oversight

California Park East Apartments, Denver, CO

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-03-19.

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

                                                                         Issue Date

                                                                              March 19, 1996
                                                                         Audit Case Number

                                                                              96-DE-219-1004




TO:            Ron Bailey, Director, Office of Housing, 8AH


FROM:          W.D. Anderson, District Inspector General for Audit, 8AGA

SUBJECT:       California Park East Apartments
               Multifamily Mortgage Insured Project
               Denver, Colorado
               Project Number 101-35274-L8-SR


We have concluded a review of the multifamily insured project known as California Park East
Apartments. The project is owned by California Park East Associates; the general partner and
mortgagor is King H. Harris. The objectives of our review were to follow up on specific concerns
expressed by the Office of Multifamily Housing regarding the management and physical condition of
the project; and to assess the owner's compliance with the terms and conditions of the Regulatory
Agreement, and with HUD regulations and requirements, regarding the project's books and records.

We found that the Office of Multifamily Housing had effectively monitored and directed the owner's
progress toward resolving HUD's concerns with the project. However, the books and records of the
project's operations were not maintained in accordance with the terms and conditions of the
Regulatory Agreement, or with HUD's regulations and requirements.

Within 60 days, please furnish this office, for each recommendation cited in the report, a status report
on: (a) the corrective action taken; (b) the proposed corrective action and the date to be completed;
or (c) why action is not considered necessary. Also, please furnish us copies of any correspondence
or directive issued because of this review.

We appreciate the courtesies extended by the Office of Multifamily Housing program staff during our
review. If you have any questions on this subject, please contact Ernest Kite, Assistant District
Inspector General for Audit, at (303) 672-5452.
Management Memorandum




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96-DE-219-1004                   Page ii
Executive Summary
At the request of the Rocky Mountain Office of Multifamily Housing, we have completed a review
of California Park East Apartments, a Section 8 Substantial Rehabilitation project insured under
Section 221(d)(4). Our objectives were to follow up on specific concerns expressed by the Office
of Multifamily Housing regarding the management and physical condition of the project; and to assess
the owner's compliance with the terms and conditions of the Regulatory Agreement, and with HUD
regulations and requirements. We reviewed the project's books and records for the period from
January 1, 1994, through May 31, 1995.

We found that the Office of Multifamily Housing had effectively monitored and directed the owner's
progress toward resolving HUD's concerns with the project. As a result, the owner had taken, or was
in the process of taking, appropriate action to resolve those issues. However, our review showed that
the books and accounts of the project's operations were not maintained in accordance with the
Regulatory Agreement, or with HUD regulations and requirements.

The owner had not implemented an adequate system of financial management internal controls and
procedures. Specific weaknesses were noted in controls over bank reconciliations, accounts
receivable, cash disbursements, cash receipts, and maintenance of the automated accounting system.
The lack of adequate controls is illustrated by the fact that over $6,800 of forged and stolen checks
that cleared the project's operating account in 1994 were undetected for several months because the
project's bank statements were not reconciled. We also found that the management agent improperly
allocated supervisory personnel salary costs of $10,780 to the project, and that project funds were
diverted to pay for maintenance related expenses of another property.



                                      The management agent had not reconciled the project's bank
 Bank accounts were not
                                      statements since late 1994. HUD guidelines specify that bank
 reconciled
                                      statements be reconciled promptly to the formal accounting
                                      records. We prepared an independent reconciliation of the
                                      statements for the 3 months ended January 1995, and found
                                      that the operating account balance per the general ledger was
                                      overstated by $10,857. This included over $6,800 of forged
                                      and stolen checks that cleared the bank during November and
                                      December of 1994. These checks were not detected by the
                                      management agent until July 1995.

                                      The management agent did not properly maintain subsidiary
 Accounts receivable
                                      ledgers for accounts receivable, and was unable to adequately
 general ledger balances
                                      support the general ledger balances. HUD guidelines specify
 were unsupported
                                      that accounts receivable balances be supported by subsidiary
                                      ledgers. The project's tenant rent and security deposits
                                      receivable were tracked on ledger cards; however, the cards
                                      were not reconciled to the general ledger receivable accounts.


                                               Page iii                                  96-DE-219-1004
Executive Summary



                             Additionally, no documentation was available to support non-
                             tenant receivable balances. We also found that tenant
                             accounts receivable were overstated because of incorrect
                             monthly accrual entries, uncollectible receivables were not
                             written off, and advances to the management agent from
                             project funds were not reimbursed on a timely basis.

                             The management agent's procedures for reviewing and
 Cash disbursements were
                             approving cash disbursements need improvement. HUD
 improper
                             guidelines specify that project funds must be used for the
                             benefit of the project, and that check requests must have
                             supporting documentation. Our testwork showed that cash
                             disbursements were made for non-project expenses, without
                             invoices, or for amounts that differed from the amounts due
                             per the invoices. Additionally, we found that supporting
                             invoices were not marked paid or otherwise canceled, and
                             disbursement checks did not consistently identify all relevant
                             account numbers.

                             The management agent's procedures for recording, depositing,
 Controls over cash
                             and safeguarding cash receipts were not adequate. HUD
 receipts need improvement
                             guidelines for cash receipts specify that collections be
                             controlled under proper safeguards and promptly deposited,
                             that rent receipts be reconciled to actual collections, and that
                             all cash and checks received be recorded. We found that
                             undeposited cash receipts were not properly safeguarded, cash
                             receipts were not deposited on a timely basis, cash receipt
                             tickets were not reconciled to actual collections, and vending
                             machine cash receipts were not recorded or deposited.

                             The management agent had limited controls in place to ensure
 Controls over the
                             the accuracy and propriety of entries to the automated
 accounting system were
                             accounting system. HUD guidelines for insured projects
 inadequate
                             specify that internal control procedures be implemented, with
                             emphasis on maintaining accurate and reliable accounting
                             information. Adequate controls for automated accounting
                             systems typically include passwords that limit access to the
                             system, and regular supervisory review of system generated
                             reports. However, no passwords or other controls were
                             required to access, or post entries to, the project's automated
                             accounting system; and supervisory review of system input
                             and output was inadequate.




