oversight

City of East Cleveland, East Cleveland, OH

Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-10-17.

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

                                                                    Issue Date

                                                                         October 17, 1995
                                                                    Audit Case Number

                                                                         96-CH-241-1002




TO: John E. Riordan, Director, Community Planning and Development, Ohio State Office


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

SUBJECT: City of East Cleveland
      Community Development Block Grant Program
      East Cleveland, Ohio


We completed a review of the City of East Cleveland's Community Development Block Grant
Program. The objectives of the review were to determine whether the City: (1) complied with
Federal laws, HUD regulations, and other requirements; (2) had adequate controls to comply with
these requirements; and (3) carried out its activities in an economical, efficient, and effective
manner. HUD's Ohio State Office requested the audit.

The City has a new administration to operate the Program. The Director of the Community
Development Department revised some policies and procedures for administering the Block
Grant Program, and the Director of Finance was strengthening controls over the City's Finance
Department. The City also engaged a nonprofit housing corporation to correct the problems in
the City's residential rehabilitation program. Still, the City had work to do to bring its Block
Grant Program into compliance with Federal laws, regulations and other requirements and carry
out its activities in an economical, efficient and effective manner.

The City of East Cleveland did not: (1) achieve its primary objective of correcting code
violations; (2) spend $42,657 Block Grant money on eligible or supported activities; and (3)
establish an effective system of internal controls.

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

If your staff has questions, please contact me at (312) 353-7832.
Management Memorandum




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96-CH-241-1002                   Page ii
Executive Summary
We completed a review of the City of East Cleveland's Community Development Block Grant
Program. The objectives of the review were to determine whether the City: (1) complied with
Federal laws, HUD regulations, and other requirements; (2) had adequate controls to comply with
these requirements; and (3) carried out its activities in an economical, efficient, and effective
manner. HUD's Ohio State Office requested the audit.

The City has a new administration to operate the program. The Director of the Community
Development Department revised some policies and procedures for administering the Block
Grant Program, and the Director of Finance was working to improve controls over the Finance
Department. The City also engaged a nonprofit housing corporation to correct the problems in
the City's residential rehabilitation program. Still, as the findings show, the City had work to do
to bring its Block Grant Program into compliance with Federal laws, regulations, and other
requirements and carry out its activities in an economical, efficient and effective manner.



                                      The East Cleveland housing rehabilitation program, funded
 Housing rehabilitation
                                      by the Community Development Block Grant Program, did
 did not meet its primary
                                      not achieve its primary objective of correcting violations of
 objective
                                      the City's occupancy code. The program was deficient in
                                      all phases. Contract work specifications omitted corrective
                                      work for some violations. Then the City did not inspect
                                      rehabilitated homes for substandard work before it paid
                                      contractors. The City also included duplicate work in its
                                      specifications, and did not obtain the lowest prices.
                                      Because of the deficiencies, the City paid $55,551 for
                                      substandard and duplicate work. Homeowners benefitted
                                      from the program, but they were, to varying degrees,
                                      adversely effected.

                                      Administratively, the City did not use its waiting list
                                      correctly, did not obtain required liens on properties and
                                      promissory notes, and did not document the benefit to low
                                      or moderate-income families.

                                      In 1994, the City suspended the rehabilitation program
                                      because of its problems and engaged a local housing
                                      organization to correct substandard work. The City intended
                                      to reassume administering the program. Based on our
                                      review, however, we concluded that without substantial
                                      improvement, the City will not have the capacity to operate
                                      a housing rehabilitation program effectively and
                                      economically.


                                              Page iii                                 96-CH-241-1002
Executive Summary




                              The City of East Cleveland paid $42,657 of Community
 Block Grant Program
                              Development Block Grant money for ineligible and
 paid for ineligible and
                              unsupported costs. The ineligible costs consisted of
 unsupported costs
                              $16,765 for indirect costs the City should have charged to
                              other programs, and $18,887 for non-Block Grant activities.
                              The City also did not have invoices to document $7,005
                              worth of payments.         The Director of Community
                              Development said the previous Director during 1993 and
                              1994 did not follow policies and procedures. More
                              critically, the City had not set up procedures to ensure
                              proper payments. As a result, less money was available to
                              pursue Block Grant Program objectives. On the positive
                              side, the City improved its payment procedures during
                              1995.

                              The City of East Cleveland did not have an effective
 Internal controls were not
                              internal control system.          The City's Community
 effective
                              Development Department did not: monitor subrecipients
                              and other city departments, properly allocate salaries among
                              city departments, obtain audits timely, segregate employees'
                              duties at the City's Finance Department, and control keys to
                              the check signing machines. The environment within the
                              department was compromised because the City's existing
                              controls were defective. As a result, the City did not ensure
                              HUD that Block Grant money was safeguarded from
                              misuse, loss, and waste.

                              We recommend that the City substantially improve its
 Recommendations
                              handling of the rehabilitation program or continue to use an
                              outside agency to administer the program. We also
                              recommend that the City: repay the Block Grant Program
                              $55,551 for incomplete, defective, and duplicate
                              rehabilitation work; repay $35,652 for ineligible
                              expenditures and $7,005 for unsupported expenditures;
                              strengthen its internal controls; and correct items cited
                              during our inspections of rehabilitated homes. We included
                              specific recommendations in each finding.

                              We presented our findings to the Community Development
                              Director during the audit. We held an exit conference on
                              September 12, 1995. The City provided written comments
                              to our findings and recommendations. We considered the
                              responses in preparing our final report. We included




96-CH-241-1002                        Page iv
                                                             Executive Summary



                         excerpts from the responses in each finding and in their
                         entirety in Appendix B.




Table of Contents

Management Memorandum                                                             i


Executive Summary                                                                iii


Introduction                                                                      1


Findings

    1      The East Cleveland Housing Rehabilitation
           Program Did Not Achieve Its Primary
           Objective of Correcting Code Violations                                3

    2      The City Paid for Ineligible and
           Unsupported Costs                                                    21

    3      The City of East Cleveland Lacked
           Effective Internal Controls                                          29


Internal Controls                                                               39


Follow Up On Prior Audits                                                       41


Appendices



                                 Page v                               96-CH-241-1002
        A        Schedule of Questioned Costs   43

        B        Auditee Comments               45

        C        Distribution                   57




96-CH-241-1002                      Page vi
                                       Table of Contents




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                Page vii                     96-CH-241-1002
Introduction

The Community Development Block Grant Program was established under Title I of the Housing
and Community Development Act of 1974. The Program provides grants to aid in the
development of viable urban communities. The Program's purpose is to provide decent housing
and a suitable living environment and expanding economic opportunities, principally for person
of low and moderate income. The Act also addresses the conservation of the Nation's scarce
energy resources, improvement of energy efficiency, and the provision of alternative and
renewable energy sources. The City of East Cleveland received grants from HUD to achieve its
goals of meeting one of three program objectives:

   •   Benefit low and moderate income persons

   •   Aid in preventing or eliminating slums or blight

   •   Address a need with a particular urgency because existing conditions pose a serious and
       immediate threat to the health or welfare of the community.

East Cleveland is incorporated, operates under its own Charter, and became an entitlement city
in 1988. The Charter provides for the Mayor-Council form of government and authorizes the
following services: Public Safety, Public Service, Water and Sanitation, Health and Social
Services, Culture-Recreation, Public Improvements, and General Administrative Service.

HUD authorized the City of East Cleveland $4,842,000 in Community Development Block Grant
grants over the past four years. It has spent $2,933,000 of the grants as the following table
shows.


                                 AMOUNT                    AMOUNT
                      YEAR      AUTHORIZED                EXPENDED
                       1992       $ 972,000               $ 972,000
                       1993        1,184,000               1,184,000
                       1994        1,301,000                 777,000
                       1995        1,385,000                   0
                                  $4,842,000              $2,933,000

The City's Community Development Department administered the Program. Mrs. Venezuela
Robinson, Director of Community Development, was the City's official representative for the
Program. The Director of Finance was Gayle Smith. The records and books of account were at
13601 Euclid Avenue and 14340 Euclid Avenue, East Cleveland, Ohio.



                                    The objectives of our review were to determine whether the
 Audit Objectives
                                    City: (1) complied with Federal laws, HUD regulations, and


                                            Page 1                                96-CH-241-1002
Introduction



     other requirements; (2) had adequate controls to comply with these requirements; and (3)
     carried out its activities in an economical, efficient, and effective manner. Our specific
     objectives were to determine whether:

                                    •   The City's rehabilitation program met its objective of
                                        correcting occupancy code violations and whether the
                                        City administered the program in an efficient and
                                        economical manner.

