oversight

The Owner of Schwenckfeld Manor, Lansdale, PA, Did Not Always Manage Its HUD-Insured Property in Accordance With Applicable HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2017-09-25.

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

    Schwenckfeld Manor, Lansdale, PA
  HUD-Insured Section 202 Multifamily Rental Housing
       for Seniors and Persons With Disabilities




Office of Audit, Region 3    Audit Report Number: 2017-PH-1006
Philadelphia, PA                             September 25, 2017
To:            Brenda J. Brown, Director, Asset Management Division, Baltimore Asset
               Management Division, Baltimore Satellite Office, Multifamily Northeast Region,
               3BHMLAP
               Craig T. Clemmensen, Director, Departmental Enforcement Center, CACB
               //signed//
From:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA
Subject:       The Owner of Schwenckfeld Manor, Lansdale, PA, Did Not Always Manage Its
               HUD-Insured Property in Accordance With Applicable HUD Requirements




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of the HUD-insured Schwenckfeld Manor
multifamily project.
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 website. 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
215-430-6734.
                    Audit Report Number: 2017-PH-1006
                    Date: September 25, 2017

                    The Owner of Schwenckfeld Manor, Lansdale, PA, Did Not Always Manage
                    Its HUD-Insured Property in Accordance With Applicable HUD
                    Requirements



Highlights

What We Audited and Why
We audited Schwenckfeld Manor because it was a high-risk multifamily project on our
multifamily risk assessment for projects within our region and we had never audited it. Our
audit objectives were to determine whether the project owner (1) disbursed project funds for
costs that were reasonable, necessary, and supported for the operation and maintenance of the
project; and (2) properly disclosed identity-of-interest relationships.

What We Found
The owner of Schwenckfeld Manor (1) may not have disbursed project funds for costs that were
supported as reasonable and necessary for the operation and maintenance of the project, and (2)
did not disclose its identity-of-interest relationships to the U.S. Department of Housing and
Urban Development (HUD). Specifically, the owner (1) used project funds to pay up to nearly
$2.1 million in costs that may have been for its parent company’s benefit and the benefit of five
other non-HUD housing entities the parent company owned, and (2) did not disclose to HUD its
related parties as identity-of-interest entities on its management certification and paid nearly
$403,000 in management fees to its parent company instead of the approved management agent
for the project.

What We Recommend
We recommend that HUD require the owner to (1) provide documentation to show that payroll
and other direct costs totaling nearly $2.1 million were reasonable and necessary expenses for
the operation of the project or repay the project from nonproject funds for any amount that it
cannot support; (2) develop and implement controls to ensure that the project complies with the
regulatory agreement and applicable HUD requirements; (3) submit a project owner’s and
management agent’s certification for identity-of-interest agents and other required
documentation for review and approval; and (4) request retroactive approval of the fees paid to
the identity-of-interest entity totaling nearly $403,000 and if HUD does not approve the
management agent retroactively, repay that amount or the amount not approved by HUD.

We also recommend that the Director of HUD’s Departmental Enforcement Center pursue civil
money penalties and administrative sanctions, as appropriate, against the owner and its parent
company and their principals for their part in the violations cited in this report.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................5
         Finding 1: The Owner Could Not Support That It Always Used Project Funds for
         Costs That Were Reasonable and Necessary for the Operation of the Project .......... 5

         Finding 2: The Owner Did Not Disclose Identity-of-Interest Relationships ............ 10

Scope and Methodology .........................................................................................13

Internal Controls ....................................................................................................15

Appendixes ..............................................................................................................16
         A. Schedule of Questioned Costs .................................................................................. 16

