oversight

Sunset Manor, Limited Partnership, Blackfoot, ID, Did Not Administer Its Section 8 Program in Accordance With HUD Rules and Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-06-23.

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

               Sunset Manor Apartments
                    Blackfoot, ID
   Project-Based Section 8 Housing Assistance Program




Office of Audit, Region 10    Audit Report Number: 2016-SE-1002
Seattle, WA                                        June 23, 2016
To:            Thomas W. Azumbrado
               Director, Multifamily Hub, San Francisco Regional Office, 9AHMLAP


               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, XAGA
Subject:       Sunset Manor, Limited Partnership, Blackfoot, ID, Did Not Administer Its
               Section 8 Program in Accordance With HUD Rules and Regulations


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 Sunset Manor Apartments.
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
913-551-5870.
                    Audit Report Number: 2016-SE-1002
                    Date: June 23, 2016

                    Sunset Manor, Limited Partnership, Blackfoot, ID, Did Not Administer Its
                    Section 8 Program in Accordance With HUD Rules and Regulations




Highlights

What We Audited and Why
We selected Sunset Manor Apartments for audit because of a complaint made to the U.S.
Department of Housing and Urban Development (HUD), Office of Inspector General’s hotline.
The complaint alleged that the project’s owner collected housing assistance payments for
unoccupied units, did not correctly calculate a tenant’s income, and made unsupported
disbursements. In addition, the complaint alleged that the owner violated identity-of-interest
rules. Our objective was to determine whether the complaint was valid and whether the project’s
owner made unauthorized distributions and repayment of advances; maintained complete,
accurate, and current books and records for the project; and participated in improper procurement
practices.

What We Found
With the exception of the identity-of-interest allegation, the complaint was valid. The project’s
owner collected housing assistance payments for unoccupied units, incorrectly calculated a
tenant’s income, made unsupported and ineligible disbursements, took unauthorized distributions
and repayment of owner advances while the project was in a non-surplus cash position, did not
maintain complete and accurate records, and did not always procure goods and services in
accordance with HUD rules and regulations.

What We Recommend
We recommend that HUD require the project’s owner to (1) reimburse HUD for $6,118 in
ineligible housing assistance payments and reimburse the project’s tenant $792 for overcharged
rent; (2) reimburse the project $106,030 for unauthorized distributions and repayment of loan
advances, insufficient funds fees, and work that was not necessary for the operation of the
project; and (3) provide support for unsupported disbursements and cost justifications for six
service contracts and reimburse the project’s operating or security deposit account, as applicable,
up to $338,751 for any unsupported or unreasonable amounts. Further, we recommend that the
owner obtain training on HUD’s Section 8 program rules and regulations.
Table of Contents
Background and Objective .......................................................................................................... 3

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

Finding 1: Sunset Manor Made Unauthorized Distributions and Repayment of Owner
Advances While the Project Was in a Non-Surplus-Cash Position.......................................... 4
Finding 2: Sunset Manor Did Not Always Solicit Written Cost Estimates ............................ 6
Finding 3: Sunset Manor Made Unsupported and Ineligible Disbursements ........................ 8
Finding 4: Sunset Manor Did Not Always Claim Housing Assistance Payments and
Calculate Tenant Income in Accordance With HUD’s Rules and Regulations .................... 10
Finding 5: Sunset Manor’s Books and Accounts Were Not Always Complete, Accurate,
and Current ................................................................................................................................. 13

Scope and Methodology .............................................................................................................. 16

Internal Controls ......................................................................................................................... 18

Appendixes................................................................................................................................... 20
           A. Schedule of Questioned Costs .................................................................................. 20
           B. Auditee Comments and OIG’s Evaluation ............................................................. 21




                                                                       2
Background and Objective
Sunset Manor Apartments (project) is a 48-unit apartment project for low-income elderly people
located at 106 Main Street, Blackfoot, ID. The project was operated under Section 202 of the
National Housing Act and regulated by the U.S. Department of Housing and Urban Development
(HUD) with respect to rental charges and operating methods. The legal operating entity is
Sunset Manor, Limited Partnership (Sunset Manor), and the general partner is Bingham County
Senior Citizens Center, Inc., a nonprofit corporation. Under section 202, non-profit entities are
not allowed to receive distributions of surplus cash from the property. The project was
refinanced twice under Section 207; on August 15, 2006, and again on April 1, 2014. Under this
section, the owner is allowed to receive distributions of surplus cash.

From January 2010 through September 2014, the project was managed by three different
management agents. It became self-managed in October 2014. The project is subject to a
Section 8 housing assistance payments agreement and a regulatory agreement with HUD. A
significant portion of its rental income, ranging from about $116,000 to almost $177,000 per
year from 2010 through 2014, was received from HUD through Section 8 housing assistance
payments regulated by the agreements. The project-based Section 8 housing assistance
payments program provides rental assistance to low-income individuals and families, enabling
them to live in affordable, decent, safe, and sanitary housing. HUD makes the assistance
payment to the owner of an assisted unit on behalf of an eligible family (including single
persons), defined as having income at or below 80 percent of the area median income adjusted
for family size.

