All executives are taught the importance of “internal controls.” Unfortunately, many executives don’t fully understand what is meant by the term “internal controls.” A recent HUD audit of a Section 8 project in Port Arthur, TX serves as a reminder of the importance of both understand what is meant by the term internal controls, and the importance of having such systems in place.
What are ‘Internal Controls’
Internal controls are methods put in place by a company to ensure the integrity of financial and accounting information, meet operational and profitability targets, and transmit management policies throughout the organization. Internal controls work best when they are applied to multiple divisions and deal with the interactions between the various business departments. No two systems of internal controls are identical, but many core philosophies regarding financial integrity and accounting practices have become standard management practices.
The importance of understanding these principles were made evident by the findings of the HUD investigation.
Details of the Audit
The HUD Office of Inspector General (OIG) audited the multifamily Section 8 project in Port Arthur (Villa Main Apartments) to determine whether the project owner was administering the Section 8 program in accordance with HUD regulations and guidance.
HUD found that the owner did not administer the Section 8 program at Villa Main in accordance with HUD regulations and guidance. It assisted at least 82 tenants who were either ineligible for assistance because they did not exist or the tenant eligibility and the unit physical condition standards could not be supported. These conditions occurred because the owner and the former management agent lacked oversight of the staff. They also failed to establish effective control systems, which allowed the onsite employees to commit fraud. The employees falsified tenant eligibility, did not properly verify tenant income, and did not inspect the units are required by HUD. As a result, HUD paid the owner $534,741 in subsidies for ineligible “ghost” tenants and incurred more than $1 million in subsidies for which the owner could not support the tenants’ subsidy amounts or that the units were in decent, safe, and sanitary condition.
As a result of the findings, the OIG recommended in January 2018, that the project owner be required to (1) repay HUD $534,741 for housing subsidies received for ineligible nonexistent “ghost” tenants, and (2) support or repay HUD more than $1 million for tenants whose eligibility the owner could not support. In addition, HUD should require the Contract Administrator to ensure that the owner’s recently implemented quality control program is working as designed and in accordance with HUD regulations. OIG also recommended that appropriate administrative actions be taken against the owner.
The results of this audit reinforce the importance of good internal controls, and the critical importance of redundant systems and strong oversight. Every owner and management company should have a system in place that includes internal audits, capital control, quality control, administrative accounting, and third party reviews. Failure to have such systems in place can result in situations similar to the one I’ve outlined here. Take the time to examine your current systems, identify weaknesses, and implement improvements.