oversight

New England Management CO., Inc., Brooklyn, NY

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-06-28.

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

                                                                      Issue Date

                                                                           June 28, 1996
                                                                      Audit Case Number

                                                                           96-NY-214-1003




TO:            Gerard W. Sheridan, Director, Office of Housing
                                          New York Office


FROM:          William H. Rooney, Assistant District Inspector General for Audit,
                                    New York/New Jersey


SUBJECT:       New England Management Co., Inc.
               Multifamily Management Agent
               Brooklyn, New York


We conducted an examination of the books and records of New England Management Co., Inc.,
(hereafter referred to as the Agent) for the period January 1, 1994 through June 30, 1995.
During our audit period, the Agent managed 19 U.S. Department of Housing and Urban
Development (HUD) insured and/or Section 8 assisted projects located throughout New York
City. The purpose of the audit was to determine whether the Agent complied with the terms and
conditions of the Regulatory Agreements and other applicable HUD regulations.

Our review disclosed that the Agent generally complied with HUD regulations; however, the
Agent did not always document that project funds were used in the most economical manner.
Specifically, the Agent: (1) made distributions at Owners' requests and repaid a loan when surplus
cash was not available; 2) could not show that it was to the projects' advantage to use an identity-
of-interest (IOI) maintenance company to perform general repairs and janitorial work; and (3)
needs to strengthen its controls over the maintenance of financial records.

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

Should your staff have any questions, please have them contact William H. Rooney, Assistant
District Inspector General for Audit, at (212) 264-8000, Ext. 3978.
Management Memorandum




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96-NY-214-1003                   Page ii
Executive Summary
We conducted an audit of New England Management Co., Inc. (the Agent), who during our audit
period managed 19 HUD-insured and/or Section 8 assisted projects located throughout New York
City. The objectives of the audit was to determine whether the Agent complied with the terms and
conditions of the Regulatory Agreements and other applicable HUD regulations.

We concluded that the Agent generally complied with HUD regulations; however, the Agent did
not always document that project funds were used in the most economical manner. The Agent
did not: (1) comply with the Regulatory Agreements and HUD requirements when making
distributions and repaying loans to Owners; (2) comply with the Management Certifications when
contracting for repair work with an identity- of-interest (IOI) maintenance company; and (3)
adequately maintain its books and records in accordance with Generally Accepted Accounting
Principles (GAAP).

The specifics concerning the above matters are discussed below.




                                    Our review revealed that between 1991 and 1995, the Agent
 Agent made improper
                                    made payments of $266,957 to Ownership entities and
 distributions at Owners'
                                    repaid an outstanding loan of $20,000 to an Owner when
 requests
                                    sufficient surplus cash was not available. Consequently, a
                                    total of $286,957 which could have been used to pay
                                    necessary operating expenses was withdrawn from project
                                    accounts; therefore, the Owners were not in compliance
                                    with the Regulatory Agreements. We attribute this
                                    deficiency to the Agent's adherence to Owners' requests to
                                    have funds made available to them in their partnership
                                    accounts, which is contrary to HUD requirements.

                                    The review also revealed that contrary to its own
 Agent did not support
                                    contracting procedures and Management Certifications, the
 reasonableness of IOI
                                    Agent did not solicit competitive bids or maintain adequate
 maintenance costs
                                    documentation to support that it paid the lowest rates
                                    available when hiring Old Towne Maintenance Company,
                                    an IOI firm to perform general repair/maintenance work at
                                    HUD related projects. Additionally, the Agent paid Old
                                    Towne for repairs of vacant units at one project which was
                                    not performed, and for duplicate/unsupported repair bills at
                                    the same project. We attribute these deficiencies to the
                                    Agent's belief that the costs charged by its IOI firm for
                                    general repair work were reasonable; therefore, bidding was
                                    not necessary. Since the Agent has not documented the


                                             Page iii                               96-NY-214-1003
Executive Summary



                            reasonableness of Old Towne's costs, there is no assurance
                            that payments were for necessary, reasonable, and proper
                            project expenses, and that the mark-up costs charged by Old
                            Towne (estimated to be over $595,000) were justified.

                            Furthermore, the review revealed that the Agent is not
 Financial records not
                            maintaining its financial records in accordance with GAAP
 maintained in accordance
                            and HUD requirements. Specifically, the review disclosed
 with GAAP
                            of the projects that: (1) cash balances reported in the
                            general ledger of the projects do not reconcile with the cash
                            balances reported on the bank statements; (2) the tenant
                            security cash account and the tenants accounts receivables
                            (TARs) are not reported in the general ledger of the projects
                            even though subsidiary records are maintained; and (3) the
                            tenant security payables and the TARs are not reconciled to
                            subsidiary records. Additionally, the Agent's operating
                            account which is used to pay for most of the operating costs
                            of each HUD project is not adequately reconciled.

                            Consequently, HUD can not rely on the general ledger
                            account balances maintained by the Agent, and there is no
                            assurance that all the Agent's reimbursements from project
                            funds are for expenses that are actually paid or paid timely.
                            We attribute these deficiencies to the Agent's desire to
                            maintain its financial records on a cash rather than accrual
                            basis, and its desire to maintain total control over the
                            disbursement and application of project expenditures.

                            We are recommending that the HUD New York Office
 Recommendations
                            make a determination regarding the amount of improper
                            distributions that should be repaid to the projects by the
                            Owners. Additionally, the Owners should be advised to
                            discontinue the practice of requesting distributions when
                            surplus cash does not exist.

