2024-001 Strengthening Compliance with Replacement Reserve Deposit Requirements
(Repeated Finding 2023-001)
Program Name/Assistance Listing Title: Supportive Elderly Housing Section 202
Federal Assistance Listing No: 14.157
Federal Agency: U.S. Department of Housing and Urban Development (HUD)
Type of Finding: Federal Award Finding
Compliance Requirements: Special Tests and Provisions – Reserve for Replacements Deposits
Finding Resolution Status: In Process
Information on Universe Population Size: 1
Sample Size Information: 1
Criteria: In accordance with the 2024 Compliance Supplement and 2 CFR Part 200, the
Regulatory Agreement (Item 5(a)) requires that an amount specified by HUD be deposited
monthly into the replacement reserve fund. The agreement stipulates that the mortgagor must
establish and maintain a reserve fund for replacements in a separate bank account, with monthly
deposits unless alternative terms are approved in writing by HUD.
Per HUD-approved Form 9250, Ivy Plaza Housing Corporation was required to deposit $6,407
monthly into the reserve fund until November 30, 2024, after which the required deposit would
be $3,200 starting December 1, 2024.
Additionally, HUD Handbook 4350.1 Rev-1 advises owners to periodically assess their Reserve
Fund against anticipated replacement needs. The guidance emphasizes maintaining a
recommended minimum threshold to ensure funds are available for unforeseen contingencies
such as major infrastructure repairs.
Statement of Condition: As part of the Compliance Supplement 2024 procedures, it was
observed that four months of reserve deposits were temporarily delayed, resulting in a shortfall
of $22,421.
Cause: The shortfall occurred due to overlapping payments for a prior-year deficit. Management
continued making monthly deposits, but a portion of these payments was applied to settling the
previous year's shortfall. This may have led to the assumption that all current-year deposits were
made, resulting in the unintentional omission of four months' funding.
Potential Effect of Condition: A temporary delay in funding replacement reserves may require
a catch-up deposit to maintain compliance with HUD requirements. If left unaddressed,
prolonged underfunding could impact financial planning for property maintenance.
Questioned Costs: $22,421
Reporting Views of Responsible Officials: The Project acknowledges the finding and is
committed to ensuring compliance with HUD reserve requirements. Steps are being taken to
enhance monitoring and reconciliation processes to prevent future deficits. Additionally, only
repairs and replacements are consistently withdrawn from the Reserve and Replacement Account
with prior approval from HUD.
Context: The replacement reserve fund must maintain the required balances, with timely
monthly deposits. A four-month shortfall occurred in the reported period; however, management
is implementing measures to ensure timely deposits.
Recommendation:
1. Prioritize funding any deficit balances as soon as possible to ensure compliance with
HUD requirements.
2. Make timely deposits into the replacement reserve to meet funding obligations and avoid
potential compliance issues.
3. Conduct quarterly reviews of reserve balances to identify and address shortfalls
proactively, rather than waiting for the annual reconciliation.
4. Implement a monitoring sheet to track monthly deposits and ensure no payments are
missed.
5. Schedule a check-in meeting with the accounting firm by the end of the third quarter to
review reserve balances, address any potential deficits early, and maintain compliance.
6. Ensure that the replacement reserve is used exclusively for repairs and replacements. Any
withdrawal from the replacement reserve must obtain prior HUD approval.
Management Response: Due to cash flow issues and high operating expenses, some
replacement reserve deposits were delayed as of December 31, 2024. The shortfall happened
because part of the deposits was used to cover a prior-year deficit, leading to an assumption that
all current-year deposits were made. HUD approved reducing the monthly deposit from $6,407
to $3,200 starting December 1, 2024, which will help manage cash flow and reduce deficits.
We acknowledge the findings and will ensure timely deposits moving forward. To prevent future
shortfalls, we will track payments using a monitoring sheet, conduct quarterly reviews, and meet
with our accounting firm by the third quarter to maintain compliance.
2024-002 HUD Approval Process for Residual Receipts Withdrawal
Program Name/Assistance Listing Title: Supportive Elderly Housing Section 202
Federal Assistance Listing No: 14.157
Federal Agency: U.S. Department of Housing and Urban Development
Type of Finding: Federal Award Finding
Compliance Requirements: Special Tests and Provisions - Residual Receipts
Finding Resolution Status: In Process
Information on Universe Population Size: 1
Sample Size Information: 1
Criteria: In accordance with the 2024 Compliance Supplement and 24 CFR sections 891.400(e)
and 891.600(e), any surplus cash in the project funds account (including earned interest) at the
end of the fiscal year must be deposited in a federally insured account within 90 days following
the end of the fiscal year. Withdrawals from this account may only be made for project purposes
and must receive prior approval from HUD.
