oversight

The District of Columbia Housing Authority, Washington, DC, Did Not Always Make Payments for Outside Legal Services in Compliance With Applicable Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-04-04.

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

                                              U.S. DEPARTMENT OF
                              HOUSING AND URBAN DEVELOPMENT
                                       OFFICE OF INSPECTOR GENERAL



                                               April 4, 2016
                                                                                            MEMORANDUM NO:
                                                                                                 2016-PH-1801


Memorandum
TO:           Christine Jenkins
              Director, Office of Public Housing, Washington, DC, Field Office, 3GPH

              //signed//
FROM:         David E. Kasperowicz
              Regional Inspector General for Audit, Philadelphia Region, 3AGA

SUBJECT:      The District of Columbia Housing Authority, Washington, DC, Did Not Always
              Make Payments for Outside Legal Services in Compliance With Applicable
              Requirements


                                          INTRODUCTION

We conducted a review of the District of Columbia Housing Authority’s payments for outside
legal services in conjunction with an ongoing internal audit of the U.S. Department of Housing
and Urban Development’s (HUD) oversight of public housing agencies’ expenditures for outside
legal services. Our review objective was to determine whether the Authority made payments for
outside legal services in compliance with applicable requirements.

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 review.

The Inspector General Act, Title 5 United States Code, section 8M, requires that the Office of
Inspector General (OIG) post its publicly available reports on the OIG Web site. Accordingly,
this report will be posted at http://www.hudoig.gov.

                              METHODOLOGY AND SCOPE

The Authority was one of three public housing agencies participating in HUD’s Moving to Work
Demonstration program that were selected for review as part of our ongoing internal audit. We
conducted our review from October 2013 to January 2016 at our office in Philadelphia, PA. To
accomplish our review objective, we determined that the Authority made 866 payments totaling

                                                    Office of Audit Region 3
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                                      100 Penn Square East, Philadelphia, PA 19107-3380
                              Visit the Office of Inspector General Web site at www.hudoig.gov.
$6.1 million for outside legal services provided during the review period. We statistically
selected 80 payments totaling $1.6 million and requested that the Authority provide
documentation to support the payments. The sample was designed using a highly stratified
random sample to control for variance. Therefore, the results of our review can be projected to
the universe. In addition, we obtained and reviewed the following:

       •   Relevant HUD regulations and requirements.

       •   Invoices, canceled checks, contracts, and general journal entries related to payments
           that the Authority made to eight outside law firms.

       •   The Authority’s record retention policy.

       •   The Authority’s Moving to Work agreement, annual plans, and annual reports.

We also held discussions with HUD program officials and Authority officials.

We relied in part on computer-processed data provided by the Authority. These data consisted of
a disbursements register listing payments related to outside legal services rendered during the
review period. Although we did not perform a detailed assessment of the reliability of the data,
we performed a minimal level of testing and found the data to be adequate for our purposes. The
testing entailed matching information from the Authority’s data to source documentation,
including invoices and canceled checks.

We used statistical sampling procedures to estimate the potentially unsupported payments related
to the universe of payments based on issues identified.

Our review covered transactions and events related to outside legal services rendered during the
period October 1, 2007, through September 30, 2012. This was a limited scope review.
Therefore, it was not performed in accordance with generally accepted government auditing
standards. For example, we did not perform an assessment of internal controls as they related to
the objective.

                                       BACKGROUND

The District of Columbia Housing Authority operates the city’s public housing. The Authority’s
main administrative office is located at 1133 North Capitol Street, NE, Washington, DC. The
Authority is governed by an 11-member board of commissioners. The board is responsible for
establishing goals, approving policy and budgets, and providing general direction to the
Authority’s executive director. The Authority manages approximately 8,700 public housing
units and 12,900 housing choice vouchers.

