oversight

Wesley Homes of Lake County, Inc., Tiptonville, TN

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-10-15.

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

                                                      U.S. Department of Housing and Urban Development

                                                      District Office of the Inspector General
                                                      Richard B. Russell Federal Building
                                                      75 Spring Street, SW, Room 700
                                                      Atlanta, GA 30303-3388
                                                      (404) 331-3369




October 15, 1996
Audit-Related Memorandum No. 97-AT-212-1803


MEMORANDUM FOR:             Ed M. Phillips, Director, Multifamily Housing Division,
                             Tennessee State Office, 4LHM


FROM:       James D. McKay
            Acting District Inspector General for Audit-Southeast/Caribbean, 4AGA


SUBJECT:        Independent Auditor Report of Illegal Acts
                Wesley Homes of Lake County, Inc.
                Review of Corrective Actions
                Tiptonville, TN

We have completed a review of information provided by an Independent Aud itor (IA) concerning
apparent illegal acts by the former president of Wesley Homes of Lake County, Inc. (WHLCI).
WHLCI owns Wesley Homes of Lake County (WHLC), a HUD-assisted, elderly housin g
development in Tiptonville, Tennessee. The information related to impro per diversions of project
funds.

The objectives of our review were to determine whether WHLCI had tak en appropriate corrective
actions - related to the funds, the former president, and any weaknesses in internal controls - and
to evaluate the adequacy of IA audit coverage. We interviewed your staff and reviewed th e
project files in your office. We also interviewed the IA and the current president of WHLCI, and
performed a cursory review of the IA's working papers.


                                          SUMMARY

WHLCI's corrective actions were generally adequate, as was IA audit coverage, and we plan no
additional audit work pertaining to either WHLCI or the IA. However, we are recommending
that you issue a limited denial of participation (LDP) for the former WHLCI president tha t
diverted the funds.
                                       BACKGROUND

WHLC is a 50 unit, Section 202 elder ly housing project located in Tiptonville, TN. WHLC was
originally sponsored by the Methodist Church and is currently managed by Wesley Housin g
Corporation of Memphis which is affiliated with the Methodist Church. The managemen t
company had no control of the accounts involved in the cash diversions and could not hav e
prevented or detected the diversions.

The IA reported in his audit for the year ended December 31, 1995, an "Accounts Receivable -
Other" of $24,367. He described the amount as reflecting certain transactions unauthorized by
the Board of Directors and inappropr iate for WHLCI. In a separate report to the HUD Inspector
General, he explained that the president of WHLCI maintained a bank account in a local bank
in Tiptonville separately fr om the operating account maintained by the management agent. The
funds in the account represented a combination of private donations and project funds left over
from construction, plus interest over the years. The president maintained the records for th e
account. During the year, the IA noted the following transactions involving the account:

     -     On February 17, 1995, check No. 191 was written to First Exchange Bank in return
           for certificate of dep osit No. 25380, in the name of the president, for "RWV", in the
           amount of $25,000, with the president's social security number assigned to th e
           certificate. (The president advised us that RWV stood for Reelfoot Wesley Village,
           a name he made up for a possible future full-pay retirement center.)

     -     On February 21, 1995, certificate of deposit No. 25380 was cashed in and replaced
           by certificate of deposit No. 25402 for $20,000, also in the name of the president for
           RWV, using the president's social security number. The $5,000 which wa s
           withdrawn from the original certificate was deposit ed back into the bank account, net
           of a $370 early withdrawal penalty.

     -     On March 1, 1995, check No. 195 was issued in the amount of $2,000 to Kentucky
           Green Nursery to pay for installation of 20 trees. Investigation of this transactio n
           revealed that only 4 trees were installed at WHLC, while 16 were installed at th e
           WHLCI president's residence.

     -     On March 14, 1995, check No. 194 in the amount of $1,200 was issued to B. G .
           Waid Construction Company for transplanting six trees at the WHLCI president' s
           residence.

