Auditor Of Public Accounts
State Auditor finds gross mismanagement in Louisville Metro Department of Housing
FRANKFORT, KY (02-17-09) State Auditor Crit Luallen today released an audit of the Louisville Metro Department of Housing and Family Services, which found gross mismanagement of critical city programs and of the millions of local and federal dollars used to fund them.
The audit, which reviews finances from July 1, 2007 to June 30, 2008, makes 43 findings and 58 recommendations to strengthen financial management and controls.
The lax controls of the department caused Luallen’s Office to “disclaim” or not issue an audit opinion. The inability to issue an audit opinion occurs when auditors are unable to confirm the accuracy of an agency’s financial statements.
Luallen’s Office has worked with law enforcement throughout the audit process and is referring the audit to the Kentucky Attorney General’s Office, Louisville Metro Police, the US Department of Housing and Urban Development, the US Department of Agriculture, the US Department of Health and Human Services, and the US Attorney’s Office for the Western District.
“It is unacceptable for any government agency to have such a severe level of mismanagement and poor oversight,” Luallen said.
“It is clear by the types of serious issues and multiple concerns we found in the housing department that the city must take every step necessary to correct them,” Luallen said. “This cannot be done overnight. The city has begun to address the issues, but the problems embedded in this department will take time to resolve by a full-time management team with strong financial expertise.”
Auditors reviewed $18 million in federal funds in the department. The audit found the following expenditures to be of concern:
The audit identified $459,000 in questioned costs – including $319,904 for a kids’ summer food program, $34,733 in a shelter grant that wasn’t matched, $46,884 in unallowable expenditures and $34,760 for summer camps that didn’t meet federal guidelines.
Additionally, housing lost $363,054 due to mismanagement – including a $104,014 reimbursement in a summer food program that was denied by the Kentucky Department of Education and a total of $259,040 that was overspent due to an accounting error. The city’s general fund had to cover this expenditure.
Auditors found that housing left $348,000 unspent in a shelter program because the agency failed to bill allowable administrative costs to the grant. The city’s general fund had to cover this administrative cost.
In addition, housing granted $369,630 in federal funds to subrecipients without proper oversight. The audit asks HUD to review the payments to the subrecipients for possible questioned costs.
As of October 31, a total of $1 million for lead-based paint hazards was in jeopardy of being forfeited to HUD. Housing requested and was granted a one-year extension.
Additionally, auditors couldn’t adequately test $6.1 million in related payroll charges to federal grants, leaving them unable to determine if these payroll charges were valid. Luallen is asking HUD to review the $6.1 million in payroll to determine if the city should reimburse any federal funding.
Auditors found seven of the eight federal grant programs they audited to be noncompliant with federal requirements.
The noncompliance due to mismanagement impacted local housing and family services and, for example, created a backlog of 400 homes in need of repair, a one-year delay in spending $1 million to control lead-based paint hazards and a lack of oversight on summer food programs for Louisville children.
The above findings all relate to the 2008 fiscal year.
In addition, the city is still working to reconcile more than $1 million of differences in prior years between the city and federal financial management systems.
The audit, which includes the city’s responses, can be viewed at www.auditor.ky.gov.
Housing and family services
The housing department annually oversees 24 federal grants and more than $22 million in federal funds with 206 permanent full-time employees.
Eight federal grant programs were audited – including the Community Service Block Grant, the Low Income Home Energy Assistance Program, the HOME Grant and the Shelter Plus Care Grant – a total of $18 million. Auditors selected programs with $700,000 or greater in federal expenditures.
The auditor’s office began its extensive audit of the department in August after problems arose with its executive director and federal financial reporting.
Kentucky law requires the state auditor to annually audit Louisville Metro Government. The state auditor may grant permission to the city to hire a private CPA firm. Luallen’s housing audit will be included in the city’s overall audit, which is being conducted this year by Strothman and Company of Louisville.
Luallen’s office performed the first three audits of metro government after merger in fiscal years 2003-2005. Strothman has audited metro government since 2006.
In the current audit, auditors found that the housing department did not adequately correct earlier reported audit findings.
Movement of payroll expenditures
According to the audit, the volume of expenditures repeatedly moved from one account to another within the department made it impossible for auditors to determine with assurance if payroll expenses were charged to the correct federal grants – ultimately causing the disclaimed opinion.