                                    •   The City spent Block Grant money for eligible and
                                        supported costs.

                                    •   The City had effective controls to ensure compliance
                                        with Federal laws, regulations, and other requirements
                                        and to ensure it spent Block Grant money economically
                                        and efficiently.

                                    We conducted the review at HUD's Ohio State Office and
 Scope and Methodology
                                    the City of East Cleveland. To find out HUD's concerns and
                                    obtain background information, we reviewed HUD
                                    monitoring and correspondence files. We also interviewed
                                    key persons at the Ohio State Office.

                                    To evaluate the City of East Cleveland's Block Grant
                                    Program, we reviewed property files and work
                                    specifications, program policies and procedures, and the
                                    1992 independent audit report. We interviewed City staff
                                    to obtain information about program administration and
                                    requirements.

                                    An Office of Inspector General Construction Specialist
                                    reviewed work specifications and inspected 27 homes to
                                    find out whether code violations were corrected. We relied
                                    on the judgement of the Construction Specialist and
                                    interviews with homeowners to find out what code
                                    violations existed at the time of the City's initial inspection.

                                    Our audit covered the period from January 1993 through
                                    February 1995. We extended the audit period as necessary.
                                    We did the field work between March and August 1995.
                                    We conducted the audit following generally accepted
                                    government auditing standards. We provided a copy of this
                                    report to the City's Community Development Director.



96-CH-241-1002                               Page 2
                                                                                         Finding 1




    The East Cleveland Housing Rehabilitation
      Program Did Not Achieve Its Primary
     Objective of Correcting Code Violations

The East Cleveland housing rehabilitation program, funded by the Community Development
Block Grant Program, did not achieve its primary objective of correcting violations of the City's
occupancy code. The program was deficient in all phases. Contract work specifications omitted
corrective work for some violations. The City did not inspect rehabilitated homes for substandard
work before it paid contractors. The City also included duplicate work in its specifications, and
did not obtain the lowest prices. Administratively, the City did not use its waiting list correctly,
did not obtain required liens on properties and promissory notes, and did not document the
benefit to low or moderate-income families.

The City's rehabilitation staff was not well versed in the City's occupancy code and the program
requirements, and especially the electrical and plumbing requirements. An unapproved volunteer
inspected some rehabilitation work. City staff that did inspections said they did not know that
the City's code required compliance with the Building Officials and Code Administration
National Property Maintenance Plan and Rule Number 6 of the National Electric Code dated
1987. One employee said the former Director told him not to correct certain code violations,
analyze contractor prices, and approve any change orders. The administrative deficiencies were
largely because of a lack of controls and oversight.

Because of the above problems, the City paid $55,551 for substandard and duplicate work from
rehabilitation costs totaling $269,417 for the 27 homes we inspected. Homeowners benefitted
from the program, but they were, to varying degrees, adversely affected. Specifically,
homeowners signed promissory notes for the total costs of the rehabilitation that included
incomplete and defective work. The promissory notes committed homeowners to live in
substandard homes for eight to ten years. Otherwise, they had to pay for the rehabilitation cost
or face losing their homes. Because of the administrative weaknesses, the City did not select
applicants equitably, could not enforce occupancy requirements, and could not be sure that
participants met income requirements.

In 1994, the City suspended the rehabilitation program because of its problems and engaged a
local housing organization to correct substandard work. The City intended to reassume
administering the program. Based on our review, however, we concluded that without substantial
improvement, the City will not have the capacity to operate a housing rehabilitation program
effectively and economically.




                                               Page 3                                   96-CH-241-1002
Finding 1




                          HUD Regulation 24 CFR 570.202(a)(1), permits spending
 HUD Requirements
                          Block Grant funds to finance the rehabilitation of homes.
                          HUD Regulation 24 CFR 85.22(b) states that costs will be
                          allowed according to cost principles applicable to the
                          organization incurring the costs. Local governments must
                          use the cost principles in Office of Management and Budget
                          Circular A-87, Cost Principles for State and Local
                          Governments. Paragraph (C)(1)(a) of Circular A-87 states
                          that to be allowable, costs must be necessary and reasonable
                          for proper and efficient administration of the program.

                          The City's policies and procedures stated that the objective
 Program Objectives and
                          of the rehabilitation program was to correct code violations.
 Description
                          The City Codified Ordinances, Chapter 1351, established
                          basic standards for residential occupancy. The City also
                          incorporated into its occupancy code the Building Officials
                          and Code Administration National Property Maintenance
                          Plan and Rule Number 6 of the National Electric Code
                          dated 1987.

                          The City operated two similar rehabilitation programs: the
                          Code Enforcement Grant Program and the Deferred Loan
                          Program. The programs were intended to rectify code
                          violations that seriously affected the use and livability of a
                          property. Rehabilitation costs were limited to $15,000 for a
                          single-family home. A lien was placed on the property for
                          the rehabilitation costs. Homeowners had to repay the
                          grants in full if they sold or transferred the property within
                          eight to ten years. If the homeowner resided in the property
                          for the required time, the City removed the lien, and the
                          loan was forgiven.

                          The City's policies and procedures stated that the City was
 City and Contractor
                          responsible for preparing work specifications to correct
 Responsibilities
                          code violations. The City was also responsible for
                          inspecting the rehabilitation work while in progress and at
                          completion.

                          The rehabilitation contracts were between the contractors
                          and homeowners. Contractors were required to complete
                          the work specifications incorporated in the contracts. The
                          contracts also required the contractor to do all work to



96-CH-241-1002                     Page 4
                                                                                       Finding 1



meet local codes and property rehabilitation standards whether covered by the specifications.

                                    The contracts prohibited changes to the contract
                                    specifications unless a homeowner had already corrected
                                    the violations. In these cases, the work items were to be
                                    deleted and the prices adjusted accordingly.         The
                                    homeowner was to pay for any additional work outside the
                                    contract.

                                    We inspected 27 homes. The City had not rehabilitated any
 How we selected and
                                    homes in 1994 and 1995. So, we judgmentally selected for
 inspected homes
                                    inspection 29 of the 32 homes rehabilitated in 1992 and
                                    1993. The homes selected were the most costly of the
                                    rehabilitated homes. We selected a large sample because of
                                    indicated problems with the City's rehabilitation program.
                                    We did not inspect two homes because their ownership had
                                    changed.

                                    We inspected the homes to find out whether: the contractors
                                    corrected all code violations, specifications covered all code
                                    violations, and work was done completely and correctly.
                                    An Office of Inspector General Construction Specialist,
                                    accompanied by a City Rehabilitation Specialist, inspected
                                    the homes. We relied on our Construction Specialist's
                                    judgment and interviews with homeowners to find out
                                    whether code violations omitted from the specifications
                                    existed at the time of the City's initial inspection.

                                    The City did not independently estimate cost and analyze
 The City did not ensure
                                    contractor prices to ensure the reasonableness of prices.
 the reasonableness of
                                    HUD does not require independent cost estimates for
 prices
                                    homeowner-contractor contracts. However, they are an
                                    effective tool for analyzing the reasonableness of prices.

                                    The City accepted the lowest-priced contract proposal
                                    without analyzing the price of individual work items. As a
                                    result, the City paid obviously unreasonable prices for some
                                    work items. For example, the City paid $100 for a splash
                                    block under an outside downspout. At another property, the
                                    City paid $275 to replace a light switch. A HUD Ohio State
                                    Office Rehabilitation Specialist told us that he would have
                                    allowed no more than a total of $50 for a splash block and
                                    $75 for a light switch, including labor.
                                    We received unreconcilable reasons on why cost estimates
 Why cost estimates were
                                    were not developed. The City Specialist said the former
 not made
                                    Director verbally instructed him not to prepare cost



                                             Page 5                                   96-CH-241-1002
Finding 1



     estimates. The former Director told us, however, that he never told the City Specialist to stop
     them. The Specialist, he said, was not capable of estimating the costs.

                                      Code violations existed in each of the 27 homes we
 Code violations were not
                                      inspected. In all, the 27 homes contained 447 uncorrected
 corrected
                                      code violations. The City's work specifications did not
                                      require correction of 188 code violations.               The
                                      specifications for 14 properties contained 25 duplicate work
                                      items.

