Audit 378544

Finding 2025-001: Inadequate Segregation of Duties and Lack of Documented Management Oversight Federal Program: U.S. Department of Housing and Urban Development - Supportive Housing for Persons with Disabilities (14.181) Compliance Requirement: Internal Control Over Compliance (2 CFR 200.303) Type of Finding: Significant Deficiency in Internal Control Over Financial Reporting and Compliance Known Questioned Costs: None Criteria: Accurate financial reporting and compliance with the Uniform Guidance require a strong internal control system. This includes proper segregation of duties, consistent application of documented policies and procedures, and routine management oversight. Under 2 CFR 200.303, non-federal entities must establish and maintain effective internal control over federal awards that provides reasonable assurance that the entity is managing the awards in compliance with the applicable requirements. Controls should be documented sufficiently to allow management to monitor their effectiveness and to demonstrate compliance to external parties. Condition: During the year, the former Senior Director of Housing & Facilities was responsible for the custody of assets and for authorizing and recording transactions in the Project’s accounting software, with limited routine oversight. Evidence of mitigating controls, such as supervisory review, documented by management approvals or signoffs, was not maintained. Cause: Staffing constraints and employee turnover have contributed to the current control environment’s inadequate segregation of duties and a lack of documented management oversight. Effect: This concentration of incompatible duties in a single individual, without documented oversight, increases the risk that errors or irregularities may occur and remain undetected. When control activities rely on a single individual’s institutional knowledge rather than documented procedures and effective internal controls, continuity and compliance can be difficult to maintain during periods of staff transition. Recommendations: Management should review existing policies and procedures and improve them where necessary to address gaps in the current control structure. Roles and responsibilities should be clearly defined and documented for all key financial reporting and compliance functions. Controls and mitigating controls should be designed, implemented, and documented, with particular attention given to segregation of duties and oversight. Evidence of supervisory review should be maintained routinely through signoffs, checklists, or review logs. Staff involved in financial reporting and compliance should be familiar with applicable HUD requirements, the Uniform Guidance, and the entity's own policies to ensure ongoing adherence to federal program requirements. Views of Responsible Officials: We concur with this finding and recognize the need for a more robust control environment. We are actively working to reevaluate staff responsibilities, expand the documentation of oversight procedures, and implement structured, recurring reviews of financial transactions and compliance-related data to ensure compliance with the Uniform Guidance.

Finding 2025-002: Replacement Reserve Disbursements Without Required HUD Approval Federal Program: U.S. Department of Housing and Urban Development - Supportive Housing for Persons with Disabilities (14.181) Compliance Requirement: Special Tests and Provisions - Replacement Reserve Account Type of Finding: Noncompliance Known Questioned Costs: $2,544 Criteria: The Project is required to establish and maintain a replacement reserve account to fund extraordinary maintenance, repair, and replacement of capital items. All disbursements from the replacement reserve must be approved by HUD prior to disbursement (24 CFR section 891.405). This requirement ensures that reserve funds are used for their intended purpose and that HUD maintains oversight of the property's capital needs and financial condition. Condition: During the year ended June 30, 2025, two disbursements totaling $2,544 were made from the replacement reserve account without obtaining required HUD approval. The disbursements consisted of $744 for a refrigerator replacement and $1,800 for chimney repairs. Both items represent eligible reserve purposes; however, HUD approval was not requested or obtained before the funds were withdrawn. Cause: Staff turnover and the absence of a centralized tracking system for replacement reserve withdrawal requests contributed to the failure to obtain required HUD approvals prior to disbursement. There was no systematic process to ensure approval requests were submitted and authorized before funds were released. These conditions are related to the broader internal control environment weaknesses described in Finding 2025-001. Effect: The Project was not in compliance with the replacement reserve provisions of its agreements with HUD. The $2,544 in unapproved disbursements is reported as known questioned costs until HUD approval is obtained. Recommendation: Management should request HUD approval for the unauthorized withdrawals. If approval is not received, the funds should be returned to the replacement reserve. Management should also implement procedures requiring documented HUD approval before any replacement reserve disbursement is made. A tracking log should be established to monitor the status of pending approval requests, with clear assignment of responsibility and submission deadlines. Staff involved in reserve transactions should receive training on HUD requirements under the Section 811 program, and supervisory review should be incorporated to verify that written HUD approval is in place before any disbursement is made. Views of Responsible Officials: Management concurs with this finding. The outstanding approval requests will be submitted to HUD. Management also plans to implement an approval checklist and tracking log, provide staff training on HUD requirements, and establish a supervisory review process.