Hub City Audit Finds Poor Accounting, Mismanagement

An independent audit has revealed “major discrepancies and mismanagement” in the financial operations of Hub City Urban Developers Inc., a nonprofit housing firm that has accumulated more than $4 million in federal and city government debts over the past seven years. Among other things, the audit says that certain financial records are missing.

Compton City Manager Laverta S. Montgomery made those disclosures in a pair of recent memos, shortly after accountant Richard L. Cook conducted what she described as an “extensive” examination of the struggling firm.

Cook’s specific findings are not expected to be released by city officials for another two weeks. But in a “preliminary” report issued in February, the accountant said he had discovered that a variety of Hub City records are either missing or were never maintained.

On Verge of Inquiry

As a result, federal officials plan a detailed review of the firm’s handling of money from a $2.1-million Urban Development Action Grant awarded to the city in 1978, said Herbert L. Roberts, regional director of community planning and development for the U. S. Department of Housing and Urban Development.

“We are very anxious to get our hands on that audit,” Roberts said Tuesday. “Things may spring from that . . . . All of our agencies”--including the HUD Inspector General’s office and the FBI--”are poised and are ready to take whatever appropriate steps are necessary.”

Charles H. Hack, Hub City’s chief executive, said Wednesday that because he has not yet discussed Cook’s findings with city officials “I have no comment on it (the examination).”

Hack, who has been in the top job only since last September, said he knows nothing about any missing or inadequate Hub City records--”I don’t know where they are, I assume they’re here . . . . I have yet to receive a request (from the city or its auditor) asking me for any records.”

Admits Lack of Sophistication

In an interview two weeks ago, Hack said he felt that Hub City’s records in general were “pretty sound,” although he acknowledged that some documents may lack a certain “sophistication.”

Montgomery said Tuesday that no public money appears to be unaccounted for judging from “the records I have seen,” although she is still reviewing a draft of Cook’s final audit report. In the five weeks since Cook’s preliminary report, she added, some of the missing records--at least six years worth of general ledger books that kept track of Hub City’s cash flow prior to 1984--have been reconstructed with the help of bank statements and canceled checks.

In the preliminary report, Cook wrote: “Supporting documents for expenditures, such as invoices and canceled checks, were not maintained for various transactions,” and that Hub City “has not implemented inventory procedures to ensure that all raw materials purchased are properly accounted for and safeguarded.” Also, the firm’s system of internal control “is inadequate to provide reasonable assurance that transactions are recorded as necessary to permit preparation of reliable financial statements.”

When contacted recently, Cook declined to elaborate. And his report offers no explanation of how the general ledgers came to be missing.

Once the audit report has been approved by Montgomery and Cook’s findings have been explained to the City Council, the city manager said, the data will be turned over to HUD officials.

“This certainly causes us some great concern that some records are missing,” said Roberts. “If we are not satisfied with the audit (performed by Cook), we have HUD internal auditors who can take over . . . . That may be our next step.” Those auditors would then try to “find out whether this warrants investigation by a criminal investigatory agency,” he said.

Hub City’s problems date back to 1978, when Compton officials gave the firm $1.1 million of the federal grant to start building 133 prefabricated town houses on what had been several blocks of blighted apartments next to City Hall. The project was designed to generate about 100 construction jobs in addition to providing the city with its first new housing in two decades.

However, in the seven years since, barely a quarter of the town houses have been built or sold and the jobs have never materialized, although the city has pumped an additional $3 million of local tax money into the project. Because of that lackluster performance, HUD officials declared the city--and indirectly, Hub City--in default of the grant provisions last fall, setting the stage for Cook’s comprehensive audit.

Weeds Growing Knee High

Now, knee-high weeds grow over much of the town house property, and Hub City’s Alondra Boulevard assembly plant is frequently locked and vacant, although Hack says that the firm continues to do business. Montgomery’s memo adds that the firm’s Heritage Estates “sales office has been closed for some time due to lack of an aggressive marketing plan which has resulted in no additional sales for the project.”

For the past several months, Hub City has been trying to bail out of its debt problems by joining forces with UNITEC Development Corp., a private Mill Valley construction company.

In February, the firms signed a joint venture agreement that, among other things, called for UNITEC to complete the Heritage Estates development and gradually pay back the federal and city loans.

But even then, Hub City encountered problems, officials say. The joint venture was signed without prior City Council approval, which federal grant regulations require.

And while Montgomery’s March 18 memo states that she “would strongly encourage” UNITEC’s participation in trying to salvage the project, she notes that the firm has had trouble getting Hub City “to cooperate and provide required documents.”

“Frankly,” concluded HUD official Roberts, “up to about a little less than a year ago, we thought this (Hub City) thing was on a good track.” Now, “if, in fact, the money can’t be traced to a (completed or) partially completed home,” he said, “then we’ve got a problem.”