U.S. Department of Housing and Urban Development
Wanamaker Building, Suite 1005
100 Penn Square East
Philadelphia, PA 19107-3380
District Inspector General for Audit
July 9, 1996
Audit Related Memorandum
No. 96-PH-185-1819
MEMORANDUM FOR: Joseph K. Aversano, Director, Community Planning
and Development Division, Virginia State
Office, 3FD
FROM: Edward F. Momorella, District Inspector General
for Audit, Mid-Atlantic, 3AGA
SUBJECT: Citizen's Complaint
Richmond Redevelopment and Housing Authority
Accounting Controls Rehabilitation Loan Program
Richmond, Virginia
Pursuant to a confidential citizen's complaint, we have completed
a review of the Richmond Redevelopment and Housing Authority (RRHA)
accounting for the rehabilitation loan program. The loan program
uses a combination of Community Development Block Grant (CDBG)
funds and bank funds.
The complainant made several allegations of improper activity in
the RRHA's administration of HUD-funded programs. The allegations
dealt with the application of the rehabilitation loan programs's
income and expenses, and the program's internal controls. The
third allegation was referred to another Federal agency for
appropriate action.
The scope of our audit work included: (1) determining if the RRHA
was utilizing CDBG funds to reduce amounts due to the bank for
rehabilitation loans made to homeowners; and (2) evaluating the
RRHA's internal accounting controls over the rehabilitation loan
program.
Based on the work performed, two findings were developed covering
the following issues.
RRHA authorized its contracted loan servicing company to charge
$36,388 in bank loan servicing fees to the CDBG program from June
30, 1993 through January 31, 1996. RRHA did not adhere to loan
servicing contracts, nor did RRHA properly match revenues with
related expenses per OMB Circular A-87. RRHA officials believe
Visit the Office of Inspector General's World Wide Web site at http://www.hud.gov/oig/oigindex.html
2
this is an eligible expense since the CDBG program requires a
combination of CDBG and bank funds to implement the loan rehab-
ilitation program. RRHA in effect, violated loan servicing
agreements, improperly matched revenues and expenses, and reduced
the amount of CDBG funds available for eligible CDBG activities.
RRHA needs to improve and strengthen internal accounting controls
over the CDBG rehabilitation loan program. RRHA: does not utilize
or verify the accuracy of remittance reports, and does not receive
the same remittance report as the bank; does not properly reconcile
bank statements to the general ledger, providing no assurance as to
the accuracy of general ledger balances; does not maintain a
complete data base to document the portfolio of rehabilitation bank
and CDBG loans; could not provide journal entries requested during
our review; and accounting journals disclosed undetected incorrect
accounting entries.
We recommend the RRHA: (1) discontinue charging the CDBG program
bank loan servicing fees and repay the CDBG program for bank loan
servicing fees paid with CDBG funds, and (2) obtain the same
remittance reports submitted to the bank with the funds deposited,
review them for accuracy, complete its loan portfolio database, and
establish a system to secure and review journal entries.
The draft findings were discussed with the RRHA who provided a
written response. The response was considered in the findings and
included as Attachment 2.
Within 60 days, please give us, for the recommendations made in the
memorandum, a status report on: (1) the corrective action taken;
(2) the proposed corrective action and the date to be completed; or
(3) why action is considered unnecessary. Also, please furnish us
copies of any correspondence or directives issued as a result of
the review.
If you have any questions, please contact Irving I. Guss, Assistant
District Inspector General for Audit, at (215) 656-3401.
Attachments
1. Findings and Recommendations
2. Auditee Comments
3. Distribution
Attachment 1
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Finding 1 Bank Loan Servicing Fees Charged to the CDBG Program
The Richmond Redevelopment & Housing Authority authorized its
contracted loan servicing company to charge $36,388 in bank loan
servicing fees to the CDBG program from June 30, 1993 through
January 31, 1996. RRHA did not adhere to loan servicing contracts,
nor did RRHA properly match revenues with related expenses per OMB
Circular A-87. RRHA officials believe this is an eligible expense
since the CDBG program requires a combination of CDBG and bank
funds to implement the rehabilitation loan program. RRHA in
effect, violated loan servicing agreements, improperly matched
revenues and expenses, and reduced the amount of CDBG funds
available for eligible CDBG activities.
