oversight

Emerald Properties, Bethesda, MD

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-08-15.

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

                                                                    Issue Date

                                                                         August 15, 1996
                                                                    Audit Case Number

                                                                         96-PH-214-1021




TO:          Ina Singer, Director, Multifamily Housing Division,
            Maryland State Office, 3BHM


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

SUBJECT:      Emerald Properties Management Co., Inc.
              Multifamily Mortgagor Operations
              Bethesda, Maryland


We audited the multifamily operations of Emerald Properties Management Co., Inc., (Agent) and
its two principals (Owners) for six projects. The purpose of our audit was to determine whether
the Agent/Owners complied with the terms and conditions of the Regulatory Agreements and
other applicable HUD directives.

We determined that the Agent/Owners maintained all six HUD-insured projects in good physical
condition. However, deficiencies were noted in management's operations as they relate to cash
withdrawals and the expenditure of project funds.

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 the date to be completed;
or (3) why action is considered unnecessary. Also please furnish us with copies of any
correspondence or directives issued because of the audit.

Should your staff have any questions, please have them contact J. Phillip Griffin, Assistant
District Inspector General for Audit, at (215) 656-3401.
Management Memorandum




96-PH-214-1021          Page ii
Executive Summary
The Agent/Owners did not comply with the terms of the Regulatory Agreements and other
applicable HUD directives. Operating funds were used for ineligible withdrawals and other
ineligible costs.



                                  The Agent/Owners made ineligible withdrawals of
 Ineligible withdrawals
                                  $1,139,408 from the projects when surplus cash was not
 were made from project
                                  available and one project had defaulted on its mortgage
 funds
                                  payments. The improper withdrawals were used to pay
                                  Owners' distributions and incentive management fees and
                                  to repay advances.

                                  Also, the Agent/Owners paid ineligible costs totaling
 Ineligible costs were paid
                                  $15,002 from project operating funds.
 from project funds
                                  The conditions occurred because the Agent/Owners
                                  misunderstood HUD requirements pertaining to
                                  distributions and felt the ineligible costs were acceptable
                                  project expenses.


Recommendations                   We made recommendations to recover the ineligible costs
                                  cited in the report.



Auditee Comments                  We discussed the draft findings with the Agent/Owners and
                                  their representatives at an exit conference. The attorney
                                  representing the Agent/Owners submitted comments on the
                                  draft findings generally disagreeing with our findings. The
                                  responses to the draft findings were considered and
                                  incorporated, where appropriate, in preparing the final
                                  report. Copies of the comments by the representative for
                                  the Agent/Owners are included as Appendices A and B.




                                          Page iii                               96-PH-214-1021
Executive Summary




96-PH-214-1021      Page iv
Table of Contents

Management Memorandum                                              i


Executive Summary                                                 iii


Introduction                                                       1


Findings

    1      The Agent/Owners Made Improper
           Withdrawals                                             3

    2      Ineligible Costs Were Paid From
           Project Operating Funds                               11


Internal Controls                                                13


Follow Up On Prior Audits                                        15


Appendices

    A      Auditee Comments (Before Exit Conference)             17


    B      Auditee Comments (After Exit Conference)              31


    C      OIG Evaluation of Auditee Comments                    33

    D      Schedule of Ineligible Costs                          37

    E      Distribution                                          39


                               Page v                  96-PH-214-1021
Table of Contents




Abbreviations
HUD U.S. Department of Housing and Urban Development
OIG Office of Inspector General
IA  I n d e p e n d e n t                            A   u   d   i   t   o   r   s




96-PH-214-1021                      Page vi
Introduction
Emerald Properties Management Co., Inc. is the management agent (Agent) for the following
HUD-insured multifamily projects reviewed during the audit:

                                                                                          Original Mortgage       No. of
 Project Name            Owner                        Location           Project Number   Note                    Units

 Harper's Mill           Harper's Mill Limited        Millersville, MD   052-35253        $4,001,800              144
 Townhouses              Partnership

