Finding 2023-001 – Accounting Controls – Internal Controls over Financial Statement Preparation
ALN 14.881 – Noncompliance and Material Weakness
Criteria: Regulations at 2 CFR Part 200, Uniform Administrative Requirements, outline the internal control requirements for recipients of federal grant funds. Non-Federal entities must demonstrate, “Effective control over, and accountability for, all funds, property, and other assets.” A deficiency in internal control exists when the design or operation of a control does not allow management or its employees, in the normal course of operation, to detect or correct errors, fraud, or misstatements in a timely manner. The failure to properly implement internal control procedures can result in material misstatements of the account balances and noncompliance with grant oversight provisions.
Condition: We noted the following deficiencies related to the maintenance of accounting records and the underlying internal controls:
1) Cash and Investments
We noted in our first onsite visit that the cash reconciliations did not balance to the general ledger. We have worked with the Authority and the Fee Accountant to reconcile these cash balances to present the financial statements accurately in all material aspects. A sample of client errors and adjustments made in the financial statements are listed below:
a. In the COCC there was a blank $598,914 entry reducing cash and offsetting other income. No support was provided for this entry.
b. In Business Activities there was a $2,458,085 entry reducing investments which was the result of a doubled entry to transfer cash to a discretely presented component unit.
c. The general fund bank reconciliation contained a $724,110 entry to “correct reconciled difference”. No support was provided for this entry on the reconciliation. We noted various below the line entries on the reconciliation similar to this which caused difficulties in reconciling total cash and investments.
d. In Low Income Public Housing the Authority double counted November 2023 subsidy of $150,306 which caused an overstatement in cash.
e. The Authority failed to account for a transfer between the COCC and Business Activities in the amount of $2,900,710. This amount is budgeted toward the COCC to cover costs allocated to it and is approved annually by the board.
The Authority uses a pooled cash system across both its federal and nonfederal programs which also include tax credit and mixed finance entities that the Authority manages. Internal control weaknesses in this area have the potential to create cascading effects that can distort the financials and result in the likely probability of material misstatements.
2) Capital Assets and Depreciation
We observed in our review of the capital assets that the depreciation schedules were not accurately maintained at December 31, 2023. The Authority did not update its capital asset software for assets acquired from July 2022 through December 2023. We also noted errors in the depreciation expense calculated for the eighteen-month period. (The Housing Authority converted to a December year end in the current audit period resulting in an eighteen-month period for the audit.)
We also noted that in Public Housing the Authority incorrectly capitalized $525,040 in appliances from the Capital Fund program that did not meet their capitalization thresholds in their policies. We have worked with the client to correct these deficiencies for the audited financial statements.
3) Notes Receivable and Notes Payable
We noted that the Authority failed to account for the terms of it’s notes receivable from various tax credit developments. We have proposed audit adjustments of $12,330,049 to bad debt for loans related to Ashley Station. We have also proposed adjustments to recognize accrued interest related to these notes in the amount of $1,281,395. Finally, the Authority repaid a debt owed to Columbus Affordable Housing Services during the fiscal year but never recognized this transaction in their financial statements in the amount of $3,839,601 which was still shown as a payable at year end. We have proposed adjustments to correct these deficiencies.
4) General Financial Statement Reconciliation
We note that there are a large number of adjustments that will need to be made to the unaudited financial statements to, in all material aspects, accurately present the audited financial statements. These adjustments and deficiencies are included in the above narrative as well as a handful of nonmaterial adjustments below:
a. The MTW HCV grant revenue was overstated by $198,937.
b. Penalties to the IRS for late filing of 1099 files was not accrued by the Authority in the amount of $65,531.
c. Authority reported CDBG revenue during the year of $325,134. It was discovered that this was not CDBG revenue but donations from the City. This amount was also capitalized on the CDBG ledger but is already included in the financial statements of Mill District I, LP. We have provided entries to correct this deficiency.
Cause: Lack of internal controls in the area of financial reporting and in the review of the financial statements. We also noted that the Chief Financial Officer left the employment of the Authority shortly after year end. The PHA then hired an outside consultant to do a full close and review of the financial statements. There appeared to be a miscommunication between the Authority and the consultant as the consultant did not perform a full year end close and instead only prepared the entries necessary for the preparation of the unaudited financials. Following the discovery of this the Authority worked with the consultant to provide the full review of financials subsequent to our first onsite visit. Even though the year-end consulting was delayed there should have been ongoing internal controls in place to fairly present monthly financial statements. The lack of adequate controls during the year contributed to the amount of work and inconsistencies at year end.