According to the loan servicing agreements, the loan servicing
company shall retain a fee for each installment payment collected
(meaning the bank loan fees are to come from the bank loan
proceeds). The service fees vary from $5 to $10 per installment
collected depending on the agreement.
OMB Circular A-87, Section C, Paragraph 2a., states that a cost is
allocable to a particular cost objective to the extent of benefits
received by such objective.
In the rehabilitation loan program, RRHA establishes bank and CDBG
fund loan groups. RRHA contracts with a loan servicing company to
collect and properly allocate installment payments to each of the
bank and CDBG loan groups. The loan servicing company is paid a
fee for each installment payment collected. RRHA and the loan
servicing company are not in compliance with respective loan
servicing agreements, because the loan servicing company has been
instructed, by RRHA, to deduct all service fees from CDBG funds and
not each installment collected.
RRHA's non-compliance with OMB Circular A-87 is similar to their
non-compliance with the loan servicing agreements. RRHA maintains
two general ledgers. Ledger 56 is titled other local funds and
includes bank loan funds, and ledger 57 represents CDBG funds.
RRHA records collections (revenues) on the bank loans in ledger 56
and the servicing fee (expense) is recorded in ledger 57. In doing
so, RRHA is improperly matching revenue with expenses, contrary to
OMB Circular A-87. There is no benefit received by cost objective
ledger 57.
According to RRHA's Deputy Director of Finance (DDF), the CDBG
program requires a combination of CDBG and bank funds. The CDBG
program allows the use of CDBG funds to pay for salaries of RRHA
employees and other miscellaneous costs associated with obtaining
bank funds and operating various other programs administered with
CDBG funds, which would include paying bank loan service fees. The
splitting of bank and CDBG funds came as a suggestion from RRHA's
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independent auditors and was strictly for financial statement
presentation purposes.
The loan servicing agreements were not amended to document the
decision to charge bank service fees to the CDBG program because it
was not thought to be necessary at the time. The loan process is
continually changing and being refined according to the DDF and new
agreements will eventually reflect this decision. The language
will be adjusted in future loan agreements. An amendment to the
agreement was not done at the time because RRHA was too busy.
The CDBG program did not require the RRHA to combine CDBG funds
with bank funds as stated by the DDF. That decision was made by
the grantee when they designed the program.
In a memorandum dated December 16, 1991, the former Director of
Finance instructed RRHA employees to have the loan servicing
company deduct bank loan fees from CDBG loan collections rather
than the bank loan collections because net collections of CDBG loan
payments could absorb the bank loan fees. To determine the amount
of CDBG funds used to pay bank loan fees, both the RRHA and the
loan servicing company were asked to provide the schedules that
disclosed the amounts. The time period obtained was from June 30,
1993 through January 31, 1996.
By using CDBG funds to pay for bank loan servicing fees the RRHA
incurred ineligible costs of $36,388 and reduced the amount of CDBG
funds available for eligible CDBG activities.
Auditee Comments
RRHA stated they had discontinued charging the CDBG program for the
bank loan service fees effective January 31, 1996 and the $36,388
will be forwarded to the city as program income by June 29, 1996.
In addition, the RRHA will complete a review by July 31, 1996 to
ensure compliance in all areas.
Recommendations
We recommend your staff verify the RRHA has implemented the
following:
1A. Discontinue charging the CDBG program bank loan servicing fees
and repay ledger 57, from ledger 56, $36,388 in CDBG funds
used to pay bank loan servicing fees from June 30, 1993
through January 31, 1996, and any additional fees charged to
date. The funds should also be returned to the City as
program income.
1B. Properly match all future revenues and expenses per OMB
Circular A-87.
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Finding 2 Improved Internal Accounting Controls Necessary Over the
CDBG Rehabilitation Loan Program
The RRHA needs to improve and strengthen internal accounting
controls over the CDBG rehabilitation loan program. RRHA:
does not utilize or verify the accuracy of remittance
reports, nor receives the same remittance report as the
bank,
does not properly reconcile bank statements to the
general ledger, providing no assurance of the accuracy of
general ledger balances,
does not maintain a complete data base to document the
portfolio of rehabilitation bank and CDBG loans,
could not provide journal entries requested during our
review, and
accounting journals disclosed incorrect accounting
entries.
RRHA officials are planning to have their independent auditors
conduct a review to improve internal accounting controls.
