Finding Text
Finding 2024-002: Replacement Reserve
Identification of the federal program: Assistance Listing Number 14.157—Supportive Housing For the Elderly, United Statements Department of Housing and Urban Development. Compliance Requirements: Special Tests and Provisions. Type of Finding: Material Weakness.
Criteria: Under 24 CFR 891.405 and 24 CFR 891.605, HUD regulations require that owners of properties receiving HUD funding obtain prior written approval from HUD before making certain withdrawals or expenditures. Specifically, 24 CFR 891.405: This regulation outlines the responsibilities of owners and the requirement to obtain HUD approval before making withdrawals from project funds for non-routine or non-ordinary expenses. These regulations are in place to ensure that HUD funds are properly managed and utilized in accordance with federal guidelines. Any withdrawal or expenditure made from the replacement reserve without prior HUD approval may result in non-compliance with program requirements.
Condition: During the 2024 audit of the replacement reserve activity, the auditors discovered that the the Project made two withdrawals without HUD approval totaling $68,528. Subsequent to year-end, management restored the funds to the replacement reserve account.
Cause: The Project did not adhere to the required compliance procedures to request and obtain HUD approval prior to withdrawing funds from the replacement reserves.
Effect or Potential: Without the necessary approval, the Project is at risk of depleting the HUD reserve funds, which are designated to provide financial relief for maintenance or repair needs.
Recommendation: We recommend that the Project establish controls to ensure that approval is obtained prior to any withdrawals.
Perspective: During the 2024 audit of the replacement reserve activity, it was found that the owners made two withdrawals, totaling $68,528, without obtaining prior HUD approval. This lack of compliance with HUD approval requirements raises concerns regarding the management of the replacement reserve fund.
Questioned costs: $68,528
Views of Responsible Officials and Planned Corrective Actions: The Managing Agent has requested and received authorization from HUD for the expenditure of funds from the Operating Account related to the design and planning of the Seismic Retrofit. The Managing Agent restored the funds expended from the Replacement Reserve Account from the Operating Account in February 2025, subsequent to year-end. Management changes (including a revision of leadership) as well as a better understanding of HUD requirements will ensure this error does not happen again.
Auditor’s evaluation of the views of responsible officials: The Managing Agent’s response is appropriate to address the noncompliance that occurred.