Finding 1056127 (2023-002)

2023-002 ALN 14.850 - Public & Indian Housing Program - Allowable Activities - Use of Operating Funds for Capital Improvements Condition and Criteria: According to the U.S. Department of Housing and Urban Development (HUD) regulations, specifically 24 CFR Part 990, public housing agencies (PHAs) are permitted to use up to 20% of their operating funds for capital improvements. Expenditures more than this threshold must be specifically approved by HUD. During our audit, it was noted that the PHA utilized $384,080 of its operating funds for capital improvements. This amount represents 28% of the total operating funds received, exceeding the 20% threshold allowed without prior HUD approval. Amount of Questioned Costs: The amount of questioned costs is $113,334, which represents an excess of the 20% allowable threshold. Context: The Authority received $1,353,732 in Operating funds during the audit period, resulting in a threshold of up to $270,746 to be allowed for the use of capital improvements. $384,080 of the Authority’s operating funds were used for capital improvements, which is in excess of the threshold by $113,334. Cause: The cause of this non-compliance was a lack of adequate internal controls from prior management to monitor the percentage of operating funds being allocated for capital improvements. The PHA did not have a system in place to ensure that expenditure for capital improvements did not exceed the allowable 20% threshold. Effect: As a result, the PHA was not in compliance with HUD regulations, which may result in questioned costs and the potential for required repayment of the funds used inappropriately. Auditor’s Recommendation: We recommend that the PHA implement stronger internal controls to monitor the use of operating funds for capital improvements. Specifically, the PHA should establish procedures to track the percentage of operating funds allocated for capital improvements and ensure compliance with the 20% threshold. Additionally, the PHA should seek retroactive approval from HUD for the excess funds used or take appropriate steps to reclassify or repay the questioned costs. Grantee Response: The Executive Director agrees with the finding and will follow the Auditor's recommendation.