On October 10, 2014, we received hotline complaint number 78944. The complaint alleged that
the project’s owner collected housing assistance payments for unoccupied units, did not correctly
calculate a tenant’s income, and made unsupported disbursements. In addition, the complaint
alleged that the project violated identity-of-interest rules.

Our objective was to determine whether the allegations in the hotline complaint were valid and
whether the owner made unauthorized distributions and repayment of advances; maintained
complete, accurate, and current books and records; and participated in improper procurement
practices.




                                                3
Results of Audit
Finding 1: Sunset Manor Made Unauthorized Distributions and
Repayment of Owner Advances While the Project Was in a Non-
Surplus-Cash Position
Sunset Manor made unauthorized distributions and repayment of owner advances while the
project was in a non-surplus-cash position. This condition occurred because Sunset Manor’s
management did not think it was making distributions, misinterpreted HUD’s advice, and did not
have written policies and procedures. As a result, the project had more than $100,000 less to
operate and pay for future repairs to keep it decent, safe, and in good repair.

Sunset Manor Made Unauthorized Distributions and Repayments of Owner Advances
Sunset Manor made three unauthorized distributions from April 2014 to January 2015.
According to Sunset Manor’s regulatory agreement with HUD, it may not take distributions from
project funds except from surplus cash calculated after the end of an annual or semiannual fiscal
period. However, Sunset Manor made distributions totaling $5,000 in 2012, $2,322 in 2014, and
$2,384 in 2015 (see table below). The project had a limited amount of surplus cash available in
2012 but none in the other years.

Sunset Manor made 11 unauthorized repayments of advances from August 2012 to November
2014. It initially borrowed $15,000 from the general partner because the project did not have
sufficient funds to pay for maintenance repairs in anticipation of an inspection by HUD’s Real
Estate Assessment Center. Also, when Sunset Manor refinanced the project’s mortgage, it did
not have $29,485 needed for the upfront refinance closing costs. The general partner loaned the
funds for that and $66,481 for other expenses to Sunset Manor.

Sunset Manor repaid the general partner $104,429 for these advances (see table below).
However, as of fiscal year ending 2011, Sunset Manor’s surplus cash was only $12,853, so any
distributions and repayment of advances in excess of this amount were ineligible.

                                                     Available   Unauthorized Unauthorized
     Year    Distributions       Repayments         surplus cash distributions repayments
        2012        $5,000           $20,750             $12,853                   $12,897
        2013                          44,163                                        44,163
        2014         2,322            39,516                            $2,322      39,516
        2015         2,384                                               2,384
   Total                                                                $4,706     $96,576




                                                4
Sunset Manor’s Management Did Not Think It Was Making Distributions, Misinterpreted
HUD’s Advice, and Did Not Have Written Policies and Procedures To Follow
The project’s management did not think it was making distributions when it made the
distributions. Management officials explained that they thought they were repaying advances the
owner had made to the project but they could not provide documentation to show that these
payments were repayments of advances.

Although HUD approved all of the Real Estate Assessment Center inspection repairs to be paid
from the reserve for replacement account, HUD’s project manager told Sunset Manor she wanted
the project to make only one withdrawal request for the release of the funds for those repairs.
Because small contractors in Blackfoot could not wait to be paid, the general partner loaned the
money to Sunset Manor to pay those contractors as the work was completed. The general
partner told us it made the advances with the stipulation that Sunset Manor would reimburse the
advances once it received the project’s reserve for replacement funds from HUD since HUD had
previously stated that it expected owners to assist financially with the project if needed and
would be reimbursed $100 or $200 per month from project funds as the project could afford to
pay. From that, the project’s management believed it was normal procedure on HUD projects
for owners to be reimbursed. It also did not realize that any repayment of advances would have
to be approved by HUD. Therefore, the general partner loaned the money to Sunset Manor to
pay vendors and contractors as work was completed and then paid itself a refund from the
reserve for replacement account once HUD released the funds.

In addition, management did not have written policies and procedures for making distributions or
repaying owner advances. However, management was in the process of developing these
policies and procedures with the assistance of a new board member who is a certified public
accountant.

The Project Had Less Money To Operate
The project had more than $100,000 less to operate and pay for future repairs to keep it decent,
safe, and in good repair. It also ended its last 3 fiscal years with a cash deficiency.

Recommendations
We recommend that the Director of HUD’s San Francisco Office of Multifamily Housing
Programs require Sunset Manor to

       1A.     Reimburse the project $101,282 from non-project funds ($4,706 for unauthorized
               distributions and $96,576 for unauthorized repayments of loan advances) and if
               necessary, make prior-period adjustments to the financial statements to disclose
               the information in accordance with generally accepted accounting principles.

       1B.     Develop and implement written policies and procedures to ensure that
               distributions are made only from surplus cash and that it obtains approval from
               HUD before making repayment of advances when the project is in a non-surplus-
               cash position.



                                                 5
Finding 2: Sunset Manor Did Not Always Solicit Written Cost
Estimates

Sunset Manor did not always solicit written cost estimates for contractors to which it paid more
than $10,000 in 1 calendar year. This condition occurred because Sunset Manor misunderstood
HUD’s requirements and wanted to continue its relationship with its existing vendors.
Additionally, Sunset Manor did not have adequate policies and procedures in place for procuring
contractors to whom it would pay more than $10,000 in a year. As a result, it could not ensure
that it obtained services at the lowest possible cost and that the $219,309 spent on the six
contractors was reasonable.