                            We are also recommending that the Agent justify the use of
                            the IOI contractor and the reasonableness of its costs. All
                            costs for duplicate billings and for repair work which was
                            not performed should be repaid to the project.

                            Furthermore, we are recommending that the Agent be
                            required to maintain its financial records in accordance with
                            GAAP and HUD requirements.



96-NY-214-1003                      Page iv
                                      Executive Summary



The results of the audit were discussed with representatives
of the Agent during the course of the audit and at an exit
conference held on May 21, 1996, attended by:

Agent Representatives

Douglas Rosenberg, President
Philip Rosenberg, Former President
Seymour Maslow, Vice President
Solomon J. Borg, Attorney

HUD - Office of Inspector General

William H. Rooney, Assistant District Inspector General
                for Audit
Mark B. Klein, Senior Auditor
Edgar Moore, Auditor

On June 11, 1996, the Agent submitted its written responses
to the draft findings which are included as Appendix E to
this report.




        Page v                                  96-NY-214-1003
Executive Summary




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96-NY-214-1003                       Page vi
Table of Contents

Management Memorandum                                                 i


Executive Summary                                                    iii


Introduction                                                          1


Findings

    1      Distributions and Loan Repayments Were
           Made When Surplus Cash Was Not Available                   3

    2      New England Management Did Not Support
           the Reasonableness or Propriety of Payments
           Made to an Identity-of-Interest Maintenance
           Firm                                                       7

    3      The Agent Needs to Strengthen Its Controls
           Over the Maintenance of Financial Records                15


Internal Controls                                                   21


Follow Up On Prior Audits                                           23


Appendices

    A      Schedule of Ineligible and Unsupported Costs             25

    B      Summary of Excess Distributions & Loan
           Repayments                                               27


                              Page vii                    96-NY-214-1003
Table of Contents




        C        Summary of Unit Repairs Paid For But
                 Not Done                                                29

        D        Summary of Duplicate/Unsupported Repair
                 Bills                                                   31

        E        Auditee Comments                                        33

        F        Distribution                                            37


Abbreviations
        GAAP        Generally Accepted Accounting Principles
        HUD         U.S. Deprtment of of Housing and Urban Development
        IOI         Identity-of-Interest
        OIG         Office of Inspector General
        TAR         Tenant Accounts Receivable




96-NY-214-1003                             Page viii
Introduction
New England Management Co., Inc. (the Agent), managed 19 HUD related projects located in
New York City.

Douglas Rosenberg is the President of the Agent, and the books and records are located at 80
Livingston Street, Brooklyn, New York.

The Agent has an identity-of-interest relationship with Old Towne Maintenance Company.
Additionally, the former President of the Agent (father of the current President) is also a General
Partner of some of the projects managed by the Agent.




                                      The objectives of our audit were to determine whether the
 Audit objectives
                                      Agent: (1) properly withdrew project funds when making
                                      owner distributions and loan repayments; (2) properly
                                      solicited bids or maintained other documentation supporting
                                      the reasonableness of costs paid to its IOI company; and (3)
                                      maintained adequate financial records.

                                      We interviewed HUD New York Office officials as well as
 Audit scope and
                                      the Agent's officials and staff to evaluate the internal
 methodology
                                      controls, and to obtain an understanding of the procedures
                                      required.

                                      We reviewed cash receipt and disbursement transactions
                                      primarily related to four of the projects managed by the
                                      Agent. However, in certain instances we expanded the
                                      scope to include other projects. We also reviewed several
                                      months of transactions made from the Agent's centralized
                                      operating account as well as records related to the IOI firm's
                                      billings and payments to subcontractors to determine the
                                      IOI firm's mark-up on repair costs.

                                      We examined the financial statements and reports submitted
                                      to HUD. We also reviewed randomly selected tenant
                                      records, and conducted inspections at four projects to
                                      determine the condition of the projects and to ensure that
                                      the repair work procured by the Agent was actually
                                      performed.

                                      Our audit covered the period from January 1, 1994 through
 Audit period
                                      June 30, 1995, and where appropriate was extended to


                                               Page 1                                  96-NY-214-1003
Introduction



     include other periods. The audit field work was conducted between September 1995 and
     January 1996.

                                  The audit was conducted in accordance with generally
                                  accepted government auditing standards.

                                  A copy of this report has been provided to the Auditee.




96-NY-214-1003                            Page 2
                                                                                        Finding 1




  Distributions and Loan Repayments Were
 Made When Surplus Cash Was Not Available
Between 1991 and 1995, New England Management ( the Agent) made payments of $266,957
to Ownership entities and repaid an outstanding loan of $20,000 to an Owner when sufficient
surplus cash was not available. Consequently, a total of $286,957 which could have been used
to pay necessary operating expenses was withdrawn from project accounts, and the owners were
not in compliance with the Regulatory Agreements. According to the Agent's President the
payments were made because the Owners requested that the cash be available to them in their
partnership accounts. The Agent believes that such payments do not constitute distributions until
the funds are taken out of the partnership accounts by the individual Owners. We disagree with
the Agent's interpretation of the term distributions. Moreover, we are recommending that the
Owners be advised to repay to the projects any unallowable distributions and to discontinue the
requests for improper distributions.




