oversight

The Somerville Housing Authority, Somerville, MA, Did Not Always Support Its Allocation of Costs to Asset Management Projects

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-08-12.

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

          Somerville Housing Authority,
                Somerville, MA
   Public Housing and Capital Fund Program Allocation
          of Costs to Asset Management Projects




Office of Audit, Region 1     Audit Report Number: 2016-BO-1004
Boston, MA                                       August 12, 2016
To:           Marilyn O’Sullivan
              Director, Office of Public and Indian Housing, Boston, 1APH




From:         Edward Jeye
              Regional Inspector General for Audit, 1AGA

Subject:      The Somerville Housing Authority, Somerville, MA, Did Not Always Support Its
              Allocation of Costs to Asset Management Projects


Attached are the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our audit of the Somerville Housing Authority’s
public housing and Public Housing Capital Fund programs and asset management projects.

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 contact Ann
Henry, Assistant Regional Inspector General for Audit, at 617-994-8345, or me at 617-994-8380.
                    Audit Report Number: 2016-BO-1004
                    Date: August 12, 2016

                    The Somerville Housing Authority, Somerville, MA Did Not Always Support
                    Its Allocation of Costs to Asset Management Projects



Highlights

What We Audited and Why
We audited the Somerville Housing Authority’s public housing and Public Housing Capital Fund
programs as part of our fiscal year 2016 regional audit plan. We initiated our review because the
U.S. Department of Housing and Urban Development’s (HUD) Boston Office of Public and
Indian Housing had not monitored the programs in the past 5 years and we had not audited the
Authority in the past 10 years. Our audit objectives were to determine whether (1) management
and other fees charged by the Authority’s central office cost center to its asset management
projects were reasonable and adequately supported and (2) public housing and Public Housing
Capital Fund procurements were executed in accordance with Federal regulations.

What We Found
Authority officials properly procured public housing and Public Housing Capital Fund program
contracts reviewed, but did not always support costs allocated to the Authority’s asset
management projects. While controls were established and implemented to ensure that costs
charged were supported and contracts were properly procured, the allocation for some
maintenance employee salaries and fee accountant services were not adequately supported. This
deficiency occurred because Authority officials and their fee accountant prepared budgets using
primarily unit percentage as the basis for the allocation rather than actual front-line or fee-for-
service costs allocated to the asset management projects. As a result, the cost allocation for
maintenance employee salaries of $660,498 and fee accountant services of $70,708 were not
adequately supported.

What We Recommend
We recommend that HUD require Authority officials to support that $731,206 in maintenance
employee salaries and fee accountant service costs to the asset management projects were
properly allocated or repay any unsupported amount from non-Federal funds. Additionally, we
recommend that Authority officials review their allocation procedures and make the necessary
adjustments to ensure that front-line or fee-for-service costs are appropriately allocated to the
asset management projects based on the actual time or service provided.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: Allocated Costs Among Asset Management Projects Were Not Always
         Supported........................................................................................................................... 4

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................9

Appendixes ..............................................................................................................10
         A. Schedule of Questioned Costs .................................................................................. 10

         B. Auditee Comments and OIG’s Evaluation ............................................................. 11




                                                                     2
Background and Objectives
The Somerville Housing Authority in Somerville, MA, was created in 1948 and incorporated
under Chapter 121B of the State Statues of the Commonwealth of Massachusetts. The Authority
operates under a board of commissioners form of government to provide safe and decent housing
to low- and moderate-income families and elderly individuals. The board selects and employs an
executive director, who is responsible for the Authority’s day-to-day operations. The Authority
owns and manages 584 conventional low-income public housing units and 733 State public
housing units and administers 1,193 housing choice vouchers. The Authority receives operating
and capital funds from the U.S. Department of Housing and Urban Development (HUD) for the
operation and modernization of its low-income public housing units.

Operating funds are provided annually to public housing agencies for the operation and
management of public housing. Capital funds are provided annually to public housing agencies
for the development, financing, and modernization of public housing developments and for
management improvements. From fiscal year 2013 through fiscal year 2015, the Authority
received operating funds and capital funds in the following amounts:

                                           Operating
                      Fiscal year                           Capital funds
                                            funds
                          2013           $1,926,845          $800,330
                          2014           1,859,537           833,219
                          2015           1,909,878           822,282

                         Totals          5,696,260          2,455,831


Our audit objectives were to determine whether (1) management and other fees charged by the
Authority’s central office cost center to its asset management projects were reasonable and
adequately supported and (2) public housing and Public Housing Capital Fund procurements
were executed in accordance with Federal regulations.




