oversight

Glenbrook Manor Could Not Always Show That Project Costs Were Eligible and Supported in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-12-16.

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

        Glenbrook Manor, Stamford, CT
        HUD-Insured and Assisted Multifamily Project




Office of Audit, Region 1       Audit Report Number: 2015-BO-1001
Boston, MA                                       December 16, 2014
To:            Richard Daugherty
               Director, Office of Multifamily Housing, Hartford, CT, Field Office, 1EHMLAT

               //SIGNED//
From:          Edgar Moore
               Regional Inspector General for Audit, Boston Region 1AGA

Subject:       Glenbrook Manor Could Not Always Show That Project Costs Were Eligible and
               Supported in Accordance With HUD Requirements


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 administration of the multifamily project,
Glenbrook Manor.

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 212-
264-4174.
                         Audit Report Number: 2015-BO-1001
                         Date: December 16, 2014

                         Glenbrook Manor Could Not Always Show That Project Costs Were Eligible
                         and Supported in Accordance With HUD Requirements




Highlights
What We Audited and Why
We audited the multifamily project, Glenbrook Manor, in Stamford, CT, based on a request by
officials from the U.S. Department of Housing and Urban Development’s (HUD) Hartford, CT,
Office of Multifamily Housing Programs. Our audit objectives were to determine whether
Glenbrook Manor expended project funds for eligible activities and costs that were reasonable
and supported, and whether surplus cash was properly calculated and deposited into the residual
receipts account.

What We Found
Glenbrook Manor could not always show that project costs were eligible and supported in
accordance with HUD requirements. Specifically, its management agent1 did not ensure that
project costs paid through the agent’s revolving fund and salaries paid in 2011 were supported.
In addition, surplus cash was not properly calculated and deposited into the residual receipts
account as required by the regulatory agreement. These conditions were caused by a lack of (1)
proper internal controls over settling the project’s payable to the agent’s revolving fund, which
resulted in noncurrent payables, and charging salaries to the project, and (2) job descriptions
showing the frontline and nonfrontline activities employees charged to the project. As a result,
officials paid $496,980 in unsupported costs and did not deposit $61,067 in surplus cash into the
residual receipts account as required.

What We Recommend
We recommend that HUD require Glenbrook Manor officials to provide support showing that
the $239,870 liability to the agent’s revolving fund and the $200,000 transferred to the agent’s
revolving fund represented expenses for eligible project costs or repay the transferred funds and
remove the liability from the project’s books. In addition, project officials should provide
documentation to support that $57,110 expended in 2011 was for eligible project salaries and
repay any unsupported amounts from non-Federal funds. Lastly, Glenbrook Manor officials
should deposit $61,067 in surplus cash into the residual receipts account.




1
    The Housing Authority of the City of Stamford is the management agent for Glenbrook Manor.
Table of Contents

Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................4

         Finding: Project Costs Were Not Always Eligible and Supported.............................. 4


Scope and Methodology ...........................................................................................8

Internal Controls ....................................................................................................10

Appendixes ..............................................................................................................12

         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 12

         B. Auditee Comments and OIG’s Evaluation ............................................................. 13




                                                            2
Background and Objectives

Glenbrook Manor is located at 10 Glenbrook Road, Stamford, CT. The property is a 44-unit
housing project for which the mortgage is insured by the U.S Department of Housing and Urban
Development (HUD) under Section 231 of the National Housing Act. Under this program, HUD
controls the project through a regulatory agreement, form HUD-92465, which was signed with
the owner, Glenbrook Road Elderly Housing Corporation, on February 27, 1980. The agreement
outlines terms and conditions for the insured mortgage, such as what expenses may be paid with
project funds, and regulates the project’s rent charges and operations.

The Corporation is a not-for-profit corporation created to provide housing to benefit low- to
moderate-income elderly people. It is a component unit of the Housing Authority of the City of
Stamford, also known as Charter Oak Communities. The Corporation is a component unit
because of its close association with the Authority.

