DEAF REACH HOUSING, INC.Non-Profit

Condition and Context During the audit, there were several errors which would be expected to have been discovered during the financial close process or review of the financial reports. Adjustments were needed to record depreciation expenses, record bad debt expenses for uncollectible accounts receivable balances, and accrue accounts payable at year- end. In addition, the beginning net assets balance on July 1, 2020 did not agree to the ending net assets balance on June 30, 2020. As a result, adjustments were recorded of $7,729 to increase accumulated depreciation, $8,384 to decrease accounts receivable, $6,089 to increase accrued expenses, $58,912 to increase net assets , and $73,374 to increase expenses. This resulted in multiple post-audit adjustments to correct and reconcile the balances for year-end. Cause Management made certain accounting department changes to have a new CFO on board as well as hiring an outsourced accountant, with the goal of improving adherence to accounting standards going forward . These changes created the delay in performing the required year-end reconciliations and reviewing the accounts which caused multiple adjustments to be necessary. Effect Inaccurate or incomplete financial information, could impact how financial decisions are made. Repeat Finding Yes. Recommendation We recommend that, as part of the system of internal control over the monthly and year- end closing process, accounting staff be assigned to review detailed schedules of accounts receivable, accounts payable and accrued expenses, and property and equipment for accuracy and completeness and that any unusual balances, such as long- outstanding balances or negative balances, should be reviewed and the necessary adjustments posted timely. In addition, once the account balances are finalized at year end, no additional changes should be made. We also recommend that DRH implement any additional procedures needed to ensure that monthly reconciliations are completed and reviewed in a timely manner. Furthermore, we recommend that DRH enhance its procedures to ensure that the evidence of review of schedules and other reconciliations, such as sign-offs by both the preparer and reviewer on the documents, are retained. See corrective action plan.

Criteria GAAP requires nonprofit organizations to record a note payable as a liability when signing a note with a financial institution for the purpose of borrowing money. Condition and Context On November 15, 2018, Deaf Reach, Inc. a parent of DRH, entered into a note payable agreement with a non-profit community development financial institution for $215,000. The proceeds were used for the capital repairs and improvements for DRH's property. DRH recorded $4,298 as notes payable outstanding balance, and recorded $26,604 as principal expense and $12,021 as interest expense as of June 30, 2021. Cause Management considered this note payable and associated principal and interest payments as DRH's liability and expenses rather than Deaf Reach, lnc.'s due to the purpose of this note exclusively for the capital repairs for DRH's property. Effect The liability and expenses of DRH were overstated in amount of $38,625 as of June 30, 2021, as the note was the obligation of the parent and not DRH and cash payments DRH made related to this note should be recorded as a reduction of the liability due to Deaf Reach, Inc. Repeat Finding Yes. Recommendation We recommend enhancing internal control procedures in that someone from management review all the journal entries prepared by accountant, as well as the supporting documentation on a monthly basis to ensure the financial information is recorded as appropriate, accurate and complete. A review should also ensure errors identified in prior years corrected.

Finding No. 2020-001: Financial Close Process and Account Reconciliations ? Material Weakness in Internal Control Over Financial Reporting Criteria Monthly and year-end closing procedures should ensure that account analysis and reconciliations are performed and all monthly and year-end required adjustments are posted. In addition, management should detail review monthly and year-end financial reports to determine if there are any unusual balances or transactions that need to be investigated. Condition and Context During the audit, there were several errors which would be expected to have been discovered during the financial close process or review of the financial reports. Adjustments were needed to record depreciation expenses, record bad debt expenses for uncollectible accounts receivable balances, and correct cash balances at year-end. As a result, net adjustments were recorded of $7,733 to increase accumulated depreciation, $15,422 to decrease accounts receivable, $3,219 to increase cash, and $19,936 to increase expenses. This resulted in multiple post-audit adjustments to correct and reconcile the balances for year-end. These adjustments were proposed by Marcum. Cause Management made certain accounting department changes with the goal of improving adherence to accounting standards going forward. These changes created the delay in performing the required year-end reconciliations and reviewing the accounts which caused multiple audit adjustments being required. Effect Inaccurate or incomplete financial information, could impact how financial decisions are made. Repeat Finding No. Recommendation We recommend that, as part of the system of internal control over the monthly closing process, accounting staff be assigned to review detailed schedules of cash, accounts receivable, and property and equipment for accuracy and completeness and that any unusual balances, such as long-outstanding balances or negative balances, should be reviewed and the necessary adjustments posted timely. We also recommend that DRH implement any additional procedures needed to ensure that monthly reconciliations are completed and reviewed in a timely manner. Furthermore, we recommend that DRH enhance its procedures to ensure that the evidence of review of schedules and other reconciliations, such as sign-offs by both the preparer and reviewer on the documents, are retained. Views of Responsible Officials and Planned Corrective Actions DRH agrees with the finding. See corrective action plan.

