jurisdiction: US

text: b' Issue Date\n March 10, 2011\n Audit Report Number\n 2011-PH-1007\n\n\n\n\nTO: Dennis G. Bellingtier, Director, Office of Public Housing, Pennsylvania State\n Office, 3APH\n\n //signed//\nFROM: John P. Buck, Regional Inspector General for Audit, Philadelphia Region, 3AGA\n\nSUBJECT: The Philadelphia, PA, Housing Authority Did Not Comply With Several\n Significant HUD Requirements and Failed To Support Payments for Outside\n Legal Services\n\n HIGHLIGHTS\n\n What We Audited and Why\n\n We audited the Philadelphia Housing Authority\xe2\x80\x99s (Authority) payments for\n outside legal services based on a citizen\xe2\x80\x99s complaint alleging misuse of these\n funds, our observations and concerns regarding the Authority\xe2\x80\x99s use of outside\n attorneys on prior audits, and concerns over the large sums the Authority paid for\n outside legal services reported in the media. The Authority paid $30.5 million for\n outside legal services provided by 15 law firms during the period April 2007\n through August 2010 (see appendix C). The audit objective was to determine\n whether the Authority\xe2\x80\x99s payments to outside legal firms could be supported and\n complied with U.S. Department of Housing and Urban Development (HUD)\n regulations and other applicable requirements.\n\n What We Found\n\n\n The Authority\xe2\x80\x99s payments to outside attorneys did not comply with HUD\n regulations and other applicable requirements. Specifically, the Authority did not\n adequately support $4.5 million that it paid to outside attorneys during the period\n April 2007 to August 2010, virtually the entire amount we reviewed, raising\n\x0c questions about the propriety of the remaining $26 million in payments that we\n did not review. The Authority made unreasonable and unnecessary payments of\n $1.1 million to outside attorneys to obstruct the progress of HUD Office of\n Inspector General (OIG) audits. The Authority also did not obtain required HUD\n written concurrence before accepting all settlement offers arising out of its\n litigations and allowed an apparent conflict of interest situation to exist. Further,\n although a previous HUD OIG audit1 found some similar problems with the\n Authority\xe2\x80\x99s payments to outside attorneys, the Authority failed to implement the\n recommendations made in the previous audit.\n\n What We Recommend\n\n\n We recommend that HUD require the Authority to provide adequate\n documentation to support $4.5 million in unsupported costs identified by the audit\n or reimburse the applicable programs from non-Federal funds for any costs that it\n cannot support. We recommend it provide documentation to support the\n remaining $26 million in payments to law firms, if the Authority cannot support\n the $4.5 million or reimburse the applicable programs from non-Federal funds for\n any costs that it cannot support. We also recommend that HUD require the\n Authority to implement adequate procedures and controls to ensure that its\n payments for outside legal services comply with relevant laws and regulations,\n develop and implement controls to ensure that invoices for legal services are\n adequately verified and payments are made in accordance with the terms of the\n related contracts, and implement appropriate measures to prevent and resolve\n conflict of interest situations.\n\n We recommend that the Authority implement controls to ensure that HUD is\n notified of pending litigation and that HUD\xe2\x80\x99s written concurrence is obtained\n before accepting a settlement offer arising out of litigation and that it implement\n controls to ensure that the use of attorneys is restricted on HUD OIG audits and\n other HUD oversight activities. We also recommend it revise its contract\n provisions for future legal service contracts to reinstate sections that it removed,\n which required prior authorization for specific legal services, specifying work\n functions of various legal staff, and identifying activity descriptors needing\n additional explanation to be acceptable for payment. We further recommend that\n the Authority develop and implement a written policy and controls to ensure that\n contract requirements in its legal services contracts are enforced and have its OIG\n periodically audit a sample of current and future legal contracts and payments to\n ensure that the responsible personnel enforce the requirements and only reimburse\n law firms for allowable expenses.\n\n For each recommendation without a management decision, please respond and\n provide status reports in accordance with HUD Handbook 2000.06, REV-3.\n1\n HUD OIG audit report #2003-PH-1002, Philadelphia Housing Authority Contracting and Purchasing Activity,\nPhiladelphia, Pennsylvania, dated January 27, 2003.\n 2\n\x0c Please furnish us copies of any correspondence or directives issued because of the\n audit.\n\nAuditee\xe2\x80\x99s Response\n\n We provided a discussion draft audit report to the Authority on February 1, 2011,\n and discussed it with the Authority at an exit conference on February 14, 2011.\n The Authority provided written comments to the draft audit report on\n February 16, 2011. It disagreed with the conclusions and recommendations in the\n report. The complete text of the Authority\xe2\x80\x99s response, along with our evaluation of\n that response, can be found in appendix B of this report.\n\n\n\n\n 3\n\x0c TABLE OF CONTENTS\n\nBackground and Objective 5\n\nResults of Audit\n Finding: The Authority Did Not Adequately Support $4.5 Million That It Paid 7\n to Outside Attorneys\n\nScope and Methodology 19\n\nInternal Controls 21\n\nFollow-up on Prior Audits 23\n\nAppendixes\n A. Schedule of Questioned Costs 24\n B. Auditee Comments and OIG\xe2\x80\x99s Evaluation 25\n C. Net Payments to Law Firms 105\n D. Summary of Payments by Deficiency Identified 106\n E. Example of Block Billing 108\n F. Example of Partial Invoice 109\n G. Example of Invoice Missing Description 110\n H. Invoice Showing Apparent Conflict of Interest 114\n\n\n\n\n 4\n\x0c BACKGROUND AND OBJECTIVE\n\nThe U.S. Housing Act of 1937 initiated the Nation\xe2\x80\x99s public housing program. That same year,\nthe City of Philadelphia established the Philadelphia Housing Authority (Authority) under the\nlaws of the Commonwealth of Pennsylvania to address housing issues affecting low-income\npersons. Normally, a five-member board of commissioners governs the Authority. However, on\nMarch 4, 2011, the Authority\xe2\x80\x99s board of commissioners, including its chairman, announced their\nresignations and the U.S. Department of Housing and Urban Development (HUD) took control\nof the Authority. HUD Secretary Shaun Donovan appointed HUD\xe2\x80\x99s Chief Operating Officer,\nEstelle Richman, to serve as the sole member of the Authority\xe2\x80\x99s board. Interim executive\ndirector Michael P. Kelly, who will be appointed administrative receiver, continues to manage\nthe day-to-day operations of the Authority. The cooperative endeavor agreement formalizing\nHUD\xe2\x80\x99s takeover of the Authority expires on March 4, 2012, and is renewable in 1-year\nincrements thereafter, or until such time as mutually determined by the Deputy Secretary of\nHUD and the mayor of Philadelphia that the Authority has built sufficient capacity to be self\nsupportive.\n\nJohn F. Street served as the mayor of Philadelphia from January 3, 2000, to January 7, 2008. He\nwas first appointed to the Authority\xe2\x80\x99s board on September 1, 1993, and he resigned March 18,\n1999. He became board chairman on April 22, 2004. He reappointed himself to the board late\ninto his second term as mayor and remained board chairman until his resignation. The\nAuthority\xe2\x80\x99s executive director at the beginning of our audit was Carl R. Greene. The Authority\nterminated his employment effective September 23, 2010. It hired Mr. Kelly to serve as interim\nexecutive director effective December 6, 2010. Between the termination of Mr. Greene and the\nhiring of Mr. Kelly, three assistant executive directors managed the day-to-day operations of the\nAuthority. The Authority\xe2\x80\x99s main administrative office is located at 12 South 23rd Street,\nPhiladelphia, PA.\n\nThe Authority is the Nation\xe2\x80\x99s fourth largest public housing authority and owns and operates\nmore than 14,000 affordable housing units, serving about 81,000 people in Philadelphia. The\nAuthority employs 1,200 people and has an annual budget of approximately $345 million. It\nreceives most of its funding from HUD.\n\nIn 1996, Congress authorized the Moving to Work Demonstration program (Moving to Work) as\na HUD demonstration program. This program allowed certain housing authorities to design and\ntest ways to promote self-sufficiency among assisted households, achieve programmatic\nefficiency, reduce costs, and increase housing choice for low-income households. Congress\nexempted participating housing authorities from much of the Housing Act of 1937 and\nassociated regulations as outlined in the Moving to Work agreements. Participating housing\nauthorities have considerable flexibility in determining how to use Federal funds. In December\n2000, the Authority submitted an application to HUD to enter the program, and in February\n2002, HUD signed a 7-year agreement with the Authority that was retroactive to April 2001.\nFrom April to October 2008, the Authority continued to operate under a HUD-developed plan to\ntransition back to traditional HUD program regulations because the term of its Moving to Work\nagreement had expired. In October 2008, HUD entered into a new 10-year Moving to Work\n 5\n\x0cagreement with the Authority. The expiration date of the Authority\xe2\x80\x99s new agreement is March\n2018.\n\nThe Authority\xe2\x80\x99s use of outside legal services has garnered the attention of Congress as well as\nthe local and national media. On January 11, 2011, Senator Charles E. Grassley sent a letter to\n20 law firms in Philadelphia for information about their billing of the Authority as part of a\nlarger review to determine whether the Authority had potentially misused Federal tax dollars.\nSenator Grassley stated that he was going directly to the firms for information about the amount\nbilled and the kind of work performed because HUD did not maintain those records and in the\ncase of the Authority, news organizations had reported how it structured settlements in at least\nfour sexual harassment cases and one case in which the failure to inspect a building before\ndemolition resulted in the death of a resident. The Senator also commented that the Authority\nreportedly had a record of trying to cover its tracks when it spent tax dollars either\ninappropriately or in a way that would embarrass its leadership, and that the situation was an\naffront to taxpayers.\n\nThe audit objective was to determine whether the Authority\xe2\x80\x99s payments to outside legal firms\ncould be supported and complied with HUD regulations and other applicable requirements.\n\n\n\n\n 6\n\x0c RESULTS OF AUDIT\n\nFinding: The Authority Did Not Adequately Support $4.5 Million That\nIt Paid to Outside Attorneys\nThe Authority\xe2\x80\x99s established practice was to not maintain or provide adequate support for any of\nits outside legal services. The Authority failed to provide adequate documentation supporting\nthe validity, accuracy, necessity, and reasonableness of $4.5 million in payments that it made for\noutside legal services during our audit period. Because all but a minor amount of the payments\nwe reviewed were unsupported, this raises questions about the propriety of the remaining $26\nmillion that the Authority paid for legal services during our audit period. The Authority paid\n$1.1 million in unreasonable and unnecessary outside legal expenses to obstruct the progress of\nHUD OIG audits. It used the $1.1 million for outside counsel who denied auditors\xe2\x80\x99 access to\nrecords, delayed providing information and records to the auditors, and imposed unreasonable\nconstraints on the auditors\xe2\x80\x99 access to Authority personnel. The Authority further allowed an\napparent conflict of interest situation to exist when it entered into a contract with the law firm\nthat employed an immediate family member of the chairman of its board of commissioners.\nFurther, it failed to provide required HUD approval for most of its legal settlements. These\nconditions occurred because the Authority\xe2\x80\x99s leadership and executive management chose to\noperate the Authority in this manner. The Authority needs to implement adequate procedures\nand controls to ensure that its payments for outside legal services meet HUD regulations and\nother laws and regulations. Otherwise it will continue to pay enormous sums for outside legal\nservices that are unsupported, unreasonable, and unnecessary.\n\n\n\n The Authority Did Not Provide\n Adequate Support for\n Payments for Outside Legal\n Services\n\n\n Regulations at 2 CFR (Code of Federal Regulations) Part 225 Appendix\n A(C)(1)(j), provide that to be allowable under Federal awards, costs must be\n adequately documented. The Authority failed to provide adequate support for its\n expenditures for outside legal services with accounting records detailing the\n expenditures and supporting documents such as invoices, receipts, canceled\n checks, or electronic transfers.\n\n The Authority paid $30.5 million for outside legal services provided by 15 law\n firms during the period April 2007 through August 2010 (see appendix C). We\n reviewed 472 invoices totaling $4.5 million in payments made by the Authority\n for legal services during the period, of which all but $11,800 was unsupported\n because the Authority did not provide adequate documentation to evidence that\n 7\n\x0c the services invoiced and payments made were in accordance with the contract\n terms and HUD requirements. Appendix D shows the overall results of our\n review. The Authority\xe2\x80\x99s outside attorneys asserted that the documents provided\n were responsive to our request, but also withheld some information, citing\n attorney-client privilege.\n\n The Authority\xe2\x80\x99s in-house counsel responsible for approving a great majority of\n the invoices acknowledged that the copies of the invoices that we were given\n were incomplete. Consequently, in most cases, we were unable to determine\n whether the payments were accurate, reasonable, and necessary because of the\n lack of documentation needed to evidence the vendors\xe2\x80\x99 compliance with various\n contract provisions (see appendixes F and G). The documentation provided by\n the Authority and relating to the invoices that we reviewed lacked one or more of\n the following elements as required by the respective contracts:\n\n General description of service or goods provided;\n Detailed description of service or goods provided;\n Detailed date(s) of performance;\n Name and title of person performing the work;\n Prior approval of personnel performing the work;\n Time charged by date, by personnel;\n Prior approval of the use of consultants;\n Prior approval for legal research hours and cost;\n Prior approval of more than one legal professional representing the\n Authority at meetings;\n Charges for time used in making telephone calls and correspondence to\n copy services providers; and\n Charges for time used in making travel arrangements.