Finding Text
Finding No. 2023-001: Restricted Cash (Material Weakness)
Statement of condition
Special Tests and Provisions
During the year ended June 30, 2023, management commingled replacement reserve deposits with operating cash.
The replacement reserve deposits made during the year ended June 30, 2023 were below the required amount, resulting in the replacement reserve being underfunded by an additional $139 at June 30, 2023.
Criteria
In accordance with 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 replacement reserve deposits. The Regulatory Agreement, including amendments, requires a monthly deposit of $207 through September 2022 and $212 thereafter in the replacement reserve.
Cause
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. This late funding resulted in only 11 deposits being made during the year ended June 30, 2023. Additionally, the amount of the deposits was set at $198 instead of the required amount, resulting in a collective underfunding of $351.
Effect
Management commingled a portion of the replacement reserve deposits with operating cash, resulting in the potential use of replacement reserve deposits to fund repairs or replacements without obtaining the required prior approval of HUD. Late and insufficient deposits to the replacement reserve could result in insufficient funds for repairs and replacements.
Recommendation
Management should review and enhance its policies, procedures and internal controls to ensure that replacement reserve deposits are segregated into a separate, restricted cash account. Management should review and enhance policies, procedures and internal controls to ensure that the replacement reserve deposits are made timely and in the amount required by HUD.
Identification of repeat finding
The finding is a repeat of Finding No. 2022-001.
Auditor non-compliance code
D - Commingling funds
Questioned costs
None
Finding resolution status
In process