S3800-010: Finding Reference Number 2024-001
S3800-011: Title and Assistance Listing Number of Federal Program: 14.856 Lower Income Housing Assistance Program (Section 8 Moderate Rehabilitation)
S3800-015: Type of Finding: Federal Award Finding
S3800-016: Finding Resolution Status: In Process
S3800-017: Information on Universe Population Size - Sixty-one (61) rental units
S3800-018: Sample Size Information - Twelve (12) rental units
S3800-019: Identification of Repeat Finding and Finding Reference Number - Not Applicable
S3800-020: Criteria:
The COSO Framework (Committee of Sponsoring Organizations of the Treadway Commission) is a widely used model for establishing, assessing, and improving internal controls within an organization. It provides a comprehensive structure for managing risks and ensuring reliable financial reporting, operational effectiveness, and compliance with laws and regulations. COSO framework is broken down into five interrelated components, which together help organizations build a robust internal control system. Control Activities is one of the five components of the COSO Framework. Control Activities are the policies and procedures put in place to mitigate risks and achieve the organization’s objectives. Control Activities can be preventative, detective, or corrective.
S3800-030: Statement of Condition:
Management designed Control Activities to ensure compliance with the Eligibility requirement with respect to tenant eligibility. Those Control Activities include verification and review of tenant files by an independent contractor prior to finalization of new tenant move-in. However, during our testing, we noted five (5) move-in files out of five (5) move-in files tested where tenants were approved for move-in prior to review and approval by the independent contractor, circumventing the control.
S3800-032: Cause:
The cause of this condition is due to inadequate enforcement of internal control policies and/or insufficient monitoring of compliance procedures. There appears to be a gap in oversight to ensure that all required tenant eligibility files are reviewed and approved prior to final move-in in accordance with the established internal controls and regulatory requirements.
S3800-033: Effect or Potential Effect:
By processing tenant certification files without the necessary review and approval, there is an increased risk of housing ineligible tenants with incorrect or incomplete files, potentially resulting in non-compliance with eligibility requirements and improper use of program funds. This could lead to penalties, and a loss of funding under federal programs, as well as undermine the integrity of the compliance processes.
S3800-035: Auditor Noncompliance Code: S – Internal Control Deficiencies
S3800-040: Questioned Costs: $0
S3800-037: FHA Contract Number: 127-11114
S3800-038: Questioned Costs: $0
S3800-045: Reporting Views of Responsible Officials:
Management has reviewed the policies and procedures with the property manager, who also serves as the compliance specialist. The property manager was instructed that no tenants are to be granted occupancy until the file has been approved by the independent contractor conducting the compliance review.
S3800-050: Context:
Five (5) move-in files out of the five (5) move-in files tested where tenants were approved for move-in prior to review and approval by the independent contractor, circumventing the control.
S3800-080: Auditor Recommendation:
We recommend that the client immediately implement corrective actions to ensure compliance with internal control procedures. Specifically:
1. The compliance specialist should be required to wait for proper approval of tenant eligibility files before processing them.
2. Review and reinforce the approval process through additional training for staff to ensure they understand the critical importance of obtaining necessary approvals before proceeding.
3. Implement stronger oversight and monitoring mechanisms to ensure that files are not processed before approval.
S3800-010: Finding Reference Number 2024-001 (Continued)
S3800-011: Title and Assistance Listing Number of Federal Program: 14.856 Lower Income Housing Assistance Program (Section 8 Moderate Rehabilitation)
S3800-090: Auditor’s Summary of the Auditee’s Comments on the Findings and
Recommendations:
Management was not aware that the property manager was granting occupancy to tenants before the tenant eligibility file was approved by the independent contractor performing the oversight function, and violates the policies and procedures of management. Management has reviewed the policies and procedures with the property manager, who also serves as the compliance specialist. The property manager was instructed that no tenants are to be granted occupancy until the file has been approved by the independent contractor conducting the compliance review.
S3800-130: Response Indicator: Agree
S3800-140: Completion Date: March 20, 2025
S3800-150: Response:
Management agrees with the recommendation of the auditor and plans to take corrective actions as noted in S300-045 above.
