Finding 1225510 (2025-001)

Finding 2025-001 – Improper approval of invoices Condition: During the audit, we noted several invoices that were not approved timely and recorded in the period that the services were performed. This resulted in the service being provided in a prior year and the expense recorded in the current year. Criteria: U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires expenses to be recognized in the period in which the related goods or services are received, in accordance with the accrual basis of accounting. In addition, the HUD Financial Operations and Accounting Procedures for Insured Multifamily Projects Handbook 4370.2 Rev-1 requires that Project books and records be maintained accurately and in sufficient detail to reflect proper accounting of Project operations and expenses in the correct accounting period. Cause of Condition : The prior management company did not approve the invoices for payment and did not record the invoices in the financial statements in the proper period. Invoice approval and review controls were not sufficiently designed or consistently applied to ensure that expenses were reviewed for the service period and recorded in the appropriate fiscal year. As a result, invoices related to the prior-year services were approved and recorded in the current year without proper cutoff consideration. Potential Effect of Condition: Failure to record expenses in the proper accounting period may result in inaccurate Project operating results and financial reporting, and noncompliance with HUD Regulatory Agreement recordkeeping requirements. Recommendation: We recommend that management should enhance invoice review and approval procedures to ensure that expenses are recorded in the period in which the related services are performed, in accordance with U.S. GAAP and HUD requirements. Approval of invoices should require verification of service dates and services performed prior to recording the expense in the general ledger. Cutoff procedures should be formalized at year-end to identify and accrue expenses for services received but not yet invoiced or approved. Supervisory reviews of expense coding and timing should be performed to confirm compliance with both financial reporting and HUD. View of Responsible Officials and Planned Corrective Action: The previous management company has been replaced with a new management company. The new management company provides complete transparency and reports directly to the Board. Existing invoice review, approval and monitoring procedures are now being consistently followed and enforced to ensure that expenses are properly reviewed and recorded in the appropriate accounting period. In addition, purchasing and payment transactions are subject to multiple levels of approval and oversight to help ensure compliance with established policies, proper authorization of expenditures and accurate financial reporting.