oversight

The Owner of Diamond Park, Philadelphia, PA, Generally Managed Its HUD-Insured Property in Accordance With Applicable Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-05-01.

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

        Diamond Park, Philadelphia, PA
  HUD-Insured Section 202 Multifamily Rental Housing
       for Seniors and Persons With Disabilities




Office of Audit, Region 3    Audit Report Number: 2018-PH-1004
Philadelphia, PA                                    May 1, 2018
To:            Brenda J. Brown, Director, Asset Management Division, Baltimore Satellite
               Office, Multifamily Northeast Region, 3BHMLAP
               //signed//
From:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA
Subject:       The Owner of Diamond Park, Philadelphia, PA, Generally Managed Its
               HUD-Insured Property in Accordance With Applicable 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 Diamond Park 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: 2018-PH-1004
                    Date: May 1, 2018

                    The Owner of Diamond Park, Philadelphia, PA, Generally Managed Its
                    HUD-Insured Property in Accordance With Applicable Requirements




Highlights

What We Audited and Why
We audited Diamond Park because of concerns raised by the U.S. Department of Housing and
Urban Development’s (HUD) Departmental Enforcement Center regarding the management of
the project and we had never audited it. Our audit objective was to determine whether the owner
managed the project in accordance with its regulatory agreement and HUD requirements. We
focused the audit on reviewing (1) participant eligibility and their selection from the waiting list;
(2) the accuracy of and support for housing assistance payments; (3) the management of security
deposits and rental receipts; (4) the use of operating funds; (5) the management and use of
reserve for replacement funds; (6) maintenance of the property; (7) whether the project made
mortgage payments; and (8) whether the project submitted annual financial statements.

What We Found
The owner of Diamond Park generally managed its project in accordance with its regulatory
agreement and HUD requirements. Specifically, the owner (1) assisted eligible participants; (2)
made housing assistance payments that were generally accurately calculated, and supported; (3)
properly managed its security deposits and rental receipts; (4) properly used operating funds; (5)
properly managed and used reserve for replacement funds; (6) maintained the property in good
physical condition; and (7) made mortgage payments as required. However, it did not maintain
adequate documentation to show that participants were selected from its waiting list as required
and did not submit financial statements for fiscal years 2013 through 2016. These conditions
occurred because the project lacked procedures to ensure that it maintained documentation to
show that it selected participants from the waiting list appropriately and lacked funds to pay an
independent accounting firm to audit its financial statements. As a result, HUD had no assurance
that the project treated applicants fairly and consistently in accordance with program
requirements and was unaware of the project’s financial position. During the audit, HUD began
working with the owner to have an independent accounting firm prepare the missing financial
statements.

What We Recommend
We recommend that HUD require the owner to develop and implement procedures to ensure that
it maintains documentation to show that it selected participants from the waiting list in
accordance with applicable requirements. We did not make a recommendation regarding the
missing financial statements because HUD was working with the owner to correct the situation.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The Owner of Diamond Park Generally Managed Its Project in
         Accordance With Applicable Requirements .................................................................. 4

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

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

Appendix .................................................................................................................11
         A. Auditee Comments and OIG’s Evaluation ............................................................. 11




                                                             2
Background and Objective
Diamond Park opened in 1985. The project is owned by Partnership for Urban Housing
Development, Inc. The owner entity was incorporated under the nonprofit corporation law of the
Commonwealth of Pennsylvania on May 31, 1978. The project is governed by a nine-member
board of directors. Proficient Management Services has been the management agent of the project
since September 2013. Diamond Park has a total of 48 housing units, all located in Philadelphia,
PA, at 2 different locations that are a few blocks apart. Twenty-four units are located at 1700 West
Susquehanna Avenue, and 24 units are located at 1500 West Page Street. The U.S. Department of
Housing and Urban Development’s (HUD) Multifamily Northeast Region Asset Management
Division located in Baltimore, MD, has oversight responsibility for the project. The project
receives project-based Section 8 assistance for 47 of its 48 housing units available to seniors and
persons with disabilities. HUD has provided the following housing assistance over the last 3 years.

