUD’s Detroit Office of Community
            Planning and Development to complete the restructuring of its demolition
            program as well as its realignment of responsibilities, if fully implemented,
            should improve the City’s administration of its activities.




                                           16
Appendix C

                                  FEDERAL REGULATIONS

HUD’s grant agreement with the City for Program funds, dated March 19, 2009, states that the
following are part of the grant agreement: the Federal Register, dated October 6, 2008; the
Housing and Economic Recovery Act of 2008; the City’s submission for Program assistance;
HUD’s regulations at 24 CFR Part 570; and the funding approval.

The Federal Register, dated October 6, 2008, states that except as described in the Federal
Register, statutory and regulatory provisions governing the Block Grant program, including the
provisions in subparts A, C, D, J, K, I, and O of 24 CFR Part 570, as appropriate, should apply to
the use of Program funds.

HUD’s regulations at 24 CFR 85.20(b)(2) state that grantees must maintain records that
adequately identify the source and application of funds provided for financially assisted
activities. These records must contain information pertaining to grant or subgrant awards and
authorizations, obligations, unobligated balances, assets, liabilities, outlays or expenditures, and
income.

HUD’s regulations at 24 CFR 85.21(f)(2) state that grantees must disburse program income,
rebates, refunds, contract settlements, audit recoveries, and interest earned on such funds before
requesting additional cash payments.

HUD’s regulations at 24 CFR 570.502(a) state that recipients and subrecipients that are
governmental entities, including public agencies, must comply with Office of Management and
Budget Circular A-87 and 24 CFR 85.20 and 85.21.

Appendix A, section C.1, of 2 CFR Part 22517 requires all costs to be necessary, reasonable,
adequately documented, and net of all applicable credits. Section C.2 states that a cost is
reasonable if, in its nature or amount, it does not exceed that which would be incurred by a
prudent person under the circumstances prevailing at the time the decision was made to incur the
cost. In determining reasonableness of a given cost, consideration must be given to (1) the
restraints or requirements imposed by such factors as sound business practices and Federal,
State, and other laws and regulations and (2) whether the individuals concerned acted with
prudence in the circumstances, considering their responsibilities to the organization, its
employees, the public at large, and the Federal Government. Section C.4.a states that applicable
credits refer to those receipts or reduction of expenditure-type transactions that offset or reduce
expense items allocable to Federal awards. Examples of such transactions include purchase
discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds or
rebates, and adjustments of overpayments or erroneous charges. As appropriate, these amounts
should be credited to the Federal award either as a cost reduction or cash refund.


17
     Office of Management and Budget Circular A-87 was relocated to 2 CFR Part 225.

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