         B. Auditee Comments and OIG’s Evaluation ............................................................. 17




                                                             2
Background and Objectives
Schwenckfeld Manor opened in 1974 and receives project-based Section 8 assistance for 225
housing units available to seniors and persons with disabilities. The project is owned by
Advanced Living, Inc. (owner). Advanced Living, Inc., was incorporated under the nonprofit
corporation law of the Commonwealth of Pennsylvania on May 10, 1962. The project is owner
managed because Advanced Living, Inc., is also the management agent for the project.
Advanced Living Management and Development, Inc. (parent), is the parent company of the
owner, five additional affordable housing entities, 1 a tenant services company and a building
services company. The parent company was incorporated in 2007 and has been the controlling
entity of the project’s ownership entity since 2008. Schwenckfeld Manor is located at 1292
Allentown Road, Lansdale, PA. The offices of the parent company and one of its other housing
projects are located on the same property as Schwenckfeld Manor. Below is the organizational
structure of the parent and its identity-of-interest entities.

                                         Advanced Living Management &
                                               Development, Inc.
                                                    (parent)




    Schwenckfeld     Schwenckfeld    Derstine    Derstine       Line Street    North       Advanced      Advanced
    Manor (HUD         Terrace          1           2           Apartments      Penn        Living        Living
     multifamily                                                              Commons       Home         Building
       project)                                                                            Services      Services


      Advanced Schwenckfeld East
     Living, Inc.
       (owner)


      Advanced
     Living, Inc.
    (management
       agent )




1
    Four of the five are for-profit affordable housing organizations: Schwenckfeld Terrace, Derstine 1, Derstine 2,
    and North Penn Commons. Line Street Apartments is a nonprofit affordable housing organization.



                                                            3
The project’s mortgage was insured by the Federal Housing Administration (FHA) under Section
202 2 of the Housing Act of 1959. In February 2017, the owner refinanced the mortgage under
Section 207, according to Section 223(f) of the National Housing Act. 3 The U.S. Department of
Housing and Urban Development (HUD) regulates the loan through a regulatory agreement with
the owner. The project received the following housing assistance from HUD over the last 3
years.

                                                      HUD housing assistance
                                    Year
                                                           payments
                                   2016                        $1,783,909
                                   2015                         1,779,832
                                   2014                         1,725,044
                                   Total                        5,288,785

Our audit objectives were to determine whether the project owner (1) disbursed project funds for
costs that were reasonable, necessary, and supported for the operation and maintenance of the
project; and (2) properly disclosed identity-of-interest relationships.




2
    Until the creation of the Section 811 program in 1990, the Section 202 program provided funding to nonprofit
    organizations that developed and operated housing for seniors with very low incomes and people with
    disabilities.
3
    Section 207-223(f) insures mortgage loans to facilitate the purchase or refinancing of existing multifamily rental
    housing. These projects may have been financed originally with conventional or FHA-insured mortgages.




                                                           4
Results of Audit

Finding 1: The Owner Could Not Support That It Always Used
Project Funds for Costs That Were Reasonable and Necessary for
the Operation of the Project
The owner may have used project funds for payroll costs 4 totaling more than $2 million in fiscal
years 2014, 2015, and 2016 for services benefiting the project’s identity-of-interest entities.
Payroll costs for its parent company’s chief operating officer, bookkeeper, receptionist, nurses,
and other employees were passed through from the parent company and charged as project
expenditures. Additionally, payroll costs for maintenance employees who worked at the
properties of the identity-of-interest entities were charged to the project. The owner also used
project funds for direct costs totaling more than $56,000 that it could not support as reasonable
and necessary to operate the project. These conditions occurred because the owner lacked
controls to ensure that it complied with its regulatory agreement and applicable HUD
requirements. As a result, project funds totaling nearly $2.1 million may have been used for
expenses that were not supported as reasonable and necessary for its operation and maintenance,
creating a non-surplus-cash position and potentially putting project assets at risk.

