oversight

Redwood Villa, Mountain View, CA

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-03-31.

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

                             Audit Report
                             District Inspector General for Audit
                             Pacific Hawaii District
                             Report: 98-SF-212-1002                     Issued: March 31,
                             1998




TO:            Janet Browder, Director, Multifamily Housing Division, California State
               Office, 9AHM



FROM:          Glenn S. Warner, District Inspector General for Audit, 9AGA

SUBJECT:      Redwood Villa
              Multifamily Mortgagor Operations
              Mountain View, California


We reviewed financial activities of Redwood Villa (project 121-38042-PM), a multifamily project
whose mortgage loan is insured by the U.S. Department of Housing and Urban Development
under Section 231 of the National Housing Act. We selected the project for audit based on a
survey which indicated that the project owners may have spent project funds for non-project
purposes.

The audit confirmed that the owners improperly spent over one million dollars for non-project
uses even though the project was not in a surplus cash position as required by the regulatory
agreement. Also in violation of HUD requirements, financial activities of the owner and another
(non-HUD) project were commingled in the accounting records of the project. We have provided
a copy of this report to the project owners.

Within 60 days please furnish 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.
                                                                      98-SF-212-1002



Should you have any questions, please call me or David McCargar, Assistant District
Inspector General for Audit, at (415) 436-8101.




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Executive Summary
We reviewed financial activities of the multifamily project known as Redwood
Villa (project number 121-38042-PM) located in Mountain View, California. We
selected the project for audit based on a survey which indicated that the project
owners may have spent project funds for non-project purposes.


The audit confirmed that the owners improperly spent over one million dollars for
non-project uses even though the project was not in a surplus cash position as
required by the regulatory agreement. Also in violation of HUD requirements,
financial activities of the owner and another (non-HUD) project were commingled in
the accounting records of the project.

                                        The owner spent project funds for non-project
Owner spent over $1 million in
                                        uses in violation of the regulatory agreement
violation of its regulatory
                                        with HUD.           Although the individual
agreement with HUD
                                        stockholders repaid the project from time to
time for certain personal expenses, there remained improper payments totaling
$1,103,279 as of December 31, 1996. These payments consisted of personal expenses
of two stockholders, excessive compensation paid to two stockholders and a
stockholder's spouse for managing the project, expenses of an affiliate company,
repayment of a stockholder's advances, payments on a stockholder's personal loan, and
salary advances to a stockholder. None of these expenditures were proper since they
were not for reasonable operating expenses and necessary repairs and the project was
not in a surplus cash position, a prerequisite for any distributions to the owner. The
improper use of project funds could cause future problems such as limiting funds
available for project maintenance and other needs. As a result, HUD's insurance risk
would also increase. The improper disbursements occurred because the owner disre-
garded the regulatory agreement.

                                   Also in violation of HUD requirements, financial
Project financial activities       activities of the owner and another (non-HUD)
were commingled with               project were commingled in the accounting records
non-project activities             of the project. This condition occurred because the
stockholders considered the project and all activities as one family business. As a
result, it has become difficult for HUD to monitor compliance with the conditions of
the regulatory agreement, and misuse of project funds was facilitated and less likely to
be detected.

Auditee Comments

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We provided a copy of the draft audit report to the auditee for comment on
January 14, 1998. The auditee, in its February 10, 1998 response, agreed with the
draft recommendations and stated that it would repay the project’s surplus cash
deficiency no later than June 30, 1999. Applicable auditee comments are included
at the end of each finding. The complete written response is included as Appendix
2 to this report.


Recommendations
We are recommending that HUD require the owners to repay the project for the
improper disbursements up to the current amount of surplus cash deficiency (the
deficiency at December 31, 1996 was $330,644). We are making additional
recommendations to address the others issues discussed in the report.