96-DE-219-1004                        Page iv
                                                                    Executive Summary



                            The management agent improperly allocated supervisory
Project improperly
                            personnel salary costs to the project. HUD guidelines specify
allocated management
                            that salary costs for ensuring that project positions are
agent salary costs
                            covered during vacancies, and for hiring and supervising
                            project personnel, must be paid out of management fee funds.
                            The president of the management agent firm was on the
                            project's payroll as a full-time employee for several months
                            through out 1995, including the period from February 25
                            through June 2. The president reportedly acted as the on-site
                            manager for 3 weeks; and stayed on the payroll an additional
                            11 weeks to provide training to a new on-site manager. The
                            president was paid $10,780, or $19.25 an hour, for these 14
                            weeks. This was over and above the $7,300 management
                            agent fee paid for the same timeframe.

                            Project funds were diverted to pay for maintenance expenses
Project funds were used
                            of an unrelated property. HUD guidelines require that
for unauthorized purposes
                            expenses paid out of project funds must be for the operation
                            and maintenance of the project. However, we found instances
                            where the project's labor and materials were used to complete
                            work at a property across the street that was managed by the
                            project owner. Management agent personnel indicated the
                            owner was billed for time and materials spent on the other
                            property. However, the project records showed no evidence
                            of owner reimbursement.

                            We are recommending the Rocky Mountain Office of
We recommend
                            Housing, Multifamily Management Operations Branch,
                            provide technical assistance and guidance to the owner in
                            establishing the necessary controls over the project's books
                            and accounts. Specific recommendations are provided with
                            the findings.

                            The draft findings were provided to the mortgagor and the
Auditee Comments
                            management agent on January 12, 1996. An exit conference
                            was held on February 7, 1996. The mortgagor's and
                            management agent's comments have been incorporated in the
                            report as appropriate. Subsequent to the exit conference, the
                            management agent provided information that was not made
                            available during the audit. Based upon this information, we
                            have made appropriate adjustments to the findings. The
                            management agent's final response to the findings is included
                            as Appendix A.



                                     Page v                                  96-DE-219-1004
Executive Summary




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96-DE-219-1004                     Page vi
Table of Contents

Management Memorandum                                             i


Executive Summary                                                iii


Introduction                                                      1


Findings

    1      Financial Management Controls Need
           to be Strengthened                                     5

    2      Project Improperly Allocated Management
           Agent Salary Costs                                   17

    3      Project Funds Were Used for Unauthorized
           Purposes                                             21


Internal Controls                                               25


Follow Up On Prior Audits                                       27


Appendices

    A      Auditee Comments                                     29

    B      Schedule of Unsupported and
           Inaccurate Disbursements                             35

    C      Distribution                                         37



                              Page vii                96-DE-219-1004
Table of Contents




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96-DE-219-1004                     Page viii
Introduction
California Park East Apartments, Project Number 101-35274-L8-SR, is a 3-building property
consisting of a 53-unit elderly building, a 6-unit multifamily building, and a 10-unit multifamily
building. The property's office is located in the elderly building at 2770 California Street, Denver,
Colorado. The mortgagor entity is California Park East Associates; the general partner is King H.
Harris.

HUD insured the mortgage under Section 221(d)(4) of the National Housing Act. The HUD
mortgage documents were executed by King H. Harris as mortgagor. The original mortgage note
was in the amount of $2,476,000. The note was current at the time of our review.

On June 13, 1980, the mortgagor executed a Regulatory Agreement with the Colorado Housing and
Finance Authority, the holding mortgagee. The agreement limits the use of the project assets, and
provides that the books and accounts of the project's operations shall be kept in accordance with
HUD requirements.

All of the project units are included under the Section 8 Housing Assistance Payments Contract
initially executed on August 28, 1981. The contract is for a maximum term of 20 years. Under the
Section 8 program HUD directly subsidizes rents paid by qualified tenants. At the time of our on-site
review on July 19, 1995, one unit was vacant.

The project has been managed since April 1988 by CKJ Realty and Management, Inc., located at
1900 Wazee Street, Suite 20, Denver, Colorado. This was the location of the project books and
records. Records maintained at the project consisted primarily of tenant files.

In January 1995, the Rocky Mountain HUD office received a congressional request to investigate
allegations made by a California Park East tenant. The tenant asserted that there were several
maintenance problems at the project, including the elevator, the air circulation system, pest control,
and access to the parking lot. On January 25, 1995, HUD program staff conducted an unannounced
physical inspection of the project. HUD found numerous irregularities, including a hazardous waste
storage area in the basement, and problems with the elevator and the heating and ventilation systems.

On February 10, 1995, representatives of HUD and the Colorado Housing and Finance Authority
performed a formal physical inspection of the project. The inspection report reflected an
unsatisfactory rating for the overall physical condition of the project, and a below average rating for
maintenance policies and procedures. The inspection report indicated that approximately sixty
percent of the basement area in the elderly building was being used by the owner to store his personal
property. However, all indications of hazardous materials that were present in January had been
removed.

On April 3, 1995, representatives from HUD and the Colorado Housing and Finance Authority
performed an on-site comprehensive management review of the project. The review report reflected
an overall below average rating for management operations.



                                                 Page 1                                   96-DE-219-1004
Introduction



On June 2, 1995, the Director of the Rocky Mountain Office of Multifamily Housing requested that
the Office of Inspector General conduct a review of California Park East's books and records. HUD's
specific concerns with the project were as follows:

•   Hazardous materials storage on-site without HUD approval.

•   Owner's failure to submit an audited financial report for 1994.

•   Evidence of deferred maintenance.

•   Major increase in the project's security expense.

Our review showed that the Office of Multifamily Housing has effectively monitored the owner's
progress toward addressing its concerns. As a result, the owner had taken, or was in the process of
taking, appropriate action to address HUD's concerns. Specifically, we found that:

•   CMTS Environmental, Inc., a business interest of the owner, was issued a license by the State of
    Colorado in November 1994 to store radioactive materials in the basement of the project's elderly
    building. The materials stored were a lead base paint testing gun, and calibration instruments
    used to test soil compaction. According to a representative from the Colorado Department of
    Health, the equipment contained shielded radioactive materials that posed no health hazard when
    stored in accordance with the conditions of the license. The owner removed the radioactive
    materials from the project prior to the physical inspection in February, and had the license
    amended to reflect a different storage area.