The Owner Could Not Support That All Project Payroll Costs Were Reasonable and
Necessary
The owner may have disbursed more than $2 million in fiscal years 2014, 2015, and 2016 for
services benefiting the project’s identity-of-interest entities. The parent company employed and
paid the staff that provided services to it and its related entities. The parent company charged
payroll costs to its related entities for reimbursement but did not charge them equitably. The
parent company’s chief financial officer prepared a spreadsheet each pay period to allocate the
total payroll. Payroll costs for the parent company’s chief operating officer, bookkeeper,
receptionist, nurses, and maintenance employees had 100 percent of their time charged to the
project. Through interviews, the chief operating officer, bookkeeper, and maintenance
employees informed us that they performed work for all of the entities and that they did not use a
timesheet to track their time. The chief financial officer told us that he did not allocate their
payroll costs to the related entities and attributed charging the parent company’s costs to the
project to the prior chief financial officer. According to HUD Handbook 4381.5, REV-2, payroll
costs for a management agent’s supervisory employees (except those who oversee accounting
and computer services) and employees who do not perform work for the benefit of the project are
not allowed to be charged as project costs. Payroll costs for employees who perform work
benefiting the project (front-line employees and central office accounting and computer




4
    For the purposes of this report, payroll costs refers to salary and fringe benefit costs.



                                                             5
supervisors) are to be allocated according to their time spent on the project. 5 Further, the
Handbook requires costs of supervising and overseeing project operations to be paid from the
project’s management fees because they are not project costs.

Project expenditures included more than $3.1 million in payroll costs during our audit period. Of
that amount, more than $392,000 was for the project’s full-time, front-line clerks serving the
residents. More than $1.4 million of that amount was for the parent company’s chief operating
officer, nurses, and maintenance supervisor, who are identified in the Handbook as supervisory
and non-front-line employees. HUD and project officials stated that it was possible that some of
these employees performed work benefiting the project, although documentation the officials
provided was not sufficient to show that the work benefited the project. The remaining nearly
$1.3 million went to payroll costs for maintenance workers and a bookkeeper, who performed
work benefiting all of the entities. Therefore, those payroll costs should have been equitably
allocated instead of being charged 100 percent to project funds. The table below provides
details.

                                                 Fiscal year       Fiscal year Fiscal year
                                                                                                          Totals
                                                    2016              2015        2014
    Total payroll charged to
                                                  $1,078,009          $977,370       $1,046,929        $ 3,102,308
    Schwenckfeld Manor
    Less payroll of the parent
    company’s chief operating officer,
                                                      537,984           421,209          472,199         1,431,392
    nurses, and maintenance
    supervisor
    Less payroll of Schwenckfeld
    Manor occupancy employees (full-                  127,276           135,906          129,247            392,429
    time project staff)
    Total front-line employee
                                                      412,749           420,255          445,483         1,278,487
    payroll costs to be allocated

We used the number of units methodology to allocate the nearly $1.3 million in payroll costs of
front-line employees and estimated that 46 percent should have been charged to the other
identity-of-interest entities owned by the parent company. The table below provides details.




5
    HUD Handbook 4381.5, REV-2, sections 6.38 and 6.39, state that reasonable expenses incurred for front-line
    management activities may be charged to the project operating account. Front-line activities include taking
    applications; screening, certifying, and recertifying residents; maintaining the project; and accounting for project
    income and expenses. If staff operating out of a single office perform front-line management functions for
    several properties, the costs must be prorated among the projects served in proportion to the actual use of
    services.



                                                            6
                 Rental properties owned by identity-                  Number         Percentage of
                         of-interest entities 6                        of units        total units
                      Schwenckfeld Manor (project)                        225                 54
                         Schwenckfeld Terrace                              63                 15
                               Derstine 1                                  59                 14
                               Derstine 2                                  60                 15
                         Line Street Apartments                             6                  2
                                      Total                               413                100
                       Total nonproject properties                        188                 46

Based on this methodology, payroll costs totaling more than $588,000 were unsupported. The
table below provides details.

