Finding Text
2024-001 NonCompliance with HUD Requirements for Restricted Reserve Accounts - Significant Deficiency Criteria for Specific Requirements: According to HUD Handbook 4350.1 REV-1 and 24 CFR section 891.605, withdrawals from the Residual Receipts Account require prior written approval from HUD, and no funds may be withdrawn without such authorization. Similarly, the Replacement Reserve Account must receive monthly deposits in the HUD- approved amount, and any withdrawals also require prior HUD approval. All funds in the Replacement Reserve Account must be maintained in a separate account and used solely for HUD-approved capital replacements. Condition: During the course of our engagement, we identified the following instances of noncompliance with HUD requirements: A withdrawal of $3,849 was made from the Residual Receipts account without HUD approval, reducing the account balance to near zero at year-end. Withdrawals of $29,312 and $57,842 were made from the Replacement Reserve account without HUD approval. Required monthly deposits of $575 were not made to the Replacement Reserve account for October–December 2024, and no HUD waiver was obtained. Questioned Cost: There were no questioned costs associated with the condition identified. Cause: Management explained that due to staff turnover, they were not aware of HUD’s approval and deposit requirements. Effect: Restricted reserve accounts were not maintained in accordance with HUD requirements, which may result in HUD questioning or disallowing the withdrawals and deposits. This also reflects a weakness in internal controls over compliance with HUD regulations. Auditor's Recommendation: We recommend that management work with HUD to obtain approval or resolution for the unapproved withdrawals, deposit the missed Replacement Reserve amounts, and establish recurring transfers to ensure compliance going forward. In addition, management should strengthen internal controls and provide staff training so that HUD approval is obtained before withdrawals and deposits are made in a timely manner.