Effect: Improper balancing of accounts and accounting controls can result in misstated financial statements and improper financial information being communicated to management and to HUD.
Recommendation: We recommend that the bank reconciliations be completed monthly and approved by a supervisor or the CEO. We also recommend CFO properly oversee the reconciliation and recording of capital assets, notes receivable, notes payable and the issuance of interim financial statements. Additionally, annually the CFO needs to reconcile all material balance sheet accounts before the issuance of year-end reports.
Finding 2023-002 – Accounting Controls – Subsequent Bank Reconciliations Not Completed
ALN 14.881 – Noncompliance and Material Weakness
Criteria: Regulations at 2 CFR Part 200, Uniform Administrative Requirements, outline the internal control requirements for recipients of federal grant funds. Non-Federal entities must demonstrate, “Effective control over, and accountability for, all funds, property, and other assets.” A deficiency in internal control exists when the design or operation of a control does not allow management or its employees, in the normal course of operation, to detect or correct errors, fraud, or misstatements in a timely manner. The failure to properly implement internal control procedures can result in material misstatements of the account balances and noncompliance with grant oversight provisions.
Condition: As of the audit field date, the Authority has failed to complete bank reconciliations for the eight months subsequent to the fiscal year-end. The internal control weaknesses in the bank reconciliation processes described in Finding 2023-001 in addition to the lack of subsequent bank reconciliations presents a high risk that there are undiscovered fraud or material misstatements in the period following year end.
Cause and Effect: Failure to properly reconcile and adjust bank reconciliations can result in misstated books and records of account. The lack of oversight over a highly liquid asset also elevates the risk of fraud or misstatement in these accounts.
Recommendation: We recommend that the Housing Authority bring all bank reconciliations up to date as soon as possible and on an ongoing basis establish a reconciliation deadline for the accounting department.
Finding 2023-001 – Accounting Controls – Internal Controls over Financial Statement Preparation
ALN 14.881 – Noncompliance and Material Weakness
Criteria: Regulations at 2 CFR Part 200, Uniform Administrative Requirements, outline the internal control requirements for recipients of federal grant funds. Non-Federal entities must demonstrate, “Effective control over, and accountability for, all funds, property, and other assets.” A deficiency in internal control exists when the design or operation of a control does not allow management or its employees, in the normal course of operation, to detect or correct errors, fraud, or misstatements in a timely manner. The failure to properly implement internal control procedures can result in material misstatements of the account balances and noncompliance with grant oversight provisions.
Condition: We noted the following deficiencies related to the maintenance of accounting records and the underlying internal controls:
1) Cash and Investments
We noted in our first onsite visit that the cash reconciliations did not balance to the general ledger. We have worked with the Authority and the Fee Accountant to reconcile these cash balances to present the financial statements accurately in all material aspects. A sample of client errors and adjustments made in the financial statements are listed below:
a. In the COCC there was a blank $598,914 entry reducing cash and offsetting other income. No support was provided for this entry.
b. In Business Activities there was a $2,458,085 entry reducing investments which was the result of a doubled entry to transfer cash to a discretely presented component unit.
c. The general fund bank reconciliation contained a $724,110 entry to “correct reconciled difference”. No support was provided for this entry on the reconciliation. We noted various below the line entries on the reconciliation similar to this which caused difficulties in reconciling total cash and investments.
d. In Low Income Public Housing the Authority double counted November 2023 subsidy of $150,306 which caused an overstatement in cash.
e. The Authority failed to account for a transfer between the COCC and Business Activities in the amount of $2,900,710. This amount is budgeted toward the COCC to cover costs allocated to it and is approved annually by the board.
The Authority uses a pooled cash system across both its federal and nonfederal programs which also include tax credit and mixed finance entities that the Authority manages. Internal control weaknesses in this area have the potential to create cascading effects that can distort the financials and result in the likely probability of material misstatements.
