REPORT OF INTERNAL AUDIT ACTIVITIES

Transcription

1 REPORT OF INTERNAL AUDIT ACTIVITIES PRESENTED TO AUDIT/TASK: #04-09, Tort Claim Findings AUDIT CLIENT: Community House, Inc.; Department of Housing and Community Development REPORT DATE: August 27, 2004 AUDITOR: Steven Rehn CIA, CBA, CFSA APPROVAL: Steven Purvis CPA INTRODUCTION In accordance with Boise Municipal Code Title 1, Chapter 9; and in response to the request of members of the City Council, the Office of Internal Audit undertook a series of reviews relative to the Community House facility. The reviews completed to date were separately reported in four numbered Internal Audit Reports, covering various aspects of Community House operations. At the specific request of the City Attorney s Office, Internal Audit is detailing its findings with respect to issues raised in a Tort Claim filed recently with the City by Ms. Peggy Sedivy, former Executive Director of Community House, Inc. Report #04-09 leverages on work performed previously, consisting of an analysis of Audit s findings in relation to accounting and revenue-related activities called into question in the Tort Claim. Generally, the Claim expresses a number of concerns relative to these activities and particularly with respect to those funds jointly controlled by Community House, Inc. and the City s Department of Housing and Community Development. Reviews and test work performed by Internal Audit either directly, or tangentially address a number of those issues.

2 SCOPE AND METHODOLOGIES Given that Report #04-09 is a re-presentment of findings and observations already reported, traditional scope and methodology statements have not been established. For purposes of presentation, the report draws language, point by point, from the Tort Claim, followed by Internal Audit s findings and observations as they relate to the point(s) in question. The report reader is urged to review in detail the following public reports (found at ) in order to gain additional insight into both context and detail that are germane to the issues addressed within this report: #04-04 Cash Intake Processes, dated March 23, 2004 #04-05 Accounting Forensics, dated March 23, 2004 #04-07 Reconstruction of Financial Information, dated June 1, 2004 #04-08 SRO Maintenance Reserve Funds, dated June 28, 2004 During the planning phase of the Community House project, Internal Audit had an opportunity to meet with a number of concerned individuals in order to determine those areas most in need of attention, and to prioritize the order of work that would be conducted. Three fact-finding meetings were held with former and current CHI board members (who were also either City employees or City Council members), and with management and staff of the City s Department of Housing and Community Development. Those meetings occurred on February 3, February 5, and February 6. Audit also met on February 6 with Ms. Peggy Sedivy, then the Executive Director of Community House in order to gain her perspective on issues in need of attention. Two additional meetings were held in March March 18 and March 23 in order to finalize work plans. Those meetings included management and staff of the City s Housing and Community Development department, and both the interim Executive Director and the interim Administrative Officer of Community House. The reviews that were ultimately conducted and reported on followed Internal Audit s established policies and procedures. Those policies and procedures are available for review, and can be accessed at the web site address referenced above. 2

3 EVALUATION AND COMMENTS Throughout the course of its work at Community House, Internal Audit has consistently noted that elemental business processes that should have been in place within the Community House organization were not. Basic accounting and process controls fundamental to the effective and efficient conduct of business were either significantly impaired, or were altogether non-existent. As a result, levels of risk and exposure were elevated to unacceptable levels the possibility that either errors or irregularities could occur within the entity was greatly increased. A sample of Internal Audit s general observations from the Reports referenced above follows: Report #04-04: Overall, the cash handling processes that were in place as of the date of our review appeared to be Unsatisfactory. Deficiencies that were deemed to be material and significant within the context of a cash-handling environment... Increased risk and exposure in terms of the potential for errors, and the potential for loss or misappropriation of scarce resources... A weak or non-existent internal control structure Report #04-05: Overall, the state of the accounting records in existence as of the date of review was deemed to be Unsatisfactory. Internal Audit noted widespread deficiencies within the records that were deemed to be fatal to the quality, accuracy, and reliability of the information Ultimately, the account balances resident on the entity s Quick Books accounting application could not be relied upon All indications are that the financial control environment within the entity was significantly impaired Report #04-07: the accounting records encountered were clearly Unsatisfactory in nature. The conditions encountered served to reinforce more strongly the conclusions that had been drawn previously by Internal Audit essentially, the entity s accounting records do not appear to have been maintained in a competent fashion Report #04-08: the overall administration of the HOME Fund reserve account appears to be Marginal. The internal control structure in place was not optimal, appearing to have been marginally adequate at best. On the positive side, funds receipt and disbursement activities tested appeared to be valid and well-supported in every instance. Overall, it appears that recorded cash receipts, disbursements, and maintenance-related expenditures attributable to the HOMErelated programs reviewed were proper... 3