 Heritage Hill           Heritage Hill Limited        Glen Burnie, MD    052-35199        $2,857,700              120
 Townhouses              Partnership

 Washington Square       Washington Square Limited    Glen Burnie, MD    052-35375        $7,287,000              181
 Townhouses              Partnership

 Lamplighter Ridge       Lamplighter Ridge Limited    Glen Burnie, MD    052-35302        $6,096,500              168
 Apartments              Partnership

 Mariner's Cove          Mariner's Cove Limited       Baltimore, MD      052-35453        $5,312,300              101
 Townhouses              Partnership

 Olde Forge Townhouses   Olde Forge Limited           Baltimore, MD      052-35427        $6,063,500              143
                         Partnership


Each project listed above is insured under Section 221(d) 4 of the National Housing Act. All
mortgages are current except for Mariner's Cove. On August 2, 1991, the mortgagee declared
the project's outstanding mortgage note of $5,598,744 in default, and assignment was made to
HUD on December 24, 1991. On July 8, 1992, HUD settled with the mortgagee for an amount
of $5,495,234.

The Agent's official representatives are Allan J. Berman, President, and Leonard A. Shapiro, Vice
President. Both of the individuals also have an ownership interest in each of the six projects.
Therefore, there is an identity-of-interest between the Agent and the Owners.

Accounting records for the projects are maintained at the Agent/Owners' office at 7200
Wisconsin Avenue, Suite 907, Bethesda, Maryland, 20814.



Audit Objectives                                  We reviewed the operations of the Agent/Owners to
                                                  determine whether the Agent/Owners' were complying with
                                                  the terms and conditions of the Regulatory Agreement and
                                                  other applicable HUD requirements. Specifically, we
                                                  determined whether the Agent/Owners:

                                                  •   made proper cash distributions;
                                                  •   made proper repayments of owners' advances; and
                                                  •   had costs which represent valid project expenses.




                                                             Page 1                                           96-PH-214-1021
Introduction



Audit Scope and   We reviewed and analyzed pertinent project records
Methodology       maintained by HUD and the Agent/Owners. Those records
                  included accounting journals, audited financial statements,
                  bank statements, cancelled checks, supporting
                  documentation for expenditures, and other management and
                  financial records for the six HUD-insured projects managed
                  by the Agent/Owners. We evaluated internal controls to the
                  extent they related to the audit objectives. In addition, we
                  interviewed the Agent/Owners, their representatives, HUD
                  program staff, and the Independent Auditors and performed
                  a physical inspection at Mariner's Cove.

                  Audit work was performed in 1995 and 1996 and covered
                  the period January 1, 1991 through December 31, 1994.
                  Where appropriate, the review was extended to include
                  other periods.

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




96-PH-214-1021            Page 2
                                                                                      Finding 1




            The Agent/Owners Made Improper
                      Withdrawals
Contrary to the projects' Regulatory Agreement, the Agent/Owners withdrew funds totaling
$1,139,408 in excess of surplus cash. Part of the amount, $105,865, was withdrawn from one
project while it was in default. Although the Agent/Owners have repaid $236,950 to the projects,
a total of $902,458 is due to the projects. As a result, the improper withdrawals contributed to
the default of one project and reduced the amount of operating cash available for the other
projects. The Agent/Owners' representative said the funds were distributed because they
misunderstood HUD regulations and adjusting entries performed by the IA reduced surplus cash
after the distributions were made.



                                    The ineligible withdrawals are detailed as follows:

                                    Ineligible Distributions of Project Funds ($843,975)

                                    The financial statements for Mariner's Cove disclosed no
 Improper distributions
                                    surplus cash for the period 1988 through 1993. Financial
 from project funds
                                    statements for four other projects disclosed surplus cash
                                    was generally available, however, distributions in certain
                                    periods exceeded surplus cash.