                                     The HUD Regulatory Agreements provide that distributions
 Criteria
                                     are authorized to be paid only from project surplus cash at
                                     the end of the fiscal year or semiannual period. Also, the
                                     Regulatory Agreements prohibit Owners or Agents from
                                     using project revenue to engage in any other business or
                                     activity not related and essential to the operation of the
                                     project. Simply stated the projects should not be in the
                                     business of lending project funds to individuals or other
                                     business enterprises. The term distributions is defined in the
                                     Regulatory Agreements as the withdrawal or taking of cash
                                     or any assets of the project, including the segregation of
                                     cash or other assets for subsequent withdrawal..., and
                                     excluding payment for reasonable expenses incident to the
                                     operation and maintenance of the project.

                                     Additionally, Paragraph 2-11 of HUD Handbook 4370.2
                                     Rev-1, Financial Operations and Accounting Procedures for
                                     Insured Multifamily Projects, provides that advances from
                                     Owners to pay for reasonable and necessary operating
                                     expenses may be repaid only from project surplus cash.
 Management Agent made
 cash distributions to
 Owners and repaid a loan
 to Owners


                                              Page 3                                  96-NY-214-1003
Finding 1



     Our review disclosed that the Agent managed 19 projects that had HUD-insured and/or
     Section 8 assisted projects; 17 of these projects had HUD insured mortgages. During our
     review of the projects' financial statements and the cash disbursement records maintained
     by the Agent, we found that six of the HUD insured projects that had current mortgages, the
     Agent made payments to Ownership entities and repaid an outstanding loan to Owners when
     surplus cash was not available.

                                     Specifically, during the period from January 1, 1991
                                     through July 31,1995, we found that the Agent made
                                     payments to Owners totalling $732,123 which exceeded
                                     surplus cash available at the end of each project fiscal year
                                     by $286,957. Of this total, $266,957 represent improper
                                     distributions and $20,000 represents an improper loan
                                     repayment (See Appendix B for details).

                                     We discussed this issue with the Agent's officials at the
 Management Agent
                                     conclusion of our audit. They explained that all payments
 comments
                                     to Owners from non-surplus cash were made at the Owners'
                                     requests, and were deposited to Owner's/partnership
                                     accounts.

                                     The Agent officials stated that they were not distributing
                                     project funds to the individual Owners when they made the
                                     payments to the Ownership entities but merely transferring
                                     funds for the Owners' use. They do not believe that they
                                     should be held responsible for subsequent improper actions
                                     by the Owners. As explained in Appendix E the Agent said
                                     that they have the fiduciary and legal responsibility to
                                     follow directives of the Owners. Nevertheless, they
                                     subsequently advised us that they informed the Owners in
                                     1995 that they would not make similar payments in the
                                     future.

                                     We do not concur with the Agent's interpretation of what
 OIG position
                                     constitutes a distribution, and believe that the $286,957
                                     represent improper withdrawals of cash as defined in the
                                     Regulatory Agreements. While the Owner is ultimately
                                     responsible for the taking of the distributions, the Agent
                                     acting on behalf of the Owner, is required to comply with
                                     the applicable HUD regulations. We do not believe that an
                                     Agent's fiduciary responsibility includes violating
                                     regulations at the Owners' request.




96-NY-214-1003                                Page 4
                                                                      Finding 1



                  The Agent's Vice-President also advised us that for three
                  projects cited in this finding the recently received 1995
                  financial statements showed that the projects have surplus
                  cash available to distribute. Accordingly, he believes that
                  these Owners should not be required to repay any project
                  funds distributed in earlier years.

                  Regarding the repayment of project funds, we agree with
                  the Agent and have addressed this in Recommendation 1B.



Recommendations   We recommend that you :


                  1A.    Inform the Agent that they are required to comply
                         with the Regulatory Agreement as it relates to the
                         term distributions.

                  1B.    Require the project Owners to reimburse the
                         projects if cash deficiencies exist at the end of fiscal
                         year 1995. Specifically, deposit sufficient cash into
                         the projects' operating accounts to eliminate the cash
                         deficiencies.

                  1C.    Instruct the project Owners to discontinue the
                         practice of taking project funds and depositing them
                         into partnership accounts when surplus cash is not
                         available. If this practice does not cease, the Owners
                         should be advised that appropriate sanctions will be
                         imposed.




                          Page 5                                    96-NY-214-1003
Finding 1




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96-NY-214-1003                   Page 6
                                                                                      Finding 2




  New England Management Did Not Support
  the Reasonableness or Propriety of Payments
   Made to an Identity-of-Interest Maintenance
                      Firm
Contrary to HUD requirements, New England Management (the Agent) did not solicit
competitive bids or maintain adequate documentation to support that it paid the lowest rates
available when hiring Old Towne Maintenance Company, an identity-of-interest (IOI) firm, to
perform repair/maintenance work at HUD related projects. Additionally, the Agent paid Old
Towne for repairs of vacant units at one project which was not performed, and for
duplicate/unsupported repair bills at the same project. We attribute these deficiencies to the
Agent's belief that the IOI firm costs were reasonable based on its knowledge of the local
marketplace; and therefore, bidding was not necessary. The Agent further advised that a
breakdown of internal controls during a period of high vacancies at the Medgar Evers project
caused errors to be made in the payment process. Since the Agent has not documented the
reasonableness of Old Towne's costs, there is no assurance that payments were for necessary,
reasonable, and proper project expenses, and that the mark-up costs charged by Old Towne
(estimated to be over $595,000) were justified. We are recommending that the Agent repay
$38,591.27 for work not performed, and submit documentation to HUD so that determinations
can be made regarding the eligibility of $11,903.04 in duplicate or unsupported repair bills and
the reasonableness of Old Towne's mark-up costs.




