The goal of the Office of Housing and Community Development (OHCD) is to provide for the development of viable communities in Hawai‘i County by providing decent housing, suitable living environments, and the expansion of economic opportunities. The OHCD’s Community Development Division is responsible for the planning, development, construction, and management of assigned housing and community-related projects in Hawai‘i County. OHCD’s Planning Branch administers the affordable housing policy, Hawai‘i County Code (HCC), Chapter 11, through processing affordable housing agreements on rezoning.

Hawaiʻi County has a severe housing crisis. The lack of affordable housing often forces residents to leave the state. Chapter 11, Hawaiʻi County’s Affordable Housing Policy, mandates the inclusion of affordable housing in and throughout various market developments. The rezoning of parcels triggers Chapter 11. Zoning is administered through Chapter 25, Article 5, Zoning Districting Regulations.

Chapter 11 provides a means for developers to satisfy their affordable housing obligation through seven options: developing finished lots, selling, or renting the required units on or off-site, conveying land or infrastructure, or purchasing affordable housing credits. At approximately 44%, purchasing has become the most often used method of satisfaction. See Table 3.

In July 2022, media outlets reported a fraud scheme committed by a now-former employee of the Office of Housing and Community Development, questioning the efficacy of Chapter 11.

In September 2022, Hawai‘i County Council’s Resolution No. 467-22 requested the Office of the County Auditor conduct a performance audit. The audit sought to ensure the efficient issuance and utilization of affordable housing credits, including a comprehensive accounting of all issued, outstanding, transferred, or redeemed, and recommendations to enhance program controls, efficiency, and effectiveness. We also evaluated Chapter 11 of the Hawaiʻi County Code and OHCD’s written policies and procedures for implementing Chapter 11.

While theft and loss can and do happen, the ability to conceal and deceive for a long time is symptomatic of inadequate internal controls. Decades of neglect in monitoring the program has left the department unable to evaluate its success.

Our audit found the following:

Based on these conditions, we offer the following seven recommendations:

Clarify County Code

  1.  We recommend Hawai'i County Council and OHCD revise applicable sections of Chapter 11.

Establish Administration Rules

  2.  We recommend OHCD establish administrative rules to effectively administer the County's Affordable Housing Policy.

Update and Enforce Policies and Procedures

  3.  We recommend OHCD clarify and enforce policies and procedures to ensure consistency throughout the department and industry best practices.

Increase Monitoring and Program Oversight

  4.  We recommend OHCD perform ongoing monitoring of their internal control system's designed and operating effectiveness as part of their operations.

  5.  We recommend OHCD use software and technology as a monitoring tool to improve managing affordable housing agreements and credits.

Segregate Incompatible Duties

  6.  We recommend OHCD management separate incompatible duties.  One individual should not oversee key elements of the affordable housing process.

Provide Training

  7.  We recommend OHCD provide ongoing internal control training to employees involved in the affordable housing process.

Conclusion

When our recommendations are implemented in good faith, OHCD can expect the following benefits:

Clarify County Code

  1.  Clarifying applicable sections of Chapter 11 will make laws easier to understand and ensure compliance.

Establish Administrative Rules

  2.  Establishing administrative rules will help guide OHCD to effectively administer the County's Affordable Housing Policy.

Update and Enforce Policies and Procedures

  3. Updating and enforcing policies and procedures will ensure consistency throughout the organization and with industry best practices.

Increase Monitoring and Program Oversight

  4.  Ongoing monitoring will ensure OHCD's internal control system operates effectively and efficiently as designed.

  5.  Using technology as a monitoring tool will improve managing affordable housing agreements and credits.

Segregate Incompatible Duties

  6.  Segregating incompatible duties will ensure one individual does not oversee key steps of the affordable housing process.

Provide Training

  7.  Ongoing training will ensure employees at all levels of the organization involved in the affordable housing process are knowledgeable and will be held accountable.

