Finding Text
Finding 2025-002: Replacement Reserve Disbursements Without Required HUD Approval Federal Program: U.S. Department of Housing and Urban Development - Supportive Housing for Persons with Disabilities (14.181) Compliance Requirement: Special Tests and Provisions - Replacement Reserve Account Type of Finding: Noncompliance Known Questioned Costs: $2,544 Criteria: The Project is required to establish and maintain a replacement reserve account to fund extraordinary maintenance, repair, and replacement of capital items. All disbursements from the replacement reserve must be approved by HUD prior to disbursement (24 CFR section 891.405). This requirement ensures that reserve funds are used for their intended purpose and that HUD maintains oversight of the property's capital needs and financial condition. Condition: During the year ended June 30, 2025, two disbursements totaling $2,544 were made from the replacement reserve account without obtaining required HUD approval. The disbursements consisted of $744 for a refrigerator replacement and $1,800 for chimney repairs. Both items represent eligible reserve purposes; however, HUD approval was not requested or obtained before the funds were withdrawn. Cause: Staff turnover and the absence of a centralized tracking system for replacement reserve withdrawal requests contributed to the failure to obtain required HUD approvals prior to disbursement. There was no systematic process to ensure approval requests were submitted and authorized before funds were released. These conditions are related to the broader internal control environment weaknesses described in Finding 2025-001. Effect: The Project was not in compliance with the replacement reserve provisions of its agreements with HUD. The $2,544 in unapproved disbursements is reported as known questioned costs until HUD approval is obtained. Recommendation: Management should request HUD approval for the unauthorized withdrawals. If approval is not received, the funds should be returned to the replacement reserve. Management should also implement procedures requiring documented HUD approval before any replacement reserve disbursement is made. A tracking log should be established to monitor the status of pending approval requests, with clear assignment of responsibility and submission deadlines. Staff involved in reserve transactions should receive training on HUD requirements under the Section 811 program, and supervisory review should be incorporated to verify that written HUD approval is in place before any disbursement is made. Views of Responsible Officials: Management concurs with this finding. The outstanding approval requests will be submitted to HUD. Management also plans to implement an approval checklist and tracking log, provide staff training on HUD requirements, and establish a supervisory review process.