U.S. Department of Housing and Urban Development District Office of the Inspector General Richard B. Russell Federal Building 75 Spring Street, SW, Room 700 Atlanta, GA 30303-3388 (404) 331-3369 May 16, 1996 Audit Related Memorandum No. 96-AT-202-1816 MEMORANDUM FOR: Harold Saether, Director, Public Housing Division, 4APH FROM: James D. McKay Acting District Inspector General for Audit-Southeast/Caribbean, 4AGA SUBJECT: Limited Review of the Statesboro Housing Authority Statesboro, Georgia We have completed a limited review of selected operations at the Housing Authority o f Statesboro, Georgia (SHA). The revie w focused on the controls over cash and other assets. We reviewed SHA's records and interviewed SHA staff. We performed the review during Marc h through April 1996. SUMMARY The Statesboro Housing Authority (SHA) did not properly safeguard cash assets against fraud and abuse. The Executive Director (ED) made personal use of SHA assets, had poor control s over cash collections, and engaged in questiona ble procurement and disposition transactions that included identity-of-interest entities. The ED charged personal purchases to the authority accounts and had a maintenance employee work at his home on authority time. The ED knowingly concealed cash shortages in the ren t collections by: representing unreceipted sources of revenue as rent collections; cashing a n unclaimed security deposit r efund to deposit as rent, and consistently moving rent collections to prior periods to cover cash shortages. Also, the ED procured services from his wife's business, and sold authority equipment to his father and a Board member. The ED continued thes e practices after being cautioned by the Board not to commingle his personal business with SHA business. Considering the serious nature of the deficiencies and deviations of established contro l procedures, we recommend you issue appropriate administrative sanctions against the ED and recommend SHA's Board terminate the ED's employment. You should require the ED to reimburse SHA for any re maining amounts owed and require SHA to implement better control procedures. We discussed the finding with the ED and Board during the audit. At the request of the Office of Public Housing we did not solicit written comments from SHA's Board. Details of our finding and recommendations are discussed in Attachment 1. BACKGROUND Through an Annual Contributions Contract (ACC) with HUD, SHA administers 146 low ren t housing units in 4 developments in Statesboro, Georgia. SHA received annual operatin g subsidies of about $62,000 from HUD for fiscal year ending March 1995 to operate and maintain its housing developments. SHA has a five member Board of Direct ors appointed by the Mayor of Statesboro. Mr. William Robert Smith is the Chairman. SHA employs three maintenan ce men, one secretary, and the ED. The ED is responsible for th e daily operations of SHA and has oversight responsibility for SHA activities. Attachments 1 - Finding and Recommendations 2 - Distribution ATTACHMENT 1 FINDING - SHA ASSETS WERE NOT PROPERLY SAFEGUARDED The Statesboro Housing Authority (SHA) did not safeguard cash and other assets against fraud and abuse. We found that the ED made p ersonal use of SHA assets, circumvented controls over cash collections, and engaged in questionable procurement and disposition transactions tha t included identity-of-interest entities. We attribute these conditions to the poor contro l environment and the lack of integrity of top management at the SHA. As a result, SHA assets were diverted for personal use. Criteria The Annual Contributions Contract (ACC), Article IV, Section 401 (D) requires the authority to use funds only for operating expenditures, investments, or development costs. No withdrawals can be made except in accordance with a voucher stating in proper detail the purpose for th e withdrawal. SHA's procurement policy requires the ED to establish procedures to monitor the procurement actions (including those under $500) ensuring compliance with the procurement policy and t o prevent fraud and abuse. The ED is required to make purchases ov er $500 on the basis of at least three price quotes. The disposition policy requir es goods to be sold at their fair value and for the authority to maintain complete records related to the disposition of all excess property. The Code of Conduct contained in the procurement policy states no employee of SHA shal l participate in the award of a contract if a conflict, real or apparent, would be involved. SH A officers shall not accept anything of monetary value from vendors and contractors. ISSUE I - Personal Uses of SHA Assets The ED made personal purchases using SHA funds and used SHA maintenance personnel t o work at his home while on duty. Each i nstance is evident of a poor control environment at SHA and a deliberate attempt to circumvent established controls. Personal Purchases - The ED used SHA's funds to purchase paint and to rent paintin g equipment and a ladder. The purchases and rentals were used to paint property owned by the ED's father. The details of the purchases are presented below. Date Amount Vendor Purchase 5/12/95 $ 722.39 Sherwin Williams Paint 5/22/95 122.85 Arrow Rental Air Sprayer 5/10/95 18.90 Arrow Rental Ladder Total $ 864.14 4 The ED repaid $722.39 for the paint purcha se in November 1995, only after it was reported to the Board and to HUD. The ED repaid $122.85 in April 1996, only after it wa s discovered during our review. The $18.90 was repaid in May 1995, when the ladder was rented. Purchase orders are used as a control at SHA. However, the paint and air sprayer wer e initially charged to the SHA account