                                      The total rehabilitation costs of the 27 homes were
                                      $269,417, of which $55,551 was for substandard and
                                      duplicate work. The City paid $39,578 for incomplete
                                      work, $10,184 for defective work, and $5,789 for duplicate
                                      work. The following table shows the inspection results in
                                      more detail.


                                                                    Number of Violations
                                            Description   Omitted    Incomplete   Defective   Totals

                                          Code-Related
                                          Exterior
                                           maintenance       33         114          14        161

                                          Electrical
                                          systems            46          42           7         95

                                          Interior
                                           maintenance       23          37           6         66

                                          General
                                                             29           2                     31
                                           maintenance

                                          Plumbing            8          12           1         21

                                          Roofs/gutters       5          12           3         20

                                          Handrails          15           5           1         21

                                          Ventilation       19                                  19

                                          Seven other
                                          code items         10           2           1         13

                                           Subtotals         188        226          33        447

                                          Non-code work                  23           1         24

                                           Totals            188        249          34        471


                                      As the table shows, the uncorrected violations mostly
                                      related to exterior maintenance, electrical systems, and
                                      interior maintenance.


96-CH-241-1002                                  Page 6
                                                                                              Finding 1




                                           Work specifications omitted correction of code violations
 The specifications
                                           but included duplicate work. The 188 omissions ran the
 omitted some code
                                           gamut, covering 15 sections of City code. The most
 violations and included
                                           frequent omission, 46 items in total, related to correction of
 duplications
                                           electrical systems violations. The next highest numbers of
                                           omissions were for exterior maintenance (33), general
                                           maintenance (29), and interior maintenance (23).

                                           The specifications also included 25 duplicate work items.
                                           Duplicate work items were items listed twice on the
                                           specifications. Thus, the City paid the contractors twice for
                                           doing the same work once.

                                           The following pictures show examples of code violations
                                           not cited by the City. We relied on our Construction
                                           Specialist's judgment and interviewed homeowners to find
                                           out whether code violations omitted from the specifications
                                           existed at the time of the City's initial inspection.




Contrary to the City code, water
pipe cutoff valves were not required
to be installed. The occupants risked
flooding if the pipes had leaked.
Also holes around the drain pipes
were not sealed. Rodents and insects
could have entered the residence through
the holes.




                                           1621-23 Delmont




                                                    Page 7                                   96-CH-241-1002
Finding 1




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96-CH-241-1002                   Page 8
                                                                                        Finding 1




The rear porch deck was rotted out.
The City did not require replace-
ment. People ran the risk of
falling through.




                                      14609-11 Orinoco




Dilapidated detached garage
in the rear yard should have
been required to be removed
from the premises. The structure
was a safety risk to the residents.
It could have collapsed and injured
anyone nearby.




                                      1907 Rosemont


                                      The City staff variously responsible for initially inspecting
 Why the specifications
                                      homes, preparing specifications, and inspecting contractor
 did not require correction
                                      work told us that they were not knowledgeable about City
 of code violations
                                      code requirements. The City Specialist responsible for all
                                      the functions said he was not knowledgeable enough to
                                      identify all electrical and plumbing violations. The former



                                               Page 9                                  96-CH-241-1002
Finding 1



                            Director, however, told us that the City Specialist had
                            received training.

                            Two Housing Department inspectors also made some initial
                            inspections. The two inspectors told us that they did not
                            know that contractors were required to comply with the
                            City and industry codes, the Building Officials and National
                            Code Administration of National Property Maintenance
                            Plan, and Rule Number 6 of the National Electric Code.
                            They believed that only compliance with the City
                            residential occupancy code was required. They did not
                            know that the City Codified Ordinances required
                            compliance with all three codes. Based on the City
                            Specialist's and Housing Inspectors' statements, we believe
                            the City's staff were not knowledgeable enough to complete
                            the initial inspections and write effective specifications.

                            Also, the City Specialist told us that the former Director
                            instructed him to hold costs to a minimum. Therefore, he
                            was not to correct code violations for driveways, sidewalks,
                            and exterior paint. He also said the former Director told him
                            not to approve change orders, regardless of City code
                            requirements.

                            The Specialist's statement was not reasonable. The
                            specifications omitted code violations other than driveways,
                            sidewalks, and exterior paint.           For example, the
                            specifications omitted work to correct electrical, plumbing,
                            ventilation, and interior maintenance violations. In
                            addition, the City had approved change orders for some
                            properties.

                            The City Specialist told us that an office worker typed the
 Why work items were
                            work specifications. The City Specialist could not
 duplicated
                            remember whether he had proofread the specifications. This
                            could explain the inclusion of duplicate items.

                            The City paid $49,762 for substandard work: $39,578 for
 The City paid for
                            incomplete work and $10,184 for defective work. For the
 incomplete and defective
                            27 homes we inspected, 226 work items to correct City
 work
                            code violations, and 23 non-code related work items were
                            incomplete.

                            The following pictures show examples of incomplete work.


96-CH-241-1002                      Page 10
                                                                                     Finding 1




Contrary to the specifications,
no repairs were made to the
window. The owner had to use a prop
to keep the window open. Occupants
risked hand injury if the prop
slipped.




                                      1233 Melbourne




Broken and missing shingles were
not replaced as required. Water
will eventually leak through
and cause interior damage and be
a hazard to the occupants.




                                      1096-98 Eddy


                                      Besides the incomplete work, we detected 34 defective
                                      work items in 14 of the 27 homes inspected. The following
                                      picture is an example of defective work.




                                              Page 11                              96-CH-241-1002
Finding 1




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96-CH-241-1002                   Page 12
                                                                                       Finding 1




The living room wall switches
were required to be replaced.
Only two were replaced. Electrical
wiring was exposed in the third
opening. Children could have stuck
an object through the outlet
and received a shock or been
electrocuted.




                                     14419 Alder


                                     Based on the results of our inspections, review of the City's
 Why the City paid for
                                     inspection reports, and discussions with the City's staff, we
 incomplete and defective
                                     concluded that the City did not effectively inspect the
 work
                                     rehabilitation work while in progress or upon completion.
                                     The City's procedures required the Specialist to inspect the
                                     properties at 30 percent completion, 80 percent completion,
                                     and 100 percent completion. The City was to pay
                                     contractors only for work items completed.               The
                                     homeowner was to sign a certificate of completion and
                                     acceptance before final payment to the contractors.

                                     Interim inspection reports did not show the percentage of
                                     completion. Without determining the percentage of
                                     completion, the City lacked a basis for paying the
                                     contractors.

                                     Files for 23 of the 29 homes we originally selected did not
                                     contain signed certificates of completion and acceptance.
                                     Only six files had signed certificates. Two other files had
                                     forms, but the homeowners had not signed them. Although
                                     certificates for 23 homes were unsigned or missing, the City
                                     paid contracts in full for the 27 properties we inspected.

                                     The former Director and City Specialist made conflicting
                                     statements about why the City paid the contractors. The



                                             Page 13                                  96-CH-241-1002
Finding 1



                       former Director told us that he paid the contractors for work
                       that the City Specialist approved as completed. He said the
                       Specialist submitted a form showing the work completed
                       and the amount payable to the contractor. However,
                       payment vouchers in the City accounting department were
                       supported only by contractor invoices, not inspection or
                       payments forms.

                       The City Specialist told us that a certificate of completion
                       and acceptance was not completed for most of the homes
                       because no final inspection was made. The City Specialist
                       told us that the former Director authorized the City to pay
                       the contractors. The Specialist did not know why the
                       former Director authorized the payments without
                       certificates of completion and acceptance. The Director
                       told us that the former Director circumvented requirements
                       at his discretion.

                       Finally, the former Director used an unapproved volunteer
                       inspector to inspect some homes. The City operated a
                       volunteer program allowing approved citizens to work for
                       the City. The City volunteer program director, however,
                       never approved the volunteer inspector working for the
                       former Director. The unapproved inspector had certified
                       that work our Construction Specialist found incomplete had
                       been completed.

                       Several aspects of the City's administrative controls were
 City administrative
                       deficient. The City did not use its waiting list, obtain
 controls were not
                       required liens, and document the incomes of homeowners.
 effective
                       The City did not use its waiting list. The City placed
                       qualified rehabilitation applicants on a waiting list in the
                       order received. The waiting list was to provide an equitable
                       basis for selecting applicants. The City, however, did not
                       use the waiting list as required by its policies and
                       procedures. A City Housing Counselor said the City did
                       not rank the applicants. She said the former Director
                       selected applicants at his discretion. Because the City did
                       not use an equitable basis for choosing applicants, it denied
                       eligible and needy applicants equitable treatment.