                                             Page 3                                 96-PH-214-1021
Finding 1




                              SCHEDULE OF INELIGIBLE DISTRIBUTIONS

                     MARINER'S    HERITAGE       HARPER'S     LAMPLIGHTE   OLDE
            YEAR     COVE         HILL           MILL         R            FORGE        TOTAL
                                                              RIDGE

             1991     $153,334     $365,000       $81,250          $0          $0       $599,584

             1992        $0         $27,543       $38,087          $0       $42,291     $107,921

             1993        $0         $37,397       $21,556        $3,905        $0       $62,858

             1994        $0         $30,908       $10,588        $3,468        $0       $44,964

          SUBTOTAL    $153,334     $460,848       $151,481       $7,373     $42,291     $815,327

            1992*        $0           $0          $21,184          $0          $0       $21,184

            1993*        $0           $0           $7,464          $0          $0        $7,464

          SUBTOTAL    $153,334     $460,848       $180,129       $7,373     $42,291     $843,975

           (LESS)        $0        ($151,151)     ($43,508)        $0       ($42,291)   ($236,950)
         REPAYMENT

          AMOUNT      $153,334     $309,697       $136,621       $7,373       $0        $607,025
           DUE TO
          PROJECT

                     * - INCENTIVE MANAGEMENT FEES




                                           Mariner's Cove Townhouses

                                           The Agent/Owners withdrew distributions totaling
                                           $153,334 from the project when no surplus cash was
                                           available. These payments were made during 1991.

                                           Heritage Hill Townhouses

                                           The Agent/Owners withdrew $460,848 from Heritage Hill's
                                           operating account. These withdrawals exceeded surplus
                                           cash and occurred between December, 1990, and July,
                                           1994. The Agent/Owners subsequently repaid the project
                                           $151,151; however, $309,697 has not been repaid.

                                           Harper's Mill Townhouses

                                           The Agent/Owners withdrew $151,481 from the operating
                                           account of Harper's Mill. These withdrawals exceeded
                                           surplus cash and occurred between February, 1991, and
                                           April, 1994. Additionally, the Agent/Owners received
                                           $28,648 in excess incentive management fees. These excess
                                           fees were paid when surplus cash was not available during


96-PH-214-1021                                     Page 4
                                                                          Finding 1



                         1992 and 1993. The Agent/Owners subsequently repaid the
                         project $43,508 for the unauthorized distributions.
                         However, $136,621 is owed to the project by the
                         Agent/Owners.

                         Lamplighter Ridge Apartments

                         The Agent/Owners withdrew $7,373 from Lamplighter
                         Ridge. The withdrawals exceeded surplus cash. The
                         Agent/Owners withdrew the funds during the period from
                         January, 1993, through January, 1994. As a result, $7,373
                         is owed to the project.

                         Olde Forge Townhouses

                         The Agent/Owners withdrew $42,291 from Olde Forge.
                         These withdrawals, which occurred in July, 1992, exceeded
                         surplus cash. The Agent/Owners subsequently repaid the
                         project for the unauthorized distributions.

                         Ineligible Repayment of Advances ($295,433)

                         Repayments of advances are not considered as distributions,
Improper repayments of
                         however, the repayments may only be made from surplus
advances
                         cash. The Agent/Owners repaid advances which were in
                         excess of surplus cash.

                         Mariner's Cove Townhouses

                         The Agent/Owners withdrew $115,556 to repay advances
                         when the project did not have surplus cash. Repayments
                         totaling $105,865 occurred after the project was in default.

                         Washington Square Townhouses

                         The Agent/Owners repaid an advance when insufficient
                         surplus cash was available. The project generated $86,516
                         in surplus cash in 1990, but, in the following year, the
                         Agent/Owners repaid an advance of $266,393. As a result,
                         the repayment exceeded surplus cash by $179,877. Further,
                         according to the Agent/Owners' representative, the funds
                         were withdrawn from the project to repay the advance.
                         However, we found no documentation to support the
                         advance to the project.