                                               3
Results of Audit

Finding 1: Allocated Costs Among Asset Management Projects
Were Not Always Supported

Authority officials properly procured public housing and Public Housing Capital Fund program
contracts reviewed, but did not always support costs allocated to the Authority’s asset
management projects. While controls were established and implemented to ensure that costs
charged were supported and contracts were properly procured, the allocation for some
maintenance employee salaries and fee accountant service costs were not adequately supported.
This deficiency occurred because Authority officials and their fee accountant prepared budgets
using primarily unit percentage as the basis for the allocation rather than actual front-line or fee-
for-service costs allocated to the asset management projects. As a result, the cost allocation for
maintenance employee salaries of $660,498 and fee accountant services of $70,708 were not
adequately supported.

Costs Allocated to Asset Management Projects Were Not Always Supported
Our review of more than $1.8 million in asset management, property management, and
bookkeeping fees allocated to asset management projects for fiscal years 2013, 2014, and 2015
(April 1, 2012, through March 31, 2015) determined that the fees were eligible and adequately
supported by Authority officials. Similarly, our review of administrative and maintenance
salaries allocated to asset management projects disclosed that Authority officials adequately
supported 72 percent of the more than $2.3 million allocated during fiscal years 2014, 2015, and
half of 2016 (April 1, 2013, through September 30, 2015).

However, Authority officials did not adequately support the salary allocations for 12
maintenance employees, resulting in $660,498 (28 percent) in unsupported costs to the asset
management projects (table 1). This deficiency occurred because Authority officials and their
fee accountant prepared budgets using primarily unit percentage as the basis for the allocation
rather than actual front-line or fee-for-service costs charged to the asset management projects as
required. 1




1
  Supplement to HUD Handbook 7475.1, REV, CHG-1, section 7.10, states that a public housing agency may
establish a reasonable method to spread personnel costs to the asset management projects receiving the service.
However, the method used to spread these costs to asset management projects must follow the guidelines established
for front-line prorated costs, which require at a minimum, that at the end of the public housing agency’s fiscal year,
it will need to adjust to actual costs.



                                                          4
                                             Table 1

Salary charged to       Fiscal year         Fiscal year       Half of fiscal
       asset               2014                2015            year 2016
                                                                                      Total
   management                                                  (through
     projects                                                   9/30/15)
  Administrative
 salary charged to
                       $509,434            $466,235            $184,357          $1,160,026
asset management
projects reviewed
   Maintenance
 salary charged to
                        575,286             421,269            212,447            1,209,002
asset management
projects reviewed
   Total salaries
                       1,084,720            887,504            396,804            2,369,028
    reviewed
      Total
   unsupported
                        263,655             263,655            133,188             660,498
   maintenance
     salaries

Our review of three public housing program contracts, valued at $665,731 over a 3-year period,
identified no concerns with the procurement method used. We also determined that Authority
officials selected the proper contract type; adequately competed and advertised the contracts; and
ensured that the costs were eligible, supported, and appropriately allocated. However, based on
our review of the allocation of charges associated with one contract for the Authority’s fee
accountant, we determined that of the $147,800 in fee accountant service costs allocated in fiscal
years 2014 and 2015 and the first half of fiscal year 2016 to the asset management projects,
$70,708 was not adequately supported.

The fee accountant did not base his allocation on actual hours. Instead, the fee accountant
advised the allocation was his best estimate of time spent on his services for each asset
management project based on his knowledge of the time required to prepare proper
documentation for each housing program of the Authority.

Public Housing Capital Fund Program Contracts Were Properly Procured and Supported
The Authority was awarded more than $2.3 million in annual Public Housing Capital Fund
grants for Federal fiscal years 2012, 2013, and 2014, of which more than $1.4 million was
designated for line 1460 – Dwelling Structures. We reviewed four Public Housing Capital Fund
program contracts totaling $917,315 (representing 64 percent of the dwelling structure total) and
determined that the contracts were properly procured. We determined that Authority officials
selected the proper contract type, adequately competed and advertised the contracts, performed a



                                                5
cost or price analysis, and ensured that the vendor maintained proper insurance and bonding and
that the costs were eligible and supported.

Conclusion
Authority officials properly procured public housing and Public Housing Capital Fund program
contracts reviewed, but did not always support costs allocated to the Authority’s asset
management projects. The allocation for some maintenance employee salaries and fee
accountant services were not adequately supported, resulting in unsupported maintenance
employee salaries of $660,498 and fee accountant service costs of $70,708 being allocated to
asset management projects.

Recommendations
We recommend that the Director of HUD’s Boston Office of Public and Indian Housing instruct
Authority officials to

       1A.    Provide documentation to support that $660,498 paid for salaries for 12
              maintenance employees was properly allocated to the asset management projects
              or repay any unsupported amount from non-Federal funds.

       1B.    Provide documentation to support that $70,708 paid for professional services (fee
              accountant) was properly allocated to the asset management projects or repay any
              unsupported amount from non-Federal funds.