S3800-010: Finding Reference Number 2024-002
S3800-011: Title and Assistance Listing Number of Federal Program: 14.856 Lower Income Housing Assistance Program (Section 8 Moderate Rehabilitation) and 14.134 Mortgage Insurance – Rental Housing (Section 207(a)/223(f)
S3800-015: Type of Finding: Federal Award Finding
S3800-016: Finding Resolution Status: In Process
S3800-017: Information on Universe Population Size - Not Applicable
S3800-018: Sample Size Information - Not Applicable
S3800-019: Identification of Repeat Finding and Finding Reference Number - Not Applicable
S3800-020: Criteria:
According to the U.S. Department of Housing and Urban Development (HUD) regulations for insured loan programs under Handbook 4370-2, Section 2-12 A (2) the security deposit account must be maintained at a level sufficient to cover the total amount of tenant security deposits held. Management must maintain clear records and ensure that the total balance in the segregated account matches the sum of all current tenant security deposits. If tenants move out or new tenants move in, the account balance must be adjusted accordingly. This ensures the protection of tenant funds and compliance with federal housing program requirements. HUD guidelines stipulate that security deposit funds must be properly segregated and accessible, with the account balance accurately reflecting the amounts due to tenants.
S3800-030: Statement of Condition:
Our audit procedures revealed that the security deposit cash account was underfunded for nine (9) out of the twelve (12) months tested. Specifically, the required balance for security deposits was not fully met in these months, resulting in a deficiency in the account. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times.
S3800-032: Cause:
The underfunding of the security deposit account occurred due to insufficient monitoring of deposit inflows and timely funding. The organization did not consistently ensure that security deposit funds were deposited into the account in accordance with HUD regulations, leading to the shortfall in the balance.
S3800-033: Effect or Potential Effect:
The underfunding of the security deposit cash account resulted in non-compliance with HUD regulations, which mandate that the account be adequately funded to cover tenant security deposits. Although the chances are remote, this could expose the program to potential financial risk, as the organization may not have sufficient funds available to return security deposits to tenants at the end of their lease terms. Additionally, failure to meet HUD's funding requirements may result in penalties or sanctions from HUD. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times.
S3800-035: Auditor Noncompliance Code: M – Security Deposits
S3800-040: Questioned Costs: $0
S3800-037: FHA Contract Number: 127-11114
S3800-038: Questioned Costs: $0
S3800-045: Reporting Views of Responsible Officials:
It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level.
S3800-050: Context:
Security deposit cash account was underfunded for three (3) out of the twelve (12) months tested by between roughly $100-$550; for six (6) out of the twelve (12) months the security deposit account was underfunded by $6.
S3800-080: Auditor Recommendation:
We recommend that property management implement a more robust process for monitoring and reconciling the security deposit cash account on a monthly basis. This process should ensure that the account balance is consistently maintained at the required level. Furthermore, management should conduct periodic reviews of the security deposit balances to identify and address any discrepancies promptly. Training for staff involved in managing security deposits should be considered to ensure compliance with HUD regulations and internal policies.
S3800-090: Auditor’s Summary of the Auditee’s Comments on the Findings and Recommendations:
It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level.
S3800-130: Response Indicator: Agree
S3800-140: Completion Date: March 20, 2025
S3800-150: Response: Management agrees with the recommendation of the auditor and plans to take corrective actions as noted in S300-045 above.
S3800-010: Finding Reference Number 2024-002
S3800-011: Title and Assistance Listing Number of Federal Program: 14.856 Lower Income Housing Assistance Program (Section 8 Moderate Rehabilitation) and 14.134 Mortgage Insurance – Rental Housing (Section 207(a)/223(f)
S3800-015: Type of Finding: Federal Award Finding
S3800-016: Finding Resolution Status: In Process
S3800-017: Information on Universe Population Size - Not Applicable
S3800-018: Sample Size Information - Not Applicable
S3800-019: Identification of Repeat Finding and Finding Reference Number - Not Applicable
S3800-020: Criteria:
According to the U.S. Department of Housing and Urban Development (HUD) regulations for insured loan programs under Handbook 4370-2, Section 2-12 A (2) the security deposit account must be maintained at a level sufficient to cover the total amount of tenant security deposits held. Management must maintain clear records and ensure that the total balance in the segregated account matches the sum of all current tenant security deposits. If tenants move out or new tenants move in, the account balance must be adjusted accordingly. This ensures the protection of tenant funds and compliance with federal housing program requirements. HUD guidelines stipulate that security deposit funds must be properly segregated and accessible, with the account balance accurately reflecting the amounts due to tenants.