                                 Page 5                                  96-PH-214-1021
Finding 1




                             When distributions exceed surplus cash, the financial
 Projects may be placed at
                             stability of the projects may be endangered. Because
 risk
                             operating cash has been reduced, the projects may not be
                             able to meet current obligations when due and the projects
                             may be forced to suspend payments for normal operating
                             expenses. As an example, if funds had not been withdrawn
                             from Mariner's Cove, more money would have been
                             available for necessary project expenses (including
                             mortgage payments), the project may have continued to
                             make its mortgage payments, and an insurance claim may
                             have been avoided.

                             Furthermore, our review of the Reserve Fund for
 Reserve account below
                             Replacements account balance for the six projects disclosed
 recommended amount
                             that five of the accounts are funded in accordance with the
                             Maryland State Office policy of requiring 24 months of
                             funds in the account. However, our review disclosed that
                             Reserve Fund for Replacements account balances for all of
                             the projects were below the recommended minimum
                             thresholds as detailed in HUD Handbook 4350.1 REV-1.
                             This is illustrated as follows:




96-PH-214-1021                       Page 6
                                                                                   Finding 1



                                Our analysis of the Reserve Fund for Replacements
                                accounts also indicates the following:


                                                                      Average
                                                  Reserve Fund for    RFR
                       No. of    Age of           Replacement         Amount
Project Name           Units     Project          (RFR) Balance 1/    Per Unit
Harper's Mill          144       15               $31,241             $217
Olde Forge             143       10               $79,176             $554
Mariner's Cove         101       7                $60,432             $598
Heritage Hill          120       17               $22,051             $184
Washington Square      181       13               $32,558             $180
Lamplighter          168       14           $50,896                   $303
1/ Reserve Fund for Replacement balance as of 12/31/94.

                                In our opinion, the current Reserve Fund for Replacement
Reserve accounts are low
                                balance for each of these properties is inadequate to
                                safeguard against possible future major expenditures. Roof
                                replacements, heating and air conditioning units, or other
                                major repair/replacement items could exhaust these minimal
                                amounts many times over.

                                The Agent/Owners' representative said the unauthorized
                                distributions were paid because there was a
                                misunderstanding of HUD regulations concerning
                                distributions. Furthermore, the representative stated
                                adjusting entries performed by the IA, after the distributions
                                were made, reduced the amount of surplus cash available.

                                In summary, the Agent/Owners improperly withdrew
                                $1,139,408 from the projects. As a result, one project
                                defaulted on its mortgage agreement and the financial
                                stability of the other five projects may have been
                                threatened.

                                According to the Regulatory Agreements, recorded
Criteria
                                documents signed by a General Partner, the Owners shall
                                not make distributions of assets or income of any kind
                                except from surplus cash.



                                         Page 7                                   96-PH-214-1021
Finding 1



                   Paragraph 2-11. A. of HUD Handbook 4370.2 REV-1,
                   Financial Operations and Accounting Procedures for
                   Insured Multifamily Projects, states advances made for
                   reasonable and necessary operating expenses may be paid
                   from surplus cash at the end of the annual or semi-annual
                   period. Such repayment is not considered an Owner
                   distribution, it is considered a repayment of advances.

                   HUD Handbook 4350.1 REV-1, Multifamily Asset
                   Management and Project Servicing, paragraph 4-11, states
                   HUD strongly recommends that Owners target a minimum
                   amount to be held in the Reserve Fund for Replacement
                   account. The purpose of having a minimum amount is to
                   have funds available for an emergency or unforeseen
                   contingency.



Auditee Comments   The Agent/Owners generally disagreed with the finding.
                   Complete auditee comments have been included as
                   Appendices A and B of this report.

                   The      Agent/Owners'       attorney      indicated     that
                   "...approximately $54,000 was inadvertently distributed
                   from Mariners Cove...." Further, the Agent/Owners'
                   attorney stated the remainder of the $268,890 discussed in
                   the audit finding was not distributions of project funds, "...
                   but appear to be payments made of partnership assets not
                   controlled by the Regulatory Agreement...." Therefore,
                   only $54,000 should be repaid to the project.