                                                           HUD project-based
                                     Year                  housing assistance
                                    2016                       $566,746t
                                    2015                          562,907
                                    2014                          567,649
                                    Total                        1,697,302

The project’s mortgage was insured by the Federal Housing Administration (FHA) under Section
2021 of the Housing Act of 1959. In January 2009, the owner refinanced the mortgage under
Section 207, according to Section 223(f) of the National Housing Act. 2 HUD governs the loan
through a regulatory agreement with the owner. As of December 2017, the project’s mortgage was
current, and the remaining balance of the mortgage totaled more than $2.5 million.
HUD’s Departmental Enforcement Center raised concerns to us regarding the management of the
project, including its failure to submit annual financial statements for fiscal years 2013 to 2015.
Our audit objective was to determine whether the owner managed the project in accordance with its
regulatory agreement and HUD requirements. We focused our work on reviewing (1) participant
eligibility and their selection from the waiting list; (2) the accuracy of and support for housing
assistance payments; (3) the management of security deposits and rental receipts; (4) the use of
operating funds; (5) the management and use of reserve for replacement funds; (6) maintenance
of the property; (7) whether the project made mortgage payments; and (8) whether the project
submitted annual financial statements.


1
    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.
2
    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.



                                                           3
Results of Audit

Finding: The Owner of Diamond Park Generally Managed Its
Project in Accordance With Applicable Requirements
The owner generally managed the project in accordance with its regulatory agreement and HUD
requirements. Specifically, the owner (1) assisted eligible participants; (2) made housing
assistance payments that were generally accurately calculated, and supported; (3) properly
managed its security deposits and rental receipts; (4) properly used operating funds; (5) properly
managed and used reserve for replacement funds; (6) maintained the property in good physical
condition; and (7) made mortgage payments as required. However, it did not maintain adequate
documentation to show that it selected participants from its waiting list as required and did not
submit financial statements for fiscal years 2013 through 2016. These conditions occurred
because the project lacked procedures to ensure that it maintained documentation to show that it
selected participants from its waiting list appropriately and the project lacked funds to pay an
independent accounting firm to audit its financial statements. As a result, HUD had no assurance
that the project treated applicants fairly and consistently in accordance with program
requirements and was unaware of the project’s financial position.

Participants Met Eligibility Requirements
Our review of the files for the four participants most recently admitted into the project contained
documentation to show that they were eligible for assistance. The files contained
documentation, such as Social Security documentation, income documentation, criminal
background checks, and citizenship documentation. We also screened the Social Security
numbers of the participants and household members who lived at the project from August 2015
through September 2017 and found that the project did not make assistance payments on behalf
of persons who were deceased. From this review, we noted that as a best practice, the project
should maintain the criminal background checks in a separate, secure file.

The Project Made Housing Assistance Payments That Were Generally Accurately
Calculated, and Supported
For the same four participants discussed in the paragraph above, the project generally accurately
calculated their housing assistance payments. For one of the participants, the project made a
minor error that resulted in an immaterial difference in the housing assistance payment. We
discussed the error with the owner so that the necessary corrections could be made. All four files
contained documentation, such as income and asset verifications, declaration of non-employment
forms, and reports from HUD’s Enterprise Income Verification system, 3 to support the payments.




3
    The Enterprise Income Verification system is a web-based computer system that contains employment and
    income information of individuals who participate in HUD rental assistance programs.



                                                       4
The Project Complied With Security Deposit Requirements
The regulatory agreement required the project to collect from new participants a security deposit
equal to 1 month’s rent and place security deposits into a separate bank account. The lease
agreement required the project to refund the security deposits to participants who provided a 30-
day written notice of intent to move. We reviewed the security deposits for the four participants
most recently admitted into the project and the security deposit refunds for the last six
participants who moved out. The project maintained documentation, such as bank statements,
lease agreements, copies of checks, and 30-day written notices from participants, to show that it
complied with the requirements.

The Project Properly Deposited Rental Receipts as Required
The regulatory agreement required the project to deposit all rents into a financial institution. For
July 2017, the project collected rents totaling $8,323. The project maintained documentation,
such as a bank statement and copies of checks, to show that it properly deposited the rents as
required.

The Project Used Operating Funds as Required
Section 2-6 of HUD Handbook 4370.2, REV-1, required that only reasonable and necessary
expenses be charged to the project. We reviewed 87 payments of operating funds totaling
$151,819 and determined that the project maintained documentation, such as a management
agreement, invoices, bank statements, copies of checks, and payroll records, to show that the
payments were reasonable, necessary, and supported.

The Project Established, Maintained, and Used Its Replacement Reserve Funds as
Required
The regulatory agreement required the project to establish and maintain a reserve for
replacement fund in a separate bank account and deposit $1,600 per month into it.4 The project
maintained bank statements to show that it had established the account and that it made the
required monthly deposits. The balance in the account as of December 2017 was $152,003.

The project used its reserve for replacement funds as required. Regulations at 24 CFR (Code of
Federal Regulations) 891.405 required HUD to approve the use of the funds before the project
drew them from the account. From August 2015 through July 2017, the project made only one
draw from this account. In November 2016, it made a $4,315 draw to replace the emergency call
system. The project had documentation, such as a HUD-approved funds authorization form, a
contractor proposal, and an invoice, to support the draw.