Sunset Manor Did Not Solicit Written Cost Estimates
Sunset Manor paid more than $10,000 each in 1 calendar year for elevator, management, housing
assistance specialist, and plumbing services. It also paid more than $10,000 each year for 2
consecutive years for book keeping services and for 3 consecutive years for general contracting
services. It did not solicit written cost estimates from at least three contractors or suppliers for
any of these services.

According to HUD Handbook 4381.5, when an owner or management agent contracts for goods
and services involving project income, it is expected to solicit written cost estimates from at least
three contractors or suppliers for any ongoing supply or service contract that is expected to
exceed $10,000 per year.


          Service provided         Paid in 2012 Paid in 2013 Paid in 2014               Total

    General contracting              $36,065          $20,722       $33,795              $90,582
    Elevator services                 14,527                                              14,527
    Management agent                                   22,887                             22,887
    Book keeping                                       21,115         24,141              45,256
    Management agent-housing
                                                                      25,587              25,587
    assistance specialist
    Plumbing                                                         20,470              20,470
    Totals                           $50,592          $64,724      $103,993            $219,309

Sunset Manor Misunderstood HUD’s Requirements, Wanted to Continue Its Relationship
With Its Existing Vendors, and Did Not Have An Adequate Process For Procurement
Sunset Manor’s understanding of the $10,000 procurement threshold was that it had to solicit
written cost estimates only if an individual job during the year was going to be more than
$10,000. It did not realize that it was required to obtain written cost estimates for multiple jobs
or services provided by one vendor that added up to more than $10,000 in 1 year.




                                                  6
Sunset Manor also wanted to continue its relationship with its existing vendors instead of
soliciting other price quotes. Three of the contractors that it improperly procured during our
audit period were either existing or previous contractors for another job at the project. Sunset
Manor improperly procured another two contractors because two existing project contractors
referred them. In addition, Sunset Manor’s policies and procedures did not include a process for
procuring contractors which it would pay more than $10,000 in one year.

Sunset Manor Could Not Ensure That It Obtained Services at the Lowest Possible Cost
Sunset Manor could not ensure that $219,309 spent on its contractors was reasonable and that it
obtained services at the lowest possible cost.

Recommendations
We recommend that the Director of HUD’s San Francisco Office of Multifamily Housing
Programs require Sunset Manor to

       2A.    Provide cost justifications for the six service contracts by obtaining written cost
              estimates from at least three contractors for each contract and reimburse the
              property’s operating account from non-project funds up to $219,309 for any
              amounts that are unreasonable.

       2B.    Obtain training to ensure that it properly implements HUD rules and regulations
              regarding procurement.

       2C.    Develop and implement policies and procedures for procuring contractors which
              it will pay more than $10,000 in a year.




                                                7
Finding 3: Sunset Manor Made Unsupported and Ineligible
Disbursements

Sunset Manor made unsupported and ineligible disbursements from project funds. This
condition occurred because Sunset Manor misunderstood HUD’s requirements regarding
disbursements and lacked oversight of the project’s management agent and book keeper. As a
result, Sunset Manor could not show that the $112,064 in unsupported disbursements was used
for the benefit of the project. In addition, $4,587 was unavailable for operations. Further, it
could not ensure $7,378 of security deposit funds was appropriately used.

Sunset Manor Paid Vendors for Invoices That Were Not Always Approved and Were Not
Always Specific in Describing the Charges
Of the 251 disbursements reviewed, 64 were not supported. The project paid invoices that were
not always approved and not always specific in describing the charges. For example, not all
maintenance invoices specified the work performed, the number of hours spent, or the hourly
rate. In addition, not all invoices had associated work orders or documented that services were
complete.

HUD Handbook 4370.2, Financial Operations and Accounting, paragraph 2-6(E), and Sunset
Manor’s policies and procedures contain the requirements for making disbursements.

Sunset Manor Paid Vendors for Work That Was Not Necessary for the Operation or
Maintenance of the Project
Of the 251 disbursements reviewed, 13 were ineligible since they were not necessary for the
operation or maintenance of the project. Examples include overpayments, groceries, personal
items, tools purchased by a contractor, and maintenance services performed in a previous
management agent’s residence.

                                                           Number of
                    Unnecessary costs                                            Value
                                                           occurrences
   Overpayments (excess of invoice, excess of Internal
   Revenue Service mileage rate, duplicate payment,            9                  $2,546
   and services already included in a contract)
   Groceries                                                   1                     113
   Personal items                                              1                      30
   Tools purchased by a contractor                             1                   1,733
   Maintenance performed at previous management
                                                               1                     165
   agent’s residence
   Total                                                       13                 $4,587




                                                8
Sunset Manor Could Not Demonstrate That Some Disbursements Made From Its Security
Deposit Account Were Appropriate
Project management could not demonstrate that 18 of the 21 disbursements made to the project’s
operating account from the security deposit account totaling $7,270 were appropriate.
Management claimed that these disbursements were for back rent owed to the project or for
cleaning fees and repairs for damages caused by the tenants. However, management could not
provide documentation to support this claim. In addition, Sunset Manor made a payment of
$108 to the project’s operating account from the security deposit account, even though it had
already refunded that amount from the security deposit account to the tenant.