                   With respect to Heritage Hill, Harper's Mill, and
                   Lamplighter Ridge, the Agent/Owners' attorney stated that
                   the projects are in exceptionally strong financial condition
                   and each is in exceptional physical condition. Further, the
                   attorney stated "Therefore, while it is true that, in certain
                   instances, distributions were made in excess of what turned
                   out to be available surplus cash, the return of these
                   distributions would simply create additional surplus cash,
                   and the funds could be redistributed. Thus, the exercise
                   would be meaningless...."

                   Regarding Washington Square, the Agent/Owners' attorney
                   stated that there was never a repayment of an advance. The
                   check was written to reimburse a master pay account.


96-PH-214-1021              Page 8
                                                                     Finding 1



                    With respect to the matter of the Reserve Fund for
                    Replacements, the Agent/Owners' attorney stated:

                    "...This is a matter which we view to be separate from the
                    question of the alleged over distributions as, even had such
                    questioned distributions never been made, the reserves
                    would today not be greater than they in fact are."

                    "Nevertheless, we agreed that the adequacy of reserve
                    funding was a matter proper for discussion between project
                    ownership and management, on the one hand, and HUD
                    program personnel on the other...."



OIG Evaluation of   Regarding Mariner's Cove, distributions and repayments of
Auditee Comments    cash advances can not be made when the project is not in a
                    surplus cash position. The ineligible withdrawal of
                    $268,890 (distribution of $153,334 and repayment of
                    advances of $115,556) is contrary to the project's
                    Regulatory Agreement and the funds should be returned to
                    HUD since an insurance claim has been paid on the project.

                    With respect to Heritage Hill, Harper's Mill, and
                    Lamplighter Ridge, the projects are not in exceptionally
                    strong financial condition. While the projects are in good
                    physical condition, the projects do not have adequate
                    amounts in the Reserve Fund for Replacements for an
                    emergency or unforeseen contingency. Furthermore, the
                    Agent/Owners applied for and received a wavier which
                    suspended Reserve Fund for Replacements payments for
                    Lamplighter Ridge on March 31, 1992. This occurred
                    because the Agent/Owners did not have sufficient revenues
                    to meet the project's operating expenses and fund the
                    account.

                    Furthermore, the Agent/Owners must comply with the
                    Regulatory Agreement. Distributions should be limited to
                    the available amount of surplus cash and should be made
                    only at the proper intervals.

                    Regarding Washington Square, the Agent/Owners did not
                    provide any documentation to support the position that the
                    payments in question were to reimburse a master pay



                            Page 9                                  96-PH-214-1021
Finding 1



                  account. According to the Agent/Owners' representative,
                  the disbursements in question were to repay an advance.

                  The Agent/Owners' projects do not have adequate funds in
                  the Reserve Fund for Replacements accounts to handle
                  potential emergencies or unforeseen contingencies.
                  Repayments of ineligible distributions should be made to
                  these accounts since there is a legitimate need. Any
                  remaining funds should be deposited in the projects'
                  operating accounts.



Recommendations   We recommend that you require the Agent/Owners to:

                  1A.   Reimburse HUD $268,890 representing             the
                        ineligible withdrawals from Mariner's Cove.

                  1B.   Reimburse Heritage Hill, Harper's Mill, and
                        Lamplighter Ridge, $453,691 ($309,697, $136,621,
                        and $7,373, respectively) representing amounts
                        owed by the Agent/Owners. When returned to the
                        projects, the funds should first be allocated to the
                        Reserve Fund for Replacements accounts in order to
                        bring them up to the minimum threshold
                        requirement. Any additional funds should go to the
                        operating accounts.

                  1C.   Repay the ineligible withdrawal of $179,877
                        disbursed from Washington Square's operating
                        account to the project.




96-PH-214-1021           Page 10
                                                                                    Finding 2




      Ineligible Costs Were Paid From Project
                  Operating Funds
Contrary to the Regulatory Agreement, the Agent/Owners made payments totaling $15,002 that
were not necessary project expenses. As a result, project funds were not used economically or
efficiently. This occurred because the Agent/Owners thought the items were eligible project
expenses.