                                                 Fiscal year       Fiscal year Fiscal year
                                                                                                         Totals
                                                    2016              2015        2014
    Total front-line employee
                                                     $412,749         $420,255         $445,483         $1,278,487
    payroll costs to be allocated
    Unsupported payroll for front-line
    employees (46 percent allocation                  189,865           193,317          204,922           588,104
    based on number of units)

Project officials stated that because the project was the oldest property maintained, it required
more staff time to operate, resulting in a larger share of allocated costs; however, they did not
provide supporting documentation, such as employee timesheets recording time worked at each
property. 7

The project’s regulatory agreement stated that all rents and other receipts of the project were
required to be used only for reasonable expenses of the project. HUD Handbook 4370.2, REV-1,
states that all disbursements from a project’s regular operating account must be supported by
approved invoices, bills, or other supporting documentation. The request for project funds
should be used only to make mortgage payments, make required deposits to the reserve for
replacements, and pay reasonable expenses necessary for the operation and maintenance of the
project. Because the owner did not comply with these requirements, the project may have made
unsupported disbursements totaling more than $2 million as shown in the table below.




6
    We did not include the parent company’s fifth non-HUD property, North Penn Commons, in this calculation
    because it was not in service until after June 30, 2016, the end of our audit period.
7
    HUD Handbook 4381.5, REV-2, paragraph 6.38.b(4), states that weekly timesheets documenting hours spent
    and duties performed on front-line activities for each project and those spent on central office functions are an
    acceptable method of documentation.



                                                            7
                                         Fiscal year Fiscal year Fiscal year
                                                                                       Totals
                                            2016        2015        2014
 Unsupported payroll of the parent          $537,984   $421,209    $472,199           $1,431,392
 company’s chief operating officer,
 nurses, and maintenance supervisor
 Unsupported payroll for front-line
 employees (46 percent allocation            189,865       193,317        204,922        588,104
 based on number of units)
 Total unsupported payroll costs             727,849       614,526        677,121      2,019,496

HUD Handbook 4381.5, REV-2, states that owner distributions are not permitted for projects
with a nonprofit ownership entity. According to the project’s audited financial statements for its
fiscal years ending 2015 and 2016, the owner’s equity was a deficit balance of $2.4 million and
$2.7 million respectively. Further, the project had a surplus cash deficiency for both years of
$114,742 and $114,212, respectively. The regulatory agreement stated that if the project had
surplus cash, the surplus cash would be controlled by the Federal Housing Commissioner. The
project would be in a more stable financial position if the parent company allocated payroll costs
equitably.

The Owner Disbursed Project Funds for Other Costs That It Could Not Support as
Reasonable and Necessary To Operate the Project
The owner disbursed nearly $43,000 in project funds to the parent company for expenses, such
as employee entertainment, staff retreats, conferences, and memberships, which may have been
required to be paid out of the management agent fee, and more than $13,000 in retainer fees to a
law firm for legal services without documentation showing that the services provided were
reasonable and necessary to operate the project. Officials of the parent company stated that
many of these costs were allowable within the scope of the project. They also stated that the
retainer fees were paid to obtain project-related legal advice from an attorney, but supporting
documentation was not available. HUD Handbook 4370.2, REV-1, section 2-6, requires that
only reasonable and necessary expenses be charged to the project, and HUD Handbook 4381.5,
REV-2, section 6.38, gives examples of costs required to be paid from the management agent fee
and those that may be charged directly to the project. The conditions described above occurred
because the project lacked controls to ensure that it complied with its regulatory agreement and
applicable HUD requirements. As a result, more than $56,000 disbursed for project expenses
was unsupported.

Conclusion
The owner disbursed project funds for payroll costs totaling more than $2 million for services
that may have benefited the project’s identity-of-interest entities. The owner also charged direct
costs totaling more than $56,000 to the project that it could not show were reasonable and
necessary. These conditions occurred because the owner lacked controls to ensure that it
complied with its regulatory agreement and applicable HUD requirements. As a result, the
project spent nearly $2.1 million in unsupported costs for expenses that may not have been



                                                 8
reasonable and necessary for its operation and maintenance, creating a non-surplus-cash position
and potentially putting project assets at risk.