Condition: As part of the 2024 Compliance Supplement procedures, it was noted that a
withdrawal of $12,195 was made from the residual receipts account in February 2024 however,
no approval from HUD was obtained prior to the said withdrawal.
Cause: The Project withdrew funds to cover financial obligations, unaware that prior HUD
approval was required. They sought guidance, but due to a staff transition at HUD in April 2024,
they were unable to get timely clarification.
Potential Effect of Condition: Withdrawals from the residual receipts account without prior
HUD approval may be considered noncompliant with federal regulations. HUD may require
further review, guidance, or corrective action, such as replenishment of funds if necessary.
Questioned Costs: $12,195
Reporting Views of Responsible Officials: The Project agrees with the findings and
recommendations and will adhere to the corrective action plan.
Context: During the audit review of compliance with HUD regulations, it was noted that the
Project withdrew funds from the residual receipts account to meet financial obligations. At the
time of the withdrawal, the Project was not aware that prior HUD approval was required. Efforts
were made to seek guidance from HUD’s Account Executive; however, due to a transition in
personnel following the official’s resignation in April 2024, the Project did not receive timely
clarification regarding the approval process. As a result, the withdrawal was made without
obtaining the necessary authorization.
Recommendation:
1. Communicate with HUD: Notify HUD of the withdrawal, provide supporting
documentation, and request guidance on next steps.
2. Replenish Funds (If required): If HUD requires repayment, explore available funding
sources to restore the withdrawn amount.
3. Enhance Documentation: Maintain a clear record of all communications with HUD
regarding residual receipts approvals.
4. Strengthen Internal Procedures: Implement a policy ensuring HUD approval is obtained
before processing any withdrawals.
5. Designate a Compliance Contact: Identify and establish a new HUD point of contact to
facilitate future approval requests.
6. Improve Monitoring Controls: Develop a tracking system to oversee fund withdrawals
and prevent similar occurrences in the future.
Management Response: Following the advice of the previous accountant, we withdrew funds
from the residual receipts account to cover financial obligations, as the account had remained
stagnant. Due to cash flow issues, we made the withdrawal in good faith but were not aware that
prior HUD approval was required. Additionally, the assigned HUD executive had already
resigned, which delayed our ability to obtain proper guidance.
We acknowledge the findings and recommendations. To prevent future noncompliance, we will
ensure that all residual receipts withdrawals receive prior HUD approval, maintain proper
documentation, designate a compliance contact for HUD communications, and strengthen
monitoring controls to track fund withdrawals.
2024-001 Strengthening Compliance with Replacement Reserve Deposit Requirements
(Repeated Finding 2023-001)
Program Name/Assistance Listing Title: Supportive Elderly Housing Section 202
Federal Assistance Listing No: 14.157
Federal Agency: U.S. Department of Housing and Urban Development (HUD)
Type of Finding: Federal Award Finding
Compliance Requirements: Special Tests and Provisions – Reserve for Replacements Deposits
Finding Resolution Status: In Process
Information on Universe Population Size: 1
Sample Size Information: 1
Criteria: In accordance with the 2024 Compliance Supplement and 2 CFR Part 200, the
Regulatory Agreement (Item 5(a)) requires that an amount specified by HUD be deposited
monthly into the replacement reserve fund. The agreement stipulates that the mortgagor must
establish and maintain a reserve fund for replacements in a separate bank account, with monthly
deposits unless alternative terms are approved in writing by HUD.
Per HUD-approved Form 9250, Ivy Plaza Housing Corporation was required to deposit $6,407
monthly into the reserve fund until November 30, 2024, after which the required deposit would
be $3,200 starting December 1, 2024.
Additionally, HUD Handbook 4350.1 Rev-1 advises owners to periodically assess their Reserve
Fund against anticipated replacement needs. The guidance emphasizes maintaining a
recommended minimum threshold to ensure funds are available for unforeseen contingencies
such as major infrastructure repairs.
Statement of Condition: As part of the Compliance Supplement 2024 procedures, it was
observed that four months of reserve deposits were temporarily delayed, resulting in a shortfall
of $22,421.
Cause: The shortfall occurred due to overlapping payments for a prior-year deficit. Management
continued making monthly deposits, but a portion of these payments was applied to settling the
previous year's shortfall. This may have led to the assumption that all current-year deposits were
made, resulting in the unintentional omission of four months' funding.
Potential Effect of Condition: A temporary delay in funding replacement reserves may require
a catch-up deposit to maintain compliance with HUD requirements. If left unaddressed,
prolonged underfunding could impact financial planning for property maintenance.
Questioned Costs: $22,421
Reporting Views of Responsible Officials: The Project acknowledges the finding and is
committed to ensuring compliance with HUD reserve requirements. Steps are being taken to
enhance monitoring and reconciliation processes to prevent future deficits. Additionally, only
repairs and replacements are consistently withdrawn from the Reserve and Replacement Account
with prior approval from HUD.