without a purchase order. A purchase order wa s prepared for the air sprayer after the purchase was made. It fa lsely stated the air sprayer was used at Butler Homes, an authority development. It is evident that the ED had ful l knowledge of the purchases because he signed the SHA checks for payment. He easil y circumvented the controls because he had the oversight responsibility for ensurin g compliance and for preventing fraud and abuse. Maintenance Employee used on SHA Time - The ED admitted he used a maintenanc e employee to build a playhouse for his children during work hours. The maintenanc e employee confirmed that he worked on the playhouse during work hours on one occasion. The authority does not maintain time records, so we could not determine the cost of th e employee's time on this instance. ISSUE II - Controls Over Cash SHA had poor controls over cash. The ED (a) knowingly concealed shortages in cas h collections, (b) cashed checks for himself, his wife, employees, and te nants from cash collections, and (c) made deposits concerning questionable transactions. (a) Cash Shortage - We obtained evidence that showed the ED took SHA cash in lat e 1993 and early 1994, then put an uncashed personal check in the cash box fo r repayment. The ED admitted to borrow ing funds in the past, but stated he had repaid the funds. He could not produce copies of any canceled checks. The ED stated h e repaid the funds with cash and took the uncashed check out of the cash box. Also, we found evidence that the ED allowed a former secretary to borrow funds in February 1994 and to place a personal check in the cash box. The ED stated the SHA fund s were recovered when the check was deposited into the SHA account. We found evidence of cash shortages at SHA after the above occurrences. The ED knowingly concealed shortages by utilizing at least three techniques: (1) The ED deposited unrec eipted funds ($623) collected from: magistrate court collections of tenant accounts receivable ($248.30), rent charged to a church for the community space ($350), and refund of overpayment of employe e taxes ($25.08). 5 The funds collected through the magistrate court for tenant account s receivable (TAR) had been written off the books. The cash shortage for rent collections was concealed by depositing the payments from the magistrate's court to represent current rent collections. The ED disclosed he did this o n five occasions. Date Amount Tenant Name 1/31/95 $ 77.00 Jerry Humpheries/Claude Hardy 2/28/95 63.30 Jerry Humpheries/Claude Hardy 3/31/95 27.00 Jerry Humpheries 4/28/95 27.00 Jerry Humpheries 6/30/95 54.00 Jerry Humpheries Total $ 248.30 The ED repaid the $24 8.30 in April 1996, when he disclosed the information to the auditor. Subsequent to the completion of our field work, we obta ined information from the Magistrate's Court that an additional $955.50 was paid to SHA during the period May 1993 through December 1994. Because of the ED's admitte d misuse of the 1995 receipts, we believe the ED may have misused the 1993 and 1994 receipts. We were unable to confirm with SHA's auditor if thes e funds were properly accounted for. The $350 from rental of the community space was not repaid. The E D claimed the checks do not represent rent paid to SHA, but were checks cashed for the church. The checks were marked as payment for rent. (2) On February 23, 1996, the ED deposited $100 unclaimed security deposi t check to cover a cash shortage. The check was dated February 8, 1996 and was payable to the daughter of a resident who had died. The check wa s endorsed for deposit to SHA. The ED stated he cashed the check and wa s holding the $100 in cash in his d esk drawer until the daughter came to collect the funds. After we questioned the ED about this check, he later showed us an envelope containing $100 in cash. At our request, the ED deposited the $100 on April 22, 1996. (3) The ED used a lapping technique to cover the cash shortage in ren t collections. The ED did not make depo sits intact, but moved rent collected in one period to prior periods to cover the cash short age in the prior periods. For example, funds wer e needed at the end of January 1996 to make the deposits match the rent receipts issued to the tenants. The ED moved at least $60 9 from February rent collections to January deposits. Ex cept for the unreceipted totals mentioned above, we con firmed that no fund shortage existed at March 18, 1996, when we conducted a cash count. 6 (b) Personal Checks Were Deposited - The ED deposited personal checks, insuranc e reimbursement checks, monthly travel all owance checks, Christmas bonus checks for himself and another employee, his wife's payroll check from a local restaurant, hi s wife's check from a telephone business, and rent checks collected from a persona l rental property. The ED stated the checks were cashed from funds held at SHA for convenience. However, we could not determine whether the checks were cashed or represented payments to cover cash shortages. The Board instructed the ED in October 1995 to stop cashing payroll checks issued from his office. The ED confirmed he was instructed by the Board to stop cashin g personal checks. Despite the instructions, the ED ca shed Christmas bonus checks and monthly travel allowance checks. The ED had no explanation for his actions. (c) Deposit Concerning Questionable Transactions - A summer maintenance employee worked from July through September 1995. The ED overpaid the employee o n several occasions because the payroll checks were prepared before the work wee k ended and the employee did not work the full week as expected. The ED wrot e payroll checks before the work week was