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Table of Contents
Management Memorandum ..................................................................i

Executive Summary.............................................................................ii

Table of Contents ...............................................................................iv

Introduction.........................................................................................1

Findings and Recommendations

         1. Owners spent Over $1 Million in Violation
            of the Regulatory Agreement................................................3
         2. Project funds and Accounting Records Were Co-
            Mingled With Other Non-Project Activities........................11

Management Controls .......................................................................13

Appendices

         1. Schedule of Unnecessary and Unreasonable Costs .............14
         2. Auditee Comments .............................................................15
         3. Distribution ........................................................................17


Abbreviations:

CAHSA             California Association of Homes for the Aging
HUD               Department of Housing and Urban Development
IPA               Independent Public Accountant
OIG               Office of Inspector General




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Introduction
Background

The objective of HUD's mortgage insurance programs for multifamily housing is to
assist in the construction, rehabilitation or preservation of rental or cooperative
housing. In consideration for the mortgage insurance, the owner agrees to various
controls over the housing's operations. These requirements are contained or referenced
in a contract known as a regulatory agreement. Some requirements include limits on
use of project assets, proper project upkeep, and maintenance of accounting records.

In 1974 HUD's Federal Housing Administration insured a $1.8 million mortgage loan
for the project, known as Redwood Villa (project), under Section 231 of the National
Housing Act. The project is an unsubsidized 81-unit multifamily housing development
consisting of connected buildings in Mountain View, California. The project is owned
by Redwood Villa, Inc. (owner), a corporation created under the laws of the State of
California and is a closed corporation which is wholly-owned by the Cappelletti family.
The owner self-manages the project.

The project is 22 years old and has been affected by age. Cement patios have cracks in
them, guard rails need repainting, and the adobe rock foundation is unstable.
However, HUD's August 1992 physical inspection concluded that the project's overall
physical condition was excellent, while the May 22, 1996 mortgagee inspection rated
the physical condition as satisfactory.

The owner has an adjacent property consisting of a 99-bed convalescent home which
was obtained by the owner through a merger with Julia Sanitarium, Inc., which was
also wholly-owned by the Cappelletti family. Since March 1, 1979 the convalescent
home has been leased and operated by Beverly Enterprises.


Objective and Methodology

The purpose of our review was to determine whether there was any improper use
of project assets. The primary methodologies for conducting the audit included:

       ·   Analysis of audited financial statements of the project, discussions with
           the public accountant performing the audits, and review of the
           accountant's working papers prepared during those audits.
       ·   Interviews of multifamily asset management staff at the HUD California
           State office and review of documents there that concerned the project.


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       ·   Interviews of the owner's principal stockholders, Florio Cappelletti and
           John Cappelletti and the staff of the IPA.

       ·   Consideration of the project's internal control structure and assessment
           of risk exposure to determine review procedures.

       ·   Examination of accounting records and supporting documentation for
           selected financial activities and transactions.

       ·   Visits to the project to observe its condition and operation, and to
           review project records.

The review generally covered the period January 1, 1991 through December 31,
1996. Efforts to review activities subsequent to December 1996 were hindered
due to the commingling of project records with other activities as discussed in
Finding No. 2.

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

OTHER MATTERS UNDER SCRUTINY BY HUD

HUD staff have identified other violations during their review and monitoring of the
project, including:

       Failure to fund tenant security deposits in a separate trust account
       Unapproved rent and meal charges
       Lack of HUD approval for loans
       Inadequate fidelity bond
       Failure to file Project/Owner's/Borrower's Certification for Elderly
           Housing Projects
       Failure of independent auditor to report improper distributions and other
           deficiencies

We did not review these areas during our audit, and are not making any
recommendations, since HUD is working with the owners to resolve those issues.




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Findings
Finding 1

Owner Spent Over $1 Million in Violation of the
Regulatory Agreement

The owner spent project funds for non-project uses in violation of the regulatory
agreement with HUD. Although the individual stockholders repaid the project
from time to time for certain personal expenses, there remained improper
payments totaling $1,103,279 as of December 31, 1996. These payments consisted
of personal expenses of two stockholders, excessive compensation paid to two
stockholders and a stockholder's spouse for managing the project, expenses of an
affiliate company, repayment of a stockholder's advances, payments on a
stockholder's personal loan, and salary advances to a stockholder. None of these
expenditures were proper since they were not for reasonable operating expenses
and necessary repairs and the project was not in a surplus cash position, a
prerequisite for any distributions to the owner. The improper use of project
funds could cause future problems such as limiting funds available for project
maintenance and other needs. As a result, HUD's insurance risk would also
increase. The improper disbursements occurred because the owner disregarded
the regulatory agreement.