Recommendations
We recommend that the Director of HUD’s Asset Management Division, Baltimore Satellite
Office, Multifamily Northeast Region, direct the owner to

       1A.    Provide documentation to show that payroll costs totaling $2,019,496 and any
              payroll costs incurred outside our audit period, including fiscal year 2017, were
              reasonable and necessary expenses for the operation of the project or repay the
              project from nonproject funds for any amount that it cannot support.

       1B.    Provide documentation to show that other direct costs totaling $56,021 and any
              direct costs incurred outside our audit period, including fiscal year 2017, were
              reasonable and necessary expenses for the operation of the project or repay the
              project from nonproject funds for any amount that it cannot support.

       1C     Develop and implement controls to ensure that the project complies with the
              regulatory agreement and applicable HUD requirements.

We recommend that the Director of HUD’s Asset Management Division, Baltimore Satellite
Office, Multifamily Northeast Region

       1D.    Provide training and technical assistance to the owner and its management agent
              to ensure compliance with the terms of its regulatory agreement and applicable
              HUD requirements.




                                                9
Finding 2: The Owner Did Not Disclose Identity-of-Interest
Relationships
The project owner did not disclose its identity-of-interest relationships to HUD on its
management certification as required. The owner also paid management fees totaling nearly
$403,000 in fiscal years 2014, 2015, and 2016 to its parent company, an identity-of-interest
entity, instead of the approved management agent for the project. These conditions occurred
because the project lacked controls to ensure that it complied with applicable HUD requirements.
As a result, the project’s disbursement of nearly $403,000 in management fees was unsupported
because, although the project received management services, the payment was made to an
identity-of-interest entity instead of the approved management agent.

The Owner Incorrectly Reported It Had No Relationships With Identity-of-Interest
Entities
The owner’s president signed a project owner’s certification for owner-managed multifamily
housing projects and checked the box indicating that no identity-of-interest existed among the
owner and any individuals or companies that regularly did business with the project. By
checking that box, the owner certified that it had read and understood HUD’s definition of
identity of interest and that the statement accompanying the checked box was true. However,
this certification was not correct. The owner entity was owned and controlled by a parent
company which employed all of the staff and performed all of the accounting and bookkeeping
for the project. That relationship was an identity-of-interest relationship and should have been
disclosed to HUD. 8 Additionally, the president of the project’s ownership entity was also the
president of the parent company. The president also had a familial relationship with the chief
operating officer of the parent company. These relationships were also identity-of-interest
relationships that the owner should have disclosed to HUD.

HUD Management Agent Handbook 4381.5, REV-2, required the owner to submit the
management certification and other information to HUD for review. HUD officials stated that
the owner needed to submit the correct owner’s management certification, 9 a management entity
profile, and a management plan. Because the owner did not submit a correct, complete
management certification, management entity profile, and management plan as required, HUD
was not aware of the identity-of-interest relationships and related financial transactions,
preventing it from properly conducting its oversight responsibilities. This condition occurred
because the project lacked controls to ensure that it complied with its regulatory agreement and
applicable HUD requirements. The president of the ownership entity stated that he was not
aware that the identity-of-interest entities were not properly reported on the management agent
certification. He further stated that he would work with HUD to file the correct management
certification and any other forms and documents HUD required.


