Audit 402674

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 monthly in the reserve fund in accordance with the Regulatory Agreement or HAP contract. 2. Condition: During the review of the required Replacement and Replacement (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 Prudential (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 Prudential. Beginning in Fiscal Year (FY) 2019, this direct approval process by HUD was discontinued, leaving Prudential without clear formal notification for the required increase. Consequently, Prudential 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 an insufficient rate, the Project's Replacement Reserve Fund had a shortfall of $21,200 as of the year end. 5. Questioned Costs: None. 6. Recommendations: We recommend management implement internal controls surrounding Replacement Reserve deposits to ensure annual HUD increases in the required R&R deposit amounts are promptly identified and communicated to Prudential, so the deposit rate is updated in a timely manner. 7. Views of Responsible Officials: Management agrees with the recommendations and will review and implement a procedure to ensure the HUD increases are communicated to Prudential on timely basis. Furthermore, management deposited the delinquent amount of $21,200 into the Replacement Reserve fund in May 2026.

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 $82,459 to cover the costs of an project ground maintenance and survey 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: $82,459 - 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. Current Status: Management is in the process of receiving the full reimbursement of the $82,459 from the affiliated entity.