The Housing Authority of the City of Stamford is the management agent for the project. In
accordance with the management agreement, the project pays a management fee to the agent in
return for property management services. Most of the financial operations of the project are
managed at the agent’s office in Stamford, CT.

The project receives a material portion of its revenue under the Section 8 housing assistance
program. The program provides for direct rent subsidy payments on behalf of tenants who
qualify under the program’s rules. Between January 1, 2011, and December 31, 2013, the
project received more than $1.2 million in housing assistance payments.

The mortgage is held by the Connecticut Housing Finance Authority, which is the contract
administrator.2 It holds the reserve accounts for the project, including the reserve for
replacement account and the residual receipts account. The reserve for replacement account is
used to fund the replacement of property, and the funds may be disbursed only as provided in the
regulatory agreement with the approval of HUD and the Connecticut Housing Finance Authority.
The residual receipts account is where surplus cash is deposited in accordance with the
regulatory agreement.

Our audit objectives were to determine whether Glenbrook Manor expended project funds for
eligible activities and costs that were reasonable and supported, and whether surplus cash was
properly calculated and deposited into the residual receipts account.




2
  The contract administrator is the entity responsible for the administration of the Section 8 assistance program under
a particular housing assistance payments contract.




                                                           3
Results of Audit

Finding: Project Costs Were Not Always Eligible and Supported

Glenbrook Manor could not always show that project costs were eligible and supported in
accordance with HUD requirements. Specifically, its agent did not ensure that project costs paid
through its revolving fund account and salaries paid in 2011 were supported. In addition, surplus
cash was not properly calculated and deposited into the residual receipts account as required. This
condition occurred primarily because the agent used its revolving fund to pay project expenses
but did not identify or invoice the project regularly for those expenses paid, resulting in
noncurrent payables. Also, the agent misunderstood HUD requirements and, therefore,
incorrectly calculated surplus cash. As a result, the agent could not support that $439,870 in
project funds, which was originally paid by its revolving fund, and $57,110 in salaries accrued in
2011 were for eligible project costs. Also, during the period January 2011 through December
2013, the agent did not deposit $61,067 in surplus cash into the residual receipts account.

Project Funds Were Not Used for Supported Expenses
The agent introduced the revolving fund in 2001 and used it to pay salaries and other expenses,
which were charged to multiple projects (including Glenbrook Manor) as well as for project
expenses when a project’s operating account lacked sufficient funds. Rather than invoice and
settle the payable to the revolving fund account regularly, the agent allowed the project’s liability
to increase year after year, and as of December 31, 2013, the fund held a balance of $239,870.
Agent officials could not support the costs associated with this balance as they said the costs
were accrued before 2011 and they no longer maintained the supporting documentation. In
2011, agent officials began to settle the payable regularly, and in 2012, they developed a policy
to ensure this practice. However, the payable that had accumulated remained on the books and
could not be supported.

In February of 2012, agent officials made a $200,000 transfer from the project’s operating
account to the agent’s revolving fund account. The transfer was made to remove a portion of the
payable from the books. However, project costs that made up this amount were not identified or
known and were, therefore, considered unsupported.

Salaries charged to the project in 2011 were not always supported. All salaries incurred by the
project were paid directly by the agent’s revolving fund and then charged to the project. In 2011,
agent officials charged $57,110 in salaries based on the budgeted amounts submitted to the
Connecticut Housing Finance Authority. Also, agent supervisory personnel who did not work
directly on project-related activities were charged. Positions charged in 2011 included the chief




                                                  4
operating officer, executive assistant, and controller. According to HUD regulations, project
costs must be charged to the project based on the actual use of services, and management agent
supervisory personnel may not be charged to the project.3 Since salaries at the project were not
charged based on the actual use of services and the agent’s supervisory personnel were charged,
salaries that were not incurred may have been charged in 2011 and were, therefore, questioned.
In 2012, the agent developed a method to allocate salaries based on the number of units for
administration and work orders for maintenance.