    In July 1995, representatives from the Colorado Housing and Finance Authority (CHFA)
    performed a detailed inspection of the areas used by the owner to store his personal property.
    CHFA advised the owner that five of six areas being used were unsuitable for storage, and the
    owner subsequently removed most of his personal property from those areas. CHFA and HUD
    have instructed the owner and management agent to execute a market rate lease for the one
    acceptable area; the lease must include language prohibiting future storage of hazardous materials.

•   The owner submitted the audited financial report for 1994 on June 2, 1995.

•   The owner had corrected many of the action items noted in HUD's physical inspection report as
    of our on-site review on July 19, 1995. Additionally, the owner submitted a Management
    Improvement and Operations (MIO) Plan that summarized estimated completion dates and costs
    for the remaining deferred maintenance and capital improvements. HUD has instructed the owner
    to complete unit-by-unit repair and/or replacement schedules to supplement the Management
    Improvement and Operations Plan.

•   The project's security expense was adequately supported by the terms of the project's security
    contract, which provided for armed security, 12 hours a day, 7 days a week.



96-DE-219-1004                                   Page 2
                                                                                     Introduction



In addition to following-up on HUD's concerns, we also assessed the owner's compliance with the
terms and conditions of the Regulatory Agreement, and with HUD's regulations and requirements,
regarding the books and accounts of the project. We found several areas that require corrective
action.



                                    The objectives of the review were to follow up on the specific
 Objectives and Scope
                                    concerns expressed by HUD's Office of Multifamily Housing
                                    regarding the management and physical condition of the
                                    project; and to assess the owner's compliance with the terms
                                    and conditions of the Regulatory Agreement, and with other
                                    HUD regulations and requirements, regarding the books and
                                    accounts of the project. To accomplish these objectives, we
                                    reviewed the management and operations of the project and
                                    the owner's system of internal controls, and performed various
                                    substantive tests.

                                    Our review period covered activities from January 1, 1994,
                                    through May 31, 1995.

                                    During the review, we examined accounting records and other
                                    documents at the project, the Rocky Mountain Office of
                                    Multifamily Housing, the Colorado Housing and Finance
                                    Authority, and the management agent. We also conducted
                                    interviews with employees of these organizations.

                                    We conducted the audit in accordance with Generally
                                    Accepted Government Auditing Standards. Our fieldwork
                                    began on July 5, 1995, and was completed on November 1,
                                    1995.




                                             Page 3                                   96-DE-219-1004
Introduction




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96-DE-219-1004                  Page 4
                                                                                            Finding 1




                   Financial Management Controls
                      Need to be Strengthened
The owner had not implemented an adequate system of financial management internal controls and
procedures. This is illustrated by the fact that over $6,800 of forged and stolen checks that cleared
the project's operating account in 1994 were undetected for several months because the project's bank
statements were not reconciled on a timely basis. As a result, the project's cash book balances were
significantly overstated. In addition, we found the following:

•     Accounts receivable balances were unsupported, tenant receivables were overstated, uncollectible
      receivables were not written off, and advances to the management agent were not reimbursed;

•     Cash disbursements of $982.15 were unsupported or inaccurate;

•     Cash receipts were not deposited on a timely basis or properly safeguarded, cash receipt tickets
      were not reconciled to actual collections, and vending receipts were not recorded or deposited;
      and

•     Access controls for the project's automated accounting system were not in place, and supervisory
      review of system entries was inadequate.

Proper management of the project's books and records is required by the Regulatory Agreement; the
Housing Assistance Payments Contract; and HUD Handbook 4370.2 REV-1, Financial Operations
and Accounting Procedures for Insured Multifamily Projects. Proper financial management controls
help to ensure that project assets are safeguarded; all transactions are executed in accordance with
project management and HUD's authorization; and timely, accurate, and complete information is
provided for management decision making.



                                        The project owner is obligated to comply with the provisions
    Proper financial
                                        of the June 13, 1980, Regulatory Agreement between the
    management procedures
                                        owner and the Colorado Housing and Finance Authority. The
    and controls are required
                                        agreement provides that the books and accounts of the
                                        project's operations shall be kept in accordance with HUD
                                        requirements.

                                        The owner must also comply with the Housing Assistance
                                        Payments Contract between the owner and the Colorado
                                        Housing and Finance Authority. The contract includes
                                        specific provisions for the use of project funds.



                                                 Page 5                                   96-DE-219-1004
Finding 1



                            HUD Handbook 4370.2 REV-1, Financial Operations and
                            Accounting Procedures for Insured Multifamily Projects,
                            details procedures and internal controls to be implemented in
                            connection with an insured project by providing for complete
                            and uniform financial information about the project. The
                            Handbook supplements the requirements of the Regulatory
                            Agreement.

A. BANK ACCOUNTS            Chapter 2 of HUD Handbook 4370.2 REV-1 describes the
   WERE NOT                 financial operations and accounting requirements of HUD-
   RECONCILED               insured multifamily projects. Section 2-12, Cash Management
                            Controls, requires that bank statements shall be reconciled
                            promptly to the formal accounting records by persons other
                            than those recording or handling cash, or preparing and
                            signing checks.

                            The management agent had not reconciled the project's bank
 Cash balances were not
                            statements since late 1994. We prepared an independent
 accurate
                            reconciliation of the project's bank accounts for the 3 months
                            ended January 1995, and found that several general ledger
                            entries needed to be made in order to bring the project's cash
                            accounts into balance for the 3 months reviewed. Below is a
                            summary of the adjustments needed for each account:

                            ACCOUNT                                NET ADJUSTMENT
                            Operating                                    ($10,856.82)
                            Security Deposits                                 $34.49
                            Payroll                                        $5,996.30
                            Reserve for Replacements                         $116.39

                            The overstatement in the operating account included over
 Forged and stolen checks
                            $6,800 of forged and stolen checks that cleared the bank
 were not detected
                            during November and December, 1994. The management
                            agent's offices were burglarized over the week-end of
                            November 26, 1994, and an unknown number of the project's
                            business checks were stolen. The president of the managing
                            firm believes a former employee perpetrated the theft, and that
                            this person also forged checks while still an employee. The
                            president reported the stolen checks to the police and the bank
                            when the theft occurred. However, because the bank
                            statements were not reconciled on a timely basis, the president
                            was unaware until July 1995, that some of the stolen checks,
                            as well as the forged checks, had cleared the bank in 1994.