                                      In consideration for the insurance endorsement
Limits on Use of Project Funds        of the project's mortgage loan, the owner agreed
to be bound by a regulatory agreement with HUD. The agreement states that the
owner will not, without HUD approval: (1) pay out any project funds for other than
the insured loan and for reasonable operating expenses and necessary repairs, except
from surplus cash; and (2) receive any distributions of project assets unless from
surplus cash. A distribution is defined as the withdrawal of any project assets for all
but necessary and reasonable expenses to operate and maintain the project.

HUD publications help define reasonable operating expenses and necessary repairs,
principally in handbook 4381.5 REV-2, The Management Agent Handbook (and its
predecessor 4381.5 REV-1) and handbook 4370.2 REV-1, Financial Operations and
Accounting Procedures for Insured Multifamily Projects.




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The project has experienced significant "surplus cash" deficiencies for several years,
and the period covered by our audit was no exception as shown below. As a result, any
distributions of project funds were prohibited during this time.


                                As of           Deficiency
                               Dec. 31
                                1991              $103,899
                                1992              $192,254
                                1993               $ 80,360
                                1994               $ 90,239
                                1995              $219,268
                                1996              $330,644


We identified improper payments totaling $1,103,279 as of December 31, 1996
consisting of:

       $413,460 -      The balance of a receivable account maintained by the
                       project for ongoing use by the stockholders for personal
                       purposes.

         28,023    -   Repayment of personal loan.

        462,375    -   Excessive compensation paid to the stockholders for
                       managing the project.

        120,159    -   Expenses of an affiliate company (which the owners
                       subsequently wrote off as uncollectible).

         64,640    -   Repayment of a stockholder's advances to the project.

         10,622    -   Interest expense for a stockholder's use of the project's credit
                       line.

          4,000    -   Salary advances.

The improper disbursements are discussed in detail below.


A. ACCOUNTS RECEIVABLE FOR PERSONAL EXPENSES OF STOCKHOLDER



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Since the inception of its operations, the project had a history of spending (advancing)
project funds for the stockholders' personal expenses. The project maintained a record
of these advances in a general ledger account entitled "Accounts Receivable -
Stockholders". Although the stockholders reimbursed the project for some of these
personal expenses from time to time, either by payroll deduction or deposit of funds,
there was a balance in the account of $460,556 at December 31, 1996 which was owed
to the project. Our analysis showed that $413,460 of the balance represented cash
disbursements by the project for the stockholders' personal or other non-project
purposes. The remaining $47,096 in the Accounts Receivable - Stockholders" account
was not really a cash disbursement, but was a record of a charge to a stockholder for a
personal loan which was assumed by the project. This is discussed separately below
under "Repayment of Stockholder's Personal Loan".

By their own admission, the balance in the "Accounts Receivable - Stockholders"
account represented personal/non-project costs. We reviewed account transactions for
the six-year period ended December 31, 1996 and confirmed that those transactions
were not project-related. Instead, expenditures were made for cash advances to
stockholders, repayment of personal loans, personal automobile expenses, etc. These
disbursements were improper since they were not for reasonable operating expenses or
necessary repairs and the project did not have surplus cash.


B. REPAYMENT OF STOCKHOLDER'S PERSONAL LOAN.

The owner improperly used project funds to make payments on a stockholder's
personal loan. Such non-project expenditures are prohibited by the regulatory
agreement unless made from surplus cash. We identified $92,742 of personal loan
payments that were recorded in the "Accounts Receivable - Stockholders" account
discussed (and questioned) above. We identified additional payments from project
funds of $28,023 as explained below.