                                    Paragraph 3(d) of the Management Certification for
 Criteria
                                    Projects with Identity-of-Interest or Independent
                                    Management Agents provides that the Agent agrees to
                                    "Purchase goods or services from individuals or companies
                                    having an identity-of-interest with the Owner or the
                                    Management Agent only if the charges levied by those
                                    individuals or companies are not in excess of the costs that
                                    would be incurred in making arms-length purchases on the
                                    open market."

                                    Additionally, Paragraph 4 of the Certification provides that
                                    the Agent agrees to:

                                    (a)   Assure that all project expenses are reasonable in
                                          amount and necessary to the operation of the project.



                                             Page 7                                 96-NY-214-1003
Finding 2



                             (b) Exert reasonable effort to maximize project income and
                                 to take advantage of.... money saving techniques.

                             (c)   Obtain contracts, materials, supplies and services....on
                                   terms most advantageous to the project and at costs
                                   not in excess of amounts ordinarily paid for such
                                   contracts, materials, supplies and services in the area
                                   in which such services are rendered or supplies and
                                   materials furnished.

                             (d) Solicit verbal and written cost estimates as necessary ...
                                 and document the reasons for accepting other than the
                                 lowest bid. The Agent must maintain copies of the
                                 documentation and make the documentation available
                                 for inspection during normal business hours.

                             As certified in the Management Agent Profile submitted to
 IOI relationship with Old
                             HUD, the Agent has an IOI relationship with Old Towne.
 Towne
                             The Agent hires Old Towne to perform routine and non-
                             routine repairs at all the projects owned by the Agent's
                             principals and the principals of Old Towne. The Agent also
                             hires Old Towne to provide janitorial services at some of
                             the projects which are located on scattered sites.

                             The Agent's Vice-President believes that the costs charged
 Agent believes Old
                             by Old Towne are reasonable based on general cost
 Towne costs are
                             standards in the industry. He stated that since Old Towne
 reasonable
                             hires nonunion maintenance employees and hires
                             unlicensed and uninsured contractors to perform the actual
                             repair work, he is confident that their costs are the lowest
                             available. The Vice-President asserted in written statements
                             to HUD, that Old Towne is used only if their bid is
                             competitive with other vendors.

                             The HUD New York Office began to question these
 HUD New York Office
                             assertions because a number of properties managed by the
 asks for documentation
                             Agent incurred high annual maintenance and operating
                             costs but remained in poor physical condition. On January
                             12,1995, and again on March 13,1995, the HUD Office
                             requested that the Agent submit detailed cost and service
                             comparisons to support the reasonableness of Old Towne's
                             charges. Satisfactory documentation was not submitted to
                             HUD as requested.



96-NY-214-1003                        Page 8
                                                                                Finding 2



                            NO DOCUMENTATION TO SUPPORT OLD TOWNE
                            COSTS ARE NECESSARY/REASONABLE

                            During the period January 1,1994 through June 30,1995,
Over $2.5 million paid to
                            we noted that Old Towne was paid a total of $2,581,059 for
Old Towne
                            repairs and maintenance services at 14 HUD-
                            insured/Section 8 projects managed by the Agent (including
                            $228,772 for salaries of janitors and porters). We selected
                            three projects with a high amount of payments to Old
                            Towne to determine whether costs were reasonable and
                            properly procured ( Medgar Evers, Gloria B. Harding, and
                            Sunset Park NSA I). A total of 17 repair contracts
                            (representing all the contracts with Old Towne ) and 23
                            repair invoices involving $240,107 in payments to Old
                            Towne were examined. We also examined $27,380 in
                            janitorial salaries charged by Old Towne to four projects
                            (Sunset Park NSA I, NSA II, Sixth Avenue Rehab II, and
                            Sunset Park Housing Assoc.).

                            Our review disclosed the following:

                            (1) No written bids or cost estimates were solicited prior to
Agent did not obtain bids
                                selecting Old Towne to perform the repair work, and no
from other contractors
                                verbal bids were documented in the Agent's records.


                            (2) The Agent did not adhere to its own contracting
                                procedures which require:

                                 (a)     That any major work whose value exceeds
                                         $5,000 must have three written competitive bids.

                                 (b)     If there is an emergency, a record should be
                                         made of at least three verbal bids.

                                 (c)     If Old Towne is used, extra care must be taken.
                                         Their bids must be at least five percent less than
                                         any competing bids.

                                 Since the Agent did not obtain any competing bids,
                                 there is no assurance that Old Towne's costs were five
                                 percent lower than other companies that provided
                                 comparable services.



                                       Page 9                                  96-NY-214-1003
Finding 2



                            (3) No cost comparisons or other data was evidenced
 No cost comparison data
                                showing that repair costs (e.g. painting, flooring,
                                carpentry, plumbing, etc.) charged by Old Towne were
                                reasonable and not in excess of costs that would be
                                incurred in arms-length transactions.

