Finding Text
Finding 2025-005: Material Weakness, Material Non-Compliance - Special Tests and Provisions, Surplus Cash and Distributions to Owners or Affiliates Federal Agency: U.S. Department of Housing and Urban Development Federal Program Name: Section 232 Mortgage Insurance for Nursing Homes and Section 241(a) Supplemental Loan Insurance Multifamily Rental Housing Assistance Listing Number: 14.129 and 14.151 Award Period: January 1, 2025 through December 31, 2025 Criteria or Specific Requirement: HUD regulations and the applicable HUD Regulatory Agreement require project management to determine surplus cash in accordance with HUD requirements and to ensure that any distributions are made only from properly calculated surplus cash. The HUD Audit Guide contemplates that surplus cash calculations be accurate, supported, and subject to appropriate internal controls to ensure compliance with HUD restrictions on the use and distribution of project funds. Condition/Context: During the fiscal year ended December 31, 2025, project management did not prepare or document a surplus cash calculation in accordance with HUD requirements, nor did management implement controls to review, approve, or retain documentation supporting the required calculation. Questioned Costs: None. No distributions of project funds were identified during the period under audit that required repayment to HUD based on the absence of an independently calculated surplus cash determination. Cause: Management did not establish formal procedures or internal controls requiring the preparation, review and retention of an independent surplus cash calculation. As a result, responsibility for determining surplus cash was not clearly assigned, and management relied on external information without sufficient verification. Effect: The failure to independently calculate surplus cash and implement controls over the calculation increases the risk that project funds could be improperly distributed or used in violation of HUD requirements. This condition reduces HUD's ability to rely on the project's financial controls to ensure compliance with surplus cash restrictions and represents a material weakness in internal control over compliance, although no actual misuse of funds was identified during the period under audit. Repeat Finding: No. Recommendation: Management should establish and implement formal policies and procedures to ensure that surplus cash is independently calculated in accordance with HUD requirements and the applicable HUD Regulatory Agreement. Such procedures should include preparation of a documented surplus cash calculation at each required reporting period using HUD-prescribed criteria; Independent review and approval of the surplus cash calculation by appropriate management personnel or, where applicable, the court-appointed receiver; and retention of supporting documentation sufficient to demonstrate compliance with HUD restrictions on the use and distribution of project funds. Management should coordinate with the court-appointed receiver and HUD to ensure that surplus cash determinations are performed consistently and in compliance with program requirements going forward. Views of Responsible Officials: Management acknowledges the finding related to the absence of an independently prepared and documented surplus cash calculation. During the fiscal year ended December 31, 2025, the Organization operated in an environment of financial distress, limited staffing resources, and evolving oversight responsibilities, which contributed to informal and undocumented procedures related to surplus cash determinations. As disclosed in the financial statements, the Organization became subject to a court-appointed receivership. Following the appointment of the receiver, responsibility for financial oversight, including compliance with HUD cash flow and surplus cash requirements, has transitioned to the receiver in coordination with HUD. The receiver and management are evaluating HUD requirements related to surplus cash calculation.