\n\n The Authority\xe2\x80\x99s special contract requirements,2 which are part of each individual\n contract for legal services, also included a provision that the \xe2\x80\x9ccontractor will be\n asked to provide the Authority with a written, step-by-step consultation and\n litigation plan, with estimated costs, before beginning each case assignment.\xe2\x80\x9d We\n found no evidence of such plans and cost estimates in any of 15 contract files\n reviewed. Authority in-house counsel and the Authority\xe2\x80\x99s outside counsel both\n acknowledged that this contract provision was not enforced. They both\n acknowledged that estimates were not submitted by outside law firms before work\n commenced on an assignment for the Authority.\n\n\n\n2\n The Authority\xe2\x80\x99s Legal Department Guidelines for Outside Counsel is included as part V of each contract for legal\nservices that it issues. It provides the guidelines under which the Authority will agree to be billed. The guidelines\nare designed to ensure that firms are only paid for allowable and reasonable expenses and prohibit payments for\ncertain normal overhead expenses such as facsimile charges, local travel, and local phone calls. In addition, the\nguidelines state that the Authority will not pay for fees or expenses that are contained within a block billing\ndescription. That is, each line of a bill for legal services must contain the description of one task per time entry.\n 8\n\x0cThe Authority Paid for Legal\nServices Based on Prohibited\nBlock Billing\n\n Contrary to its special contract requirements, the Authority made payments\n to law firms based on invoices in prohibited block billing format despite\n this issue\xe2\x80\x99s having been addressed in our previous audit1 and the\n Authority\xe2\x80\x99s assurance that it would update its procedures to ensure that\n contract requirements would be enforced. Law firms submitted invoices\n for prohibited block billing in 142 of 472 invoices (30 percent) reviewed\n (see appendix D). The block billing on the 142 invoices totaled $2.4\n million. Block billing is the act of billing more than one activity in a single\n line item while billing only one aggregate amount for multiple activities.\n Examples of block billing are invoices that include only a general\n description of services (i.e., provide legal advice with no detailed\n description of services performed) or include only a summary of time\n charged for each attorney (i.e., only attorney name, rate, and total hours and\n amount billed). Block billing does not identify the nature of the work\n performed. Because block billing provides little or no description of the\n work performed, it is impossible to tell how much time was spent on an\n activity and determine the reasonableness, necessity, and accuracy of the\n work performed. An example of prohibited block billing can be found in\n appendix E. In this example, the firm of Schnader Harrison Segal & Lewis\n LLP, was paid $67,856 based on an invoice that simply stated \xe2\x80\x9cFor\n Professional Services Rendered through September 30, 2008.\xe2\x80\x9d\n\nThe Authority Made\nUnreasonable and Unnecessary\nPayments for Outside Attorneys\n\n\n We estimated that at least $1.1 million in costs were not reasonable and\n necessary. These fees were for routine matters dealing with our audits that are\n typically performed by lower level staff at other housing authorities that we\xe2\x80\x99ve\n audited. Documents that were routinely provided on similar audits often were\n requested by the auditors and then not provided by the attorneys. When the\n documents were provided, it often took an inordinate amount of time to\n coordinate the delivery and acceptance of the documents from the outside\n attorneys. Such interference obstructed the efficient conduct of our audits without\n benefiting the Authority\xe2\x80\x99s housing programs. Further, in many cases, work was\n duplicated by more than one law firm, an excessive number of personnel from a\n single law firm performed the same tasks, and work performed by attorneys was\n clerical in nature. The \xe2\x80\x9cassistance\xe2\x80\x9d rendered by the outside attorneys included\n such tasks as (1) monitoring and forwarding to Authority staff all HUD OIG\n requests for information and data, (2) monitoring and scheduling all HUD OIG\n 9\n\x0c interviews with Authority staff, (3) monitoring and attending all HUD OIG\n interviews of Authority staff, (4) requiring multiple attorneys and consultants to\n accompany HUD OIG and Authority inspectors on all housing quality standards\n inspections, (5) contracting of duplicative consulting services, and (6) monitoring\n and attending all meetings between HUD OIG and Authority officials.\n\n The duplicative and unnecessary nature of these legal fees was vividly illustrated\n during our recent audit of the Authority\xe2\x80\x99s Housing Choice Voucher program.3\n During this audit, we inspected 67 rental units to determine whether the\n Authority\xe2\x80\x99s program units met housing quality standards. We inspected the\n selected units between November 30 and December 11, 2009. The Authority had\n one employee, one outside public housing consultant, and up to three outside\n attorneys accompany our auditor and appraiser on every inspection. The outside\n attorneys were typically paid on average $330 per hour to observe the auditor and\n our certified HUD inspector as they performed every inspection for up to 8 hours\n a day for about 2 weeks. The amount the Authority paid for only 1 hour for one\n outside attorney could have been used to help house a low-income family for a\n month. At the audit entrance conference for another recent audit,4 the Authority\n had one program employee present, accompanied by its chief of staff and four\n outside attorneys.5 We saw no need for any of the outside attorneys to be present.\n\n Regulations at 2 CFR Part 225 Appendix A(C)(1) state that to be allowable under\n Federal awards, a cost must be necessary and reasonable for proper and efficient\n performance and administration of Federal awards. While we do not question\n whether the Authority is entitled to procure outside legal and consulting services\n when it is justified, in the cases cited, the Authority failed to follow these\n requirements and incurred $1.1 million in legal fees in connection with HUD OIG\n audits that were unnecessary and were counterproductive to helping the Authority\n achieve its overall mission to provide decent, safe, and sanitary housing to low-\n income persons.\n\n The Authority Did Not Provide\n Evidence of HUD Concurrence\n With Settlement Agreements\n\n\n In accordance with paragraph 5-3c of HUD Handbook 1530.01, REV-5,\n Litigation Handbook, a public housing authority is required to notify HUD of\n pending litigation and obtain written concurrence before accepting a settlement\n\n3\n HUD OIG audit report #2010-PH-1011, The Philadelphia Housing Authority, Philadelphia, PA, Did Not Ensure\nThat Its Section 8 Housing Choice Voucher Program Units Met Housing Quality Standards, dated July 8, 2010.\n4\n HUD OIG audit report #2010-PH-1002, The Philadelphia Housing Authority, Philadelphia, Pennsylvania, Needs to\nImprove Its Controls over Housing Assistance Payments, dated October 6, 2009.\n5\n The Authority\xe2\x80\x99s former executive director did not participate in this meeting although our audit notification letter\nwas sent to him. It was standard practice for the former executive director to not attend any audit-related meetings\nuntil the audit exit conference.\n 10\n\x0c offer arising out of litigation. The handbook states that no settlement arising out\n of litigation shall be accepted by a housing authority without the prior written\n concurrence of HUD. The terms of any such offer shall be communicated in\n writing to the HUD Regional Counsel, together with the recommendations of the\n Authority for disposition and the arguments in support of those recommendations.\n We asked the Authority to provide us a current listing of any settlements or\n lawsuits filed against it. Through one of its outside attorneys, the Authority told\n us to look for this information on its Web site because it was posted there in\n August 2010. We expressed concern that the list on the Authority\xe2\x80\x99s Web site\n might not be complete and accurate and requested this information independent of\n the Web site. While the Authority had not provided us with a current list\n independent of its Web site, we noted that the Web site showed that the Authority\n had settled 33 cases. Our review of the Web site indicated that it referenced a\n HUD approval letter on only 13 of the settlements (39 percent). On\n December 10, 2010, we served the Authority with a subpoena for these and other\n records and in response to the subpoena, the Authority provided us with a list of\n 234 claims settled since March 1998. These 234 claims are in addition to the 33\n cases shown on its Web site. After the exit conference, the Authority provided\n evidence of HUD approval of 4 of the 33 settlements listed on its Web site. In\n addition, after the exit conference, HUD Regional Counsel provided copies of\n approval letters for 22 (which includes the 4 letters that the Authority provided\n after the exit conference) of the 33 cases. HUD Regional Counsel did not have\n any record of approving any of the other 234 cases. The Authority did not\n provide documentation to demonstrate that HUD concurred with settlements in\n 245 cases (11 from the Web site plus 234) or that the costs of litigation, settlement\n and judgment were entirely covered by an insurance policy.\n\nThe Authority Allowed an\nApparent Conflict of Interest\nTo Exist With an Outside Law\nFirm\n\n\n The Authority allowed an apparent conflict of interest situation to exist when it\n entered into a contract with a law firm that employed a member of the immediate\n family of its board chairman. The Authority paid the firm approximately $7\n million during the 41-month period from April 2007 through August 2010. John\n F. Street was first appointed to the Authority\xe2\x80\x99s board on September 1, 1993, and\n he resigned March 18, 1999. He was later appointed to the board as chairman on\n April 22, 2004. He reappointed himself to the board late into his second term as\n mayor and has remained board chairman since that time. His appointment expires\n September 20, 2011. The Authority\xe2\x80\x99s consolidated annual contributions contract\n prohibits it from entering into any contract or arrangement in connection with any\n project under the contract in which several classes of people have an interest,\n direct and indirect, during their tenure or for 1 year thereafter. These classes\n would include any member of a governing board member\xe2\x80\x99s immediate family.\n 11\n\x0c Sharif Street, the son of the chairman of the board of the Authority, was an\n associate in the affordable housing group of Wolf Block Schorr & Solis-Cohen,\n LLP (Wolf Block), until March 2008. We reviewed 185 invoices/payments for\n Wolf Block from 5 contracts totaling approximately $923,000. Sharif Street\xe2\x80\x99s\n name was included in each of the five contracts. We could not determine the full\n extent of his billings to the Authority because of the Authority\xe2\x80\x99s overall failure to\n provide support for its payments to its outside law firms. However, the audit\n identified one invoice that included hours charged directly by Mr. Street. The\n charge was for 37.6 hours at $250 per hour for a total of $9,400 (see appendix H).\n It should be noted that 45 of the firm\xe2\x80\x99s 185 invoices contained prohibited block\n billing and, therefore, did not include the names, hours, or amount attributed to\n specific individuals charging time to the case(s). Additionally, the payment\n documentation provided by the Authority to support the payments to this firm did\n not include 108 invoices. This omission precluded us from determining whether\n Sharif Street charged additional time to cases.\n\nThe Authority\xe2\x80\x99s Outside\nCounsel Obstructed the Audit\nProcess\n\n The Authority failed to provide the auditors with data, information, and\n documents requested as far back as August 2010. The requested records were\n needed to assess the completeness, reliability, and accuracy of other data that the\n Authority selectively provided. The Authority\xe2\x80\x99s outside counsel repeatedly\n questioned the auditors\xe2\x80\x99 purpose and necessity for certain records and responded\n that the Authority would provide what it thought was sufficient without regard to\n the auditors\xe2\x80\x99 request. In other cases, the Authority\xe2\x80\x99s outside counsel provided\n little or no meaningful response to the auditors\xe2\x80\x99 repeated requests for records.\n After many weeks and repeated requests, the Authority provided a listing of legal\n contracts in effect during the audit period and represented that the listing was\n complete in that it included all contracts for legal services related to specific\n Authority payments in our sample. However, as a result of our review and\n analysis of the selected payments, we discovered that the list was incomplete.\n Hence, we question the completeness and reliability of all data and information\n that the Authority provided that were not original documents.\n\n The Authority\xe2\x80\x99s outside counsel finally responded to our repeated requests for a\n download of the Authority\xe2\x80\x99s accounts payable ledger by stating that the limited\n payments listing that the Authority provided to the auditors would suffice and\n that, since such was adequate for the purposes of the Authority\xe2\x80\x99s independent\n auditors, it should suffice for our audit. The requested ledger was not provided.\n Requests for other documents went unanswered. The Authority responded to our\n request for a listing of settlements of claims and lawsuits against it only after we\n served it a subpoena for the information on December 10, 2010. The information,\n however, was incomplete.\n\n 12\n\x0cThe Authority\xe2\x80\x99s outside counsel continued to assert that the Authority\xe2\x80\x99s payments\nfor legal services were eligible and supported but refused to provide the majority\nof the supporting documentation that we requested, citing attorney-client\nprivilege. The Authority, however, gave no reason why it had not responded to\nthe auditors\xe2\x80\x99 repeated requests for other data and information, some of which\ndated back to August 2010. These records were included in our subpoena for\nrecords. The Authority provided limited additional information in response to the\nsubpoena, but continued to assert that it had provided all information and data\naccess that we had requested.\n\nThe Authority required that the scheduling of all interviews between the auditors\nand Authority staff be done by the Authority\xe2\x80\x99s outside counsel. In this regard, the\nAuthority\xe2\x80\x99s outside counsel demanded that any communication by the auditors\nwith the interviewee or requests for information from Authority employees be\nprocessed through them. The Authority\xe2\x80\x99s outside counsel attended all interviews\nof Authority personnel. Consequently, not only did the interviewee have to be\navailable, but the attorney also had to be available on a mutually agreeable date.\nIn some cases, interview scheduling took up to 3 weeks to accomplish. Such\nneedlessly imposed conditions caused delays in the progression of the audit.