According to 24 CFR 85.20 Standards for financial management
systems paragraph (b):
"The financial management systems of... grantees and
subgrantees must meet the following standards:
(2) Accounting records. Grantees and subgrantees
must maintain records which adequately identify the
source and application of funds provided for
financially-assisted activities. These records
must contain information pertaining to grant or
subgrant awards and authorizations, obligations,
unobligated balances, assets, liabilities, outlays
or expenditures, and income.
(3) Internal Control. Effective control and
accountability must be maintained for all grant and
subgrant cash, real and personal property, and
other assets. Grantees and subgrantees must
adequately safeguard all such property and must
assure that it is used solely for authorized
purposes."
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Remittance reports not utilized or verified
The RRHA does not receive the same remittance reports the loan
servicing company sends to the bank; therefore, is unable to
effectively utilize the remittance reports. Also the RRHA is not
reviewing the remittance reports for accuracy.
Monthly homeowner loan payment collections are documented by
remittance reports the RRHA receives from the loan servicing
company. These remittance report totals are used to establish a
monthly loan receivable balance, which is not representative of
actual collections deposited in the bank account. A different
remittance report is sent to the bank. These remittance reports
are generated by deposits from collections made by the loan
servicing company. The deposits, made twice each month, are
representative of actual collections deposited in the bank account.
The remittance report received by the bank, shows up as credit
memos on each bank statement.
By utilizing the remittance report RRHA is receiving, the following
journal entries are made each month: An advance account is debited
and mortgage receivable homeowners and interest income accounts are
credited. When the bank statement is received, a journal entry
debiting debt service, (a cash account), and crediting advances is
made to record the actual cash received. By utilizing the same
remittance reports the bank is receiving, RRHA can set up the
receivable and eliminate the journal entry made when the bank
statement is received. Use of the advance account is not necessary
and entries to the general ledger become more meaningful. The
remittance report totals could be reconciled to the bank statement
and the RRHA would know where the cash deposited into the bank
accounts came from. The remittance reports could also be utilized
to track and update a loan portfolio data base.
The RRHA does not review remittance reports for accuracy. No
apparent review is conducted to verify additions to or deletions
from loan portfolios. Also, no review is conducted to ensure the
transition from bank loan to CDBG loan is timely and accurate.
RRHA is placing significant reliance on the loan servicing company
to accurately report and track bank and CDBG loans.
According to RRHA officials, timing differences between the
remittance reports they receive and the bank statements does not
allow the RRHA to utilize the remittance reports in an effective
manner. The DDF stated the RRHA is relying on the loan servicing
company to post and track loan payments correctly. He agreed this
is an internal control issue which needs to be addressed.
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By not receiving the same remittance report as the bank, the RRHA
is making unnecessary journal entries and increasing the likelihood
of errors. By placing reliance on the loan servicing company the
RRHA is not ensuring amounts posted to the general ledger are
correct or that loan balances are accurately tracked and reported.
Bank reconciliation not performed
The RRHA does not reconcile bank statements to the general ledger,
and has no assurance as to the accuracy of the general ledger. The
RRHA is adjusting the general ledger accounts to agree with bank
statement entries. The RRHA takes the credit and debit memos
posted to the bank statements and posts those amounts to the
general ledger to arrive at the account balances. Credit memos
represent payments made by homeowners on their loans and bank fees
not charged to the account. Debit memos represent deductions for
payments made on the notes payable. Based on the bank statement
and a supporting letter from the bank, notes payable and interest
expense are debited and debt service credited to document the
reduction of the note. As a result, RRHA is not reconciling the
bank statements, but adjusting the general ledger to agree with the
bank statements.
The DDF agreed no reconciliation was being performed and stated
RRHA would be agreeable to recommendations to correct this internal
control weakness.
Rehabilitation loan data base incomplete
There is no available data base documenting the RRHA's portfolio of
rehabilitation bank and CDBG loans. The loan servicing company
remittance report is RRHA's only source document listing current
loans and the name of each loan holder. The rehabilitation
department maintains the homeowner loan files and a partial loan
data base. A complete data base for two years of bank loans and a
partial data base reportedly exists for CDBG loans. The loan files
are organized by property address and do not correspond with
remittance reports. Therefore, loan numbers, investor codes,
homeowner names, etc... are useless in attempting to locate a
specific loan. The RRHA currently relies on the memories of the
rehabilitation department staff to identify and locate requested
loan files when the address is unknown. The data base documents
homeowner and property records, but is not used to track current
loan balances or to identify delinquencies. Reports cannot be
generated from the data base because the program is incomplete.
