oversight

Chapter 4 - HUD Multifamily Hospital Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-07-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                    CHAPTER 4. HUD Multifamily Hospital Program

4-1.   Background. This chapter contains the U.S. Department of Housing and Urban
       Development’s (HUD) requirements for conducting annual financial audits of entities
       participating in the profit-motivated and limited-distribution HUD multifamily hospital
       program.

       Separately, practitioners with nonprofit clients who participate in Federal Housing
       Administration (FHA)/HUD programs covered by the Single Audit Act should conduct
       financial audits in accordance with Office of Management and Budget (OMB) Circular
       A-133 and the associated compliance supplement.


4-2.   Reporting Requirements. The regulatory agreement incident to the insured mortgage
       requires the annual submission of audited financial statements, prepared in
       accordance with the requirements of the Secretary, within 90 days after the end of the
       fiscal year. In addition to the basic financial statements of the housing project, the
       auditor is required to submit a report on the consideration of internal controls and a
       report on compliance with specific requirements as well as supplemental data reports.
       These statements must be certified to be accurate by the mortgagor when the project is
       owned by an individual. They should be certified by two general partners when the
       project is owned by a partnership or by two officers when owned by a corporation.
       When circumstances prohibit the ideal number of partners’ or officers’ certifying
       signatures, explanatory information should be provided with the audit report. These
       statements must also be certified to by the chief executive officer of the management
       agent when applicable. The report shall include the employer identification number
       assigned by the Internal Revenue Service. This number must be entered below the
       partner or corporate signatures. The report should include the following basic financial
       statements plus supplemental data prepared in accordance with Real Estate Assessment
       Center (REAC) instructions.

       The auditors’ role is to conduct and report the results of their audits in accordance with
       generally accepted auditing standards (GAAS) and generally accepted government
       auditing standards (GAGAS). It is the owner’s responsibility to file an accurate
       electronic submission with HUD’s REAC. In that regard, the independent auditor shall

       A. Issue an independent auditor’s report (refer to chapter 2, example A) on the
          ownership entity’s basic financial statements. This report should cover the
          following items:

              •   Balance sheet,
              •   Statement of income,



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                  •   Statement of changes in partner’s capital, 1
                  •   Statement of cash flows, and
                  •   Footnotes to the basic financial statements including descriptions of
                      accounting policies.

         B. Issue an independent auditors’ report (refer to chapter 2, example A) on the
            supplemental information. This report may be added to the auditor’s report on the
            basic financial statements or may appear separately in the auditor-submitted
            document. 2

         C. Issue the additional reports described in chapter 2.


4-3.     Compliance Requirements and Audit Areas.

         A. Federal Financial Reports.

             1. Compliance Requirement. Projects participating in HUD-assisted activities
                are required to ensure that financial status reports contain reliable financial data
                and are presented in accordance with the terms of applicable agreements
                between the entity and HUD. The individual agreements contain the specific
                reporting requirements that the entity is to follow.

             2. Suggested Audit Procedures.

                        a. Identify all required financial reports by inquiry of the owner/manager.

                        b. Obtain an understanding of the auditee’s procedures for preparing and
                           reviewing the financial reports.

                        c. Select a sample of financial reports, other than those that are included in
                           the audited financial statements, and determine that the reports selected
                           are prepared in accordance with HUD instructions.

                        d. For the sample, trace significant data to supporting documentation, i.e.,
                           worksheets, ledgers, etc. Report all material differences between
                           financial reports and project records.

                        e. Review significant adjustments made to the general ledger accounts
                           affecting HUD-assisted activity and evaluate for propriety.
1
  Or similarly titled report based on the type of participating ownership entity. For example, if a limited liability
company owns the property, a “statement of changes in members’ equity” should be opined upon.
2
  Refer to AICPA Professional Standards, Volume 1, U.S. Auditing Standards, AU §551.06 e.



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           f. For a Section 236 interest reduction payment subsidy project, obtain a
              sample of the monthly reports of excess income for the period under
              audit and test the accuracy. Reconcile any differences. Report any
              delinquent unremitted excess income of the project as of the end of the
              period under audit as a finding. Determine whether the owner has
              approval to retain excess income. If the owner is under a repayment plan
              for delinquent excess income, determine compliance with the plan.

B. Fair Housing and Nondiscrimination.

   1. Compliance Requirement. Management and owners are prohibited from
      discriminatory practices in accepting applications, renting units, and designating
      units or sections of a project for renting to prohibited bases of the Fair Housing
      Act and according to the regulatory agreement.