The Authority is a participant in HUD’s Moving to Work Demonstration program. In 1996,
Congress authorized the Moving to Work Demonstration program as a HUD demonstration
program. This program allowed certain public housing agencies to design and test ways to
promote self-sufficiency among assisted families, achieve programmatic efficiency, reduce costs,




                                                2
and increase housing choice for low-income households. Congress exempted participating
agencies from much of the Housing Act of 1937 and associated regulations as outlined in the
Moving to Work agreements. Participating agencies have considerable flexibility in determining
how to use Federal funds. The Authority was accepted into the program on July 25, 2003, when
HUD’s Assistant Secretary for Public and Indian Housing signed the Authority’s Moving to
Work agreement. In September 2010, the Authority entered into a new Moving to Work
agreement with HUD. The agreement expires in September 2018. The Authority’s fiscal year
begins on October 1.

                                         RESULTS OF REVIEW

The Authority did not always make payments for outside legal services in compliance with
applicable requirements. It did not always maintain documentation to support payments for legal
services. It also paid for services (1) performed by unapproved personnel, (2) performed beyond
the terms of the contract, and (3) that were block billed. These problems occurred because the
Authority lacked controls to ensure that it adequately verified invoices before payment and
followed Federal requirements and contract terms. As a result, the Authority made $1 million 1 in
unsupported payments for outside legal services.

The Authority Paid for Legal Services That Were Not Billed in Accordance With Federal
Requirements and Contract Terms

The Authority made $1 million in payments for legal services that were not billed in accordance
with Federal requirements and contract terms. It lacked documentation to support some
payments for outside legal services. It also paid for services (1) performed by unapproved
personnel, (2) performed beyond the terms of the contract, and (3) that were block billed.
Regulations at 2 CFR (Code of Federal Regulations) Part 225, appendix A, required that costs be
necessary, reasonable, and adequately documented. Also, Office of Management and Budget
(OMB) Circular A-133, subpart C.300(c), required the Authority to comply with laws,
regulations, and the provisions of contracts or grant agreements related to each of its Federal
programs. In addition, regulations at 24 CFR 85.36 required the Authority to ensure that
contractors performed in accordance with the terms, conditions, and specifications of their
contracts. The Authority lacked controls to ensure that it adequately verified invoices before
payment and followed Federal requirements and contract terms and as a result, made $1 million
in payments for legal services that were not billed in accordance with Federal requirements or
the contract. The following paragraphs provide details.




1
    Appendix C contains a summary of payments to law firms by deficiency identified.




                                                        3
The Authority Did Not Maintain Documentation To Support Payments for Outside Legal
Services

The Authority made 50 payments totaling $1.4 million that included $764,377 in payments for
outside legal services for which the Authority did not maintain documentation to support the
payments. Regulations at 2 CFR Part 225 required that costs be necessary, reasonable, and
adequately documented. Of the 50 payments reviewed, we could not determine the contract
numbers on the related invoices for nine payments totaling $324,897. The contract numbers
listed on an invoice identify the contract associated with the invoice. The Authority was unable
to provide contract numbers for these invoices. Since we could not identify which contracts
were related to the invoices, we were unable to determine whether the payments complied with
the provisions of the contracts. Appendix D provides a sample excerpt from an invoice that does
not contain a contract number. In addition, three payments totaling $382,127 included $286,555
for legal services, however, the related contract did not identify the personnel authorized to
provide services under the contract or their hourly billing rates. Also, 32 payments totaling more
than $1 million included $109,256 in reimbursable direct costs that were not supported with
documentation, such as receipts for reimbursable expenses or adequate descriptions of services.
Lastly, the Authority did not provide documentation to support six payments totaling $43,669.
As a result, the Authority made $764,377 in unsupported payments for outside legal services.