                                   The Agent/Owners paid $15,002 from the projects'
 Ineligible expenses
                                   operating funds for ineligible costs. Specifically, the
 charged to the projects
                                   Agent/Owners and the property managers disbursed project
                                   funds for employees' bonuses, lunches, parties, and
                                   Baltimore Orioles baseball tickets. Project funds were also
                                   disbursed on tenants' donations, welcome baskets,
                                   entertainment and gift certificates. Disbursements for these
                                   items are not a necessary use of the projects' funds. Copies
                                   of schedules detailing the ineligible costs were provided to
                                   your office and the auditee.

                                   The Agent/Owners believed that some of the payments
                                   were necessary marketing expenses.

                                   The Regulatory Agreement requires the Owners to pay only
 Criteria
                                   costs that are reasonable and necessary to the operation and
                                   maintenance of the project.


Auditee Comments                   The Agent/Owners object to the classification of $15,002 in
                                   disbursements as "ineligible" costs. They feel the items
                                   were generally tenant incentives which were ordinary and
                                   necessary business expenditures. These incentives were
                                   designed to attract residents and keep them satisfied with
                                   their residential environment.




                                           Page 11                                 96-PH-214-1021
Finding 2



OIG Evaluation of   The disbursements for employees' bonuses, lunches, parties,
Auditee Comments    Baltimore Orioles baseball tickets, and other similar items
                    are not necessary costs for the operation of the project.



Recommendations     We recommend that you require the Agent/Owners to:

                    2A.    Reimburse the respective projects $15,002 for the
                           ineligible costs incurred.




96-PH-214-1021              Page 12
Internal Controls
In planning and performing our audit, we considered internal control systems of the management
of Emerald Properties Management Co., Inc., to determine our auditing procedures and not to
provide assurance on internal control. 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
 Control Categories
                                     categories were relevant to our audit objectives:

                                     •   Cash Receipts and Disbursements
                                     •   Project Maintenance and Condition
                                     •   Liabilities
                                     •   Owner Distributions
                                     •   Accounts Receivables
                                     •   Purchases and Expenses

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

                                     A significant weakness exists if internal control does not
 Significant Weaknesses
                                     give reasonable assurance that the entity's goals and
                                     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:

                                     (1) Owner Distributions (Finding 1)
                                     (2) Cash Disbursements (Finding 1)
                                     (3) Purchases and Expenses (Finding 2)




                                             Page 13                                   96-PH-214-1021
Internal Controls




96-PH-214-1021      Page 14
Follow Up On Prior Audits
This is the first OIG audit of the Agent/Owners' operations. The most recent Independent Auditor
reports, for the fiscal year ended December 31, 1995, disclosed findings that are relevant to our
audit objectives and remain uncorrected. The remaining findings are not applicable to our audit.




 Project Name               IA Findings Which Relate To Distributions (Finding 1)             IA Findings Not Applicable To OIG Audit

 Harper's Mill Townhouses                               1                                                        0

 Heritage Hill Townhouses                               1                                                        1

 Washington Square                                      0                                                        0
 Townhouses

 Lamplighter Ridge                                      0                                                        0
 Apartments

 Mariner's Cove                                         0                                                        2
 Townhouses

 Olde Forge Townhouses                                  0                                                        0

 Total                                                  2                                                        3
                              Note: There were no IA findings which relate to ineligible cost (Finding 2).




                                                               Page 15                                                    96-PH-214-1021
Follow Up On Prior Audits




96-PH-214-1021              Page 16
                                    Appendix A

Auditee Comments (Before Exit Conference)




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          Appendix A




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          Appendix A




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          Appendix A




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          Appendix A




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96-PH-214-1021   Page 30
                                     Appendix B

Auditee Comments (After Exit Conference)




                    Page 31           96-PH-214-1021
Appendix B




96-PH-214-1021   Page 32
                                                                                      Appendix C

OIG Evaluation of Auditee Comments
The following comments are in response to the Auditee's Comments regarding the audit. Auditee
Comments relating to the findings are incorporated, where appropriate, in the applicable finding.

