oversight

Henderson Cty. HA, Oquawka, IL

Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-10-30.

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

Issue Date
October 30, 1995
Audit Case Number
96-CH-202-1004

TO: Richard B. Kruschke, Director of Public Housing, Illinois State
   Office

FROM: Dale L. Chouteau, District Inspector General for Audit, Midwest

SUBJECT: Henderson County Housing Authority
    Section 8 Programs
    Oquawka, Illinois

We completed an audit of the Henderson County Housing Authority's
Section 8 Programs. We conducted the audit at the request of HUD's
Illinois State Office. The audit was requested because the Authority's
former Executive had admitted to misappropriating Authority funds. The
audit objectives were to: (1) review for indicators of loss or misuse of
cash and other monetary assets; and (2) establish the amount of detected
misappropriations, their causes, and the individuals involved.

During our review, the Housing Authority attempted to address our
concerns and improve its operations. However, the Authority can do more
to improve the administration of its programs and ensure compliance with
the Annual Contributions Contract and other HUD requirements. This
report addresses issues relating to inadequate control of its
disbursements.

Within 60 days, please give us, for each recommendation made in this
report, a status report on: (1) the corrective action taken; (2) the
proposed corrective action and the date to be completed; or (3) why
action is considered unnecessary. Also, please furnish us copies of any
correspondence or directives issued because of this audit.

Should you or your staff have any questions, please have them contact me
at (312) 353-7832.

Executive Summary

We completed an audit of the Henderson County Housing Authority's
Section 8 Programs. We conducted the audit at the request of HUD's
Illinois State Office. Our audit objectives were to: (1) review for
indicators of loss or misuse of cash and other monetary assets; and
(2) establish the amount of detected misappropriations, their causes, and
the individuals involved.

During our review, the Henderson County Housing Authority attempted to
address our concerns and improve its operations by: (1) establishing a
general depository agreement with its depositories; (2) changing the
authorized signers on its checking accounts as recommended by HUD's
Illinois State Office; (3) no longer issuing checks to local banks and
then exchanging them for cash without support; (4) no longer issuing
travel advances to Authority employees; (5) issuing pre-numbered receipts
for rent collections and maintaining a copy as a permanent record;
(6) maintaining a record of shared expenses to be reimbursed to the
operating account and reimbursing this account once a month; and
(7) fully funding the Section 8 New Construction security deposit
account.

We found that the Authority: (1) maintains its accounting records in a
logical order; and (2) has obtained an independent public accounting firm
to bring its audit requirements up to date. Still, the Authority needs
to improve the administration of its Section 8 Programs and ensure
compliance with the Annual Contributions Contract and other HUD
requirements.

The Authority Did Not Adequately Control Its Cash Disbursements

The Henderson County Housing Authority did not have adequate controls
over its disbursements between October 1, 1992 and September 7, 1995.
The Authority's former Executive Director misappropriated or did not
justify the use of $12,243 of Section 8 Program funds. She has since
repaid $7,969 of the misappropriated amount to the Authority. The former
Executive Director also used $8,115 of Section 8 Program funds for
ineligible expenses. The ineligible expenses included employee bonuses
and Internal Revenue Service penalties and interest. The misuses of
funds occurred because the former Executive Director had extensive
control over the Authority's disbursements and the Board of Commissioners
did not review and verify the supporting documentation for disbursements.
As a result, HUD funds were misused and there was no assurance that
disbursements were proper.

We recommend that the HUD Illinois State Office's Director of Public
Housing assures the Henderson County Housing Authority takes appropriate
actions to correct the weaknesses cited in this report.

We presented our draft findings to the Housing Authority's Executive
Director and staff of the HUD Illinois State Office during the audit. We
held an exit conference with Authority personnel on October 6, 1995. The
Housing Authority's legal counsel provided written comments to our
finding and recommendations. We included excerpts from the comments with
the finding.

Introduction

The Henderson County Housing Authority was organized on March 4, 1947
under the laws of the State of Illinois. The primary objective of the
Housing Authority is to provide housing assistance to low income persons.