   2. Suggested Audit Procedures.

           a. Obtain a copy of the owner’s approved affirmative fair housing
              marketing plan if applicable to the project.

           b. Inquire of the owner/manager as to policies and procedures relating to
              marketing of the units; processing, approving, and rejecting applications,
              including determining that applicants are processed and selected in
              appropriate order; and providing reasonable accommodation to
              applicants and tenants with disabilities in accordance with the
              requirements of applicable federal civil rights laws.

           c. Test whether procedures were placed in operation as established by
              management through inquiry and examination of documentary evidence.

           d. Review a sample of correspondence files for applications rejected,
              including documented reasons for valid rejections, or tenants evicted and
              legal invoices for any evidence of litigation or potential litigation related
              to discriminatory rental practices.

           e. Determine that the HUD-approved equal housing opportunity logo,
              slogan, or statement is displayed in marketing materials.

C. Mortgage Status.

   1. Compliance Requirement. Owners shall promptly make all payments due
      under the note and mortgage (regulatory agreement).



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          2. Suggested Audit Procedures.

                   a. Read the mortgage note, mortgage (or deed of trust), and associated loan
                      amortization schedule to determine the terms and conditions of those
                      agreements. Obtain an understanding of the owner’s procedures for
                      assuring prompt payment of the mortgage

                   b. Obtain or prepare a schedule of the client’s mortgage and escrow
                      payments and withdrawals for the reporting period. The schedule should
                      include the amount, by escrow item, and date each item was paid or
                      disbursed.

                   c. Verify that the monthly mortgage and escrow payments were made.

                   d. Confirm the outstanding loan balance and annual escrow account activity
                      with the loan servicer as of the client’s fiscal year end. Determine
                      whether payments on the notes are current at the reporting entity’s fiscal
                      year end. (Note: The auditor should use alternative procedures to satisfy
                      this requirement if the auditor considers the confirmation process
                      unreliable or impractical.)

                   e. If the project is operating under an agreement (mortgage modification
                      agreement, workout agreement, forbearance agreement, use agreement,
                      etc.), test whether the owner is complying with the terms and conditions.

      D. Replacement Reserve.

          1. Compliance Requirement.           Owners of profit-motivated and limited-
             distribution properties shall establish a reserve for replacement account and
             make deposits in accordance with HUD requirements. Disbursements from such
             fund may be made only after receiving written consent from HUD (source:
             HUD regulatory agreement).

          2. Suggested Audit Procedures.

                   a. Obtain an understanding of the project owner’s procedures, including the
                      regulatory agreement (and any amendments or other written agreements
                      with HUD) for establishment and maintenance of the fund and for
                      making approved disbursements from the reserve fund.

                   b. Determine that the reserve fund has been established in a federally
                      insured depository approved by the mortgagee and that interest was



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             retained in the account and test whether the conditions were met for the
             funds not federally insured for the period.

          c. Using the schedule prepared for the mortgage status compliance
             requirement, verify the reserve for replacement account activity for the
             reporting period for compliance with the client’s regulatory agreement.

          d. Verify that deposits were made into the replacement reserve.

          e. Trace disbursements from the reserve for replacement account to the
             associated HUD approval form and canceled invoices. Trace to the
             client’s general ledger, monthly (or annual) mortgage statement(s), and
             the schedule prepared above. Determine whether sampled disbursements
             were authorized by HUD and used for the purpose authorized by HUD.

          f. Confirm the account balance and annual reserve for replacement account
             activity with the loan servicer as of the client’s fiscal year end. (Note:
             The auditor should use alternative procedures to satisfy this requirement
             if the auditor considers the confirmation process unreliable or
             impractical.)

E. Residual Receipts.

   1. Compliance Requirement. Owners of limited-distribution properties shall
      establish a residual receipts account and make deposits into the account in
      accordance with HUD requirements. Disbursements from such fund may be
      made only after receiving written consent from HUD (source: HUD regulatory
      agreement).