96-DE-219-1004                       Page 6
                                                                                  Finding 1



                             Regular, documented reconciliation of bank statements to the
                             general ledger cash accounts is a key detective control for
                             ensuring that all cash disbursements from the bank accounts
                             are authorized and supported by appropriate documentation,
                             and that all recorded cash receipts are deposited.

                             The management agent contracted with an accountant to
Corrective action had been
                             prepare the bank reconciliations, and the accountant's work
taken
                             was in process during our review. As of November 3, 1995,
                             the accountant's reconciliations for the project's operating
                             account were current through July 1995. We did not verify
                             the accuracy or completeness of the accountant's
                             reconciliations.

B. ACCOUNTS                  Chapter 4 of HUD Handbook 4370.2 REV-1 lists the
   RECEIVABLE                prescribed uniform system of accounts used by owners of
   BALANCES WERE             HUD-insured projects. The use of each account is defined to
   UNSUPPORTED               ensure that project accounting transactions are properly
                             recorded and classified. The definitions for accounts
                             receivable specify that account balances must be supported by
                             subsidiary ledgers, and that receivables be written off when all
                             collection efforts have failed.

                             The management agent did not properly maintain subsidiary
Subsidiary ledgers were
                             ledgers for accounts receivable, and was unable to adequately
not properly maintained
                             support the general ledger balances. The tenant rent and
                             security deposits were tracked on ledger cards, but the cards
                             were not reconciled to the respective receivable accounts.
                             Additionally, no documentation was available to support non-
                             tenant receivable balances.

                             The general ledger tenant accounts receivable balance of
Tenant-related receivables
                             $2,499.63 on May 31, 1995, was overstated. The tenant
were overstated
                             ledger cards reflected no significant outstanding balances, and
                             the project status report dated April 12, 1995, reflected zero
                             delinquencies. The inflated general ledger balance appeared
                             to be the result of incorrect monthly accruals. The
                             management agent records tenant rent receivables based on
                             the rent roll; however, the housing assistance and tenant rent
                             payments reflected on the rent roll were inaccurate for several
                             recently re-certified tenants. The management agent had made
                             no attempt to adjust the incorrect accrual entry to actual
                             receivables each month.



                                      Page 7                                    96-DE-219-1004
Finding 1



                             The security deposits receivable general ledger balance of
                             $504 was also overstated. We reviewed entries posted to the
                             account since January 1, 1995, and found that the $504
                             balance included security deposit refunds of $147 that should
                             have been debited to the security deposit liability account.
                             The management agent did not reconcile security deposits per
                             the tenant ledger cards to the general ledger account.

                             The general ledger reflected two other receivable accounts
 Uncollectible receivables
                             with balances of $3,291 and $3,285 as of May 31, 1995. The
 were not written off
                             $3,291 balance consisted of payments made in 1992 to two
                             vendors for partially completed work, and the vendors
                             subsequently went out of business without completing the
                             work. Although the management agent had determined in
                             1993 that there was no remedy to collect the receivables, the
                             accounts were still booked as of May 31, 1995.

                             The $3,285 balance consisted of an estimated management fee
 Advances to the
                             advanced to the management agent in November 1993, and a
 management agent were
                             warehouse membership paid out of project funds on behalf of
 not reimbursed
                             the management agent in October 1993. The management
                             agent did not reimburse the project for these advances until
                             June 12, 1995.

                             Accounts receivable are one indication of how well a project
                             is being managed; therefore, it is important that the receivable
                             balances are accurately stated. Subsidiary ledgers should be
                             maintained for each receivable account carried on the general
                             ledger, and the subsidiary ledgers reconciled to the general
                             ledger balances on a regular basis, preferably by someone who
                             does not post to either ledger. Additionally, it is important
                             that doubtful and uncollectible accounts be recognized and
                             appropriately accounted for.

C. CASH                      The Regulatory Agreement provides that the owner shall not
   DISBURSEMENTS             pay out any funds of the project, except for reasonable
   WERE IMPROPER             operating expenses and necessary repairs. Additionally, the
                             Housing Assistance Payments Contract between the owner
                             and the Colorado Housing and Finance Authority requires that
                             project funds must be used for the benefit of the project, to
                             make mortgage payments, to pay operating expenses, and to
                             make required deposits to the replacement reserve.




96-DE-219-1004                        Page 8
                                                                                 Finding 1



                            Chapter 2 of HUD Handbook 4370.2 REV-1 includes the
                            following requirements regarding cash disbursement controls:

                            •   The authorized check signer shall review supporting
                                documentation before signing the check.

                            •   Check requests must have supporting documentation
                                (invoice itemizing amount requested with an authorized
                                signature) in order for approval to be obtained to make the
                                disbursement.

                            •   Invoices and other supporting documentation should be
                                marked "paid" and the check number and date should be
                                posted to the invoice.

                            •   Disbursement checks shall be identified with all relevant
                                account numbers and amounts applicable to each account
                                when one check is for more than one invoice/bill.

                            The management agent's procedures for reviewing and
Disbursements were
                            approving cash disbursements need improvement. Vendor
unallowable, unsupported,
                            invoices were received by the on-site manager. The manager
and inaccurate
                            reviewed the invoices, completed check request forms, and
                            forwarded the invoices and request forms to the accounting
                            clerk who prepared the checks. The president reviewed the
                            checks, the check request forms, and the invoices for propriety
                            and accuracy of the disbursement, and signed the checks.
                            Although this procedure provided appropriate separation of
                            duties for processing and approving cash disbursements, it
                            appears the management agent's procedures for ensuring
                            check requests have supporting documentation need to be
                            strengthened.

                            We tested cash disbursements for the months of September
                            1994, and March and April 1995, and found disbursements
                            totalling $18,742.26 that were unallowable, unsupported, and
                            inaccurate. Specifically, we found that:

                            •   disbursements were made for operating and personnel
                                expenses applicable to other properties,

                            •   disbursements were made for telephone calls made from a
                                non-project telephone number,



                                     Page 9                                    96-DE-219-1004
Finding 1



                   •   a disbursement was made for a refrigerator and range that
                       were delivered to a non-project address,

                   •   disbursements were made without invoices or other
                       supporting documents,

                   •   disbursement amounts differed from the amounts due per
                       the invoices or other supporting documents,

                   •   supporting invoices or other documents were not marked
                       paid or otherwise canceled, and

                   •   disbursement checks did not consistently identify all
                       relevant account numbers.