We thank the Office of Housing and Community Development for their cooperation and efforts to improve internal controls over their affordable housing program.  

To improve government accountability and ensure audit recommendations are implemented or resolved, we will continuously monitor the status of pending recommendations using our remediation tracker.  To view the status, visit us at: https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-auditor.

Mission

It is our mission to serve the Council and citizens of Hawai‘i County by promoting accountability, fiscal integrity, and openness in local government. Through performance and/or financial audits of County agencies and programs, the Office of the County Auditor examines the use of public funds, evaluates operations and activities, and provides findings and recommendations to elected officials and citizens in an objective manner. Our work is intended to assist County government in its management of public resources, delivery of public services, and stewardship of public trust.

Audit Authority

Hawai‘i County Charter §3-18 establishes an independent audit function within the Legislative Branch through the Office of the County Auditor.

Purpose

This engagement aims to evaluate affordable housing credits (AHC) issued, transferred, redeemed, and outstanding through a comprehensive accounting of credits and testing of the Office of Housing and Community Development’s control environment.

Performance Audit Definition

Performance audits provide objective analysis, findings, and conclusions to assist management and those charged with governance and oversight with, among other things, improving program performance and operations, reducing costs, facilitating decision-making by parties responsible for overseeing or initiating corrective action, and contributing to public accountability.

Our objective in performance auditing is to improve public services provided by the county government. We do this by recommending specific actions to address the issues we raised and by providing valuable information to the public, the administration, program leadership, the county council, and the mayor.

What is the County’s Affordable Housing Policy?

In support of the county’s ongoing efforts to provide adequate, affordable housing to its residents, the Hawaiʻi County Council established an affordable housing policy in 1998 through the adoption of Ordinance No. 98-1.  “The objectives of this affordable housing policy are to:

• Implement the goals and policies of the county’s general plan

• Promote and assist private development of affordable housing for senior citizens and qualified households

• Use available governmental grants and funds in the development of affordable housing and increase the capabilities of qualified households to obtain affordable housing

• Support innovative, lower-cost approaches that may be used in the development of affordable housing

• Require large resort and industrial enterprises to address related affordable housing needs as a condition of rezoning approvals based on current economic and housing conditions”. [1]

Why is affordable housing important?

“The need for affordable housing is immense, and the lasting impact it can have on homeowners and their families are undeniable [2].”  A 2019 Hawaiʻi Housing Planning Study reported Hawaii County will need 10,795 [3] affordable housing units within the next five years (2020-2025).  “Research shows that increasing access to affordable housing is the most cost-effective strategy for reducing childhood poverty and increasing economic mobility in the United States. [4]”

The lack of affordable housing is a significant challenge facing many residents of Hawai‘i, including those in Hawai‘i County.  To address this problem, the county legislated an affordable housing policy requiring “residential developers to include affordable housing in their projects or contribute to affordable housing off-site.”

The Office of Housing and Community Development (OHCD) – Planning Branch oversees and implements the county’s affordable housing policy requirements, also known as Chapter 11.  Through OHCD, the county enters into affordable housing agreements (AHA) with developers.  AHAs are signed by a developer, the county housing administrator, corporation counsel, and the mayor.

Developers who agree to construct new affordable housing units in excess of any requirements required under Chapter 11-15(a) may earn “excess credits.”  Initially, once the developer and OHCD recognize excess credits, they can be transferred without the administrator's approval.  Developers or persons can use credits as well as excess credits to satisfy current or future affordable housing requirements.  OHCD may not recognize purchased credits in satisfaction of a developer’s obligations if it determines the preceding developer sold them without fulfilling an initial obligation.

What are the Long-Term Effects of Housing Regulations?

