Audit 402671

1. Criteria: The Project shall establish and maintain a replacement reserve to aid in funding extraordinary maintenance and repair and replacement of capital items. An amount as required by HUD, as applicable, shall be deposited on a monthly basis in the reserve fund in accordance with the Regulatory Agreement or HAP contract. 2. Condition: During the review of the required Replacement and Reserve (R&R) deposit, it was noted that the Project did not make the deposit in the correct increased amount after the new required rate became effective. 3. Cause: The shortfall in the required deposit is attributed to the lack of timely communication and authorization for the increase to PGIM Real Estate Loan Services (PGIM) (presumably, the entity responsible for administering or making the deposits). Historically, HUD provided form HUD-9250 (Approval of Operating Budget) to formally approve the increased required deposit directly to PGIM. Beginning in Fiscal Year (FY) 2019, this direct approval process by HUD was discontinued, leaving PGIM without clear formal notification for the required increase. Consequently, PGIM did not increase the deposit amount and continued to remit funds at the old, lower rate. 4. Effect: As a result of the deposits being made at the insufficient rate, the Project’s Replacement and Reserve fund had a shortfall of $2,380 as of year end. 5. Recommendations: We recommend management implement internal controls surrounding Replacement and Reserve deposits to ensure annual HUD increases in the required R&R deposit amounts are promptly identified and communicated to PGIM, so the deposit rate is updated in a timely manner. 6. Views of Responsible Officials: Management agrees with the recommendations and will review and implement a procedure to ensure the HUD increases are communicated to PGIM on a timely basis. Furthermore, management deposited the delinquent amount of $2,380 into the Replacement Reserve subsequent to year end.

1. Criteria: The Project’s regulatory and grant agreements mandate that project funds be used solely for the benefit of the specific audited HUD project. The Project is strictly prohibited from loaning or utilizing project funds for non-project purposes, including making disbursements or advances on behalf of other affiliated entities or projects without prior written consent from HUD. 2. Condition: During the review of related-party transactions and cash disbursements, it was noted that the Project disbursed restricted federal funds totaling $59,971 to cover the costs of an elevator replacement project on behalf of an affiliated entity. This transaction effectively functioned as an unauthorized loan or advance of project funds to an affiliated entity. 3. Cause: The Project utilizes a centralized cash account to manage and disburse payments to shared vendors across all its affiliates. While these entities share a management structure and vendor relationships, the internal control and accounting procedures failed to prevent or flag a disbursement made for separate cost objectives that did not benefit the Project. 4. Effect: By utilizing project funds to pay for the expenses of related entities, the Organization diverted restricted federal funds away from the specific project for which they were intended. 5. Questioned Costs: $59,971 - Representing the total amount due from the affiliate entity for the unauthorized disbursement. 6. Recommendations: We recommend management establish and implement robust internal control policies that strictly prohibit the payment of non-project expenses from the Project funds. 7. Views of Responsible Officials: Management agrees with the findings and recommendations. Management will review and implement an updated cash disbursement procedure to ensure that Project funds are restricted solely to project-specific operations and are not disbursed on behalf of separate entities. 8. Current Status: Management is in the process of receiving the full reimbursement of $59,971 from the affiliated entity.