We audited the Orchard Court project, located in Bath, Maine, in response to a referral received by the Office of Inspector General's (OIG) Office of Investigation (Region 1). The referral indicated a potential inappropriate use of project funds by the Orchard Court Housing Corporation (project owner) and/or the management agent. Our overall objective was to determine whether the project owner and/or management agents operated the project in accordance with U.S. Department of Housing and Urban Development (HUD) requirements.

The project owner and/or prior management agents failed to operate the Orchard Court project in accordance with HUD regulations. The owner and/or prior management agents did not comply with HUD requirements with regard to maintaining vacancies at a reasonable rate; making payments that were eligible, reasonable, adequately supported; following proper procurement procedures; maintaining the project in good physical condition; and ensuring that tenants qualified for subsidized rental housing. As a result, the project had $265,226 in vacancy losses and incurred ineligible, unreasonable, and unsupported costs of $511,727.

The project owner and a prior management agent executed two interest-bearing promissory notes in violation of the regulatory agreement, and a "Letter of Agreement" that may have violated the Project Owner's/Management Agent's Certification (Certification). The two notes allowed for the inappropriate accrual of interest in the amount of $56,086. Further, accounting records were incomplete, inaccurate or unavailable. The project's current certified public accounting firm refused to prepare the project's 2007 financial statements because it considered the project's records not auditable. The project also lacked controls over the calculation of management fees and bad debts.

We recommend that the Director of the Office of Housing require the project owner to reimburse or require the responsible management agents to reimburse the project $49,270 for ineligible administrative, site supervisor, HUD 202, and site management fees paid to mangement agents; eliminate from the project's accounting records $151,436 in accrued administrative, maintenance, site management, other administrative, and HUD 202 fees that are ineligible project costs; and request from responsible management agents supporting documentation for the $265,412 in unsupported costs charged to the project so that the eligibility of these costs can be determined. For any amounts determined to be ineligible, the project owner should repay or seek reimbursement from responsible management agent to pay the project from non-project funds; and remove $56,086 in interest accrued on the notes payable of $303,653 from the accounting records. In addition, HUD should consider pursuing administrative sanctions against the project owner and three prior management agents, including recovering management fees paid and removing payables representing unpaid management fees from the project's accounting records.