8
    The management certification contained a warning that there were fines and imprisonment for anyone who made
    false, fictitious, or fraudulent statements and who misused rents and proceeds in violation of HUD regulations
    applicable when the project was in a non-surplus-cash position.
9
    Project owner’s or management agent’s certification for multifamily housing projects for identity-of-interest or
    independent management agents



                                                          10
The Owner Incorrectly Paid Management Fees
The project owner improperly paid management fees totaling nearly $403,000 for fiscal years
2014, 2015, and 2016 to the parent company instead of the approved management agent. HUD
Management Agent Handbook 4381.5, REV-2, section 3.1, states that management fees may be
paid only to the entity approved by HUD to manage the project. By signing the management
certification, the owner agreed to submit a new management certification to HUD for approval
before permitting an entity other than itself to manage the project or collect a fee. HUD officials
stated that they had not received a new management certification and were not aware of the
relationship to the parent company and its other identity-of-interest entities. This condition
occurred because the project lacked controls to ensure that it complied with applicable HUD
requirements. As a result, its disbursement of nearly $403,000 in management fees was
unsupported because, although the project received management services, the payment was made
to an identity-of-interest entity instead of the approved management agent.

Conclusion
The project owner did not disclose its identity-of-interest relationships to HUD on its
management certification and management entity profile as required. The owner also paid
management fees totaling nearly $403,000 in fiscal years 2014, 2015, and 2016 to an identity-of-
interest entity instead of the approved management agent for the project. These conditions
occurred because the owner lacked controls to ensure that it complied with its regulatory
agreement and applicable HUD requirements. As a result, HUD was not aware of the identity-
of-interest relationships, and it could not properly conduct its oversight responsibilities. The
disbursement of nearly $403,000 for management fees was unsupported.

Recommendations
We recommend that the Director of HUD’s Asset Management Division, Baltimore Satellite
Office, Multifamily Northeast Region, direct the owner to

       2A.     Submit a project owner’s or management agent’s certification for identity-of-
               interest agents, a management entity profile, a management plan, and other
               required documentation for review and approval.

       2B.     Request retroactive approval of the fees paid to the identity-of-interest entity
               totaling $402,975 and any fees incurred outside our audit period, including fiscal
               year 2017, when submitting the project owner’s or management agent’s
               certification for identity-of-interest agents in response to recommendation 2A. If
               the request is not approved retroactively, the owner should repay the project from
               nonproject funds for the amount that was not approved.

We recommend that the Director of HUD’s Asset Management Division, Baltimore Satellite
Office, Multifamily Northeast Region

       2C.     Evaluate the owner’s capability to effectively manage the project and consider
               whether independent professional management services are needed.




                                                 11
We recommend that the Director of HUD’s Departmental Enforcement Center

      2D.    Pursue civil money penalties and administrative sanctions, as appropriate, against
             the owner and its parent company and their principals for their part in the
             violations cited in this report.




                                              12
Scope and Methodology
We performed our onsite audit work from March through August 2017 at the offices of the
parent company located on the property at 1292 Allentown Road, Lansdale, PA. The audit
covered the period July 1, 2013, through June 30, 2016, but was expanded when necessary.

To accomplish our objective, we reviewed

     •    HUD’s files for the project, including the owner’s management certification and
          regulatory agreement.

     •    HUD’s program requirements at 24 CFR (Code of Federal Regulations) Parts 983 and 5;
          HUD Handbooks 4350.3, 4350.5, 4370.2, and 4381.5; housing assistance payment
          agreements; and other guidance.

     •    The project’s audited financial statements for 2014, 2015, and 2016 and its parent
          company’s consolidated audited financial statements, which included the project’s owner
          entity, for 2015 and 2016 and its organizational charts.

     •    The project’s computerized financial records.

     •    The project’s cash disbursements journal, general ledger, and invoices and the parent
          company’s journal entries, payroll registers, timesheets, invoices, and credit card bills.

     •    Return of Organization Exempt From Income Tax forms (Internal Revenue Service Form
          990) for fiscal years ending June 30, 2014, and June 30, 2015, for the owner and for the
          fiscal year ending June 30, 2014, for the parent company.

     •    HUD’s monitoring reports for the project.

We interviewed employees of the parent company and HUD staff. Neither the owner entity nor
the project had any employees.