The Economic Research Organization at the University of Hawaiʻi (UHERO) produced Measuring the Burden of Housing Regulation in Hawaiʻi [5], a study of the impact of regulations on housing markets across Hawaiʻi’s four counties using the Wharton Index survey as a basis to gauge where Hawaiʻi ranks in comparison to similar areas across the U.S.  UHERO authors Bonham, Inafuku, and Tyndall, compared counties to the nation’s top 30 countries with the highest mean home prices and found:

• “One of the factors that may explain Hawaiʻi’s high home prices are government regulations that limit the ability of the housing market to create the units necessary to meet demand.”

• “While clearly important to the production of new housing, regulatory barriers are difficult to measure.”

• “Reducing barriers to housing development is sometimes viewed as a handout for housing developers.”

• “Reforming and removing regulatory barriers to new housing production could significantly contribute to new housing production and ultimately reduce the burden that high housing costs place on local households and improve affordability in the state.”

The Department of Hawaiian Home Lands (DHHL) Credits.

As a major landowner, the state can release land for housing projects. The Department of Hawaiian Home Lands (DHHL) has become one of the largest affordable housing developers throughout the state of Hawaiʻi. The Hawaiian Homes Commission Act of 1920, as amended (HHCA), authorizes the DHHL to enter into project development agreements to develop available lands for homestead projects.

DHHL created the Affordable Housing Credits Policy [6] to provide guidelines for determining the value of credits, clarifying terms and conditions applied, and subsequently transferred to other entities pursuant to Act 141, Session Laws of Hawaiʻi (SLH) 2009, which is codified in Hawaiʻi Revised Statutes (HRS) 46-15.1 (b). Act 141 is effective [Repeal and reenactment on July 1, 2024. L2019, c80, §§1. 2.]

HRS 46-15.1(b) requires counties to recognize housing units developed by DHHL and issue affordable housing credits to DHHL. Credits are transferable and can be applied within the same county in which the credits are earned. Counties are directed to issue credits on a one-for-one basis to DHHL for existing and future projects. Until HRS 46-15.1(b) is repealed or amended, credits will continue to be a part of the affordable housing process.

DHHL credits create obstacles for OHCD because issuance is beyond the department's control, and there is no mechanism to recognize credits continually.

DHHL credits don’t have the same radius restrictions that county-originated projects have.  This contributes to turning localized credit availability imbalances into a countywide problem as credits could be used to fulfill obligations anywhere on the island of Hawaii. In one instance, DHHL built 42 affordable housing units, obtained 42 credits, and transferred those credits to a developer in exchange for building fencing around an endangered plant preserve near La’i Opua Village, Phase 5 (2016).  Several potential problems accompany non-cash forms of payment.  For example, it can circumvent competitive procurement, sidestep a project's budget, carry tax implications, etc.  The extent and effect are beyond the scope of this audit.

Objective, Scope, and Methodology

Objective

To evaluate if internal controls at the Office of Housing and Community Development - Planning Branch are adequate to ensure the efficient issuance and utilization of affordable housing credits and compliance with Chapter 11 of the Hawai‘i County Code.

Scope

The audit will evaluate affordable housing credits (AHC) issued, transferred, redeemed, and outstanding through a comprehensive accounting of credits and testing of OHCD’s control environment.

Developer projects that did not include credits in the affordable housing agreements were omitted from the review.

The audit was conducted from September 2022 to January 2023.

Methodology

To accomplish our objective, we:

We conducted this performance audit in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives.  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

Noteworthy Events

We are pleased to report that the Office of Housing and Community Development (OHCD) has begun to strengthen controls affecting its operations.  We appreciate the cooperation exhibited by OHCD to implement our recommendations. OHCD asserted they have:

Additionally, to improve transparency, the County Council proposed Bill 9 (January 2023), requiring the housing administrator to:

We will follow up at the appropriate time to determine whether and to what extent all recommendations have been completed.

Adequate internal controls reduce the risk of fraud or theft and help provide reasonable assurance that the county’s objectives will be achieved. Internal controls are affected by the actions of individuals within the county and written policies and procedures.  By identifying gaps in policies and procedures, management can identify where adequate controls need to be placed, where to provide sufficient detail for new and existing procedures, and clarification of procedures so that they are easier to follow and enforce.

