We audited the Philadelphia Housing Authority’s (Authority) payments for outside legal services based on a citizen’s complaint alleging misuse of these funds, our observations and concerns regarding the Authority’s use of outside attorneys on prior audits, and concerns over the large sums the Authority paid for outside legal services reported in the media. The Authority paid $30.5 million for outside legal services provided by 15 law firms during the period April 2007 through August 2010. The objective of the audit was to determine whether the Authority’s payments to outside legal firms could be supported and complied with U.S. Department of Housing and Urban Development (HUD) regulations and other applicable requirements.

We found that the Authority’s payments to outside attorneys did not comply with HUD regulations and other applicable requirements. Specifically, the Authority did not adequately support $4.5 million that it paid to outside attorneys during the period April 2007 to August 2010, virtually the entire amount we reviewed, raising questions about the propriety of the remaining $26 million in payments that we did not review. The Authority made unreasonable and unnecessary payments of $1.1 million to outside attorneys to obstruct the progress of HUD Office of Inspector General (OIG) audits. The Authority also did not obtain required HUD written concurrence before accepting all settlement offers arising out of its litigations and allowed an apparent conflict of interest situation to exist. Further, although a previous HUD OIG audit found some similar problems with the Authority’s payments to outside attorneys, the Authority failed to implement the recommendations made in the previous audit.

We recommend that HUD require the Authority to provide adequate documentation to support $4.5 million in unsupported costs identified by the audit or reimburse the applicable programs from non-Federal funds for any costs that it cannot support. We recommend it provide documentation to support the remaining $26 million in payments to law firms, if the Authority cannot support the $4.5 million or reimburse the applicable programs from non-Federal funds for any costs that it cannot support. We also recommend that HUD require the Authority to implement adequate procedures and controls to ensure that its payments for outside legal services comply with relevant laws and regulations, develop and implement controls to ensure that invoices for legal services are adequately verified and payments are made in accordance with the terms of the related contracts, and implement appropriate measures to prevent and resolve conflict of interest situations.

We recommend that the Authority implement controls to ensure that HUD is notified of pending litigation and that HUD’s written concurrence is obtained before accepting a settlement offer arising out of litigation and that it implement controls to ensure that the use of attorneys is restricted on HUD OIG audits and other HUD oversight activities. We also recommend it revise its contract provisions for future legal service contracts to reinstate sections that it removed, which required prior authorization for specific legal services, specifying work functions of various legal staff, and identifying activity descriptors needing additional explanation to be acceptable for payment. We further recommend that the Authority develop and implement a written policy and controls to ensure that contract requirements in its legal services contracts are enforced and have its OIG periodically audit a sample of current and future legal contracts and payments to ensure that the responsible personnel enforce the requirements and only reimburse law firms for allowable expenses.