                       Liens were not filed. The City did not place required liens
                       against five of the rehabilitated homes. The City's policies


96-CH-241-1002                 Page 14
                                                                            Finding 1



                         and procedures required the filing of a lien equal to the
                         rehabilitation cost. Liens established legal claims against
                         the property owners. Without liens, the City lacked
                         recourse in the event the owners sold their properties before
                         the required occupancy of eight to ten years.

                         One promissory note was not executed. The City did not
                         obtain a promissory note for one home. The City's policies
                         and procedures required that the homeowner sign a
                         promissory note for the rehabilitation costs.          The
                         promissory note would have allowed the City to recover the
                         rehabilitation costs if the homeowner sold the property
                         before an agreed upon time. This property was one of the
                         five for which the City did not file a lien. A mortgage
                         company foreclosed on the property. Because the City had
                         failed to file a lien and obtain a promissory note from the
                         homeowner, it lacked a basis for obtaining reimbursement
                         for the rehabilitation costs.

                         Low-and moderate-income benefit was not documented.
                         Three of the 29 rehabilitation files we reviewed did not
                         document any verification of the homeowners' incomes.
                         The City's policies and procedures required verification.
                         Without documentation of homeowners' income, HUD and
                         the City had no way to determine whether the rehabilitation
                         work met the national objective of benefitting low and
                         moderate-income persons.

                         We attribute the administrative deficiencies to the former
Why administrative
                         Director's failure to ensure compliance with program
deficiencies existed
                         requirements. A City Housing Counselor, who was
                         responsible for maintaining the waiting list, told us that the
                         former Director approved whomever he wanted despite
                         their waiting list position.          The former Director
                         acknowledged that he did not select homeowners in the
                         order of the waiting list. Further, a Housing Counselor told
                         us that there was a high turnover of the staff responsible for
                         obtaining homeowner income information and filing liens;
                         therefore, some duties were not always done.

                         We provided the Director of the City's Community
The Director concurred
                         Development Department and HUD's Ohio State Office
with our audit results
                         staff with the inspection results. The Director agreed with
                         our inspection results and analysis of the City's program.


                                 Page 15                                   96-CH-241-1002
Finding 1



                          The City Specialist, however, disagreed in general with our
                          inspections. He attributed the rehabilitation deficiencies to
                          the former Director's verbal instructions to ignore certain
                          code violations. He did not, however, dispute any specific
                          deficiency we identified. We also discussed the results of
                          our inspections with HUD's Ohio State Office staff. They
                          concurred with our findings.

                          The Director did not want to correct the violations we cited.
                          She said it would be too costly to bring some homes up to
                          code. She would rather use the money to rehabilitate other
                          homes rather than pour more money into properties that the
                          City probably should not have selected in the first place.
                          The Director said the City should not have selected homes
                          that were too costly to rehabilitate.

                          We agree that bringing the homes into compliance with the
                          City's code may be costly. However, we believe that the
                          City has an obligation to the homeowners to correct code
                          violations as it had originally committed to do.

                          The City planned to administer future rehabilitation work
 The City planned to
                          itself. The Director had revised some policies and
 administer the
                          procedures for administering rehabilitation programs. By
 rehabilitation program
                          revising policies and procedures, the Director made a
                          positive effort to correct the rehabilitation program
                          deficiencies. In our opinion, however, the City's revised
                          policies and procedures alone will not correct the problems.
                          Instead, the City must ensure that staff can operate the
                          rehabilitation program.

                          The results of our audit showed that the staff who inspected
                          the 27 homes in our sample were not capable of operating
                          the program. In 1994, at the request of HUD's Ohio State
                          Office, the City engaged a local housing organization to
                          administer the program. HUD praised the decision to use
                          an outside agency to administer the program. We
                          concurred with the decision.

                          During our audit, the Director said the City had new
                          employees who were capable of completing the initial
                          inspections, writing specifications, and assuring that
                          contractors completed the required work. We have no basis
                          to evaluate the Director's statements concerning the new


96-CH-241-1002                    Page 16
                                                                      Finding 1



                    staff. Therefore, HUD's Ohio State Office must evaluate
                    whether the City's new staff can administer the program. If
                    HUD's Ohio State Office determines that the new staff are
                    capable, then the City should be allowed to administer the
                    rehabilitation program. If HUD determines that the City's
                    new staff are not capable, the City should continue to use an
                    outside qualified organization to do certain functions such
                    as initial inspections, write-up of work specifications, and
                    final inspections. Therefore, HUD's Ohio State Office must
                    work closely with the City and find out the new staff's
                    capabilities.



Auditee Comments    The City has supplied to the Inspector General's office
                    resumes and background materials for new designated
                    positions of Housing Program Manager and Construction
                    Manager. These individuals will work with the established
                    Housing Rehabilitation Specialist and Housing Counselor.
                    The Housing Program Manager's background includes
                    specification writing and experience in construction
                    management and housing rehabilitation. The Housing
                    Program Manager will work with the City's Chief Building
                    Official. The Chief Building Official holds Plumbing and
                    Electrical Certificates under authority of the Ohio Basic
                    Building Code. The Housing Construction Manager has
                    experience in housing maintenance and as a housing
                    inspector for three years. The City's Housing Rehabilitation
                    Specialist and Housing Counselor report directly to the
                    Housing Program Manager. Together, these parties monitor
                    each other's work for accuracy and code compliance. This
                    team approach also will monitor the City's waiting list and
                    make certain that liens and required promissory notes are
                    executed. In this way, the City is confident that by
                    generating daily inspection reports, proposed specifications
                    for any rehabilitation assignment may be reviewed for
                    accuracy and code compliance before solicitation of bids
                    for construction.

OIG Evaluation of   The City's response states, in essence, that the new staff is
Auditee Comments    qualified and is going to correct the deficiencies described
                    in our finding. The new staff has not been involved with
                    the City's rehabilitation program. Therefore, we are
                    recommending that HUD's Ohio State Office evaluate the
                    new staff's capability to administer the program.


                            Page 17                                  96-CH-241-1002
Finding 1




Auditee Comments    Simply put, we concur with the observation that constant
                    management of the Housing Rehabilitation Program is
                    required. If there are members of the Community
                    Development Department that are unable (or incapable) of
                    performing their official duties as anticipated and required,
                    a detailed performance evaluation outlining these
                    deficiencies, including progressive discipline, will be
                    implemented. The City pledges to continue working
                    closely with HUD officials with the Ohio State Office to
                    ensure compliance.

OIG Evaluation of   The City's response shows that the City intends to monitor
Auditee Comments    closely its staff and work with HUD's Ohio State Office to
                    insure compliance with program requirements. We believe
                    these are positive steps.


Auditee Comments    The City supports any recommendation that those
                    contractors that have done incomplete or defective work
                    should be suspended temporarily from participating in the
                    City's Housing Rehabilitation Program.

OIG Evaluation of   The City should provide HUD with sufficient
Auditee Comments    documentation to support a temporary denial of
                    participation of those contractors paid for incomplete and
                    defective work.

                    The City did not address our recommendations to: correct
                    code violations, do costs estimates and analyses, provide
                    training to staff. It also did not comment on controls for:
                    paying contractors, determining family income, selecting
                    applicants, ensuring rehabilitation costs are reasonable,
                    proofreading work specifications, and rejecting or accepting
                    contractors. Finally, the City did not comment on the
                    recommendations to repay $55,551 for incomplete,
                    defective, and duplicate work.



Recommendations     We recommend that the Ohio State Office's Director of
                    Community Planning and Development Division instructs
                    the City to take the following corrective actions:



96-CH-241-1002              Page 18
                                                  Finding 1



1A.   Correct the incomplete and defective work
      particularly those items that are immediate health
      and safety issues. No future rehabilitation work
      should be done until these items are completed or
      the City can demonstrate that it has sufficient funds
      to correct the items and do new rehabilitation work.
1B.   Correct the code violations that City specifications
      did not require to be corrected, particularly those
      violations that are dangers to the tenants' health and
      safety.

1C.   Prepare cost estimates and analyses in the future for
      specification work items. The City should negotiate
      a price reduction for work items with unreasonably
      high prices.

1D.   Train the rehabilitation staff in identifying code
      violations and preparing specifications to correct
      them. The training should emphasize violations
      related to electrical and plumbing systems.