Outside Legal Services Were Not Always Performed by Approved Personnel

The Authority failed to comply with OMB regulations and its own contractual agreement when it
paid for services that were performed by personnel not listed in the contract. It made 22
payments totaling $406,975 showing that $113,436 in legal services were performed by
unapproved personnel. The personnel listed on the invoices were not listed in the contracts or
the law firm’s fee proposal submitted in response to the Authority’s request for proposal. The
Authority’s contracts stated that replacements for key personnel were subject to the approval of
the general counsel. However, the documentation provided by the Authority did not contain
evidence of such approvals. OMB Circular A-133, subpart C.300(c), required the Authority to
comply with contract provisions. Ensuring that personnel performing services were authorized
to do so is an important control to safeguard funds spent in relation to the contract. Therefore,
the Authority should have ensured that the services for which it paid were performed by
authorized personnel. As a result, the Authority made $113,436 in unsupported payments for
outside legal services.

The Authority Paid for Legal Services That Were Beyond the Terms of the Contract

The Authority failed to comply with OMB regulations and its own contractual agreement when it
paid for legal services that were beyond the terms of the contract. It made eight payments
totaling $112,039 for legal services that were performed outside the contract period. The
Authority lacked documentation to show that it extended the contract terms. OMB Circular A-
133, subpart C.300(c), required the Authority to comply with contract provisions. As a result,
the Authority made $112,039 in unsupported payments for outside legal services.




                                                4
The Authority Paid for Legal Services Based on Block Billing

The Authority made one payment totaling $13,645 that included $13,626 in block-billed entries.
Regulations at 2 CFR Part 225 required that costs be necessary, reasonable, and adequately
documented. Block-billed entries do not identify the nature of the work performed; therefore, it
was impossible to know how much time was spent on an activity to determine the necessity and
reasonableness of the work performed and the accuracy of the billing. As a result, the Authority
made $13,626 in unsupported payments for outside legal services. Appendix E provides a
sample excerpt from an invoice showing block billing.

Conclusion

The Authority did not always make payments for outside legal services in compliance with
applicable requirements. It lacked controls to ensure that it adequately verified invoices before
payment and followed Federal requirements and contract terms. As a result, it paid unsupported
costs totaling $1 million for outside legal services. However, based on our review, at least $2.6
million of the $6.1 million in payments for outside legal services could be unsupported. 2

                                          RECOMMENDATIONS

We recommend that the Director of HUD’s District of Columbia Office of Public Housing
require the Authority to

         1A.      Provide documentation to support the $999,977 3 in unsupported payments
                  identified by the review or reimburse its program from non-Federal funds for
                  costs that it cannot support.

         1B.      Develop and implement controls to ensure that invoices for legal services are
                  adequately verified and its payments for outside legal services are made in
                  accordance with the terms of the related contracts and other applicable
                  requirements.




2
    For the 866 payments totaling $6.1 million, the weighted average per legal payment was $3,427. Deducting for
    a statistical margin of error, we can say – with a one-sided confidence interval of 95 percent – that the average
    amount of unsupported funds paid per legal payment is $2,958 based on the 80 sample legal payments
    reviewed. Extrapolating the $2,958 average unsupported amount to the universe of 866 legal payments indicates
    that at least $2.6 million of the $6.1 million in payments for outside legal services could be unsupported.
3
    Payments for services totaling $3,501 had more than one deficiency. Although the sum of the amounts discussed
    in each section of the finding totals $1,003,478, to avoid double-counting, we counted each payment only one
    time in our calculation of unsupported payments.




                                                         5
APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                           Recommendation
                                                  Unsupported 1/
                               number

                                  1A                $999,977



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.




                                              6
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                          7
Comment 1



Comment 2

Comment 3




Comment 4



Comment 5




Comment 6




            8
Comment 5




Comment 5




Comment 7

Comment 5


Comment 8




Comment 9




            9
Comment 10




Comment 11




             10
                         OIG Evaluation of Auditee Comments


Comment 1   The Authority stated that its Moving to Work status had no impact and played no
            part in the audit review for the audit period. It further stated that even though its
            Moving to Work authority permitted it to re-regulate its existing regulations, it did
            not seek re-regulation of any of the audited items. We did not state that the
            Authority’s Moving to Work status had an impact in the audit review for the audit
            period. We noted the Authority’s participation in the Moving to Work program
            and provided relevant background information because the Authority was one of
            three public housing agencies participating in the program that we selected for
            review as part of our ongoing internal audit.

