Audit 406908

Condition: Management utilizes a centralized operating account to process transactions. During our audit, we identified multiple instances in which expenses were not allocated to the appropriate project. Certain costs were charged to the wrong entity and, in some cases, were recorded to projects that did not benefit from the expenditure. The misallocations occurred across multiple fiscal years. Criteria: HUD Handbook 4370.2, Financial Operations and Accounting Procedures for Insured Multifamily Projects, requires that each project maintain accounting records that accurately reflect its own financial activity. Costs must be charged to the specific project that receives the direct benefit, and shared expenses must be allocated using a reasonable, supportable, and consistently applied methodology. HUD also requires that project funds be used solely for the operation of the project to which they relate. Cause: The centralized operating account structure, combined with insufficient controls over transaction coding and allocation, resulted in errors in assigning expenses to the correct project. Management did not consistently review or reconcile postings to ensure that costs were properly allocated. Effect: Misallocation of expenses can distort the financial position and operating results of individual projects. This may result in inaccurate reporting to HUD, potential improper use of project funds, difficulty assessing each project's true financial performance, and an increased risk of noncompliance with HUD program requirements. Questioned Costs: $1,300 Auditor's Recommendation: We recommend that management strengthen internal controls over the allocation and recording of expenses, including a) Requiring supervisory review of all centralized account postings, b) Performing periodic reconciliations to ensure expenses are charged to the correct project, and c) Correcting prior year misallocations where appropriate. Views of Responsible Officials and Planned Corrective Actions: Management acknowledges the finding related to the misallocation of some expenses among projects. The issue resulted from errors in address based allocation, which have since been corrected. Although the impact of these misallocations was not material to the overall financial statements, we recognize the importance of accurate project level reporting in accordance with HUD requirements. Corrective actions have been implemented, including correcting address assignments, enhancing supervisory review of transactions, and performing periodic reconciliations. Management will continue to monitor expenses to ensure they are consistently allocated to the appropriate project. Adjustments to correct prior misallocations will be made during fiscal year 2026. Management remains committed to maintaining compliance with HUD requirements and ensuring the accuracy of each project’s financial records.