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INTRODUCTION
This digest covers our compliance examination of the
Authority for the year ended June 30, 2006.
A financial audit report covering the year ended June 30, 2006 was
issued separately.
FINDINGS, CONCLUSIONS, AND
RECOMMENDATIONS
INADEQUATE CASH MANAGEMENT PROCEDURES
The Authority did not have
procedures in place to ensure cash draws are performed in accordance with
U.S. Treasury Regulations. The
Authority receives its Section 8 project funding during the first week of
each month, based upon a budgeted amount approved at the beginning of the
year by the U.S. Department of Housing and Urban Development (HUD). The Authority either applies the amount to
the loan balance or transfers the amount to the development during the third
week of the month. During our testing
we selected thirty-five Section 8 project developments receiving federal
funds for test work, and we noted the Authority held funds for six to twenty
days before the funds were either applied to the loan balances or disbursed
to the development.
Authority management stated
that the timing of passing through the Section 8 project funding is a
longstanding practice that is performed in conjunction with the billing
cycle, which is around the middle of the month.
Failure to draw funds in
accordance with the U.S. Treasury Regulations could result in HUD sanctioning
the Authority for non-compliance or possibly reducing the funding of the
Section 8 project programs. (Finding
3, pages 15-16) This finding was first reported in 2004.
We recommended the Authority
implement procedures to ensure federal funds are disbursed in accordance with
the U.S. Treasury Regulations.
Authority management
concurred and stated in January 2006 they accelerated the billing cycle one
week to further limit the number of days before transferring federal
funds. They agreed to investigate
whether the process can be further accelerated. (For the previous Authority response, see Digest footnote #1.)
FAILURE TO OBTAIN SUSPENSION AND DEBARMENT CERTIFICATIONS FROM
SUBRECIPIENTS
During our testing of 30
subrecipients of the Section 8 program, we noted the Authority did not
include a suspension and debarment certification in its subrecipient
agreements. Additionally, the
Authority did not perform a verification check with the “Excluded Parties
List System” (EPLS) maintained by the General Services Administration for any
of its subrecipients; however, as a result of our audit test work we noted
that none of the 30 subrecipients were suspended or debarred from participation
in federal assistance programs.
Authority management
indicated the lack of certifications was an oversight.
Failure to obtain the
required certifications or perform verification procedures with the EPLS
could result in the awarding of federal funds to subrecipients that are
suspended or debarred from participation in federal assistance programs. (Finding 4, pages 17-18)
We recommended the Authority
establish procedures to ensure grantees receiving individual awards for
$25,000 or more certify their organization is not suspended or debarred or
otherwise excluded from participation in federal assistance programs.
Authority management
concurred with our recommendation and noted it is amending its procedures so
that all subrecipients will be required to provide the Authority with the
debarment certifications or the Authority will perform a verification check
of subrecipients.
FINANCIAL STATEMENTS NOT TIMELY
The Authority did not have
an adequate process to ensure financial reporting is completed in a timely
manner. The Authority had
approximately $1.4 billion in bonded debt outstanding at June 30, 2006. The debt covenants require that audited
financial statements of the Authority be filed within 120 days of year end
with the trustee and each rating agency of each of its bond issuances. Thus, the June 30, 2006 financial
statements were required to be filed by midnight on October 28, 2006. The first complete draft of the financial
statements was received on September 29, 2006, which was 10 business days
later than planned. An accounting
issue was identified related to the financial statement presentation which
delayed the finalization of the audit past the 120 day deadline. The independent auditors’ report was
delivered to the Authority on November 8, 2006. As a result, a violation of the debt covenant was disclosed in
the June 30, 2006 financial statements.
(Finding 5, pages 19-20) This finding was first reported in 2005.
We recommended the Authority
review the current process for preparing the financial statements and
incorporate changes to complete them in a timely manner so the audit can be
completed in advance of the required filing date.
Authority officials
concurred and stated they will continue to implement procedures to streamline
the preparation of annual financial statements. (For the previous Authority response, see Digest footnote #2.)