\n\nThe Authority\xe2\x80\x99s actions were contrary to the Inspector General Act of 1978 (Act),\nHUD regulations at 24 CFR 982.158(c), the Authority\xe2\x80\x99s consolidated annual\ncontributions contract, and the Authority\xe2\x80\x99s Moving to Work agreement. The Act\nauthorizes the Inspector General access to all records, documents, papers, or other\nmaterials available to the applicable establishment which relate to programs and\noperations with respect to that which the Inspector General has responsibilities\nunder the Act.\n\nHUD regulations at 24 CFR 982.158(c) state, in part, that HUD shall have full\nand free access to all public housing authority offices and facilities and to all\naccounts and other records of the public housing authority that are pertinent to\nadministration of the program, including the right to examine or audit the records,\nand to make copies. The public housing authority must grant such access to\ncomputerized or other electronic records and to any computers, equipment, or\nfacilities containing such records and shall provide any information or assistance\nneeded to access the records.\n\nSection VII.C of the Authority\xe2\x80\x99s Moving to Work agreement requires the\nAuthority to give access to all requested sources of information including access\nto files, access to units, and an opportunity to interview agency staff and assisted\nresidents.\n\nSection 15(C) of the Authority\xe2\x80\x99s low-rent consolidated annual contributions\ncontract requires the Authority to provide full and free access to all its books,\ndocuments, and records relevant to the administration of the projects under the\ncontract.\n 13\n\x0c Likewise, section 14.c of the Authority\xe2\x80\x99s housing choice voucher consolidated\n annual contributions contract requires the Authority to provide full and free\n access to all books, documents, and records of the Authority relevant to\n administration of the program, including the right to audit.\n\n The Authority\xe2\x80\x99s unwarranted denial of the auditors\xe2\x80\x99 access to records and other\n conditions imposed by the Authority caused needless delays in the audits and\n obstructed our ability to effectively carry out our statutory responsibilities.\n\nThe Authority Did Not Have\nControls to Adequately Verify\nReceipt of Outside Legal\nServices\n\n During our interviews with the Authority\xe2\x80\x99s in-house legal staff, we were told that,\n with specific limited exceptions, only one Authority senior counsel person was\n responsible for review and approval of invoices submitted by legal service\n providers. This individual stated that the Authority did not have a desk procedure\n or other operating guide for invoice approval but that she used her interpretation\n of the respective legal services contracts as the basis of her decisions to approve\n invoiced fees and costs. She stated that she determined whether the invoiced\n hours and costs were reasonable based on her experience. While she stated that\n she contacted the department receiving the benefit of the legal service if she had\n questions regarding an invoice, we found no evidence of such communications\n regarding the invoices reviewed. When questioned as to the control benefits of\n verifying charges through users who were directly involved in the work that was\n invoiced, she stated that the managing partner of the billing law firm attested to\n the accuracy of the invoice and that practice provided adequate control.\n\n The individual stated that at one time, invoices for legal services related to human\n resources and labor relations were referred to the Authority\xe2\x80\x99s general counsel for\n labor relations but they currently came to her for approval. She believed that they\n should go to general counsel for labor relations. Another Authority senior\n counsel stated that she was concerned that she was not asked by anyone to verify\n work performed by outside counsel related to her areas of responsibility. She\n stated that before about a year ago, she routinely received such invoices but she\n once questioned an invoice from Ballard Spahr Andrews & Ingersoll, LLP,\n because she thought it was a duplicate billing. She further stated that it was the\n last legal services invoice she received. Others on the Authority\xe2\x80\x99s in-house legal\n staff stated that they were not asked to verify legal services received.\n\n The Authority needs to establish controls that ensure the adequate verification and\n approval of invoices. The verification and approval process should be structured,\n defined, and documented to ensure that payments are not only in accordance with\n 14\n\x0c terms of the contract and the Authority\xe2\x80\x99s policies, but are also made only for those\n services and goods, the receipt of which is verified by person(s) having adequate\n knowledge of such. Lack of verification and approval procedures and related\n reimbursement rate schedules can result in the Authority\xe2\x80\x99s payment for services\n that have not been received or are not reasonable and necessary.\n\nThe Authority Did Not Correct\nDeficiencies Identified in a\nPrevious HUD OIG Audit for\nLegal Service Contracts\n\n\n In a previous audit,1 we determined that the Authority did not always pay for\n legal services in accordance with its special contract requirements and made\n payments for costs that were specifically prohibited by the requirements. In\n response to the recommendations, the Authority agreed to hire an outside law firm\n to assist in the process of updating its contract requirements for legal service\n contracts. Additionally, the Authority stated that it would update its procedures to\n ensure that the new requirements were enforced. It also agreed to have its Office\n of General Counsel periodically audit a sample of current legal contracts and\n payments to ensure that the responsible personnel enforced its contract\n requirements. However, although the Authority had updated its contract\n requirements, it had also weakened them; it could not demonstrate that it had\n implemented a written policy to ensure the enforcement of the contract\n requirements; and it could not demonstrate that its Office of General Counsel\n periodically audited a sample of contracts and payments on an ongoing basis. As\n a result, the Authority made $2.4 million in payments to law firms based on\n invoices that included prohibited block billing and for costs that were specifically\n prohibited by the contract requirements. The following paragraphs provide\n additional details.\n\n The Authority Weakened Its Contract Requirements for Legal Service Contracts\n\n We compared the contract requirements that the Authority revised in response to\n our previous audit to the contract requirements it had in force during that audit.\n Notable changes included the omission of several sections which required prior\n authorization for specific legal services, sections specifying work functions of\n various legal staff, and a section identifying activity descriptors needing\n additional explanation to be acceptable for payment. These changes weakened\n the internal controls that were otherwise contained in the earlier version of the\n requirements.\n\n\n\n\n 15\n\x0c The Authority Continued To Pay for Legal Services That Were Block Billed\n\n During our review, we found that law firms submitted invoices that included\n prohibited block billing in 142 of 472 invoices (30 percent) reviewed. The block\n billing on the 142 invoices totaled $2.4 million.\n\n The Authority Reimbursed Law Firms for Prohibited Expenses\n\n The Authority could not demonstrate that it had implemented a written policy to\n ensure that it was enforcing its contract requirements. As a result, although the\n majority of the supporting documentation the Authority provided for the invoices\n that we reviewed was missing, incomplete, and insufficient, we noted that the\n Authority continued to pay for costs that were specifically prohibited by the\n contract requirements.\n\n The Authority Could Not Demonstrate That Legal Service Contracts and\n Payments Were Periodically Reviewed\n\n The Authority agreed to have its Office of General Counsel periodically review a\n sample of current legal contracts and payments to ensure that the responsible\n personnel enforced its contract requirements. However, during the current audit,\n the Authority provided no documentation to demonstrate that this quality control\n task was completed during our audit period. After the exit conference, the\n Authority provided a copy of a May 24, 2005, memorandum audit report from its\n OIG addressing compliance of contract billings for legal services with its legal\n department\xe2\x80\x99s contract requirements. This internal audit identified no material\n problems. Nonetheless, the Authority could not demonstrate that it periodically\n conducted reviews to ensure continued compliance of contract billings for legal\n services with contract requirements.\n\nConclusion\n\n\n The Authority failed to provide adequate documentation supporting the validity,\n accuracy, necessity, and reasonableness of $4.5 million in payments that it made\n for outside legal services during our audit period. The Authority also allowed an\n apparent conflict of interest situation to exist when it entered into a contract with\n the law firm that employed an immediate family member of the chairman of its\n board of commissioners and it did not obtain required HUD approval for all of its\n legal settlements. Further, the Authority did not implement corrective action that it\n had agreed to take in response to recommendations made in a previous HUD OIG\n audit report. These conditions occurred because the Authority\xe2\x80\x99s leadership, board\n of commissioners and executive management chose to operate the Authority in\n this manner. In particular, the Authority\xe2\x80\x99s board of commissioners failed to meet\n its fiduciary responsibility to ensure that the Authority complied with all Federal\n laws and regulations as well as fully cooperate with HUD OIG. The Authority\n 16\n\x0c needs to implement adequate procedures and controls to ensure that its payments\n for outside legal services meet applicable laws and regulations and that HUD\n approves its legal settlements. The Authority also needs to implement appropriate\n measures to prevent and resolve conflict of interest situations, revise its contract\n requirements, and develop and implement controls to ensure that the contract\n requirements are enforced, including a quality control function. Without these\n improvements, it will continue to pay enormous sums for outside legal services\n that are unsupported, unreasonable, and unnecessary.\n\nRecommendations\n\n\n We recommend that the Director of HUD\xe2\x80\x99s Pennsylvania State Office of Public\n Housing direct the Authority to\n\n 1A. Implement adequate procedures and controls to ensure that its payments\n for outside legal services comply with applicable laws and regulations.\n\n 1B. Immediately provide documentation to support the $4,496,120 in\n unsupported costs identified by the audit or reimburse the applicable\n programs from non-Federal funds for any costs that it cannot support.\n\n 1C. Immediately provide documentation to support the remaining $25,981,001\n in payments to law firms during the audit period of April 2007 to August\n 2010, if the Authority cannot support the costs referenced in\n recommendation 1B or reimburse the applicable programs from non-\n Federal funds for any costs that it cannot support.\n\n 1D. Develop and implement controls to ensure that invoices for legal services\n are adequately verified and payments are made in accordance with the\n terms of the related contracts.\n\n 1E. Require its board of commissioners to implement appropriate measures to\n prevent and resolve conflict of interest situations.\n\n 1F Implement controls to ensure that HUD is notified of pending litigation and\n that HUD\xe2\x80\x99s written concurrence is obtained before accepting a settlement\n offer arising out of litigation.\n\n 1G. Revise its contract provisions for future legal service contracts to reinstate\n sections that it removed, which required prior authorization for specific\n legal services, specifying work functions of various legal staff, and\n identifying activity descriptors needing additional explanation to be\n acceptable for payment.\n\n\n 17\n\x0c1H. Develop and implement a written policy and controls to ensure that its\n legal services contract provisions are enforced.\n\n1I. Task its Office of Inspector General to periodically audit a sample of\n current and future legal contracts and payments to ensure that the\n responsible personnel are enforcing contract requirements and only\n reimbursing law firms for allowable expenses.\n\n1J. Restrict the use of outside attorneys when dealing with HUD OIG and\n HUD program officials who are conducting oversight activities.\n\n\n\n\n 18\n\x0c SCOPE AND METHODOLOGY\n\nTo accomplish our objective, we reviewed\n\n Applicable laws; regulations; the Authority\xe2\x80\x99s administrative plan; HUD\xe2\x80\x99s program\n requirements at 2 CFR Part 225, and 24 CFR Parts 85 and 135; HUD Handbook 7460.8,\n REV-2; HUD Handbook 2210.18; and HUD Litigation Handbook 1530.01, REV-5.\n\n The Authority\xe2\x80\x99s contract files and related payment records, computerized database\n information including disbursement data and contract data, organizational chart, board\n meeting minutes, policies and procedures, Moving to Work agreement and amendments,\n and consolidated annual contributions contract.\n\nWe also interviewed the Authority\xe2\x80\x99s employees and HUD staff.\n\nTo achieve our audit objective, we relied, in part, on computer-processed data in the Authority\xe2\x80\x99s\ndatabases. The Authority, however, denied our requests for read-only access to its computerized\ndata and contract and invoice files. It provided us with only selected portions of original contract\nand invoice files that we requested. Because of these limitations imposed by the Authority, we were\nprevented from assessing the reliability and completeness of the data to which the Authority\nallowed us access. Consequently, for our purposes, we used the data and files that the Authority\nprovided without a complete data reliability assessment.\n\nWe used an automated data file of disbursements that the Authority provided and determined that\nthe Authority paid 15 law firms $30.5 million during the period April 1, 2007, to August 31,\n2010. We selected a nonstatistical sample of 48 payments for a detailed review. The 48\npayments were associated with 433 invoices. We selected the sample to include disbursements\nto vendors that had high dollar payments over the audit period. Additionally, we included in our\nsample all invoices which represented legal services related to the Authority\xe2\x80\x99s monitoring of OIG\naudits during the audit period, in response to which the Authority provided 39 invoices associated\nwith 34 contracts. In total, we reviewed 472 invoices associated with 15 contracts and\nrepresenting $4.5 million in payments for legal services during the period. The payments and\ninvoices were selected to determine whether the Authority\xe2\x80\x99s payments to outside legal firms\ncould be supported and complied with HUD regulations and other applicable requirements.