HRC Cottage, Inc.

FINDING 2024-001: DELINQUENT AUDIT REPORT Condition and Criteria: In accordance with 2 CFR 200.512(a), auditees must submit the completed Single Audit reporting package to the Federal Audit Clearinghouse within the earlier of 30 calendar days after receipt of the auditors' report or nine months after the end of the auditee’s fiscal year. The audit for the current year ended December 31, 2024 was not submitted to the Federal Audit Clearinghouse within the statutory deadline. Cause: The delay in submission resulted from a change in key financial reporting personnel during the audit period. The transition led to gaps in institutional knowledge and challenges in coordinating audit requests, ultimately impacting the timely completion and submission of the Single Audit reporting package. Effect or Potential Effect: Submission of the audited financial statements and auditors' reports to the Federal Audit Clearinghouse may be delinquent resulting in the Organization not qualifying as a low-risk auditee and being subject to more stringent audit requirements. Recommendation: We recommend the Organization implement a formal transition plan when financial staff changes occur to ensure the accounting records and information pertaining to the audit process are finalized and made available to the auditors to allow adequate time to complete the audit prior to the statutory deadline.

Action Taken: We concur with the recommendation, and it was implemented effective March 17, 2026.

FINDING 2022-001: DELINQUENT AUDIT REPORT Condition and Criteria: The audit for the current year ended December 31, 2022 was not submitted to the Federal Audit Clearinghouse within the statutory deadline of the earlier of nine months after the end of the fiscal year or thirty days after the date of the auditors' report. Internal controls should be in place to provide reasonable assurance that accounting records and information pertaining to the audit process are finalized and made available to allow adequate time to complete the audit prior to the statutory deadline. Cause: There is not a process in place to provide reasonable assurance that the accounting records and information pertaining to the audit process are finalized and made available to the auditors to allow adequate time to complete the audit and reporting prior to the statutory deadline. Effect or Potential Effect: Submission of the audited financial statements and auditors' reports to the Federal Audit Clearinghouse may be delinquent resulting in the Organization not qualifying as a low-risk auditee and being subject to more stringent audit requirements. Recommendation: We recommend the Organization implement procedures to ensure the accounting records and information pertaining to the audit process are finalized and made available to the auditors to allow adequate time to complete the audit prior to the statutory deadline.

Action Taken: We concur with the recommendation, and it was implemented effective November 27, 2023.

FINDING 2021-001: INVESTMENTS Condition and Criteria: During the current year audit, we discovered an investment made by the Organization into a separate entity was recorded directly to net assets. As a result of this error, assets and net assets were understated by $124,446 as of December 31, 2021. Investments should be recognized as an asset and, if impaired, the impairment should be recognized as a loss that reduces the investment asset. Cause: HRC Cottages, Inc. is the administrative general partner of Two Rivers Apartments, LLLP. During 2021, the Organization made an equity contribution of $124,446 into Two Rivers Apartments, LLLP to allow the partnership to pay the developer fee, which is critical to the future success of the partnership. However, the contribution was recognized directly to the net assets of HRC Cottages, Inc. as opposed to recognizing an asset. As such, the Organization did not have adequate procedures in place to recognize this investment in accordance with U.S. generally accepted accounting principles. Effect: Assets and net assets were understated by $124,446. This deficiency has the potential effect of understating the assets of the Organization when an investment is made. Recommendation: We recommend the Organization recognize investments as an asset in accordance with the applicable guidance regarding the type of investment (i.e. cost method, equity method, consolidation). If there are concerns regarding the impairment of the investment, we recommend following accounting guidelines for determining if an impairment loss needs to be recognized.

Management?s Response: Background: HRC Cottages Inc. is a general partner in several partnerships which specialize in Low Income Housing Tax Credits (LIHTC). In each of the partnerships, HRC Cottages Inc. typically hold a 0.01% ownership. As part of the partnership agreement, HRC Cottages guarantees that the investor limited partner?s tax credits are protected. During 2021 HRC Cottages transferred $124,446 cash to Two Rivers Apartments LP to protect the tax credits for the investor limited partner in that partnership, in compliance with the partnership agreement. Because the percent ownership for HRC Cottages in Two Rivers Apartments LP is only 0.01%, the partnership agreement de?nes how gains and losses are distributed regardless of contributions, and no return of the contribution is expected, the Organization did not initially recognize this transfer of cash as an investment or asset on the ?nancial statements. Generally Accepted Accounting Principals (GAAP) are a comprehensive set of approved accounting methods and practices that dictate a standard recording of speci?c types of ?nancial transactions. In this case, although the Organization may never receive any return of the contribution to Two Rivers LP, nor a return on the investment, this transaction is considered an investment. Action Taken: We concur with the recommendation, and it was implemented effective August 11, 2022.

FINDING 2019-001: RECOGNITION OF LIABILITIES DUE TO RELATED PARTIES Condition and Criteria: During the current year audit, we discovered that assets and liabilities for the year ended December 31, 2018 were understated by $47,564. This was due to costs incurred for the construction of fixed assets, paid for by a related party during the year-ended December 31, 2018, being recorded as increases to fixed assets and liabilities during period ended December 31, 2019. However, FASB defines liabilities as probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities in the future as a result of past transactions. As this transaction occurred during the Organizations' year-ended December 31, 2018, the liability and corresponding increase to fixed assets should have been recorded in that period. Cause: The Organization did not have adequate procedures in place to provide reasonable assurance that costs paid for by related parties are recognized in the proper period. Effect: Based on our testing, assets and liabilities were understated in the amount of $47,564 for the year-ended December 31, 2018. There was no effect on net assets. This deficiency has the potential effect of understating assets and liabilities if amounts paid by related parties are not identified and recognized in the correct period. Recommendation: Due to the differences in year-end cutoff dates between the Organization and the related party, we recommend the Organization implement procedures to identify transactions with related parties to ensure that amounts owed to and from are recorded in the correct period, such as a formal close of the accounting records at June 30 and December 31 for both entities.

District XI Human Resource Council received a grant to develop 3 units of HOME program rental housing, owned by HRC Cottages, Inc. 2018 was the final year of development of the units, and $47,564 of Liability due to Related Parties and $47,564 of the developed asset was not recorded in the HRC Cottages 2018 books. During 2019 when the units were rented up and the final grant closed out, the final development costs of $47,564 were recorded in HRC Cottages records. The $47,564 is less than 1% of the total Long-term Debt and approximately 1% of Property and Equipment, Net. As such, HRC Cottages does not consider this transaction to be a significant misstatement of either the liabilities or assets presented in the 2018 financial statements. Never-the-less, we have followed the recommendation, and implemented it effective June 30, 2020.