Audit of Regal Management and Systems' Contracts

(Audit Report No. 98-082, September 29, 1998)

The Office of Inspector General (OIG) has completed an audit of two property management contracts that the Federal Deposit Insurance Corporation (FDIC) awarded to Regal Management and Systems. The OIG conducted this audit at the request of Division of Resolutions and Receiverships (DRR) officials in the Northeast Service Center (NESC), East Hartford, Connecticut, who were concerned about Regal's lack of management reports, incomplete accounting for FDIC funds, and overbilling of management fees. The objectives of the audit were to determine whether Regal (1) collected, properly recorded, and deposited revenues and (2) billed allowable fees that were adequately supported and in accordance with contract terms.

The FDIC has no assurance that Regal collected and deposited all rental income due because Regal did not maintain records crucial to properly accounting for rental income, such as leases showing monthly lease amounts and security deposits. In addition, Regal billed (1) $44,987 for management fees, (2) $26,139 for tax abatement certificates, (3) $71,590 for disposition fees, and (4) $8,750 for business plan preparation fees that were not allowed under the contract. Also, Regal passed through $12,239 in asset-related expenses that were not allowable or supported. Further, Regal did not (1) pay maintenance-fee arrears on time, (2) disclose to the FDIC several bank accounts that it maintained and report on and timely close out bank accounts, and (3) obtain a fidelity bond or errors and omission insurance coverage as required by the contract. Also, Regal's late payment of maintenance-fee arrears contributed to the FDIC incurring additional late fees and deeding four properties with a book value of $4.5 million back to the cooperative associations.

We recommended that the Regional Director, DRR, NESC, disallow the following questioned costs billed by Regal:

On August 10, 1998, the Regional Director, DRR, NESC, provided a written response to a draft of this report. The Regional Director agreed with recommendations 4, 5, 6, 7, and 8; partially agreed with recommendations 1 and 3; and disagreed with recommendation 2. Because the OIG did not agree with the Regional Director's reasons for disagreeing with recommendation 2 and parts of recommendations 1 and 3, we held meetings with Office of Internal Control Management, NESC, and DRR Internal Review representatives in an effort to resolve the disagreements. On September 14, 1998, the Regional Director provided a revised response. The Regional Director continued to disagree with recommendation 2, and the OIG continues to disagree with his reasoning. For the parts of recommendations 1 and 3 that the Regional Director disagreed with in his original response, he stated that he would obtain a legal opinion regarding the allowability of the amounts questioned.

The Regional Director's response provided the requisites for a management decision on recommendations 2, 4, 5, 6, 7, and 8. As stated above, we do not agree with the Regional Director's decision on recommendation 2. However, we do not consider the disagreement to be significant. Because the Regional Director's response did not provide the requisites for a management decision on recommendations 1 and 3, we requested that after he receives the legal opinion, he inform us of the corrective actions he plans to take along with the actual or expected dates for completing those actions.

Based on the audit work, the OIG will report questioned costs of $163,705 ($3,223 of which is unsupported) in its Semiannual Report to the Congress.