Sunset Manor Misunderstood HUD’s Requirements Regarding Disbursements and Lacked
Oversight of the Project’s Management Agent and Book Keeper
The project’s management incorrectly thought the management agent was allowed to invoice the
project for repairs and materials procured without having to provide underlying receipts or other
supporting documentation for invoices because the management agent was considered an outside
contractor. Additionally, oversight was lacking as Sunset Manor relied on its management agent
and book keeper, who did not always follow HUD rules and Sunset Manor’s policies and
procedures.

As a result, Sunset Manor could not show that $112,064 in disbursements was used for the
benefit of the project. In addition, $4,587 was unavailable for operations. Further, it could not
ensure that $7,378 in security deposit funds was appropriately used.

Recommendations
We recommend that the Director of HUD’s San Francisco Office of Multifamily Housing
Programs require Sunset Manor to

       3A.     Provide supporting documents for the $112,064 in unsupported disbursements and
               repay the project operating account from non-project funds for any amounts that
               remain unsupported.

       3B.     Repay the project $4,587 from non-project funds for the costs that were not
               necessary for the operation or maintenance of the project.

       3C.     Provide support showing that the project was entitled to the $7,378 from the
               security deposit account or reimburse the security deposit account from the
               operating account for any amounts to which the project was not entitled.

       3D.     Obtain training to ensure that it properly implements HUD rules and regulations
               regarding disbursements from project funds.

       3E.     Develop and implement controls to ensure that it follows HUD rules and its own
               policies and procedures for paying invoices.




                                                 9
Finding 4: Sunset Manor Did Not Always Claim Housing
Assistance Payments and Calculate Tenant Income in Accordance
With HUD’s Rules and Regulations

Sunset Manor did not always claim housing assistance payments and calculate tenant income in
accordance with HUD’s rules and regulations. It claimed housing assistance payments for
tenants that had moved out and did not fully include one tenant’s medical expenses in her income
calculation. This condition occurred because Sunset Manor lacked knowledge of HUD rules and
regulations and did not monitor the housing assistance payment process. As a result, it received
$6,118 in ineligible housing assistance payments for vacant units and overcharged a tenant $792.

Sunset Manor Claimed Housing Assistance Payments for 13 Tenants After They Had
Moved Out of the Project
We reviewed the project’s files and records for the 36 tenants who moved out during our audit
period. Sunset Manor claimed housing assistance payments for 13 of the 36 tenants after they
moved out of the project. The move-out dates reported to HUD did not match the dates and
circumstances documented in the tenants’ files and other records. Documents that conflicted or
were inconsistent with the reported move-out dates included the move-out inspection checklist,
lease termination notice, security deposit letter, obituary article, rent roll, and transaction entries
in the project’s books.

The housing assistance payments contract states that if a family vacates its unit, owners are not
entitled to housing assistance payments unless the owner immediately notifies HUD of the
vacancy or prospective vacancy and the reason for the vacancy. According to HUD, Sunset
Manor did not notify HUD or ask for this entitlement during 2012-2014. In addition, HUD
Handbook 4350.3, REV-1, CHG-3, section 9-12, states that owners are entitled to an assistance
payment only for the actual number of days during the month in which the tenant occupied the
unit.

Below are three examples of the questionable move-out dates that the project used to claim
housing assistance payments.

Sunset Manor reported one tenant’s move-out date as August 14, 2014, on the form HUD-52670
(Housing Owner’s Certification and Application for Housing Assistance Payments) it submitted
to HUD. However, the tenant’s move-out date should have been June 9, 2014. The project’s
books showed that the last rent received from this tenant was on May 8, 2014, and an obituary
article showed that the tenant passed away on May 26, 2014, at the project. Since HUD allows
owners to prorate and receive housing assistance payments for 14 days after a tenant’s death, the
latest move-out date reported for a housing assistance payment claim should have been June 9,
2014. Sunset Manor claimed ineligible housing assistance payments in the amount of $833 for
this tenant (from June 10 through August 14, 2014).

Sunset Manor reported another tenant’s move-out date to HUD as August 30, 2014. However,
the tenant’s move-out date should have been June 15, 2014. The project’s books showed that the


                                                    10
last rent received from this tenant was on May 8, 2014. Management told us it held the unit for
30 days after discovering that the tenant had abandoned the unit. Its discovery of the
abandonment was not documented in the file, and there was no correspondence in the file after
April 2014. Although move-out documentation was required to be signed, dated, and placed into
the tenant file, we had to request a copy of the move-out checklist and the move-out HUD-
50059A (Owner’s Certification of Compliance with HUD’s Tenant Eligibility and Rent
Procedures). The checklist had an incomplete date on the top and a signed date of July 15, 2015,
about a year after the reported move-out date. The project’s management said it mistakenly
dated the checklist July 15, 2015, rather than July 15, 2014. Since Sunset Manor held the unit
for 30 days after discovering it was abandoned and the move-out inspection checklist was dated
July 15, the unit was vacated no later than June 15, 2014. Therefore, it claimed ineligible
housing assistance payments in the amount of $933 for this tenant (from June 16 through August
30, 2014).