As discussed above, $47,096 in the "Accounts Receivable - Stockholders" account was
not a cash disbursement, but was recorded in this account as a charge to one of the
stockholders for a personal loan which was later assumed by the project. The project
assumed the balance of the loan because the stockholder wished to sell his residence
which was encumbered by his personal loan. By having the project assume the balance
of the loan, the stockholder was then free to sell the residence.
No funds changed hands when the project assumed the loan. On December 31, 1995
the project recorded this loan assumption on its books by crediting "Notes Payable" for
the loan balance of $48,012 as of February 2, 1996 and debiting "Accounts Receivable
- Stockholders" for $47,096, and "Interest Expense" for $916.




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From calendar year 1993 and through 1996, the owner used project funds to pay
$92,742 of the monthly loan payments and charged these payments to the stockholder's
account (Accounts Receivable - Stockholders). After the project assumed the note,
additional payments of $28,023 were made as follows:

       Recorded in Acct. No. 23600 - Note Payable                      $22,917
       Recorded in Acct. No. 68009 - Interest Expense                    5,106

       Total                                                         $ 28,023

As explained above, the project recorded the $47,096 note balance in the stockholders
accounts receivable. As of December 31, 1996, the project had paid $22,917 of the
balance and the remaining balance of $24,179 ($47,096 less $22,917) has not yet been
paid by the project, and is still reflected as owed by the stockholder. We are not
recommending that the stockholder pay this balance because the project did not pay for
this yet. However, the project should not make any more payments on the loan
because prior HUD approval had not been obtained for this liability which had
encumbered the project assets.


C. EXCESSIVE COMPENSATION.

The project paid three employees, who were stockholders or related to a stockholder,
excessive compensation totaling at least $462,375 over the six calendar years from
1991 to 1996. The Resident Manager explained that these employees deserve their
compensation because of the unique management style and expertise that they bring
into the project. However, the owner had no basis to show how the compensation was
determined to be reasonable. In our opinion, the underlying cause for the excessive
compensation was the employees' ability to set their own compensation by virtue of
their being the project owners (stockholders).

The owner had 43 employees working for the project, most of whose compensation
appeared reasonable when compared to industry data as explained below. This was
not the case, however, for three employees who were stockholders or related to one.
The owner had no written job descriptions describing the duties and responsibilities of
the three employees and, had no specific information, analysis, or documentation to
show or support the reasonableness of the amount of salaries paid to the project
officers. In order to evaluate the reasonableness of the compensation, we requested
that they write up the job descriptions which we compared with comparable positions
in the elderly health care and housing industry. We obtained comparable positions and
salary data from the annual wage and benefit survey reports prepared by the California
Association of Homes for the Aging (CAHSA). Based on the list of duties, we
considered one of three employees to be comparable to the position of Administra-




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tor/Resident Manager (of an independent living facility) and the other two employees
to be comparable to an Assistant Administrator.

Our analysis of the excess compensation for the three employees for the six years
follows.

                                     Employee       Employee        Employee
          Description
                                       No. 1           No. 2           No. 3           Totals
A. Compensation Paid                  $ 558,935       $ 460,368       $ 526,519       $ 1,545,822
B. Comparable                           317,394         200,456         200,456           718,306
   Compensation per Survey
C. Excess Compensation                $ 241,541       $ 259,912         326,063           827,516
   (A less B)
D. Portion of                           132,027         108,744         124,370           365,141
   Salary Paid from
   Non-Project Funds1
E. Excess Compensation                $ 109,514       $ 151,168       $ 201,693         $ 462,375
   Paid from Project Funds
   (C less D)


The $462,375 excessive compensation we calculated is a conservative figure since we
compared the project compensation with the compensation level in the survey data for
the top ten percent in each position in the CAHSA survey. The compensation would be
more excessive if compared with the average annual salary (for the comparable
position), instead of that for the top ten percent. This comparison would have resulted
in excessive compensation for the three employees of $642,447, instead of $462,375.

 In our opinion, the underlying cause for the excessive salaries was the employees'
ability to set their own salaries by virtue of being the project stockholders. Payment of
the excessive salaries does not constitute a reasonable operating expenses and, in
effect, represents distributions to owners, which were not permitted since the project
was not in a surplus cash position.




