Date Issued: December 18, 1996 Audit-Related Memorandum 97-SF-207-1802 TO: C. Raphael Mecham, Administrator, Southwest Office of Native American Programs, 9EPI FROM: Gary E. Albright, District Inspector General for Audit, 9AGA SUBJECT: Hualapai Housing Authority Internal Controls Over Monetary Assets and Inventory Peach Springs, Arizona INTRODUCTION We con ducted a limited review of the Hualapai Housing Authorit y (HHA) to evaluate its internal controls over monetary assets , inventory, and related areas. This included a review of the HHA's controls over cash receipts, cash disbursements, security de posits, inventory, investments, genera l accounting, travel and procurement which were in effect at the time of our field work in Septembe r 199 6. We concluded that the HHA's controls over investments , travel , inventory and procurement were inadequate. Further, it s controls over general accounting were so deficient that it wa s impossible to determine the status of its programs. In general , the HHA had adopted policies but not implemented procedures tha t provid ed adequate controls in these areas. We have recommende d tha t the HHA implement strengthened controls over these areas i n order to protect its assets and improve its administrative an d budgetary controls. BACKGROUND At th e time of our review the HHA was administering 298 housin g units in 11 projects under three programs as follows: • Low rent program - 135 units • New mutual help program - 53 units • Old mutual help program - 110 units Page 1 Hualapai Housing Authority In add ition, the HHA was administering a Comprehensive Gran t program with annual funding of approximately $1.5 million. The HHA had 10 employees, incl uding seven administrative employees and th ree maintenance employees. Its accounting records ar e mainta ined by a fee accountant, Wright, Darnell & Rector, P.C. , located in Atlanta, Georgia. PURPOSE AND METHODOLOGY The objective of this review was to determine whether the HHA' s internal controls over monetary assets and inventory were ad equate. Based upon problems noted while carrying out the review, ou r objective was expanded to include a limited analysis of th e adequacy of the HHA's controls over travel and procurement. T o accomplish our review objectives we: • Interviewed HHA staff. • Reviewed existing HHA policies and procedures relating to ca sh receipts, cash disbursements, inventory, travel, an d procurement. • Tested the implementation of the HHA's adopted policies an d procedures by reviewing selected travel charges, procurement actions, disbursements and receipt cycles. • Scanned available accounting records. Our review was primarily limit ed to a testing of in place policies and procedures at the time of our review. However, as part of this testing, a limited number of transactions occurring during th e period July 1993 through June 1996 were reviewed. REVIEW RESULTS The Hualapai Housing Authority Needs to Strengthen and Enforce its Financial and Management Controls The Hualapai Housing Authority (HHA) did not enforce its adopte d policies or had not developed adequate procedures relating t o controls over accounting, investments, procurement, travel, an d inventory. As a result, it has lost budgetary and administrative contro l over its programs and operations; its assets are no t adequately protected; ineligible travel costs were paid; and it has no assurance that goods and services were obtained in such a manner as to ensure full and open competition and price reasonableness . In our opinion, the HHA's failure to adhere to its adopted p olicies was a result of unfamiliarity with the policies, a failure t o Audit-Related Memorandum Page 2 97-SF-207-1802 Hualapai Housing Authority develop procedures to implement policies, and intentional di sregard of procedures by the previous executive director. The Hualapai Housing Authority is Required to Have Financial and Management Controls The HHA's contractual responsibilities to HUD are set out in it s Annual Contributions Contract (ACC). Section 4 of the ACC r equires the HHA to operate its projects in an economic and efficien t manner. In order to do this, appropriate operating policies an d proced ures must be adopted and implemented. Additiona l requirements relating to general financial and procuremen t requirements are contained in 24 CFR Parts 85 and 950. Esse ntially these regulations require housing authorities (and other federa l grant recipients) to: • Establish financial management systems whic h provide accurate, current, and complete disclosure of its operations; effective controls an d accountability; budgetary controls; procedures for determination of cost eligibility; and accountin g records supported by source documentation. • Adopt and comply with procurement policies which , at a m inimum: ensure full and open competition i n all procurement transactions; establish procedures for inventory control; set out employee and boar d members standards of conduct and conflict o f interest provisions; and provi de for implementation of a contract administration system to ensure that contractors adhere to the terms, conditions, an d specifications of their contracts. We noted problems in the HHA's financial and management control s rela ting to (a) accounting records, (b) procurement, (c ) investments, (d) travel and (e) inventory as detailed below: a. Accounting Records At the time of our review, the HHA's accounting records were posted only through June 1995. Further, the