Finding Text
III. FINDINGS – FEDERAL AWARDS PROGRAMS AUDITS (Continued) UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (Continued) Finding Reference Number 2025-002 S3800-011: Title and Assistance Listing Number of Federal Program: 14.856 Lower Income Housing Assistance Program (Section 8 Moderate Rehabilitation) and 14.134 Mortgage Insurance – Rental Housing (Section 207(a)/223(f) S3800-015: Type of Finding: Federal Award Finding S3800-016: Finding Resolution Status: In Process S3800-017: Information on Universe Population Size - Not Applicable S3800-018: Sample Size Information - Not Applicable S3800-019: Identification of Repeat Finding and Finding Reference Number - 2024-002 S3800-020: Criteria: According to the U.S. Department of Housing and Urban Development (HUD) regulations for insured loan programs under Handbook 4370-2, Section 2-12 A (2) the security deposit account must be maintained at a level sufficient to cover the total amount of tenant security deposits held. Management must maintain clear records and ensure that the total balance in the segregated account matches the sum of all current tenant security deposits. If tenants move out or new tenants move in, the account balance must be adjusted accordingly. This ensures the protection of tenant funds and compliance with federal housing program requirements. HUD guidelines stipulate that security deposit funds must be properly segregated and accessible, with the account balance accurately reflecting the amounts due to tenants. S3800-030: Statement of Condition: Our audit procedures revealed that the security deposit cash account was underfunded for eight (8) out of the twelve (12) months tested. Specifically, the required balance for security deposits was not fully met in these months, resulting in a deficiency in the account. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times. S3800-032: Cause: The underfunding of the security deposit account occurred due to insufficient monitoring of deposit inflows and timely funding. The organization did not consistently ensure that security deposit funds were deposited into the account in accordance with HUD regulations, leading to the shortfall in the balance. S3800-033: Effect or Potential Effect: The underfunding of the security deposit cash account resulted in non-compliance with HUD regulations, which mandate that the account be adequately funded to cover tenant security deposits. Although the chances are remote, this could expose the program to potential financial risk, as the organization may not have sufficient funds available to return security deposits to tenants at the end of their lease terms. Additionally, failure to meet HUD's funding requirements may result in penalties or sanctions from HUD. Although the funding deficit amounts were not always significant, it is important that the security deposit cash account be fully funded at all times. S3800-035: Auditor Noncompliance Code: M – Security Deposits S3800-040: Questioned Costs: $0 S3800-037: FHA Contract Number: 127-11114 S3800-038: Questioned Costs: $0 S3800-045: Reporting Views of Responsible Officials: It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level. The account was fully funded and monitored starting in April of 2025. S3800-050: Context: Security deposit cash account was underfunded for eight (8) out of the twelve (12) months tested by between roughly $100-$1,900 each month. S3800-080: Auditor Recommendation: We recommend that property management implement a more robust process for monitoring and reconciling the security deposit cash account on a monthly basis. This process should ensure that the account balance is consistently maintained at the required level. Furthermore, management should conduct periodic reviews of the security deposit balances to identify and address any discrepancies promptly. Training for staff involved in managing security deposits should be considered to ensure compliance with HUD regulations and internal policies. S3800-090: Auditor’s Summary of the Auditee’s Comments on the Findings and Recommendations: It is management’s policy to fully fund the security deposit account so the balance in cash meets or exceeds the total liability of deposits collected from tenants. Management discussed the importance of reviewing funding monthly with the Project Accountant, and new procedures have been implemented to include a monthly process to compare the security deposit liability to the bank account and fund any shortages to ensure the security deposit bank account is consistently maintained at the required level. The account was fully funded and monitored starting in April of 2025. S3800-130: Response Indicator: Agree S3800-150: Response: Management agrees with the recommendation of the auditor and plans to take corrective actions as noted in S3800-045 above.