1. The project owners used funds from Julia Sanitarium to pay part of Redwood's salary costs.




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D. EXPENSES OF AFFILIATE COMPANY

The project loaned funds to an affiliate company called Racquet World sometime prior
to December 31, 1986, and the loan balance at that date was $109,446. The affiliate
became insolvent and the project wrote off the balance of this debt that year. In
addition, the project paid $10,713 in unpaid bills in 1987 and wrote that amount off
that same year. The $120,159 in project payments on behalf of the affiliate were not
for reasonable operating expenses or necessary repairs, and therefore constituted
improper distribution of project funds since the project was not in a surplus cash
position.

E. REPAYMENT OF A NOTE PAYABLE TO A STOCKHOLDER.


The project repaid $64,640 of a loan from a stockholder while the project was not in a
surplus cash position. Repayments were made monthly between November 1991 and
December 1995. The stockholder loaned $244,796 to the project for repairs. The loan
to the project is evidenced by an Adjustable Rate Note dated September 13, 1991 and
is secured by the project property. The loan was not approved by HUD and the
encumbrance of the project property without HUD approval is in violation of the
regulatory agreement. Nonetheless, the project benefited from the loan. However,
project funds to make repairs may have been available and the loan may not have been
needed if the owners had not used project funds for non-project purposes as discussed
above.

F. INTEREST EXPENSE AND LOAN FEES ON LINE OF CREDIT.


On September 28, 1994 the project contracted with a local bank for a $65,000
unsecured line of credit. Although the project received the entire $65,000 from the line
of credit, it paid $25,000 or 38% to a stockholder for his personal use. During 1995
and 1996, the project paid $10,622 in interest and loan fees. In our opinion, $4,048 of
the loan costs were allocable to the stockholder and should be considered as not related
to the project. In addition, the remaining payments of $6,574 are also an ineligible
project cost because no HUD approval was obtained for the loan (line of credit). These
payments contributed to the project's weakened financial condition.

G. UNPAID PAYROLL ADVANCES.

The project paid $4,000 for short-term payroll advances to a stockholder during the
month of August 1995. These advances were not repaid because they were overlooked
when the transactions were buried in the officer salaries account.




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Violations of the Regulatory Agreement Occurred Because
the Owners Disregarded HUD Requirements

The ownership is a closed corporation whose stock is wholly owned by family
members and the family members closely and actively managed the project. The
owners believed that they did not have to comply with HUD's distribution restriction
because distributions had no financial impact on their ability to pay project obligations.
However, the owners contradicted themselves when they told us that they could not
fund the project's security deposit obligation (over $32,000) because it would affect
their ability to pay for daily project obligations. In any event, HUD provided the
mortgage insurance based on the owners' promise to abide by the regulatory agreement
and their personal rationale for not keeping that agreement is not relevant.

Also, the stockholders believed that there was no need to separate the activities of the
project because everything belonged to them, including the project assets. As regards
the excessive salaries, they felt that they were entitled to higher salaries because of their
day to day involvement in the operation of the business and the expertise that they
brought with them in the management of the project.

STOCKHOLDER ADVANCES

The above misuses of project assets occurred during the life of the project through
1996; however, the stockholders also advanced substantial funds ($229,411) to the
project. These advances are represented by the balances of a commingled account with
an affiliated company (Julia Sanitarium $30,036) and a note payable to a stockholder
($199,375). Nevertheless, these advances did not alleviate the surplus cash deficiencies
and other financial deficiencies of the project.