To achieve our audit objective, we relied in part on computer-processed data from the parent
company’s computer system. 10 We used the owner’s general ledger and cash disbursements
journal downloads to identify accounts and vendors we determined to be at high risk of being the
types of costs that HUD Handbooks 4370.2, REV-1, and 4381.5, REV-2, required to be paid by a
project’s management agent or not eligible to be paid from project funds. Although we did not
perform a detailed assessment of the reliability of the data, we did perform a minimal level of
testing and found the data to be adequate for our purposes.

10
     The parent company maintained automated records for itself and all of its identity-of-interest entities.



                                                             13
To determine whether the owner managed the project in accordance with its regulatory agreement
and applicable HUD requirements, we selected the three journal entries with the largest amounts
for salary expense, totaling $118,073, from the project’s general ledger office salary and
maintenance salary expense accounts for fiscal years 2014 to 2016. 11 These amounts were the
payroll reimbursement to the parent company, calculated by the parent company’s chief financial
officer. We identifed the employees whose salaries were charged to the project from the
supporting payroll registers. We interviewed several of these employees, including the parent
company’s chief operating officer, bookkeeper, and maintenance supervisor and his staff, to
understand the work they did.

From the project’s 2016 general ledger accounts, we reviewed two accounts, “conventions and
meetings” and “memberships and subscriptions,” because they were at risk of including expenses
that should be paid by the management agent rather than from project funds. We selected the
three largest expenditures, totaling $5,768, from the accounts for review. The charges were for
food and entertainment and expenses related to attendance at a professional conference.
Employees of the parent company incurred these costs on the company’s corporate credit card.
It appeared that the costs were allocated; however, the documentation accompanying the
disbursements did not show that the costs were reasonable and necessary for the operation of the
project. We also reviewed the project’s 2016 disbursements journal and selected an $846
payment for rental of a hot dog cart and propane and an $820 payment for a staff retreat. We
selected these disbursements because they also appeared to be expenses that should be paid by
the management agent. The project was charged 100 percent of the cost of the rental of the hot
dog cart. The project was charged 50 percent of the cost related to the staff retreat. Again, the
documentation accompanying the disbursements did not show that the costs were reasonable and
necessary for the operation of the project. Because all $7,434 that we reviewed was not
reasonable and necessary, rather than expand our review to smaller dollar amounts, we decided
to question all $42,811 charged to the “conventions and meetings” and “memberships and
subscriptions” accounts during the audit period as unsupported.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




11
     The three journal entries represented salary for pay periods ending September 20, 2014, October 3, 2015, and
     June 11, 2016.



                                                          14
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:

•   Program operations – Policies and procedures that management has implemented to
    reasonably ensure that a program meets its objectives.
•   Validity and reliability of data – Policies and procedures that management has implemented
    to reasonably ensure that valid and reliable data are obtained, maintained, and fairly
    disclosed in reports.
•   Compliance with applicable laws and regulations – Policies and procedures that management
    has implemented to reasonably ensure that resource use is consistent with laws and
    regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   The owner lacked controls to ensure that the project complied with its regulatory agreement
    and applicable HUD requirements (findings 1 and 2).




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Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 1/
                               number
                                   1A              $2,019,496
                                   1B                 56,021
                                   2B                402,975
                                 Totals             2,478,492


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.




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Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               17
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




Comment 3


Comment 4




Comment 5




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation



Comment 6




Comment 7




                               19
                         OIG Evaluation of Auditee Comments


Comment 1   The owner acknowledged that it may not have always used best business practices
            with regard to documenting work activity to manage the project. The current
            chief financial officer is in the process of developing policies and procedures
            which should address some of the comments in the report. The owner will work
            with HUD to resolve the issues identified in the report. We acknowledge the
            owner’s positive attitude toward the report. As part of the audit resolution
            process, the owner will work with HUD to resolve the recommendations.

