Audit 408391

Finding 2025-001 – Improper approval of invoices Condition: During the audit, we noted several invoices that were not approved timely and recorded in the period that the services were performed. This resulted in the service being provided in a prior year and the expense recorded in the current year. Criteria: U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires expenses to be recognized in the period in which the related goods or services are received, in accordance with the accrual basis of accounting. In addition, the HUD Financial Operations and Accounting Procedures for Insured Multifamily Projects Handbook 4370.2 Rev-1 requires that Project books and records be maintained accurately and in sufficient detail to reflect proper accounting of Project operations and expenses in the correct accounting period. Cause of Condition : The prior management company did not approve the invoices for payment and did not record the invoices in the financial statements in the proper period. Invoice approval and review controls were not sufficiently designed or consistently applied to ensure that expenses were reviewed for the service period and recorded in the appropriate fiscal year. As a result, invoices related to the prior-year services were approved and recorded in the current year without proper cutoff consideration. Potential Effect of Condition: Failure to record expenses in the proper accounting period may result in inaccurate Project operating results and financial reporting, and noncompliance with HUD Regulatory Agreement recordkeeping requirements. Recommendation: We recommend that management should enhance invoice review and approval procedures to ensure that expenses are recorded in the period in which the related services are performed, in accordance with U.S. GAAP and HUD requirements. Approval of invoices should require verification of service dates and services performed prior to recording the expense in the general ledger. Cutoff procedures should be formalized at year-end to identify and accrue expenses for services received but not yet invoiced or approved. Supervisory reviews of expense coding and timing should be performed to confirm compliance with both financial reporting and HUD. View of Responsible Officials and Planned Corrective Action: The previous management company has been replaced with a new management company. The new management company provides complete transparency and reports directly to the Board. Existing invoice review, approval and monitoring procedures are now being consistently followed and enforced to ensure that expenses are properly reviewed and recorded in the appropriate accounting period. In addition, purchasing and payment transactions are subject to multiple levels of approval and oversight to help ensure compliance with established policies, proper authorization of expenditures and accurate financial reporting.

Finding 2025-002 – Personal Expenses Charged To The Project Condition: During audit testing procedures, we identified personal expenses charged and expensed to the Project. Criteria: The HUD Regulatory Agreement requires that Project funds be used solely for reasonable and necessary expenses directly related to the operation and maintenance of the Project and explicitly prohibits the use of Project funds for personal or non-Project-related purposes. Cause of Condition: Controls over expense review and approval were not sufficiently designed or consistently applied to ensure that only eligible Project-related costs were charged to the Project. In addition, supporting documentation was not adequately provided or reviewed to confirm the business purpose and Project eligibility of expenses prior to payment. Potential Effect of Condition: Charging personal expenses to the Project resulted in noncompliance with the HUD Regulatory Agreement, potential repayment of ineligible costs, and increased risk of regulatory findings or enforcement actions by HUD. Recommendation: Management should strengthen expense and invoice review and approval procedures to ensure that all costs charged to the Project are reasonable, necessary, and directly related to Project operations, in accordance with the HUD Regulatory Agreement. Expense reimbursements should require detailed supporting documentation clearly demonstrating a valid Project purpose. A formal certification should be implemented as part of the approval process to attest that expenses are not personal in nature and have been approved. Internal reviews of Project expenses should be performed to identify and promptly correct any ineligible charges, including reimbursement to the Project where necessary. View of Responsible Officials and Planned Corrective Action: The individuals involved in the issues identified during the audit are no longer associated with the Project. Specifically, the former resident property manager is no longer employed by the Corporation and the composition of the Board has changed since the period under review. Management believes the identified issues resulted from a breakdown in adherence to existing approval, oversight and monitoring controls, including collusion among individuals responsible for reviewing and approving expenditures. The Project’s established policies and procedures were not properly followed. With the turnover in key personnel and Board leadership, management expects improved compliance with existing controls and oversight responsibilities. Management and the Board will continue to monitor Project expenses and ensure that expenditures are reviewed and approved in accordance with Project requirements and fiduciary responsibilities.