Sunset Manor reported a third tenant’s move-out date on the HUD 52670 as December 5, 2013.
However, the tenant’s move-out date should have been November 1, 2013. Sunset Manor paid a
move-out cleaning invoice for this unit, dated November 19, 2013. Additionally, the last rent for
this tenant was recorded on October 3, 2013, the tenant’s written move-out notification stated
that the intended move-out date was November 30, 2013, and the move-out inspection checklist
noted that the tenant moved out 30 days before the intent to vacate. Therefore, Sunset Manor
claimed ineligible housing assistance payments in the amount of $400 for this tenant (from
November 2 through December 5, 2013).

The ineligible housing assistance payments received for the 13 tenants are shown in the table
below.

                       Ineligible
    Unit number         housing
                      assistance
         106            $ 380
         111                 84
         113                221
         115                 32
         201                288
         203                361
         206                833
         208                 13
         302                198
         306                933
         308                400
         310                656
         316              1,719
        Total         $ 6,118




                                                11
Sunset Manor Miscalculated One Tenant’s Income
Sunset Manor miscalculated one of the nine tenant income calculations reviewed. It incorrectly
calculated the tenant’s income by not including the tenant’s full year’s medical expenses. HUD
Handbook 4350.3, paragraph 5-10(D), Medical Expense Deduction, states that if the family is
eligible for a medical expense deduction, owners must include the unreimbursed medical
expenses and that medical expenses include all expenses the family anticipates to incur during
the 12 months following certification or recertification that are not reimbursed by an outside
source, such as insurance. In this case, Sunset Manor did not multiply the monthly medical
insurance policy payment by 12 months when it processed the tenant’s recertification effective
February 1, 2013.

Sunset Manor Lacked Knowledge of HUD Rules and Regulations and Did Not Monitor Its
Housing Assistance Payment Process
Sunset Manor thought it could collect housing assistance payments for 30 days on units from
which the tenant had moved but for which the tenant had not provided a 30-day written notice of
intent to vacate. Additionally, it did not have a process for monitoring its housing assistance
payment process and did not have written policies and procedures to follow when processing
move-outs. The incorrect calculation of tenant income was due to human error and was not a
systemic issue. As a result, Sunset Manor received $6,118 in ineligible housing assistance
payments for vacant units and overcharged a tenant $792.

Recommendations
We recommend that the Director of HUD’s San Francisco Office of Multifamily Housing
Programs require Sunset Manor to

       4A.    Reimburse HUD $6,118 for ineligible housing assistance payments.

       4B.    Reimburse the overcharged tenant $792.

       4C.    Obtain training on HUD rules and regulations regarding Section 8 housing
              assistance payments.

       4D.    Develop and implement policies and procedures for monitoring its housing
              assistance payment claims and processing move-outs.




                                               12
Finding 5: Sunset Manor’s Books and Accounts Were Not Always
Complete, Accurate, and Current

Sunset Manor’s books and accounts were not always complete, accurate, and current.
Specifically, its waiting list was not complete, its accounting system incorrectly identified checks
written to the general partner as being deleted, voided, or missing, it contained incorrect
information for other checks, and its bank reconciliations were not always accurate. This
condition occurred because Sunset Manor did not have adequate written policies and procedures
for its management agents to follow. As a result, it could not ensure that the tenants were
properly and fairly housed, and did not always know the financial position of its operating
account.

Sunset Manor’s Waiting List Was Not Complete
Sunset Manor had no waiting list until it started keeping a manual list in September 2014.
However, even that list did not always contain the date and time of selection to confirm that the
tenants were correctly selected and housed at the appropriate time. Sunset Manor did not record
the date and time for 8 of the 10 tenants who were selected from the waiting list and housed
during our audit period. HUD Handbook 4350.3, REV-1, paragraph 4-18(D), requires that the
manual waiting list provide an easily viewable record of the date and time of application and date
and time of selection from the waiting list.

Sunset Manor’s Accounting System Incorrectly Identified Five Checks Written to the
General Partner as Voided, Deleted, or Missing
We found five checks totaling $37,250 that were written to the general partner and cleared the
bank but were voided, deleted or missing from the accounting system. The following schedule
shows the details for all five checks.

                                                                Date recorded as
    Check #       Amount           Date           Date         Voided     Deleted       Listed as
                                  issued        cleared                                 missing
       7670     $ 1,500.00      11/17/2011    11/22/2011     12/5/2011
       7803     $ 1,000.00      7/19/2012      7/23/2012     11/22/2012 9/11/2013
       7827     $ 18,250.00     8/31/2012       9/4/2012                                   Yes
       7898     $ 1,500.00      12/13/2012    12/14/2012                    9/4/2012       Yes
       7930     $ 15,000.00      2/4/2013       2/5/2013      9/4/2014      9/4/2014

Sunset Manor’s Accounting Records Contained Incorrect Information
The accounting system contained incorrect information for 20 checks. The following are
examples of checks cashed by the bank that did not match the check number, vendor, or amount
in the accounting system:

       Check 7673 cleared the bank, payable to cash for $172.04, but in the accounting system
        check register, it was recorded as payable to the general partner for $1,500.



