Bad books

Despite criticism, lax accounting persisted in the City of Providence's housing program

by Irwin Becker

WHEN TWO BOARD members of the Providence Neighborhood Housing Corporation (PNHC) raised questions about inconsistent financial reports, they were ignored, and in one case, selectively accused of a conflict of interest.

But the critics' instincts were absolutely right. The PNHC's internal accounting for 1998 and 1999 is in such disarray that an independent firm has been hired to reconstruct it. The nonprofit corporation, part of Providence's Department of Planning and Development, was fined $21,800 by the Internal Revenue Service, because a former accountant "forgot" to file the PNHC's federal tax return for fiscal 1998.

The PNHC board learned earlier this week that the IRS, after a series of appeals, has agreed to waive the fine. But the problems that sparked the fine could hurt the functions of the PNHC and the Planning Department, both of which rely almost exclusively on funding from the US Department of Housing and Urban Development (HUD). These stakes are high: The PNHC, for example, distributed $8.6 million in federal funds in 1997.

The accountant responsible for this bookkeeping mess, Don Pedro DeSilva, is a former IRS agent who in 1987 was sentenced to a year in prison for filing a false personal income tax return while working as a certified public accountant in Cranston.

Providence officials downplay these problems. John F. Palmieri, director of the city's Department of Planning and Development, and acting director of the PNHC, agrees that the corporation's "books were unauditable after Don left. But it did not smack of malfeasance." Palmieri says he was told by the independent accounting firm hired by the city that no funds were missing. "Sloppy bookkeeping," concludes the planning director.

But the situation shows how long-term financial weaknesses have been ignored at the PNHC and its predecessor agency, the Providence Plan Housing Corporation (PPHC), which was created in 1992. An investigation by the Phoenix has revealed the following:

* DeSilva's monthly and annual reports to the PNHC board for the two years before he left "did not represent actual results" and "did not reconcile" to the organization's records, according to a report prepared by the auditing firm Aaronson, Lavoie, Streitfield & Co. of Cranston, which is being paid $17,000 to reconstruct the PNHC's books.

* The 28 vacant and renovated housing units owned by PNHC, with mortgages of nearly $1.6 million, have "no value and is most likely a liability," according to an internal report to the board.

* At least 102 purchase or repair loans are delinquent, some dating back to 1993. The outstanding amount exceeds $629,000 as of June 1998. Attempts to start collecting the loans only began at the request of the PNHC board, in 1999.

Aaronson's auditing report was barely discussed and sent immediately to the finance committee after it was given to the board at a public meeting earlier this year. As of a few weeks ago, it was still under review.

"We asked [the independent auditor] about fraud or missing funds," says Steven O'Rourke, chairman of the PNHC board, who was also head of the original PPHC board. After two meetings with the auditing team, O'Rourke says, it seems more like "sloppy bookkeeping or [bookkeeping] just not being done at all."

But in a letter to the PNHC board, dated January 28, Aaronson, Lavoie, Streitfield & Co. note that "significant deficiencies" were uncovered. The deficiencies are significant enough to be listed as "reportable conditions" -- which in the accounting trade means serious problems that have to be addressed and corrected immediately. A reportable condition is one step below the more severe "material weakness," which, according to CPAs familiar with municipal finance issues, could "adversely affect" the ability of an agency to administer a federal program.

The US Department of Housing and Urban Development (HUD) which has financed the city housing programs with loans and grants, and which has given the City of Providence $10 million for housing and social programs in the current fiscal year, was unaware of these problems before recently being contacted by the Phoenix.

Susan Lang, a HUD representative responsible for overseeing the Providence programs, says there haven't been any thorough recent audits of funds for HOME, one of the main housing programs. Most of that money is targeted for projects controlled by nonprofit developers.

Asked if the independent auditor's findings are serious enough to stop the flow of HUD dollars to the City of Providence, Lang says, "We would stop the program until financial management systems were in place." HUD will "certainly look into this," she says, and will "certainly ask for an audit."

THE PROVIDENCE NEIGHBORHOOD Housing Corporation was formed in 1997 after the Providence Plan Housing Corporation (PPHC), established in 1992, ran out of funding. PPHC was the centerpiece of Mayor Vincent A. "Buddy" Cianci Jr.'s Providence Plan, which was intended to improve schools and reduce crime. PPHC was created as a private, non-profit for several reasons: it could seek private, as well as public funds; It wouldn't be controlled by the Department of Planning and Development; And it would be outside the purview of the city's unions. L. Matthew Powell, who had run a similar effort in Chattanooga, Tennessee, was hired as the agency's executive director.

