John B. Meyers
Consultant
Louisville, KY
502.451.2727
DEALING WITH AUDITS — 3:
YOU EAT WHAT YOU KILLeat what you kill idiom. The philosophy that a person who accomplishes something should get the full financial benefit that results from that accomplishment.
“You eat what you kill” — that’s got to be the unwritten motto of OIG, as well as of some other equally appealing professions.
If it weren’t so close to home, we could admire the motto for its directness. The members of this industry are the herd of animals, with OIG coming by from time to time to pick off a meal. In one recent audit on insurance costs OIG nibbled on about three percent of the 17,000 projects in the 515 program. Roughly speaking, projects had odds of about 1 in 30 of being selected. If this were a state lottery, these are great odds of winning. But since the winners are killed and eaten by OIG, you really don’t want to win. You don’t want to be a meal for OIG.
First Line of DefenseIn this case, rather than selecting by owners and going in for a kill, OIG selected management companies because they could be taken as the first line of defense against fraud, waste, and abuse in the program.
In the September 2002 audit entitled “Rural Housing Service, Rural Rental Housing Program Servicing of Insurance Expenses — Phase III,” OIG explained that they worked with Rural Development to obtain insurance cost information from the MFIS database. (As we all know, MFIS is the Multifamily Information System). OIG obtained the nationwide database for 1999 actual year-end income and expenses by project.
OIG then analyzed insurance costs per state, costs per management company, costs per project, management companies with large numbers of units managed and high costs; and summarized the information provided using database and spreadsheet applications.
Errors? In MFIS?OIG explained that while the MFIS database contained errors, they considered it satisfactory for their purposes because they were able to identify management companies with unusually high or low average insurance costs per unit.
OIG then selected six management companies with over 560 projects:
— two management companies because their average insurance costs were among the top ten in the nation for management companies with more than 500 units;— one management company because it had higher than average insurance costs in two states. According to MFIS, one project had the eighth highest workers compensation expense in the United States;
— one management company because it had an identity of interest on insurance (the management company reported to RHS that a management official was a relative of an employee of the insurance agency);
— one management company because, according to MFIS, it is the largest management company managing RRH projects in the nation; and
— a sixth management company because its projects had higher than average insurance costs in two states.
You can ask yourself if there’s any way you can position your company or your projects against being selected. The short answer and long answer is, “No.” Not only are project expenses what they are, but you have to hope that the MFIS information entered by RD is correct in all respects. OIG started by acknowledging that MFIS had errors. Nope: Once you’re in the program, you’re fair game to be killed and eaten.
OIG conducted this audit in accordance with Government Auditing Standards.
One OIG chapter title was “Management Company Practices Unnecessarily Increased Project Insurance Costs and Payroll Taxes.” This has got to make you feel good as a manager.
OIG FindingsOIG found several of the six management companies did several bad things in particular, among all the other bad things the companies did. They:
(1) charged projects for workers compensation and payroll taxes using estimated rates that were higher than the actual costs without reconciling the project charges to the actual costs incurred; and(2) did not take effective steps to reduce costs, such as obtaining workers compensation insurance policies that classified site managers at the most advantageous rate.
OIG explained that, in general, these bad things occurred because the Agency was not aware of the existence of the overcharges because the Agency had relied on the reports submitted by the management companies and — ominously — on the CPA audits that did not expose the overcharges. OIG explained that these practices unnecessarily increased project expenses and, in some cases, improperly increased management company revenue.
I can become very concerned that OIG is raising an issue about the Agency relying on the reports — probably on the budgets. And OIG is raising a question about audits not exposing overcharges. These two issues are the sort of thing OIG could be likely to pursue in a future report. Keep in mind that OIG is just as happy to kill and eat the Agency as a Borrower. We can almost entitle such a report as “Agency Maladministration of MFIS Increases Costs to Government.” Stay tuned.
Two Bad ThingsIn any event, OIG identified two bad things.
BAD THING ONE (sort of like Dr. Seuss): One company overcharged projects for workers compensation insurance by charging the projects for workers compensation at rates higher than the actual cost for payroll of site management and maintenance employees. The projects also reimbursed the company at rates higher than the actual cost for any subcontractors’ workers compensation (in which the subcontractor did not have their own workers compensation insurance).
OIG could be right — that’s bad, or certainly not good, or certainly looks bad. An explanation, offered up by OIG, from a company was that they charge a flat 5 percent rate for workers compensation for all employees, including resident manager, maintenance, custodial, etc., and they do not differentiate whether they are doing cleaning, maintenance, grounds, or office work. The company acknowledged workers compensation should be charged at different rates, but contended that historically it has averaged out to be 5 percent.