The Agent/Owners questioned the conduct of the audit by OIG. In particular, the Agent/Owners
claimed:

    "You should be aware that, at no time, was any such entrance conference held. Thus, the
    'purpose, scope, and objectives' of the Audit were never transmitted in a coherent fashion to
    the auditee (and in our opinion perhaps never properly formulated or understood by the
    individual conducting the Audit), no timetables for audit completion were ever established,
    required records and information were never identified, and access to records and
    information was sought only on an incomplete, ad hoc basis. There did not seem to be an
    'audit team' involved in this audit, as the Auditor alone conducted the audit and indeed, at no
    time during the conduct of the Audit, did he even speak with or meet either Mr. Berman or
    Mr. Shapiro."

The OIG Auditor contacted Ms. Ginger Linden, Controller for the Agent, by phone on February
9, 1995. Arrangements were made for the OIG Auditor to perform a physical inspection of
Mariner's Cove on February 13, 1995. Additionally, an entrance conference was scheduled for
February 21, 1995, at 9:00 am.

An entrance conference was held as scheduled with the Controller. The Controller was informed
OIG would conduct a survey, and possibly an audit, of the Agent/Owners' operations to
determine whether the Agent/Owners were complying with Regulatory Agreement and other
applicable HUD requirements. The OIG Auditor informed the Controller that the survey, and the
audit, if warranted, would cover the period January 1, 1991, through December 31, 1994.
Further, the Controller was informed the audit period may be extended as considered necessary.
The Controller stated that the day to day operations of the Agent were managed by her and all
requests for information should be addressed to her.

Furthermore, the OIG Auditor informed the Controller that the following documents may be
examined during the survey/audit:

    Contracts; copies of reports, operating policies, and procedures; organizational charts;
    financial statements; accounting books and records, including receipt and disbursements of
    funds, bank statements and cancelled checks; documentation such as invoices, bills, and
    contract payments to support expenditures; personnel files; payroll; and time and attendance
    records.




                                              Page 33                                  96-PH-214-1021
Appendix C




The Controller stated that no space was available at the Agent's office, however, work space
would be provided at the IA's office. Arrangements were made to provide the OIG Auditor with
1994 cancelled checks, bank deposits, bank statements, vendor files, monthly disbursements
journals, and the IA reports for the periods 1990 through 1993 for all six properties.
Additionally, the OIG Auditor obtained the following documentation from the Controller before
the entrance conference was concluded:

     Listing of the HUD-insured properties managed by the Agent; project and Agent employee
     listing; 1994 audited financial statements for the six properties managed by the Agent;
     management certifications with amendments; chart of accounts; and the disbursement journal
     for Mariner's Cove.

Regarding the Agent/Owners' comments that the audit was never announced, the OIG Auditor
informed the Controller, during the entrance conference, that a survey was being performed. At
that time, it was explained to the Controller that part of the survey process was to determine if
further audit work was warranted.

On March 16, 1995, the Auditor discussed the preliminary results of the survey with the
Controller in order to obtain information on the areas that were tested. At that point, the
Controller was presented with the 1994 disbursements that were not supported or did not appear
to be reasonable and necessary project expenses. Furthermore, unauthorized distributions that
were paid to the Owners was also discussed. The purpose of that meeting was to determine the
reasons for the transactions and to inform the Controller that the Agent/Owners were not in
compliance with the Regulatory Agreement.

In the following weeks, the Controller was informed that the survey was expanded to an audit and
requests were made for information for the years 1991, 1992, and 1993. This information was
requested to determine if the conditions found in 1994 also occurred in the previous years.

The Agent/Owners' comments contained the following regarding the staffing and supervision of
the audit:

     "...Emerald is thus uncertain as to the degree of review which any of the field work received
     and again wishes to point out that only one individual conducted this field work, so that the
     normal communications between auditors during the audit phase was not possible."

Adequate supervision was provided throughout the survey and audit as required. It is not unusual
for one Auditor to perform audit field work. The Auditor and the Supervisor communicated
frequently throughout the survey and audit via meetings, telephone calls, and electronic mail.