                   Subsequent to our audit, the management agent provided
                   additional invoices and other documentation that supported
                   $16,643.83 of these expenses. Additionally, the management
                   agent reimbursed the project's operating account for
                   $1,116.28 of disbursements made for operating and personnel
                   expenses applicable to other properties. Appendix B
                   summarizes the remaining $982.15 of unsupported and
                   inaccurate disbursements.

                   Disbursements made from project funds must be for the
                   benefit of the project, and be supported by invoices or other
                   documentation that have been properly authorized. The
                   management agent's procedures for authorizing, reviewing,
                   and approving the project's cash disbursements should be
                   strengthened to ensure that each expenditure is properly
                   supported, and for a project related expense. Additionally,
                   supporting documentation should be cancelled to prevent
                   resubmission, and disbursement checks identified with relevant
                   account numbers.

D. CONTROLS OVER   Chapter 2 of HUD Handbook 4370.2 REV-1 includes the
   CASH RECEIPTS   following requirements regarding cash receipt controls:
   NEED
   IMPROVEMENT     •   Whenever possible, all collections shall be promptly
                       deposited on the day received.

                   •   Collections and all other funds held within an office,
                       whether pending regular deposit or in imprest funds, shall
                       be completely controlled under proper safeguards.


96-DE-219-1004              Page 10
                                                                                 Finding 1



                            •   Numbered rent receipts shall be used and reconciled to
                                actual collections.

                            •   An adequate recording system shall be employed to note
                                all cash and checks received and deposited.

                            •   All cash receipts must be deposited in the name of the
                                project in a bank whose deposits are federally insured.

                            The project's cash receipts were not consistently deposited on
Cash receipts were not
                            a timely basis. The on-site manager said that cash receipts
deposited on a timely
                            were deposited whenever they exceeded $500. However, our
basis, or properly
                            testwork showed that $725.85 of receipts collected through
safeguarded
                            June 29, 1995, and $585.00 of receipts collected on June 30,
                            1995, were not deposited until July 7, 1995. Additionally, the
                            undeposited cash receipts were kept in an unlocked desk
                            drawer.

                            Voided cash receipt tickets were thrown away. Therefore, it
Receipt tickets were not
                            was not possible to account for the numerical sequence of
reconciled to actual
                            tickets issued or to reconcile the tickets to cash collections.
collections
                            Additionally, there was no control to prevent someone from
                            diverting a tenant payment for personal use, and voiding the
                            cash receipt ticket number on the cash receipt journal. The
                            potential for this type of misuse of cash receipts was further
                            increased because access to the unused supply of cash receipt
                            tickets was not restricted.

                            Cash collected from a soda machine was not receipted or
Vending receipts were not
                            deposited. One of the soda vending machines at the project
recorded or deposited
                            was owned by the project owner. Cash proceeds collected
                            from this machine were not recorded on a cash receipt ticket,
                            or deposited to a bank account. Instead, the proceeds were
                            used as a social fund for the tenants. No log was maintained
                            to track the receipt or use of the proceeds.

                            The lack of controls over the project's cash receipts decreased
                            the project's ability to account for its revenues. Maintaining
                            excessive amounts of cash receipts at the project increased the
                            potential for misuse of project funds. This potential for
                            misuse was further increased because the undeposited receipts
                            were not safeguarded. Additionally, any misuse of cash
                            receipts would not have been detected because the cash
                            receipt tickets were not reconciled to actual collections. The


                                     Page 11                                   96-DE-219-1004
Finding 1



                            project's cash receipts should be properly safeguarded, and
                            deposited as frequently as possible, preferably daily. The
                            numeric sequence of cash receipt tickets should be accounted
                            for, and the tickets reconciled to the actual collections when
                            the bank deposit is prepared. Additionally, all cash receipts
                            should be recorded and deposited intact, and should not be
                            used for other purposes, such as maintaining an informal petty
                            cash fund.

E. CONTROLS OVER            HUD Handbook 4370.2 REV-1, Financial Operations and
   THE ACCOUNTING           Accounting Procedures for Insured Multifamily Projects,
   SYSTEM WERE              specifies that internal control procedures be implemented, with
   INADEQUATE               emphasis on maintaining accurate and reliable accounting
                            information. An automated data processing environment
                            presents special challenges for ensuring adequate internal
                            controls and audit trails because of the limited opportunities
                            for segregation of duties. However, system controls can be
                            established that are designed to prevent, detect, and correct
                            errors that could adversely impact the project's business
                            activities. Examples of system controls for verifying the input,
                            processing, and output of automated accounting systems
                            include:

                            •   Establish password access to the accounting system to
                                ensure only designated employees have access to the
                                system.

                            •   Generate regular reports to ensure that a complete and
                                accurate audit trail exists. The reports should be reviewed
                                by a supervisor on a regular basis.

                            The management agent had limited controls in place to ensure
 Access controls were not
                            the accuracy and propriety of entries to the automated
 in place
                            accounting system. The system used by the management
                            agent was installed on two stand-alone computers; however,
                            no passwords or other controls were required to access, or
                            post entries to, the system.

                            The office staff of the agent consisted of the president and an
                            accounting clerk, and the clerk was responsible for preparing
                            and posting all entries to the accounting system. Because
                            there were only two office employees, separation of duties
                            was not practical. However, appropriate compensating



96-DE-219-1004                       Page 12
                                                                             Finding 1



                        controls, such as supervisory review and approval of the
                        clerk's work, were not in place.

                        The president did not review the accounting clerk's work for
Review of entries was
                        accuracy and propriety, even though the clerk was responsible
inadequate
                        for preparing and posting all entries to the automated general
                        ledger and other accounting modules (check register, income
                        register, etc.). In addition to preparing and posting the
                        accounting system entries, the clerk prepared cash
                        disbursements, initiated transfers between bank accounts,
                        prepared payroll, and received and distributed payroll checks.
                        The clerk did not maintain adequate documentation
                        supporting the general ledger entries, and the president did not
                        review and/or approve the entries. Additionally, the president
                        did not review the monthly consolidated general ledger,
                        journal entry, cash receipt, cash disbursement, accounts
                        payable, or other automated reports; nor did the president
                        review the monthly report packages sent to HUD.