                                                 13
      Check 7919 cleared the bank on January 14, 2013, payable to Idaho Power for $2,029,
       but in the accounting system, it was recorded as a missing check. Check 7917 was
       recorded in the system as the check issued to Idaho Power instead. Check 7917 had not
       cleared the bank as of December 22, 2014.

      Check 7920 cleared the bank on January 4, 2013, payable to Melinda’s Management
       Company, LLC, for $1,567, but in the accounting system check register, it was recorded
       as payable to Shirley & Company for $675. The check register showed check 7918,
       payable to Melinda’s Management for $1,567. However, this check had not cleared the
       bank as of December 22, 2014. The accounting system showed check 7922 as missing.
       However, it cleared the bank on January 10, 2013, payable to Shirley & Company for
       $675.

Sunset Manor’s Bank Reconciliations Were Not Always Accurate
Of the 60 months’ bank reconciliations reviewed, 11 months included discrepancies beginning
October 2012. In performing reconciliations, Sunset Manor’s accounting software uses the
ending balance from the previous month’s reconciliation as the beginning balance for the current
month’s reconciliation. This is similar to what is done on the bank statement where the bank
uses the ending balance from the last statement as the beginning balance on the current
statement. Therefore, the beginning balance from Sunset Manor’s reconciliation should match
the ending balance from its previous reconciliation as well as the beginning balance used by the
bank. However, in 10 of the 11 reconciliations, the beginning balance in Sunset Manor’s
reconciliation was not the same as the beginning balance shown in the bank statements. In 8 of
the 11 reconciliations, the beginning balance in the reconciliation was not the same as the prior
month’s ending balance.

Sunset Manor Did Not Have Adequate Written Policies and Procedures for the
Management Agents To Follow
The project was managed by three different property management agents from fiscal years 2010
to 2014. Since there were no policies and procedures, there was no consistency as to how each
management agent maintained the project’s records. This inconsistency created the many
financial record discrepancies noted. The discrepancies generally started at the end of fiscal year
2011. The general partner was unaware of the inaccuracy of the accounting activities until we
brought the matter to its attention. The general partner discovered during our audit that the
previous property management agents and their contracted employees were not skilled in
managing HUD properties or operating the project’s QuickBooks accounting system. Also
during our audit, the general partner reviewed the related HUD handbooks and worked on
creating and implementing written policies and procedures.

Due to the poor record keeping, Sunset Manor could not ensure that tenants were properly and
fairly housed, did not always know the financial position of its operating account to effectively
manage the project, and incurred $161 in insufficient funds fees.




                                                 14
Recommendations
We recommend that the Director of HUD’s San Francisco Office of Multifamily Housing
Programs require Sunset Manor to

      5A.    Establish and implement written policies and procedures to record the date and
             time of tenant selection from its waiting list.

      5B.    Establish and implement written policies and procedures to ensure check
             numbers, amounts, and payees are accurately recorded in its accounting system.

      5C.    Reimburse its operating account $161 from non-project funds for ineligible
             insufficient funds fees.

      5D.    Establish and implement written policies and procedures to ensure that bank
             reconciliations are accurately performed.

      5E.    Reperform its operating account bank reconciliations, beginning with the October
             2012 statements, to reflect the accurate balance in its accounting system.




                                              15
Scope and Methodology
We performed our onsite audit work between January 26 and June 26, 2015, at Bingham County
Senior Center located at 20 East Pacific Street, Blackfoot, ID. Our audit period originally
covered January 2012 through December 2014 but was expanded to include January 2010
through January 2015.

To accomplish our objective we performed the following steps:

      Reviewed the complaint;
      Reviewed applicable laws and HUD regulations and handbooks;
      Reviewed the Sunset Manor Apartments regulatory agreement and housing assistance
       payments contract;
      Interviewed HUD, project-based contract administrator, and project staff members; and
      Reviewed the project’s policies and procedures, books and records, and financial
       statements.

Sample Selection
To determine whether the complaint allegations were valid, we sampled various areas of the
project’s books as described below. Since we were looking for specific examples of
noncompliance, taking a statistical sample with results that would be representative and
projectable would not have been cost effective. Also, given the number of records to review in
the various areas, a 100 percent review was also not always cost effective.

Distributions and Advances
We selected and reviewed 100 percent of the checks totaling $120,635, written by Sunset Manor
to the Bingham Senior Citizen’s Center from January 2012 through January 2015, to determine
whether distributions and repayment of advances were appropriate.

Procurement
We selected all vendors that received more than $10,000 in any one year from 2012 through
2014 to determine whether the project followed HUD’s procurement requirements. We focused
on these vendors since the project is required to solicit written cost estimates for any contract or
service anticipated to exceed $10,000 in a year. These services totaled $276,235.

Disbursements
For 2012 through 2014, we selected 100 percent of the payments to the four contractors that
received the highest dollar amounts during our audit period totaling $222,542. We focused on
the contractors that received the largest payments so we could evaluate a large portion of the
funds disbursed to vendors by reviewing only a few vendors. In addition, for 2012, we reviewed
all other checks that cleared the project’s operating bank account in the amount of $252,504 to
ensure that they were supported.