Comment 2   The Authority stated that the audit review process that required it to look back
            almost a decade was onerous and inconsistent with the Federal Government’s
            own rules and regulations regarding the retention and maintenance of
            documents. We notified the Authority in December 2012 that we had selected it
            to be a source of data for use in our internal audit of HUD’s oversight of public
            housing agencies’ expenditures for outside legal services and that our audit period
            was October 1, 2007, through September 30, 2012. The Authority did not
            indicate that it would have a problem providing data or information. In July 2013
            we decided to perform external reviews at three agencies participating in HUD’s
            Moving to Work program, including the Authority, because it had already
            provided information related to our internal audit, and we planned to include the
            results of those external reviews in our internal audit. In February 2014 we issued
            a subpoena for the Authority to provide information and documentation
            supporting specific payments it made for outside legal services. The subpoena
            requested support for only two payments from 2007. The Authority made those
            payments in December 2007. Of the 80 payments we reviewed, the Authority
            fully supported 18 of them. The 18 included 1 payment from 2007, 2 payments
            from 2008, and 6 payments from 2009. The remaining nine payments were made
            between 2010 and 2012. As stated in this memorandum, the Authority did not
            provide documentation to support 6 of the 80 payments reviewed totaling
            $43,669. Those six payments included two payments from 2008 and four
            payments from 2009.

Comment 3   The Authority stated that contrary to our finding, it had controls in place that
            ensured that legal services costs were necessary, reasonable, and adequately
            documented prior to approving legal services invoices for payment. However, as
            shown in this memorandum, the review disclosed that the Authority made
            approximately $1 million in unsupported payments because it did not adequately
            verify invoices before payment and did not follow Federal requirements and
            contract terms.

Comment 4   The Authority stated that it maintained documentation that supported payments of
            its outside legal services invoices. It provided an example that it provided most of



                                             11
            the contract numbers that were not listed on the invoices. It further stated that we
            made necessary adjustments for some but not all of its findings as it related to this
            issue. We made necessary adjustments to this memorandum based on additional
            documentation the Authority provided after the exit conference. As stated in this
            memorandum, the Authority was unable to provide contract numbers for nine
            payments totaling $324,897. As a result, we classified the related costs as
            unsupported.

Comment 5   The Authority stated that there were no applicable regulation requirements or cost
            principles that regulated the process through which personnel were approved. It
            also stated that there were no requirements in its contracts or solicitations that
            required pre-approval in writing for any changes, additions, replacement or
            substitution of staff. The Authority further stated that legal service contractors
            notified it by phone or in person to advise the General Counsel of any staffing
            changes and formally introduce the new personnel to the General Counsel. We
            agree that there were no regulation requirements or cost principles that regulated
            the process through which personnel were approved. We also agree that there
            were no requirements in the Authority’s contracts or solicitations that required
            pre-approval in writing for any changes, additions, replacement or substitution of
            staff. However, OMB Circular A-133, subpart C.300(c), required the Authority to
            comply with laws, regulations, and the provisions of contracts or grant
            agreements related to each of its Federal programs. The Authority’s contracts
            stated that replacements for key personnel were subject to the approval of the
            General Counsel. Regulations at 2 CFR Part 225 required that costs be
            adequately documented. Identifying the personnel who will perform services
            under a contract and ensuring that those authorized personnel were the ones that
            performed the services and that the rates billed for their services are accurate, are
            important controls to safeguard funds spent in relation to a contract. For 15 of the
            16 contracts that we reviewed related to the 80 payments, the contract
            documentation identified the personnel that were authorized to work under the
            contract and their billing rates. Likewise, decisions regarding replacement and
            additional personnel and their billing rates should be documented as well to
            maintain the safeguard of funds. The documentation provided by the Authority
            did not contain evidence of such approvals. As a result, we classified the related
            costs as unsupported. After a subsequent review of our workpapers, we
            determined that a small adjustment was needed to the amount of unsupported
            costs and we corrected the amount reported in the final memorandum to
            $113,436.