The Department of Finance’s Accounting Manual requires County departments and agencies to establish internal control systems with the further responsibility of seeing that the internal controls continue to function as designed.

Our audit evaluated OHCD’s affordable housing processes over agreements and credits to ensure the efficient issuance and use of commodities such as affordable housing credits that includes a comprehensive accounting of credits issued, outstanding, transferred, or redeemed.  We found prior internal controls were generally inadequate and not operating according to best practices to prevent, detect, and deter fraudulent transactions. (Figure 2)

While OHCD recently developed policies, procedures, and forms to help guide and better manage its process, no projects have advanced to include the new materials.  As such, we could not determine if current internal controls have been strengthened to provide reasonable assurance that the affordable housing process can be effectively managed.  We will follow up at the appropriate time to determine whether and to what extent all recommendations have been implemented.

Overview

The Office of Housing and Community Development (OHCD) maintains its affordable housing documents in its department’s Laserfiche repository or document management system.  In October 2018, two of OHCD’s five server drivers failed simultaneously, resulting in data loss. While some information was recovered through backups, OHCD has spent four years working to recover lost data.  Some scanned data will never be recovered because the original documents were shredded.  In June 2022, OHCD said they believed they had an accurate accounting of approximately 1,042 credits recorded.  Two worksheets detailing only “excess credit” transactions (Table 1a and Table 1b) [7] were prepared at the request of a Hawaiʻi County Councilmember and published.  We found two calculation errors in OHCD’s credit register tables:

The beginning excess credit balance should be 1,402 credits (Table 1a)

• 1,250 starting balance is missing 2 entries:
  • 5 credits for DJAT, LLC.
  • 147 credits for NHICORAM, Inc.

    The ending excess credit balance should be 1,089 (Table 1b)

• 1,042 is missing 1 entry:
  • 47 credits for Bridge Aina Lea

In August 2022, management began internal audits, including maintaining a complete credit register and rescanning available records.  Both efforts remained ongoing during the audit period.

Through the creation of AHAs, credits are recognized as either running with the land and are part of a committed obligation to fulfill a proposed project or may be identified as excess credits when more units are built than the code requires.  Historically, OHCD has not recognized committed obligation-type credits as having been awarded because, theoretically, they are restricted from resale and are committed to a project. In some cases, credit calculations are not addressed.

Audit Activity

We relied on and assessed the information provided by OHCD to gain an understanding of their affordable housing program. We observed files did not have a standardized format, which generally provides a reasonable basis for quality control. We conducted tests of controls and transactions to and from source data. We observed some information was missing and incomplete, resulting in variances in the total count. In addition, some credits may be in the process of being transferred or redeemed.

Results

As of January 2023, our reconciliation found at least 1,811 credits from October 1988 to current. See Table 2 for a comprehensive accounting of credits.  

Additional information can be accessed on our website, where we house an interactive dashboard, Auditor Dashboard (Ctrl + Click), compiled courtesy of the Office of the County Auditor.

Auditor Notes:

Although not defined on OHCD’s policies and procedures, we determined the following definitions:

Obtained: Includes unfulfilled obligations, credits awarded, pre-awarded, awarded as “bonus credits” (credits issued prior to Chapter 11).  In exchange for conveyance of land or gifted and does not necessarily indicate successful project completion.

Sold: Includes credits sold, transferred, confiscated, dissolved, or brokered.

Purchased: Includes credits purchased, unfulfilled obligations, and awarded through civil judgments from another developer or broker;

Redeemed: Includes credits recouped on projects to satisfy development obligations.

Outstanding: Includes those credits available for existing or future projects.

Sold should equal purchased. Committed obligations, seized, and adjustments account for the difference (781 and 660). For sold, 781 + 67 Kona Three (commitment to purchase) = 848. For purchase, 660 +45 (US Marshal Seizure), + 143 Luna Loa credits dissolved = 848.