Another company said payroll taxes were about 9.5 percent. However, that company actually charged its projects 10 and 11 percent of manager salary in 1999 and 2000, respectively, for payroll taxes.
My thought on these is oops! — if OIG is right. But they aren’t always right. Remember, OIG has to find problems because they eat only when they kill.
BAD THING TWO: In addition, at one company site managers were not classified at the most advantageous rate to the projects. Site managers were classified as “9015,” which was the same rate for performing maintenance and repair work. This rate did not reflect less risky site management duties including leasing and collecting rents. In comparison, we noted that other management companies classified their site managers as “9012,” which was the same rate for leasing agents. For other management companies, we found the “9012” rate was seven times less than the “9015” rate. In addition, another rate which could be used (“8742”) includes collectors who are employees engaged in such duties away from the employer’s premises. The “8742” rate was also about seven times less than the “9015” rate.
OIG noted that the company said they classified site managers as “9015” because that was their interpretation of the workers compensation insurance regulations. The company believed that since site managers also perform some maintenance duties, all their salary had to be classified as “9015.” The company said they contacted their insurance agent/company about splitting site managers between the different classification codes, but the request was denied.
Just Collect MoneyMy reaction is that OIG shot wide of the mark and the Agency went along with OIG because classifications seem highly debatable and complex.
In any event, one of the recommendations made by OIG and accepted by the Agency was:
Instruct the responsible servicing officials to require the cited management companies to fully account for and recover the improper workers compensation charges (including potential overcharges for 2001) for all their RRH projects and to establish written procedures to prevent similar overcharges in the future.
I take this to mean that the management companies will have to figure out how much they overpaid in workers compensation, presumably for 1999, 2000, 2001 (and maybe 2002, in an Agency excess of exuberance). Rather than being able to go back to the insurance companies for a refund, the companies will have to reimburse the amounts themselves, depositing the reimbursements in project accounts.
Of course, this whole reimbursement issue can be run through the appeal process, so there’s hope for the management companies.
Results Justify ExistenceIn summary, OIG has found the results they need to justify their job. Sadly, it doesn’t make any difference if they’re right or wrong in their findings — once RD accepts the findings, OIG has done their job. If you’re not careful after that, you’re toast.
The forecast is that OIG will continue to eat what they kill.
Of course, OIG is continuing to look in the insurance arena. I think OIG will also be active in looking at projects which received equity loans.
Thank you.
QUESTION FROM THE FLOOR:
What obligation does OIG have to tell you on what they based their report?
ANSWER (from Richard Price, Esq.):
There are two kinds of events here, one is an Investigation and one is an Audit. If you have an Audit, they are supposed to give you a copy of the Audit. If they don’t give you a copy of the Audit, then that’s when you bring in the Freedom of Information Act, and ultimately may have to go to court. The whole point of the Audit is to give you an analysis. Oftentimes they don’t give you a copy.
If you’re dealing with an Investigation or a situation where an Auditor thinks it’s going to come to an Investigation, then that is treated differently. Under the Freedom of Information Act we can beat it out of them without going directly to court, although there are exceptions. The government does not have to give up their work papers, their Audit, their whatever, if it’s part of an Investigation.
Investigation: Term of ArtWhat’s an Investigation? An Investigation is a decision to bring criminal charges, civil charges. In that context, the government is allowed to complete its “review,” call it whatever you want to, without divulging. That would be the Investigation.
Of course, once you get this sort of letter, a $2 million letter, contact a lawyer. The first response of the lawyer should be: I want a copy of your analysis. If it doesn’t happen right away, then the answer from the government is likely: Pound sand. Then the discussions commence.
Whether or not you get it right off the bat, I think it is very important to persevere, because then you can bring in your accountant and what not. The way you make mileage on these things is you pick apart their analysis.
Waste, Fraud, AbuseI find that a lot of Government Investigators and Auditors, particularly IG, are focussed on waste, fraud and abuse. What’s waste? I have no idea. What’s abuse? I don’t know that either; I know it in other contexts. What’s fraud? Okay, I get fraud: Fraud is lying. Lying is bad. That’s easy.
But these other things are very subjective. You know and the professional industry knows better, almost always, than the folks within the Agency — who don’t run properties, who don’t manage properties, who don’t provide financial returns, who don’t produce Audits — and many of the folks in the OIG Audit offices in both HUD and USDA are not actually CPAs. They’re Auditors, they have training, they have a badge, and they do use those skills very well. But the analytical piece is oftentimes incomplete and only somewhat focussed.
That’s a long answer, but it’s the entire process and how you get that information.
Next: For Your Information
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