Warrior Run Manor HUD PROJECT NO. 34-11170/PA26T815007Non-Profit

Federal Agency: U.S. Department of Housing and Urban Development Federal Program Name: Mortgage Insurance for the Purchase or Refinancing of Existing Multifamily Housing Projects - Section 207 / 223(f) Assistance Listing Number: 14.155 Award Identification Number and Year: 034-11170 / PA26T815007 - 2022 Award Period: January 1, 2022 through December 31, 2022 Type of Finding: Significant Deficiency in Internal Control over Compliance, Other Matters Criteria or specific requirement: Reserve for Replacement (RFR) ? In accordance with regulations and guidelines outlined in the U.S. Code of Federal Regulations (2 CFR 200; 24 CFR B) and HUD Handbooks (4350.1; 4565.1; 7420.3), as well as in agreements with terms of the Project?s Regulatory Agreement for Multifamily Projects and Section 8 HAP Renewal Contract with HUD, pursuant to requirements of the National Housing Act, the Project is required to establish and maintain a RFR account for defraying certain costs of replacing property and equipment and other project expenditures. Withdrawal requests and changes in monthly deposits require approval of HUD through submissions of form HUD-9250. Required monthly deposits to the RFR account must be increased annually on the anniversary of the HAP contract, in relation to contract rent adjustments, by most recent published Annual Adjustment Factors (AAFs) based on Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) data relating to changes in residential rent and utility costs. The Corporation should have internal controls designed to ensure compliance with the timing and completeness of this provision. Condition: The Project?s required monthly deposit amount to the RFR account was increased 1.025% from $2,757.20 to $2,785.46 on April 1, 2022 (Attributes: FY21 AAF; Table 2; South Region; Highest Cost Utility Excluded). During our testing, in reviewing the procedures performed to comply with the annual change in monthly deposit requirement occurring within the period under audit, we noted the Corporation completed and submitted the required documents and received approval from HUD on February 7, 2022. Furthermore, required monthly deposits to the RFR account in 2022, for the first 3 months (Jan - Mar) as well as for the last 8 months (May - Jun) of the year, were made timely and in the proper amounts in accordance with the respective, approved HUD-9250 forms. However, the monthly deposit for April (posted 4/5/22) was in the amount of $2,757.20 instead of the newly established amount of $2,785.46 that was effective beginning April 1, 2022, which resulted in the RFR account being underfunded from the amount required for the Project by $28.26. The Corporation did not have adequate internal controls designed and operated to prevent, or detect and correct, noncompliance with this required provision of its major federal program. Questioned costs: None Material Context: During our testing, it was noted that the Corporation completed the required actions to request and receive approval by HUD to increase the monthly deposits into the RFR account beginning April 1, 2022, however was unable to detect the error and resolve the issue by making an arrears deposit. As part of our testing, 100% of transactions involving the RFR account are reviewed and traced to statements independently obtained from the institution holding the account, and there were no other audit findings this year or in the prior year that were required to be reported. As such, the auditor considers our testing sample to be statistically valid and this audit finding to be an isolated instance. Cause: The Corporation did not reconcile the monthly balance of the Project?s RFR account with consideration to the timing and amounts of deposits in relation to program compliance requirements. Effect: Noted no material instances of noncompliance with provisions of the RFR account; however, the lack of internal controls over this compliance requirement provides an opportunity for further noncompliance to occur and inadequate reserves needed to support Project costs in future periods. Repeat Finding: Not Applicable Recommendation: We recommend Management of the Corporation communicate the importance of timely and accurate processing of requests with the Project?s mortgagee, and design controls to ensure an adequate review process is in place to reconcile activity of HUD restricted accounts to the requirements as established pursuant to provisions of regulations in accordance with federal programs. Views of responsible officials: There is no disagreement with the audit finding.