Comment 2   The owner stated that service coordinator payroll was incorrectly charged 100
            percent to the project until it changed the payroll allocation during the audit, in
            the second quarter of 2017. The owner stated that it will provide HUD with
            supporting documentation to show that the service coordinators only did work
            within the scope of work defined by HUD regulations and that their timesheets
            reflect time spent on the project. The chief financial officer changed the payroll
            allocation after we informed him of the problem in April 2017. As stated in the
            audit report, payroll costs for employees who perform work benefiting the project
            are to be allocated according to their time spent on the project. Timesheets
            documenting work hours and duties performed are acceptable methods of
            documentation. As part of the audit resolution process, HUD will review the
            documentation provided by the owner and determine whether it satisfies the
            recommendations.

Comment 3   The owner acknowledged that effort allocation reporting for three of the parent
            company’s management staff was not properly maintained and documentation
            regarding their time spent on the project will be collected and provided to HUD
            because the owner believes they qualify for frontline staff reimbursement. As
            stated in the audit report, 100 percent of the payroll costs for the parent
            company’s chief operating officer, bookkeeper, and receptionist were charged to
            the project. Sections 6.38 and 6.39 of HUD Handbook 4381.5, REV-2, state that
            reasonable expenses incurred for front-line management activities may be charged
            to the project operating account. Front-line activities include taking applications;
            screening, certifying, and recertifying residents; maintaining the project; and
            accounting for project income and expenses. The Handbook also states that
            payroll costs for a management agent’s supervisory employees, except those who
            oversee accounting and computer services, are not allowed to be charged as
            project costs. Lastly, the Handbook requires costs of supervising and overseeing
            project operations to be paid from the project’s management fees because they are
            not project costs. As part of the audit resolution process, the owner can provide
            documentation to HUD for consideration to address the recommendation.

Comment 4   The owner stated that its historical method of documenting work activity for
            maintenance employees was not a best practice and that in June 2016 it started
            implementing property management software to track their work activity


                                              20
            reporting. However, full implementation of the software fell outside of the audit
            period. As stated in the audit report, the owner charged all of the maintenance
            employees’ time to the project and did not equitably allocate their costs, using
            paper work orders or any other method, for work performed at the parent
            company’s five other housing projects. We questioned a portion of the
            maintenance employees’ payroll costs based on the total number of apartment
            units owned and operated by the parent company. Payroll costs for employees
            who perform work benefiting the project are to be allocated according to their
            time spent on the project and timesheets documenting hours spent and duties
            performed are an acceptable method of documentation. As part of the audit
            resolution process, the owner can provide documentation to HUD for
            consideration to address the recommendations.

Comment 5   The owner acknowledged that it lacked a written agreement to support the legal
            services that it incurred during the audit period. The owner stated that it hired a
            new law firm with a written engagement letter and that proper controls are now in
            place to address the finding. The owner will provide documentation to HUD
            supporting the allocation of the costs in question to the project. As part of the
            audit resolution process, the owner can provide documentation to HUD for
            consideration to address the recommendations.

Comment 6   The owner acknowledged that it did not correctly complete the management
            entity profile and management certification forms and as a result, did not properly
            disclose the identity-of-interest relationships to HUD. The owner stated that it
            will submit corrected forms to HUD and request retroactive approval of
            management fees paid to the project’s parent company. The owner’s planned
            actions meet the intent of our recommendations. As part of the audit resolution
            process, HUD will evaluate the documentation provided by the owner and
            determine whether it satisfies the recommendations.

Comment 7   The owner believed that its response, the controls and procedures it implemented
            after the audit period, and the documentation it will provide to HUD, adequately
            address the findings in the report. Additionally, the owner stated that it is capable
            of effectively managing the project and that payroll costs, except as noted in its
            response, were properly allocated to the project. As part of the audit resolution
            process, HUD will evaluate the documentation provided by the owner and
            corrective actions taken by the owner to determine that they satisfy the
            recommendations.




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