                            (4) Although the Agent advised that janitors' salaries
                                charged by Old Towne were allocated based on usage
                                patterns at various scattered sites, no employee time
                                distribution records were maintained to support the
                                salary charges to specific projects. Moreover, there was
                                no documentation supporting the reasonableness of Old
                                Towne's mark-up costs for janitorial salaries.
                            (5) The Agent did not adequately justify why it was
 Agent did not justify
                                advantageous to the HUD projects to use its IOI firm as
 pass-through arrangement
                                a middleman or "pass-through" between the actual
                                contractors that performed the repair work and the HUD
                                projects. Moreover, the Agent did not support that Old
                                Towne provided any viable service or function other
                                than those services that would normally be provided by
                                an Agent in fulfilling its HUD required management
                                duties.

                                 Old Towne merely hires other contractors to perform
                                 the actual repair work that it bills to the various
                                 projects. Old Towne prepares the contractors' invoices
                                 by taking the contractors' handwritten bills and
                                 preparing a computer generated invoice almost
                                 identical to their own. After obtaining work order
                                 approvals from project/Agent staff, Old Towne simply
                                 marks up the contractors' repair bills between 10 and
                                 50 percent, and prepares its own computerized bill to
                                 be submitted to the Agent's President for payment
                                 from project funds.

                            Old Towne also mark-ups their janitorial payroll
                            significantly and bills this amount to the projects for
                            cleaning services. Using a conservative average mark-up of
                            30 percent for repairs and janitorial services, we estimate
                            that Old Towne passed through to the projects at least
                            $595,629 without cost justification.




96-NY-214-1003                      Page 10
                                                                             Finding 2



                         PAYMENT FOR WORK NOT PERFORMED AND
                         DUPLICATE/UNSUPPORTED BILLINGS

                         (A) Repair work not performed

                         During our physical inspections of randomly selected units
Old Towne was paid for
                         at the HUD-insured project, Medgar Evers, we found that
work not performed
                         major repair work billed by Old Towne for five vacant units
                         was not performed. A total of $38,591.27 in project funds
                         was disbursed on March 31, 1995 to pay for these repairs,
                         yet our inspections in October 1995 revealed that the repair
                         work billed for these units was not done ( see Appendix C
                         for details). The Agent paid Old Towne without
                         independently verifying and documenting that the work was
                         completed.

                         The Agent's Vice-President advised us that the monies that
Agent attributes
                         were paid to Old Towne for the above repairs were
deficiency to high
                         reapplied to other jobs billed by Old Towne. However, our
vacancies at Medgar
                         examination revealed that not until we performed our
Evers
                         inspections did the Agent begin to reallocate these funds .
                         The Agent's official further stated that the above monies
                         were paid as advances on proposals submitted by Old
                         Towne and not on actual work performed. He stated that
                         because of the desire to turn over a high number of
                         vacancies at Medgar Evers during a short period of time
                         deviations from the normal payment controls occurred. We
                         believe that advancing project funds prior to the start of
                         work is an improper management practice since it gives the
                         appearance of preferential treatment, and in effect provides
                         the IOI firm with interest free loans at the project's expense.


                         (B) Payments for duplicate/unsupported billings

                         Our review of payments made by the Agent also revealed
Old Towne was paid for
                         that once a contractor's invoice is paid, the Agent does not
duplicate billings
                         keep a listing by apartment of what repair work was done,
                         billed, and paid for at that apartment. Consequently, there
                         is no assurance that invoices billed for the same work will
                         not be paid twice. In fact, we found that the Agent paid
                         $11,903.04 to Old Towne for repairs that were either
                         duplicated with other previous bills or added without
                         adequate justification (e.g. approved change orders) at five


                                 Page 11                                   96-NY-214-1003
Finding 2



                         different apartments at the project, Medgar Evers (see
                         Appendix D for details).

                         For example, on December 16,1994, Old Towne was paid
                         $2,598.00 under contract No.43 for the following repairs at
                         Apartment No.6F-701 Gates Avenue: installing floor tiles
                         throughout the apartment, installing new base cove,
                         repairing four closet doors and plastering and painting the
                         entire apartment. On March 3,1995, Old Towne was also
                         paid $2,675.94 under invoice No. 26757 for almost the
                         identical work described in contract No. 43; and on March
                         23,1995, Old Towne was paid an additional $617.46 under
                         invoice No.20605B for painting and plastering the
                         apartment which was already paid twice under the previous
                         payments. Since the latter two payments totalling $3,293.40
                         are apparent duplicates with the first payment we are
                         questioning these costs pending an eligibility determination
                         by HUD.

                         While we found no evidence to indicate that the above
 Safeguards need to be
                         payment deficiencies existed at other projects managed by
 established
                         the Agent, we believe that adequate safeguards must be
                         established to ensure that duplicate/unsupported payments
                         are not made and the potential for waste and abuse is not
                         increased.

                         In its response to the draft findings, (Appendix E) the Agent
 Management Agent
                         reiterated that it has no need to solicit bids on every item of
 comments
                         work since its personnel are extremely familiar with the
                         costs in the New York marketplace. Regarding the janitorial
                         salaries, the Agent stated that Old Towne's costs are less
                         than the costs that would be incurred if the Agent hired
                         janitors from the Local 32-b union. The Agent further
                         advised that no project funds were lost as a result of the
                         instances of duplicate bills/ work not performed disclosed
                         by the audit since all work has since been performed or the
                         costs are in the process of being refunded to the project.