Auditee Comments

The auditee agreed with the finding and stated that it would repay the unnecessary and
unreasonable costs to the project no later than June 30, 1999. The auditee also agreed
to seek guidance from HUD as to what salaries may be reasonably charged to the
project




Recommendations



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We recommend HUD:

     A. Require the owners to repay the unnecessary and unreasonable costs to the
        project up to the current amount of surplus cash deficiency (the deficiency
        at December 31, 1996 was $330,644. The amount should be updated to at
        least December 31, 1997). Any remaining ineligible costs should be
        considered distributions of surplus cash. We recommend you coordinate
        with Office of Counsel in making the repayment demand to the auditee;

     B. Determine what is reasonable compensation for the employees and provide
        guidance to the owners on what salaries may be reasonably charged to the
        project. Any additional compensation should be paid either from non-
        project funds or surplus cash; and

     C. Ensure that the owners fully understand and comply with HUD restrictions
        on use of project funds.




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Finding 2

Project Funds and Accounting Records Were
Commingled With Other Non-project Activities
In violation of HUD requirements, financial activities of the owner and another
(non-HUD) project were commingled in the accounting records of the project.
This condition occurred because the stockholders considered the project and all
activities as one family business. As a result, it has become difficult for HUD to
monitor compliance with the conditions of the regulatory agreement, and misuse
of project funds was facilitated and less likely to be detected.

Paragraph 2-3.A. of the Financial Operations and Accounting Procedures Handbook
4370.2 REV-1, CHI-1 (12/95) provides that, "Both the Regulatory Agreement and the
certificate executed by the mortgagor, at the time the mortgage is insured, contain
provisions that accounts of mortgaged property operations be kept in accordance with
the requirements of the Secretary and in such form as to permit a speedy and effective
audit.", and paragraph 2-12.A.1. provides that, "All cash receipts... must be deposited
in the name of the project in a bank or banks whose deposits are federally insured."
Finally, Paragraph 3-3.A. provides that, "Financial reports shall be based on data
obtained from separate books and records established for and relating solely to the
project. Particular care must be taken in cases where an individual person owns and
operates additional projects. In other words, each projects's books must be separate
and distinct."

During our review of the project records, we noted that separate books and records
were not established for the project as required by the regulatory agreement. Instead,
the accounting records and the audited financial statements combined the activities of
the owner, a project that is not related to HUD in any way, and a project with a
mortgage endorsed by HUD. For example,

       Bank accounts are all under the name of the corporate owner instead of in the
       name of the project as required in Paragraph 9.(g) of the regulatory agreement.
       Also, the rental receipts of another non-HUD project were commingled with
       the project receipts.

       Funds collected as security deposits were not kept separate and apart from all
       other funds of the project or the owner in a trust account as required by
       Paragraph 6.(g) of the regulatory agreement.

       Motor vehicles were acquired in the name of specific stockholders instead of
       the project, yet the resulting obligations are paid for with project funds. Also,
       the vehicles were recorded as assets of the project.



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        A stockholder's personal loan was taken under the name of the project (credit
        line), and another stockholder had his balance (which provided no benefit to
        the project) assumed by the project under a new note. The new note was
        secured by a Security Agreement on the inventory and equipment of the
        project. Both obligations are recorded and reported as obligations of the
        project.

The above violations of the regulatory agreement occurred generally because of a
disregard of HUD requirements. The managing stockholders believed that there was
no need for separation between their (owner) activities and that of the project's because
they considered the whole operation as one family business.

Because the funds and records were commingled, the financial information that HUD
needed to determine compliance with the conditions of the regulatory agreement was
not available and misuse of project funds was facilitated and less likely to be detected.
As a result, HUD's monitoring efforts had been uninformed and ineffective. In
addition, our audit was difficult and required an extensive review of transactions to
identify some project transactions.

Auditee Comments

The auditee agreed to establish separate bank accounts in the name of the project.
Also, at the time of our review, it was planning to establish separate project accounting
records.


Recommendations

We recommend HUD ensure that the owner:

        A. Maintains separate accounting records for the project and submit separate
           statements on the project's financial condition and operating results; and

        B. Establishes bank accounts that are in the name of the project.




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Management Controls
In planning and performing our audit, we considered internal control systems used at
Redwood Villa to determine our auditing procedures and not to provide assurance on
internal control. Internal control is the process effected by an entity's board of
commissioners, management, and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives in the following categories:

                • Effectiveness and efficiency of operations,
                • Reliability of financial reporting, and
                • Compliance with applicable laws and regulations.