complete in order to get them signed by a Board member before payday. To recover the overpayment, the ED cashed th e employee's check, paid him what he was due and was to deposit the balance to th e general fund. Since time records were not maintained by SHA, an accurat e accounting of the amount due the employee and SHA could not be determined. The ED did not deposit any of the differences until November 11, 1995, after th e matter was reported to the Board. The deposit slip showed that the deposit of $165 was for overpayment to part-time labor (July 19 through Septem ber 8). The ED stated he kept the cash in the authority safe until it was deposited. The funds should have been deposited when withheld in the summer. ISSUE III - Questionable Procurement and Disposition The ED entered the authority into contracts or soli cited services from contractors when a conflict of interest or the appearance of a conflict was evident. The ED (a) hired a landscape contractor with whom he was conducting personal business, (b) enrolled the Authority with his wife' s business venture for long distance telephone services, and (c) sold authority equipment to hi s father and a Board member. (a) Landscape contractor - The ED contracted for landscape and sidewalk work fo r $10,500. During the procurement, the ED contacted three contractors for bids, bu t only one of those contractors submitted a bid for the work. We found no othe r attempt by the ED to o btain two other bids as required in the procurement policy. In addition, the ED purchased a truck from the only contractor to bid on the work a t about the time he awarded the contract. By conducting personal business with th e contractor and not following the procurement policy, the ED's actions give a n appearance of possible favoritism in the contract award and show an apparent conflict of interest existed. 7 8 (b) Excel telephone service - The ED procured long distance services without obtaining at least three oral or written bids as required. Instead, he enrolled SHA with Excel, his wife's network marketing business. By enrolling SHA with Exce l, the ED received an indirect benefit throu gh his wife's earnings. We did not verify whether Excel was the least expensive long distance carrier for SHA. (c) Disposed equipment - The ED sold a refrigerator to his father for $45. Also, the ED sold a refrigerator to a Board member at the same time for $50. The ED said th e refrigerators were old and needed to be replaced. We could not determine the fai r value of the refrigerators from the documentation in the files. The Board did no t approve the sale of the equipment and the Chairman of the Board was unaware of the disposition. The authority disposition policy requires complete records related to the disposition and that goods be disposed according to lo cal County or City policy. The City policy required the Council to declare the equipment surplus bef ore being disposed by sealed bid or public auction. INTERNAL CONTROLS Internal control is the process by which an entit y obtains reasonable assurance as to achievement of specified objectives. Internal controls consist of interrelated components, including integrity, ethical values, competence, and t he control environment which includes establishing objectives, risk assessment, information systems, control procedures, commun ication, managing change, and monitoring. GAO, Office of Policy Publication OP-4.1.1, Assessing Internal Controls in Performance Audits states internal controls are intended to provide reasonable ass urance that resources are adequately safeguarded and efficiently utilized. In assessing risk exposure, the auditor should conside r whether management r ecognizes the importance of, and has made a commitment to implement, internal controls. Managers and employees should have personal and professional integrity and should maintain a level of competence that allows them to accomplish their duties, as well a s understand the importance of developing and implementing good internal controls. The ED is an integral part of the in ternal control system given the responsibilities of his position and the relatively small size of the office personnel at SHA. We believe the internal contro l systems have been seriously compromised by the actions of the ED. We noted serious control weaknesses and, in some cases, circumvention of controls by the ED. The ED has failed to set the right "tone at the top." Therefore, the overall ris k exposure would be considered high as long as the current ED remains in his position. 9 RECOMMENDATIONS: We recommend that you: 1A. Issue an administrative sanction against the Ex ecutive Director and recommend to the Board that they terminate his employment. 1B. Pursue reimbursement for the $375 related to the rent al of the community space to the church and the tax refund. 1C. Assure controls over SHA assets are implemented on an authority wide basis. 10 ATTACHMENT 2 DISTRIBUTION Secretary's Representative, 4AS Director, Office of Public Housing, 4APH Comptroller, 4AF Audit Liaison Officer, 4AFI Director, Field Accounting Division, 4AFF Chief Financial Officer, F, Room 10164 (2) Director, Office of Internal Control and Audit Resolution, FOI (Room 10176) (2) Associate Director, US GAO, 820 1st St. NE Union Plaza, Bldg. 2, Suite 150, Washington, DC 20002 (2) Audit Liaison Officer, Office of Public and Indian Housing, PF (Room 4122) (3) Assistant to the Deputy Secretary for Field Management, SDF (Room 7106) Board of Directors, Statesboro Housing Authority 11
Statesboro HA, Statesboro, GA
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-05-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)