The operation was funded by $20 million from a 20-year city bond and $7 million borrowed from the federal government. In five years of operations, PPHC went through some $30 million, mostly with loans and grants to about 2100 families, for home repairs, mortgage assistance, paint projects, housing development, sidewalk repairs, demolition of abandoned properties and aid to 14 nonprofit neighborhood groups, mostly through loans and grants.

When the original funds were exhausted, Cianci decided not to seek more money through a second city bond issue, say several sources. The subsequent demise of PPHC, according to Powell, former staff members and current community leaders, involved the lack of a long-range plan; the desire of Planning and Development officials to regain control for housing programs; criticism from local housing groups -- which feared the city wanted to put them out of business; and heavy pressure from City Council members, who wanted more construction and greater emphasis on owner-occupied housing, rather than rentals.

"There was a free-for-all for the money and continuous arguments where it should be spent," recalls Powell, now executive director of the Austin, Texas, Housing Finance Corporation. "The major problem was [that] there was not enough ground work to get consensus by the [City] Council, city agencies and by the nonprofits. The controversy doomed a good idea -- how to get more investment in housing."

PPHC also had a cash deficit each year, Powell says, because "we had a capital grant to spend, but no revenue coming to us. Why create an organization with limited time without building a program?" He wound up leaving his job six months before his contract ended, along with a payment for $50,000, half his annual salary.

The Providence Neighborhood Housing Corporation was formed in 1997 to carry on a much more limited housing program. PNHC, which was placed within the city's Department of Planning and Development, focused on distributing federal housing funds to encourage expanded construction and rehabilitation by neighborhood nonprofits and community development corporations. But PNHC, which was created with many carry-over board members from PPHC, continued to face cash shortages.

Several current and former PPHC/PNHC and Planning Department workers say the board has never exerted strong control over the agency's housing programs. Many monthly meetings are canceled for a lack of quorum or for unstated reasons. Few sessions have been held this summer, for instance, despite the accounting dilemma and lack of acceptable financial data.

By the time the more serious problems were discovered -- after initial concerns by critics on PNHC's 11-member board were dismissed -- DeSilva's failure to file the nonprofit's 990 form for 1998 was probably the most acute. The omission was discovered after DeSilva left his job with the city in 1999.

Referring to information provided by DeSilva in a

year-end fiscal report in June 1998, Aaronson, the

independent auditor found, "These reports did not

represent actual results of the corporation's activities

and did not reconcile to the corporation's accounting records." This management letter also indicates, "the

corporation does not have procedures in place to record, maintain and periodically inventory capital expenditures."

Other failings cited by the independent auditor include:

* Eighteen percent of contractors' invoices couldn't be located.

* Thirty percent of the sample tested did not contain the form l099, which is required by the IRS for anyone paid more than $600 a year. It is the standard form issued for contractors and consultants who are not regular employees.

* "Numerous checks were returned" for insufficient funds because monthly bank reconciliations weren't done for seven cash accounts.

* Grant expenses were not charted separately, as required by the federal government.

DESILVA, A l977 graduate of Northeastern University in Boston, attended college under an IRS scholarship and, after receiving his degree, worked for 10 years as a revenue agent for the tax service before entering a private accounting practice. Reached at his home in Bowie, Maryland, the former Cranston resident was candid about his conviction for filing a false income tax return. DeSilva, now 47, says that while in private practice in 1983, he took a $2300 investment tax credit a year before he was legally allowed to do so.

"When I was presented with it, I tried to cover it up," he says. "I had whited out a date on the tax document. It was a temporary lapse of good professional judgment." DeSilva, who pleaded guilty in federal court to three charges and was criticized by US District Court Judge Francis J. Boyle for having "misused" a public trust, served five months of a one-year sentence at the federal prison in Allenwood, Pennsylvania. His CPA license, which was suspended for two years, was reinstated by 1990. Ironically, considering the IRS fine against the City of Providence, he's also in "good standing," he says, with the tax agency.

DeSilva, who resigned from his city position in 1999 and moved out of state, blames PNHC's accounting problems on unfiled records, an obsolete computerized accounting system, and a board of directors that didn't see audits or financial statements before his tenure. "The place was a mess," he says. "I told them they would be out of money in two years. I told them the facts, but I'm an easy target."

According to the most recent files at the Rhode Island Board of Accountancy, DeSilva has not been the subject of any complaints and has a valid license as a certified public accountant. The state agency's files do not contain any reference to the CPA's conviction, possibly because the board's computer records do not extend as far back as 1987. In September 1999, a judgment of $5830 was entered against DeSilva's consulting firm in Cranston for non-payment of a copier lease.