                         We believe that the Agent has not provided sufficient
 OIG position
                         documentation to OIG or to the HUD Field Office to
                         support the reasonableness of repair/janitor costs charged
                         by Old Towne and to support its compliance with the
                         Management Certification. As stated in the finding, HUD
                         has repeatedly asked for this information and to date has not


96-NY-214-1003                   Page 12
                                                                     Finding 2



                  received it. With respect to the questionable/ineligible costs
                  for duplicate bills and work not performed, documentation
                  evidencing that repayments were made or work has been
                  completed subsequent to the audit should be submitted to
                  the HUD New York Office for a review and determination.



Recommendations   We recommend that the Agent be instructed to:

                  2A.    Comply with its own contracting procedures and
                         Management Agent Certifications when obtaining
                         bids or other cost estimates for general repair/
                         maintenance work. The IOI firm should be hired
                         only if they are the lowest bidder. All documents
                         related to the solicitation and selection of any
                         contractor should be maintained by the Agent.

                  2B.    Submit documentation to HUD showing that Old
                         Towne's charges for repairs and janitorial salaries
                         are necessary and reasonable. In this regard, an
                         assessment should be made of whether the services
                         and functions provided by Old Towne are necessary,
                         and whether their mark-up costs are reasonable and
                         proper project expenses.

                  2C.    Repay $38,591.27 in project funds for repair work
                         not completed, or submit documentation showing
                         that the repairs were satisfactorily completed.

                  2D.    Cease the practice of advancing project funds to
                         contractors including Old Towne for work that has
                         not been completed.

                  2E.    Submit documentation to HUD so that
                         determinations can be made regarding the eligibility
                         of $11,903.04 in duplicate or unsupported repair
                         bills. Any amounts determined to be ineligible
                         should be repaid to the project.

                  2F.    Implement internal controls to prevent its IOI firm
                         or any other vendor from being paid twice for work
                         already done.




                          Page 13                                  96-NY-214-1003
Finding 2




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96-NY-214-1003                   Page 14
                                                                                          Finding 3




   The Agent Needs to Strengthen Its Controls
   Over the Maintenance of Financial Records

The Agent is not maintaining its financial records in accordance with HUD requirements.
Specifically, the review disclosed that: (1) the cash balances reported in the general ledger of the
projects do not reconcile with the cash balances reported on the bank statements; (2) the tenant
security cash account and the tenants accounts receivables (TARs) are not reported in the general
ledger of the projects even though subsidiary records are maintained; and (3) the tenant security
payables and the TARs are not reconciled to subsidiary records. Additionally, the Agent's
operating account which is used to pay for most of the operating costs of each HUD project is not
adequately reconciled. Consequently, HUD can not rely on the general ledger account balances
maintained by the Agent, and there is no assurance that all the Agent's reimbursements from
project funds are for expenses that are actually paid or paid timely. We attribute these deficiencies
to the Agent's desire to maintain its financial records on a cash rather than accrual basis, and its
desire to maintain total control over the disbursement and application of project expenditures.




                                      The HUD Regulatory Agreement requires that books and
 Criteria
                                      accounts must be complete and accurate, and maintained in
                                      such form as to permit a speedy and effective audit. HUD
                                      Financial Operations and Accounting Procedures for
                                      Insured Multifamily Projects Handbook 4370.2 Rev-1
                                      provides that :

                                      •   The general objectives of the HUD prescribed
                                          accounting system include reporting on all financial
                                          transactions using HUD guidelines and Generally
                                          Accepted Accounting Principles...(Paragraph 2-2)

                                      •   In order to ensure that books are complete and reporting
                                          is uniform, prescribed accounts must be maintained as
                                          outlined and described... in the HUD chart of
                                          accounts.(Paragraph 2-4)

                                      •   The books of original entry must be kept current at all
                                          times, and postings must be made at least monthly to
                                          ledger accounts.(Paragraph 2-3)




                                               Page 15                                  96-NY-214-1003
Finding 3



                             In addition, HUD Handbook 4370.1 REV-2, Reviewing
                             Annual and Monthly Financial Reports provides that
                             commingling of funds in an Agent's account is an
                             acceptable practice only if approved in advance by HUD
                             and if the Agent can identify the exact amount of funds that
                             belong to a particular project at all times. This is a privilege
                             and may be revoked at any time.

                             (1) INACCURATE CASH BALANCES

                             Our review of the Agent's financial records for four projects
 Large differences in cash
                             revealed that there were large differences between cash
 balances
                             balances recorded in the general ledger of the projects and
                             the cash balances reported in the project bank statements.
                             For example, at June 30, 1995, the cash balance in the
                             general ledger for Gloria B. Harding was $729,194.58, yet
                             the balance in the bank for the same period was a shortage
                             of $63,936.73. Agent officials explained that the cash
                             balances in their books of original entry/general ledger have
                             to be adjusted by adding and subtracting various general
                             ledger accounts to the general ledger cash balance to arrive
                             at a corrected book balance prior to conducting a bank
                             reconciliation. However, we believe that there should not
                             be such significant differences between cash balances
                             reported on a bank statement and cash balances reported on
                             a cash basis general ledger. Although it is normal to make
                             some adjustments (eg. outstanding checks and bank charges
                             etc.) in order to reconcile the book balance with the bank
                             balance, the Agent's adjustments are time consuming and
                             preclude a speedy and effective audit.

