oversight

Dorchester Square Apartments Multifamily Mortgagor Operations, Franklin, Virginia

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-06-27.

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

                                                                    Issue Date

                                                                         June 27, 1996
                                                                    Audit Case Number

                                                                         96-PH-212-1017




TO:            Charlie Famuliner, Director, Multifamily Division,
                Virginia State Office, 3FHM


FROM:          Edward F. Momorella, District Inspector General for
                Audit, Mid-Atlantic, 3AGA

SUBJECT:       Dorchester Square Apartments
               Multifamily Mortgagor Operations
               Franklin, Virginia


As you requested we have audited the operations of Dorchester Square Apartments (project) to
determine whether the Owner operated the project according to the terms and conditions of the
Regulatory Agreement and HUD requirements.

The report identifies that improper cash distributions were paid to the Owner. Additionally, the
identity-of-interest Agent and the Owner incurred ineligible and unsupported expenses, did not
properly verify income of tenants reporting little or no income on recertification and failed to
maintain the financial records of the project as required.

Within 60 days, please give us, for each recommendation in this report, 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 because of the audit.

If you have any questions, please contact Irving I. Guss, Assistant District Inspector General for
Audit, at (215) 656-3401.
Management Memorandum




96-PH-212-1017          Page ii
Executive Summary
We audited Dorchester Square Apartments to determine whether the Owner operated the project
according to the terms and conditions of the Regulatory Agreement and HUD requirements.
Issues identified in the report indicate that the Owner/Agent's oversight of financial and certain
program areas requires improvement. From a monetary standpoint these conditions resulted in
ineligible and unsupported costs of $113,463 and $104,604 respectively.



                                     The Owner was paid $16,856 in excess cash distributions
 Improper distributions
                                     and did not deposit an additional $17,076 in the residual
 paid Owner
                                     receipts fund as required. Based on surplus cash
                                     computations for the period 1989 through 1995, there was
                                     not a cash surplus to support the excess distributions. The
                                     Owner's actions represent a disregard for HUD
                                     requirements and mismanagement of project funds.

                                     The Agent increased management fees and paid their
 Agent received and paid
                                     employee from project funds contrary to HUD
 improper project
                                     requirements. The improper payments totaled $79,531.
 expenses
                                     The Agent's actions were to their benefit and detrimental to
                                     project operations. As a result the project has lost needed
                                     revenue.

                                     Review of the projects' books and accounts identified
 Unsupported project costs
                                     numerous instances of non-compliance. The Owner/Agent:
 and questionable
                                     1) Disbursed $96,108 from the operating account without
 accounting transactions
                                     proper supporting documentation. When documentation
                                     was available it did not fully identify the items purchased or
                                     the services performed. 2) Used an accounting system that
                                     produced unreliable information. These actions by the
                                     Owner/Agent demonstrate a disregard for HUD
                                     requirements, and have resulted in questionable financial
                                     operation of the project.

                                     Our review disclosed that five project tenants are reporting
 Management has failed to
                                     no income on recertification, and other tenants are reporting
 adequately justify tenants
                                     income as low as $100 per month. In all cases the files did
 non-income status
                                     not contain documentation that indicated all efforts were
                                     exhausted by management to verify possible income as
                                     required. As a result the potential exists that HUD has
                                     overpaid Housing Assistance Payments (HAP) for these
                                     tenants.



                                              Page iii                                 96-PH-212-1017
Executive Summary



                    We recommend the Owner/Agent: (1) repay ineligible
                    costs to the project; (2) justify the eligibility of unsupported
                    costs; and (3) implement accounting and income
                    verification requirements.

                    We discussed the finding issues with the Owner/Agent and
                    staff during the audit and their comments are summarized
                    in the findings. The draft findings were provided the
                    Owner and responses received were considered in our
                    report. The Owner's written response, exclusive of exhibits,
                    is included as Appendix B. Copies of exhibits supporting
                    the questioned costs in the findings were provided to the
                    Owner and your staff.

                    An exit conference was held with the Owner on June 17,
                    1996.