Agent officials also did not have job descriptions that outlined the frontline and nonfrontline
responsibilities of each position4 from 2011 through 2013. According to HUD Handbook
4381.5, a management agent that employs staff members at a project may charge the project for
salaries only if the employees work directly at the project. Also, job descriptions must be
developed, which outline the frontline and nonfrontline responsibilities of each position.
Although we did not question salaries charged to the project in 2012 and 2013, job descriptions
should be developed to ensure that salaries charged for agent employees are for direct project
purposes and not for indirect responsibilities that should be covered under the management fee.

According to Federal regulations,5 accounting records must be supported by such source
documentation as canceled checks, paid bills, payrolls, time and attendance records, contracts,
etc. Glenbrook Manor did not comply as its agent could not support the $439,870 ($239,870 +
$200,000) in costs paid from the agent’s revolving fund for the project or the questioned $57,110
in salaries charged based on budgeted amounts.

Surplus Cash Was Not Deposited Into the Residual Receipts Account
Glenbrook Manor did not deposit surplus cash into the residual receipts account in the years
2011 through 2013.6 In each of these years, the agent misunderstood HUD requirements and
calculated surplus cash by including noncurrent payables that the project owed to the agent’s
revolving fund account in the current obligations section on form HUD-93486, Computation of
Surplus Cash, Distributions, and Residual Receipts. According to the instructions on form HUD-
93486, accounts payable are to be included in the calculation only if they are due within 30 days.
However, the payable that the project owed to the agent’s revolving fund account was made up
of expenses accrued before 2011, which were not current and had not been settled. Therefore,




3
  With the exception of supervisory staff providing oversight for centralized accounting and computer services for
the project.
4
  Frontline responsibilities include activities directly related to the project, such as the project’s legal, auditing,
maintenance services, etc., that may be charged to the project operating account. Costs for services that are
nonfrontline, such as the agent’s supervisory staff, must be paid out of management fee funds, except for centralized
account and computer services.
5
  24 CFR (Code of Federal Regulations) 85.20, Standards For Financial Management Systems
6
  According to section 2(c) of the regulatory agreement, “Owners shall establish and maintain a residual receipts
fund by depositing thereto, with the mortgagee, the residual receipts, as defined herein, within 60 days after the end
of the semiannual or annual fiscal period within which such receipts are realized.”




                                                           5
we recalculated the surplus cash by subtracting the noncurrent payables owed by the project to
the agent’s revolving fund account on form HUD-93486, covering the years 2011 through 2013,
and determined that the project did not deposit $61,067 in surplus cash into the residual receipts
account. By including the payable in the computation of surplus cash, the agent incorrectly
increased the project’s current liabilities, which canceled out any surplus cash that should have
been deposited into the residual receipts account. Therefore, those funds were not available to
reduce future housing assistance payments.

                                    Surplus cash calculation
                                                                        Total surplus
                          2011            2012            2013              cash
         Cash         $32,139         $82,924         $102,594
    Cash adjusted
     for previous
                         n/a             $0            $37,260
     year surplus
         cash
    Cash available    $32,139         $82,924          $65,334
       Current
      payables –
                      $45,145         $45,664          $41,527
    revolving fund
       payable

     Surplus cash        $0           $37,260          $23,807           $61,067


Conclusion
Glenbrook Manor could not always show that project funds were used for costs that were supported
in accordance with HUD requirements. This condition occurred because the agent used its
revolving fund to pay project expenses but did not identify or settle those expenses paid by the
revolving fund account in a timely manner. Also, salaries in 2011 were charged based on
budgeted amounts, not the actual use of services. Lastly, agent officials misunderstood HUD
requirements and calculated surplus cash by including noncurrent payables due to the revolving
fund account as a current liability in the calculation of surplus cash, which canceled out any
available surplus cash. As a result, the agent could not support $439,870 in project funds paid by
the agent’s revolving fund account or show that $57,110 in salaries paid in 2011 was for eligible
project costs. In addition, during the period January 2011 through December 2013, the agent did
not deposit $61,067 in surplus cash into the residual receipts account as required.