S3800-030: Statement of Condition:
Our audit procedures revealed that the security deposit cash account was underfunded for nine (9) out of the twelve (12) months tested. Specifically, the required balance for security deposits was not fully met in these months, resulting in a deficiency in the account. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times.
S3800-032: Cause:
The underfunding of the security deposit account occurred due to insufficient monitoring of deposit inflows and timely funding. The organization did not consistently ensure that security deposit funds were deposited into the account in accordance with HUD regulations, leading to the shortfall in the balance.
S3800-033: Effect or Potential Effect:
The underfunding of the security deposit cash account resulted in non-compliance with HUD regulations, which mandate that the account be adequately funded to cover tenant security deposits. Although the chances are remote, this could expose the program to potential financial risk, as the organization may not have sufficient funds available to return security deposits to tenants at the end of their lease terms. Additionally, failure to meet HUD's funding requirements may result in penalties or sanctions from HUD. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times.
S3800-035: Auditor Noncompliance Code: M – Security Deposits
S3800-040: Questioned Costs: $0
S3800-037: FHA Contract Number: 127-11114
S3800-038: Questioned Costs: $0
S3800-045: Reporting Views of Responsible Officials:
It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level.
S3800-050: Context:
Security deposit cash account was underfunded for three (3) out of the twelve (12) months tested by between roughly $100-$550; for six (6) out of the twelve (12) months the security deposit account was underfunded by $6.
S3800-080: Auditor Recommendation:
We recommend that property management implement a more robust process for monitoring and reconciling the security deposit cash account on a monthly basis. This process should ensure that the account balance is consistently maintained at the required level. Furthermore, management should conduct periodic reviews of the security deposit balances to identify and address any discrepancies promptly. Training for staff involved in managing security deposits should be considered to ensure compliance with HUD regulations and internal policies.
S3800-090: Auditor’s Summary of the Auditee’s Comments on the Findings and Recommendations:
It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level.
S3800-130: Response Indicator: Agree
S3800-140: Completion Date: March 20, 2025
S3800-150: Response: Management agrees with the recommendation of the auditor and plans to take corrective actions as noted in S300-045 above.
III. FINDINGS – FEDERAL AWARDS PROGRAMS AUDITS (Continued)
UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (Continued)
S3800-010: Finding Reference Number 2024-003
S3800-011: Title and Assistance Listing Number of Federal Program: 14.134 Mortgage Insurance – Rental Housing (Section 207(a)/223(f)
S3800-015: Type of Finding: Federal Award Finding
S3800-016: Finding Resolution Status: In Process
S3800-017: Information on Universe Population Size - Not Applicable
S3800-018: Sample Size Information - Not Applicable
S3800-019: Identification of Repeat Finding and Finding Reference Number - Not Applicable
S3800-020 Criteria:
The HUD Regulatory Agreement includes a contract provision requiring establishment and maintenance of a replacement reserve account, which stipulates monthly deposits. That deposit requirement was increased on December 1, of each year through the issuance of a HUD Form 9250.
S3800-030 Statement of Condition:
Management did not make all of the required deposits to the replacement reserve at June 30, 2024. The mortgage company billed $2,398 per month with the monthly mortgage statement which was the required deposit that went into effect on December 1, 2019. That deposit was increased by HUD each year thereafter effective each December 1; however, management believes that they were not notified of the increases in deposit requirements, and maintain that they did not receive copies of the revised HUD 9250 forms establishing the effective dates and amounts of deposit requirements changes for the years ended December 31, 2020 through December 31, 2022. The total amount of the replacement reserve deposit shortage was calculated to be $13,302.
S3800-030 Cause:
Management asserts that they did not receive copies of the HUD 9250 from December 1, 2020 through December 1, 2022 that increased the deposit requirements; the first HUD 9250 they have on file was effective December 1, 2023, which increased the deposit requirement from $2,666 to $2,672. In addition, the lender did not adjust the required deposit to include the increase in deposits in their monthly escrow billing with the monthly mortgage statement and is still billing $2,398 per month; however, management is ultimately responsible for making all required deposits.
S3800-033 Effect or Potential Effect:
Management is not making the full replacement reserve deposit stipulated by HUD which is required under the terms of the Regulatory Agreement.