A five member Board of Commissioners governs the Housing Authority.
Members of the Board are appointed by the County Board for 5 year
staggered terms. The Housing Authority's Executive Director is Christina
Carnes and the Chairman of the Board is Lee Carlson. The Housing
Authority's books and records are kept at Third and Mercer Streets,
Oquawka, Illinois. The Authority's fee accountant is Kopsa, Sylvester &
Associates, Certified Public Accountants, 306 East Seventh Street, York,
Nebraska 68467.

As of September 30, 1995, the Authority had 135 Section 8 units under
lease. The units consisted of 82 Housing Certificate units, 25 Housing
Voucher units, and 28 New Construction units.

Audit Objectives

Our audit objectives were to: (1) review for indicators of loss or
misuse of cash and other monetary assets; and (2) establish the amount of
detected misappropriations, their causes, and the individuals involved.

Audit scope and methodology

To determine whether the Authority deposited all rents collected, we
tested Section 8 New Construction Program tenant records and receipts for
the months of February 1994, December 1994, and January 1995. To
determine whether rent receipts were deposited intact, we reviewed the
tenant receipts which were issued for cash collections. We traced
receipts issued to tenants to the Authority's tenant ledger cards to
verify that the receipts were properly recorded to the Authority's
records. We also traced the rent receipts to the deposit slips and
subsequent bank statements to assure funds were deposited intact. We
traced the rent subsidies received from HUD into the Authority's
Section 8 Certificate, Section 8 Voucher, and Section 8 New Construction
bank accounts.

To determine if the Authority accounted for and expended project funds
efficiently and effectively, we reviewed the Authority's Cash
Disbursements Ledger; General Ledger; Housing Assistance Payments
Register; Transaction Report; Check Register; cancelled checks; invoices;
and payroll records. To determine if the Authority's disbursements for
the Section 8 Programs were proper, we reviewed disbursements for the
period October 1, 1992 through September 7, 1995. We also interviewed
the Authority's Executive Director to obtain information regarding the
Authority's cost allocation method.

The audit covered the period between October 1, 1992 and May 31, 1995.
We extended the audit period as necessary. We conducted the audit at the
Authority between August and September 1995.

We conducted the audit in accordance with generally accepted government
auditing standards.

We provided a copy of this report to the Authority's Executive Director.

Finding

The Authority Did Not Adequately Control Its Cash Disbursements

The Henderson County Housing Authority did not have adequate controls
over its disbursements between October 1, 1992 and September 7, 1995.
The Authority's former Executive Director misappropriated or did not
justify the use of $12,243 of Section 8 Program funds. She has since
repaid $7,969 of the misappropriated amount to the Authority. The former
Executive Director also used $8,115 of Section 8 Program funds for
ineligible expenses. The ineligible expenses included employee bonuses
and Internal Revenue Service penalties and interest. The misuses of
funds occurred because the former Executive Director had extensive
control over the Authority's disbursements and the Board of Commissioners
did not review and verify the supporting documentation for the
disbursements. As a result, HUD funds were misused and there was no
assurance that disbursements were proper.

HUD Requirements

The Annual Contributions Contract, Part I, Section 2.4 states in part
that the public housing authority cannot make any program expenditures
except in accordance with an operating budget approved by HUD, including
any limitations as specified in the budget approved by HUD, for costs of
administration or housing assistance payments.

HUD Handbook 7420.7, Chapter 8, paragraph 4(d) states in part: that
fines and penalties resulting from the violation of, or failure to comply
with Federal, State, and local laws and regulations are unallowable costs
except when incurred as a result of compliance with specific written
instructions from HUD.

A HUD memorandum dated February 24, 1983 regarding a public housing
authority's use of excess Section 8 administrative fees states in part:
"Excess administrative fees may be used to pay bonuses to public housing
authority employees. However, the use of excess administrative fees for
this purpose is only justified when the employee receiving the bonus has
demonstrated exceptional performance related to the public housing
authority's housing programs. It is our position that public housing
authority employees should not be given across the board unearned
bonuses."