                                                  16
Security Deposits
For the period January 2012 through December 2014, we selected and reviewed all checks from
the project’s security deposit account totaling $5,460 that were issued to anyone other than
tenants. For the same period, we reviewed all transfer and withdrawal transactions in the
project’s security deposit account totaling $23,977.

Housing Assistance Payments
We reviewed the housing assistance payments for all 36 of the units from which tenants moved
from January 2012 through December 2014 to determine whether claims were made on vacant
units. We reviewed the income calculations for all nine of the tenants mentioned in the
complaint.

Waiting List
We selected and reviewed 100 percent of the tenants who were selected and housed from the
waiting list during our audit period to determine if they were correctly selected and housed in the
proper order.

Bank Reconciliations
We selected and reviewed 100 percent of the reconciliations performed from 2010 through 2014.

We did not rely on computer-processed data as the basis for our conclusions. Instead, we relied
on source documentation to support our conclusions.

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 objective.




                                                 17
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

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

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

Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

       Controls to ensure that distributions and repayment of advances to owners are authorized
        and appropriate.
       Controls to ensure that contracts for goods and services are appropriately procured and
        documented.
       Controls to ensure that disbursements are appropriate and supported.
       Controls to ensure that security deposits are appropriately used.
       Controls to ensure that housing assistance payment calculations are correct and claimed
        appropriately.
       Controls to ensure that accounting records are current and accurate.

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:

   Sunset Manor did not have a written policy in place to ensure that it obtained approval from
    HUD for repayment of owner advances and ensure that distributions and repayment of owner
    advances were made only when the project was in a surplus-cash position (finding 1).


                                                 18
   Sunset Manor did not have adequate written policies in place for procuring contractors which
    it would pay more than $10,000 in a year (finding 2).
   Sunset Manor did not have controls in place to ensure that its management agents followed
    HUD rules and its own policies and procedures for paying invoices (finding 3).
   Sunset Manor did not have written policies and procedures for making housing assistance
    payment requests or for processing move-outs (finding 4).
   Sunset Manor did not have adequate written policies and procedures to ensure accuracy in
    maintaining the project’s books and records (finding 5).




                                                19
Appendixes

Appendix A


                          Schedule of Questioned Costs
                  Recommendation
                                   Ineligible 1/ Unsupported 2/
                      number
                          1A             $101,282
                          2A                                 $219,309
                          3A                                  112,064
                          3B                 4,587
                          3C                                     7,378
                          4A                 6,118
                          4B                   792
                          5C                   161
                        Totals           $112,940            $338,751


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                              20
Appendix B
             Auditee Comments and OIG’s Evaluation




              Auditee Comments


Ref to OIG
Evaluation




              May 13, 2016
              Finding 1

Comment 1     The Bingham County Senior Citizen Center or its Board Members
              have never received any distribution or gained monetarily in any way
              from owning Sunset Manor. All money paid back to the Senior
              Center was for loans given to the project to pay for operating
              expenses and necessary repairs.
Comment 2     Since October of 2014 when the project became owner managed the
              project has operated in a surplus cash position and has completed any
              and all repairs needed as well as received new flooring and paint
              throughout the building in the common areas.

Comment 3     To suggest the Senior Center move money over to the project is
              unreasonable and will only result in a much higher surplus cash
              position. According to the current regulatory agreement the owner is
              entitled to receive a distribution of all surplus cash after the end of a
              semiannual or annual fiscal period.
              Finding 2
Comment 4     When the general contractors and plumbing services were hired it
              was not expected by the management agent at the time that they
              would be paid over $10,000.00. Everything reimbursed from the
              R4R account was approved by HUD and estimates were obtained to
              HUD’s satisfaction or money would not have been released.




                                   21
            I don’t believe it would be possible to get 3 contractors to bid jobs that
            were completed years ago. We live in a very small rural community
            and have a difficult time getting three bids on anything we bid out.

Comment 5   The Management assistant specialist was hired by CNU as well as the
            bookkeeper, I do not know if CNU bid those out. The amount listed
Comment 6   included mileage as that was what CNU agreed upon with them. The
            Management agent was paid a higher amount in 2013 due to the
Comment 7
            REAC score and the need for numerous repairs.
            Again, I would like to reiterate that moving money to the project for
Comment 3   these costs will serve no purpose other than to result is a big surplus of
            cash for the project which will then be eligible to be utilized for
            disbursement to the owner.
            Finding 3
            The owner realizes that the person(s) hired to keep the books during
Comment 8   this time frame was not qualified. This situation has been rectified
            since October of 2014. Internal controls have been established to
            assure bank reconciliations are accurately performed. The security
            deposit account has been reconciled and all current tenant deposits are
            recorded correctly.
            When the Board of Directors decided to become Owner Managed they
            sent the Director of the Senior Center to training in Denver. The
            Director passed the test with a score in the 90’s. The training was
            provided by Quadel and she received her certificate as AHM (Assisted
            Housing Manager). The Board then approved earlier this year for
            both the Director and the office manager at Sunset to attend training in
            Boise from Zeffert and Associates. Both of these trainings are
            national accredited for HUD training.
            The owner’s incorrectly assumed that when HUD approved a
            management agent that they were qualified. They never were told by
            HUD that their agent should receive national accreditation as an
            Assisted Housing Manager
            Finding 4
            After our exit meeting we do agree that we received an over payment
            from HUD. We are currently working to correct those overpayments
            on our upcoming HAP payments.
            The overcharged tenant was a result of a previous management agent
            who did the recertification incorrectly. The tenant has since been
             OIG Evaluation
            credited           of over
                     the $792.00  Auditee  Comments
                                       charge.