96-PH-212-1017               Page iv
Table of Contents

Management Memorandum                                               i


Executive Summary                                                  iii


Introduction                                                        1


Findings

      1    Improper Cash Distributions Paid The Owner               3

      2    Project Paid Ineligible Agent Costs                      5

      3    The Projects' Records Are Improperly Maintained          9

      4    Questionable Tenant Income Verification
           By Management                                          13


Internal Controls                                                 17


Follow Up On Prior Audits                                         19


Appendices

  A        Schedule of Ineligible and
          Unsupported Costs                                       21


  B       Auditee Comments                                        23

  C        Distribution                                           27



                               Page v                   96-PH-212-1017
Table of Contents




Abbreviations
         HAP Housing Assistance Payments
         HUD Department of Housing and Urban Development
         OIG                         Office       of     Inspector   General




96-PH-212-1017                         Page vi
Introduction

Dorchester Square Apartments is a HUD-insured multifamily housing project in Franklin,
Virginia with 125 Section 8 units. The mortgage was initially endorsed for insurance under
Section 221(d)(3) of the National Housing Act on December 27, 1972.

The Owner, Dorchester Associates, a limited partnership, was organized on December 1, 1972.
On January 1, 1983, the current ownership was organized as a Virginia Limited Partnership. The
principals of the partnership are Rocco Lassiter, David Levine and Gale Levine. The project is
operated under the Section 8 Rental Supplement Program of the National Housing Act. David
Levine and Gale Levine have managed the project since 1983 through an identity-of-interest
management agent, Sun Realty Co (Agent). Sun Realty Co. offices are located in Virginia Beach,
Virginia.

Primary tenant records are maintained at the project's office in Franklin, Virginia. Financial
records are kept at Hodges Manor Apartments in Portsmouth, Virginia, another HUD-insured
project managed by the Agent.

During the audit your office engaged a contractor to physically inspect the project. The
contractor reported many physical conditions of the project were unsatisfactory together with the
project's maintenance policies and practices. Ninety-nine percent of the units inspected by the
contractor failed housing quality standards. We inspected ten units which failed housing quality
standards, confirming the contractor's work. The physical condition of the project is not being
reported since your office is handling the problem with the Owner.



                                     The objectives of the audit were to determine whether the
 Audit Objectives
                                     Owner complied with the Regulatory Agreement and HUD
                                     requirements. Specific objectives were to determine
                                     whether the project's system of internal control was
                                     adequate and disbursements were reasonable and necessary.

                                     We examined Dorchester Square's accounting and financial
 Audit Scope
                                     records, and reports located in the HUD Virginia State
                                     Office. We reviewed the project's independent public
                                     accountant's work papers for Fiscal Year 1993 and 1994.
                                     We interviewed project, Agent, and HUD staff members.
                                     We inspected two vacant and eight occupied units.

                                     Audit work was performed between October 1995 and June
 Audit Period
                                     1996 and covered activities between January 1993 through
                                     December 1995. The audit period was expanded when
                                     appropriate.


                                              Page 1                                 96-PH-212-1017
Introduction



                 We conducted the audit in accordance with generally
                 accepted government auditing standards.




96-PH-212-1017          Page 2
                                                                                     Finding 1




 Improper Cash Distributions Paid The Owner

The Owner was paid $16,856 in excess cash distributions and did not deposit an additional
$17,076 in the residual receipts fund as required. Based on surplus cash computations for the
period 1989 through 1995, there was not a cash surplus to support the excess distributions. The
Owner's actions represent a disregard for HUD requirements and mismanagement of project
funds.



                                    Paragraph 9G of the Regulatory Agreement provides that
                                    surplus cash is any cash remaining after the current
                                    mortgage payment is made; all required deposits are made
                                    to the reserve fund for replacements; and the payment of
                                    project expenses.

                                    The project is also required to make deposits in a residual
                                    receipts fund.       The Regulatory Agreement limits
                                    distributions to six percent annually on the Owners initial
                                    equity investment amounting to $20,034. Any additional
                                    cash surplus must be deposited into the residual receipts
                                    fund. However, the Owners can take more surplus cash
                                    than they earned during the year if they had distributions
                                    accrued and unpaid in prior years.