*The status of some projects may be pending administrative review by the Office of the Corporation Counsel and is subject to change.

Overview

The purpose of Chapter 11, the County’s Affordable Housing, requires residential, industrial, and hotel projects to include affordable housing in their developments or contribute to affordable housing off-site. Chapter 11 is complex.  Elements include rezoning triggers, satisfaction methods, credit awards based on Area Median Income (AMI) scales, and short and long-term monitoring obligations related to sales, conveyance, buyers, rentals, eligibility, and resales.

OHCD said that developers grow frustrated with the complexity of the overall process and want the easiest way to fulfill the obligation. Purchasing has become the preferred method of satisfaction.

Audit Activity

We gained an understanding of Chapter 11 requirements and reviewed and compared affordable housing agreements (AHA), re-zone ordinances, OHCD’s Affordable Housing Credit Transfer Register, and other supporting documents. Initially, we examined 70 developers, or 100% of the population, provided by OHCD.  We removed projects based on non-executed agreements, missing project details, or credits not mentioned.  These conditions resulted in an adjustment to the population totaling 49 developers and 56 projects.

In 24 cases, executed AHAs were missing from project files (40.7%).  Of the remaining projects, we noted four instances where required signatures were missing. 

We note 22 instances where the Bureau of Conveyance (BOC) recordation could not be confirmed between missing AHAs or incomplete project files. (37.3%).  Furthermore, we noted 12 instances of AHA were not recorded with the BOC.

Before 2019, we observed questionable internal control practices:

• No periodic reports were submitted pursuant to Hawaiʻi County Code Section 11-19 Reports by the housing administrator

   

• Partial and/or early release based on verbal or written requests without performing an independent verification

   

• 3 instances, erroneously used critical housing need determination
  • 2 instances, 15-mile restriction
  • 1 instance, 30-mile waiver
• 1 instance, applied housing subsidy in-lieu of Chapter 11-5(1-7)

• 7 developers were pre-awarded credits
• 6 developers resold, pre-awarded credits
• 4 developers resold pre-awarded credits without affordable units constructed

• 2 instances of credit over-awards

As required by HRS 46-15. (b) all counties recognize housing units developed and credits issued by DHHL. Other jurisdictions use a combination of in-lieu fees and land conveyance to satisfy all or a portion of housing obligations. Hawaiʻi County is the only county within the State of Hawaiʻi that awards “excess” credits and does not charge in-lieu fees.

Cause of the Condition

A complicated Chapter 11 and a lack of systems to manage and maintain developments increased OHCD's risk of misinterpretations and non-compliance.

Effect of the Condition

OHCD misinterpreted and did not always consistently comply with Chapter 11.

Finding 1 Complex County Code

Recommendation 1: Clarify County Code

We recommend OHCD work with the Hawaiʻi County Council to revise applicable sections of Chapter 11, including the following elements:

Overview

Rules are created to regulate behavior, ensure compliance, and maintain discipline throughout the organization.  Rules are promulgated to help the agency fulfill its purpose.  Once adopted, administrative rules have the force and effect of the law.  In contrast, management-formulated policies guide the decision-making processes and ensure uniformity and consistency.

There are at least three laws authorizing OHCD management to establish rules:

• Hawaiʻi County Code, Chapter 11-18 Adoption of rules
• Hawaiʻi Revised Statutes Section 46-15.1(c)(6) Housing; county powers
• Hawaiʻi Administrative Procedure Act, Chapter 91, Hawai‘i Revised Statutes, as amended, establishes the method by which rules and consequences can be created

Audit Activity

We reviewed the following criteria to benchmark the adoption of rules:

• HRS 201H Hawaiʻi Housing Finance and Development Corporation
  • HRS 201H-32 Definitions
• 7A Administrative Rules for the Kauaʻi County Housing Agency
  • Sections 1.3(e)(g)(q) Definitions
  • Section 2.2 Confirmation of Applicability
  • Subchapter 4 Workforce Housing Agreement
• Department of Planning and Permitting City and County of Honolulu
  • Title 20 Administrative Rules 201H Housing Program Rules
    • Section 20-25-7 Eligible Applicant
    • Section 20-25-12 Development Agreement
  • Rules to Implement City’s Affordable Housing Requirements Effective March 31, 2019
  • Section 1-9 Contracts

   

We found OHCD does not have administrative rules to effectively administer Chapter 11.

