oversight

Chesterfield Square Mutual Homes, Inc. Mortgagor Operations, Richmond, Virginia

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-12-30.

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

                                         U.S. Department of Housing and Urban Development
                                                            Wanamaker Building, Suite 1005
                                                                      100 Penn Square East
                                                               Philadelphia, PA 19107-3380

                                                        District Inspector General for Audit



December 30, 1996

                                                    Audit Related Memorandum
                                                    No. 97-PH-212-1802


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



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

SUBJECT:      Chesterfield Square Mutual Homes, Inc.
               Mortgagor Operations
               Richmond, Virginia


Pursuant to your request, we have completed a review of projec      t
operations for Chesterfield Square Mutual Homes, Inc. Your    request
identified   questionable transactions and indicated potentia       l
mismanagement of project affairs by the Management Agent (Agent).

The purpos e of our review was to determine if the project wa                             s
operated in accordance with the terms and conditions set forth in
the Regulatory Agreement and applicable HUD directives.

We   reviewed   project   records  and   reports,  analyzed   cas   h
disbursements and reserve account activity, performed on-sit        e
testing of tenant housing assi stance eligibility, and examined the
preparation of the annual budg et. We interviewed Asset Management
Branch staff in your office and project personnel.

Results of Review

Our review disclosed the following:

        -      Evaluation of expenditure documentation  from June 1993 t                  o
               May 1996 showed that project f unds totalling $4,175 were
               used to pay health insurance p remiums for a non-employee
               painting contractor.       This improper procedure wa                      s
               perm itted by the Agent. The contractor made periodi                       c
               payments and reimbursed the project $4,020.          Th                    e
               contractor, who relocated out-of-state, still owes th                      e
               project $155.
Visit the Office of Inspector General's World Wide Web site at http://www.hud.gov/oig/oigindex.html

                                                                                                 2


 -        Expenditure documentation supp orts the reasonableness of
          the project's $11,200 purchase of the Agent's persona                                       l
          truck in 1993. No evidence was found to indicate tha                                        t
          the purchase was other than necessary to meet projec                                        t
          requir ements, and approved by the project's Board o                                        f
          Directors.

 -        Expe nditures may not have been made at the lowes                                           t
          poss ible cost to the project. Contrary to provision                                        s
          contained in the Housing Management Agreement, writte                                       n
          cost estimates from three sources were not alway                                            s
          obtained for project expenses valued at $5,000 or more.
          In addition, documentation was  not available to show tha                                   t
          verbal and written quotes were  solicited to validate the
          reas onableness of costs for ongoing supply or servic                                       e
          requir ements valued at less than $5,000 as required b                                      y
          the    Management    Agreement   and    the    Managemen                                    t
          Certification.

 -        Required reserve deposits were made, reserve accoun                                         t
          levels were maintained, and disbursements from reserv                                       e
          fund accounts were proper. However, as of November 20,
          1996, excess cash amounting to   $107,425 was contained in
          the project's reserve accounts . The Agent maintained an
          unneeded painting reserve fund, valued at $65,792. The
          Agent also held earned interest in the membership trust
          and general operating reserve   accounts, totalling $36,25                                  2
          and $5,381, respectively.     The Agent stated that th                                      e
          accoun ts were used to hold excess cash to preclud                                          e
          residual receipts identificati on and restriction, and to
          maintain control over the funds.           The Regulator                                    y
          Agreement requires that any residual receipts realize                                       d
          from property operations be deposited into the reserv                                       e
          fund for replacements and shall at all times be subject
          to HUD's control.

 -        The Fi scal Year 1996 and 1997 annual budgets were no                                       t
          properly prepared, overstating project expenses b                                           y
          $21,036 and $28,788, respectiv ely. The Agent overstated
          the   bu dgeted expense for the reserve fund fo                                             r
          replacements deposit requirement by the amount of planne                                    d
          interest to be earned on the account. The Agent stated
          that the interest amount was added to the expense i                                         n
          ord er to offset the income since it was restricted an                                      d
          not readily available for proj ect use. According to the
          Regulatory Agreement, housing charges  shall be in amount                                   s
          suffic ient to meet the estimated expenses set forth i                                      n
          the operating budget.      Ownership should revise th                                       e
          current budget and eliminate overstated expenses.
                                                                         3



     -     In coordination with the HUD Office of the Inspecto               r
           General for Investigation, we determined that the Agent
           was the subject of an investigation involving another HU          D
           project. As a result of the investigation, the Agent wa           s
           con victed of fraud in June 1996 in connection with hi            s
           posit ion as managing agent for the other project                 .
           Because of this conviction, HUD has suspended the Agent
           from participation in procurement and non-procuremen              t
           transactions as either a participant, principal, o                r
           contractor with HUD. Additionally, HUD is considerin              g
           debarring the Agent for a three year period.