                                    The Owner contrary to the Regulatory Agreement took
 Owner took excess
                                    excess distributions without an available cash surplus and
 distributions
                                    did not make the required deposit to the residual receipts
                                    fund. The Owner claims cash surpluses were available to
                                    support the distributions. Further, the Owner stated that
                                    $18,000 in surplus cash is available every year. However,
                                    our computations of surplus cash from 1989 to 1995
                                    disclosed the Owner did not deposit $17,076 in the residual
                                    receipts fund as required, and made excess distributions
                                    totaling $16,856.

                                    The Owner's lack of knowledge of HUD requirements has
                                    contributed to the mismanagement of project finances.




                                             Page 3                                96-PH-212-1017
Finding 1



Auditee Comments    The Owner disputes the finding that they made excess
                    distributions of surplus cash and failed to deposit funds in
                    residual receipts as required. The basis for the dispute is the
                    OIG Auditor failed to use the proper HUD forms to
                    compute surplus cash and their accountant did. The
                    accountant states that in 1994 and 1995 excess distributions
                    of $14,000 and $14,700 respectively were repaid.



OIG Evaluation of   Calculations of surplus cash were made in accordance with
Auditee Comments    HUD Handbook 4370.2. The information compiled in the
                    schedule provided to the Owner came directly from HUD
                    Form 93486 (Computation of Surplus Cash, Distributions
                    and Residual Receipts) and the project's accounting records.

                    Regarding the $28,700 reported as repaid to the project by
                    the Owner documentation was not provided to support
                    repayment.


Recommendations     We recommend the Owner:

                    1A.    Provide documentation to support repayment of
                           $28,700 to the project in 1994 and 1995.
                           Documentation shall include bank deposits, bank
                           statements, wire transfers, canceled checks and
                           accounting analysis of the net amounts claimed. In
                           the absence of documentation reducing excess
                           distributions reimburse the project $16,856 for
                           excess cash distributions and deposit $17,076 in the
                           residual receipts fund as required.

                    1B.    Implement accounting controls that conform to
                           HUD requirements regarding the distribution of
                           surplus cash.




96-PH-212-1017               Page 4
                                                                                      Finding 2




            Project Paid Ineligible Agent Costs

The Agent increased management fees and paid their employee from project funds contrary to
HUD requirements. The improper payments totaled $79,531. The Agent's actions were to their
benefit and detrimental to project operations. As a result the project has lost needed revenue.



                                    A.     Excess management fees taken by the Agent

                                    The Agent increased its management fee without HUD's
                                    approval and took excess management fees totaling
                                    $35,968.

                                    The Management Agreement signed by the Agent, Owner
                                    and HUD on January 1, 1983, stated that each monthly fee
                                    will be equal to six percent of gross collections during the
                                    preceding month. Further, the percentage fee may be
                                    increased by 1/4 of one percent on the anniversary date of
                                    the agreement, if HUD approves the Owner's written
                                    request.

                                    HUD Handbook 4381.5 REV-2, Chapter 3, Section 3.10,
                                    states to request a change in the management fee
                                    percentage, the Owner and Agent are required to submit a
                                    new management certification with the revised management
                                    fee. Further, Section 3.11B states that rent increases do not
                                    trigger management fee reviews.

                                    The Agent contrary to HUD requirements increased the
 Agent improperly
                                    percentage for the management fee without HUD's written
 increased management
                                    approval. Additionally, the Owner never sought to obtain
 fee
                                    a new management agreement with HUD when it expired
                                    in 1985. The Owner claims that HUD approved the
                                    increased percentage for the management fee when it
                                    approved the rent increase in 1990.

                                    In a memo dated October 31, 1995, HUD's Virginia State
                                    Office directed the Agent to reduce the fee to the amount
                                    agreed upon in the Management Agreement signed in 1983.




                                             Page 5                                  96-PH-212-1017
Finding 2



                           However, the Agent has not complied and continues to
                           collect excess management fees.

                           B.     Ineligible payments made to an employee of the
                                  Agent

                           The Agent paid an employee $28,563 classified as
                           bookkeeping fees from January 1, 1993 to December 31,
                           1995. However, the bookkeeper for Hodges Manor
                           Apartments, is the bookkeeper of Dorchester Square
                           Apartments.