   2. Suggested Audit Procedures.

          a. Read the client’s regulatory agreement (and any amendments) to
             determine the client’s requirements for making deposits into the residual
             receipts fund. Normally, program participants are required to deposit
             “surplus cash” into the account within 60 days after the end of each
             fiscal year.

          b. Determine that the prior year’s amount required to be deposited to the
             residual receipts fund was calculated correctly and deposited within 60
             days of the close of the fiscal year.

          c. Using the schedule prepared for the mortgage status compliance
             requirement, verify the residual receipts account activity for the reporting



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                      period for compliance with the client’s regulatory agreement.

                   d. Verify that deposits were made into the residual receipts account.

                   e. Trace disbursements from the residual receipts account to the associated
                      HUD approval form and canceled invoices. Trace to the client’s general
                      ledger, monthly (or annual) mortgage statement(s), and the schedule
                      prepared above. Determine whether disbursements were authorized by
                      HUD and used for the purpose intended.

                   f. Confirm the account balance and annual residual receipts account
                      activity with the loan servicer as of the client’s fiscal year end. (Note:
                      The auditor should use alternative procedures to satisfy this requirement
                      if the auditor considers the confirmation process unreliable or
                      impractical.
                   g. Test whether established procedures for deposit of cash receipts into a
                      federally insured bank are being followed through inquiry and
                      examination of documentary evidence.

      F. Distributions to Owners.

          1. Compliance Requirement.           Owners of profit-motivated and limited-
             distribution properties are not allowed to make or receive and retain any
             distribution of assets or any income of any kind of the project except surplus
             cash. Surplus cash distributions can only be made as of and after the end of a
             semiannual or annual fiscal period. Surplus cash distribution cannot be made
             when the owner is in default under any of the terms of the regulatory agreement
             or under the note or mortgage. The allowable distribution for limited-
             distribution owners is further restricted to a percentage of the owner’s initial
             equity investment as described in the regulatory agreement or subsequent HUD-
             approved agreements.

          2. Suggested Audit Procedures.

                   a. Read the client’s regulatory agreement (and any amendments or
                      associated documents) to determine the client’s requirements for
                      receiving distributions.

                   b. Inquire of management about the existence of any notices of default
                      under any of the terms of the regulatory agreement and read any notices.

                   c. Inquire of management about the payment of distributions during the
                      reporting period. Conduct follow-up or corroboration of management’s



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              responses as considered necessary.

           d. Read the minutes of partner meetings held during the reporting period
              for evidence of any discussions about distributions.

           e. Scan cash disbursements for evidence of payments made to the project
              owners. Trace payments and determine whether they are allowable
              under the terms of the regulatory agreement.

           f. If applicable, determine that surplus cash computations were prepared in
              accordance with HUD criteria.

G. Tenant Application, Eligibility, and Recertification.

   1. Compliance Requirement. Owners who participate in HUD’s rent subsidy
      programs are responsible for accepting applications, correctly calculating the
      tenant’s contribution toward rent and utilities, and correctly calculating any
      subsidy. They are also responsible for determining initial tenant eligibility,
      annual recertification of tenant eligibility, and rectifying improper or inaccurate
      tenant information.

   2. Suggested Audit Procedures.

           a. Compare the client’s procedures for accepting applications, determining
              initial eligibility, total tenant payment, and reexamination of eligibility
              with the provisions in HUD Handbook 4350.3.

           b. Review a sample of tenant files to determine that applications are
              complete and signed by the applicant, that tenants met the eligibility
              requirements pertaining to their subsidized unit for annual income and
              family composition, that the tenant payment was calculated correctly,
              and that the family income was reexamined on an annual basis. Include
              in the sample some of the oldest and some of the most recently admitted
              tenants.

           c. Review a sample of tenant files for evidence of whether the owner noted
              any improper or inaccurate information while determining tenant
              eligibility or during tenant recertification. If so, determine that the
              owner followed the guidance in HUD Handbook 4350.3 pertaining to
              overpayment of a subsidy and follow up on suspected fraud.

       d. Review a sample of tenant files to determine that the tenant file contains the
          following documents:



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                             (1) Application;

                             (2) Required verifications of Social Security numbers, disability
                                 status, waiting list preferences, income, and allowances for
                                 adjusted income;

                             (3) Lease/lease addendums in the form as required by HUD;

                             (4) Certification and recertification forms (Form HUD-50059);

                             (5) Move-in and move-out inspections; and

                             (6) Computation of tenant’s contribution toward rent and utilities
                                 and the subsidized portion of the tenant’s monthly rent

                   e. Test Section 8 rents to ensure that those rents do not exceed the fair
                      market rents.

                   f. Compare the amount claimed according to the housing assistance
                      payment billing to the supporting documentation in the tenant files.

                   g. Verify the mathematical accuracy of the billing, including the accuracy
                      of the total number of units on the bill.