                        System controls for automated accounting systems should be
                        established to prevent, detect, and correct errors that could
                        adversely impact the project's business activities. Passwords
                        or other controls that limit access and posting to the
                        automated accounting system; and regular, documented
                        supervisory review of accounting entries and related reports;
                        should be implemented.

                        A sound system of financial management controls is necessary
SUMMARY
                        to minimize the potential for misuse of project funds, such as
                        the $6,800 of forged and stolen checks that cleared the
                        project's operating account in 1994. Proper controls will also
                        help to ensure that project assets are safeguarded; all
                        transactions are executed in accordance with project
                        management and HUD's authorization; and timely, accurate,
                        and complete information is provided for management
                        decision making.




                                 Page 13                                   96-DE-219-1004
Finding 1



Auditee Comments   In general, the project owner and management agent
                   concurred with our finding and recommendations. The
                   management agent's written response, which is included as
                   Appendix A, indicates the agent has initiated, or is willing to
                   initiate, corrective action in establishing the proper financial
                   management controls.           The response indicates that
                   documentation justifying the $982.15 of unsupported and
                   inaccurate disbursements was available; however, this
                   documentation was never provided to us.



Recommendations    We recommend the Rocky Mountain Office of Housing,
                   Multifamily Management Operations Branch:

                   1A Provide the necessary guidance and assistance to the
                      owner in establishing the necessary controls over the
                      project's books and accounts.

                   1B     Require the owner to establish adequate financial
                          management internal controls that encompass the
                          following provisions:

                          •      Prompt reconciliation of bank statements to the
                                 general ledger, preferably by someone who does
                                 not handle or record cash receipts or prepare or
                                 sign checks.

                          •      Supervisory review and approval of bank
                                 statement reconciliations.

                          •      Maintenance of subsidiary ledgers for accounts
                                 receivable, and regular reconciliation of the
                                 subsidiary ledgers to the general ledger, preferably
                                 by someone who does not post to the subsidiary
                                 ledgers.

                          •      Periodic aging of accounts receivable balances,
                                 establishment of reserves for doubtful accounts,
                                 and write-off of loss accounts.

                          •      Documented supervisory review of cash
                                 disbursements to ensure that payees and check




96-DE-219-1004                Page 14
                                                   Finding 1



            amounts are supported, and all disbursements are
            for authorized project expenses.

     •      Cancellation of invoices and other supporting
            documentation to prevent resubmission.

     •      Identification of all relevant accounts on each
            disbursement.

     •      Frequent deposit of all cash receipts, including
            vending receipts.

     •      Proper safeguarding of undeposited cash receipts
            and the unused supply of cash receipt tickets.

     •      Reconciliation of cash receipt tickets to actual
            collections.

     •      Passwords or other controls that limit access and
            posting to the automated accounting system.

     •      Regular, documented supervisory review of
            accounting entries and related reports.

1C Review appropriate documentation from the owner to
   show the corrective actions taken in implementing
   recommendation 1B above.

1D Require the management agent to submit
   documentation to HUD, for review and approval as
   project costs, for the $982.15 in unsupported and
   inaccurate disbursements detailed in Appendix B.

1E          Review the owner's implementation of these
            recommendations and determine that adequate
            controls and procedures are established and that
            they are in conformity with HUD requirements.

1F          Require the owner to provide evidence that the
            bank credited the project's operating account for
            the stolen and forged checks that were paid.




         Page 15                                 96-DE-219-1004
Finding 1




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96-DE-219-1004                  Page 16
                                                                                            Finding 2




                 Project Improperly Allocated
                Management Agent Salary Costs
The management agent improperly allocated supervisory personnel salary costs to the project. The
president of the management agent firm was on the project's payroll as a full-time employee for
several months throughout 1995, including 14 weeks during the first 6 months of the year. The
president reportedly acted as the on-site manager for 3 weeks, and stayed on the payroll an additional
11 weeks to provide training to a new on-site manager. The president was paid $10,780, or
$19.25/hour, for these 14 weeks. HUD guidelines specify that salary costs for ensuring that project
positions are covered during vacancies, and for hiring and supervising project personnel, must be paid
out of management fee funds. However, the $10,780 paid to the president was over and above the
$7,300 management agent fee paid for the same timeframe.



                                       On April 1, 1988, the owner and management agent of the
 Supervisory personnel
                                       property executed a HUD Management Certification
 must be paid out of the
                                       statement. Per the terms of the Certification, the owner and
 management fee
                                       the management agent agree to comply with the project's
                                       Regulatory Agreement. The agreement provides that the
                                       books and accounts of the project's operations shall be kept in
                                       accordance with HUD requirements.

                                       Specific accounting requirements and procedures the
                                       management agent is to follow are contained in various HUD
                                       Handbooks. Handbook 4381.5 REV-2, The Management
                                       Agent Handbook, includes the following provision regarding
                                       the allocation of management costs:

                                       •   Certain management costs may be charged to the project's
                                           operating account. However, other management costs
                                           may be paid only out of the management fee. Specifically,
                                           salary costs for ensuring that project positions are covered
                                           during vacancies, and for hiring and supervising project
                                           personnel, must be paid out of management fee funds.

                                       Payroll expenses for supervisory personnel of the management
 President's salary of
                                       agent were improperly allocated to the project. We reviewed
 $10,780 was charged to
                                       the project's 1995 payroll journal through the pay period
 the project
                                       ended June 23, 1995, and found that the president of the
                                       management agent received compensation as the project's on-



                                                Page 17                                   95-DE-219-1004
Finding 2



                              site manager for the period from February 25, 1995, through
                              June 2, 1995. The president was paid $10,780, or $19.25 an
                              hour, for these 14 weeks. This was over and above the
                              $7,300 management agent fee paid for the same timeframe.

                              The president said he acted as the project's on-site manager
                              during a gap between when he fired one manager and hired
                              another, and that he stayed on the payroll as a full-time
                              employee for about one month after the new on-site manager
                              came on board to provide training.