                           The Agent also paid the same employee $15,000 which was
 Project improperly paid
                           classified as partners' distributions. The employee is not
 Agent costs
                           listed as a general or limited partner of the partnership
                           entity therefore not entitled to distributions from surplus
                           cash. The owner claims that HUD approved the payments
                           to the employee when they approved the rent increase in
                           1990.

                           According to HUD Handbook 4381.5 REV-2, salaries of
                           the Agent's personnel are paid from the management fee.
                           Further, as stated above, rent increases do not trigger
                           management fee reviews. As a result, the $15,000 and
                           $28,563 are Agent costs not project costs and ineligible.



Auditee Comments           The Owner/Agent disputes that the Management Agreement
                           has expired. A memo to HUD in 1985, Virginia contract
                           law and the management review report that stated the
                           contract was indefinite are cited as supporting their
                           position.

                           The Owner/Agent contends that a HUD Asset Manager
                           authorized the management fee increases prior to the
                           issuance of the 1994 HUD Handbook 4381.5 REV-2.

                           The Owner/Agent states that the employee was paid
                           additional fees for bookkeeping services performed beyond
                           her normal duties. They also claim that the $15,000 was a
                           bonus permitted by HUD Handbook 4381.5 REV-2 under
                           extraordinary circumstances. Additionally, the bonus was
                           disclosed to HUD in 1990, and not questioned.



96-PH-212-1017                     Page 6
                                                                      Finding 2




                     The Management Agreement between the Owner/Agent
 OIG Evaluation of   and HUD clearly states that the percentage fee may be
 Auditee Comments    increased by 1/4 of one percent on the anniversary date of
                     the agreement, if HUD approves the Owner's written
                     request. No documentation was provided that HUD
                     approved such a request or the 1985 memorandum
                     allegedly sent to HUD. The Management Review Report
                     representation of indefinite by the reviewer indicates the
                     management term was not definite and unclear. In our
                     opinion the indefinite citation was made because the
                     agreement had expired.

                     HUD Handbook 4381.5 and all subsequent revisions state
                     to request a change in the management fee percentage, both
                     the Owner and the Agent are required to submit a new
                     management certification with the revised management fee.
                     Further, there is no documentation that a HUD Asset
                     Manager authorized any increase in the management fee.

                     Bookkeeping fees are allowable expense from operations.
                     However, the employee in question does not perform any
                     bookkeeping duties as stated in the finding.

                     HUD Handbook 4381.5 all revisions do not permit bonuses
                     to the Agent's employees to be paid from the operating
                     account. Salaries of agent's employees are paid from the
                     management fee. HUD Handbook 4381.5 REV-2 will only
                     allow the cost of supervisory personnel providing oversight
                     of computer and accounting services to be paid from the
                     operating account. However, they must be prorated and
                     approved by HUD.



Recommendations      We recommend the Agent:

                     2A.    Repay the project $79,531 for ineligible
                            management fees and improper payments made to
                            the employee. Repay the project additional fees
                            taken from January 1, 1996 to date, and discontinue
                            the improper practices.

                     2B.    Submit to HUD for approval a new management
                            certification and proposal for the management fee.


                             Page 7                                 96-PH-212-1017
Finding 2




96-PH-212-1017   Page 8
          Finding 2




Page 9   96-PH-212-1017
                                                                                    Finding 3




         The Projects' Records Are Improperly
                      Maintained

Review of the projects' books and accounts disclosed numerous instances of non-compliance.
The Owner/Agent: 1) Disbursed $96,108 from the operating account without proper supporting
documentation. When documentation was available it did not fully identify the items purchased
or the services performed. 2) Used an accounting system that produced unreliable information.
These actions by the Owner/Agent demonstrate a disregard for HUD requirements, and have
resulted in questionable financial operation of the project.



                                   A. Unsupported costs

                                   The Regulatory Agreement, paragraph 9d, states that the
                                   books and accounts of the property must be maintained in
                                   accordance with the requirements of the Commissioner.

                                   HUD Handbook 4370.2 REV-1, Chapter 2, paragraph 2B,
                                   states that the books and accounts must be complete and
                                   accurate.     Further, paragraph 2-6B states that all
                                   disbursements must be supported by approved invoices and
                                   other supporting documentation.