Auditors found that since June 30, 2007 the department used approximately 1,280 financial adjustments, or “journal vouchers,” with over 26,000 accounting lines moved to transfer $17 million in federal grant money within the department. This was 49 percent of the department’s $34.9 annual expenditures for the fiscal year.
Journal vouchers, which normally have limited use, were used at an “alarming percentage” because of a “lack of top management understanding, direction and oversight,” causing financial statements to have a high risk of misstatement.
Inability to reconcile federal funds
Auditors found that the department failed to properly reconcile its records to the federal reporting system, the Integrated Disbursement and Information System (IDIS), as required, leaving an unreconciled balance in excess of $1 million from 2003-2007.
Earlier media reports gave this number as high as $20 million.
In the past, housing processed drawdowns but did not reconcile the amounts, causing the city’s department of finance to start processing drawdowns for housing during fiscal year 2008.
Auditors found, however, that housing then processed numerous journal vouchers to move expenditures between accounts, grants and funds.
According to the audit, finance provided a reconciliation of the two systems for fiscal year 2008 but not for 2007 back to merger (2003). There is currently a team of temporary employees working on this reconciliation.
Because the systems are not reconciled, housing cannot assure HUD that grant funds have been properly handled.
Auditors found that housing had no IDIS administrator and did not properly train IDIS staff who worked with the federal reporting system. Additionally, when HUD provided free training in the Louisville area, housing management did not allow IDIS staff to attend, according to the audit.
The audit recommends housing continue to address the prior year reconciliations and properly train management and staff on the IDIS system.
Lack of adequate training
The audit found housing management reduced staff, changed staff’s job duties numerous times and redecorated and moved offices “instead of focusing on properly administering programs,” according to the audit.
During staff interviews, auditors discovered employees were unfamiliar with federal programs and management lacked an understanding of basic financial procedures.
Several employees interviewed told auditors they “did not have a basic understanding of their job functions” because they were continuously moved.
The audit recommends that housing provide training to staff and management responsible for federal reporting to ensure that accurate and complete information is reported.
Other audit findings
The audit noted two bank accounts controlled by the housing department personnel.
The Jefferson County Children’s Welfare Fund, Inc. was used to pay part of a mortgage payment for the former housing director’s mother. Because the department of finance was not given information on this bank account, finance staff was unable to monitor the account and record the transactions associated with this account in the city’s accounting system.
Finance policy requires notification for any bank account associated with any city department, according to the audit.
The second account belongs to the Landbank Authority, which is a joint venture between the Louisville Metro Government, Jefferson County Public Schools and the Commonwealth of Kentucky. Since this account has not had an audit, Luallen’s Office recommends an audit be performed of this account.
The audit also found a conflict of interest with the executive administrator of the HOME grant. The audit recommends new housing management adopt a policy to ensure that conflicts of interest are prevented from occurring and work in conjunction with human resources to put an effective ethics plan in place.
Although the city has several ethics guidelines in place, in order to be effective, all employees must be aware of and adequately trained on those guidelines, according to the audit.
The audit also found:
· A grant aimed at reducing poverty and revitalizing low-income communities was inappropriately used to pay the legal association dues and a cell phone bill for the former director of housing.
· An owner of a referral agency owned the apartment building where the referral agency advised Tenant Based Rental Assistance (TBRA) clients to live. This apartment building also housed dozens of convicted sex offenders. TBRA clients are either homeless or on the verge of being homeless and often have children.
· Housing employees signed and processed their own cases to receive benefits under the Low Income Home Energy Assistance Program. Auditors also found six employees, not on the city’s payroll, were paid with stipends from this grant.
· The department didn’t properly monitor 33 of 50 summer food program sites for children, allowing the sites to close or operate at unscheduled times. Lack of oversight caused inaccurate reporting of meals served and a loss of federal funds.
· The department’s rehab specialist created invoices for contractors over the phone then approved invoices for payment from the Home Repair Program. There were additional problems with approved contractors and the bidding process.
· Top housing management hired employees above starting pay grade without sufficient reason and despite disagreement by the office of human resources.
“Of the 58 recommendations, the overarching recommendation is the need for a strong, full-time management team to improve financial accounting and compliance with federal programs,” Luallen said.