       1C.    Review their allocation procedures and make the necessary adjustments to ensure
              that front-line or fee-for-service costs are appropriately allocated to the asset
              management projects based on the actual time or service provided.




                                               6
Scope and Methodology
The audit focused on whether Authority officials ensured that public housing and Public Housing
Capital Fund program contracts were properly procured and that expenses allocated to the
Authority’s asset management projects complied with HUD regulations. We performed audit
fieldwork from October through December 2015 at the Authority, 30 Memorial Road,
Somerville, MA. Our audit generally covered the period April 2012 through September 2015
and was adjusted when necessary to meet our audit objectives.

To accomplish our objectives, we

        •    Reviewed applicable laws, regulations, HUD handbooks, HUD notices, and the
             Authority’s policies and procedures.

        •    Conducted discussions with Authority officials to gain an understanding of the
             organizational structure and the management of the asset management projects.

        •    Reviewed independent public accountant and HUD monitoring reports.

        •    Reviewed 100 percent, or more than $2.3 million, of the Authority’s administrative
             and maintenance salaries allocated to its asset management projects for fiscal years
             2014, 2015, and half of 2016 (April 1, 2013, through September 30, 2015) to evaluate
             the reasonableness of the allocation.

        •    Reviewed 100 percent, or more than $1.8 million, of the asset management, property
             management, and bookkeeping fees charged by the Authority’s central office cost
             center to the asset management projects for fiscal years 2013, 2014, and 2015 (April
             1, 2012, through March 31, 2015) to determine whether they were eligible and
             adequately supported.

        •    Nonstatistically selected three public housing contracts, valued at $665,731 2 over a 3-
             year period, to determine whether the contracts were properly procured and the costs
             were eligible and appropriately allocated to the Authority’s asset management
             projects. Although this approach did not allow us to make a projection to the




2
 The contract log provided by the Authority contained 27 contracts with contract totals valued at more than $2.6
million over an approximate 3-year period. The contract log contained additional contracts that did not have a
specific contract total but, instead, were based on percentage of revenue or quotes or were statewide contracts
available to the Authority. From the 27 known contracts, we selected 3 contracts, based on dollar value, valued at
$665,731, or 25.2 percent ($665,731/$2,637,465).



                                                          7
             population, it was sufficient to meet the audit objectives.

        •    Nonstatistically selected four Public Housing Capital Fund contracts, valued at
             $917,315, 3 to determine whether the contracts were properly procured and the costs
             were eligible and adequately supported. Although this approach did not allow us to
             make a projection to the population, it was sufficient to meet the audit objectives.

To achieve our audit objectives, we relied in part on computer-processed data from the
Authority’s computer system. Although we did not perform a detailed assessment of the
reliability of the data, we did perform a minimal level of testing and found the data to be
adequate 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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




3
  The Authority was awarded more than $2.3 million in Public Housing Capital Fund grants for Federal fiscal years
2012, 2013, and 2014, of which more than $1.4 million was designated for line 1460 (Dwelling Structures). We
reviewed four Public Housing Capital Fund contracts, based on dollar value, valued at $917,315 (64 percent of total
dwelling structures).



                                                         8
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.

We evaluated internal controls related to the audit objectives in accordance with generally
accepted government auditing standards. Our evaluation of internal controls was not designed to
provide assurance regarding the effectiveness of the internal control structure as a whole.
Accordingly, we do not express an opinion on the effectiveness of the Authority’s internal
control.


                                                   9
Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 2/
                               number
                                   1A              $660,498
                                   1B               70,708

                                 Totals            731,206



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.




                                              10
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               11
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 2




Comment 3




                               12
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




                               13
                         OIG Evaluation of Auditee Comments


Comment 1   Authority officials acknowledge the audit conclusion that the work hours of 12
            maintenance employees were allocated in a manner that could not be adequately
            supported. Authority officials are confident that expenses charged to the asset
            management projects are supportable by work orders and timesheets when viewed
            as overall maintenance activity performed. Authority Officials should provide
            any support to HUD for its review and determination during the audit resolution
            process.
Comment 2   Authority officials stated that they requested additional services to address
            personnel changes and that, due to these changes at the time, the fee accountant
            needed to assume different roles. At that point, Authority officials and their fee
            accountant should have entered into a fee-for-service agreement outlining the cost
            for the services provided. Authority officials stated that they will request a matrix
            of the value of services performed by program for the audit period. Authority
            officials should provide any support to HUD for its review and determination
            during the audit resolution process.
Comment 3   Authority officials stated they completed necessary adjustments to ensure that
            front-line and fee-for-service costs are appropriately allocated. Also, for
            professional services performed by the fee accountant, they will procure a
            contract that includes specific values for services rendered for each program.
            These reported actions by Authority officials are responsive to the audit
            recommendation and will need to be verified by HUD during the audit resolution
            process.




                                              14