4 As the following sections of the report indicate, certain of the comments contained within the Tort Claim have been validated by Internal Audit s findings. However, a number of allegations included within the Claim do not appear to be supported by the facts, or by the documentation that was reviewed during the course of the audits. A detailed presentation of the allegations contained within the Tort Claim, and Internal Audit s corresponding findings follows. 4

5 TORT CLAIM ALLEGATIONS, AND ASSOCIATED FINDINGS TORT CLAIM MATTER: #2 I received reports from insurance companies that bills were not being paid and there were other matters that the financial administrator.. had not been attending to. Those items were serious AUDIT FINDINGS: During the course of its work, Internal Audit had the opportunity to examine a considerable amount of data within Community House. The results have been separately documented in the four Audit Reports referred to previously. Observations with respect to fiscal and financial management: Numerous past due invoices and delinquent notices were present in the entity s Accounts Payable files. Cash intake, and receipting and deposit processes have generally been deficient with respect to the major program revenue types. Basic accounting records were not properly maintained, containing erroneous entries, misstated liability positions, and stale entries. Also, accrual adjustments had not been made for 2002, and Audited financial statements had not been produced for 2002 and Critical issues existed with respect to Federal tax returns and related tax deposits: Required Form 990 returns had been filed late for Fiscal Years 2000 and Required Form 990 returns had not yet been filed for Fiscal Years 2002 and Significant penalties had accrued in relation to three of the Form 990 returns. Payroll taxes and withholdings, and associated Form 941 returns, had not been accurately remitted to the IRS for 2003 and 2004 to date. Significant penalties were accruing on the 941 returns for 2003 and

6 The entity historically has not performed required grant compliance and reimbursement reporting on a timely and accurate basis: Cost reimbursement reports, critical to drawing on grant funds, have been both chronically inaccurate and delinquent. Census reports (indicating the populations served) were not generated and submitted for the final two months of the 2003 grant year. The issues noted have placed Community House out of compliance with major requirements of the grants it relied upon for funding. The conditions noted are consistent with the comments contained within the Tort Claim relative to both the non-payment of critical insurance billings, and to the general administrative failures. 6

7 TORT CLAIM MATTER: #4 there were checks written and simply stored in drawers rather than mailed out to the payees and incoming checks which had not been deposited.. bookkeeping arrangements were in great disarray and it soon became apparent to me that the organization was insolvent. AUDIT FINDINGS: Internal Audit noted the following: Report #04-05, Finding #1: Two of the checks listed as outstanding (on a bank account reconciliation) were of a size and age that appeared to be unusual. Follow up analysis in one case, and vendor contact in the other, indicated that the checks had not been released after production, and had in fact been replaced by checks issued subsequently. Together, the two checks totaled $5,395.07, and were shown as outstanding obligations of the entity. The condition noted by Audit is consistent with the comments contained within the Tort Claim relative to checks stored rather than released. Report #04-04, Finding #2: Deposits were not created each day. Multiple days receipts were batched into a single deposit on an intermittent basis. As a result, checks were not restrictively endorsed on a timely basis. The condition noted by Audit is consistent with the comments contained within the Tort Claim relative to the holdover of receipts and deposits. Report #04-04, Evaluation and Comments: Overall, the cash handling processes that were in place as of the date of our review appeared to be Unsatisfactory. Report #04-05, Evaluation and Comments: Overall, the state of the accounting records in existence as of the date of review was deemed to be Unsatisfactory. Internal Audit noted widespread deficiencies within the records that were deemed to be fatal to the quality, accuracy, and 7