Comment 6   The Authority stated that reimbursable direct costs were adequately documented
            and approved for payment. It provided an example of how copying expenditures
            done in-house by the law firms and not by a third party did not require receipts.
            In addition, the Authority stated that the findings related to conferences and legal
            research should be deemed supported. The Authority also stated that legal
            research was a necessity and does not require pre-approval. We did not question
            in-house copying expenditures because they lacked a receipt. We questioned the




                                             12
            in-house copying expenditures because the invoices did not show the number of
            pages printed and the price the firm billed per printed page. We did not question
            any costs related to conferences. We only questioned legal research when it was
            provided by a third party as a reimbursable direct cost and the invoice lacked
            additional information or documentation to support the reimbursable expense.
            We agree that legal research performed under the Authority’s contracts did not
            require prior approval. As stated in this memorandum, the reimbursable costs
            were not supported with documentation, such as receipts or adequate description
            of services. Regulations at 2 CFR Part 225 required that costs be necessary,
            reasonable, and adequately documented. The Authority did not provide
            documentation to demonstrate that these costs were adequately supported.

Comment 7   The Authority stated it had not been disadvantaged or prejudiced by a change of
            personnel or by the General Counsel’s approval of replacement personnel. It
            further stated that the General Counsel’s verbal approval process was more
            efficient and ensured that the Authority maintained continuous and competent
            legal representation. However, regulations at 2 CFR Part 225 required that costs
            be adequately documented. Without adequate documentation, the necessity and
            reasonableness of the cost cannot be determined. Ensuring that personnel
            performing services were authorized to do so and that the rates billed for their
            services are accurate, are important controls to safeguard funds spent in relation to
            the contract.

Comment 8   The Authority stated a number of invoices identified in the memorandum as legal
            services performed by unapproved personnel were identified in error because we
            did not thoroughly review and compare all invoices, contracts and solicitation
            responses. In addition, the Authority stated that had we done a more thorough
            review of the invoices and contract, the legal services would have been supported
            because the work was conducted during the contract term. We disagree. We
            reviewed all invoices, contracts, and solicitation responses provided by the
            Authority during our review to identify the personnel that were approved to
            perform legal services. Regulations at 2 CFR Part 225 required that costs be
            necessary, reasonable, and adequately documented. Further, OMB Circular A-
            133, subpart C.300(c), required the Authority to comply with contract provisions.
            Ensuring that personnel performing services were authorized to do so is an
            important control to safeguard funds spent in relation to the contract. The
            contracts between the Authority and the law firms listed the names and rates of
            attorneys who were approved to perform legal services. Therefore, if an invoice
            contained a name that was not listed in the contract and there was no additional
            documentation showing approval, we classified the related cost as unsupported.
            The Authority did not identify the invoices and contracts that it claimed would
            have been supported because the work was conducted during the contract term.
            We did not question any payments as unsupported costs because the legal services
            were performed by unapproved personnel and they were performed outside the
            contract period.




                                             13
Comment 9     The Authority stated that it properly paid for legal services consistent with the
              terms of the contracts. As an example, the Authority stated that it determined that
              three invoices that we identified as being paid when the invoice was outside of the
              contract terms were incorrect and that a simple reading of the invoices and
              contract established that the expenditures were properly approved as the work was
              done during the contract term. We disagree with the Authority’s assertion.
              Although the Authority did not identify the three invoices to which it referenced
              in its comments, we closely reviewed all of the invoices, contracts, and related
              contract documentation the Authority provided and determined that for eight
              payments, it paid for legal services that were performed outside of the contract
              period. As part of the audit resolution process, the Authority can provide
              additional documentation to HUD and HUD will determine whether the
              documentation is adequate to satisfy recommendation 1A.