LOAN LOSS RESERVE CALCULATION DOES NOT CONSIDER ALL RELEVANT FACTORS
The key processes used by
the Authority to monitor the commercial loan portfolio includes
annual/semiannual property inspections, annual independent audit reports,
comprehensive annual loan rating reports, and monthly meetings to review
problem assets. On an annual basis,
the asset manager uses a standard loan rating form and rates all loans. General reserves are assigned for each
loan based on the rating. Specific
reserves are generally assigned when management feels that foreclosure and
liquidation of the underlying asset will be required, or there is a
recognized weakness in the property.
We tested ninety loans in
the multi-family, single family, and trust fund programs and noted that
required and scheduled property inspections were not completed. We noted 2 loans did not have inspections
in 2005 and still had not been inspected as of September 30, 2006 and another
43 loans had not been inspected in 2006 as of September 30, 2006. We also noted the following:
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The Authority
did not utilize a trend and forecast analysis of the reserves.
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The Authority
did not rate loans at inception.
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The Authority
performed its formal loan review analysis at year end only.
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The Authority
did not require operating and maintenance plans or appraisals for all
troubled properties.
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The
Authority’s rating scale only provides four grades.
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The
Authority’s reporting did not include a detailed liquidation analysis and
recovery prospects.
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The Authority
had not established a policy for when a property needs an appraisal, and
collateral appraisals are infrequent.
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Underlying
investor support and real estate tax credits were not considered.
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The Authority
did not have a tracking system to ensure all receipts from the trustee for
collateral documentation are returned.
Without considering these additional factors the loan loss reserve
estimate may not include the most accurate and complete information. (Finding 8, pages 24-28) This finding was first reported in 2004.
Authority officials
concurred and stated they will continue to make every effort to ensure all
required and scheduled property inspections are completed as required by
their policy. They responded they are
currently drafting revisions to the Loan Rating and Loan Loss Reserve
procedures based on this finding and from recommendations in an external
consultant audit report received in January 2007. (For the previous Authority response, see Digest footnote #3.)
INTERNAL AUDIT DEFICIENCIES
The Authority’s Office of
Internal Audit did not perform auditing procedures in conformity with
International Standards for the Professional Practice of Internal Auditing,
and did not comply with the Fiscal Control and Internal Auditing Act of the
State of Illinois.
During fiscal year 2006, the
Authority’s Office of Internal Audit conducted a quality assurance
self-assessment which was validated by an independent external party. The final report indicated several
findings including:
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No
documentation that the audit charter was presented to the Board.
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No policies
or procedures for documenting independence, continuing professional education
or internal quality assessment.
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Workpapers
were not complete or contain evidence of review.
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A two-year
audit plan was not approved by the Chief Executive Officer prior to the
beginning of the fiscal year.
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All major
systems of internal accounting and administrative control were not reviewed
at least once every two years.
Authority management stated that staffing shortages led to the
deficiencies in the internal audit department. (Finding 9, pages 29-31)
We recommended that the
Authority implement procedures to ensure the Office of Internal Audit
conforms with professional standards and State law.
Authority officials
concurred and responded a number of the deficiencies involve practices the
Authority follows but has not documented.
They are addressing the areas noted and working with the Authority’s
audit committee.
OTHER FINDINGS
The remaining findings are reportedly being given attention
by the Authority. We will review the
Authority’s progress toward the implementation of our recommendations in our
next engagement.
AUDITORS’ OPINION
We conducted a compliance examination of the Authority for
the year ended June 30, 2006 as required by the Illinois State Auditing
Act. A financial audit covering the
year ending June 30, 2006 was issued separately.
___________________________________
WILLIAM
G. HOLLAND, Auditor General
WGH:KMA:pp
SPECIAL ASSISTANT AUDITORS
KPMG LLP were our special assistant auditors for this
engagement.
