Finding No. 2022-002 Material Weakness - Internal Control - Accounting Corrections Criteria According to Government Auditing Standards and Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) a deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected and corrected, on a timely basis. Condition The auditor calculated, and NWCH approved recording several material adjustments to the financial state- ments in order for the audited financial statements to be materially correct. Context NWCH created a partnership entity and sold an apartment complex to the new partnership, however, the transaction was not properly recorded in either entities' accounting system. Nor were the new partnership's assets and liabilities completely removed from NWCH's books. A construction loan for renovation of the apartment complex on a cost reimbursement basis with funds held by the lender was not recorded or disclosed in the financial statements. For NWCH, a material amount of fixed assets were expensed rather than capitalized, and grants awarded but not yet received (over $1 million) were not recorded as receivables and prepaid revenue. The new lease accounting standard was implemented during, rather than prior to the 2022 audit. Accordingly, the audited consolidated financial statements required several adjustments to be materially correct. Cause The transactions discussed above did not go through NWCH's bank accounts and, accordingly, were not recorded by the bookkeeper. Property purchase and sale closing statements were received but were not recorded in the books of accounts until after the audit began. Recording of fixed assets purchases did not follow NWCH's capitalization policy. The bookkeeper does not have the accounting experience and back- ground, or a full understanding of U.S. GAAP to properly record transactions as they occur without further training and oversight. The new lease accounting standard is not understood by NWCH staff, and was not implemented, nor were the related entities consolidated into one set of financial statements. Effect Initial accounting records provided for the audit from NWCH and the new partnership understated assets by $855,551 and $8,498,772, understated liabilities by $644,791 and $7,756,414, and incorrectly reported the change in net assets by $148,269 and ($35,291), respectively. Questioned Costs None. Recommendation The two property management companies managing NWCH apartment complexes produce accurate accounting and tenant records. A college degreed accountant, CPA, or CPA firm is needed to oversee the NORTHWEST COASTAL HOUSING Spyglass Ridge Limited Partnership, HUD Project No. 126-11130 Schedule of Findings and Questioned Costs For the Year Ended December 31, 2022 63 Section II - Financial Statement Findings (continued) Finding No. 2022-002 (continued) Material Weakness - Internal Control - Accounting Corrections Recommendation (continued) accounting function for NWCH to properly prepare the consolidated financial statements in accordance with U.S. GAAP. Views of Responsible Officials and Planned Corrective Actions We agree with this finding. NWCH was successful in adding needed staff in 2023, but was unable to hire a degreed accountant or controller, or to contract with an accounting firm for oversight of the accounting function. Bookkeeper training was provided from Shelter Resources Financial Manager in February 2023. NWCH is researching CPA firms in order to contract a qualified controller with expertise in real estate holdings relevant to NWCH. NWCH has been actively searching for a qualified CPA to hire or contract with since 2021, however, due to capacity constraints and overwhelmed CPA firms, NWCH has been unsuccessful. Efforts to hire experienced accounting personnel continues. NORTHWEST COASTAL HOUSING Spyglass Ridge Limited Partnership, HUD Project No. 126-11130 Schedule of Findings and Questioned Costs For the Year Ended December 31, 2022 64