S3800-035 Auditor Non-Compliance Code - (N) Replacement Reserve Deposits
S3800-040 Questioned Costs - $13,302
S3800-045 Reporting Views of Responsible Officials:
Management will follow up with the lender about the new deposit requirement and deposit the funding shortage of $13,302 in the replacement reserve escrow account held by the lender. They will also request all missing copies of the HUD 9250 forms for the effective dates of December 1, 2020 through December 1, 2022.
Property(s) and associated questioned costs this finding applies to:
S3800-037 FHA/Contract Number - 127-HD025
S3800-038 Questioned Costs - $13,302
S3800-050 Context:
The mortgage company bills the Project for the monthly replacement reserve deposit with the monthly mortgage billing, and deposits the fund into a segregated escrow account. The mortgage company adjusts that monthly deposit amount based upon HUD’s stipulation to increase or decrease that monthly deposit documented with a HUD approved form 9250. Management received a HUD form 9250 which established the required deposit amount of $2,398 effective December 1, 2019. Thereafter management received a new HUD form 9250 increasing the monthly deposit from $2,666 to $2,672 effective December 1, 2023, but never received the intervening HUD forms 9250 that increased the monthly deposit from $2,398 to $2,666; further, the increase of $2,672 was not implemented as the mortgage company billed $2,398 for the entire fiscal year.
S3800-080 Recommendation:
Management should review policies and procedures to ensure all required deposits to the reserve account are properly billed and deposited into the escrow account with the lender. Management should also deposit the shortage of $13,302 in the replacement reserve account held by the lender.
S3800-090 Auditor's Summary of the Auditee's Comments on the Findings and
Recommendations:
Management will follow up with the lender about the new deposit requirement and deposit the funding shortage of $13,302 in the replacement reserve escrow account held by the lender. They will also request all missing copies of the HUD 9250 forms for the effective dates of December 1, 2020 through December 1, 2022.
S3800-130 Response Indicator – Agree
S3800-140 Completion Date – March 27, 2025
S3800-150 Response:
Management concurs with the auditor’s recommendation, and will take corrective action. Management will follow up with the lender about the new deposit requirement and deposit the funding shortage of $13,302 in the replacement reserve escrow account held by the lender.
S3800-010: Finding Reference Number 2024-001
S3800-011: Title and Assistance Listing Number of Federal Program: 14.856 Lower Income Housing Assistance Program (Section 8 Moderate Rehabilitation)
S3800-015: Type of Finding: Federal Award Finding
S3800-016: Finding Resolution Status: In Process
S3800-017: Information on Universe Population Size - Sixty-one (61) rental units
S3800-018: Sample Size Information - Twelve (12) rental units
S3800-019: Identification of Repeat Finding and Finding Reference Number - Not Applicable
S3800-020: Criteria:
The COSO Framework (Committee of Sponsoring Organizations of the Treadway Commission) is a widely used model for establishing, assessing, and improving internal controls within an organization. It provides a comprehensive structure for managing risks and ensuring reliable financial reporting, operational effectiveness, and compliance with laws and regulations. COSO framework is broken down into five interrelated components, which together help organizations build a robust internal control system. Control Activities is one of the five components of the COSO Framework. Control Activities are the policies and procedures put in place to mitigate risks and achieve the organization’s objectives. Control Activities can be preventative, detective, or corrective.
S3800-030: Statement of Condition:
Management designed Control Activities to ensure compliance with the Eligibility requirement with respect to tenant eligibility. Those Control Activities include verification and review of tenant files by an independent contractor prior to finalization of new tenant move-in. However, during our testing, we noted five (5) move-in files out of five (5) move-in files tested where tenants were approved for move-in prior to review and approval by the independent contractor, circumventing the control.
S3800-032: Cause:
The cause of this condition is due to inadequate enforcement of internal control policies and/or insufficient monitoring of compliance procedures. There appears to be a gap in oversight to ensure that all required tenant eligibility files are reviewed and approved prior to final move-in in accordance with the established internal controls and regulatory requirements.
S3800-033: Effect or Potential Effect:
By processing tenant certification files without the necessary review and approval, there is an increased risk of housing ineligible tenants with incorrect or incomplete files, potentially resulting in non-compliance with eligibility requirements and improper use of program funds. This could lead to penalties, and a loss of funding under federal programs, as well as undermine the integrity of the compliance processes.