Recommendations
We recommend that the Director of HUD’s Hartford, CT, Office of Multifamily Housing
Programs require Glenbrook Manor officials to




                                                 6
1A.   Provide documentation to support that the $239,870 liability to the agent’s
      revolving fund account was expended for eligible project costs and if such support
      cannot be provided, remove the liability from the project’s books.

1B.   Provide documentation to support that the $200,000 transferred to the agent’s
      revolving fund account was expended for eligible project costs and if such support
      cannot be provided, repay the project this amount from non-Federal funds.

1C.   Develop controls to ensure that project expenses paid from the agent’s revolving
      account are adequately supported and related to the project.

1D.   Provide documentation to support that the expenditure of $57,110 in 2011 was for
      eligible project salaries and if such support cannot be provided, repay the amount
      to the project from non-Federal funds.

1E.   Develop job descriptions that show the frontline and nonfrontline activities its
      employees perform to justify charging expenses to the project as required by
      HUD Handbook 4381.5.

1F.   Deposit $61,067 in surplus cash into the residual receipts account.

1G.   Strengthen the project’s internal controls to ensure that only current liabilities are
      included in the computation of surplus cash.




                                         7
Scope and Methodology

The audit focused on whether agent officials who managed Glenbrook Manor expended project
funds for eligible activities and costs that were reasonable and supported in accordance with
HUD requirements. We performed the audit fieldwork from March to August 2014 at Charter
Oak Communities located at 22 Clinton Avenue, Stamford, CT. Our audit covered the period
January 2011 through December 2013 and was extended when necessary to meet our audit
objectives.

To accomplish our objectives, we

      Reviewed applicable Federal regulations, HUD handbooks, and the regulatory agreement
       as well as internal policies and procedures.

      Reviewed the project’s audited financial statements and general ledgers.

      Reviewed the project’s payable owed to the agent’s revolving account and attempted to
       obtain support for the postings in the general ledger for this payable account.

      Reviewed the project’s form HUD-93486, Computation of Surplus Cash, Distributions,
       and Residual Receipts. We subtracted the payable owed by the project to the agent’s
       revolving account on the form from 2011 through 2013 to determine the amount of
       surplus that was required to be deposited into the residual receipts account. Each year the
       balance was adjusted for the next calculation.

      Reviewed project salaries to determine whether they were eligible and properly charged.
       We reviewed all project salaries from 2011 through 2013 totaling $131,970.

      Interviewed agent officials who managed the project and HUD Hartford Office of
       Multifamily Housing Programs staff.

We also selected a sample of eight operating expense accounts and reviewed the supporting
documentation for transactions in 2011, 2012, and 2013. The accounts were chosen based on
high-risk accounts as determined by a review of the general ledgers and financial statements and
large dollar accounts. We reviewed a total of $228,384 in operating expenses during that period.

We relied, in part on accounting data provided by the agent. We did not perform a detailed
assessment of the reliability of the data, but we determined that the computer-processed data
were sufficiently reliable to be used in meeting our objectives because the data in the sampled
accounts were corroborated by supporting documentation provided by the agent.




                                                 8
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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                9
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 data – 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 resources 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.

Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

   The project did not have adequate controls over the efficiency and effectiveness of program
    operations when officials did not establish administrative controls to ensure that project costs



                                                   10
    were always eligible and supported (see finding).

   The project did not have adequate controls over the reliability of financial data when officials
    did not establish adequate financial controls to ensure that project funds were always used for
    eligible purposes and surplus cash was deposited into the residual receipts account (see finding).

   The project did not have adequate controls over compliance with laws and regulations when
    officials did not comply with HUD regulations by repaying a portion of their liability to the
    revolving fund for costs that were not supported, charging ineligible and unsupported salaries to
    the project, and incorrectly calculating surplus cash, thereby not depositing these funds into the
    residual receipts account (see finding).