Context: The replacement reserve fund must maintain the required balances, with timely
monthly deposits. A four-month shortfall occurred in the reported period; however, management
is implementing measures to ensure timely deposits.
Recommendation:
1. Prioritize funding any deficit balances as soon as possible to ensure compliance with
HUD requirements.
2. Make timely deposits into the replacement reserve to meet funding obligations and avoid
potential compliance issues.
3. Conduct quarterly reviews of reserve balances to identify and address shortfalls
proactively, rather than waiting for the annual reconciliation.
4. Implement a monitoring sheet to track monthly deposits and ensure no payments are
missed.
5. Schedule a check-in meeting with the accounting firm by the end of the third quarter to
review reserve balances, address any potential deficits early, and maintain compliance.
6. Ensure that the replacement reserve is used exclusively for repairs and replacements. Any
withdrawal from the replacement reserve must obtain prior HUD approval.
Management Response: Due to cash flow issues and high operating expenses, some
replacement reserve deposits were delayed as of December 31, 2024. The shortfall happened
because part of the deposits was used to cover a prior-year deficit, leading to an assumption that
all current-year deposits were made. HUD approved reducing the monthly deposit from $6,407
to $3,200 starting December 1, 2024, which will help manage cash flow and reduce deficits.
We acknowledge the findings and will ensure timely deposits moving forward. To prevent future
shortfalls, we will track payments using a monitoring sheet, conduct quarterly reviews, and meet
with our accounting firm by the third quarter to maintain compliance.
2024-002 HUD Approval Process for Residual Receipts Withdrawal
Program Name/Assistance Listing Title: Supportive Elderly Housing Section 202
Federal Assistance Listing No: 14.157
Federal Agency: U.S. Department of Housing and Urban Development
Type of Finding: Federal Award Finding
Compliance Requirements: Special Tests and Provisions - Residual Receipts
Finding Resolution Status: In Process
Information on Universe Population Size: 1
Sample Size Information: 1
Criteria: In accordance with the 2024 Compliance Supplement and 24 CFR sections 891.400(e)
and 891.600(e), any surplus cash in the project funds account (including earned interest) at the
end of the fiscal year must be deposited in a federally insured account within 90 days following
the end of the fiscal year. Withdrawals from this account may only be made for project purposes
and must receive prior approval from HUD.
Condition: As part of the 2024 Compliance Supplement procedures, it was noted that a
withdrawal of $12,195 was made from the residual receipts account in February 2024 however,
no approval from HUD was obtained prior to the said withdrawal.
Cause: The Project withdrew funds to cover financial obligations, unaware that prior HUD
approval was required. They sought guidance, but due to a staff transition at HUD in April 2024,
they were unable to get timely clarification.
Potential Effect of Condition: Withdrawals from the residual receipts account without prior
HUD approval may be considered noncompliant with federal regulations. HUD may require
further review, guidance, or corrective action, such as replenishment of funds if necessary.
Questioned Costs: $12,195
Reporting Views of Responsible Officials: The Project agrees with the findings and
recommendations and will adhere to the corrective action plan.
Context: During the audit review of compliance with HUD regulations, it was noted that the
Project withdrew funds from the residual receipts account to meet financial obligations. At the
time of the withdrawal, the Project was not aware that prior HUD approval was required. Efforts
were made to seek guidance from HUD’s Account Executive; however, due to a transition in
personnel following the official’s resignation in April 2024, the Project did not receive timely
clarification regarding the approval process. As a result, the withdrawal was made without
obtaining the necessary authorization.
Recommendation:
1. Communicate with HUD: Notify HUD of the withdrawal, provide supporting
documentation, and request guidance on next steps.
2. Replenish Funds (If required): If HUD requires repayment, explore available funding
sources to restore the withdrawn amount.
3. Enhance Documentation: Maintain a clear record of all communications with HUD
regarding residual receipts approvals.
4. Strengthen Internal Procedures: Implement a policy ensuring HUD approval is obtained
before processing any withdrawals.
5. Designate a Compliance Contact: Identify and establish a new HUD point of contact to
facilitate future approval requests.
6. Improve Monitoring Controls: Develop a tracking system to oversee fund withdrawals
and prevent similar occurrences in the future.
Management Response: Following the advice of the previous accountant, we withdrew funds
from the residual receipts account to cover financial obligations, as the account had remained
stagnant. Due to cash flow issues, we made the withdrawal in good faith but were not aware that
prior HUD approval was required. Additionally, the assigned HUD executive had already
resigned, which delayed our ability to obtain proper guidance.
We acknowledge the findings and recommendations. To prevent future noncompliance, we will
ensure that all residual receipts withdrawals receive prior HUD approval, maintain proper
documentation, designate a compliance contact for HUD communications, and strengthen
monitoring controls to track fund withdrawals.