                                   During our review, we presented the Owner/Agent a list of
 Documentation not
                                   questionable disbursements. We were told documentation
 provided to support costs
                                   would be provided to support the questioned disbursements.
                                   The documentation provided by the Owner/Agent
                                   supported some of the disbursements questioned. The
                                   following list represents the remaining $96,108 in
                                   questionable and unsupported disbursements.

                                   A contractor was paid $58,942 from January 1, 1993 to
                                   December 31, 1995 for work identified as contract
                                   maintenance. The invoices provided by the contractor
                                   consist of envelopes filled with invoices from local
                                   hardware stores and convenience stores. Handwritten on
                                   the envelopes are the words wages and gas followed by
                                   dollar amounts. No contract was provided identifying the
                                   cost of labor or any other services requiring reimbursement.



                                            Page 9                                 96-PH-212-1017
Finding 3



                 A contractor was paid $6,800 for work identified as siding;
                 however, no invoice was provided that identifies the cost of
                 the labor or the materials used.

                 Two contractors were paid $9,220 for labor and materials;
                 however, no invoices were provided to support the cost of
                 the labor and materials.

                 The Agent paid a hardware store $12,784 and an office
                 supplies store $1,906; however, in both instances the
                 invoices provided only identified the amount owed on
                 account. Supporting invoices identifying the items
                 purchased on account was not provided.

                 Miscellaneous disbursements totalling $6,456 either did not
                 have invoices available or if an invoice was available it
                 lacked adequate detail to support the disbursement as a
                 project expense.

                 The Owner/Agent was provided a detailed schedule of the
                 above costs to assist them in gathering documentation to
                 support the costs. To date we have not received any
                 additional documentation, and the costs remain questioned.

                 B. Accounting system deficiencies

                 HUD Handbook 4370.2 REV-1, Chapter 2 states that the
                 projects' accounting system should meet certain general
                 objectives, two of which are, provide timely, accurate and
                 complete information for management decision making;
                 and safeguard the projects' assets. Contrary to HUD
                 requirements the Owner/Agent accounting system does not
                 meet these objectives. Examples of system deficiencies
                 identified during our review follow:

                 •   Amounts posted to tenants accounts receivable were
                     based on the rent roll and did not agree with the tenant
                     ledgers. Beginning in July 1995, the project used the
                     tenant ledgers to calculate tenants' accounts receivable.
                     However, our testing of July tenants' accounts
                     receivable disclosed that those figures were incorrect.




96-PH-212-1017           Page 10
                                                                     Finding 3



                   •   A bad debt account did not appear on any of the trial
                       balances we reviewed, through December 1995. In the
                       Fiscal Year 1994 Financial Statements, $8,496 was
                       reported as bad debts. We requested postings to the
                       account, but none were provided, and the write off is
                       questioned.

                   •   Postings made to the Housing Assistance Payment
                       account were higher than those posted to the bank
                       statements and the cash account for the two months we
                       reviewed.

                   •   The Owner/Agent allowed contractors, performing work
                       at the project, to purchase materials at a local hardware
                       store and charge the purchases to the project's account.
                       The contractor simply signs the invoice. As stated in
                       Part A, the Agent pays the hardware store from invoices
                       that only identify the amount owed on account.
                       Supporting invoices identifying the items purchased on
                       account were not provided.

                   •   Owner/Agent maintains two bank accounts for the
                       project. Copies of cancelled checks show that the
                       management fee and the bookkeeping fee were
                       disbursed from both accounts. Maintaining two
                       operating accounts confuses rather than simplifies
                       accountability of financial operations.

                   •   An Agent employee claims that bids are solicited when
                       selecting contractors to perform work at the project.
                       However, a review of the project's files did not disclose
                       any bids or a bid selection process.

                   The Owner/Agent did not seem aware that there were any
                   problems with their accounting system. However, other
                   employees were aware of the problems but were concerned
                   with job security and believed the best policy was to follow
                   the Owner/Agent's direction.



Auditee Comments   Owner/Agent claim they are unable to provide supporting
                   documentation to support the questioned costs, because the
                   OIG Auditor, removed records from the files. Further, the



                           Page 11                                  96-PH-212-1017
Finding 3



                    findings did not identify the questionable costs and
                    disbursements by contract and amount.