Cause of the Condition

Management did not establish rules to effectively administer Chapter 11.

Effect of the Condition

OHCD had questionable practices and variances between projects.

Finding 2: No Administrative Rules

Recommendation 2: Establish Administrative Rules

We recommend OHCD establish administrative rules to effectively administer the County’s Affordable Housing Policy.

Administrative Rules should include but not be limited to the following:

• Define Developer, Eligible Developer, and Project.
• Developer. A landowner or authorized agent of a landowner of real property that:
  • Seeks any County approval for the development or subdivision of real property;
  • Apply to the county for a State Land use district boundary amendment, a zoning district boundary amendment, or an applicable amendment
  • Obtain from the County a State Land Use district boundary amendment or zoning district boundary amendment but has not yet satisfied an existing housing condition, or the county has not yet executed a written housing agreement specifying the means to satisfy all or any portion of an existing housing condition.

     

• Eligible Developer. Any person, association, partnership, or cooperative, including limited-equity housing cooperatives as defined in Chapter 201H, firm, nonprofit or for-profit entity, or public agency determined by OHCD:
  • To be qualified by experience, financial responsibility, and support construction housing of the described type and of the magnitude of the given project.
  • To have submitted plans for a housing project adequately meeting objectives of Chapter 201H, HRS, the maintenance of aesthetic values in the project's locale, and the requirements of all applicable environmental statutes and rules.
  • To meet all other requirements the county deems to be just and reasonable, such as:
    • To be licensed or otherwise authorized by all applicable laws to do business in the State of Hawaiʻi.
    • To have reasonable experience in the type of work it proposes.
    • To obtain control of the project site.

       

• Project. The lots or parcels and any development are included and approved in a developer's application for zoning or building permit, subdivision or consolidation, State Land Use district boundary amendment, zoning amendment, or applicable amendments.

 

OHCD should develop definitions to align with actual affordable housing policies, procedures, and practices.

• Drafting of Affordable Housing Agreement (AHA). The agreement should include:

   

  General

  • Use standardized templates with permission-restricted access.

   

  Project specifications - OHCD’s subject matter expert

  • The purpose of the agreement.
  • A description of the role and responsibilities of OHCD, the developer, and other parties to the agreement.
  • The number of units for each household Area Median Income (AMI) category and a minimum period during which the affordability will be maintained.
  • Sales or rental periods for affordable housing units, which specify procedures for the release of units from affordable housing requirements should units not be sold or rented following the expiration of the sales or rental periods.
  • If applicable, payment of in-lieu fees or provision of in-lieu land
  • Resale restrictions may include buy-back provisions, shared equity, and encumbrances.

     

  Enforcement elements - Corporation Counsel subject matter expert(s)

  • Standard clauses for indemnity, severability, termination, assignability, breach, and remedy.
  • The right to enforce the agreement should be granted to the county. The county should have strong performance, enforcement, and recourse clauses. The contract should be subject to the approval of the Corporation Counsel of the County as to form and legality.

   

By establishing written rules, management could better achieve its mission of providing affordable housing units and comply with the County’s Affordable Housing Policy.

Overview

The Government Accountability Office’s Green Book recommends establishing written policies and procedures to document internal controls and responsibilities.  “Internal control comprises the plans, methods, policies, and procedures used to fulfill the entity's mission, strategic plan, goals, and objectives.  Internal control serves as the first line of defense in safeguarding assets.  In short, internal control helps managers achieve desired results through effective stewardship of public resources [8].”  Developing written departmental policies and procedures is an effective way to maintain a robust internal control system.