1E.   Develop controls to pay contractors only for work
      that has been completed correctly and passed
      inspection. An inspection progress report or
      certificate of completion should accompany requests
      for payment.

1F.   Implement quality control procedures to assure that
      required family income information is obtained and
      recorded in the rehabilitation files, contracts are
      signed, promissory notes are obtained, liens are
      filed, and homeowners sign certificates of
      completion and acceptance.

1G.   Establish a waiting list and select eligible and needy
      applicants from the list in the order the applications
      were received, unless, the City can demonstrate an
      alternate and equitable basis for selecting applicants.
      An example of an alternate basis, may be the
      selection of a home with a dangerous electrical
      hazard.




       Page 19                                  96-CH-241-1002
Finding 1



                 1H.    Implement procedures to prevent the City from
                        rehabilitating homes when the costs exceed
                        established price thresholds.

                 1I. Implement procedures to assure that work
                     specifications are proofread before bids are solicited.

                 1J. Evaluate the competency of contractors paid for
                     substandard work. Incompetent contractors should not
                     be awarded future work.

                 1K.    Repay the Block Grant Program $55,551 for the
                        incomplete, defective, and duplicate work items in
                        the specifications.

                 We also recommend that the Ohio State Office's Director of
                 Community Planning and Development:

                 1L.    Provide oversight to the City in its selection of
                        incomplete, defective, and uncorrected code
                        violations that are immediate health and safety
                        issues.

                 1M.    Evaluate whether the City's new staff is capable of
                        administering the rehabilitation program. If it is
                        determined that the new staff is not capable, the City
                        should continue to use an outside agency to do
                        initial inspections, write work specifications, and
                        perform final inspections.

                 1N.    Instruct the City to submit documentation to support
                        a temporary denial of participation for contractors
                        paid for incomplete and defective work.




96-CH-241-1002           Page 20
                                                                                        Finding 2




  The City Paid for Ineligible and Unsupported
                      Costs

The City of East Cleveland paid $42,657 of Community Development Block Grant money for
ineligible and unsupported costs. The ineligible costs consisted of $16,765 for indirect costs that
should have been charged to other programs, and $18,887 for non-Block Grant activities. The
City also did not have invoices to document $7,005 worth of payments. The Director said the
previous Director during 1993 and 1994 did not follow policies and procedures. More critically,
the City had not set up procedures to ensure proper payments. As a result, less money was
available to pursue Block Grant Program objectives. On the positive side, the City improved its
payment procedures during 1995.



                                      HUD Regulation 24 CFR 570.200(a)(2) requires that, for
 HUD Requirements
                                      costs to be eligible for Block Grant assistance, grantee
                                      programs must meet one of three national objectives. In
                                      brief, to meet a national objective Block Grant payments
                                      must: 1) benefit low or moderate income families; 2)
                                      eliminate or prevent slums or blight; or (3) remedy an
                                      urgent need.

                                      HUD Regulation 24 CFR 570.207(a)(1 and 2) states that
                                      buildings for general government activities cannot be
                                      assisted with Community Development Block Grant funds.
                                      Similarly, payments to carry out the regular responsibilities
                                      of the unit of general local government are not eligible for
                                      assistance.

                                      HUD Regulation 24 CFR 570.501(b) states that the
                                      recipient is responsible for ensuring that it uses funds
                                      according to program requirements. The use of a
                                      subrecipient does not relieve the recipient of this
                                      responsibility.

                                      HUD Regulation 24 CFR 570.506(b) describes the
                                      documentation that must be maintained. Some examples
                                      are: records showing that each activity meets one of three
                                      national objectives, information on income by family size,



                                              Page 21                                  96-CH-241-1002
Finding 2



                           and evidence establishing that assisted persons qualify as
                           low or moderate income persons or households.

                           Based on indicators from HUD's monitoring reports and our
 Block Grant paid for
                           survey, we judgmentally selected and reviewed 165
 ineligible costs
                           payments made from January 1993 through March 1995.
                           As the table below shows, the City spent $42,891 for
                           ineligible purposes. It repaid $7,239 to the Block Grant
                           Program, leaving net ineligible costs totaling $35,652.


                                              Description               Amounts

                             Excess indirect building cost
                              - Telephones                                  $ 15,953
                              - Gas and electric                               6,638
                              - Building and equipment
                                maintenance                                   1,413

                               Subtotal                                     $ 24,004
                              -Reimbursement to Program                      (7,239)

                             Net excess indirect cost                       $ 16,765

                             Other ineligible cost
                              - Holiday season lights and decorations         9,980
                              - Mayor's membership dues                       3,499
                              - Dinner for recipients and city-wide
                                picnic                                        2,739
                              - Airfare to Jamaica                            2,313
                              - Vehicle accessories                             356

                                Total ineligible cost                       $ 35,652


                           The City overcharged the Block Grant Program $24,004
 Indirect costs were not
                           for indirect expenses that it should have charged to other
 allocated among
                           City departments and programs. HUD's Ohio State Office
 departments
                           noted the apparent overcharges in its monitoring report
                           dated November 1994. As a result, the City refunded
                           $7,239 to the Block Grant Program. The HUD Office
                           requested that we find out the amount the City still owed
                           the Block Grant Program.

                           To calculate the telephone overcharge to the Block Grant
                           Program, we used the ratio of telephone lines the
                           Community Development Division used to the total lines
                           used by the City. The overcharge for telephones was
                           $15,953. The City had been charging 25 percent of its base



96-CH-241-1002                      Page 22
                                                                         Finding 2



                        telephone costs to the Block Grant Program. However,
                        based on the number of telephone lines used by the Block
                        Grant Program, charges should not have exceeded 11
                        percent of the City's base telephone charges.

                        Similarly, for other utilities and maintenance we used the
                        percentage of the office space occupied by Community
                        Development compared to the total usable office space in
                        the building. During its 1994 review, the HUD Office
                        estimated that the Community Development Department
                        occupied 60 percent of the building's office space. We
                        reviewed HUD's analysis and concurred with its
                        assessment.

                        Based on Community Development's occupancy, the City
                        charged the Block Grant Program $8,051 for utility and
                        maintenance costs that it should have charged to other
                        departments. The Community Development Department
                        shared a building at 13601 Euclid Avenue with two other
                        departments, the Building and Engineering Department and
                        the Housing Department. Community Development was
                        the only department with indirect costs allocable to the
                        Block Grant Program. The City, however, charged the
                        Block Grant Program 100 percent of the building's costs for
                        gas and electric and for maintenance.

                        As a result of a HUD monitoring report, the City paid the
                        Block Grant Program $7,239 as partial reimbursement for
                        the overcharges. The reimbursement reduced the excess
                        indirect costs to $16,765 from $24,004. The City also
                        revised its allocation methods to charge the Block Grant for
                        only 11 percent of the City's base telephone bill and 60
                        percent of the common gas, electric, and maintenance
                        costs.

                        The City paid $18,887 for other ineligible expenses related
Block Grant paid for
                        to general local government and other ineligible activities.
other ineligible cost
                        The City spent $9,980 of Block Grant Program funds to put
                        up lights and decorations throughout the City during the
                        1993 and 1994 holiday seasons. The City lacked
                        documentation identifying the national objective and
                        eligibility requirements met. The Director agreed that this
                        program did not meet a national objective and told us that
                        the City will not fund the program in the future.


                                Page 23                                 96-CH-241-1002
Finding 2



                      The City reimbursed a subrecipient $2,313 for airfare to
                      send youngsters to an exhibition boxing match in Jamaica.
                      The request for reimbursement did not state how the
                      children benefitted, whether they were from low or
                      moderate income families, or identify the eligibility
                      requirement met. Regardless, the cost of the trip was not a
                      reasonable and economical use of Block Grant funds. The
                      HUD Community Planning and Development Division
                      agreed with this assessment.

                      In 1993, the City paid $3,499 of Block Grant Program
                      money for the Mayor's membership dues to the Northeast
                      Ohio Area-wide Coordinating Agency. The Director agreed
                      that the dues were not an eligible expense. She declined to
                      pay the Mayor's 1994 and 1995 membership dues.

                      In 1993, the City charged $2,739 to the Block Grant
                      Program for a dinner for Block Grant recipients and a
                      picnic in the park for the entire city. The former Director
                      authorized the payments. The Director said the purpose
                      was other than to reach out to Block Grant participants.
                      The Director concurred that the payments were not eligible.