DeSilva says he was hired to serve as the Providence Neighborhood Housing Corporation's accountant for a year because a temporary bookkeeper had left. He hired his then-sister-in-law, Pam DeSilva, as an independent contractor, he says, because she had experience in accounting work. The hiring of Pam DeSilva, who remains employed by the Department of Planning and Development, as an independent contractor, rather than a regular employee, is among the criticisms leveled by Aaronson, the independent auditor. Don Pedro DeSilva concedes the hiring of a relative was probably a conflict of interest, but says he needed help "ASAP."

DeSilva says he recommended hiring Aaronson's firm to audit the PNHC books. He says he inherited a financial system that was in disarray: the software application was nearly 10 years old; The Lotus system for maintaining loan files was "archaic"; and files from the old PPHC system were "lost" in the move from the first to the fourth floor at the agency's headquarters at 400 Westminster St., he says.

Asked why the PNHC's annual tax return for 1998 wasn't filed, DeSilva cites a computer crash and says the city was already half-way through the fiscal year. The filing "slipped through the cracks," he says.

As to his criminal record, DeSilva said it "was not a secret to the city," and was "disclosed to the board in an executive session. I'm paying for this thing my entire life," he adds. "It never ends."

Palmieri, the executive director of Planning and Development, says he hired DeSilva. "He had good references," particularly from Lawrence Brown, an accountant with whom DeSilva had shared an office, "and we wanted a local consultant and a minority," Palmieri recalls. DeSilva is Cape Verdean.

Was the city aware of DeSilva's felony conviction for tax fraud? Palmieri says he could not recall when he learned of the conviction without reviewing minutes of the PNHC board. "It was discussed at the board level," Palmieri says. Board member "Fred Lippitt brought it to my attention." By then, DeSilva had been able to renew his CPA's license.

How did DeSilva manage to not file the vital 990 federal tax return? "DeSilva forgot," Palmieri says, "and didn't tell any of us."

RICHARD H. GODFREY Jr., a member of the Providence Neighborhood Housing Corporation board, became so frustrated with the lack of consistent financial reports at PNHC that he blew up at a board meeting earlier this year, attacking DeSilva's work. "The financial reports were indecipherable and made no sense from month to month," says Godfrey, executive director of Rhode Island Housing and Mortgage Finance Corporation.

Godfrey's complaints weren't new. In a series of letters dating to 1995, he criticized the weakness of the PPHC board, the inattention of staff and, as in a letter dated January 22, 1997, noted that "the information presented by staff was incomprehensible."

When Godfrey excoriated DeSilva during the meeting earlier this year, Palmieri came to the former accountant's defense, saying it was unfair for him to be criticized. But after the auditor's report detailed the accounting problems, Palmieri apologized to Godfrey. In the same way, Godfrey and another PNHC board member who persistently raised questions about the agency's finances now feel vindicated.

Asked to assess the impact of the accounting problems, Godfrey says, "it has consumed a great deal of board attention." Since "we don't know how much money" is available, payments to nonprofits have been delayed, holding up housing work, he says.

Arthur Hanson, associate director of Planning and Development, disputes that view, asserting the accounting mess has caused "no" problems, and that the use of funds hasn't been delayed.

The other critic on the PNHC board is Brenda Clement, executive director of the Rhode Island Housing Network, which represents 22 housing nonprofits across the state, including nine operating in Providence. After being asked two years ago to serve on the PNHC board, she immediately questioned budgets and monthly reports, noting inconsistencies and seeking answers. "They thought we were crazy," Clement recalls.

The city's response to Clement's persistent criticism was to level an accusation of conflict of interest against her. The state Ethics Commission supported the complaint, ruling that Clement could not vote on financial matters related to local nonprofits that are part of the Rhode Island Housing Network.

But the city's decision to target Clement for the complaint was unusual and selective, since other PNHC board members are part of the same small informal network.

PNHC Board member Patricia K. Nolan, a Providence councilwoman, for example, was a long-time ex officio board member of the Elmwood Foundation, which has received PNHC support. The PNHC has given loans and grants exceeding $1.2 million to the Blackstone housing development on Providence's south side, which has been publicly referred to several times by Councilwoman Balbina Young, a PNHC board member, as "my development."

Board member Jeanne Cola is a vice president at Citizens Bank, which has provided construction and long-term mortgages to several nonprofit developments, including Blackstone. And Godfrey's RIHMFC provides loans and grants to practically all of the nonprofit housing developers in the city, all of whom receive funds from various PNHC and Planning and Development sources.