96-PH-214-1021                                Page 34
                                                                                      Appendix C




The Agent/Owners commented that the draft findings contained significant inaccuracies and the
audit was not complete. The following is an excerpt from the Agent/Owners' comments:

    "...The draft findings contain significant inaccuracies, distorting the reality of Emerald's
    stewardship of the affected properties, and ignoring the true economic effects of the
    questioned occurrences. Further, the draft findings list $409,259 of 'unsupported'
    expenditures, and, if issued without change in final form, would instruct the Baltimore HUD
    Office to determine if adequate documentation exists to support these expenditures. As will
    be seen from this response, these expenditures are 'unsupported' in the eyes of the auditor
    only, who never asked for nor reviewed the appropriate supporting data. Thus, the Audit is
    incomplete, and appears to push the responsibility for its completion to Baltimore Office
    housing officials, and to raise unnecessary questions in the minds of field office personnel
    regarding Emerald's management operations...."

The first request for supporting documentation concerning the projects' disbursements cited in
the draft findings occurred on April 12, 1995. A second request was made on April 20, 1995.
The Controller stated that supporting documentation could not be found because files may have
been destroyed or damaged. Further, the Controller stated a history of the files was being created.

The process of attempting to obtain adequate documentation for project disbursements required
two months of detailed review. Cancelled checks, deposit slips, IA working papers, and other
documentation were reviewed to determine if the disbursements were appropriate project
expenditures. The OIG Auditor interviewed the IA and the Controller on numerous occasions
in order to help clarify the disbursements in question.

The OIG Auditor meet with the Controller, IA representative, and the Agent/Owners' Attorney
on June 28, 1995, to discuss the current status of the audit and provide schedules detailing
ineligible and unsupported cost. Furthermore, it was explained to the Controller at the meeting
that the OIG Auditor, if called, would return to review additional documentation before the final
report was issued. The Controller never called to inform the OIG Auditor that additional
supporting documentation was available.

At the exit conference, the Agent/Owners were provided with another opportunity to present
supporting documentation. The Controller stated documentation needed to provide support for
the unsupported disbursements totaling $409,259 cited in the draft finding would be provided.
It was agreed the information would be available for review on October 23, 1995. On November
1, 1995, necessary supporting documentation was provided to OIG. As a result, all
disbursements were either accepted as reasonable and necessary operating expenses or were
classified as ineligible disbursements.




                                              Page 35                                  96-PH-214-1021
Appendix C




96-PH-214-1021   Page 36
                                                                                Appendix D

Schedule of Ineligible Costs


Recommendation
Number                                  Ineligible 1/

  1A                                                        $   2   6   8   ,    8    9    0


  1B                                      453,691

  1C                                      179,877

  2A                                        1           5       ,       0        0          2


 Totals                                                     $   9   1   7   ,    4    6     0




1/ Ineligible amounts are not allowed by law, contract, HUD or local agency policies or
   regulations.




                                         Page 37                                96-PH-214-1021
Appendix D




96-PH-214-1021   Page 38
                                                                          Appendix E

Distribution

Secretary's Representative, Mid-Atlantic, 3AS
Director, Multifamily Division, Maryland State Office, 3BHM
Internal Control and Audit Resolution Staff, 3AFI
Director, Housing Division, 3AH
State Coordinator, Maryland State Office, 3BS
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Audit Liaison Officer, HF (Room 5132) (5)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Participation & Compliance Division, HSLP (Room 9164)
Director, Division of Housing Finance Analysis, REF (Room 8204)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer for Operations, FO (Room 10164) (2)
Assistant Director in Charge, US GAO, 820 1st St. NE Union Plaza,
 Bldg. 2, Suite 150, Washington, DC 20002
 Attn: Mr. Cliff Fowler (2)

Emerald Properties Management Co., Inc.
7200 Wisconsin Avenue, Suite 907
Bethesda, MD 20814




                                          Page 39                         96-PH-214-1021