Finding Text
Criteria: Per Financial Operations and Accounting Procedures for Insured Handbook 4370.20, Chapter 2. Financial Operations and Accounting 2-2 Objective of the HUD- Prescribed Accounting System General Objectives of the HUD accounting system include “Reporting on all financial transactions using HUD guidelines and Generally Accepted Accounting Principles (GAAP).” Per Financial Operations and Accounting Procedures for Insured Handbook 4370.20, Chapter 2. Maintenance of Books and Account 2-3, “Book and accounts must be complete and accurate. The books of the original entry must be kept current at all times, posting must be made at least monthly to ledger accounts. Standard journal entries may be established for recurring items and posted monthly.
Condition: The Project’s general ledger is currently maintained on the cash basis of accounting and accrual adjustments are performed at year-end to convert the cash basis of accounting to the accrual basis of accounting. The accrual basis is the method of accounting where revenues are recognized when earned and expenses are recognized when incurred. We understand that maintaining the general ledger on the accrual basis of accounting is more difficult than using the cash basis. However, the accrual basis provides more meaningful financial information to management and complies with generally accepted accounting principles. Failure to maintain the Project’s general ledger on the accrual basis of accounting distorts the interim financial statements and may lead to critical financial decisions being made on erroneous data.
Cause: The Project books and records are kept on the cash basis of accounting which is not generally accepted accounting principles.
Effect: During our testing of cash disbursements, we noted that the majority of the expenditures are recorded when paid as opposed to when the transactions are incurred. The majority of expenditures are recorded one month to three months after the transactions are incurred. During our testing of Accounts Receivable for Tennant and HUD and Revenue, we noted the Rent Potential on an accrued basis.is unrecorded on a monthly basis. The monthly rental income is recorded when rent income is deposited. At year-end, there is no Detail Schedule for 1130 Tenant Accounts Receivable and 1135 Accounts Receivable-HUD. In summary, the majority of the audit adjustment entries were to convert the books and records to the accrual basis of accounting.
Recommendation: We recommend that the Project implement the use of accrual basis accounting and utilize QuickBooks Accounts Payable Module to record vendor’s invoices as Accounts Payable and make payments
Recommendation (Continued): We also recommend that the Owner hire a Management Agent Company that has the dual capacity to perform the HUD property management and HUD accounting functions.
Views of Responsible Officials and Corrective Action Plan: No disagreements with the audit finding.