Recommendations

We recommend the owner:

     1A.   Obtain from the Agent the $155 owed the project on th             e
           painting contractor's health insurance premiums.

     1B.   Assure that project expenditures are obtained at th               e
           lowest possible cost by enforcing the provisions of the
           Housing Management Agreement.

     1C.   Close the painting reserve account.        Transfer th            e
           account's balance and the excess funds contained in the
           membership trust and the general operating reserv                 e
           accounts to the reserve fund for replacements account.

     1D.   Revis e the FY 1997     operating   budget   and   eliminat       e
           overstated expenses.

     1E.   Evaluate the Agent's suspension and proposed debarment b y
           HUD.   Determine it's impact on the current managemen    t
           agreement and take whatever action deemed necessary.

                                  ****

The results of our review were discussed with the project's Board
of Directors and your staff.

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

Attachment - Distribution
CC: OSWALD
    CIANCI

3AGA:GUSS:AMP:12/30/96
 Correspondence
 Code              3AGA
 Concurrence       GUSS
 Date
                                                    Attachment


DISTRIBUTION

Secretary's Representative, Mid-Atlantic, 3AS
Internal Control & Audit Resolution Staff, 3AFI
Director, Multifamily Division, Virginia State Office, 3FHM
Virginia State Coordinator, 3FS
Associate General Council Office of Asst Housing and CD, CD (Room
  8162)
Assistant to the Deputy Secretary for Field Management, SDF (Room
  7106)
Housing, Comptroller, HF, (Room 5132)
Director, Participation & Compliance Division, HSLP (Room 9164)
Director, Housing Finance Analysis Division, REF (Room 8204)
Chief, Financial Officer, F (Room 10164)
Deputy Chief Financial Officer for Finance, FF (Room 10164)
Director, Housing and Community Development Issue Area, U.S. GAO,
  441 G Street, NW, Room 2474, Washington, DC 20548
President Board of Directors, Chesterfield Square Mutual Homes,
  Inc., 1017 Hioaks Road, Richmond, VA 23225
                         REPORT NAME:         Chesterfield Square Mutual Homes, Inc.
                                              Mortgagor Operations
                                              Richmond, Virginia
                         REPORT NO:           97-PH-212-1802
                         ISSUE DATE:          December 27, 1996




                         REGIONAL OFFICE (NON-OIG)
Secretary's Representative, Mid-Atlantic, 3AS                                          1

Internal Control & Audit Resolution Staff, 3AFI                                        1

Director, Multifamily Division, Virginia State Office, 3FHM                            1

Virginia State Coordinator, 3FS                                                        1

                          HEADQUARTERS (NON-OIG)
Associate General Council Office of Asst Housing and CD, CD (Room 8162)                1

Assistant to the Deputy Secretary for Field Management,                                1
SDF (Room 7106)

Housing, Comptroller, HF (Room 5132)                                                   5

Director, Participation & Compliance Division, HSLP (Room 9164)                        1

Director, Housing Finance Analysis, REF (Room 8204)                                    1

Chief Financial Officer, F (Room 10164)                                                2

Deputy Chief Financial Officer for Finance,                                            2
FF (Room 10164)

                             HEADQUARTERS (OIG)

Assistant Inspector General, Office of Audit, GA (Room 8286)                           1

James M. Martin, Director, Research & Planning                                         1
 Division, GAP (Room 8180)

Michael R. Phelps, Deputy Assistant Inspector General for                              1
 Audit, GA (Room 8286)

Director, Financial Audits Division, GAF (Room 8286)                                   1

Central Files, GF (Room 8266)                                                          4

Semi-Annual Report Coordinator, GF (Room 8254)                                         1

                         DISTRIBUTION OUTSIDE HUD

Director, Housing and Community Development Issue Area,                                1
US GAO, 441 G Street, NW, Room 2474,
Washington, DC 20548 Attn: Judy England-Joseph

Ms. Elaine Hall, President, Board of Directors, Chesterfield Square                     1
Mutual Homes, Inc., 1017 Hioaks Road, Richmond, VA 23225                               28

From:
Edward F. Momorella, DIGA, Mid-Atlantic
Wanamaker Building, Suite 1005
100 Penn Square East
Philadelphia, PA 19107-3380