According to RRHA's financial advisor, the data base is incomplete
due to a lack of financial resources. The RRHA ran out of funding
before the report portion of the program was completed. The
rehabilitation department has discussed the situation with the
Executive Director and finance department. The financial advisor
explained the Executive Director would like to have the ability to
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access and review the rehabilitation loan portfolio. The finance
department is making an effort to find and allocate additional
resources to enable the completion of the rehabilitation loan data
base.
By not maintaining a rehabilitation loan data base, the RRHA is
placing reliance on the loan servicing company to identify and
track all bank and CDBG loans. RRHA provides no assurance to the
extent and accuracy of its loan portfolio.
Requested journal entries not provided
As of April 16, 1996, the RRHA did not locate seven of eighteen
journal entries requested during our review. None of the seven
entries requested, that were prepared prior to December 24, 1994,
were provided.
According to the DDF, the journal vouchers are still missing and
probably still in storage. The DDF suggested the journal vouchers
may have been taken from the RRHA by a former employee.
Journal vouchers of a routine and non-routine nature were reviewed
to verify the accuracy of accounting entries and to address a
complaint issue, that CDBG funds were being used to pay off bank
loans. The unavailability of these journal vouchers did not allow
us to adequately address the issue and determine if CDBG funds were
being used to pay off bank loans.
Incorrect accounting entries
A review of accounting journal vouchers disclosed undetected
incorrect accounting entries made by the RRHA's accounting staff.
For example, on a journal voucher dated April 12, 1995 the amounts
posted to two advance accounts were booked incorrectly. The amount
credited to the advance accounts were posted as a credit to
interest income and vise versa. Having brought the error to the
RRHA's attention they plan to correct the error.
This error causes the advance and interest income accounts to be
overstated. The error also suggests the existence of additional
general ledger posting errors undetected by the RRHA and reduces
the reliance one can place on the accuracy of the general ledger.
The DDF stated the RRHA is aware that internal controls require
improvement and explained that a formal internal control review
would be performed by RRHA's internal auditors as a part of the
upcoming financial statement audit. He also explained that due to
recent changes in RRHA's organizational structure the
implementation of additional controls should be easier.
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In summary, the RRHA must strengthen internal accounting controls
over the CDBG rehabilitation loan program. By not maintaining
adequate internal accounting controls, RRHA cannot ensure the
accuracy of: rehabilitation loan balances, journal entries booked
to the general ledger, and general ledger account balances. RRHA
also cannot support its portfolio of CDBG rehabilitation loans and
the legitimacy and accuracy of all journal entries.
Auditee Comments
RRHA stated they are currently using and reviewing the correct
remittance reports to assist in bank reconciliations and will
review each month in the current fiscal year to ensure receipts are
properly recorded by July 31, 1996. The RRHA is committed to
completing the loan data base by December 31, 1996. The RRHA
believes the causes that generated the disclosed issues were
personnel based and they have taken the appropriate corrective
action.
Recommendations
We recommend your staff verify the RRHA has implemented the
following:
2A. Request the loan servicing company to issue the same
remittance reports as issued to the bank and utilize the
remittance reports to properly reconcile the bank statement.
2B Review remittance reports for variances in order to ensure the
accuracy of journal entries and to assist in documenting and
tracking loan account balances.
2C. Complete the partially established rehabilitation loan
database and obtain and utilize exception reports to update
and track homeowner, as well as, bank and CDBG loan groupings.
2D. Establish a system to ensure the security of current and
archived RRHA records and provide the missing journal vouchers
requested during the review.
2E. Correct the accounting entries made April 12, 1995 and
establish a supervisory oversight system to test accounting
entries to assure they are correct and properly posted.
Attachment 3
DISTRIBUTION
Director, Community Planning and Development Division, Virginia
State Office, 3FD
Internal Control & Audit Resolution Staff, 3AFI
Assistant Director in Charge, US GAO, 820 1st St., NE Union Plaza,
Bldg 2, Suite 150, Washington, DC 20002 (2)
Citizen's Complaint, Richmond Redevelopment and Housing Authority, Accounting Controls Rehabilitation Loan Program, Richmond, Virginia
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-07-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)