Finding Text
Department of Housing and Urban Development
Federal Assistance Listing #14.128
Section 242 – Mortgage Insurance ‐ Hospitals
Special Tests and Provisions
Significant Deficiency in Internal Control Over Compliance
Criteria: A good system on internal controls over compliance includes processes to ensure all provisions within the agreements are fully followed as well as following generally accepted accounting principles.
Condition: The Organization did not request prior approval from HUD before entering into a finance lease agreement. A finance lease is identified in the Mortgage Note Insured by HUD as the incurrence of additional indebtedness which, by terms of the agreement, should be approved by HUD in advance of entering into such agreements.
Cause: The finance lease agreement replaced an expiring lease which was recognized as an operating lease under prior accounting standards. As a result, management did not consider a request for approval of the new lease agreement. The new lease was determined to be a finance lease under current accounting standards during the financial statement audit process.
Effect: The Organization violated a covenant within the Mortgage Note Insured by HUD agreement.
Questioned Costs: None reported.
Context: There were three new finance leases entered into during the fiscal year and it was noted that the two of the three leases had proper HUD approval.
Repeat Finding from Prior Years: No
Recommendation: We recommend that management evaluate all lease agreements to determine whether the lease should be accounted for as an operating or finance lease at the time the lease is entered into. The evaluation process should be documented, and the lease recognized in the financial statements based on the conclusion. If the lease is concluded to be a finance lease, HUD should be notified, and the Organization should request and receive approval from HUD prior to entering into the lease agreement.
Views of Responsible Officials: Management agrees with the finding.