                              The payroll records show that the president's first paycheck
 The president remained on
                              was for the 2 week pay period ended March 10, 1995. The
 the payroll for several
                              new on-site manager was then hired on March 16, 1995, or
 months after an on-site
                              about 3 weeks after the president began being paid as the on-
 manager was hired
                              site manager. However, instead of staying on the payroll for
                              about one month to train the new manager as the president
                              indicated, he actually stayed on the project's payroll as a full-
                              time employee for 11 more weeks, or through June 2, 1995.

                              Additionally, documentation provided subsequent to our audit
                              by the management agent showed that the president charged
                              many more hours as the project's on-site manager during the
                              period from late September through mid-December, 1995.

                              Allocation of 100% of the president's salary directly to the
 Project management tasks
                              project account is not an acceptable use of project resources.
 performed by the president
                              Subsequent to the audit, the management agent provided
 were not documented
                              timesheets supporting the hours spent by the president at the
                              project. However, no documentation was provided regarding
                              whether the duties performed by the president included front-
                              line activities of the project.

                              Additionally, the hourly rate paid to the president does not
                              appear to be reasonable. A reasonable rate includes the hourly
                              salary for the position and an allocation for overhead
                              expenses, and should not exceed the amount that would be
                              paid to an on-site staff member with similar experience. The
                              president was paid $19.25 an hour, while the on-site manager
                              hired in March was paid $7.75 an hour.


Auditee Comments              The management agent disagreed with our finding and
                              recommendations. The agent's written response, which is


95-DE-219-1004                         Page 18
                                                                      Finding 2



                  included as Appendix A, indicates that the president carried
                  out the everyday supervisory role of the on-site manager while
                  searching for replacement managers; and while training,
                  monitoring, and supervising new on-site managers. However,
                  the response goes on to indicate that the president will no
                  longer collect a salary for on-site supervision, and will
                  cooperate with HUD in determining whether the salary already
                  paid is an allowable project expense.



Recommendations   We recommend the Rocky Mountain Office of Housing,
                  Multifamily Management Operations Branch:

                  2A Determine the total amount of supervisory personnel
                     salary costs that were allocated by the management agent
                     to the project during 1995 and year-to-date 1996.

                  2B     Determine how much, if any, of the supervisory
                         personnel salary costs allocated to the project, are an
                         allowable project expense under HUD's requirements.

                  2C Require that the owner direct the management agent to
                     reimburse the project for unallowable supervisory
                     personnel salary costs that were allocated to the project.

                  2D Require the owner to provide appropriate documentation
                     to show that the management agent reimbursed the
                     project.




                          Page 19                                   95-DE-219-1004
Finding 2




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95-DE-219-1004                  Page 20
                                                                                          Finding 3




                    Project Funds Were Used for
                       Unauthorized Purposes
Project funds were diverted to pay for maintenance expenses of an unrelated property. HUD
guidelines require that expenses paid out of project funds must be for the operation and maintenance
of the project. However, we found instances where the project's labor and materials were used to
complete work at a property across the street that was managed by the project owner. Management
agent personnel indicated the owner was billed for time and materials spent on the other property.
However, the project records showed no evidence of owner reimbursement.



                                      The project owner is obligated to comply with the provisions
 Expenses must be project-
                                      of the June 13, 1980, Regulatory Agreement between the
 related
                                      owner and the Colorado Housing and Finance Authority. The
                                      agreement provides that the books and accounts of the
                                      project's operations shall be kept in accordance with HUD
                                      requirements.

                                      The owner must also comply with the Housing Assistance
                                      Payments Contract between the owner and the Colorado
                                      Housing and Finance Authority. The contract requires that
                                      project funds must be used for the benefit of the project.

                                      Specific accounting requirements and procedures the project
                                      owner is to follow are contained in various HUD Handbooks.
                                      Handbook 4370.2 REV-1, Financial Operations and
                                      Accounting Procedures for Insured Multifamily Projects,
                                      provides that disbursements of project funds should only be
                                      used to pay reasonable expenses necessary for the operation
                                      and maintenance of the project, distributions of surplus cash,
                                      or to repay owner advances.

                                      Project funds were diverted to pay for maintenance related
 Project funds were used to
                                      expenses of another property. The address of the project's
 pay expenses of another
                                      elderly building is 2770 California; the two multifamily
 property
                                      buildings are located at 621-631 28th Street, and 820-836
                                      28th Street.     However, our review of the project's
                                      maintenance records for March 1995 showed that five work



                                               Page 21                                  96-DE-219-1004
Finding 3



                   orders were issued on March 24 for unit addresses in the 700
                   block of 28th Street. These unit numbers did not correspond
                   to the project's unit addresses. We found that these units were
                   located in a building across the street from the project that
                   was managed by the project owner.

                   According to the management agent's staff, the on-site
                   manager of the owner's other building had sometimes
                   requested that the project's maintenance staff perform work at
                   the other building. The project's on-site manager provided the
                   labor and materials needed to complete work at the other
                   building when the project's maintenance schedule allowed it.

                   The on-site manager indicated that he billed the owner for
                   labor and material expenses incurred by the project for work
                   performed at the other building. However, we reviewed
                   activity posted to the project's general ledger since January
                   1994, and found no evidence that the owner reimbursed the
                   project for these costs.

                   Subsequent to our audit, the management agent billed the
                   owner for labor and materials expenses incurred on three work
                   orders for the other building. However, none of the work
                   orders billed by the management agent corresponded to the
                   work orders we found that were issued on March 24.



Auditee Comments   The project owner and management agent concurred with our
                   findings and recommendations. The management agent's
                   response, which is included as Appendix A, indicates that
                   invoices were presented to the owner for work performed at
                   the other building, and that the practice of issuing work orders
                   at the other building will cease. Also, the management agent
                   verbally agreed to take action to ensure all additional work
                   orders for the other building are identified and invoiced.


Recommendations    We recommend the Rocky Mountain Office of Housing,
                   Multifamily Management Operations Branch:

                   3A Require the owner and management agent to discontinue
                      the practice of using the project's labor and materials to
                      perform maintenance work at the owner's other property.


96-DE-219-1004              Page 22
                                                    Finding 3



3B     Identify all work orders issued during 1995 and year-
       to-date 1996 for unit addresses in the 700 block of
       28th Street.