\n\nWe performed our onsite audit work from September through December 2010 at the Authority\xe2\x80\x99s\noffice located at 12 South 23rd Street, Philadelphia, PA. The audit covered the period April 2007\nto August 2010 but was expanded when necessary to include other periods.\n\nExcept for those instances in which the Authority imposed limitations, we conducted the audit in\naccordance with generally accepted government auditing standards. Those standards require that\nwe plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable\nbasis for our findings and conclusions based on our audit objective. We believe that the\nevidence obtained provides a reasonable basis for our findings and conclusions based on our\n\n 19\n\x0caudit objective. The audit included tests of internal controls that we considered necessary under\nthe circumstances.\n\n\n\n\n 20\n\x0c INTERNAL CONTROLS\n\nInternal control is a process adopted by those charged with governance and management,\ndesigned to provide reasonable assurance about the achievement of the organization\xe2\x80\x99s mission,\ngoals, and objectives with regard to\n\n Effectiveness and efficiency of operations,\n Reliability of financial reporting, and\n Compliance with applicable laws and regulations.\n\nInternal controls comprise the plans, policies, methods, and procedures used to meet the\norganization\xe2\x80\x99s mission, goals, and objectives. Internal controls include the processes and\nprocedures for planning, organizing, directing, and controlling program operations as well as the\nsystems for measuring, reporting, and monitoring program performance.\n\n\n\n Relevant Internal Controls\n\n\n We determined that the following internal controls were relevant to our audit\n objective:\n\n Policies and procedures that the Authority has implemented to reasonably\n ensure that resource use is consistent with applicable laws and regulations.\n\n Policies and procedures that the Authority has implemented to reasonably\n ensure that resources are safeguarded against waste, loss, and misuse.\n\n Except for those instances in which the Authority imposed limitations, we\n assessed the relevant controls identified above.\n\n A deficiency in internal control exists when the design or operation of a control does\n not allow management or employees, in the normal course of performing their\n assigned functions, the reasonable opportunity to prevent, detect, or correct (1)\n impairments to effectiveness or efficiency of operations, (2) misstatements in\n financial or performance information, or (3) violations of laws and regulations on a\n timely basis.\n\n Significant Deficiencies\n\n\n Based on our review, we believe that the following items are significant deficiencies:\n\n\n 21\n\x0cThe Authority did not ensure compliance with applicable laws and\nregulations concerning record-keeping requirements and documentation to\nsupport payments for legal services.\n\nThe Authority violated its Moving to Work agreement, its consolidated\nannual contributions contracts, and HUD regulations when it denied and\nobstructed the HUD OIG auditors access to its records and documentation.\n\nThe Authority lacked sufficient procedures and controls to ensure that\nservices invoiced by law firms were adequately verified before payment.\n\nThe Authority allowed an apparent conflict of interest situation to exist.\n\nThe Authority did not implement corrective action that it agreed to take in\nresponse to recommendations made in a previous HUD OIG audit report.\n\n\n\n\n 22\n\x0c FOLLOW-UP ON PRIOR AUDITS\n\n\nPhiladelphia Housing Authority\nContracting and Purchasing\nActivity, Philadelphia,\nPennsylvania, 2003-PH-1002,\ndated January 27, 2003\n\n\n In this audit, we found that the Authority made payments to law firms based on\n invoices in block format, which was contrary to contract requirements. The\n Authority also paid the firms for other prohibited charges without questioning\n them. We recommended that HUD require the Authority to update its contract\n requirements for legal services contracts to reflect more current conditions and\n draft and implement a written policy to ensure that the new requirements would\n be enforced and have the Authority\xe2\x80\x99s OIG periodically audit a sample of current\n legal services contracts and payments to ensure that the responsible personnel\n enforced the contract requirements and only reimbursed law firms for allowable\n expenses. The finding starting on page 15 provides details of our follow-up on\n these issues.\n\n During this previous audit we also found that the Authority issued 18\n modifications over a 10-year period to 3 legal service contracts. Although the\n modifications to these three legal services contracts increased the original contract\n values by $3.2 million, the Authority did not compete any of the additional work\n as required by Federal regulations. Due to time constraints and the failure of the\n Authority\xe2\x80\x99s outside attorneys to cooperate on this current audit, we did not follow\n up on these issues. The following information pertains to the three legal contracts\n reviewed on the prior audit.\n\n Contract Date of Original Amount of Adjusted Percent Number of\n Number Award Amount Modifications Value Increase Modifications\n 353 11/21/90 $150,000 $2,228,762 $2,378,762 1486% 11\n 378 5/23/91 $100,000 $175,000 $275,000 175% 2\n 464 7/14/92 $125,000 $830,550 $955,550 664% 5\n\n\n\n\n 23\n\x0c APPENDIXES\n\n\nAppendix A\n\n SCHEDULE OF QUESTIONED COSTS\n\n Recommendation\n number Unsupported 1/\n 1B $ 4,496,120\n\n\n\n\n1/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program\n or activity when we cannot determine eligibility at the time of the audit. Unsupported\n costs require a decision by HUD program officials. This decision, in addition to\n obtaining supporting documentation, might involve a legal interpretation or clarification\n of departmental policies and procedures.\n\n\n\n\n 24\n\x0cAppendix B\n\n AUDITEE COMMENTS AND OIG\xe2\x80\x99S EVALUATION\n\n\n\n\n 25\n\x0cComment 1\n\n\n\n\nComment 2\n\n\n\nComment 3\n\n\n\n\n 26\n\x0cComment 4\n\n\n\n\nComment 5\n\n\n\n\nComments 6\nand 7\n\n\n\n\nComment 7\n\n\n\n\n 27\n\x0cComment 7\n\n\n\nComment 2\n\n\n\n\nComment 8\n\n\n\n\nComment 8\n\n\n\n\n 28\n\x0cComment 8\n\n\n\n\nComments 7\nand 8\n\n\n\n\nComment 7\n\n\n\n\nComment 9\n\n\n\n\n 29\n\x0cComment 9\n\n\n\n\nComments 9\nand 10\n\n\n\n\nComment 10\n\n\n\n\n 30\n\x0cComment 10\n\n\n\n\n 31\n\x0cComment 10\n\n\n\n\n 32\n\x0cComment 10\n\n\n\n\n 33\n\x0c34\n\x0cComment 10\n\n\n\n\n 35\n\x0cComment 10\n\n\n\n\n 36\n\x0cComment 10\n\n\n\n\n 37\n\x0cComment 10\n\n\n\n\nComment 10\n\n\n\n\nComment 10\n\n\n\n\n 38\n\x0cComments 9\nand 10\n\n\n\n\n 39\n\x0cComment 11\n\n\n\n\nComment 11\n\n\n\n\nComment 11\n\n\n\n\n 40\n\x0cComment 11\n\n\n\nComment 11\n\n\n\n\nComment 12\n\n\n\n\n 41\n\x0cComment 12\n\n\n\n\nComment 13\n\n\n\n\nComment 14\n\n\n\n\n 42\n\x0cComment 10\n\n\n\n\nComment 10\n\n\n\n\nComment 15\n\n\n\n\n 43\n\x0cComments 15\nand 16\n\n\n\n\nComment 15\n\n\n\n\nComment 17\n\n\n\nComment 16\n\n\n\n\n 44\n\x0cComment 17\n\n\n\n\nComment 18\n\n\n\n\nComments 18\nand 19\n\n\n\n\nComments 18\nand 19\n\n\n\n\n 45\n\x0cComment 19\n\n\n\n\nComment 19\n\n\n\n\n 46\n\x0cComment 19\n\n\nComment 18\n\n\n\n\nComment 20\n\n\n\n\nComment 20\n\n\n\n\n 47\n\x0cComment 20\n\n\n\n\nComment 20\n\n\n\n\nComments 20\nand 21\n\n\n\n\nComment 22\n\n\n\n\n 48\n\x0cComment 22\n\n\n\n\nComment 22\n\n\n\n\n 49\n\x0cComment 22\n\n\n\n\nComment 22\n\n\n\n\n 50\n\x0cComment 22\n\n\n\n\n 51\n\x0cComment 22\n\n\n\n\n 52\n\x0cComment 22\n\n\n\n\n 53\n\x0cComment 22\n\n\n\n\nComment 22\n\n\n\n\n 54\n\x0cComment 22\n\n\n\n\nComment 22\n\n\n\n\nComment 22\n\n\n\n\n 55\n\x0cComment 22\n\n\n\n\nComment 23\n\n\n\n\nComment 23\n\n\n\n\nComment 23\n\n\n\n\n 56\n\x0cComments 15\nand 23\n\n\n\n\n 57\n\x0cComments 15\nand 23\n\n\n\n\n 58\n\x0cComments 15\nand 23\n\n\n\n\n 59\n\x0cComment 24\n\n\n\n\n 60\n\x0cComment 24\n\n\n\n\n 61\n\x0cComment 24\n\n\n\n\n 62\n\x0cComment 24\n\n\n\n\n 63\n\x0cComment 24\n\n\n\n\n 64\n\x0cComment 24\n\n\n\n\nComment 24\n\n\n\n\n 65\n\x0cComment 24\n\n\n\n\n 66\n\x0cComment 24\n\n\n\n\nComment 24\n\n\n\n\nComment 24\n\n\n\n\n 67\n\x0cComment 24\n\n\n\n\nComment 24\n\n\n\n\nComment 24\n\n\n\n\nComment 24\n\n\n\n\n 68\n\x0cComment 24\n\n\n\n\nComment 25\n\n\n\n\nComment 26\n\n\n\n\n 69\n\x0cComment 26\n\n\n\n\nComment 26\n\n\n\n\nComment 27\n\n\n\n\n 70\n\x0cComment 27\n\n\n\nComment 27\n\n\n\n\nComment 7\n\n\n\n\n 71\n\x0cComment 7\n\n\n\n\nComment 28\n\n\n\n\nComment 28\n\n\n\n\n 72\n\x0cComments 9,\n26, 7 and 27\n\n\n\n\nComment 8\n\n\n\n\n 73\n\x0cComment 8\n\n\n\n\nComments 9\nand 7\n\n\nComments 9\nand 26\n\n\n\n\nComment 8\n\n\n\n\n 74\n\x0cComments 7,\n9 and 26\n\n\n\n\nComments 7,\n8, 9 and 26\n\n\n\n\n 75\n\x0cComments 7,\n8, 22 and 26\n\n\n\n\nComments 7,\n8, 20 and 26\n\n\n\n\nComments 7,\n8 and 26\n\n\n\n\n 76\n\x0cComment 8\n\n\n\n\nComments 7,\n26 and 27\n\n\n\nComment 8\n\n\n\n\n 77\n\x0cComment 8\n\n\n\n\nComments 7,\n8 and 10\n\n\n\n\nComments 7\nand 9\n\n\n\n\n 78\n\x0cComments 7,\n9, 26 and 27\n\n\n\n\nComments 7,\n9, 15, 22 and\n23\n\n\n\n\n 79\n\x0cComments 7,\n9, 15, 22 and\n23\n\n\n\n\nComment 23\n\n\n\n\nComments 7,\n20, 22 and 29\n\n\n\n\nComment 25\n\n\n\n\n 80\n\x0cComments 7,\n22 and 23\n\n\n\n\nComment 26\n\n\n\n\nComment 22\n\n\n\n\nComment 27\n\n\n\n\n 81\n\x0cComments 4\nand 7\n\n\n\n\nComment 20\n\n\n\n\nComment 30\n\n\n\n\n 82\n\x0cComment 8\n\n\n\n\nComments 5\nand 10\n\n\n\n\nComments 2,\n18 and 19\n\n\n\n\nComment 8\n\n\n\n\n 83\n\x0cComment 8\n\n\n\n\n 84\n\x0c OIG Evaluation of Auditee Comments\n\nComment 1 The Authority\xe2\x80\x99s contention that it has had \xe2\x80\x9cyears of undisputed success at\n revitalizing Philadelphia\xe2\x80\x99s public housing and improving conditions for residents\xe2\x80\x9d\n was not the subject of this audit. However, its operations have in fact been\n questioned by HUD OIG in eight audits conducted over the last 9 years. Some\n examples follow:\n\n In audit report 2010-PH-1011, HUD OIG reported that the Authority did not\n ensure that its Section 8 Housing Choice Voucher program units met HUD\xe2\x80\x99s\n housing quality standards. The audit found that 62 of the 67 units (93 percent)\n statistically selected for review did not meet HUD\xe2\x80\x99s minimum standards and\n 29 units (47 percent) were seriously noncompliant. The Authority\xe2\x80\x99s Moving\n to Work agreement (Section II.E.) and HUD regulations require the Authority\n to provide public housing that is safe, decent, sanitary, and in good repair.\n\n In audit report 2002-PH-1803, HUD OIG reported that the former executive\n director failed to follow the Authority\xe2\x80\x99s personnel policies and promoted\n employees or raised their salaries without justification, hired staff without\n allowing for competition, and created a conflict of interest by hiring the\n daughter of a member of the board of commissioners, although she was\n unqualified, to fill a senior position. The Authority\xe2\x80\x99s Moving to Work\n agreement requires it to follow 24 CFR Part 85, which prohibits conflicts of\n interest and requires competition for obtaining services (Section I.C.).\n\n Audit report 2003-PH-1002 disclosed that the Authority did not always\n comply with Federal procurement requirements or its own procurement policy\n when awarding service contracts, processing and approving contract\n modifications, approving contract payments, and determining which\n purchases should be under contract. In addition, the Authority split purchases\n to avoid competing contracts under the competitive award process, all in\n violation of 24 CFR Part 85.\n\n In audit report 2003-PH-1803, an audit that straddled pre- and post- Moving\n to Work participation by the Authority, HUD OIG reported that the Authority\n failed to fully utilize its Section 8 funding although it had about 18,000\n families on its waiting list, and otherwise poorly managed its Section 8\n program. Since entering the Moving to Work program, the Authority was\n allowed to combine its Section 8 funds with operating and capital funds.\n\n Lastly, in audit report 2010-PH-1002, HUD OIG reported that the Authority\n improperly overpaid Section 8 housing assistance and utility allowances.\n\nComment 2 In accordance with the HUD OIG Audit Operations Manual, in an exceptional\n case, such as if substantial revisions to the draft are required based on the exit\n conference, the Regional Inspector General for Audit (RIGA), at his discretion,\n 85\n\x0c may provide a revised draft to the auditee for formal comment. However, only\n minor changes needed to be made to the draft audit report based on the exit\n conference.\n\n With the exception of Board Chairman John Street\xe2\x80\x99s reading of a prepared\n statement at the beginning of the meeting, and asking some questions later in the\n meeting, the Authority\xe2\x80\x99s objections to the audit report were presented solely by its\n outside counsel. The outside attorney\xe2\x80\x99s comments at the exit conference are\n consistent with the Authority\xe2\x80\x99s written reply to the audit report. The Authority\n did provide some additional documentation on February 16, 2011, along with its\n written reply and on February 18, 2011. We reviewed this material and made\n only minor revisions to the report after considering the additional documentation.\n Since the changes did not affect our overall conclusions, there was no need to\n provide a revised draft report to the Authority for formal comment. The\n Authority provided additional invoices via e-mail on February 25, 2011, however,\n since the audit was completed, we provided the documentation to HUD officials\n for a final determination and their consideration in formulating a proposed\n management decision for recommendation 1B.\n\nComment 3 We included the Authority\xe2\x80\x99s reply in its entirety in this final report as appendix B.\n\nComment 4 The very broad and vague allegations in this paragraph are without merit. No\n credible example of the alleged violations is presented in the Authority\xe2\x80\x99s\n response. We conducted the audit in accordance with generally accepted\n government auditing standards.\n\nComment 5 The Authority states that it is common knowledge that HUD OIG has had a\n contentious relationship with the former executive director going back over a\n decade. We are unclear as to what support it has for this statement or what\n exactly this means. In reality, during all of our prior audits there was little or no\n interaction with the former executive director because he insisted that we interact\n instead with his outside attorneys. On several audits, the outside attorneys\n presented the Authority\xe2\x80\x99s official objections to our audit recommendations on\n their own letterhead, and signed the Authority\xe2\x80\x99s official written reply to the draft\n audit report as a substitute for the former executive director.\n\nComment 6 HUD OIG has performed numerous audits in accordance with generally accepted\n government auditing standards and made numerous recommendations for\n improvement to the Authority\xe2\x80\x99s operations. The Authority\xe2\x80\x99s vague claim of\n wanting to \xe2\x80\x9cput old disputes behind it\xe2\x80\x9d certainly does not relieve it of its\n responsibility to make the operational improvements recommended in this and\n other previous HUD OIG audits. These are problems which, unfortunately in\n many cases, continue to exist and put significant sums of taxpayer funds at risk.