8 reliability of the information.. Ultimately, the account balances resident on the entity s Quick Books accounting application could not be relied upon Report #04-07, Evaluation and Comments: the accounting records encountered were clearly Unsatisfactory in nature.. essentially, the entity s accounting records do not appear to have been maintained in a competent fashion The conditions noted by Audit are consistent with the comments contained within the Tort Claim relative to the state of the bookkeeping functions. Report #04-04, Evaluation and Comments: staffing levels at Community House have been on a steady decline. This has been due in large part to funding shortfalls the facility has encountered. Report #04-05, Evaluation and Comments: funding shortfalls and the downsizing of staff appear to have had a marked impact on internal processes and procedures. Report #04-08, Evaluation and Comments: Based on Audit s observations, it appears that the entity has suffered from a chronic funding shortfall. A number of indicators.. point to the lack of a reliable, stable funding source The conditions noted by Audit are consistent with the comments contained within the Tort Claim relative to the financial condition of the entity. 8

9 TORT CLAIM MATTER: #5 I requested than an entire audit of Community House as well as an audit of the Single Room Occupancy Rent Account (SRO) which involved funds for which the city was required to account for and utilize for maintenance of the facility... To the best of my knowledge the City did not conduct such an audit and at least if it did so, no report was made back to me. AUDIT FINDINGS: Internal Audit has to date undertaken and completed four separate projects related to Community House, Inc., and its affairs. Those four projects were scoped in order to address specific, pre-defined objectives. Report #04-04: Internal Audit s objectives for the review were determined to be: Assess the effectiveness of cash intake and processing procedures Determine the opportunities for immediate improvements in the procedures Assist facility management in designing and implementing improved procedures Report #04-05: Internal Audit s objectives for the review were established: Assess the current state of financial information available on the entity s main accounting software application and the validity of any associated financial controls Determine the amount of current, significant liability positions Assist facility management in gathering data and completing required reporting for close-out of the 2003 grant year Consult with management and participate in the reconstruction of business processes necessary to move the entity forward Report #04-07: The objectives established for the work were: Reconstruct financial records for the period in question, and establish the entity s financial position to a reasonable degree of accuracy. Create basic summary financial information for the period under review. 9

10 Format the financial information in a manner that is consistent with required tax returns IRS Form 990 s. Assist Community House, Inc. s Board of Directors in engaging a public accounting firm to review financial data, and to prepare and file the required tax returns with the IRS. Report #04-08: Internal Audit s activities were performed at two separate levels. First, overall (SRO) program activities were reconstructed for the period CY1996 through CY2003, inclusive, in order to validate the flow of funds, and project a residual balance at the end of CY2003. And second, detailed transaction testing was undertaken for the period of CY1999 to CY2003 in order to validate account activities. Analysis and reconstruction of historical account activity were performed for CY1996 to CY2003 inclusive. Analyses and / or projections were performed utilizing estimates that were either extracted from data under review, or that were estimated based on a reasonable set of expectations. Reconstructions of historical data were based on file documentation.. The objective of this activity was to establish a projected balance of funds held in reserve for the purpose of repairs and maintenance of the Community House facility. Objectives established for the transaction testing portion of the review were: Validate all cash contributions to the HOME Fund reserve account during the scope period selected Validate all disbursement activities from the HOME Fund reserve account during the scope period selected Review the internal control structures in place with respect to the HOME Fund reserve account Internal Audit has not performed an entire audit of Community House. However, Audit has conducted reviews pertaining to a number of Community House s major functions and operations. Additionally, Report #04-08 details findings specific to the SRO rent account referred to in the Tort Claim. All finalized Internal Audit Reports are available, in their entirety, on the City s web site at: 10

11 TORT CLAIM MATTER: #6 the Transitional Housing Program account.. had not been held in escrow and accounted for AUDIT FINDINGS: Report #04-05, Finding #1: detailed subsidiary ledger sheets were not maintained for Transitional Housing rents. As of the date of review, ten past or present tenants had funds in the entity s accounts. Account activity revealed the following discrepancies: Three past tenants had small residual balances that appeared to result from inaccurate refunds. On refund payouts, one tenant was overpaid by $35.00; and two were underpaid; one by $10.00, and one by $ This condition is indicative of the need for maintaining detailed subsidiary ledgers for these payables Report #04-05, Finding #2: Audit reconstructed activity relative to.. Transitional Housing rents from January 1, 2001 forward to the date of review, which was April 5, The objective of the reconstruction was to establish the entity s current position with respect to these liabilities. Based on the work performed, the balance of refundable rents associated with Transitional Housing tenants is projected to be $3, as of April 5, The balance sheet account for the same date reflected a total of $4, Report #04-04, Finding #2: With respect to the establishment of Custodial Accounts, Internal Audit took the lead on this issue and pursued resolution.. Facilitating meetings were conducted with City Division / Department heads and staff in order to encourage the establishment of accounts, and to determine their titling and usage. As of April 9, 2004, two such accounts were open and in use. The two accounts hold, respectively, general operating and other revenues; and tenant security deposits and transitional housing receipts. The conditions noted by Audit are consistent with the comments contained within the Tort Claim relative to Transitional Housing Rents. Corrective actions have been implemented as a result of the Audit findings. 11