The Office of Housing and Community Development (OHCD) had limited policies and procedures (Attachment 1 and 2) in August 2019.  Policies and procedures were subsequently developed when fraud was found.  Detailed policies and procedures for implementing Chapter 11 were created in August 2022.

Best practices recommend that management evaluate written policies and procedures annually and update them periodically.  At the county, it is also a requirement for each department and agency to be responsible for creating and maintaining its policies and procedures.  One example of an adequate system of internal controls can be found in the Department of Finance’s Accounting Manual [9].

An organization’s management should incorporate controls into written policies and procedures.  These policies and procedures should cover all aspects of operations, be sufficiently detailed, and be distributed to staff.  In addition, ongoing monitoring is necessary to ensure policies and procedures, and internal controls remain effective and efficient as operations change.

The Department of Finance’s Accounting Manual defines:

• Control Environment. The collective effect of various factors on establishing, enhancing, or mitigating the effectiveness of specific policies and procedures. Including:
  • Management philosophy and operating style
  • Organizational structure
  • Methods of assigning authority and responsibility
  • Managing control methods
  • The internal audit functions

• Control Procedures. In addition to the control environment and accounting system, management has established policies and procedures to achieve its objectives.

OHCD’s internal control system should be designed to include the following:

• Timely Reconciliation.  Existing procedures do not address the timely reconciliation of AHC.  Policies and procedures should require timely reconciliation, adjustments, and administrative reviews.

   

• Close Out Process.  Existing procedures do not address the close-out process.  Policies and procedures should require a close-out process to verify deliverables and credits.

   

• Management Review.  Existing procedures do not detail management’s review and oversight.  Policies and procedures should establish role expectations for management at all stages of the review process to ensure compliance with Chapter 11.

• Fraud Reporting Procedures. Existing procedures do not address fraud reporting.  Policies and procedures should require a fraud reporting process to aid in detecting and preventing fraud.  By providing fraud reporting procedures, everyone within the department will be aware of the fraud risk policy, including types of fraud and the consequences associated with them.  If fraud or theft does occur, the records cannot easily be taken, destroyed, or modified.  Fraud reporting procedures act as a strong deterrent.  Employees will be better educated to identify possible signs of fraud or theft and how to report red flags.

Audit Activity

To determine if policies and procedures were followed and enforced, we compared written policies and procedures to best practices and found:

• No new projects were available during the audit to test compliance with new procedures
• Policies and procedures were not written until August 2022
• 2022 forms do not align with OHCD’s current practices
• Insufficient monitoring practices
• Monitoring procedures not sufficiently addressed in policies and procedures

By identifying gaps in written guidance, management can identify where effective controls need to be placed, where to provide sufficient detail for new and existing procedures, and clarify unclear procedures.

Cause of the Condition

Management did not provide clear expectations through written policies and procedures.

Effect of the Condition

The lack of policies and procedures promoted weak internal controls.

Finding 3: Incomplete Written Policies and Procedures

Recommendation 3: Update and Enforce Policies and Procedures

We recommend OHCD clarify and enforce policies and procedures to ensure consistency throughout the department and industry best practices.

Cause of the Condition

One individual had control over multiple steps.  The same individual compiles, drafts, revises, routes, files, and monitors projects.

Effect of the Condition

Employee(s) learn to exploit weaknesses in the control environment.

Finding 6: Insufficient Segregation of Duties

Recommendation 6: Segregate Incompatible Duties

We recommend OHCD management separate incompatible duties. One individual should not oversee key elements of the affordable housing process.  Compensating controls should be implemented to reduce the risk if duties cannot be sufficiently segregated.

• County employees are not allowed to acquire financial interests in any business or other undertaking that they have reason to believe may be directly involved in official action to be taken by them. 
• Similarly, County employees are not allowed to take any official action directly affecting: 
  • A business or other undertaking in which they have a substantial financial interest.
  • A private undertaking in which they are engaged as a consultant.