In each of these three categories of objectives, organizations will establish their own
specific control objectives and control procedures aimed at achieving these broad
objectives. If organizations are to meet these control objectives, five components of
internal control - control environment, risk assessment, control activities, information
and communication, and monitoring must be present. That is, the control objectives in
each category are inextricably linked with the five supporting components.

We determined the following internal control categories were relevant to our audit
objectives:
             • Accounting books and records
             • Use of project funds

We evaluated the two relevant control categories identified above by determining the
risk exposure and assessing control design and implementation.

A significant weakness exists if internal control does not give reasonable assurance that
all three control objectives are met. Based on our review, we believe the following
were significant weaknesses:

        • The owners did not develop or implement policies and procedures that were
         adequate to ensure that project funds were properly used in accordance with
         the regulatory agreement with HUD (Finding 1).

          • Financial reports were not be based on data obtained from separate books
          and records established for and relating solely to the project. Financial
          transactions of non-project entities were commingled with the project
          (Finding 2).




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Appendices
Appendix 1

Schedule of Unnecessary and Unreasonable Costs
 Finding                          Description                         Amount

     1         The balance of a receivable account maintained by
               the project for ongoing use by the stockholders for      $413,460
               personal purposes

     1         Repayment of a personal loan                               28,023

     1         Excessive compensation paid to the stockholders for
               managing the project                                      462,375

     1         Expenses of an affiliate company (which the owners
               subsequently wrote off as uncollectible)                  120,159

               Repayment of a stockholder's advances to the
     1
               project                                                    64,640

               Interest expense for a stockholder's use of the
     1
               project's credit line                                      10,622

               Salary advances.                                            4,000
     1

               Total                                                 $1,103,279



Unnecessary/unreasonable amounts represent project assets that were not used for
necessary or reasonable project operations, thus violating the regulatory agreement
with HUD.




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Appendix 2          Page 1 of 2


Auditee Comments




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Appendix 2                                                                       Page 2 of 2

Auditee Comments




AUDIT NOTE:   Recommendation A and B both appear on page 10 of the final report. Recommendation
              A actually refers to Recommendation B on page 12




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                                                                  98-SF-212-1002



Appendix 3

Distribution

Director, Multifamily Housing Division, California State Office, HUD
Chief, Multifamily Asset Management Branch, California State Office, HUD
Director, Office of Housing, California State Office, HUD
Assistant General Counsel, California State Office, HUD
Secretary's Representative, HUD
Director, Accounting Division, California State Office, HUD
Director, Administrative Service Center, Colorado State Office, HUD
Office of Comptroller (audit liaison officer), Texas State Office, HUD
Deputy Secretary, HUD
Assistant Secretary for Housing, HUD
Chief of Staff, HUD
Assistant Secretary for Congressional and Intergovernmental Relations, HUD
Deputy Assistant Secretary for Public Affairs, HUD
Counselor to the Secretary, HUD
Senior Advisor to the Secretary for Communications and Policy, HUD
Assistant to the Secretary for Labor Relations, HUD
General Counsel, HUD
Deputy General Counsel for Operations, HUD
Housing-FHA Comptroller (audit liaison officer), HUD
Director, Participation and Compliance Division, HUD
Director, Housing Finance Analysis Division, HUD
Assistant to the Deputy Secretary for Field Management, HUD
Chief Financial Officer, HUD
Deputy Chief Financial Officer for Finance, HUD
Acquisitions Librarian, HUD
Director, Housing and Comm. Dev. Issue Area, U.S. General Accounting Office
Redwood Villa, Inc.
George W. Piane, CPA
Senator John Glenn, Committee on Government Affairs, U.S. Senate
Senator Fred Thompson, Committee on Government Affairs, U.S. Senate
Representative Dan Burton, Committee on Government Reform and Oversight,
U.S. House of Representative
Representative Pete Sessions, Committee on Government Reform and Oversight,
U.S. House of Representative
Ms. Cindy Sprunger, Subcommittee on General Oversight and Investigations,
U.S. House of Representative




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