                    Owner/Agent does not believe items identified are really
                    deficiencies that need to be corrected, and requested a more
                    detailed explanation before they will make the corrections.



OIG Evaluation of   No records were removed from              the   project   or
Auditee Comments    Owner/Agent's office by the auditor.

                    The disbursements in question were specifically identified
                    in December to the Owner/Agent. The items identified in
                    the report were those items that were not supported by
                    documentation provided.

                    The HUD Handbook citation clearly identifies the basic
                    requirements that the project's accounting system shall meet
                    and the Owner is required to maintain. The accounting
                    deficiencies cited identifies that the project's system does
                    not meet HUD requirements.


Recommendations     We recommend the Owner/Agent:

                    3A. Provide supporting documentation for the
                    disbursements questioned or reimburse the operating
                    account for $96,108.

                    3B.    Install an accounting system that will provide timely
                    and accurate information to conform with HUD
                    requirements. Establish an Internal Control System that
                    adequately safeguards the project's assets. Use only one
                    bank account to disburse funds for project operations.
                    Provide documentation to support the $8,496 reported as a
                    bad debt in Fiscal Year 1994.




96-PH-212-1017              Page 12
                                                                                        Finding 4




  Questionable Tenant Income Verification By
                 Management

Our review disclosed that five project tenants are reporting no income on recertification. We
also reviewed the files of tenants reporting income as low a $100 per month. In all cases the files
did not contain documentation that indicated all efforts were exhausted by management to verify
possible income as required. As a result the potential exists that HUD has overpaid HAP for
these tenants.



                                      HUD Handbook 4350.3 CHG-27, Chapter 3, Paragraph 3-
                                      30, requires Owners of Section 8 projects to verify all
                                      sources of income, expenses, assets, household
                                      characteristics and circumstances that effect tenant
                                      eligibility or rent.

                                      During November 1995, we identified nine tenants not
 Tenant income
                                      reporting any income on recertification. In April 1996, we
 verification not effective
                                      found only five tenants not reporting income on
                                      recertification, four from the list in November and one new
                                      tenant. In both November and April, contrary to HUD
                                      requirements, management did not perform an extensive
                                      search to verify all sources of income. Additionally, an
                                      inspection of the units occupied by the aforementioned
                                      tenants in April 1996 disclosed three telephones in one
                                      apartment, new furniture, stereo equipment and televisions.
                                      To afford such amenities some source of income exists.
                                      Further, the question arises how do these tenants subsist?

                                      Reports received from the Virginia Employment
                                      Commission indicated that four of the tenants not reporting
                                      income in 1995 and 1996 are also not reporting income
                                      earned by the their adult children or unemployment
                                      benefits.

                                      The resident manager claims that the Virginia Employment
                                      Commission will not allow access to certain information
                                      that might disclose unreported income. Further, she stated
                                      that HUD does not have any specific guidelines describing



                                              Page 13                                  96-PH-212-1017
Finding 4



                    the necessary steps to take when a tenant reports no income.
                    We point out that a thorough interview with the tenant,
                    asking simple common sense questions might disclose
                    unreported income. There was no evidence that such an
                    approach was taken by management.



Auditee Comments    Owner/Agent nonconcurs that management did not
                    adequately verify tenant income, and claims the following
                    to support their contention: 1) Resident Manager verifies
                    with social services to determine eligibility of benefits; 2)
                    former HUD employee stated that there were no definitive
                    guidelines to determine lack of income; and 3) tenants who
                    lose their jobs provide verification of job loss and
                    termination of unemployment benefits. Various documents
                    were provided as support for income verification. Further,
                    recommendation 4A has been accomplished, and need
                    definition for extensive search, under recommendation 4B.


OIG Evaluation of   The finding identifies nine tenants not reporting income on
Auditee Comments    recertification in November 1995 and five tenants in April
                    1996. The documentation provided with the response is on
                    three tenants, two who were reporting income on
                    recertification in April 1996. Our assessment of the
                    documentation provided disclosed the Owner/Agent did not
                    verify that the tenant:

                    •   received food stamps or other government assistance;

                    •   was no longer employed;

                    •   was receiving unemployment benefits; and

                    •   identified the source of income to support amenities in
                        all units cited. Response referred to only one unit.
                    The documents provided are not sufficient income
                    verification.       Recommendation 4A still requires
                    implementation.

