Audit 394602

III. FINDINGS – FEDERAL AWARDS PROGRAMS AUDITS UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT S3800-010: Finding Reference Number 2025-001 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 - 2024-001 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. The 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 tenant income certifications and new tenant move-in files. However, during our testing, we noted four (4) move-in files out of four (4) move-in files tested where tenants were approved for move-in prior to review and approval by the independent contractor, circumventing the control. In addition, there was no evidence of approvals of tenant income certifications in the tenant files prior to billing of rental assistance for eleven (11) out of twelve (12) tenant files tested. 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 or billing of rental assistance 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 computations 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 and no billing of rental assistance based on tenant income certifications should be billed until the file has been approved by the independent contractor conducting the compliance review. S3800-050: Context: Four (4) move-in files out of the four (4) move-in files tested where tenants were approved for move-in prior to review and approval by the independent contractor, circumventing the control. In addition, there was no evidence of review approvals of certifications in the tenant files prior to billing of rental assistance for eleven (11) out of twelve (12) tenant files tested. 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. S3800-090: Auditor’s Summary of the Auditee’s Comments on the Findings and Recommendations: 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 and no billings based on certifications should occur until the file has been approved by the independent contractor conducting the compliance review. S3800-130: Response Indicator: Agree S3800-150: Response: Management agrees with the recommendation of the auditor and plans to take corrective actions as noted in S3800-045 above.

III. FINDINGS – FEDERAL AWARDS PROGRAMS AUDITS (Continued) UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (Continued) Finding Reference Number 2025-002 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 - 2024-002 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 eight (8) 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. The account was fully funded and monitored starting in April of 2025. S3800-050: Context: Security deposit cash account was underfunded for eight (8) out of the twelve (12) months tested by between roughly $100-$1,900 each month. 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. The account was fully funded and monitored starting in April of 2025. S3800-130: Response Indicator: Agree S3800-150: Response: Management agrees with the recommendation of the auditor and plans to take corrective actions as noted in S3800-045 above.

UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (Continued) S3800-010: Finding Reference Number 2025-003 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) S3800-020: Criteria: Under the United States Department of Housing and Urban Development (HUD) regulatory agreement, final reports due to HUD must be electronically submitted to the United States Department of Housing and Urban Development Real Estate Assessment Center (US HUD REAC) within the earlier of nine months or thirty days after receipt of the auditor’s report, unless a longer period is agreed to in advance by the cognizant or oversight agency for the audit. S3800-030: Statement of Condition: The June 30, 2024 year-end audit reporting package required to be submitted to the federal government through United States Department of Housing and Urban Development Real Estate Assessment Center (US HUD REAC) was not submitted before the submission deadline. The Federal Audit Clearinghouse Data Collection Form and annual reporting package were submitted to the Federal Audit Clearing House by the due date. S3800-032: Cause: The primary contributing cause to this late submission was the fact that there were discovered errors in the template that included the address on file. The directions on the HUD REAC website states when creating the report template if any information is not correct to stop and contact the HUD Project Manager, which management did to correct the problem. However, resolution to the problem did not occur until after the due date of the submission. S3800-033: Effect or Potential Effect: The property was not in compliance with the HUD regulatory agreement regarding submission of the annual reporting package; however, management was following the directive of HUD to correct the information within REMS by contacting the HUD Project Manager before proceeding. Management followed the directions of HUD to the best of their ability to both file on time and the directive not to proceed if any information was inaccurate or incomplete on the financial statement template. S3800-035: Auditor Noncompliance Code: Z - Other S3800-040: Questioned Costs: $0 S3800-037: FHA Contract Number: 127-11114 S3800-038: Questioned Costs: $0 S3800-045: Reporting Views of Responsible Officials: The Corporation took steps to ensure that audits are completed in a timely manner and that the annual reporting package was submitted before the deadline to US HUD REAC, but the reporting was late due to circumstances beyond the Corporation’s control. Management does not believe this noncompliance will reoccur. S3800-050 Context: See Statement of Condition. S3800-080: Auditor Recommendation: It is our opinion that management acted in good faith and that the submission was late due to circumstances beyond their control that could not be corrected before the submission was due. S3800-090: Auditor’s Summary of the Auditee’s Comments on the Findings and Recommendations: Management acknowledges that the annual submission due to REAC was late, but acted in good faith to correct errors in the template before proceeding, and contact HUD as instructed based upon on the HUD REAC website instructions. Management does not believe this noncompliance will reoccur. S3800-130 Response Indicator: Agree S3800-150: Response: See Auditor’s Summary of the Auditee’s Comments on the Findings and Recommendations.