\n\nComment 7 We conducted the audit in accordance with generally accepted government\n auditing standards. Those standards require that we plan and perform the audit to\n 86\n\x0c obtain sufficient, appropriate evidence to provide a reasonable basis for our\n findings and conclusions based on our audit objective. We believe that the\n evidence obtained provides a reasonable basis for our findings and conclusions\n based on our audit objective. The audit included tests of internal controls that we\n considered necessary under the circumstances.\n\n On January 14, 2010, Board Chairman John F. Street signed the annual Moving to\n Work Certification of Compliance on behalf of the Authority\xe2\x80\x99s Board of\n Commissioners. In signing the certification, Chairman Street certified that all the\n information stated therein, \xe2\x80\x9cis true and accurate.\xe2\x80\x9d 6 Among the certifications\n made by the chairman on behalf of the Authority in the document in question are\n the following:\n\n The Authority will keep records in accordance with 24 CFR 85.20 and\n facilitate an effective audit to determine compliance with program\n requirements.\n\n The Authority will comply with the policies, guidelines, and requirements\n of OMB Circular No. A-87 (Cost Principles for State, Local, and Indian\n Tribal Governments) and 24 CFR Part 85 (Administrative Requirements\n for Grants and Cooperative Agreements to State, Local and Federally\n Recognized Indian Tribal Governments)\xe2\x80\xa6\n\n Pennsylvania State law also provides elaboration on what is expected of the board\n of directors of a nonprofit corporation operating within the Commonwealth. For\n example, 15 Pa.C.S. \xc2\xa75712 \xe2\x80\x9cStandard of care and justifiable reliance\xe2\x80\x9d states in\n part that, (a) DIRECTORS.\xe2\x80\x94A director of a nonprofit corporation shall stand in a\n fiduciary relationship to the corporation and shall perform his duties as a director,\n including his duties as a member of any committee of the board upon which he\n may serve, in good faith, in a manner he reasonably believes to be in the best\n interests of the corporation and with such care, including reasonable inquiry,\n skill and diligence, as a person of ordinary prudence would use under similar\n circumstances. In performing his duties, a director shall be entitled to rely in\n good faith on information, opinions, reports or statements, including financial\n statements and other financial data\xe2\x80\xa6\xe2\x80\x9d7 Therefore, under Pennsylvania State law\n the members of the Authority\xe2\x80\x99s board of commissioners owe a fiduciary duty to\n the Authority.8\n\n\n6\n The certification included the warning that \xe2\x80\x9cHUD will prosecute false claims and statements. Conviction may\nresult in criminal and/or civil penalties. (18 USC 1001, 1010, 1012; 31 USC 3729, 3802)\xe2\x80\x9d\n7\n Italics are not original.\n8\n See also 15 Pa.C.S. \xc2\xa75715, \xe2\x80\x9cIn discharging the duties of their respective positions, the board of directors,\ncommittees of the board and individual directors of a nonprofit corporation may, in considering the best interests of\nthe corporation, consider to the extent they deem appropriate: (1) The effects of any action upon any or all groups\naffected by such action\xe2\x80\xa6 (2) The short-term and long-term interests of the corporation\xe2\x80\xa6 (4) All other pertinent\nfactors.\xe2\x80\x9d\n\n 87\n\x0cComment 8 The Authority ultimately came to a realization that it needed to hire a new\n executive director and then did so. In this regard, the new interim executive\n director has publicly stated that a number of steps are needed to correct many\n serious existing problems. We completely agree with him on this. The three\n areas the new interim executive director mentions are: (1) creating a culture of\n respect, (2) back to basics, and (3) transparency and accountability. These are\n indeed areas that are deficient and extremely serious problems that the Authority\n needs to immediately correct. HUD OIG audits have attempted to assist the\n Authority in acknowledging and accomplishing these very same goals over the\n years.\n\nComment 9 The Authority paid $30.5 million for outside legal services provided by 15 law\n firms during the period April 2007 through August 2010 (see appendix C). We\n reviewed 472 invoices totaling $4.5 million in payments made by the Authority\n for legal services during the period, of which all but $11,800 was unsupported\n because the Authority did not provide adequate documentation to evidence that\n the services invoiced and payments made were in accordance with the contract\n terms and HUD requirements. Appendix D shows the overall results of our\n review. The Authority\xe2\x80\x99s outside attorneys asserted that the documents provided\n were responsive to our request, but also withheld some information, citing\n attorney-client privilege. The information provided was not sufficient to ascertain\n if the legal services were legitimate, necessary, reasonable expenses to be paid for\n with Federal funds. Critical information such as the attorney\xe2\x80\x99s name, the billing\n rate, the number of hours, and the date and time that the services were provided\n were missing. This information is not considered privileged information. We\n estimated that at least $1.1 million in costs were not reasonable and necessary.\n These fees were for routine matters dealing with our audits that are typically\n performed by lower level staff at other housing authorities that we\xe2\x80\x99ve audited.\n Documents that were routinely provided on similar audits often were requested\n for this audit by the auditors and then not provided by the attorneys. When the\n documents were provided, it often took an inordinate amount of time to\n coordinate the delivery and acceptance of the documents from the outside\n attorneys. Such interference obstructed the efficient conduct of our audits without\n benefiting the Authority\xe2\x80\x99s housing programs.\n\nComment 10 HUD OIG does not question the Authority\xe2\x80\x99s right to obtain outside legal services\n or to invoke attorney-client privilege when warranted. However, as a HUD\n spokesperson has also recently similarly articulated, these legal services must be\n reasonable, necessary and supported when taxpayer dollars are at stake. The\n Authority\xe2\x80\x99s claims of attorney-client privilege must be adequately justified and\n supported. Attorney billing statements and time records do not enjoy carte\n blanche protections of attorney-client or attorney-work product protections. An\n excellent article on the subject of attorney-client privilege appeared in the\n American Bar Association Law Practice Management Section\xe2\x80\x99s Law Practice\n TODAY in December 2006. The article, authored by Ballard Spahr Andrews &\n Ingersoll, LLP partner Carl Roberts, of the Philadelphia office, makes the point\n 88\n\x0cthat only communications pertaining to legal advice, not the underlying facts, are\nprotected by the privilege. \xe2\x80\x9cAttorney billing statements and time records are\nprotected by the attorney-client privilege only to the extent that they reveal\nlitigation strategy of/or the nature of services performed\xe2\x80\x9d (citation omitted). We\nrequested from the Authority the underlying facts related to its use of outside law\nfirms, not anything even remotely protected by attorney-client privilege.\n\nAlso, regarding an assertion of privilege to attorney billing statements, the United\nStates District Court for the Eastern District of Pennsylvania held:\n\n For example, a typical time sheet may contain several\n different pieces of information, such as the attorney\xe2\x80\x99s\n name, the client\xe2\x80\x99s name, the general matter being\n worked on if the attorney has represented the client on\n more than one matter, the date and time the services\n were provided as well as a description of the actual legal\n services performed. In this example only the last item of\n information would generally be protected under the\n attorney-client privilege.\n\n Leach v. Quality Health Svs., et al, 162 F.R.D. 499, 501\n (E.D. Pa. 1995)\n\nThe information bolded above is exactly the nature of the information required to\nascertain if the legal services billed for were legitimate, necessary, and reasonable\nexpenses to be paid for with Federal funds. What is privileged is information that\ndivulges strategy, work product or other confidential information. It is for these\nreasons that the auditor did not respond to counsel\xe2\x80\x99s suggestion. Counsel had\nmade it clear that the Authority would not provide any additional documentation\nto support payments.\n\nHUD OIG has reviewed all correspondence and other documentation the\nAuthority provided both during the audit and after the audit exit conference, and\nhas correctly categorized the $4.5 million reviewed as unsupported costs in\nappendix A to this audit report. Unsupported costs are those costs charged to a\nHUD-financed or HUD-insured program or activity when we cannot determine\neligibility at the time of the audit. Unsupported costs require a decision by HUD\nprogram officials. This decision, in addition to obtaining supporting\ndocumentation, might involve a legal interpretation or clarification of\ndepartmental policies and procedures. To the extent HUD officials believe that\nthe correspondence and other statements included in the Authority\xe2\x80\x99s official\nresponse to this audit report are relevant to HUD\xe2\x80\x99s proposed management\ndecision on the eligibility of the $4.5 million in unsupported payments the audit\nidentified, they will duly consider them. It is important for responsible HUD\nofficials to also consider in their proposed management decision, that the\nAuthority paid 142 of 472 invoices (30 percent) using block billing which is\n 89\n\x0c prohibited by its contracts with the law firms, and paid 134 invoices, but did not\n provide the HUD OIG with even redacted or incomplete copies of the invoices to\n support its payments. As stated above, we reviewed 472 invoices totaling $4.5\n million in payments made by the Authority for legal services during the period, of\n which all but $11,800 was unsupported because the Authority did not provide\n adequate documentation to evidence that the services invoiced and payments\n made were in accordance with the contract terms and HUD requirements. The\n Authority\xe2\x80\x99s outside attorneys asserted that the documents provided were\n responsive to our request, but also withheld some information, citing attorney-\n client privilege. Appendix D shows the overall results of our review of these\n payments.\n\nComment 11 The audit survey is the initial phase of an audit for quickly gathering information\n pertaining to an organization, program, activity, or function to satisfy the general\n audit objective without performing detailed audit verification. The survey is\n directed at identifying areas of materiality and sensitivity; identifying key aspects\n and features of the entity or program targeted for audit; and disclosing controls\n and areas that are susceptible to error, illegal acts, or abuse. The results of the\n survey work are used to refine the general audit objectives, establish the scope of\n the audit work to be performed, develop an audit program, and determine whether\n an audit is necessary or to suspend the assignment. As the Authority states,\n although the survey included payments for professional, consulting and legal\n services, we refined our objective to include only fees for outside legal services\n and did not pursue a detailed review of the fees for professional or consulting\n services in the audit. We did so because the survey disclosed controls and areas\n related to payments to outside attorneys that in the professional judgment of the\n OIG were immediately susceptible to error and/or abuse. This is standard practice\n and is consistent with generally accepted government auditing standards. HUD\n OIG reserves the right to audit the Authority\xe2\x80\x99s fees for other professional and\n consulting services in the future.\n\n Due to the fact that the Authority continued to use outside attorneys to obstruct\n the progress of the audit, we were unable to communicate in a constructive and\n timely manner with responsible Authority officials. We requested complete\n documentation to support payments for legal services. Counsel asserted that the\n Authority\xe2\x80\x99s payments for outside legal services were eligible and supported, but\n refused to provide documentation to demonstrate that the legal services were\n legitimate, necessary, and reasonable, citing attorney-client privilege. Therefore,\n HUD OIG served the Authority with a subpoena on December 10, 2010, which\n clearly identified to the Authority and its outside attorneys the focus of the audit.\n The Authority\xe2\x80\x99s outside counsel unfortunately did not comply with the subpoena\n and continued to assert that the Authority\xe2\x80\x99s payments for outside legal services\n were eligible and supported, but refused to provide the majority of the supporting\n documentation that we requested, citing attorney-client privilege. The Authority,\n however, gave no reason why it had not responded to the auditors\xe2\x80\x99 repeated\n requests for other data and information, some of which dated back to August\n 90\n\x0c 2010. A demand for these records was included in our subpoena. The\n Authority\xe2\x80\x99s outside counsel provided only limited additional information in\n response to the subpoena, but continued to assert that it had provided all\n information and data access that we had requested.\n\nComment 12 The Authority contends that if it chooses not to enforce its own contract\n provisions contained in Part V that are designed to ensure that its payments for\n outside legal services are supported, reasonable and necessary, it does not have to\n do so. HUD OIG considers this apparent disregard for contractual requirements\n to be a material internal control weakness. Part V is included as part of each legal\n contract issued by the Authority. Title 24 CFR 85.36 (b)(2), requires that the\n Authority ensure each vendor perform in accordance with its contract\n requirements. Further, the Philadelphia Housing Authority Legal Department\n Guidelines for Outside Counsel (Contract Part V) provides guidelines under\n which the Authority will agree to be billed. The guidelines are designed to ensure\n that firms are only paid for allowable and reasonable expenses and prohibit\n payments for certain normal overhead expenses such as facsimile charges, local\n travel, and local phone calls. In addition, the guidelines state that the Authority\n will not pay for fees or expenses that are contained within a block billing\n description. That is, each line of a legal bill must contain the description of one\n task per time entry.\n\nComment 13 The Authority represented to the auditors that the block-billed invoices were\n complete support for the outside legal payments and did not inform the auditors\n that the invoices it provided were \xe2\x80\x9csummary pages\xe2\x80\x9d subject to attorney-client\n privilege. In either case however, subject to further support or justification, the\n outside legal payments shown on these invoices are considered unsupported at\n this point in time.