accounting records for fiscal year ended (FYE) June 30, 1995 were not available until July 1996. The lack of current accounting records seriously impacts the HHA's ability to administer its programs. It is unable to monitor th e fin ancial progress of its projects and programs or even complet e and manage an operating budget. Basically, it lacks th e information needed to effectively and efficiently administer it s operations. Audit-Related Memorandum Page 3 97-SF-207-1802 Hualapai Housing Authority The HHA currently uses the services of a fee accountant for posting its accounting (general ledger) records. However, it has no t submit ted documents needed by the fee accountant to post th e accoun ting records on a timely basis, i.e. check carbons an d related invoices, bank statements, cash receipt records, deposi t slips, copies of contracts, budgets, etc. For example, none of the documents needed to post the a ccounting records for FYE ended June 30, 1996 were submitted to the fee accountant until August 1996 . The failure to submit needed documents to the fee accountant wa s due to staff's unfamiliarity with the terms of its fee accountant contract and the lack of procedures to identify and promptly submit required documents to the fee accountant. Comp licating the accounting process is the HHA's attempt t o establish its own on-site accounting system. It recently pu rchased a software accounting package and has been attempting to use learn the use of it. However, staff does not currently have th e expertise or program experienc e to implement the accounting system to the point that a fee accountant would not be necessary . Accordingly, the HHA should place primary emphasis on gettin g needed documents to its fee ac countant, with secondary emphasis on postings to its on-site system. To ensure timely submittal, the HHA should establish procedure s which provide for a check list detailing documents needed to b e sent to the fee accountant mon thly and assigned responsibility for ens uring that these documents are accumulated and shipped to th e fee accountant on a timely basis, such as by the 15th of the next month. Audit-Related Memorandum Page 4 97-SF-207-1802 Hualapai Housing Authority b. Procurement The HHA had adopted a comprehensive procurement policy. However, the policy was not followed. Our review of procurement wa s limited, but we noted numerous deficiencies including: • Large procurements were made without obtaining pric e quotes, or sealed bids as appropriate. • Substantial repair contracts were entered withou t appropriate plans and specific ations setting out work to be done under the contracts. • Contract "change orders" were entered without an y documentation showing what the change order was for, onl y that the price of the contract was being raised . Further, change orders were entered into which resulted in large rehabilitation contracts being increased by up to 96 percent indicating, at a minimum, serious problems in the procurement planning process. • Substantial up-front payments were made to contractor s (up to 100 percent) prior to construction start . Additionally, contract retainage was limited to 2. 5 percent rather than the 5 percent set out in severa l large rehabilitation contracts. • Small purchases were made by employees (and non - employees) without purchase requisitions as called for b y the HHA's policies. As a result of these deficiencies in the procurement process , competition was limited and there was no assurance that goods and services were obtained at the best available price. Further, the HHA was placed at risk of contractors being paid for work bu t never completing it, which happened in at least one instance. Th e weakne sses also resulted in the HHA being unable to properl y monito r rehabilitation contracts because of the lack of detaile d plans and specifications and the payment for goods and service s without determination as to their legitimacy. The procurement deficiencies identified occurred during the term of the prior executive director. The current HHA administration i s attemp ting to strengthen its procurement process. To b e successful, it needs to train its employees in its procuremen t poli cy; establish vendor lists to assist in the procuremen t process; and assign one employee responsibility for its larg e procurement activities. c. Investments Audit-Related Memorandum Page 5 97-SF-207-1802 Hualapai Housing Authority The HHA had not adopted investment policies and procedures whic h ensured that excess funds were fully invested and investments and investment income were controlled and properly accounted for . Specifically, the HHA did not have procedures in place to identify and invest excess funds (inves tment policy) nor did it maintain an investment register to properly account for and control inve stments it did h ave. Further, its policy for the handling of investmen t income was inconsistent as on some investments, income was rolled back into the investment and i n other instances income was sent to the HHA on a monthly basis. As a result of these deficienci es, the HHA has no controls over investments and a significant risk o f loss. In order to properly control its investments the HHA needs t o adopt and implement an investment policy and establish and maintain a n investment register. As part of its investment policy, investment earnings should be rolled into the investment rather than sent to the HHA. Such a procedure will strengthen the HHA's interna l