                             (2) TENANT ACCOUNTS NOT REPORTED IN
                                 GENERAL LEDGER

                             Our review of the Agent's financial records for the HUD
 General Ledger
                             related projects also disclosed that the Tenant Security
 incomplete
                             Deposits and Tenant Account Receivables (TAR) are not
                             recorded in the general ledger of the projects. Agent
                             officials state that this has occurred because their books are
                             kept on a cash basis; however, it would appear that if the
                             records are being maintained on a cash basis then all cash
                             accounts including tenant security deposits should be
                             recorded. The failure to maintain complete financial records
                             is contrary to Generally Accepted Accounting Principles,


96-NY-214-1003                        Page 16
                                                                            Finding 3



                        and impedes effective monitoring by HUD since all
                        financial information is not readily available on a monthly
                        basis.

                        (3) TENANT ACCOUNTS ARE NOT RECONCILED

                        While the general ledger of the projects include Tenant
Tenant accounts not
                        Security Payable accounts they are not reconciled to the
reconciled
                        subsidiary records or the individual project security bank
                        statements. For example, the tenant security payable
                        account reported in the general ledger for the project, Sixth
                        Avenue Rehab I showed a negative balance of $1,073 yet
                        the bank statement showed a balance of $6,809. A tenant
                        security cash account should be established in the general
                        ledger (as noted above), and this account and the tenant
                        security payable account should be adjusted to reflect the
                        true tenant security balances so that the books will be
                        complete and accurate.

                        The review also showed that the TAR subsidiary records can
                        not be reconciled to the Independent Public Accountant's
                        (IPA) records or the year-end financial statements. We
                        attribute this to the fact that the Agent does not post the IPA
                        write-offs of TARs. Agent officials state that they do not
                        post tenant receivable write-offs unless ordered to by the
                        courts because they believe such write-offs will harm them
                        in any legal actions brought against tenants. However, we
                        believe that the IPA write-offs should be posted to the
                        subsidiary records so that an accurate and complete
                        accounting of tenant balances is maintained.


                        (4) OPERATING ACCOUNT NOT ADEQUATELY
                            RECONCILED

                        The Agent maintains a separate bank account in their name
Operating account not
                        to pay project related expenses for the HUD projects.
reconciled
                        However, this operating account is not adequately
                        reconciled. The Agent's procedure is to issue computer
                        generated checks from their operating account to pay the
                        project vendors for all HUD related projects. On a weekly
                        basis, the Agent draws a project check to reimburse itself
                        for the checks issued out of the operating account. The



                                Page 17                                   96-NY-214-1003
Finding 3



                              reimbursement checks from the various projects are
                              deposited into this operating account.
                              Agent officials stated that they use this centralized
 Distribution of checks are
                              operating account to ensure that all project expenses are
 sometimes delayed
                              paid on a timely basis. For example, if a project does not
                              receive Section 8 funds from HUD on a timely basis,
                              essential expenses can still be paid by the Agent through
                              this operating account. However, they did state that
                              sometimes they hold up the release of the operating account
                              checks until they are certain that sufficient project funds are
                              available for deposit.

                              In an attempt to ensure that project expenses are being paid
 Agent only reconciles
                              timely, we examined the Agent's bank reconciliations for its
 totals
                              operating account to determine which checks were
                              outstanding. We found that while numerous checks are
                              issued monthly for all HUD projects (ranging from 200 to
                              over 600 checks a month), from the projects the Agent only
                              reconciles the total dollars received from the projects to the
                              total dollars of checks issued from the operating account.
                              The resulting balance, which should represent outstanding
                              checks, is not reconciled to the bank balance. Because of
                              the huge volume of checks issued monthly from this
                              account, it is difficult to readily identify which checks are
                              outstanding at the end of a given month and the projects to
                              which these checks pertain to. Consequently, the Agent can
                              not provide assurance that project reimbursements received
                              and deposited into the operating account were for actual
                              project payments. Furthermore, there is no assurance that
                              project reimbursements received in advance of payments
                              are not being used for non-project related expenses to the
                              benefit of the Agent.

                              We believe that project expenses should be paid from a
                              separate project account not a centralized operating account
                              where the reimbursements from all HUD projects are
                              commingled. The centralized operating account and the
                              process by which the Agent issues and releases checks from
                              this account provides the Agent with the ability to obtain
                              interest-free loans by using the float on the project funds
                              received.

 Management Agent             In its response to the draft finding, (Appendix E) the Agent
 comments                     advised that it is considering making changes to its various


96-NY-214-1003                        Page 18
                                                                                      Finding 3



   financial reporting systems in order to meet all the requirements of HUD and GAAP. The
   Agent stated that its centralized operating account has not been used in an improper manner,
   and has advantages for projects that have close to a negative cash balance. The Agent also
   advised that subsequent to our audit, it completed reconciliations for 1996 which are
   available for HUD review.



Recommendations                    We recommend that the Agent :

                                   3A.     Be advised to comply with GAAP and HUD
                                           requirements when maintaining its general ledger.

                                   3B.     Ensure that general ledger cash balances of the
                                           projects accurately reflect bank cash balances of the
                                           HUD related projects.

                                   3C.     Establish tenant security cash accounts and tenants
                                           accounts receivables in the general ledger of the
                                           projects.

                                   3D.     Ensure that the tenant security cash accounts and the
                                           tenant security payable accounts for all HUD related
                                           projects are adequately reconciled.

                                   3E.     Ensure that the tenants accounts receivable
                                           subsidiary records reflect adjustments made by the
                                           IPA for write-offs.