                                  22
            Finding 5
            The waiting list was not always kept up during the time frame covered
            by the review. The person responsible for the wait list did not record all
            information because everyone who applied was moved in and there was
            no reason to put them on a wait list. This situation has been corrected
            since October of 2014.

Comment 9   My auditors (Deaton and Company) have assured me that the numbers
            are correct after adjusting journal entries were made. If you look at the
            ASK account Tiffany created you will see over 106,000.00 that was
            money owed to the senior center that was written off.




                                 23
                         OIG Evaluation of Auditee Comments


Comment 1   Sunset Manor stated that it has not received any distributions or gained monetarily
            in any way from owning Sunset Manor. The 2014 Regulatory Agreement defines
            distribution as, “…any disbursal, conveyance or transfer of any portion of the
            Mortgaged Property, including the segregation of cash or assets for subsequent
            withdrawal as Surplus Cash, other than in payment of Reasonable Operating
            Expenses, or any other disbursement, conveyance, or transfer provided for in this
            Agreement.” The report identified funds as distributions since neither the project
            nor the Senior Citizen’s Center could provide documentation that these were
            reimbursements of loans to the project for project expenses.
Comment 2   Sunset Manor stated that it has operated in a surplus cash position since October
            2014 and has completed any and all repairs needed as well as received new
            flooring and paint throughout the building. However, according to the financial
            records, surplus cash was not available at fiscal year ends 2012-2014. We did not
            verify whether Sunset Manor completed the repairs, installed new flooring, or
            painted the building. This was outside the scope of our audit and was not the
            reason we questioned the distributions and advances. Therefore, Sunset Manor
            must reimburse the project for the unauthorized distributions and unauthorized
            repayment of advances.
Comment 3   Sunset Manor stated that moving money over to the project is unreasonable and
            will only result in a much higher surplus cash position. In addition, it stated that
            according to the current regulatory agreement the owner is entitled to receive a
            distribution of all surplus cash after the end of a semiannual or annual fiscal
            period.
            While moving money back to the project might result in higher surplus cash at the
            end of the year, moving the money is not unreasonable. Sunset Manor may only
            take a distribution at the end of an annual or semiannual period and only after
            surplus cash has been calculated. Until that time, the funds must be held in the
            project’s operating account, used to operate the project, and not be segregated for
            future withdrawal as surplus cash. This is the only way to be certain that surplus
            cash is actually available for distribution each year.
Comment 4   Sunset Manor said that it did not expect that it would pay its vendors more than
            $10,000 when it procured the services. However, Sunset Manor did not provide
            written cost estimates for the services requested to show that it had an idea how
            much it expected the services to cost.
Comment 5   Sunset Manor stated that its management agent, CNU, hired the management
            assistant specialist and book keeper and Sunset Manor did not know if CNU bid
            those out. According to HUD Handbook 4381.5, 1.6.a, “…the property owner is
            ultimately responsible for a project’s compliance with HUD regulations and
            requirements…” and “HUD expects that owners will oversee the performance of


                                              24
            their management agents and take steps to correct deficiencies that occur.”
            Therefore, Sunset Manor is responsible for the actions of its management agent.
Comment 6   Sunset Manor stated that the amount listed included mileage since that was what
            CNU agreed to. The mileage amount used was supposed to have been the IRS
            mileage rate in effect at the time. However, we noted that sometimes, the rate
            used was more than the IRS rate.
Comment 7   Sunset Manor stated that the management agent was paid a higher amount in 2013
            due to the REAC score and the need for numerous repairs. However, Sunset
            Manor should have estimated the cost for the management agent services and
            should have obtained at least three written cost estimates for the services
            estimated to be more than $10,000 for the year.
Comment 8   Sunset Manor stated that it has established internal controls to ensure bank
            reconciliations are accurately performed. It also stated that it is currently working
            to correct overpayments from HUD, credited the tenant for the overcharge,
            reconciled its security deposit account, recorded all current tenant deposits
            correctly, is now keeping a waiting list, and that it sent the director to training.
            Although we did not verify whether Sunset Manor implemented the controls and
            completed all other actions, if done correctly, these controls and actions should
            help correct the problems found. HUD will need to follow up during resolution to
            confirm these are completed.
Comment 9   Sunset Manor stated that its auditors have provided assurance that the numbers
            discussed in the finding were corrected after adjusting journal entries were made.
            However, during our audit, we did not receive documentation supporting this
            assertion. In addition, when we questioned the ASK account, Sunset Manor and
            its independent auditors told us that they were not aware of the ASK account or
            what it represented because this account was not reflected in the auditor’s trial
            balance before making adjusting journal entries. If this account was a write-off of
            more than $106,000 of loans that the senior center made to the project, then the
            entire amount paid to the senior center as reimbursement of those loans would
            have been distributions made while the project was in a non-surplus cash position.




                                              25