2) Capital Assets and Depreciation
We observed in our review of the capital assets that the depreciation schedules were not accurately maintained at December 31, 2023. The Authority did not update its capital asset software for assets acquired from July 2022 through December 2023. We also noted errors in the depreciation expense calculated for the eighteen-month period. (The Housing Authority converted to a December year end in the current audit period resulting in an eighteen-month period for the audit.)
We also noted that in Public Housing the Authority incorrectly capitalized $525,040 in appliances from the Capital Fund program that did not meet their capitalization thresholds in their policies. We have worked with the client to correct these deficiencies for the audited financial statements.
3) Notes Receivable and Notes Payable
We noted that the Authority failed to account for the terms of it’s notes receivable from various tax credit developments. We have proposed audit adjustments of $12,330,049 to bad debt for loans related to Ashley Station. We have also proposed adjustments to recognize accrued interest related to these notes in the amount of $1,281,395. Finally, the Authority repaid a debt owed to Columbus Affordable Housing Services during the fiscal year but never recognized this transaction in their financial statements in the amount of $3,839,601 which was still shown as a payable at year end. We have proposed adjustments to correct these deficiencies.
4) General Financial Statement Reconciliation
We note that there are a large number of adjustments that will need to be made to the unaudited financial statements to, in all material aspects, accurately present the audited financial statements. These adjustments and deficiencies are included in the above narrative as well as a handful of nonmaterial adjustments below:
a. The MTW HCV grant revenue was overstated by $198,937.
b. Penalties to the IRS for late filing of 1099 files was not accrued by the Authority in the amount of $65,531.
c. Authority reported CDBG revenue during the year of $325,134. It was discovered that this was not CDBG revenue but donations from the City. This amount was also capitalized on the CDBG ledger but is already included in the financial statements of Mill District I, LP. We have provided entries to correct this deficiency.
Cause: Lack of internal controls in the area of financial reporting and in the review of the financial statements. We also noted that the Chief Financial Officer left the employment of the Authority shortly after year end. The PHA then hired an outside consultant to do a full close and review of the financial statements. There appeared to be a miscommunication between the Authority and the consultant as the consultant did not perform a full year end close and instead only prepared the entries necessary for the preparation of the unaudited financials. Following the discovery of this the Authority worked with the consultant to provide the full review of financials subsequent to our first onsite visit. Even though the year-end consulting was delayed there should have been ongoing internal controls in place to fairly present monthly financial statements. The lack of adequate controls during the year contributed to the amount of work and inconsistencies at year end.
Effect: Improper balancing of accounts and accounting controls can result in misstated financial statements and improper financial information being communicated to management and to HUD.
Recommendation: We recommend that the bank reconciliations be completed monthly and approved by a supervisor or the CEO. We also recommend CFO properly oversee the reconciliation and recording of capital assets, notes receivable, notes payable and the issuance of interim financial statements. Additionally, annually the CFO needs to reconcile all material balance sheet accounts before the issuance of year-end reports.
Finding 2023-002 – Accounting Controls – Subsequent Bank Reconciliations Not Completed
ALN 14.881 – Noncompliance and Material Weakness
Criteria: Regulations at 2 CFR Part 200, Uniform Administrative Requirements, outline the internal control requirements for recipients of federal grant funds. Non-Federal entities must demonstrate, “Effective control over, and accountability for, all funds, property, and other assets.” A deficiency in internal control exists when the design or operation of a control does not allow management or its employees, in the normal course of operation, to detect or correct errors, fraud, or misstatements in a timely manner. The failure to properly implement internal control procedures can result in material misstatements of the account balances and noncompliance with grant oversight provisions.
Condition: As of the audit field date, the Authority has failed to complete bank reconciliations for the eight months subsequent to the fiscal year-end. The internal control weaknesses in the bank reconciliation processes described in Finding 2023-001 in addition to the lack of subsequent bank reconciliations presents a high risk that there are undiscovered fraud or material misstatements in the period following year end.
Cause and Effect: Failure to properly reconcile and adjust bank reconciliations can result in misstated books and records of account. The lack of oversight over a highly liquid asset also elevates the risk of fraud or misstatement in these accounts.
Recommendation: We recommend that the Housing Authority bring all bank reconciliations up to date as soon as possible and on an ongoing basis establish a reconciliation deadline for the accounting department.