Comment 10 The Authority stated that there were no regulations, cost principles, HUD policies,
           HUD procedures, Authority contracts or solicitations, or procurement policies that
           prohibited block billing. It also stated that most invoice entries identified the
           nature of the work performed with detail and specificity. We agree that block
           billing was not expressly prohibited. However, as discussed in this memorandum,
           regulations at 2 CFR Part 225 required that costs be necessary, reasonable, and
           adequately documented. Based on a subsequent review of the invoices in
           question, we reduced the amount of unsupported costs related to block-billed
           entries to $13,626. The block-billed entries on the three related invoices did not
           identify the date the service was provided, the amount of time the service was
           provided, and a description of the actual legal service performed; therefore, it was
           impossible to know how much time was spent on an activity to determine the
           necessity and reasonableness of the work performed and the accuracy of the
           billing. We provided an example of block billing in Appendix E. As a result, we
           classified the related costs as unsupported.

Comment 11 The Authority stated that it approved and paid for its legal services expenditures
           in accordance with Federal requirements, regulations, HUD policies and
           procedures, and its contract terms. However, as discussed in this memorandum, it
           did not always make payments for outside legal services in compliance with
           Federal requirements and contract terms. It did not always maintain
           documentation to support payments for outside legal services. It also paid for
           services (1) performed by unapproved personnel, (2) performed beyond the terms
           of the contract, and (3) that were block billed.




                                              14
Appendix C

SUMMARY OF PAYMENTS TO LAW FIRMS BY DEFICIENCY
                 IDENTIFIED




                                                                                                                                                                                           performed beyond the terms of the
                                                                                                                                                                                           Number of payments with services



                                                                                                                                                                                                                               Number of payments with block
                            Number of payments reviewed 4




                                                                                                                               insufficient documentation (1)
                                                                                                                                 Number of payments with


                                                                                                                                                                Number of payments with
                                                                                                                                                                unapproved personnel (2)
                                                                                                 Unsupported amount
                                                              Total dollar amount




                                                                                                                                                                                                     contract (3)

                                                                                                                                                                                                                                         billing (4)
             Law firm




    Ballard Spahr,
                            33                               $655,697                             $472,841                           19                                7                               2                                0
    LLP
    Venable LLP             11                                    316,256                                   252,199                  10                                6                               0                                0
    Musolino &
                            13                                    310,318                                   104,885                     9                              0                               0                                0
    Dessel
    Douglas Boykin          16                                    232,571                                             60,886            8                              9                               3                                0
    Holland & Knight         1                                     66,266                                             62,364            1                              0                               1                                0
    Nixon Peabody,
                                4                                            41,428                                   33,051            1                              0                               2                                0
    LLP
    Hawkins
    Delafield &                 1                                            13,645                                   13,645            1                              0                               0                                1
    Wood, LLP
    Reno &
                                1                                                   1,189                               106             1                              0                               0                                0
    Cavanaugh
    Totals                  80                              $1,637,370                            $999,977                           50                             22                                 8                                1




4
    Some payments had more than one deficiency.




                                                                                            15
(1) Insufficient Documentation:

   1. An invoice was provided, but the invoice lacked a contract number;
   2. An invoice was provided, but the related contract did not identify the personnel
      authorized to perform services under the contract and their hourly billing rates;
   3. An invoice was provided, but there was no documentation to support reimbursable direct
      costs listed on the invoice; or
   4. No documentation was provided to support a payment.

(2) Unapproved Personnel

   Lack of supporting documentation to show that a law firm’s staff was authorized (approved)
   to perform legal services according to the contract

(3) Services Performed Beyond the Terms of the Contract:

   Charges for legal services that were performed outside the contract terms and lacked
   supporting documentation to show that the contract terms were extended

(4) Block Billing:

   A single-time charge for multiple activities performed




                                              16
Appendix D

    EXAMPLE OF AN INVOICE WITHOUT A CONTRACT
                     NUMBER




 The example above represented an invoice that did not have a contract number listed
                                  on the invoice.




                                          17
Appendix E

                EXAMPLE OF BLOCK BILLING




 The example above represented multiple activities billed as a single-time charge.




                                       18