12 TORT CLAIM MATTER: #7 I had done a rough draft attempt to determine the amount of monies which had not properly been accounted for and retained by the City as part of the SRO fund. My calculation, which I reported to the Auditor, was that there should have been approximately $1,800,000 accumulated over a period of approximately eight years, and of that figure only approximately $80,000 had been accounted for. I understand that the monies did not belong to the City.. the monies were to be held by the City in trust for utilization by the Community House organization. AUDIT FINDINGS: Internal Audit noted the following with respect to the SRO Maintenance Reserve account: Report #04-08, Finding #5: The Community House facility currently contains 39 SRO units. Not all of the units are available at any given time, but records indicate use on a relatively regular basis. The following tables project rent receipts and contributions to the Reserve Account from two different perspectives. From the standpoint of 8-year average receipts and contributions: Parameter Values Average Monthly Rent Receipts CY 96 to CY 03 $8,386 Estimated Annual Rent Receipts $100,632 Time Period 8 Years Estimated Receipts for Eight Years $805,056 Percentage Contributed to the Reserve Account (historical estimate) 35% Estimated Contribution to the Reserve Account $281,769 12

13 Receipts from the standpoint of estimated occupancy levels: Parameter Estimated Occupancy Total SRO Units in the Facility 39 Rental Rate / Month / Unit $ Occupancy Rate 87% Collection % of Rents Due 90% Annual Estimated Receipts $100,772 Estimated Receipts for Eight Years $806,176 Percentage Contributed to the Reserve Account (historical estimate) 35% Estimated Contribution to the Reserve Account $282,162 Based on projected levels of activity, it appears that the SRO program within Community House was capable of generating, in gross terms, revenues amounting to approximately 45% (approximately $806,000) of the amount alleged in the Claim. Internal Audit s findings do not support the allegations contained within the Tort Claim with respect to SRO Rent Receipts. $1,800,000 likely could not have accumulated over a period of eight years with the 39 SRO units available, and at the prevailing rent rates charged. Report #04-08, Evaluation and Comments: the overall administration of the HOME Fund reserve account appears to be Marginal. Internal Audit noted issues with respect to the funds, and has included observations relative to those weaknesses within this Report. The internal control structure in place was not optimal, appearing to have been marginally adequate at best. On the positive side, funds receipt and disbursement activities tested appeared to be valid and well-supported in every instance. Overall, it appears that recorded cash receipts, disbursements, and maintenance-related expenditures attributable to the HOMErelated programs reviewed were proper. 13

14 it appears that receipt and disbursement activities related to the HOME Fund reserve account have generally been conducted in a satisfactory manner. During the course of the review, Internal Audit examined and validated more than 120 transactions related to the receipt of funds into the reserve account. These transactions were typically supported by reports that had been generated by Community House administrative officers, and contained certifications under original signature as to their correctness. Internal Audit also reviewed and validated in excess of 150 separate disbursement transactions related to major maintenance and repair work at Community House. The disbursements were supported by records that attested to the validity of the expenditures on behalf of CHI, and were noted to have been approved and / or authorized by HCD management in every instance. Report #04-08, Finding #4: Internal Audit reconstructed account activity for the period CY 96 through CY 03, inclusive. Based on the data assimilated, a Reserve account balance as of December 31, 2003 of $93,291 was projected. Carried forward to June 23, 2004, the projected balance amounts to $71,769. The general ledger balance as of June 23, 2004 appears to be $40,165 a discrepancy of $31,604. Report #04-08, Finding #5: The following table documents actual SRO program activities (as reconstructed by Internal Audit), and projects a final Reserve Account Balance as of 12/31/03. (As noted previously, all data has been presented in a receipt date / disbursement date format, in order to better match program-related activities.) (See following page for the table referenced above, presented in its entirety.) 14