\n\nComment 14 Although the Authority\xe2\x80\x99s normal practice was to heavily redact and remove all\n private and confidential information from documentation it provided to HUD\n OIG, it appears it may have inadvertently left sensitive information9 on one of the\n invoices that it provided. We have removed that information from the example of\n prohibited block billing that was in the draft audit report that was presented to the\n Authority strictly for discussion and comment only. We informed the Authority\n in the letter transmitting the draft report that we require officials who receive draft\n audit reports for review and comment to exercise due care to avoid premature or\n otherwise improper disclosure of the information contained in such reports. Draft\n reports may not be released without the express written approval of the Assistant\n\n\n9\n The Authority references the Privacy Act in its response. However, that statute does not apply in this instance.\nThe Privacy Act defines an \xe2\x80\x9cindividual\xe2\x80\x9d as a citizen of the United States or an alien lawfully admitted for permanent\nresidence. The term \xe2\x80\x9cindividual\xe2\x80\x9d is used in the Privacy Act instead of the term \xe2\x80\x9cperson\xe2\x80\x9d in order to distinguish\nbetween rights which are given to citizens as individuals under the Act and rights of proprietorships, businesses and\ncorporations which are not intended to be covered by the Act. OKC Corp. v Williams (1978, ND Tex) 461 F Supp\n540, CCH Fed Secur L Rep P 96745.\n 91\n\x0c Inspector General for Audit. We informed the Authority that reproduction of the\n report without our knowledge or consent was prohibited.\n\n It is worth noting that on another recent audit, HUD OIG was compelled to\n enforce a subpoena in the United States District Court for the Eastern District of\n Pennsylvania to obtain Privacy Act information from the Authority, so it is quite\n surprising that it inadvertently left this type of information on an invoice that it\n provided to us. On this other audit, the Authority\xe2\x80\x99s outside attorney refused to\n provide 28 partial Social Security numbers requested by the auditor to perform\n public record searches to perform a common audit test. This common audit test is\n designed to detect apparent conflict of interest situations involving responsible\n Authority officials and contractors doing business with the Authority. We\n requested the information in our audit notification letter dated April 9, 2010, and\n reiterated the need for the information during a May 19, 2010, audit status\n meeting, and several additional communications with the outside attorney\n throughout the audit. Since the Authority\xe2\x80\x99s outside attorney continued to refuse\n to provide the information, on November 9, 2010, the United States Attorney\xe2\x80\x99s\n Office petitioned for summary enforcement of the subpoena on behalf of HUD\n OIG. After a court hearing, in a written opinion, the court ordered that the\n petition for summary enforcement of the subpoena be granted on February 4,\n 2011. The Authority\xe2\x80\x99s unwarranted denial of access to records and other\n conditions imposed by the Authority caused needless delays and required HUD\n OIG to enforce the subpoena in court to effectively carry out its statutory\n responsibilities.\n\nComment 15 The tasks and items that the Authority lists were commonly handled by in-house\n staff on other HUD OIG audits much more efficiently and effectively than we\n experienced with the Authority\xe2\x80\x99s outside attorneys. Additionally, based on our\n review of the invoices the Authority provided for the audit period of April 2007\n through August 2010, we determined that the Authority paid the firm of Schnader\n Harrison Segal & Lewis LLP at least $672,000 for services it performed on our\n two recent audits of the Authority\xe2\x80\x99s Housing Choice Voucher program. It also\n paid this same firm at least $91,000 for work it did on our ongoing audit of\n Recovery Act capital funds used to rehabilitate its scattered site housing. Invoices\n from Ballard Spahr Andrews & Ingersoll, LLP showed that it was paid $326,000\n for work on HUD OIG audits during the audit period April 2007 until August\n 2010, but the invoices did not identify costs to the specific audit. In contrast,\n salary and benefit costs for the HUD OIG staff that worked on the audits of the\n Authority\xe2\x80\x99s Housing Choice Voucher program totaled about $321,000. The\n Authority paid one of the law firms more than twice as much to assist it on the\n two audits as it cost HUD OIG to perform the audits. This excessive cost was\n certainly not reasonable or necessary for the taxpayer.\n\nComment 16 Our auditor and appraiser were sometimes accompanied by up to three outside\n attorneys on housing quality inspections. The Authority acknowledges that this\n occurred in \xe2\x80\x9conly a few instances\xe2\x80\x9d and implies that therefore it was not a problem.\n 92\n\x0c During those inspections, the Authority also had its in-house housing experts,\n non-attorneys, accompany our staff and it was these individuals who made\n comments and answered questions from our staff. At $330 per hour for each\n attorney, the cost for outside counsel to participate in the inspections was nearly\n $8,000 for just one day. The attorneys had no expertise in housing inspections,\n asked no questions, and did nothing but occasionally take notes. Further, the\n sheer number of persons involved with the inspections, entering and walking\n through the homes, became difficult for tenants to tolerate. In the view of HUD\n OIG, a single occurrence was a problem and an unreasonable and unnecessary\n cost to the taxpayer. These taxpayer dollars could have been much better spent\n housing low-income families rather than spent on outside attorneys to simply tour\n the homes of low-income families.\n\nComment 17 The Authority states that the total potential funds at risk for recapture during these\n two audits were $490 million and that it has repaid $9,000. We do not know how\n the Authority arrived at these figures, and the Authority has not shared its\n methodology with us. We are confident however, that if the Authority reasonably\n complies with all applicable HUD regulations, it is not in danger of having HUD\n recapture its funds, and has absolutely no need to spend huge sums on expensive\n outside attorneys to assist it on HUD OIG audits.\n\nComment 18 The allegations in this paragraph are without merit. The HUD OIG senior auditor\n who was in charge of this audit has performed numerous audits of the Housing\n Choice Voucher program at this and other housing authorities in an objective,\n efficient, and effective manner. He has more than 15 years of auditing experience\n in the Federal government and more than 14 years of auditing experience in the\n private sector, and performed countless audits objectively, efficiently and\n effectively. He is a certified information systems auditor and a certified public\n accountant. The fact that the senior auditor led other recent audits at the\n Authority only served to sharpen his keen knowledge and insight into the\n Authority\xe2\x80\x99s operations and in no way impaired his objectivity.\n\nComment 19 The RIGA and the Assistant Regional Inspector General (ARIGA) have more\n than 50 combined years of auditing experience in the Federal government. They\n have accomplished and managed many successful and objective audits throughout\n their long Federal auditing careers. The allegation from 2002 that the HUD OIG\n auditor mishandled alleged privileged information is simply unfounded and\n blatantly false. The former RIGA appropriately responded to this allegation at the\n time by informing the outside counsel that there was no ethical or any other type\n of violation and that the records in question were not subject to privilege. No one\n at the Authority had even asserted a privilege with respect to any attorney\n invoices. The former RIGA reminded the outside attorney that the attorney-client\n privilege \xe2\x80\x9cbelongs to the client, not the attorney.\xe2\x80\x9d Moreover, in light of the\n Federal Government\xe2\x80\x99s right of access to the records, we questioned whether a\n privilege would be applicable if one even existed.\n\n\n 93\n\x0c Additionally, even if a privilege had existed with respect to the invoices or billing\n records, such privilege was waived by the Authority\xe2\x80\x99s actions. The Authority\xe2\x80\x99s\n director of finance provided the auditors with full access to all accounts payable\n information in order to facilitate the disbursement review of the contracts. In fact,\n the finance director was fully aware that the auditors were copying attorney\n billings for one of the contracts being reviewed and at no time did the finance\n director raise any objections to our obtaining the records.\n\n The additional implication that the former RIGA left office shortly thereafter\n because of this alleged improper incident is obviously patently false and again not\n relevant to this audit. Tactics of this type are illustrative of those employed over\n the years by the Authority\xe2\x80\x99s outside counsel and served only to obstruct our\n ability to carry out lawful audit activities and to cloud the serious issues at hand.\n Unfortunately, such tactics divert significant energy and scarce resources away\n from fixing the Authority\xe2\x80\x99s current serious problems. The Authority states that\n the RIGA and ARIGA have worked on audits with the Authority that were\n \xe2\x80\x9ccontentious.\xe2\x80\x9d There have been disagreements over the years between HUD OIG\n and the Authority on audit related matters as there are on many HUD OIG audits\n involving entities that receive HUD funds. The main difference between the\n Authority and the other entities we have audited is its excessive use of outside\n attorneys which have obstructed the progress of our audits. The fact that the\n RIGA and the ARIGA worked on prior audits at the Authority served to help\n them develop a very clear and objective insight into the Authority\xe2\x80\x99s operations.\n\nComment 20 The overall HUD OIG conclusion that the Authority failed to provide evidence\n that it obtained required HUD approval for most of its legal settlements did not\n change based on the additional documentation provided by the Authority after the\n exit conference. The Authority provided evidence of HUD approval of 6\n settlements, however, only 4 of the 6 corresponded to settlements included in the\n list of the 33 settlements listed on its Web site. The other two settlements were\n not listed on the Authority\xe2\x80\x99s Web site. In addition, after the exit conference,\n HUD Regional Counsel provided copies of approval letters for 22 (which includes\n the 4 letters that the Authority provided after the exit conference) of the 33 cases.\n HUD Regional Counsel did not have any record of approving any of the 234\n additional cases identified by the Authority during the audit. The Authority states\n that it does not need HUD approval for cases covered by its insurance carrier.\n This is correct. However, the Authority did not provide documentation to\n demonstrate that in 245 cases (11 from the Web site plus the other 234) the costs\n of litigation, settlement and judgment were entirely covered by an insurance\n policy.\n\n Also, there is also some question as to whether or not the HUD Regional Counsel\n was even provided with any notice of these matters while they remained\n pending.10 We believe that the Authority violated the terms of its Moving to\n10\n The apparent failure of the Authority to inform the HUD Regional Counsel of the threat of litigation, of ongoing\nlitigation, and of the settlement of such litigation also impacted the U.S. Department of Justice\xe2\x80\x99s (DOJ) and HUD\n 94\n\x0c Work Agreement by failing to follow the guidelines established by HUD\n Handbook 1530.01, REV-5.11\n\nComment 21 The Authority\xe2\x80\x99s outside counsel either misunderstood or perhaps did not hear the\n entire discussion. HUD OIG repeatedly informed her during the meeting that in\n accordance with the HUD OIG Audit Operations Manual (a document from\n which counsel often quotes), in an exceptional case, such as if substantial\n revisions to the draft are required based on the exit conference, the RIGA may\n provide a revised draft to the auditee for formal comment. HUD OIG informed\n her that based on what we had heard at the exit conference we did not believe that\n the finding would be removed from the report. We informed her that our normal\n procedure required that all supporting documentation provided by the Authority\n immediately after the exit conference would be reviewed by the auditors and\n considered in the final audit report. We did in fact consider the additional\n documentation provided immediately after the exit conference and made\n necessary revisions to the audit report. However, only minor revisions were\n needed. Since the revisions were minor, there was no need to provide a revised\n draft report to the Authority for formal comment. The allegation that HUD OIG\n made a statement that it would include blatantly false information in the report is\n not true. Again, the allegations of personal impairments are blatantly false.\n\nComment 22 Documentation provided by the Authority in its letter of April 19, 2004, showed\n that Mr. Street was granted a waiver of the conflict of interest provision of\n Section 19 A (iii) of the Public Housing annual contributions contract for him to\n serve as an Authority board commissioner. HUD never received a request for a\n conflict of interest wavier for the Authority to hire his son, Sharif Street, or any\n law firm with which he was associated. HUD did not issue a waiver to the\n Authority in connection with its engagement of legal services by Wolf Block\n while Sharif Street was employed by the firm.\n\n Section 19 of the annual contributions contract that the Authority signed with\n HUD addresses conflicts of interest. It states in part at (A)(1) that,\n\n In addition to any other applicable conflict of interest requirements, neither\n the housing agency nor any of its contractors or their subcontractors may enter\n into any contract, subcontract, or arrangement in connection with a project\n\nOffice of General Counsel\xe2\x80\x99s authorities. As an example, Handbook Section 2-4, which addresses defensive\nlitigation, states at (h)(4) that \xe2\x80\x9cIt is both HUD\xe2\x80\x99s and DOJ\xe2\x80\x99s policy to enter a settlement agreement or consent decree\nonly where it is consistent with HUD\xe2\x80\x99s authority, and in the Government\xe2\x80\x99s interest to do so.\xe2\x80\x9d Additionally, \xe2\x80\x9cAll\nsettlements of Federal Party Litigation must be approved by DOJ.\xe2\x80\x9d Furthermore, at subparagraph (b) this section\nprovides that \xe2\x80\x9cWhen other parties propose settlement, the Litigating Associate or Regional Counsel shall consult\nappropriate Program Officials and Program Counsel regarding their recommendations for the Department\xe2\x80\x99s position\non the offer\xe2\x80\xa6\xe2\x80\x9d In short, it seems per the HUD Handbook that HUD has rights which may not have been protected\nin these matters.