      H. Management Functions.

          1. Compliance Requirement.      The owner is responsible for performing
             management functions or contracting with a management agent to provide
             project management. The owner or the owner’s agent must be approved by
             HUD to manage a project and must certify that it will follow HUD’s project
             management regulations.

          2. Suggested Audit Procedures.

                   a. Determine that the owner’s designated management agent has obtained a
                      fidelity bond in an amount at least equal to two months potential
                      collections. When an agent has multiple projects, the coverage must be
                      at least equal to two months of the highest potential collections. All
                      principals of the management entity and all persons who participate
                      directly or indirectly in the management and maintenance of the project
                      and its assets, accounts, and records must be covered.




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b. Test work orders and complaints for timely follow-up and compliance
   with management’s procedures.

c. Test management’s procedures for ensuring that units meet applicable
   housing quality standards.

d. Inquire whether management has conducted routine unit and general
   property inspections and if findings were identified, whether corrective
   action was taken (HUD Form 9834, part A.4).

e. Inquire of management about any fees charged to the project for property
   management services. Also inquire about whether there has been a
   change in the project’s property management agent. Conduct follow-up
   or corroboration of management’s responses as considered necessary.

f. Read a copy of the owner’s latest HUD-approved management
   certification (form HUD-9839a, b, or c, as appropriate). Determine
   whether HUD has approved the current management agent.

g. Review the management certification to determine whether the owner
   has disclosed the existence of an identity of interest (item 12).

h. Review the management entity profile for disclosure of identity-of-
   interest companies.

i. Review the maintenance contracts and vendor invoices for identity-of-
   interest relationships with the owner/agent and agent/service contractor.

j. Test a sample of payments, including those made to identity-of-interest
   relationship for services, supplies, etc., to determine that the amounts do
   not exceed the amounts ordinarily paid for such services and supplies.

k. Obtain from client or prepare a schedule analyzing the fees charged to
   the project for management services. Trace the amounts on the schedule
   to the client’s general ledger.

l. Compare the schedule created above to form HUD-9839. Determine
   whether the management fees charged exceed the HUD-approved
   amount.

m. Determine that there is comprehensive general liability coverage on an
   industry standard form, in an amount required by the project’s mortgage,
   and that HUD is named as an additional payee in the event of loss.



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      I. Unauthorized Change of Ownership/Acquisition of Liabilities.

          1. Compliance Requirements.           Owners of profit-motivated and limited-
             distribution properties shall not, without the prior written consent of HUD,
             convey, transfer, or encumber any of the mortgaged property or permit the
             conveyance, transfer, or encumbrance of such property (source: HUD
             regulatory agreement).

          2. Suggested Audit Procedures.

                   a. Inquire of management about the existence of any agreements to sell or
                      encumber any of the mortgaged property and read any agreements.

                   b. Confirm all material debt agreements listed on the client’s balance sheet.
                      Review confirmations to determine whether a change of ownership has
                      occurred or whether any of the mortgaged property was encumbered
                      without HUD approval.

                   c. Review the results of the audit procedures applied to specific accounts or
                      other general procedures to identify the existence of any unauthorized
                      conveyance, transfer, or encumbrance of any of the mortgaged property.

                   d. Read the minutes of partner meetings held during the reporting period
                      for evidence of any unauthorized conveyance, transfer, or encumbrance
                      of any of the mortgaged property.

      J. Unauthorized Loans of Project Funds.

          1. Compliance Requirements.           Owners of profit-motivated and limited-
             distribution properties shall not, without the prior written consent of HUD,
             assign, transfer, dispose of, or encumber any personal property of the project,
             including rents, or pay out any funds except from surplus cash, except for
             reasonable operating expenses and necessary repairs (source: HUD regulatory
             agreement.

          2. Suggested Audit Procedures.

                   a. Inquire of management about the existence of any agreements to assign,
                      transfer, dispose of, or encumber any of the personal property of the
                      project, including rents, and read any agreements.

                   b. Review the results of the audit procedures applied to specific accounts or



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                            other general procedures to identify the existence of any unauthorized
                            transactions.

                        c. Read the minutes of partner meetings held during the reporting period.
                           Highlight discussions of any unauthorized agreements to assign, transfer,
                           dispose of, or encumber any of the personal property of the project.