The former Executive Director misappropriated or did not justify the use
of Section 8 Program funds

The former Executive Director misappropriated or did not justify the use
of $12,243 of Section 8 Program funds between January 1, 1993 and
February 28, 1995. The amount misappropriated or not justified included
$9,443 from the Section 8 New Construction Program account; $2,150 from
the Section 8 Existing Program account; and $650 from the Section 8
Voucher Program account.

The former Executive Director misappropriated the Section 8 funds through
duplicate payroll checks and unreimbursed payroll advances. The
duplicate payroll checks were neither recorded on the Authority's payroll
ledgers, nor included on the former Executive Director's W-2 forms. All
of the payroll costs were paid from the Section 8 New Construction
Program account.

The former Executive Director also received Section 8 funds by cashing
Authority checks made payable to local banks. There was no supporting
documentation available to show that these funds were used to pay
eligible Authority expenses. When the Authority's Board of Commissioners
confronted the former Executive Director with some of these transactions,
she repaid the entire amount of the transactions in question to the
Authority.

The former Executive Director repaid $2,150 taken from the Section 8
Existing Program and $200 taken from the Section 8 Voucher Program. The
balance owed to the Section 8 Voucher Program account is $450.

Of the $9,443 taken from the Section 8 New Construction Program, the
former Executive Director has repaid $5,619. However, $5,371 of the
$5,619 in repayments was deposited into the accounts of other programs.
The full amount should have been deposited into the Section 8 New
Construction Program account.

The following table shows the funds erroneously deposited into other
accounts which need to be transferred to the Section 8 New Construction
Program account:

                           Amount of Funds
Program Account                 To Be Transferred

Section 8 Existing Account deposits        (2,405)
Section 8 Voucher Account deposits            (882)
Farmers Home Administration deposits         (2,084)

The former Executive Director still needs to reimburse the New
Construction account $3,824.

The Authority had ineligible expenses

Between October 1, 1992 and September 7, 1995, the Authority's former
Executive Director disbursed program funds totalling $8,115 for
ineligible expenses. These expenditures were not necessary for the daily
operations of the Authority. A breakdown of the ineligible expenses paid
from Section 8 Program funds follows:

-- $ 4,660 for interest and penalties paid to the Internal Revenue
   Service.

-- $ 3,455 for employee bonuses.

The Authority paid $4,660 in penalties and interest charges from its
Section 8 New Construction Program Account because it was delinquent in
filing its quarterly tax returns for federal withholding taxes for
calendar years 1992 through 1994. According to HUD Handbook 7420.7,
Chapter 8, paragraph 4(d), fines and penalties are unallowable costs
except when incurred as a result of compliance with specific written
instructions from HUD.

The Authority paid employee bonuses totalling $3,455 from Section 8 funds
between October 1, 1992 and December 31, 1994. The bonuses included
$2,412 charged to the Section 8 New Construction Program, $303 charged to
the Section 8 Voucher Program, and $740 charged to the Section 8 Existing
Program. There was no evidence to show that these bonuses were based
upon exceptional employee performance. HUD believes that public housing
employees should not be given across the board unearned bonuses.

The former Executive Director extensively controlled cash disbursements

The misappropriation of funds, unsupported disbursements, and ineligible
expenses occurred because the former Executive Director had extensive
control over the Authority's disbursements. She had the authority to
sign checks with another employee of the Authority being the co-signer.
No one from the Board of Commissioners co-signed the checks or reviewed
the documents supporting the payments. Thus, the Board of Commissioners
did not effectively carry out its responsibility to review and verify the
supporting documentation for disbursements. As a result, HUD funds were
misused and there was no assurance that disbursements were proper.

Auditee Comments

Excerpts from the Authority's comments on our draft finding follow.

The Commissioners are now exercising more hands on control of the
expenses and deposits by how they review these items. All of the
finances are being reviewed more diligently. As to the amount of
misappropriation, the Commissioners have no knowledge at this time to
dispute the amount. However, an audit is underway and the Commissioners
reserve the right to reexamine these figures with you at the conclusion
of the audit.