3C Require the management agent to invoice the owner, and
   the owner to reimburse the project's operating account, for
   labor and materials expended on work performed at the
   owner's other property.

3D Require the owner and/or management agent to provide
   appropriate documentation to show the corrective actions
   taken by the owner.




        Page 23                                   96-DE-219-1004
Finding 3




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96-DE-219-1004                  Page 24
Internal Controls
We selected and tested transactions and records to determine whether the owner complied with
regulations that prescribe requirements for internal controls over the management and maintenance
of the books and records of multifamily insured and subsidized projects. For the items tested, we
found noncompliance with these regulations as described in the Executive Summary and Findings.

In planning and performing our review, we considered the internal controls in place over the project's
activities in order to determine our auditing procedures and not to provide assurance on internal
controls.

Internal controls consist of the plan of organization and methods and procedures adopted by
management to ensure that resource use is consistent with laws, regulations, and policies; that
resources are safeguarded against waste, loss, and misuse; and that reliable data are obtained,
maintained, and fairly disclosed in reports.



                                       We determined that the following controls were relevant to
 Internal Controls Assessed
                                       the audit objectives and each was assessed during our review:

                                       •   Controls that ensure project assets are safeguarded.

                                       •   Controls that ensure funds are properly expended.

                                       •   Controls that ensure reliable accounting data.

                                       •   Controls that ensure compliance with the terms and
                                           conditions of the Regulatory Agreement and with HUD
                                           regulations and requirements.

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

                                       The following audit procedures were used to evaluate internal
 Assessment Procedures
                                       controls:

                                       •   Interviews with staff knowledgeable of the day-to-day
                                           application of controls in each of the control systems
                                           identified above.



                                                Page 25                                   96-DE-219-1004
Internal Controls



                          •   Review and tests of the project's operating policies and
                              procedures.

                          •   Review of the project's accounting and administrative
                              records.

                          •   Tests of the execution of a sample of transactions related
                              to each of the control systems identified above.

                          We identified significant internal control weaknesses in the
 Significant Weaknesses
                          following areas:

                          •   The owner did not have safeguards in place to protect
                              project assets against waste, loss, and misuse.

                          •   The owner did not have adequate controls to ensure the
                              propriety of cash disbursements.

                          •   The owner did not have adequate controls to ensure the
                              reliability of accounting data.

                          •   The owner did not comply with the terms and conditions
                              of the Regulatory Agreement regarding the books and
                              records of the project's operations.




96-DE-219-1004                     Page 26
Follow Up On Prior Audits
This was the Office of Inspector General's first audit of California Park East Apartments. The project
is also subject to annual financial audit by an Independent Public Accountant, as well as periodic
reviews by HUD. The results and follow up of each of the most recent reviews follows.



Annual Financial Audits

                                       The 1994 financial audit was prepared by Jackson &
 Results
                                       Goldstine. The report noted no instances of noncompliance
                                       with HUD program requirements. Additionally, no matters
                                       involving the project's internal control structure and its
                                       operations were considered to be material weaknesses.




HUD Reviews

                                       The most recent HUD reviews of the project were conducted
 Results
                                       in February and April 1995. The inspection report reflected an
                                       unsatisfactory rating for the overall physical condition of the
                                       property, and a below average rating for maintenance policies
                                       and procedures. The management review report reflected an
                                       overall below average rating for management operations.

                                       HUD transmitted the results of the reviews to the owner in
                                       May 1995 and has conducted periodic follow up reviews since
                                       then to monitor and assess the owner's progress in taking
                                       corrective action.

                                       We found that HUD has effectively monitored the owner's
 Follow Up
                                       progress toward addressing HUD's concerns with the physical
                                       condition and management of the project. As a result, the
                                       owner had taken, or was in the process of taking, appropriate
                                       action to resolve the concerns.




                                                Page 27                                   96-DE-219-1004
Follow Up On Prior Audits




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96-DE-219-1004                       Page 28
                             Appendix A

Auditee Comments




                   Page 29   96-DE-219-1004
Appendix A




96-DE-219-1004   Page 30
          Appendix A




Page 31   96-DE-219-1004
Appendix A




96-DE-219-1004   Page 32
          Appendix A




Page 33   96-DE-219-1004
Appendix A




96-DE-219-1004   Page 34
                                                                                             Appendix B

Schedule of Unsupported and Inaccurate
Disbursements
The following is a listing of cash disbursements reviewed for the months of September 1994, and
March and April, 1995, that did not have sufficient documentation to support the disbursement, or
the disbursement amount exceeded the invoiced amount.

DATE                                                            DESCRIPTION OF
PAID          VENDOR                  CHECK        AMOUNT       PROBLEM

03/20/95     Mile High Maintenance        1361         $39.07   Invoice for $87.30 paid twice; $48.23 not paid

03/20/95     AT&T                         1365       $126.89    Partial invoice; can't tie to CPE phone numbers

03/20/95     U.S. West                    1366       $183.11    Partial invoice; can't tie to CPE phone numbers

04/14/95     Public Service               1402       $633.08    Invoice for $676.83 paid twice; $43.75 not paid


              TOTAL                                  $982.15

None of the invoices or other supporting documentation tested were marked "paid" or otherwise cancele d

to prevent resubmission.

Additionally, 37 of 106 disbursement checks tested were not identified with all relevant account numbers .




                                                  Page 35                                    96-DE-219-1004
Appendix B




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96-DE-219-1004                 Page 36
                                                                                 Appendix C

Distribution
Secretary's Representative, 8AS
Director, Office of Housing, 8AH (5)
Director, OFC, Field Accounting Division, 8AF
Director, Office of Administration, 8AA
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Comptroller/Audit Liaison Officer, Office of Public and Indian Housing, PF(Room 5156) (3)
Compliance Coordinator, Office of Public and Indian Housing, PO (Room 4244)
Acquisitions Librarian, Library, ARSL (Room 8141)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer for Finance, FF (Room 10166) (2)
Assistant Director in Charge, US GAO, 820 1st Street, NE, Union Plaza, Building 2,
 Suite 150, Washington, DC 20002 Attn: Mr. Cliff Fowler
Associate General Counsel, Office of Assisted Housing and Community Development, GC     (Room
8162)




                                           Page 37                                96-DE-219-1004
Appendix C




96-DE-219-1004   Page 38