                      The remaining $356 of ineligible costs were for accessories
                      for vehicles used by other City departments not involved in
                      Block Grant activities. The accessories included a hitch,
                      hitch ball, heavy duty flasher, and alarm system. The
                      Community Development Director and the Financial
                      Analyst said the City should not been paid these costs with
                      Block Grant money.

                      The City did not adequately support three payments totaling
 The City did not
                      $7,005. The unsupported payments consisted of $5,900
 adequately support
                      paid to a contractor for demolition; $955 paid to a home
 payments of $7,005
                      improvement store; and $150 paid to the petty cash fund of
                      another department.

                      The City's Finance Department did not have invoices,
                      receipts, or statements of work completed to support the
                      payments. The Assistant Finance Director said the support
                      must have been misplaced.




96-CH-241-1002                Page 24
                                                                            Finding 2



                        The Community Development Director officially was
 The Director has
                        appointed in December 1994. During our audit, we
 implemented improved
                        concluded that the Director had improved policies and
 controls
                        procedures for payments. Our testing showed that
                        ineligible and unsupported payments decreased
                        substantially in 1995. Our review of 1995 payments turned
                        up only $249 of ineligible costs.

                        The Director's most important improvement was that she
                        was reviewing all payment requests for compliance with
                        Block Grant Program requirements. In addition, the
                        Director started to require subrecipients and other City
                        departments to submit supporting documentation before
                        paying them.



Auditee Comments        The City has a reasonable explanation to those asserted
                        ineligible and unsupported costs funded by the Community
                        Development Block Grant. Additional receipts and
                        documentation, which apparently were previously
                        unavailable, have been supplied to the Inspector General for
                        Audit during the exit conference on September 12, 1995.

                        Thus, the City appears to have adequate support for
                        $34,609 of the asserted ineligible and unsupported costs.
                        Therefore, the City respectfully requests that the Inspector
                        General for Audit find no violation of applicable HUD
                        regulations as to these items.

OIG Evaluation of       Based upon the information provided by the City we
Auditee Comments        reduced the amount of unsupported costs by $28,754. The
                        City did not provide adequate support for disbursements
                        totaling $7,005. Specifically, the City did not provide
                        invoices for payments of $5,900 for demolition, $955 to a
                        retail store, and $150 to a petty cash fund.


Auditee Comments        The reality is that the City's general fund is incapable of
                        directly repaying any identified ineligible cost without risk
                        of substantially impairing the City's ability to provide
                        essential public services to its citizens. Simply put, the City
                        lacks the unencumbered resources in its general fund to
                        repay any of the costs determined to be ineligible.


                                Page 25                                   96-CH-241-1002
Finding 2




                    The City is most interested in pursuing discussions with the
                    Inspector General for Audit or the Ohio State Office to
                    establish a process by which the City may reduce the
                    identified unsupported costs from future allocations under
                    the Community Development Block Grant funding process.
                    This may be the preferred method of resolving this matter
                    as the City of East Cleveland must continue directing its
                    limited general fund resources toward maintaining essential
                    governmental services.

OIG Evaluation of   Reduction of future grants for ineligible and unsupported
Auditee Comments    costs is an alternative to direct repayment. The City should
                    pursue this alternative with the Ohio State Office.



Recommendations     We recommend that the Community Planning and
                    Development Director requires the City of East Cleveland
                    to:

                    2A.        Reimburse the Community Development Block
                               Grant Program $16,765 from non-Federal funds
                               for indirect costs that should have been charged
                               to other City departments.

                    2B.        Reimburse the Community Development Block
                               Grant Program $9,980 from non-Federal funds
                               for the lighting and decorating program.

                    2C.        Reimburse the Community Development Block
                               Grant Program $3,499 for an ineligible payment
                               of the Mayor's dues to an area organization.

                    2D.        Reimburse the Community Development Block
                               Grant Program $2,739 for the dinner and the
                               picnic for the City.

                    2E.        Reimburse the Community Development Block
                               Grant Program $2,313 from non-Federal funds
                               for the airfares to Jamaica.

                    2F.        Reimburse the Community Development Block
                               Grant Program $356 for accessories for vehicles
                               used by other City departments.


96-CH-241-1002              Page 26
           Finding 2




Page 27   96-CH-241-1002
Finding 2



                 2G.      Provide adequate support for payments of
                          $7,005 made to contractors, a retail store, and a
                          petty cash fund.        If documentation is
                          unavailable, the unsupported amounts should be
                          repaid to the Community Development Block
                          Grant Program from non-Federal funds.

                 2H.      Establish adequate procedures to ensure that
                          future program charges are eligible and
                          supported.




96-CH-241-1002         Page 28
                                        Finding 2




(THIS PAGE LEFT BLANK INTENTIONALLY)




                Page 29                96-CH-241-1002
Finding 3




  The City of East Cleveland Lacked Effective
               Internal Controls

The City of East Cleveland did not implement effective internal controls over its Community
Development Block Grant Program. The City did not monitor subrecipients to ensure that Block
Grant money was spent in compliance with Federal requirements. The City also did not:
segregate the duties of the accounts payable clerk, limit access to its check signing machine, and
obtain audits timely. The Director of the Community Development Department took over her
responsibilities in December 1994. She told us that there were so many issues to address that she
could not resolve them all over night. As a result, the City could not ensure that Block Grant
money was spent for eligible purposes and economically and efficiently.



                                     The United States General Accounting Office publication,
 Internal Control
                                     Assessing Internal Controls in Performance Audits, cites the
 Standards
                                     following relevant control standards:

                                     •   Managers and employees always are to show a positive
                                         and supportive attitude to internal controls.

                                     •   Access to resources and records is to be limited to
                                         authorized individuals. Accountability for the custody
                                         and use of resources should be assigned and maintained.
                                         Periodic comparison shall be made of the assets with the
                                         accounting records to find out whether the two agree.
                                         The frequency of the comparison shall be a function of
                                         the vulnerability of the asset.

                                     •   Key duties and responsibilities in authorizing,
                                         processing, recording, and reviewing transactions
                                         should be separated among individuals.

                                     •   Internal control systems are to provide reasonable
                                         assurance that objectives of the system will be met.

                                     24 CFR sections 85 and 570 address the various
 HUD Requirements
                                     requirements for safeguarding Block Grant funds.




96-CH-241-1002                                Page 30
                                                                            Finding 3



                           •   The recipient is responsible for ensuring the Block
                               Grant money is used in accordance with Program
                               requirements.

                           •   Each recipient must maintain sufficient records that a
                               national objective was met.

                           •   Salaries allocated to the Block Grant Program are
                               charged according to the amount of time spent on
                               Program activities.

                           The Community Development Department staff did not
The City did not monitor
                           monitor subrecipients and other City departments receiving
subrecipients and other
                           Community Development Block Grant money. 24 CFR
City departments
                           section 85.40(a) states that grantees must monitor grant and
                           subgrant supported activities to assure compliance with
                           applicable Federal requirements and that performance goals
                           are achieved. Section 570.506 states that each recipient
                           shall maintain sufficient records to enable the Secretary to
                           find out whether the recipient has met requirements on
                           national objectives.

                           The Community Development Department was responsible
                           for administering the Block Grant Program. The value of
                           monitoring was to find out whether subrecipient activities
                           met program requirements and objectives. Monitoring may
                           be in the form of reviewing subrecipient performance
                           reports submitted to the City, or reviewing documentation
                           at the subrecipient during on-site monitoring visits.
                           Community Development staff told us the former Director
                           did not implement a monitoring function. Therefore, the
                           Community Development Department did not obtain
                           documentation to support that the subrecipient's and other
                           City department's activities paid for with Block Grant funds
                           met a national objective.

                           The Community Development Department did not obtain
                           performance reports from its subrecipients and other
                           departments for its 1993 program year. The City obtained
                           performance reports from subrecipients and other
                           departments in 1994. The reports, however, did not support
                           whether the activities met a national objective.




                                   Page 31                                 96-CH-241-1002
Finding 3



                        In addition, the City had not conducted monitoring visits.
                        Therefore, it could not have determined whether
                        subrecipient activities paid for with Block Grant money met
                        a national objective. Without performance reports or direct
                        verification from monitoring visits, the City cannot provide
                        HUD with documentation to show that $368,608 in Block
                        Grant funds were spent on eligible activities.

