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
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Appendix A
96-DE-219-1004 Page 30
Appendix A
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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
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)