We audited Folts, Inc.’s management of the Folts Adult Home and Folts Home projects to address our concern with U.S. Department of Housing and Urban Development (HUD)-assisted health care facilities.  We selected this auditee as the result of a risk assessment of nursing homes located in New York State, which considered HUD’s risk indicators and factors such as loan default; internal control issues; and financial statements not being filed.  The objective of our audit was to determine whether the projects were administered in accordance with their regulatory agreements.

Project owners and two receivers failed to administer the projects in compliance with the projects’ regulatory agreements.  Specifically, they failed to make required mortgage payments, incurred costs that were not eligible for the projects’ operations, and inadequately supported costs.  As a result, two mortgages with outstanding principal balances of approximately $11.9 million have been assigned to HUD with HUD expected to pay claims on both mortgages, more than $1.8 million was charged for ineligible costs, and more than $2 million in expenditures lacked documentation showing that the expenditures were necessary for the projects’ operations.

We recommend that the Director of HUD’s Office of Residential Care Facilities instruct project officials to (1) develop an adequate liquidation plan for the two assigned mortgages, (2) reimburse the projects from nonproject funds for the more than $1.8 million in ineligible expenses, and (3) provide documentation to justify more than $2 million in unsupported costs.