                        The City's Finance Department did not segregate the duties
 The City did not
                        of its accounts payable function. The accounts payable
 segregate employee
                        clerk was responsible for processing all invoices and
 duties adequately
                        disbursements including those for the Block Grant Program,
                        reconciling vendor accounts, and entering payroll data.
                        Because of the Finance Department's small staff size, the
                        Assistant Director said the employee, at the request of the
                        former Director of Finance, was trained to do all aspects of
                        a function. However, we believe the Finance Department
                        staff of six was adequate to allow a reasonable segregation
                        of the duties for the accounts payable function.

                        Also, contrary to the duties assigned to the Accounts
                        Payable clerk, no one individual should have control over
                        all key aspects of a transaction or event. Controls, such as
                        segregation of duties, should be designed to reduce the
                        possibility of wrongful acts going undetected. Inadequate
                        segregation of duties allows for the possibility of
                        unauthorized payments to vendors or employees and the
                        possibility of collusion among employees. As a result, the
                        City could not assure HUD that Block Grant money was
                        adequately safeguarded from waste, loss, and misuse.

                        The City did not safeguard the key to the check-signing
 The City did not
                        machines. The City kept the key in a deposit box.
 adequately safeguard
                        However, the key to the deposit box hung on a hook inside
 access to the check-
                        the door of a walk-in vault. The key was easily accessible
 signing machines
                        to all employees of the Finance Department and other City
                        departments. The City used its check signing machines for
                        all disbursements including those from Block Grant funds.

                        The Assistant Finance Director said only authorized
                        personnel would know which key opened the safe deposit
                        box. However, easy access to the safe deposit key,
                        increased the risk that unauthorized persons could have
                        access to the check signing machines.


96-CH-241-1002                  Page 32
                                                                             Finding 3



                           The City did not have a system for allocating salaries
Employee's salary was
                           between the Block Grant and other programs. Such a
not allocated among city
                           system was necessary to charge the Block Grant Program
departments
                           correctly. 24 CFR section 570.206(a)(1) states that in
                           charging salaries to the Block Grant Program, the recipient
                           may either include the entire salary and related costs
                           allocable to the program whose primary responsibility is to
                           administer the program or pro rate a share of the salary. The
                           following example illustrates why the City needed an
                           allocation procedure.

                           The City charged the total salary of an employee to the
                           Block Grant Program while the employee also worked for
                           other City departments. The employee's self evaluation,
                           completed as a part of her annual review, showed that
                           besides the Block Grant Program, the employee worked for
                           the Building and Engineering Department and the Housing
                           Department. The work included typing and switchboard
                           duties. Documentation was not available to figure out the
                           amount of time the employee spent performing duties for
                           the other departments. The Director said she was not aware
                           the employee did work other than for the Block Grant
                           Program.

                           During our audit, the Director of Community Development
                           developed a system to account for each employee's job
                           activities. The system required all employees in the
                           Community Development Department to complete a time
                           allocation sheet daily. The sheet showed the amount of
                           time spent on each activity. It was then used by the
                           Financial Analyst to allocate the employees' salaries to the
                           correct program, based on the percentages identified on the
                           time sheets. Such procedures are positive and adequate to
                           ensure that salaries are allocated properly.

                           Office of Management and Budget Circular A-128 "Audits
The City did not submit
                           of State and Local Governments" states that local
required audits timely
                           governments receiving $100,000 or more in a year in
                           Federal funds must have an audit made for that year. The
                           audit reports shall be sent no later than one year after the
                           end of the audit period.

                           The City did not obtain the required audits timely. The
                           single audit report for the year ended 1992 was issued in


                                   Page 33                                  96-CH-241-1002
Finding 3



                   February 1995. The report should have been issued within
                   one year from the end of the fiscal year, December 31,
                   1992. As of August 15, 1995, the 1993 and 1994 audits
                   had not been completed. Annual financial audits are
                   important because they provide reasonable assurance
                   whether the City's financial position is presented fairly. The
                   Finance Director who the City recently hired, said the City
                   had a history of not having the financial statements done
                   timely.

                   Prior to hiring the new Director, the City did not have staff
                   sufficiently knowledgeable to convert its financial
                   statements to the required generally accepted accounting
                   principles. As a result, the State Auditors Office has not
                   been able to complete the annual financial audits. The
                   Finance Director said she would work toward making sure
                   the audits are done timely.



Auditee Comments   The Director has revised the Subrecipient Agreement to
                   include a detailed scope of services and procedures to
                   monitor expected performance. A subrecipient technical
                   assistance session was held in May 1995 to distribute these
                   revised contracts, including copies of applicable HUD
                   regulations, and newly designed monthly monitoring
                   reports. Monthly monitoring reports are due from all
                   subrecipients by the 5th day after the close of the following
                   month. Monitoring reports are further expected to track
                   how many low and-moderate income persons are being
                   served and how these participants support the stated scope
                   of services. Payments are withheld if monitoring reports
                   are not received timely. Subrecipient including City
                   Departments monitoring visits began during the Third
                   Quarter of 1995. The Finance and Community
                   Development Departments have worked closely to ensure
                   strict compliance in this area. All monitoring visits are
                   documented and evidence noted that subrecipient activities
                   are eligible.

                   The Community Development Director will attempt to
                   secure documentation from all subrecipients (including City
                   Departments) for the 1993 and 1994 Program Year to
                   ensure that Community Development funds were spent
                   according to applicable guidelines.


96-CH-241-1002             Page 34
                                                                     Finding 3




                    Based on recent correspondence from the HUD Ohio State
                    Office the subrecipient management actions of the current
                    Director, Community Development, have positively
                    addressed identified concerns in this area.

OIG Evaluation of   The City has made efforts to improve the controls over
Auditee Comments    monitoring of subrecipients. The City had started
                    conducting monitoring visits; however, it had not
                    completed all monitoring visits at the time of our exit
                    conference on September 12, 1995.

                    We concur with the City's proposal to attempt to secure
                    documentation from subrecipients. If the City does not
                    obtain adequate supporting documentation, however, it
                    should repay the Block Grant Program.

                    The HUD correspondence referred to in the comments was
                    dated September 1, 1995. The letter stated that the City had
                    made progress in developing a plan for subrecipient
                    monitoring. The letter also stated that the progress related
                    to subrecipient monitoring would be reviewed by HUD in
                    the future.



Auditee Comments    The City's internal controls for the Accounts Payable
                    responsibilities are as follow:

                    a. The Receptionist/Telephone Operator sorts incoming
                       mail or invoices are and places them in the appropriate
                       Department's mailbox.

                    b. Each Department Head is responsible for reviewing
                       each invoice and matching these documents to the City
                       generated Purchase Order prepared by the Purchasing
                       Agent. The Department Head approves each invoice
                       for payment and submits the invoice plus the gold copy
                       of the Purchase Order to the Accounts Payable Clerk.
                       Invoices are time-stamped in the Finance Department,
                       then placed in the Accounts Payable Clerk's payment
                       box. The Accounts Payable Clerk inputs data into the
                       system for payment. The City maintains a standard
                       operational cycle for issuing checks for vendor
                       payments on the 15th & 28th day of each month.


                            Page 35                                 96-CH-241-1002
Finding 3



                    c. If the Accounts Payable Clerk erroneously receives
                       invoices intended for other City Departments, these
                       invoices are returned immediately to the Receptionist
                       for proper placement or rerouting. Thus, the City
                       believes that more than adequate controls exist in this
                       area, since the processing of invoices occurs at the
                       Departmental level.       For example, additional
                       compensating controls the City has implemented are as
                       follows:

                    The Finance Director periodically reviews invoices before
                    the disbursement cycle to ensure the City remits payments
                    in the desired thirty day cycle;

                    The Accounts Receivable Clerk separately prepares the
                    outstanding check list for the general operating account;
                    and

                    The Assistant Finance Director/Chief Accountant separately
                    does the monthly bank check reconciliation and proof of
                    cash statement.

                    The Finance Department plans to implement additional
                    compensating controls to the extent possible to assure that
                    the accounts payable Clerk's duties are adequately
                    segregated.

OIG Evaluation of   The compensatory controls described in the City's response
Auditee Comments    would improve internal controls over the accounts payable
                    function. The controls as described in the response,
                    however, were not sufficient to compensate fully for
                    inadequate segregation of duties. The Finance Director's
                    periodic review of invoices before disbursement are made
                    would not necessarily prevent the issuance of false checks
                    after her review. The other controls described in the
                    comments are procedures designed to reconcile the City's
                    books of accounts and bank statements. They do not
                    prevent or necessarily detect falsified invoices or checks
                    because the person who processes the invoices also
                    processes the disbursements. Therefore, we agree with the
                    City's intention to implement stronger compensatory
                    controls.