\n11\n See Moving to Work Agreement VIII.B.4. It is also possible that the Authority also concurrently violated section\nVIII (B)(3) for using Federal funds subject to the Moving to Work Agreement for the unauthorized purpose of\nproviding the monies for settlement.\n 95\n\x0c under this annual contributions contract in which any of the following classes\n of people has an interest, direct or indirect, during his or her tenure or for one\n year thereafter.\n\n Among the classes of people covered are \xe2\x80\x9cAny present or former member or\n officer of the governing body of the Authority, or any other member of the\n officer\xe2\x80\x99s immediate family.\xe2\x80\x9d12 Furthermore, the annual contributions contract\n provides that a member of the covered classes must disclose the member\xe2\x80\x99s interest\n or prospective interest to the housing authority and HUD, and that the\n requirements of the section \xe2\x80\x9cmay be waived by HUD for good cause, if permitted\n under State and local law.\xe2\x80\x9d Although, the annual contributions contract goes on\n to caution that, \xe2\x80\x9cNo person for whom a waiver is required may exercise\n responsibilities or functions with respect to the contract to which the wavier\n pertains.\xe2\x80\x9d13\n\n Departmental regulations also address conflicts of interest in procurement matters\n in strong terms at 24 CFR 85.36. That section at (b)(3) states in part that,\n\n No employee, officer or agent of the grantee or subgrantee shall participate in\n selection, or in the award or administration of a contract supported by Federal\n funds if a conflict of interest, real or apparent, would be involved. Such a\n conflict would arise when:\n\n (i) The employee, officer or agent,\n (ii) Any member of his immediate family,\n (iii) His or her partner, or\n (iv) An organization which employs, or is about to employ any of the\n above, has a financial or other interest in the firm selected for\n award\xe2\x80\xa6\n\n Furthermore, HUD directs grantees and subgrantees to punish any violators of the\n above: \xe2\x80\x9cTo the extent permitted by State and local law or regulations, such\n standards or conduct will provide for penalties, sanctions, or other disciplinary\n actions for violations of such standards by the grantee\xe2\x80\x99s and subgrantee\xe2\x80\x99s officers,\n employees, or agents, or by contractors or their agents.\xe2\x80\x9d14\n\n John F. Street was elected to be the 97th mayor of the City of Philadelphia and\n took office on January 3, 2000. Mayor Street was elected to a second term and\n\n12\n The annual contributions contract defines \xe2\x80\x9cimmediate family member\xe2\x80\x9d at 19(D) as \xe2\x80\x9cthe spouse, mother, father,\nbrother, sister, or child of a covered class member\xe2\x80\xa6\xe2\x80\x9d\n13\n Without any doubt, voting in favor of a contract with which an immediate family member has an interest would\nviolate the quoted language.\n14\n 24 CFR 85.36(b)(3).\n\n 96\n\x0c left office on January 7, 2008. During Mr. Street\xe2\x80\x99s time serving as mayor the\n former executive director of the Authority, Carl Greene, submitted a request to\n HUD to waive the annual contributions contract\xe2\x80\x99s prohibitions on conflicts of\n interest, in order for then-Mayor Street to join the Authority\xe2\x80\x99s board of\n commissioners. Mr. Greene submitted the request for waiver on April 19, 2004.\n Mayor Street\xe2\x80\x99s son, Sharif Street, was at that time employed as an associate\n attorney by the law firm of Wolf Block Schorr & Solis-Cohen (Wolf Block).15\n Wolf Block had at the time of the request several current and active contracts for\n the provision of legal services to the Authority.\n\n Appended to Mr. Greene\xe2\x80\x99s conflict of interest waiver request was a memorandum\n on the matter authored and signed by the Authority\xe2\x80\x99s General Counsel Leigh A.\n Poltrock and addressed to HUD. The memorandum sought to demonstrate, in\n part, that a waiver by HUD would be permitted under State and local law.16 The\n General Counsel noted that the Pennsylvania Public Official and Employee Ethics\n Act regulates conflicts of interest of this nature within the Commonwealth of\n Pennsylvania. Turning to that statue, 65 Pa. C.S.A. \xc2\xa71102 defines a \xe2\x80\x9cconflict of\n interest,\xe2\x80\x9d in part, as the use by a public official of the authority of his office for\n the pecuniary benefit of: (1) himself; or (2) a member of his immediate family; or\n (3) a business with which he or a member of his immediate family is associated.17\n\n The General Counsel\xe2\x80\x99s memorandum continued advising that Section 1103 of\n Title 65 lists 10 specifically restricted activities, 2 of which could be applicable to\n the (then) mayor\xe2\x80\x99s activities on the board of commissioners. First, 65 Pa. C.S.A.\n \xc2\xa71103(f) states in relevant part that:\n\n (f) Contract.- No public official or public employee or his spouse or child or\n any business in which the person or his spouse or child is associated shall\n enter into any contract valued at $500 or more with the governmental body\n with which the public official or public employee is associated or any\n subcontract valued at $500 or more with any person who has been awarded a\n contract with the governmental body with which the public official or public\n employee is associated, unless the contract has been awarded through an\n open and public process, including prior public notice and subsequent public\n disclosure of all proposals considered and contracts awarded\xe2\x80\xa618\n\n The General Counsel noted that if any issues pertaining to the ongoing Wolf\n Block contracts were to come before the board of commissioners the above would\n not prohibit the mayor from engaging in related activities of the board, he would\n\n15\n It is the understanding of HUD OIG that on March 23, 2009, the firm\xe2\x80\x99s partners voted to dissolve the partnership.\n16\n HUD\xe2\x80\x99s waiver did not extend to provisions of State law. Obviously, HUD lacks the authority to waive State law.\nRather, HUD\xe2\x80\x99s waiver was of Section 19 of the Authority\xe2\x80\x99s annual contributions contract and only addressed then\nMayor Street\xe2\x80\x99s ability to serve on the board as mayor.\n17\n Italics not original.\n18\n Italics not original.\n\n 97\n\x0c simply be prohibited from having any supervisory role or other responsibility for\n the implementation of such contracts. The other relevant section from 65 Pa.\n C.S.A. \xc2\xa71103 discussed by the Authority\xe2\x80\x99s General Counsel addressed voting\n conflicts. The relevant portion states that:\n\n (j) Voting conflict.- \xe2\x80\xa6 Any public official or public employee who in the\n discharge of his official duties would be required to vote on a matter that\n would result in a conflict of interest shall abstain from voting and, prior to the\n vote being taken, publicly announce and disclose the nature of his interest as a\n public record in a written memorandum filed with the person responsible for\n recording the minutes of the meeting at which the vote is taken\xe2\x80\xa619\n\n As the Authority\xe2\x80\x99s general counsel noted in her memorandum, this section would\n prohibit Mr. Street from voting on any issue relating to Wolf Block\xe2\x80\x99s contracts\n with the Authority, as well as voting on any other matter where a conflict of\n interest might exist.20 Mr. Street would be compelled to abstain on any such vote.\n\n However, based on board minutes, on five occasions during our audit period, Mr.\n Street voted to approve Wolf Block\xe2\x80\x99s contracts with the Authority.21 These votes\n occurred between December 16, 2004, and January 31, 2007. At each and every\n board meeting wherein a contract for Wolf Block was part of the agenda,\n Authority Board Chairman Street voted \xe2\x80\x9caye,\xe2\x80\x9d or yes, on all five of these\n contracts.22 Furthermore, at each and every such vote Mr. Street was concurrently\n serving as the chairman of the board of commissioners.\n\n19\n Italics not original.\n20\n Note that 24 CFR 85.36(b)(1) would apply 65 Pa. C.S.A. \xc2\xa71103 to Federal monies, and would similarly prevent\nMr. Street from voting on the contracts in question. That section states that \xe2\x80\x9c(1) Grantees and subgrantees will use\ntheir own procurement procedures which reflect applicable State and local laws and regulations, provided that the\nprocurements conform to applicable Federal law and the standards identified in this section.\xe2\x80\x9d\n21\n HUD OIG understands that Chairman Street\xe2\x80\x99s son was an associate in the affordable housing group of Wolf Block\nuntil March 2008. In reviewing 185 invoices/payments for Wolf Block, from 5 contracts totaling approximately\n$923,000, Chairman Street\xe2\x80\x99s son was included in each of the 5 contracts. Unfortunately, HUD OIG was unable to\ndetermine the full extent of the son\xe2\x80\x99s billings to the Authority because the Authority failed to provide support for its\npayments to its outside law firms. However, the HUD OIG audit did identify one invoice that included hours\ncharged directly by the family member. The charge was for 37.6 hours at $250 per hour, for a total of $9,400. HUD\nOIG also notes that 45 of the firm\xe2\x80\x99s 185 invoices contained prohibited block billing, and therefore, did not include\nthe names, hours, or amount attributed to the specific individuals charging time.\n22\n The relevant contracts Chairman Street voted on are:\n 1) PHA Contract 003281B, with a maximum contract amount of $5,000,000, approved by board resolution\n 11017 on December 16, 2004;\n 2) PHA Contract 003459D, with a maximum contract amount of $4,500,000, approved by board resolution\n 11060 on June 16, 2005;\n 3) PHA Contract 003486A, with a maximum contract amount of $7,500,000, approved by board resolution\n 11073 on September 15, 2005;\n 4) PHA Contract 003486H, with a maximum contract amount of $5,000,000, approved by board resolution\n 11084 on October 24, 2005; and,\n 5) PHA Contract 003598B, with a maximum contract amount of $7,500,000, approved by board resolution\n 11154 on January 31, 2007.\n\n 98\n\x0c Mr. Street\xe2\x80\x99s role as chairman of the board of commissioners for the Authority\n makes his actions more egregious. The five contracts Chairman Street voted in\n favor of had a combined total maximum contract amount of $29.5 million. In\n voting on these contracts, and in particular by voting in favor of these contracts,\n Chairman Street and the Authority violated Section 19 of its annual contributions\n contract with HUD, as well as Pennsylvania State law.23 Consequently, for all of\n the reasons above, Chairman Street and the Authority may have violated Article\n III of the Moving to Work agreement which became active on April 1, 2001.24\n\n HUD\xe2\x80\x99s Office of Regional Counsel reviews all litigation services contracts to\n assure that they contain adequate protection against fraud and abuse and all\n mandatory provisions required for personal services contracts for the program or\n activity giving rise to the litigation, and that the legal fees charged are reasonable\n for the services rendered.\n\n On February 14, 2011, HUD\xe2\x80\x99s Assistant Secretary for Public and Indian Housing\n sent a letter to Chairman Street restating the Department\xe2\x80\x99s position that it granted\n a waiver of the conflict of interest provision of Section 19 A (iii) of the Public\n Housing Annual Contributions Contract for then-Mayor Street to serve as a\n member of the Authority\xe2\x80\x99s board of commissioners. HUD OIG exerted no\n pressure for the letter to be sent.\n\n We initially did not have the correct date that Chairman Street\xe2\x80\x99s son ended his\n employment with the firm in the draft audit report. We have revised the date from\n the draft report that was initially presented to the Authority strictly for discussion\n and comment only. This change did not impact the conclusion on this matter in\n any way however because Chairman Street voted to award all five contracts\n during the period December 2004 to January 2007 while his son was employed by\n the firm.\n\nComment 23 The Authority states that \xe2\x80\x9cthere is not a scintilla of evidence\xe2\x80\x9d that it did not work\n cooperatively with the auditor. HUD OIG disagrees. The Authority\xe2\x80\x99s lack of\n cooperation through its outside legal counsel came in many forms and was\n manifested in many ways. The outside counsel mainly obstructed the audit by\n refusing to provide HUD OIG auditors with \xe2\x80\x9cfull and free\xe2\x80\x9d access to responsible\n employees and officials and the billing records that the outside law firms had\n submitted to the Authority, and then suggested that the auditors\xe2\x80\x99 interest in such\n records evidenced their alleged bad faith. The Authority\xe2\x80\x99s claim that all of the\n missing support for outside legal payments is somehow related to its yet\n\n23\n Chairman Street\xe2\x80\x99s appointment to the board of commissioners will expire on September 20, 2011.\n24\n The Authority\xe2\x80\x99s Moving to Work Agreement of April 1, 2001 (signed on February 28, 2002), Article III, Default\xe2\x80\x9d\nprovides that default is defined as \xe2\x80\x9cUse of funds subject to this Agreement for a purpose other than as authorized by\nthis Agreement; noncompliance with legislative, regulatory, or other requirements applicable to this Agreement;\nother material breach\xe2\x80\xa6\xe2\x80\x9d This language mirrors that found in the current Moving to Work Agreement at VIII(B)(3),\n(B)(4) and (B)(5).\n\n 99\n\x0cunsupported claim of \xe2\x80\x9cattorney client privilege\xe2\x80\x9d is not supported by the audit\nevidence. In this regard, it is important to consider that the Authority paid 142 of\n472 invoices (30 percent) using block billing which is prohibited by its contracts\nwith the law firms, and paid at least 134 invoices, without providing HUD OIG\neven redacted or incomplete copies of the invoices to support the payments. It\nappears that counsel expects HUD OIG to accept its verbal assurance that millions\nof Federal tax dollars were paid to them with little or no documentation provided\nto support the payments.\n\nFor a specific example to disprove the Authority\xe2\x80\x99s claim that there was not a\n\xe2\x80\x9cscintilla of evidence\xe2\x80\x9d that it did not work cooperatively with the auditor, we\npresent an e-mail from the auditor to responsible Authority officials and their\noutside counsel on November 30, 2010, with which the Authority never fully\ncomplied. The e-mail states:\n\n Previously, we requested PHA to provide various data, documentation, and\n scheduling of interviews with PHA personnel. (Additional detail is contained\n in my prior emails regarding the various data/information requests listed\n below). Our requests and repeated follow-ups, both verbal and by email,\n have been, in all cases, directed to you, in accordance with PHA imposed\n restrictions regarding such requests. However, regarding the items requested\n in the following list, PHA has provided little or no meaningful response.