controls. Additionally, the HHA should ensure that its inve stments are adequately insured and collateralized. d. Travel The HH A had adopted travel policies, however its procedures fo r implementation of these policies were inadequate to ensure t hat all employee travel costs were legitimate and eligible program costs. Additionally, travel advances were accounted for as a cost rather than as an advance. In order to ensure adequate control, advances should be accounted for as such until the travel vouche r documenting actual costs is submitted by the employee an d processed. During our limited review of travel we noted several questionable travel charges as follows: • On August 22, 1995 the former Executive Director was pai d $213.60 for use of her own vehicle on a trip t o Albuquerque, New Mexico. However, based upon othe r available information, the for mer Executive Director did not use her own vehicle for the trip but instead rented a ca r which was also paid for by the HHA. There is n o documentation which indicates that the improper duplicat e payment for the use of a perso nal vehicle was reimbursed to the HHA. • The HHA paid $617.84 for the r ental of a vehicle for the former Executive Director's si ster for the period August 11 through 20, 1995. This individual was not a HH A emp loyee and there is no documented reason why the HH A would be responsible for paying her car rental expense. Audit-Related Memorandum Page 6 97-SF-207-1802 Hualapai Housing Authority The HHA needs to establish strict controls over its approval an d review of travel and related claimed costs. e. Inventory The HHA had developed policies but not implemented procedures t o adequately account for and control equipment and materials an d sup plies. Specifically, up to date property records were no t main tained nor were annual inventories taken. Without suc h controls the HHA can not protect and control its assets. AUDITEE COMMENTS On December 6, 1996 we received a written response from th e Hualapai Housing Authority (HHA) in response to our draft report. The HHA expressed agreement with our draft findings an d rec ommendations and detailed steps they are taking or plan o n taking to improve their operations. The complete text of th e HHA's comments is included as Attachment A to this memorandum. RECOMMENDATIONS In order to protect and account for its monetary assets an d inventory, ensure cost eligibi lity and fairness in its procurement activities, and provide for full and current disclosure of it s operations, we recommend you require the HHA to: A. Establish procedures which provide for a check lis t detailing documents needed to be sent to the fe e accountant monthly and assign responsibility to ensur e that these documents are accumulated and shipped to the fee accountant on a timely bas is, such as by the 15th of the next month; B. Train its employees in its pro curement policy; establish vendor lists to assist in the procurement process; an d assign one employee responsibility for its larg e procurement activities; C. Adopt and implement an investment policy and establis h and maintain an investment register. As part of it s investment policy, investment earnings should be rolled int o the investment rather than sent to the HHA an d investments must be adequately insured an d collateralized; D. Establish strict review procedures for approving an d reviewing travel requests and claims. Additionally, all tra vel advances should be accounted for as such in th e accounting records; Audit-Related Memorandum Page 7 97-SF-207-1802 Hualapai Housing Authority E. Identify all existing equipment inventory, establis h appropriate control records for this equipment, an d install procedures for properly recording new equipment purchases and the performance of periodic inventor y counts. * * * * Within 60 days, please furnish us a status report on the cor rective action taken, the proposed corrective action and the date to b e com pleted, or why action is not considered necessary for eac h recommendation. Also, please furnish us copies of correspondence or directives issued because of this review. We have provided a copy of this audit-related memorandum to th e Audit ee. If you have any questions, please contact me at (415 ) 436-8101. Attachments: A - Auditee Comments B - Distribution Audit-Related Memorandum Page 8 97-SF-207-1802 Hualapai Housing Authority Attachment A AUDITEE COMMENTS Page 1 of 2 Audit-Related Memorandum Page 9 97-SF-207-1802 Hualapai Housing Authority Attachment A Page 2 of 2 Audit-Related Memorandum Page 10 97-SF-207-1802 Hualapai Housing Authority Attachment B Distribution Secretary's Representative, 9AS Administrator, Southwest Office of Native American Programs, 9EPI State Coordinator, Phoenix Office, 9ES Administrative Service Center #3 Director, Accounting Division, 9AFF Office of the Comptroller, Texas State Office, 6AF Assistant to the Secretary for Field Management, SDI Audit Liaison Officer, PF Deputy Assistant Secretary for Native American Programs, PI Associate General Counsel, Office of Assisted Housing & Community Development, CD Chief Financial Officer, F Deputy Chief Financial Officer for Finance, FF Director, Housing & Community Development Issue Area, US GAO, 441 G St. NW, Washington, DC 20548 Hualapai Housing Authority Audit-Related Memorandum Page 11 97-SF-207-1802
Hualapai HA, Peach Springs, AZ
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-12-18.
Below is a raw (and likely hideous) rendition of the original report. (PDF)