                                                   11
Appendixes

Appendix A


           Schedule of Questioned Costs and Funds To Be Put to Better Use
                Recommendation                            Funds to be put
                                      Unsupported 1/
                    number                                to better use 1/
                        1A              $239,870
                        1B              $200,000
                        1D              $57,110
                        1F                                   $61,067

                      Totals            $496,980             $61,067



1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.
2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an 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, if the project implements our
     recommendation to deposit $61,067 into the residual receipts account, these funds will be
     available to HUD to offset future housing assistance payments.




                                              12
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2




                               13
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 3




Comment 4




Comment 5



Comment 6




                               14
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 7



Comment 7



Comment 8




Comment 9




                               15
                         OIG Evaluation of Auditee Comments


Comment 1   The management agent believes that since the expenses that make up the project’s
            payable to the agent’s revolving fund occurred as early as 2002 it is past the
            record retention period, and thus the project should not be responsible to provide
            support for those expenses. We disagree with the agent because although the
            expenses may have occurred as early as 2002 the agent’s revolving fund was not
            managed correctly and thus the project’s payable to the revolving fund remained
            on its books during the audit period. Without support for those expenses the
            project could reimburse the agent for expenses that were not eligible when settling
            the payable.

Comment 2   The agent stated that independent auditors prepared annual financial statements
            each year from the period of 2002 to the present, and did not question any
            program costs. We acknowledge other reports may not have questioned program
            costs, but again without support for the program expenses that make up the
            payable it is unknown whether those costs were for eligible purposes, therefore,
            the payable balance is in question.

Comment 3   The agent agrees that internal controls were lacking in some areas. The agent
            stated it relied on external auditors to promote compliance with HUD
            requirements and there is no reason to believe that there was intent to incorrectly
            calculate surplus cash. We did not question intent, but the project was not in
            compliance with HUD requirements when it incorrectly calculated surplus cash.

Comment 4   In response to recommendation 1A, the agent stated that it does not have the
            ability to support the project’s payable to the agent revolving fund since the
            expenses began accumulating as early as 2002. However, our recommendation
            remains unchanged, if the expenses cannot be supported the payable should be
            removed from the books and also not charged to the other Federal projects if the
            allocation is not supported. Also see comment 1.

Comment 5   In response to recommendation 1B, the agent does not believe it is reasonable to
            expect repayment for a fund in which expenses were accrued as early as 2002.
            However, the agent agreed to work with HUD to attempt to support the expenses
            during audit resolution process. Also see comments 1 and 4. The agent’s actions
            are responsive to our recommendation, which should be verified with HUD
            during audit resolution process.

Comment 6   In response to recommendation 1C, agent officials stated that they updated the
            revolving fund policy to create a process to make timely payments to the


                                              16
            revolving fund along with supporting documentation for those payments. We
            reviewed the policy and supporting documentation and agree that the policy is
            adequate; however, HUD officials should verify that the policy is being
            implemented during the audit resolution process.

Comment 7   The agent’s actions are responsive to our recommendation, which should be
            verified with HUD during audit resolution process.

Comment 8   In response to recommendation 1F, agent officials state that they will deposit the
            appropriate amount of surplus cash by calendar year end but the amount may
            change based on support for the other recommendations. The agent officials
            requested the recommendation be closed based on this action. The agent’s plan is
            responsive to our recommendation, which should be verified with HUD during
            audit resolution process prior to any decision to close the recommendation.

Comment 9   In response to recommendation 1G, agent officials state that they hired a new
            audit firm with experience in HUD Multifamily rules and regulations. They
            request that this recommendation be closed as they will work closely with the new
            audit firm to ensure that surplus cash is calculated in compliance with HUD
            requirements. Although the agent official’s proposed actions are responsive with
            our recommendation, these actions will have to be verified by HUD officials
            during the audit resolution process prior to any decision to close the
            recommendation.




                                             17