DIGEST FOOTNOTES
#1 – INADEQUATE CASH
MANAGEMENT PROCEDURES – Previous Authority Response
The Authority concurs
with the recommendation and has implemented procedures to ensure federal
funds are disbursed in accordance with the U.S. Treasury Regulations. The Authority examined the feasibility of
accelerating its billing cycle, and, as a result in January 2006 accelerated
its cycle by one week in order to further limit the number of days before it
transfers federal funds.
The timing of passing
through the Section 8 project funding is performed in conjunction with the
billing cycle, which was around the middle of the month. Through the billing cycle, a number of
reports are generated that document the transfer process. A large portion of the Section 8 funds are
not passed through directly to the recipient, but instead are retained by the
Authority to pay the recipients’ debt service payments and fund escrow
accounts.
#2 –
FINANCIAL STATEMENTS NOT TIMELY – Previous Authority Response
The Authority concurs
with and is proceeding to implement the recommendation that the Authority review
the current process for preparing the financial statements and incorporate
changes that will allow for the completion of the financial statements in a
timely manner so the auditors’ testing can be completed well in advance of
the financial statement required filing date. The Authority in March 2006 reorganized its accounting
department to streamline the functioning of the department, achieve greater
specialization and to implement a number of procedural controls. In addition, throughout the current fiscal
year the Authority has continued to improve the linkages of its various
sub-systems to its general ledger with the result that monthly financial
statements are now being prepared.
These enhancements should enable the Authority to prepare its annual
financial information on a timely basis.
#3 – LOAN
LOSS RESERVE CALCULATION DOES NOT CONSIDER ALL RELEVANT FACTORS – Previous
Authority Response
The Authority will make
every effort to ensure that all required and scheduled property inspections
are completed during the year per the Authority’s policy, recognizing that,
as occurred during fiscal year 2005, staff resignations and other unplanned
events may affect the timing of such inspections.
The Authority will
investigate the adoption of a trend and forecast methodology based upon the
historical performance of the portfolio to utilize when establishing the loan
reserves, but believes that this analysis would only be of limited
benefit. The Authority loan portfolios
differ materially in their nature and vary in their age and ultimate
maturities.
The Authority concurs
with the recommendation to rate loans at inception, and will base the ratings
on its initial underwriting analysis and later change the rating if
anticipated performance does not meet projections.
The Authority concurs
with the recommendation to establish a formal loan review function throughout
the year to provide senior management an independent assessment of loan
policy and procedure compliance. The
Authority has undertaken this during fiscal year 2006 and is conducting more
extensive reviews to assess its reserves as of December 31 and March 31. The Authority also intends to contract
with an outside firm to provide an independent assessment of loan policy and
procedure compliance.
The Authority concurs in
principle with the recommendation to require developers to establish
operating and maintenance plans and report the progress on a quarterly basis
to the Authority’s loan portfolio management. The Authority, for its first position loans, continuously
collects operating and maintenance information from developments through its
annual and periodic inspections. In
addition, budgets, audited financial statements and monthly operating
reports/tenant selection plans are reviewed.
If problems are noted, the Authority requests that the development
management prepare plans to correct the situation noted. The Authority will take measures to
document these plans and the progress made towards their successful
implementation. The Authority’s agreements
for loans in which the Authority has a subordinate position, however, do not
require the submission of such reports, and the Authority, as a result, may
not be able to obtain such reports.
The Authority concurs
with the recommendation to consider expanding the rating scale and formally
document the definitions of each grade, taking into account the estimated
collectibility of each loan within the grade definitions.
The Authority concurs
with the recommendation to perform detailed liquidation analyses supported by
financial projections for all D and in some cases C rated properties. The Authority would use this analysis to
adjust the reserve, if necessary, from the standard reserve percentage on
such loans. This would essentially
have the effect of expanding the rating scale.
The Authority concurs
with the recommendation to establish a formal policy to describe the
circumstances under which a property needs an appraisal. The Authority is currently ordering
appraisals for D rated properties in which the Authority has a significant
financial position. These appraisals
are being utilized when considering the loan loss reserve pertaining to these
properties.
The Authority concurs
with the recommendation to formally document, when applicable, the consideration
of investor support and real estate tax credits in each loan review file.
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