Finding Text
SECTION II – FINANCIAL STATEMENT FINDINGS Finding 2025-1 Lack of Internal Controls Over Replacement Reserve Withdrawal Finding Resolution Status: Resolved Information on Universal Population Size: One Instance Sample Size: N/A Questioned Costs: $0 Criteria: Withdrawals from the Replacement Reserve account must have prior written approval from HUD and may only be used for capital expenditures or other purposes specifically authorized by HUD. Condition: In accordance with the HUD requirements, the Project is required to get approval from HUD before any withdrawals from the Replacement Reserve Account can be made. Our review disclosed that there was a withdrawal in the amount of $2,994 from the Replacement Reserve account in October 2024 to pay operating expenses after the projects operating account did not hold enough funds to cover the costs. Cause: The withdrawal was made because the Project’s Operating Account did not contain sufficient funds to cover the costs. There were no adequate cash management procedures in place to ensure that operating obligations were paid only by the operating account. There were no internal controls in place to detect or prevent unauthorized withdrawals from the Replacement Reserve account. Effect: Replacement Reserve account is underfunded and the Project is not in compliance with HUD’s regulations. If a significant replacement need were to arise, there may not be adequate funds in Replacement Reserve to cover the cost. Auditors’ Recommendation: Management should implement internal controls suitable to detect and prevent unauthorized replacement reserve withdrawals and implement stronger cash management and oversight procedures to ensure operating expenses are paid only by the operating account and that sufficient operating funds are available before obligations are incurred. Also, Management should make the necessary deposits to restore the funding shortfall as of June 30, 2025. In addition, Management should establish internal control procedures to reconcile, on a monthly basis, the Replacement Reserve account balance and the Replacement Reserve general ledger to the total amount of the Replacement Reserve required by HUD. Auditor Non-Compliance Code: N – Reserve for Replacement Requirements FHA/Contract Number: 064- HD044 Auditor’s Summary of the Auditee’s Comments on the Findings and Recommendations: The auditee concurs with the finding. Magnolia Manor Corporation has taken corrective action to restore the Replacement Reserve account by depositing the underfunded amounts of $2,688.00 on August 20, 2025, and $306.00 on September 15, 2025. The auditee further stated that it has reviewed the auditors’ recommendation and will implement more thorough monthly reviews to ensure adequate monitoring and to prevent future unauthorized withdrawals from the Replacement Reserve account. Reporting Views of Responsible Officials: We agree with the auditor’s finding and recommendation. Magnolia Manor Corporation has taken steps to ensure that the Replacement Reserve account will not be underfunded by withdrawing funds to cover the Operating Account and will ensure that more thorough monthly reviews are implemented. The previously underfunded amount was partially restored on August 20, 2025, and fully replenished on September 15, 2025. Response Indicator: Agree Completion Date: September 15, 2025 Response: Magnolia Manor Corporation has taken steps to ensure that the Replacement Reserve account will not be underfunded by withdrawing funds to cover the Operating Account. The underfunded amount of $2,688.00 has been deposited on August 20, 2025, and $306.00 has been deposited on September 15, 2025. Magnolia Manor Corporation has reviewed the auditors' recommendation and will ensure that more thorough monthly reviews will be implemented. Contact Person: Rhonda M. Kay SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS Supportive Housing for Persons with Disabilities Assistance Listing Number 14.181 See Finding 2025-1 under Section II – Financial Statement Findings.