\n\n Once again, please provide me with a date(s) as to when the OIG can meet\n with the individuals indicated and when the OIG can expect to receive the\n previously requested data/information or a detailed explanation as to why\n PHA will not provide the requested data/information.\n\n November 17, 2010:\n\n Meeting requested with Ms. Helen Ferris.\n\n Meeting with someone from finance who can discuss/explain certain of\n PHA\xe2\x80\x99s general ledger descriptions taken from data download provided by\n PHA.\n\n November 12, 2010:\n\n Explanation of the basis for invoices from Flaster Greenberg, PC, to the\n Housing Authority Risk Retention Group being included in the invoices\n that Flaster Greenberg sent to PHA in response to Ms. Shelly James\xe2\x80\x99s\n request.\n\n\n\n\n 100\n\x0c November 9, 2010:\n\n HUD Office of the Regional Counsel, in a letter dated December 05, 2005\n regarding contracts 003459, and in a letter dated January 25, 2006\n regarding contracts 003486 urged the inclusion of the Addendum to\n Engagement Agreement found in HUD Notice 2003-24 (HA). We\n requested an explanation as to why such addendum was not included as\n part of the contracts.\n\n November 8, 2010:\n\n Copy of the PHA travel reimbursement policy and guidelines applicable to\n travel of persons providing contracted professional and consulting\n services during the period of April 1, 2007 through August 31,\n 2010 including all changes made to the policy and guidelines during that\n time period.\n\n October 29, 2010:\n\n List of legal settlements during the audit period (April 1, 2007 through\n August 31, 2010) on behalf of PHA.\n\n Copy of recent legal contracts submitted by PHA to HUD for approval\n along with related requests and authority response(s) to any related HUD\n correspondence.\n\n August 27, 2010:\n\n Download of PHA accounts payable records.\n\n The Authority claims that responsive information was always provided to HUD\n OIG. However, this was not always the case. We requested complete\n documentation to support payments for legal services. The Authority\xe2\x80\x99s outside\n counsel asserted that the documents provided were responsive to our request, but\n also withheld some information, citing attorney-client privilege. Counsel asserted\n that the Authority\xe2\x80\x99s payments for outside legal services were eligible and\n supported, but refused to provide documentation to demonstrate that the legal\n services were legitimate, necessary, and reasonable. The information provided\n was not sufficient to ascertain if the legal services were legitimate, necessary,\n reasonable expenses to be paid for with Federal funds.\n\nComment 24 The Authority has provided copies of written correspondence and e-mails and\n makes other claims that it asserts indicated that it worked cooperatively with\n HUD OIG to fulfill its document requests. There was, of course, by necessity,\n some communication between HUD OIG and the Authority\xe2\x80\x99s outside attorneys as\n 101\n\x0c the auditors attempted to perform the audit. Ultimately the responses from the\n attorneys simply served to delay the progress of the audit and on December 10,\n 2010, HUD OIG had to serve the Authority with a subpoena to obtain information\n and documentation.\n\n We requested an automated download of the Authority\xe2\x80\x99s accounts payable file\n (subsidiary ledger) for the audit period. The documents that the Authority\n provided were not responsive to this request. The Authority\xe2\x80\x99s outside counsel\n stated that the Authority does not maintain a separate accounts payable file. This\n is contrary to generally accepted accounting principles for an entity on the accrual\n basis of accounting and is contradicted by the Authority\xe2\x80\x99s general ledger trial\n balances for such accounts. An accounts payable subsidiary ledger contains the\n detail transaction history and amounts of individual customer accounts which tie\n into the control account and the general ledger. The Authority\xe2\x80\x99s disbursement\n file, or register, is not the equivalent of an accounts payable file. The\n disbursements file shows only payments that were generated, not the individual\n transactions and amounts.\n\n We requested read-only access to the Authority\xe2\x80\x99s computer system, specifically,\n its general ledger, contracts register/database, accounts payable records, and its\n disbursement register. The documents that the Authority provided were not\n responsive to this request. The Authority opted to provide selected listings in lieu\n of the requested access. Because of the Authority\xe2\x80\x99s refusal to provide the\n requested access and because of the limitations imposed by its decision to provide\n only selected information/data, we were unable to determine the completeness\n and reliability of information/data that the Authority provided and whether an\n adequate audit trail existed.\n\n During the audit, the Authority\xe2\x80\x99s outside counsel repeatedly stated that it would\n provide only those documents and information that it unilaterally determined\n would satisfy our requests for information/documentation. For example,\n regarding payments for legal services, we requested original invoices including\n all supporting documentation. The copies of invoices that the Authority provided\n were not responsive to this request. Moreover, although the Authority provided\n some documentation such as contracts and related documents, we could not verify\n the completeness and reliability of the information provided because the\n Authority denied the auditors access to the filing cabinets and office areas where\n the files were stored.\n\nComment 25 Based on our review of the invoices the Authority provided for the audit period of\n April 2007 through August 2010, we determined that the Authority paid the firm\n of Schnader Harrison Segal & Lewis LLP at least $672,000 for services it\n performed on our two recent audits of the Authority\xe2\x80\x99s Housing Choice Voucher\n program. In contrast, salary and benefit costs for the HUD OIG staff that worked\n on the audits of the Authority\xe2\x80\x99s Housing Choice Voucher program totaled about\n $321,000. The Authority paid just one of the two law firms working on these\n 102\n\x0c audits more than twice as much to assist it on the two audits as it cost HUD OIG\n to perform the audits. Invoices from the firm Ballard Spahr Andrews & Ingersoll,\n LLP showed it was paid $326,000 for work on HUD OIG audits during the audit\n period April 2007 until August 2010, but the invoices did not identify costs to the\n specific audit. This excessive duplicative cost was certainly not reasonable or\n necessary. In this regard, the reference to the Housing Choice Voucher program\n regulation is relevant because the costs for these legal services were related to the\n program. Moreover, the regulations at 24 CFR 982.158(c) provide another\n example of the Authority\xe2\x80\x99s obligation to provide HUD OIG full and free access to\n all accounts, records, computerized or other electronic records and to any\n computers, equipment, or facilities containing such records and to provide any\n information or assistance needed to access the records.\n\nComment 26 The Authority\xe2\x80\x99s statements in this written response were also presented by its\n outside counsel at the February 14, 2011, exit conference. It is worth noting that,\n as shown in appendix C, the outside counsel\xe2\x80\x99s firm received $8.7 million from the\n Authority during the 41-month audit period. As shown in appendix D, HUD OIG\n reviewed $1.1 million in payments to this firm and concluded that the Authority\n has yet to adequately support nearly all of the payments. The outside counsel\n elaborated in greater detail on the comments that she made at the exit conference\n regarding the Authority\xe2\x80\x99s controls for verifying receipt and supportability of\n outside legal services (the same type of legal services she was also paid to\n perform) in the Authority\xe2\x80\x99s written response.\n\n As stated in the audit report, the Authority did not have written procedures for\n approving invoices submitted by law firms. The audit results showed that the\n Authority made payments to law firms based on invoices in prohibited block\n billing format and, although the majority of the supporting documentation the\n Authority provided for the invoices that we reviewed was missing, incomplete,\n and insufficient, we noted that the Authority continued to pay for costs that were\n specifically prohibited by the contract requirements. The senior in-house counsel\n person who was responsible for reviewing and approving invoices submitted by\n law firms stated that she contacted the departments receiving the benefits of the\n legal services if she had questions regarding an invoice, but we found no evidence\n of such communications in the documentation the Authority provided. We could\n not perform any additional verification because the Authority denied the auditors\n access to the filing cabinets and office areas where the payment files were stored.\n Moreover, contrary to counsel\xe2\x80\x99s assertion that the Authority consolidated the\n invoice review process several years ago, another Authority senior counsel person\n stated during the audit that before about a year ago she reviewed invoices from\n law firms. She expressed concern that she has not been asked to verify work\n performed by outside counsel related to her areas of responsibility. She stated she\n no longer received invoices for review after questioning an invoice from Ballard\n Spahr Andrews and Ingersoll, LLP.\n\n\n\n 103\n\x0cComment 27 According to generally accepted government auditing standards, auditors should\n evaluate whether the audited entity has taken appropriate corrective action to\n address findings and recommendations from previous engagements that are\n significant within the context of the audit objectives. The audit report should\n disclose the status of known but uncorrected significant or material findings and\n recommendations that could affect the current audit objective(s). If the findings\n with incomplete action are significant and planned action is not adequate, the\n auditor should present this information in the reported findings. The fact that a\n HUD management decision was achieved does not preclude HUD OIG from\n determining whether or not the audited entity continued to take corrective action\n to address findings and recommendations from previous engagements. Since we\n identified significant and material findings that had not been corrected from a\n prior audit, we had a responsibility to report it.\n\nComment 28 As stated in the audit report, due to time constraints and the failure of the\n Authority\xe2\x80\x99s outside attorneys to cooperate on this current audit, we did not follow\n up on these issues. However, HUD OIG reserves the right to review this area of\n concern on a future audit engagement.\n\nComment 29 Section VII.C of the Authority\xe2\x80\x99s Moving to Work agreement does in fact require\n the Authority to give access to all requested sources of information including\n access to files, access to units, and an opportunity to interview agency staff and\n assisted residents to HUD. This provision would of course include HUD OIG.\n We are very concerned that the Authority continues to question HUD OIG\xe2\x80\x99s\n statutory authority to access its records.\n\nComment 30 The Authority has provided these statements in an effort to justify large sums it\n paid to outside attorneys and has provided no support for these statements to\n HUD OIG. HUD OIG does not question the Authority\xe2\x80\x99s right to obtain outside\n legal services when warranted. However, as a HUD spokesperson has also\n similarly articulated, these legal services must be reasonable, necessary and\n supported when taxpayer dollars are at stake. HUD OIG has reviewed all\n correspondence and other documentation the Authority provided both during the\n audit and immediately after the audit exit conference, and have correctly\n categorized $4.5 million reviewed as unsupported costs in appendix A to this\n audit report. The audit showed that the Authority paid $30.5 million for outside\n legal services provided by 15 law firms during the period April 2007 through\n August 2010 (see appendix C). The audit objective was to determine whether the\n Authority\xe2\x80\x99s payments to outside legal firms could be supported and complied with\n HUD regulations and other applicable requirements. The audit concluded that the\n Authority\xe2\x80\x99s payments to outside attorneys did not comply with HUD regulations\n and other applicable requirements.\n\n\n\n\n 104\n\x0cAppendix C\n\n NET PAYMENTS TO LAW FIRMS\n\n\n\n Law firm Net payments\n Ballard Spahr Andrews & Ingersoll, LLP $ 8,697,998\n Wolf Block Schorr & Solis-Cohen, LLP 7,056,703\n Duane Morris LLP 4,177,734\n Schnader Harrison Segal & Lewis LLP 3,137,900\n Fox Rothschild LLP 3,089,427\n Cozen O\xe2\x80\x99Conner 1,066,283\n Flaster Greenberg PC 936,952\n Cohen & Grigsby, P.C. 818,813\n Kolber and Freiman & Randazzo 709,053\n Blank Rome LLP 530,670\n Law Offices of Denise Joy Smyler 112,151\n Kelly, Monaco and Naples 102,314\n Greenberg Traurig LLP 28,780\n Hangley, Aronchick, Segal & Pudlin 20,181\n Margaret R. Brogan, Esq. 4,000\n Total payments $30,488,959\n\n\n\n\n 105\n\x0cAppendix D\n\n SUMMARY OF PAYMENTS BY DEFICIENCY IDENTIFIED\n\n\n\n\n Redacted information (2)\n Unsupported amount\n Total dollar amount\n Number of invoices\n\n\n\n\n Missing invoice (4)\n documentation (3)\n Block billing (1)\n\n\n\n\n Insufficient\n reviewed25\n Law firm\n\n\n\n\n Ballard Spahr Andrews &\n 183 $1,073,240 $1,071,569 29 154 25 23\n Ingersoll, LLP\n Wolf Block Schorr &\n 185 922,566 920,606 45 71 42 108\n Solis-Cohen, LLP\n Flaster Greenberg PC 17 248,475 248,366 3 17 0 0\n Duane Morris LLP 45 614,598 613,398 35 8 19 0\n Fox Rothschild LLP 14 616,266 609,368 4 7 8 3\n Schnader Harrison Segal &\n 28 1,032,813 1,032,813 26 10 1 0\n Lewis LLP\n Totals 472 $4,507,958 $4,496,120 142 267 95 134\n\n(1) Block Billing:\n\n 1. Includes only general description of services (e.g., legal advice with no detailed description of services\n performed) or\n 2. Includes only a summary of time charged for each attorney (e.g., only attorney name, rate, and total hours\n and amount billed).\n\n(2) Redacted Information:\n\n 1. Evidence in the documentation provided that specific information on one or more pages of the invoice was\n omitted/redacted or\n 2. Evidence in the documentation provided that complete page(s) was/were omitted.\n\n\n(3) Insufficient Documentation:\n\n 1. Invoice was provided, but there was no documentation to support the amount invoiced/paid for services\n and/or costs or\n\n\n25\n Some invoices had more than one deficiency.\n 106\n\x0c 2. Invoice was provided, but the accompanying documentation did not adequately support the amount\n invoiced/paid.\n\n(4) Missing Invoice:\n\nPurchase order(s), remittance record(s), or disbursement record, etc., indicated that a payment was made against the\ncontract on a specific date, but no invoice was provided to support the payment.\n\n\n\n\n 107\n\x0cAppendix E\n\n EXAMPLE OF BLOCK BILLING\n\n\n\n\n 108\n\x0cAppendix F\n\n EXAMPLE OF PARTIAL INVOICE\n\n\n\n\n 109\n\x0cAppendix G\n\n EXAMPLE OF INVOICE MISSING DESCRIPTION\n\n\n\n\n 110\n\x0c111\n\x0c112\n\x0c113\n\x0cAppendix H\n\n INVOICE SHOWING APPARENT CONFLICT OF INTEREST\n\n\n\n\n 114\n\x0c'