The Project Maintained the Property in Good Physical Condition
HUD’s Real Estate Assessment Center performed its most recent physical inspection of the
project buildings and apartments in January 2017 and gave the project a score of 98b. 5 During a


4
    Reserve for replacement funds are generally used to replace a project’s capital items or for emergency purposes.
5
    A passing score is 60 or higher. The score determines the timeline for the project’s next inspection. A score of
    90 or higher means that the property’s next routine inspection should be in 3 years. The letter “b” indicated that
    the inspector noted non-life-threatening health and safety deficiencies.



                                                           5
physical tour of the project, we observed that the buildings and apartments were in good
condition.

The Project Made Mortgage Payments as Required
The regulatory agreement required the project to make all payments due in accordance with the
mortgage note. The mortgage note stated that payments of principal and interest in the amount
of $20,440 were due and payable monthly. HUD’s Multifamily Default and Delinquency
Reporting report and the project’s cash disbursement register showed that the project was current
on its mortgage.

The Project Did Not Maintain Adequate Documentation To Show That It Selected
Participants From Its Waiting List in Order
HUD Handbook 4350.3, REV-1, section 4-18, required the project to develop a method to
maintain documentation of the waiting list composition, application status, and actions taken.
Section 4-23 required the project to select the next applicant from its waiting list when a unit
became vacant. The project did not maintain adequate documentation to show that it selected the
four participants that were most recently admitted to the project from its waiting list in the order
of their application. This condition occurred because the project lacked procedures to ensure that
it maintained documentation to show that it selected participants from the waiting list in order.
The project used a computer program to maintain its waiting list and the program did not have
the capability to recreate waiting lists for dates in the past. As a result, HUD had no assurance
that the project treated applicants fairly and consistently in accordance with program
requirements.

The Owner Did Not Submit the Project’s Financial Statements as Required
The regulatory agreement required the owner to submit annual audited financial statements.
Regulations at 24 CFR 5.801 required the owner to submit annual audited financial statements
no later than 90 days after the end of its fiscal year. 6 For fiscal years 2013 through 2016, the
owner did not submit audited financial statements for the project as required. This condition
occurred because the project lacked funds to pay an independent accounting firm to audit its
financial statements. The project’s fiscal year 2012 audited financial statements showed that the
operating account had an ending balance of $17,273 and a surplus cash deficiency of $76,240.
The project owner estimated that it would cost $21,000 for an independent accounting firm to
audit its financial statements for fiscal year 2013. We reviewed the project’s cash disbursement
register for the period August 2015 through July 2017, and it showed that the project operated at
a loss of $8,765. As of December 2017, the project’s operating account had an ending balance of
$7,798. As a result, because the project did not submit audited financial statements, HUD was
unaware of the project’s financial position.

In October 2017, the owner requested that HUD allow it to use its reserve for replacement funds
to hire an independent accounting firm to audit its financial statements for fiscal year 2013. As
of February 2018, HUD had approved the owner to use nearly $20,000 of its reserve for
replacement funds to hire an independent accounting firm to prepare its audited financial

6
    Diamond Park’s fiscal year begins January 1 and ends December 31.



                                                       6
statements for fiscal year 2013. HUD stated that after the fiscal year 2013 audited financial
statements were completed, it would work with the project on providing approval to use its
reserve for replacement funds to prepare audited financial statements for fiscal years 2014 and
beyond. Since HUD was working with the owner to correct this situation, we did not
recommend any further action.

Conclusion
The owner of Diamond Park generally managed its project in accordance with its regulatory
agreement and HUD requirements. The conditions identified by the audit occurred because the
project lacked procedures to ensure that it maintained documentation to show that it selected
participants from its waiting list in the order of their application and lacked funds to pay an
independent accounting firm to audit its financial statements. As a result, HUD had no assurance
that the project treated applicants fairly and consistently in accordance with program
requirements and was unaware of the project’s financial position. Since HUD was working with
the owner to have an independent accounting firm prepare the missing financial statements, we
did not make a recommendation.

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

       1A.     Develop and implement procedures to ensure that it maintains documentation to
               show that it selected participants from its waiting list in accordance with
               applicable requirements.

       1B.     Develop and implement procedures to ensure that it maintains criminal
               background checks in separate, secure files.




                                                7
Scope and Methodology
We conducted the audit from August 2017 through March 2018 at Diamond Park’s office located
at 1700 West Susquehanna Avenue, Philadelphia, PA, and at our office located in Philadelphia,
PA. The audit covered the period April 2014 through September 2017 but was expanded to
include the periods January through December 2013 and September 2017 through February 2018
since the owner did not submit annual audited financial statements during these periods.

