Audit 415163

2025-001 Special Test and Provision - Replacement Reserve Federal Agency: U.S. Department of Housing and Urban Development (HUD) Federal Program: 14.181 Supportive Housing for persons with Disabilities Condition: Required monthly deposits to the replacement reserve account were not made for nine of twelve months. In addition, the entity made withdrawals from the replacement reserve account without obtaining prior HUD approval as required. Criteria: An amount, as required by HUD, will be deposited monthly in the replacement reserve account and all withdrawals from the replacement reserve account must be approved by HUD. Cause: The Organization did not generate sufficient cash flow to make the required deposits into the replacement reserve account while also meeting its other obligations as they became due. Additionally, because of these cash-flow constraints, the Organization withdrew funds from the replacement reserve account to pay for purchases of fixed assets and repair expenditures before obtaining the required approval from HUD. Effect: Monthly required deposits to the replacement reserve account were not made and approval for withdrawal from the replacement reserve fund were not obtained. Context: A sample of twelve months were selected for the replacement reserve account to determine if the monthly required deposits were deposited in accordance with HUD requirements. Our test found that for nine months, the monthly required deposit was not made. A sample of three of three withdrawals were selected for the replacement reserve account to determine if the withdrawals were approved in accordance with HUD requirements. Our test found that for all three withdrawals, HUD’s approval was not obtained. Our sample was not a statistically valid sample. This was not a repeat finding from a prior period. Questioned Costs: No questioned costs were identified because the expenditures funded through the replacement reserve withdrawals appeared allowable and adequately supported. However, the withdrawals were noncompliant because required HUD approval was not obtained.Recommendations: Management should establish procedures to ensure all required reserve deposits are made timely and require documented HUD approval prior to withdrawing funds from the replacement reserve. Additionally, management should obtain subsequent HUD approval for withdrawals made in 2025. Management Response: Management will establish and implement procedures to ensure that all required deposits to the Replacement Reserve account are made in the amount and within the timeframes required by the applicable HUD regulatory agreement and other governing documents. Management will also implement procedures requiring appropriate HUD approval and supporting documentation be obtained and maintained prior to making any withdrawal from the Replacement Reserve account, whenever such approval is required. Management will periodically review the Replacement Reserve activity and reconcile the account to ensure that required deposits have been made timely, withdrawals are property authorized and supported, and documentation is retained in the property’s records to demonstrate compliance with HUD requirements. These procedures will be incorporated into the property’s financial controls to help ensure ongoing compliance with HUD requirements.