Audit Activity

To determine if OHCD provided sufficient training, we reviewed policies and procedures, interviewed appropriate staff, conducted site visits, made observations, and found:

Cause of the Condition

Because management relied on one employee and did not provide continuous training, there were many problems that went undetected, and AHA’s were not appropriately reviewed for completeness and accuracy.

Effect of the Condition

A former government employee used their official position to circumvent the department’s internal control system.

Finding 7: No Training

Recommendation 7: Provide Training

We recommend OHCD provide ongoing training to employees involved in affordable housing, including specialized training to support competency.

What is Fraud?

“Fraud” is any activity that relies on deception to achieve a gain.  Fraud becomes a crime when it is a “knowing misrepresentation of the truth or concealment of a material fact to induce to act to his or her detriment” (Black’s Law Dictionary). In other words, if you lie in order to deprive a person or organization of their money or property, you’re committing fraud. [11]” (ACFE)

How is Fraud Different from Theft?

Theft is taking something that belongs to someone else without their consent.  Fraud is using deceit or trickery to gain an advantage or unfair profit.  To be convicted of fraud, the deception must be proven as intentional.  Typically, fraud is used to get money or something of value to which the person would not typically get access.  “Ultimately, the biggest difference between fraud and theft is that fraudsters will work to ensure that the deceived person does not find out they have been duped.  As long as the person does not realize they have been deceived, no case can be made regarding intentional fraud.” [12]

Fraud Triangle.

Generally, why some people commit fraud is known as the Fraud Triangle.  The Fraud Triangle hypothesizes that if all three components are present: financial pressure, opportunity, and rationalization, a person is very likely to pursue fraudulent activities.

As a practice, we remain mindful and document instances of fraud, waste, and abuse within the scope of the audit objective and not specifically Countywide.

Management reported actual fraud, ongoing investigations and pending litigation.  We will work with corporation counsel or appropriate law enforcement if it impacts the audit results.

We noted internal controls deficiencies and instances of non-compliance with provisions of Hawaiʻi County Code Chapter 11 Affordable Housing Policy and Affordable Housing Agreements (contracts). See Chapter 2, Audit Results.

Clarity County Code

1.  Clarifying applicable sections of Chapter 11 will make laws easier to understand and ensure compliance.

Establish Administrative Rules

2.  Establishing administrative rules will help guide OHCD authority to effectively administer the County's Affordable Housing Policy.

Update and Enforce Policies and Procedures

3.  Updating and enforcing policies and procedures will ensure consistency throughout the organization and with industry best practices.

Increase Monitoring and Program Oversight

4.  Ongoing monitoring will ensure OHCD's internal control system operates effectively and efficiently as designed.

5.  Using technology as a monitoring tool will improve managing affordable housing agreements and credits.

Segregate Incompatible Duties

 6.  Segregating incompatible duties will ensure one individual does not oversee key steps/elements of the affordable housing process.

Provide Training

 7.  Ongoing training will ensure employees at all levels of the organization involved in the affordable housing process are knowledgeable and will be held accountable.

To improve government accountability and ensure audit recommendations are implemented or resolved, we will continuously monitor the status of pending recommendations using our remediation tracker. To view the status, visit us at: https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-auditor.

In closing, the improper use of government resources or positions is often discovered thanks to employees and the public, and we encourage you to report concerns through our fraud and whistleblower hotlines:

Fraud and waste hotline: (808) 480-8213

Whistleblower hotline: (808) 480-8279

Email: concern@hawaiicounty.gov

Fax: (808) 961-8905

Mail: Office of the County Auditor, 120 Pauahi St., Hilo, HI 96720

To access the complaints directory:

https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-auditor/inquiry-and-complaint

Submit a claim:

https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-auditor/inquiry-and-complaint/intake-form