                                   3F.     Submit to HUD or make available for review a
                                           current reconciliation of its operating account which
                                           would identify all outstanding checks and the fund
                                           balances for all HUD projects. These reconciliations
                                           should be performed on an ongoing basis. If a
                                           satisfactory reconciliation is not provided, the Agent
                                           should be advised to cease using the operating
                                           account to pay for project related expenses.




                                            Page 19                                 96-NY-214-1003
Finding 3




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96-NY-214-1003                   Page 20
Internal Controls
In planning and performing our audit, we evaluated the internal controls of the Agent to
determine our auditing procedures and not to provide assurance on internal controls. Internal
controls are the process by which an entity obtains reasonable assurance as to achievement of
specific objectives. Internal controls consist of interrelated components, including integrity,
ethical values, competence, and the control environment which includes establishing objectives,
risk assessment, information systems, control procedures, communication, managing change, and
monitoring.




                                    We determined that the following internal control
 Relevant controls
                                    categories were relevant to our audit objectives:

                                    •   Financial Management

                                    •   Cash Receipts and Disbursements

                                    •   Procurement

                                    •   Maintenance and Repairs

                                    We evaluated all of the control categories identified above
                                    by determining the risk exposure and assessing the control
                                    design and implementation.

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

                                    Based on our review, significant weaknesses were noted in
 Assessment results
                                    the following control areas:

                                    •   Control over Financial Management (Finding 3).

                                    •   Control over Cash Receipts and Disbursements (Finding
                                        1).

                                    •   Control over Procurement (Finding 2).



                                            Page 21                                 96-NY-214-1003
Internal Controls




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96-NY-214-1003                      Page 22
Follow Up On Prior Audits
This is the initial Office of Inspector General (OIG) audit of New England Management Co., Inc.




                                            Page 23                                96-NY-214-1003
Follow Up On Prior Audits




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96-NY-214-1003                      Page 24
                                                                                   Appendix A

Schedule of Ineligible and Unsupported Costs


                       Finding
                       Number    Ineligible (1)                  Unsupported (2)
                          2                 $38,591.27               $11,903.04
                        Total               $38,591.27               $11,903.04




(1) Ineligible Costs             - Costs clearly not allowed by law, contract, HUD or local
                                   Agency policies and regulations.

(2) Unsupported Costs            - Costs not clearly eligible or ineligible, but which warrant
                                   being contested (e.g. lack of satisfactory documentation
                                   to support the eligibility of the cost, etc.).




                                             Page 25                               96-NY-214-1003
Appendix A




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96-NY-214-1003                   Page 26
                                                             Appendix D
                                                             Appendix C


                   NEW ENGLAND MANAGEMENT
                       BROOKLYN, NEW YORK
           SUMMARY OF UNIT REPAIRS PAID FOR BUT NOT DONE


 Bldg/Apt. No.   Contract No.    Check No.    Check     Olde Towne
                                              Date      Invoice Amt.


715-3B                45        53546        03/31/95    7,809.59
735-6A                46        53546        03/31/95    8,328.02
735-2E                47        53546        03/31/95    7,798.87
735-3F                48        53546        03/31/95    8,828.26
745-2C                49        53546        03/31/95    5,826.53
                                                        $ 38,591.27




                                Page 29                       96-NY-214-1003
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96-NY-214-1003                   Page 30
                                                                             Appendix C




                  NEW ENGLAND MANAGEMENT
                     BROOKLYN, NEW YORK
         SUMMARY OF DUPLICATE/UNSUPPORTED REPAIR BILLS


BLDG/APT No.   Contract   Invoice   Check      Check      Questioned Costs
               No.        No.       No.        Date          Amount           Reasons

701-3C         32         26958     D5097      03/29/95   $ 627.75            A
701-3C                    26570 &   D5097      03/29/95     384.18            B
                          26951
701-1E         33         26569     D5097      03/29/95    1,044.04           A
                          26950
701-6A         35         26960     D5097      03/29/95     665.41            A
735-2B         36         26091     D5010      11/23/94    5,888.26           B
701-6F         43         26757 &   R53470     03/03/95    2,675.94           B
                          20605B    R53542     03/23/95     617.46            B
                                               TOTAL      $11,903.04

A - Unsupported charges
B - Duplicate charges




                                     Page 31                                 96-NY-214-1003
Appendix C




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96-NY-214-1003                   Page 32
                                                                         Appendix F

Distribution
Secretary's Representative, New York/New Jersey, 2AS
Director, Office of Housing, New York State Office, 2AH (2)
Director, Accounting Division, New York/New Jersey
Special Assistant, New York State Office, 2AS (3)
Assistant to the Deputy Secretary for Field Management, SDF, Room 7106
Deputy Assistant to the Secretary for Field Management, SDF, Room 7106
Office of Housing/FHA Comptroller, HF (Attention: Comptroller, Room 5132) (3)
Acquisitions Librarian, AS (Room 8141)
Director, Participation and Compliance Division, HSLP, Room 9164
Director, Division of Housing Finance Analysis, TEF, Room 8212
Chief Financial Officer, F (Room 10166) (2)
Field Comptroller, Midwest Field Office, 5AF
Deputy Chief Financial Officer, FF (Room 10166) (2)
Associate General Counsel, Office of Assisted Housing and Community Development, CD,
Room 8162
Assistant Director in Charge, US GAO, 820 lst Street, NE Union Plaza, Building 2,
Suite 150, Washington, DC (2)
New England Management Co., Inc., Brooklyn, New York




                                       Page 37                            96-NY-214-1003