Criteria: GAAP requires nonprofit organizations to record a note payable as a liability when signing a note with a financial institution for the purpose of borrowing money. Condition and Context: On November 15, 2018, Deaf Reach, Inc. a parent of DRH, entered into a note payable agreement with a non-profit community development financial institution for $215,000. The proceeds were used for the capital repairs and improvements for DRH?s property. DRH recorded $215,000 as notes payable and due from parent when the funding was available. In addition, DRH recorded settlement expenses, such as legal fees, in amount of $11, 281 associated to this note as its expenses. There were no note payable and settlement expenses recorded on Deaf Reach, Inc.?s book as of June 30, 2019. Cause: Management considered this note payable and associated settlement expenses as DRH?s liability and expenses rather than Deaf Reach, Inc.?s due to the purpose of this note exclusively for the capital repairs for DRH?s property. Effect: The liability and expenses of DRH were overstated in amount of $215,000 and $11,281, respectively, as of June 30, 2019, as the note was the obligation of the parent and not DRH. Questioned Costs: No questioned costs. Repeat Finding: No.Recommendation: We recommend enhancing internal control procedures in that someone from management review all the journal entries, as well as the supporting documentation on a monthly basis to ensure the financial information is recorded as appropriate, accurate and complete. Views of Responsible Officials and Planned Corrective Actions: DRH agrees with the finding. See corrective action plan

Criteria: GAAP requires nonprofit organizations to record net assets into two classes according to the existence or absence of donor-imposed restrictions: net assets with donor restrictions and net assets without donor restrictions. A donor-imposed restriction is a donor stipulation for the use of an unconditional contributed asset that is more specific than the board limits that result from the nature of a nonprofit organization, the environment in which it operates, and the purpose described in its articles of incorporation and bylaws. A donor-imposed time restriction expires when the time stipulated in the restricted contribution lapses, and therefore the purpose stipulated in the restriction has been fulfilled. Condition and Context: DRH received the capital advance in prior year from HUD bearing no interest and the repayment not required so long as the housing remains available for very low-income elderly persons or very low-income person with disabilities for at least 40 years. The term under the capital advance agreement specifically states the conditions and restrictions to use the funds. DRH classified the capital advance in the accompanying statement of financial position as net assets without donor restrictions. As of June 30, 2018, total capital advance balance of $1,386,902 were recorded at net assets without donor restrictions. Cause: Management took the position the advances where earned at the time received (an exchange) and not aware of the requirement to recognize the unconditional contribution as restricted due to the 40 year time restriction and other compliance requirements. Effect: This resulted in improper classification of the capital advance as net assets without donor restrictions, rather than net assets with donor restriction and a prior period adjustment to correct the classification of net assets was recorded during the audit for the year ended June 30, 2019. Questioned Costs: No questioned costs. Repeat Finding: No.Recommendation: Although it is unusual for DRH to receive contributions, we recommend that management implement additional internal control procedures over contributions to ensure that those involved in accounting and decision-making processes relating to financial reporting are updating their understanding of reporting requirements for net assets under GAAP. Views of Responsible Officials and Planned Corrective Actions: DRH agrees with the finding. See corrective action plan.

Criteria: A capital advance program agreement requires DRH obtain written approval from HUD if (a) transfer, dispose of or encumber any of the mortgaged property; (b) assign, transfer, dispose of or encumber any personal property, including rents or charges; (c) remodel, reconstruct, add to, or demolish any part of the mortgage property or subtract from any real or personal property of the project; (d) pay any compensation or make any distribution of income or other assets to an of tis officers, directors, or stockholders; (e) enter into any contract or contracts for supervisory or managerial services. Condition and Context: DRH used proceeds from a note payable which was entered into between Deaf Reach, Inc. DRH?s parent, and a non-profit community development financial institution to complete its capital repairs and improvements which created a liability to the parent in the current year. DRH included capital expenditures in the budget which was approved by HUD; however, DRH did not obtain an explicit approval from HUD before creating debt due to Deaf Reach, Inc., as required by the capital advance program agreement. Cause: Procedures have not been formally established to monitor the implementation of the compliance requirements stated in a capital advance program agreement. Effect: There could be a risk that HUD will recall the capital advance granted to DRH due to incompliance. Questioned Costs: No questioned costs. Repeat Finding: No. Recommendation: We recommend DRH enhance its internal control over compliance including performing a thorough review of all compliance requirements stated in the capital advance program agreement. Formal procedures should be documented and be communicated to all those invoiced in the process to ensure the requirements are in compliance. Views of Responsible Officials and Planned Corrective Actions: DRH agrees with the finding. See corrective action plan.