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
(THIS PAGE LEFT BLANK INTENTIONALLY)
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.
96-CH-241-1002 Page 44
Appendix A
(THIS PAGE LEFT BLANK INTENTIONALLY)
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Appendix B
Auditee Comments
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Appendix B
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Appendix B
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Appendix B
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Appendix B
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Appendix B
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Appendix B
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Appendix B
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Appendix B
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Appendix B
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Appendix B
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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)
96-CH-241-1002 Page 58
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)