S3800-035: Auditor Noncompliance Code: S – Internal Control Deficiencies
S3800-040: Questioned Costs: $0
S3800-037: FHA Contract Number: 127-11114
S3800-038: Questioned Costs: $0
S3800-045: Reporting Views of Responsible Officials:
Management has reviewed the policies and procedures with the property manager, who also serves as the compliance specialist. The property manager was instructed that no tenants are to be granted occupancy until the file has been approved by the independent contractor conducting the compliance review.
S3800-050: Context:
Five (5) move-in files out of the five (5) move-in files tested where tenants were approved for move-in prior to review and approval by the independent contractor, circumventing the control.
S3800-080: Auditor Recommendation:
We recommend that the client immediately implement corrective actions to ensure compliance with internal control procedures. Specifically:
1. The compliance specialist should be required to wait for proper approval of tenant eligibility files before processing them.
2. Review and reinforce the approval process through additional training for staff to ensure they understand the critical importance of obtaining necessary approvals before proceeding.
3. Implement stronger oversight and monitoring mechanisms to ensure that files are not processed before approval.
S3800-010: Finding Reference Number 2024-001 (Continued)
S3800-011: Title and Assistance Listing Number of Federal Program: 14.856 Lower Income Housing Assistance Program (Section 8 Moderate Rehabilitation)
S3800-090: Auditor’s Summary of the Auditee’s Comments on the Findings and
Recommendations:
Management was not aware that the property manager was granting occupancy to tenants before the tenant eligibility file was approved by the independent contractor performing the oversight function, and violates the policies and procedures of management. Management has reviewed the policies and procedures with the property manager, who also serves as the compliance specialist. The property manager was instructed that no tenants are to be granted occupancy until the file has been approved by the independent contractor conducting the compliance review.
S3800-130: Response Indicator: Agree
S3800-140: Completion Date: March 20, 2025
S3800-150: Response:
Management agrees with the recommendation of the auditor and plans to take corrective actions as noted in S300-045 above.
S3800-010: Finding Reference Number 2024-002
S3800-011: Title and Assistance Listing Number of Federal Program: 14.856 Lower Income Housing Assistance Program (Section 8 Moderate Rehabilitation) and 14.134 Mortgage Insurance – Rental Housing (Section 207(a)/223(f)
S3800-015: Type of Finding: Federal Award Finding
S3800-016: Finding Resolution Status: In Process
S3800-017: Information on Universe Population Size - Not Applicable
S3800-018: Sample Size Information - Not Applicable
S3800-019: Identification of Repeat Finding and Finding Reference Number - Not Applicable
S3800-020: Criteria:
According to the U.S. Department of Housing and Urban Development (HUD) regulations for insured loan programs under Handbook 4370-2, Section 2-12 A (2) the security deposit account must be maintained at a level sufficient to cover the total amount of tenant security deposits held. Management must maintain clear records and ensure that the total balance in the segregated account matches the sum of all current tenant security deposits. If tenants move out or new tenants move in, the account balance must be adjusted accordingly. This ensures the protection of tenant funds and compliance with federal housing program requirements. HUD guidelines stipulate that security deposit funds must be properly segregated and accessible, with the account balance accurately reflecting the amounts due to tenants.
S3800-030: Statement of Condition:
Our audit procedures revealed that the security deposit cash account was underfunded for nine (9) out of the twelve (12) months tested. Specifically, the required balance for security deposits was not fully met in these months, resulting in a deficiency in the account. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times.
S3800-032: Cause:
The underfunding of the security deposit account occurred due to insufficient monitoring of deposit inflows and timely funding. The organization did not consistently ensure that security deposit funds were deposited into the account in accordance with HUD regulations, leading to the shortfall in the balance.
S3800-033: Effect or Potential Effect:
The underfunding of the security deposit cash account resulted in non-compliance with HUD regulations, which mandate that the account be adequately funded to cover tenant security deposits. Although the chances are remote, this could expose the program to potential financial risk, as the organization may not have sufficient funds available to return security deposits to tenants at the end of their lease terms. Additionally, failure to meet HUD's funding requirements may result in penalties or sanctions from HUD. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times.
S3800-035: Auditor Noncompliance Code: M – Security Deposits
S3800-040: Questioned Costs: $0
S3800-037: FHA Contract Number: 127-11114
S3800-038: Questioned Costs: $0
S3800-045: Reporting Views of Responsible Officials:
It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level.