15 Historical Activity: Year Rent Receipts Funds Retained by CHI Reserve Account Contribution* Maintenance Expenditures Reserve Account Balance** Balance Forward $31, $104,765 $72,439 $32,326 $63, $101,537 $45,483 $56,054 $7,991 $111, $100,665 $65,017 $35,648 $17,369 $129, $100,169 $60,056 $40,113 $3,016 $166, $101,043 $83,499 $17,544 $39,176 $145, $101,529 $77,152 $24,375 $73,678 $96, $106,866 $75,341 $31,524 $29,852 $97, $96,802 $54,048 $42,754 $47,193 $93,291 Totals $813,376 $533,035 $280,338 $218,275 $93,291 *Note: Reserve Account Contributions represent the amounts received by the Reserve account. HCD staff are resolving two short remittances from CHI, totaling $8,252 from CY2000 and CY2003. **Note: Reserve Account Balance began with an initial funding of $31,227, carried in from 94/ 95 activities, which were accounted for in their entirety by CHI. Note: Activity was reconstructed from original source documents / reports submitted by CHI administrative staff to HCD, and additional records as appropriate to the reporting methodology(ies) in place. Based on Internal Audit s reconstruction of SRO Account activities over the most recent eight year period, it appears that of the $813,376 in SRO rents collected $533,035 was disbursed back to, or retained by Community House to cover allowable SRO-related operating expenses that were allocated against the 15

16 program. Additionally, $218,275 was expended by the City, on behalf of Community House, for major repairs and maintenance activities within the facility. A residual balance (estimated at $93,291 as of December 31, 2003; $71,769 as of June 23, 2004) remains in trust for future use in support of the Community House programs. Internal Audit s findings do not support the allegation that substantial amounts of SRO-related monies are unaccounted for. Internal Audit findings do indicate that the liability balance currently appearing on the City s general ledger system is under-stated by an estimated $31,604. However, that understatement appears to be attributable to computation and logic errors that occurred when the balance was originally booked. The reserve balance was historically maintained in a spreadsheet format, and was not booked into the general ledger system until March 10, No evidence that funds had been converted to inappropriate uses was noted during Audit s reviews. 16

17 TORT CLAIM MATTER: #8 I am not in a position to testify as to where the unaccounted for monies went, but I am reasonably certain that they did not find their way into maintenance and repair of Community House and likely for the most part did not get reinvested into any of the Community House programs AUDIT FINDINGS: Based on Internal Audit s findings (Please refer to Tort Claim Matter #7), it appears that SRO-related monies have been expended in an appropriate fashion. Detail testing of approximately 5 years worth of City-authorized expenditures on behalf of Community House did not reveal any instances where funds appeared to have been diverted to inappropriate uses, or otherwise converted to unauthorized use. Additionally, as indicated in the table appearing in Tort Claim Matter #7, page 15, over the eight year period that was reconstructed Community House apparently received the majority of the gross SRO rents it had collected as reimbursement for allowable program-related expenses. The City also expended significant amounts on behalf of the facility for major maintenance and repairs. Those two uses appear to have accounted for over 92% of the gross SRO rents that were taken in during that eight year period. The remainder of the funds is currently held in trust for use in future repairs and maintenance. Internal Audit s findings do not support the Tort Claim allegation that monies were utilized for purposes other than support of the Community House facility, and the appropriate programs housed therein. 17

18 TORT CLAIM MATTER: #9 I had at least two conversations with Mayor Beiter.. I told him that I thought that a complete and comprehensive audit should be instigated.. to date I have received no reports that such audits did occur. AUDIT FINDINGS: Internal Audit has to date undertaken and completed four separate projects related to Community House, Inc., and its affairs. As described in the Scope and Methodologies section of this report, appearing on page 2, and also in Tort Claim Matter #5, those four projects were scoped in order to address specific, predefined objectives. Audit has not performed a complete and comprehensive audit of Community House. However, the reviews that have been conducted relate to a number of Community House s major functions and operations. All finalized Internal Audit Reports are available to the general public, in their entirety, on the City s web site at: 18

19 Concluding Statement Internal Audit s findings indicate a pattern of chronic and pervasive deficiencies within the operations of Community House. The type and number of issues noted are indicative of an internal control environment that was significantly impaired or entirely lacking in many respects. The end result was an operating environment conducive to error and / or irregularity, and subject to unacceptable levels of risk and exposure. 19