96-CH-241-1002              Page 36
                                                                     Finding 3




Auditee Comments    Only the personnel of the Finance Department are permitted
                    in the City's vault -- where the check signing machine is
                    stored. Any non-Finance Department employee must be
                    accompanied by a Finance Department staff person. The
                    City maintains 12 safety deposit boxes of which only one
                    box contains the key to the check signing machine. Inside
                    the vault, the Finance Department maintains approximately
                    50 or more keys. Any non-Finance Department person
                    must know the specific deposit box and its identified
                    number to find the key that accesses the safe deposit box.
                    The keys to the deposit boxes are not in numerical
                    sequence.

                    A log is maintained for all City disbursements that includes
                    date and check sequence and is initialed by the Finance
                    Department staff person making the disbursement request.
                    Because of the small size of the Finance Department staff
                    and limited access to the Department itself and the
                    locked/buzzer security system, the City believes sufficient
                    controls are in place to safeguard from waste, loss, and
                    misuse of Community Development Block Grant funds.

                    The Finance Department plans to set up additional
                    compensating controls to the extent possible to assure that
                    the check-signing machine is adequately safeguarded
                    against theft, loss, and misuse.

OIG Evaluation of   A knowledgeable person such as the accounts payable clerk
Auditee Comments    can easily identify the keys to the safe deposit box and the
                    check signing machines. Therefore, the keys to the
                    machines should be secured and access limited to
                    authorized personnel only.

                    The City's plan to implement additional compensatory
                    controls is a step to ensuring the safeguarding of the check
                    signing machines. However, the City's comments did not
                    describe any additional controls. Therefore, we can evaluate
                    their effectiveness.


Auditee Comments    The employee in question is a Secretary/Administrative
                    Assistant. Her full-time duties now include answering the


                            Page 37                                 96-CH-241-1002
Finding 3



                    switchboard approximately four hours a day, not to exceed
                    60 percent of the entire switchboard coverage time. All
                    employees paid from Block Grant funds or who work on
                    Block Grant projects, are required to fill out allocation
                    sheets supporting the use of time. In those limited
                    situations where employees are out sick, on vacation, or on
                    leave of absence, an employee may be asked to fill in or
                    perform an essential function. However, for the present and
                    in the future, those hours will be noted on the time
                    allocation sheet and charged to the proper City department.

OIG Evaluation of   The City's use of time allocation sheets is a step to more
Auditee Comments    accurately charging the Block Grant Program.




Auditee Comments    The Finance Director started her position on April 18, 1994.
                    Since then she has aggressively addressed any identified
                    noncompliance issues within the Department of Community
                    Development. The Director of Finance currently prepares
                    the City's generally accepted accounting principles
                    conversion internally with technical assistance from an
                    outside accounting firm. The Finance Department is
                    working diligently to maintain current audited financial
                    statements.

                    The Finance Director is currently performing the 1994
                    generally accepted accounting principles conversion. Once
                    completed, the City believes this area will be in full
                    compliance.


Recommendations     We recommend that the Community Planning and
                    Development Director requires the City of East Cleveland
                    to take the following corrective actions:

                    3A.    Submit documentation to show that $368,608 of
                           activities performed by subrecipients and other City
                           departments during 1993 and 1994 met a national
                           objective and was for eligible program expenses.
                           HUD should require the City to repay the portion of
                           money for which no documentation is obtained.



96-CH-241-1002              Page 38
                                                  Finding 3



3B.   Conduct monitoring visits of subrecipients and other
      City departments. The visits should be documented
      and evidence that subrecipient activities are eligible.

3C.   To the extent practical establish a system that will
      segregate the duties of the accounts payable clerk.

3D.   Safeguard the check-signing machines by limiting
      access to the safe deposit key to authorized
      personnel.

3E.   Implement procedures whereby employees' salaries
      are correctly charged to the Block Grant Program.

3F.   Implement procedures to convert the City's financial
      statements to generally accepted accounting
      principles timely. The conversion should be
      completed to permit the annual financial audits to be
      issued within one year of the fiscal year-end.




       Page 39                                  96-CH-241-1002
Internal Controls
In planning and performing our audit, we considered internal systems relating to the City of East
Cleveland's administration of the Community Development Block Grant Program, to determine
our auditing procedures and not to provide assurance on internal controls. Internal control is the
process by which an entity obtains reasonable assurance as to achievement of specified
objectives. Internal control is interrelated components, including integrity, ethical values,
competence, and the control environment that includes establishing objectives, risk assessments,
information systems, control procedures, communication, managing change, and monitoring.



                                     We determined that the following internal control
 Relevant Internal
                                     categories related to our audit objectives:
 Controls
                                     •   Management philosophy and operating style.

                                     •   Accounting system and controls.

                                     •   Management monitoring methods.

                                     •   Documenting benefits to low and moderate income
                                         persons.

                                     A significant weakness exists if internal controls do not
                                     give reasonable assurance that the entity meets goals and
                                     objectives; 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 fairly disclosed in reports.

                                     Based on our review, we concluded that the following items
 Significant Weaknesses
                                     were significant weaknesses:

                                     •   Management philosophy and operating Style. The
                                         former Director circumvented policies and procedures.
                                         Specifically, the former Director authorized payments
                                         without supporting documents (see Findings 1 and 2).

                                     •   Accounting system and control. The City did not
                                         maintain proper controls over disbursements. It used
                                         Block Grant money to pay ineligible and unsupported
                                         expenses (see Finding 2). In addition, it did not
                                         establish controls to safeguard assets (see Finding 3).




96-CH-241-1002                                Page 40
                                          Internal Controls



•   Management monitoring methods.             The City's
    monitoring methods did not adequately ensure that the
    City achieved the objectives of its rehabilitation
    program (see Finding 1); and subrecipient activities met
    a national objective (see Finding 3).

•   Documenting benefit to low and moderate income
    families. The City did not monitor the subrecipients to
    ensure Block Grant money benefitted low and moderate
    income persons (see Finding 3). The City did not
    document in all rehabilitation files that it verified
    homeowners' income (see Finding 1).




        Page 41                                 96-CH-241-1002
Follow Up On Prior Audits
The last OIG audit report, 81-CH-241-1134, dated July 24, 1981 contained seven findings. There
are no open findings from the last audit. The City had not obtained an independent auditor's
report for fiscal years ended 1993 or 1994.




96-CH-241-1002                              Page 42
                                Follow Up On Prior Audits




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                Page 43                       96-CH-241-1002
                                                                                   Appendix A

Schedule of Questioned Costs

                 Recommendation       Type of Questioned Costs
                     Number         Unsupported 1/   Ineligible 2/
                      1M                               $55,551
                      2A                                16,765
                      2B                                 9,980
                      2C                                 3,499
                      2D                                 2,739
                      2E                                 2,313
                      2F                                  356
                      2G               7,005
                      3A            $368,608
                     Total          $375,613             $91,203




1/ Unsupported costs are charged to a HUD-financed or insured program or activity whose
   eligibility cannot be determined at the time of the audit since the costs were not supported
   by adequate documentation or there is a need for a legal or administrative determination on
   the eligibility of the costs. These costs require a future decision by HUD program officials.
   This decision, besides obtaining supporting documentation might involve a legal
   interpretation or clarification of Departmental policies and procedures.

2/ Ineligible costs are charged to a HUD program or activity that are not allowable by law,
   contract, or Federal, State, or local policies, or regulations.




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                                       Appendix A




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                             Appendix B

Auditee Comments




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          Appendix B




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                                                                            Appendix C

Distribution
Secretary's Representative, Midwest
Director, Community Planning and Development, Ohio State Office (2)
State Coordinator, Ohio State Office (2)
Director, Field Accounting Division, Midwest
Field Controller, Midwest
Assistant General Counsel, Midwest
Public Affairs Officer, Midwest
Assistant Deputy Secretary for Field Management, SC (Room 7106)
Acquisition Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10166) (2)
Deputy Chief Financial Officer for Operations, FO (Room 10166) (2)
Audit Liaison Officer, Office of Community Planning and Development, COM (Room 7228) (3)
Associate General Counsel, Office of Assisted Housing and Community Development, GC
(Room 8162)
Assistant Director in Charge, U.S. General Accounting Office,
 820 1st St. NE, Union Plaza, Bldg. 2, Suite 150, Washington DC, 20002 (2)




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