Finding Text
Finding No. 2022-001: Restricted Cash (Material Weakness) Statement of condition Special Tests and Provisions During the year ended June 30, 2022, management did not segregate certain tenant security deposits, replacement reserve amounts and the residual receipts deposits into segregated, restricted cash accounts. For three months of the fiscal year, the monthly replacement reserve deposit was funded in the subsequent month. Security deposit funding liability was not properly tracked. Criteria In accordance with the U.S. Department of Housing and Urban Development ("HUD") Handbook 4350.3, Occupancy Requirements of Subsidized Multifamily Housing Programs, HUD projects are required to establish and maintain at all times fully funded, separate bank accounts in the name of the entity for all security deposits collected and for residual receipts deposits. The Regulatory Agreement requires a monthly deposit of $27 in the replacement reserve. Security deposits owed to tenants are required to be tracked for accurate financial and HUD reporting. Cause Certain tenant security deposits and the residual receipts deposits were deposited into the replacement reserve account or operating cash account and were not transferred into segregated accounts as of June 30, 2022. The Sponsor funds tenant security deposits and the deposits funded during the year were included within the amounts owed to the Sponsor instead of within the tenant security deposit liability. The monthly replacement reserve transfer was delayed by several days into the subsequent month due to it being on a set interval of time rather than on a monthly date. Effect Management commingled certain tenant security deposits and residual receipts deposits with its replacement reserve and operating cash accounts, resulting in the potential use of tenant security deposit cash or residual receipts deposits to fund repairs or replacements without obtaining the required prior approval of HUD. Inaccurate tracking of the tenant security deposit liability could result in understated liability and improper refunding of tenant security deposits. Late deposits to the replacement reserve could result in underfunding of the replacement reserve. Recommendation Management should review and enhance policies, procedures and internal controls to ensure that all tenant security deposits and residual receipts deposits are segregated into separate, restricted cash accounts. Management should revisit its review procedures for tracking tenant security deposits and its timing schedule for making deposits to the replacement reserve. Identification of repeat finding The finding is a repeat of Finding No. 2021-001. Auditor non-compliance code D - Commingling funds Questioned costs None Finding resolution status In process Reporting views of responsible officials and planned corrective actions Management will ensure that security deposits are tracked so they can be recorded accordingly when there is a move in and/or move out. Moving forward management will put in place controls to ensure that the calculation is done at the end of the fiscal year.