To accomplish our objective, we reviewed

   •   HUD’s program requirements at 24 CFR Parts 891 and 5, HUD Handbooks 4350.3 and
       4370.2, the housing assistance payment agreement, the regulatory and use agreement, the
       mortgage note, the management certification, and HUD’s income limits.

   •   The project’s audited financial statement for fiscal year 2012 and its organizational chart.

   •   The project’s cash disbursement register, general ledger, invoices, payroll registers,
       participant files, rent roll report, rent schedules, waiting list, and bank statements.

   •   HUD’s April 2017 management and occupancy review report.

   •   The project’s policies and procedures handbook related to applicant eligibility, waiting
       list administration, security deposits, and rent collection.

We observed the physical condition of the project buildings and two apartments to determine
whether the project was maintained in good condition. We interviewed officials and employees
of the project and HUD staff.

To achieve our audit objective, we relied in part on computer-processed data from the project’s
computer system. We used information from the project’s cash disbursement register to identify
vendors with the largest disbursements during the period August 2015 through July 2017. We
also used the project’s rent roll report as of August 2017 to identify participants that were most
recently admitted to the project. 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. The testing entailed comparing the project’s cash disbursement
register to bank statements and the project’s rent roll report to the participant files.

We reviewed a nonstatistical sample of 4 participant files from a universe of 45 participants that
the project assisted as of August 2017. These four participants were the most recent participants
admitted into the project. Three were admitted in 2017, and one was admitted in 2014. We
reviewed the files to determine whether the participants met eligibility requirements and the
project accurately calculated housing assistance payments and maintained documentation to



                                                 8
support the calculations, properly selected participants from its waiting list, and collected the
correct security deposit amounts. We also reviewed security deposit refunds the project made
for six participants who moved out during the period April 2014 through August 2017 to
determine whether the project refunded the correct security deposit amounts to them.

We screened the Social Security numbers for 55 participants and household members who lived
at the project during the period August 2015 through September 2017 to determine whether the
project made payments for any persons who were deceased.

We selected a sample of 87 payments totaling $151,819 from a list of 722 payments totaling $1.4
million that the project made using operating funds during the period August 2015 through July
2017. We selected the 87 payments because they represented the largest payments, excluding all
routine payments for expenses such as utilities and mortgage payments.

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.




                                                  9
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

•   effectiveness and efficiency of operations,
•   reliability of financial reporting, and
•   compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

Relevant Internal Controls
We determined that the following internal controls were relevant to our audit 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.
We evaluated internal controls related to the audit objective in accordance with generally
accepted government auditing standards. Our evaluation of internal controls was not designed to
provide assurance regarding the effectiveness of the internal control structure as a whole.
Accordingly, we do not express an opinion on the effectiveness of Diamond Park’s internal
control.




                                                  10
Appendix

Appendix A
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1


Comment 2




                               11
                           OIG Evaluation of Auditee Comments


Comment 1     The owner stated that ownership and management had already instituted new
              procedures to adequately document tenant selection procedures from the waiting
              list. The owner also stated that management was reassessing computer programs
              used to manage the waiting list, including applicant selection. We did not review
              the new procedures cited by the owner. However, as part of the audit resolution
              process, HUD will evaluate the owner’s corrective actions to ensure that they
              satisfy the recommendation.

Comment 2     The owner stated that HUD was aware of the project’s financial position because
              its management agents submitted monthly financial reports to HUD. Although
              the agents may have submitted monthly reports for establishing net income 7 to
              HUD, those self-certified reports provided information for only part of the
              project’s financial operations. It did not include a statement of financial position,
              the related statements of activities, changes in net assets, and cash flows, and any
              notes to the financial statements. The regulatory agreement required a certified
              public accountant to prepare and certify the project’s annual financial statements.
              A certified public accountant is responsible for expressing an opinion on the
              project’s financial statements, including the financial position of the project and
              changes in its net assets and cash flows. As stated in the audit report, HUD had
              approved the owner to use nearly $20,000 of its reserve for replacement funds to
              hire an independent accounting firm to prepare its audited financial statements for
              fiscal year 2013. HUD stated that after the fiscal year 2013 audited financial
              statements were completed, it would work with the project on providing approval
              to use its reserve for replacement funds to prepare audited financial statements for
              fiscal years 2014 and beyond. Since HUD was working with the owner to correct
              this situation, we did not recommend any further action.




7
    Form HUD-93479



                                                12