The Commissioners have asked that the IRS be contacted to see if any of
the penalties paid can be abated.

The HUD regulations do allow the payment of bonuses. You are questioning
these payments because the employees did not demonstrate "exceptional
performance related to the public housing authorities housing programs."
The Commissioners believe that the payments are justified.

OIG Evaluation of Auditee Comments

Generally, the Authority's comments show positive actions to address our
finding and recommendations.

If the Authority does get the IRS to abate all or part of the tax
penalties paid, the Section 8 New Construction Account should be credited
to reduce the amounts due to this account by the Authority.

Regarding the employee bonuses, the issue in the audit finding is not
whether the Authority's employees demonstrated exceptional performance.
Rather, the audit finding states that the bonuses paid to the employees
were across the board holiday bonuses. The checks issued to the
employees notated that the payments were holiday bonuses. There was no
documentation to show that the bonuses were based on the employees'
performance.

Recommendations

We recommend that the HUD Illinois State Office's Director of Public
Housing assures that the Henderson County Housing Authority:

1A. Establishes controls to ensure the Board of Commissioners reviews
  and verifies supporting documentation before authorizing Authority
  disbursements.

1B. Transfers the following amounts repaid by the Authority's former
   Executive Director to the Section 8 New Construction Program
   account: $2,405 from the Section 8 Existing Program account;
   $882 from the Section 8 Voucher Program account; and $2,084 from the
   Farmers Home Administration project accounts.

1C. Requires the former Executive Director to repay misappropriated or
   unsupported funds of $3,824 to the Section 8 New Construction
   Program account and $450 to the Section 8 Voucher Program account.

1D. Reimburses the following amounts from non-HUD funds: $7,072 to the
  Section 8 New Construction Program account; $303 to the Section 8
  Voucher Program account; and $740 to the Section 8 Existing Program
  account. These reimbursements are for ineligible employee bonuses
  and penalties and interest paid to the Internal Revenue Service.

Internal Controls

In planning and performing our audit, we considered the internal controls
of the management of the Henderson County Housing Authority in order to
determine our audit procedures and not to provide assurance on internal
controls. Internal Controls consist of the plan of organization,
methods, and procedures adopted by management to ensure that resource use
is consistent with laws, regulations, and policies; that resources are
safeguarded against waste, loss, and misuse; and that reliable data are
obtained, maintained, and disclosed in reports.

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

-- Oversight body

-- Management monitoring methods

-- Personnel policies and practices

-- Completeness of accounting system

-- Proper authorizations

-- Segregation of duties

-- Safeguard over access to and use and records

-- Independent verifications and reconciliations

Significant weaknesses

It is a significant weakness if internal controls do not give reasonable
assurance that resources use in consistent with laws, regulations, and
policies; that resources are safeguarded against waste, loss, and misuse;
and that reliable data are obtained, maintained, and fairly disclosed in
reports.

Based on our review, the following item is a significant weakness:

Management monitoring methods: Taken as a whole, the finding in this
report show, that the Housing Authority Board of Commissioners needs to
increase effective managerial oversight to assure HUD's requirements are
met, and to improve supervisory controls. We found that the Authority's
Board of Commissioners did not have adequate control of the Authority's
cash disbursements (see Finding 1).

Follow Up on Prior Audits

This is the first OIG audit of the Henderson County Housing Authority.

The Housing Authority's last Single Audit Report was for the Fiscal Year
ended September 30, 1990. The report did not contain any findings
related to our audit.

The Authority has contracted with a Certified Public Accounting firm to
complete the Single Audit for the fiscal years ended September 30, 1991
through September 30, 1994. This audit was not completed at the
conclusion of our audit.

Appendix A

Schedule of Ineligible Costs

Recommendation       Ineligible
  Number            Costs

    1C          $4,274.00
    1D           8,115.00

    TOTAL          $12,389.00

Ineligible costs are costs the Housing Authority charged to a HUD program
or activity that are not allowed by law, contract, or Federal, State, or
local policies, or regulations.

Appendix B

Auditee Comments

[Available in official printed copy ONLY.]

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