S3800-050: Context:
Security deposit cash account was underfunded for three (3) out of the twelve (12) months tested by between roughly $100-$550; for six (6) out of the twelve (12) months the security deposit account was underfunded by $6.
S3800-080: Auditor Recommendation:
We recommend that property management implement a more robust process for monitoring and reconciling the security deposit cash account on a monthly basis. This process should ensure that the account balance is consistently maintained at the required level. Furthermore, management should conduct periodic reviews of the security deposit balances to identify and address any discrepancies promptly. Training for staff involved in managing security deposits should be considered to ensure compliance with HUD regulations and internal policies.
S3800-090: Auditor’s Summary of the Auditee’s Comments on the Findings and Recommendations:
It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level.
S3800-130: Response Indicator: Agree
S3800-140: Completion Date: March 20, 2025
S3800-150: Response: Management agrees with the recommendation of the auditor and plans to take corrective actions as noted in S300-045 above.
S3800-010: Finding Reference Number 2024-002
S3800-011: Title and Assistance Listing Number of Federal Program: 14.856 Lower Income Housing Assistance Program (Section 8 Moderate Rehabilitation) and 14.134 Mortgage Insurance – Rental Housing (Section 207(a)/223(f)
S3800-015: Type of Finding: Federal Award Finding
S3800-016: Finding Resolution Status: In Process
S3800-017: Information on Universe Population Size - Not Applicable
S3800-018: Sample Size Information - Not Applicable
S3800-019: Identification of Repeat Finding and Finding Reference Number - Not Applicable
S3800-020: Criteria:
According to the U.S. Department of Housing and Urban Development (HUD) regulations for insured loan programs under Handbook 4370-2, Section 2-12 A (2) the security deposit account must be maintained at a level sufficient to cover the total amount of tenant security deposits held. Management must maintain clear records and ensure that the total balance in the segregated account matches the sum of all current tenant security deposits. If tenants move out or new tenants move in, the account balance must be adjusted accordingly. This ensures the protection of tenant funds and compliance with federal housing program requirements. HUD guidelines stipulate that security deposit funds must be properly segregated and accessible, with the account balance accurately reflecting the amounts due to tenants.
S3800-030: Statement of Condition:
Our audit procedures revealed that the security deposit cash account was underfunded for nine (9) out of the twelve (12) months tested. Specifically, the required balance for security deposits was not fully met in these months, resulting in a deficiency in the account. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times.
S3800-032: Cause:
The underfunding of the security deposit account occurred due to insufficient monitoring of deposit inflows and timely funding. The organization did not consistently ensure that security deposit funds were deposited into the account in accordance with HUD regulations, leading to the shortfall in the balance.
S3800-033: Effect or Potential Effect:
The underfunding of the security deposit cash account resulted in non-compliance with HUD regulations, which mandate that the account be adequately funded to cover tenant security deposits. Although the chances are remote, this could expose the program to potential financial risk, as the organization may not have sufficient funds available to return security deposits to tenants at the end of their lease terms. Additionally, failure to meet HUD's funding requirements may result in penalties or sanctions from HUD. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times.
S3800-035: Auditor Noncompliance Code: M – Security Deposits
S3800-040: Questioned Costs: $0
S3800-037: FHA Contract Number: 127-11114
S3800-038: Questioned Costs: $0
S3800-045: Reporting Views of Responsible Officials:
It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level.
S3800-050: Context:
Security deposit cash account was underfunded for three (3) out of the twelve (12) months tested by between roughly $100-$550; for six (6) out of the twelve (12) months the security deposit account was underfunded by $6.
S3800-080: Auditor Recommendation:
We recommend that property management implement a more robust process for monitoring and reconciling the security deposit cash account on a monthly basis. This process should ensure that the account balance is consistently maintained at the required level. Furthermore, management should conduct periodic reviews of the security deposit balances to identify and address any discrepancies promptly. Training for staff involved in managing security deposits should be considered to ensure compliance with HUD regulations and internal policies.
S3800-090: Auditor’s Summary of the Auditee’s Comments on the Findings and Recommendations:
It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level.
S3800-130: Response Indicator: Agree
S3800-140: Completion Date: March 20, 2025
S3800-150: Response: Management agrees with the recommendation of the auditor and plans to take corrective actions as noted in S300-045 above.