THe IA advised that invoices described in the latter two transactions were addressed to th e
president, and all checks were co-signed by the secretary/t reasurer of WHLCI. (The checks were
signed by the president.) The IA also advised that on April 2, 1996, all funds were restored to
WHLCI, including interest at six percent, and the president resigned as president and director of
WHLIC.




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                                    RESULTS OF REVIEW

The IA's description of the events and transactions was accurate. The diverted funds were in an
account maintained by WHLCI entitled Cash in Bank - Construction. The current president of
WHLCI stated about half of the funds in the account was project funds and half was entity funds
(donations). Records were not available for us to verify this. The IA audit for the year ende d
December 31, 1994, reflected a balance of $50,801 in the accou nt, with no indication the account
was anything but project funds.

The current president (formerly the s ecretary/treasurer) said that he and the rest of the board had
not taken sufficient interest in what the president was doing, but they are much more vigilan t
now. Internal controls for s uch a small entity, i.e., two signatures on checks and documentation
of disbursements, were and are adequate; individuals were just lax in their enforcement. Th e
president said the former president asked for and received board approval to purchase th e
certificate at a March 1996 board meeting, but did not tell the board he had already purchased
the certificate nearly a year before.

The IA detected the tree t ransactions by obtaining duplicate invoices directly from vendors. He
first requested, but did not receive, invoices to support the disbursements from the forme r
WHLCI president. The IA and the secretary /treasurer confronted the former president with their
findings. He admitted the transactions, and claimed he intended to reimburse WHLC for th e
trees, but had forgotten to do so. He said he purchased the certificate to move the funds out of
WHLC to prevent HUD from denying future rent increases.

The board asked for the president's resignation and restoration of the diverted funds. On April
2, 1996, the former president resigned, returned the $20,000 certificate to the board and mad e
restitution in the amount of $3,783, including payment for the trees, the $370 early withdrawal
penalty on the certificate, and imputed interest on the funds.

Our cursory review of the IA's working papers indicated they support adherence to AICPA and
GAO standards. Based on the actions taken by WHLCI, the IA's work, and our review o f
WHLCI's internal controls, we plan no further work at WHLCI.

However, we believe you should take appropriate administrative action against the forme r
WHLCI president to preclude future participation in HUD programs. The diversions wer e
contrary to disbursement restrictions in the Regulatory Agreement at paragraphs 7(b), 7(d), 11(a),
11(c) and 11(h). These paragraphs prohibit distribution of any income or assets to officers o r
directors (paragraph 7(d)), and payments for any services, supplies or material for other tha n
project purposes (all other paragraphs). The former president signed the Regulatory Agreement.

24 CFR 24.700 authorizes Multifamily Housing Division Directors to order an LDP for an y
program participant or contractor based upon adequate evidence of, among other things ,
irregularities in past performance in a HUD program, and failure to honor contractual obligations.
We believe there is need and adequate evidence of these, and perhaps other, causes for you to
issue an LDP against the former president.




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                                    RECOMMENDATION

1A. We recommend that you issue an LDP for the former president of WHLCI as provided by
    24 CFR 24.700.

                                       *   *    *   *    *


Within 60 days, please furnish this office, for the recommendation cited, 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 unnecess ary. Also, please furnish us copies of any correspondence
or directives issued because of the audit.

Should you or your staff have questions, please call me at (404) 331-3369 or Rudy E. McBee,
Assistant District Inspector General for Audit, at (423) 545-4368.




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                                                                                  Attachment


                                    DISTRIBUTION


Secretary's Representative, 4AS
Comptroller, 4AF
Director, Field Accounting Division, 4AFF
Special Agent-in-Charge, Southeast/Caribbean, 4AGI
Tennessee State Coordinator, 4LS
Director, Multifamily Division, 4LHM (2)
Housing-Federal Housing Comptroller, HF (Room 5132) (3)
Chief Financial Officer, F (RM 10166) (2)
Director, Office of Internal Control and Audit Resolution, FOI (Room 10176) (2)
Associate Director, US GAO, 820 1st St., NE Union Plaza, Bldg. 2, Suite 150,
 Washington, DC 20002, (2)
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)




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