                    During the closing conference explanation was provided
                    covering the type of questions that can be posed to a tenant
                    during the certification interview. As stated in the finding


96-PH-212-1017              Page 14
                                                                 Finding 4



                  asking common sense questions might disclose unreported
                  income. This approach together with the guidelines
                  provided in HUD Handbook 4350.3 CHG-27 provides the
                  basis for adequately verifying tenant income.



Recommendations   We recommend the Owner/Agent:

                  4A.   Recertify all tenants reporting no income and
                        income of $100 or less. For tenants with validated
                        income restructure the HAP payments. Establish a
                        workout agreement with the tenants to recapture the
                        subsidy overpayments due HUD. If there is a
                        hardship for such a plan consult with HUD for
                        appropriate action to be taken.

                  4B.   Implement HUD requirements to ensure tenant
                        interviews are conducted and verification
                        procedures followed to identify all sources of
                        income.




                         Page 15                               96-PH-212-1017
Finding 4




96-PH-212-1017   Page 16
Internal Controls
In planning and performing our audit, we considered the internal control systems of the
management of Dorchester Square Apartments in order to determine our auditing procedures and
not to provide assurance on internal controls.

Internal control is the process by which an entity obtains reasonable assurance as to achievement
of specified objectives. Internal control consists 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
 Internal controls assessed
                                          categories were relevant to our audit objectives:

                                      •   Accounting records and reports

                                      •   Cash receipts and disbursements

                                      •   Occupancy requirements

                                      A significant weakness exists if internal control does not
 Significant weaknesses
                                      give reasonable assurance that the entity's goals and
 found
                                      objectives are met; that resource use is consistent with laws,
                                      regulations, and policies; that resources are safeguarded
                                      against waste, loss, and misuse; and that reliable data are
                                      obtained, maintained, and fairly disclosed in reports. Based
                                      on our review, we believe the following items are
                                      significant weaknesses:

                                      •   Accounting records and reports

                                      •   Cash receipts and disbursements

                                      •   Occupancy requirements

                                      These weaknesses are detailed in the findings in this report.




                                              Page 17                                   96-PH-212-1017
Internal Controls




96-PH-212-1017      Page 18
Follow Up On Prior Audits
This was the first OIG audit of Dorchester Square Apartments.




                                           Page 19              96-PH-212-1017
Follow Up On Prior Audits




96-PH-212-1017              Page 20
                                                                                   Appendix A

Schedule of Ineligible and
Unsupported Costs


       Finding Number                    Ineligible 1/                  Unsupported 2/
              1                            $ 33,932
              2                              79,531
              3                                                            $104,604
                                           $113,463                        $104,604




1/ Ineligible costs are not allowed by law, contract, or HUD policies or
  regulations.

2/ Unsupported costs were not clearly eligible or ineligible but warrant being contested because
   of the lack of documentation supporting such costs.




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Appendix A




96-PH-212-1017   Page 22
                             Appendix B

Auditee Comments




                   Page 23   96-PH-212-1017
Appendix B




96-PH-212-1017   Page 24
          Appendix B




Page 25   96-PH-212-1017
Appendix B




96-PH-212-1017   Page 26
                                                                    Appendix C

Distribution
Director, Multifamily Division Virginia State Office, 3FHM (2)
Internal Control & Audit Resolution Staff, 3AFI
Director, Housing Division, 3AH
Director, Field Accounting Division, 3AFF
State Office Manager, Richmond, 3FS
Assistant to the Secretary for Field Management, SDF
Deputy Assistant Secretary for Field Management, SDF
Audit Liaison Officer, HF (3)
Acquisitions Librarian, Library, AS
Director, Participation & Compliance Division, HSLP
Chief Financial Officer, F (2)
Deputy Chief Financial Officer for Operations, F (2)
Assistant Director in Charge, US GAO, 820 1st St. NE Union Plaza,
 Bldg 2, Suite 150, Washington, DC 20002 (2)
General Partner Dorchester Associates, 2100 Marina Shores Drive,
 Virginia Beach, VA 23451




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