III. FINDINGS – FEDERAL AWARDS PROGRAMS AUDITS (Continued)
UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (Continued)
S3800-010: Finding Reference Number 2024-003
S3800-011: Title and Assistance Listing Number of Federal Program: 14.134 Mortgage Insurance – Rental Housing (Section 207(a)/223(f)
S3800-015: Type of Finding: Federal Award Finding
S3800-016: Finding Resolution Status: In Process
S3800-017: Information on Universe Population Size - Not Applicable
S3800-018: Sample Size Information - Not Applicable
S3800-019: Identification of Repeat Finding and Finding Reference Number - Not Applicable
S3800-020 Criteria:
The HUD Regulatory Agreement includes a contract provision requiring establishment and maintenance of a replacement reserve account, which stipulates monthly deposits. That deposit requirement was increased on December 1, of each year through the issuance of a HUD Form 9250.
S3800-030 Statement of Condition:
Management did not make all of the required deposits to the replacement reserve at June 30, 2024. The mortgage company billed $2,398 per month with the monthly mortgage statement which was the required deposit that went into effect on December 1, 2019. That deposit was increased by HUD each year thereafter effective each December 1; however, management believes that they were not notified of the increases in deposit requirements, and maintain that they did not receive copies of the revised HUD 9250 forms establishing the effective dates and amounts of deposit requirements changes for the years ended December 31, 2020 through December 31, 2022. The total amount of the replacement reserve deposit shortage was calculated to be $13,302.
S3800-030 Cause:
Management asserts that they did not receive copies of the HUD 9250 from December 1, 2020 through December 1, 2022 that increased the deposit requirements; the first HUD 9250 they have on file was effective December 1, 2023, which increased the deposit requirement from $2,666 to $2,672. In addition, the lender did not adjust the required deposit to include the increase in deposits in their monthly escrow billing with the monthly mortgage statement and is still billing $2,398 per month; however, management is ultimately responsible for making all required deposits.
S3800-033 Effect or Potential Effect:
Management is not making the full replacement reserve deposit stipulated by HUD which is required under the terms of the Regulatory Agreement.
S3800-035 Auditor Non-Compliance Code - (N) Replacement Reserve Deposits
S3800-040 Questioned Costs - $13,302
S3800-045 Reporting Views of Responsible Officials:
Management will follow up with the lender about the new deposit requirement and deposit the funding shortage of $13,302 in the replacement reserve escrow account held by the lender. They will also request all missing copies of the HUD 9250 forms for the effective dates of December 1, 2020 through December 1, 2022.
Property(s) and associated questioned costs this finding applies to:
S3800-037 FHA/Contract Number - 127-HD025
S3800-038 Questioned Costs - $13,302
S3800-050 Context:
The mortgage company bills the Project for the monthly replacement reserve deposit with the monthly mortgage billing, and deposits the fund into a segregated escrow account. The mortgage company adjusts that monthly deposit amount based upon HUD’s stipulation to increase or decrease that monthly deposit documented with a HUD approved form 9250. Management received a HUD form 9250 which established the required deposit amount of $2,398 effective December 1, 2019. Thereafter management received a new HUD form 9250 increasing the monthly deposit from $2,666 to $2,672 effective December 1, 2023, but never received the intervening HUD forms 9250 that increased the monthly deposit from $2,398 to $2,666; further, the increase of $2,672 was not implemented as the mortgage company billed $2,398 for the entire fiscal year.
S3800-080 Recommendation:
Management should review policies and procedures to ensure all required deposits to the reserve account are properly billed and deposited into the escrow account with the lender. Management should also deposit the shortage of $13,302 in the replacement reserve account held by the lender.
S3800-090 Auditor's Summary of the Auditee's Comments on the Findings and
Recommendations:
Management will follow up with the lender about the new deposit requirement and deposit the funding shortage of $13,302 in the replacement reserve escrow account held by the lender. They will also request all missing copies of the HUD 9250 forms for the effective dates of December 1, 2020 through December 1, 2022.
S3800-130 Response Indicator – Agree
S3800-140 Completion Date – March 27, 2025
S3800-150 Response:
Management concurs with the auditor’s recommendation, and will take corrective action. Management will follow up with the lender about the new deposit requirement and deposit the funding shortage of $13,302 in the replacement reserve escrow account held by the lender.