         K. Unauthorized Transfer of Beneficial Interest.

              1. Compliance Requirements.           Owners of profit-motivated and limited-
                 distribution properties shall not, without the prior written consent of HUD,
                 convey, assign, or transfer any beneficial interest in any trust holding title to the
                 property or the interest of any general partner in a partnership owning the
                 property or any right to manage or receive the rents and profits from the
                 mortgaged property (source: HUD regulatory agreement).

              2. Suggested Audit Procedures.

                        a. Inquire of management about the existence of any agreements to convey,
                           assign, or transfer any beneficial interest. 3

                        b. Review the results of the audit procedures applied to specific accounts or
                           other general procedures to identify the existence of any unauthorized
                           conveyance, assignment, or transfer of any beneficial interest of any of
                           the owners.

                        c. Read the minutes of partner meetings held during the reporting period
                           for evidence of discussions of any unauthorized conveyance, assignment,
                           or transfer of any beneficial interest of any of the owners.

         L. Electronic Submission Verification.

              1. Compliance Requirements.          Owners of profit-motivated and limited-
                 distribution properties are required to submit electronically to HUD audited
                 financial information in accordance with GAAP and HUD requirements (source:
                 HUD regulatory agreement and 24 CFR [Code of Federal Regulations] Part 5,
                 Subpart H).

              2. Suggested Audit Procedure. Compare the client’s Financial Assessment
                 Subsystem submission from the last reporting period to the annual financial

3
  Beneficial interest is generally the right to profits from an estate or property without owning the estate or
property.


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              report prepared for the same period. Identify any material misstatements or
              omission from the data electronically submitted to HUD’s REAC.

       M. Excess Income.

          1. Compliance Requirements. Owners of limited-distribution properties with
             mortgages insured under Section 236 of the National Housing Act must obtain
             prior authorization from HUD before retaining excess income and use excess
             income only for HUD-authorized purposes.

          2. Suggested Audit Procedures.

                   a. Inquire of management about the existence of a letter of permission or
                      denial from HUD with respect to excess income. If the owner has
                      received a letter from HUD permitting or denying the retention of excess
                      income, obtain and read a copy of that correspondence from the
                      property’s management.

                   b. Select a sample of the HUD forms HUD-93104, Monthly Report of
                      Excess Income, filed by the client, covering the period under audit.
                      Determine whether the reports selected were prepared in accordance
                      with HUD instructions.

                   c. For the sample, determine whether the client retained excess income or
                      remitted the amount collected to HUD in accordance with HUD
                      instructions. Trace amounts retained back to the client’s supporting
                      records.

                   d. If excess income was retained by the client, determine whether

                             (1) HUD approved if the amount was retained.

                             (2) The amount retained was used for authorized purposes as
                                 enumerated in housing notices.


4-4.   *Audit Finding Reporting.

       All instances of noncompliance with any HUD requirement or regulation, deficiencies
       in internal control, instances of fraud or illegal acts, or contract violations that were
       disclosed during the audit process must be reported as findings in the audit report. All
       nonmaterial instances of noncompliance disclosed during the audit process may be
       reported separately to management. Such reporting must be in writing in a management



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       letter or other type of written communication, and form and date of written
       communication must be mentioned in the independent auditor’s report.
       Noncompliance, deficiencies, or violations that were* *corrected before the issuance of
       the audit report must be included in the report as resolved findings or in a management
       letter or other written communication depending on their materiality.

       A. Content of Finding. Findings are to be presented in accordance with the standards
          and requirements of GAGAS. Refer to chapter 2 for further information on the
          information that is to be included in a finding.

       B. Corrective Action Not Started or in Process. When the project’s management is
          in the process of correcting a finding at the time of report issuance, the auditee can
          include a description of the action completed and the action remaining to be taken in
          the auditee’s response to the finding, stated in the auditee’s comment section of the
          finding and in the corrective action plan.

       C. Corrective Action Completed. When the project’s management has corrected a
          finding, the action taken should be included in the auditee’s response to the finding,
          stated in the auditee’s comment section of the finding and in the corrective action*
          *plan, and should be validated by the auditor. The auditor’s recommendation in the
          finding should state the results of the auditor’s validation testing. In addition, the
          auditor could include any additional recommendations that he/she believes are
          necessary based on the auditor’s testing of that action.

4-5.   Technical Assistance Needed. The Office of Insured Health Care Facilities is
       responsible for answering programmatic questions for the programs being audited using
       the procedures outlined in this chapter. Programmatic questions on audits performed
       using this chapter should be referred to that office, 202-708-0599 or 877-458-4342.*




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