What to Expect During a HUD Audit: An Overview for Multifamily Housing Providers

Many multifamily housing projects are supported by the U.S. Department of Housing and Urban Development (HUD) through tenant assistance payments, HUD-insured or HUD-guaranteed loans, or both. Multifamily HUD programs commonly encountered by McKonly & Asbury include:

• Housing Choice Voucher Program (also known as Section 8)
• Section 202 Supportive Housing for the Elderly
• Section 811 Supportive Housing for Persons with Disabilities
• Section 221(d)(4) mortgage insurance
• Section 207/223(f) mortgage insurance
• HOME Investment Partnerships Program

The projects may also be owned and managed by either nonprofit or for-profit organizations. This is an important distinction as this can lead to differences in applicable auditing standards and financial reporting requirements. For instance, nonprofit organizations expending $1,000,000 or more of federal awards during the year are subject to audit in accordance with the Uniform Guidance. In contrast, for-profit organizations participating in individual assistance programs for which expenditures equaled or exceeded $500,000 during the year or a project that has a HUD-insured or HUD-guaranteed loan with an outstanding balance equal to or exceeding $500,000 as of the end of the period under audit are subject to audit in accordance with the Consolidated Audit Guide for Audits of HUD Programs (HUD Audit Guide). For purposes of this overview, the focus will be directed towards those audits in accordance with the HUD Audit Guide, specifically Chapter 3. Understanding what areas auditors will be focused on and what documentation will be requested can help management plan and prepare for the audit to avoid delays and surprises.

At a high level, the areas that draw the most attention from auditors and require the most assistance from management typically are:

1. Tenant Files
2. Rental Income
3. Expense Testing

Tenant Files

One of the most significant areas of audit focus is the review of tenant files. Auditors will select a sample of tenant files to review in detail. This sample will include residents recently admitted and residents that no longer reside at the project. The purpose of this testing is to confirm that tenants were eligible for assistance and that rental amounts were calculated in accordance with HUD guidelines.

Key items auditors will review in each tenant file include:

1. Certification and recertification information is accurate and properly supported by documentation
2. Household income has been verified
3. Correct contract rents were applied
4. The tenant’s portion of rent is properly calculated
5. Recertifications were completed timely
6. Proper move-in and move-out procedures were completed

From an owner and management perspective, ensuring tenant files are complete, well-organized, and consistently maintained significantly increases the likelihood of a smooth and efficient audit process. Incomplete or poorly documented files are one of the most common causes of compliance findings in HUD audits.

Rental Income

Auditors will also perform procedures to ensure rental income, including tenant assistance payments, is not overstated or understated. In order to do so, auditors will select a sample of cash receipts and review supporting documentation to verify the accuracy and completeness of recorded revenue.

Key procedures include:

1. Verifying the assistance payment calculated in the tenant file matches the amount charged to HUD in the monthly voucher request
2. Confirming the tenant rent charged by the project matches the tenant’s portion of rent calculated in the tenant file
3. Reviewing whether deposits were made in a timely manner
4. Tracing assistance payments and tenant rent received to the project’s general ledger and matching those amounts to the bank statements

In light of these procedures, owners and management should have bank statements and monthly rent rolls that are properly reconciled to the general ledger.

Expense Testing

Expense testing addresses many of the key areas of audit concern from HUD’s perspective. More specifically, review of expenses can ensure disbursements have been appropriately made for the operation of the project and may reveal indicators of equity skimming, unauthorized distributions to owners, or unauthorized loans of project funds. In this regard, auditors will select a sample of cash disbursements to review.

Typical procedures include:

1. Reviewing supporting documentation to verify documents are in the name of the project and are reasonable and necessary for the operation of the project
2. Scanning for evidence of any payments to project owners or related parties
3. Ensuring distributions made to owners do not exceed the amount authorized for that period
4. Verifying disbursements were charged to the correct account within the general ledger

The most important consideration for owners and management is to have invoices and supporting documentation readily available to support each disbursement and proof of payment.

Consideration of Internal Controls

In addition to the aforementioned audit areas, owners and management will also want to have processes clearly and fully documented. This would include identifying who is responsible for the preparation, reporting, reconciliation, and review. Ideally, these responsibilities are divided among multiple individuals and, if possible, across different departments to ensure proper segregation of duties and reduce the risk of misstatements.

HUD audits play a critical role in ensuring that federal funds are used appropriately and that multifamily housing providers remain in compliance with program requirements. While the process can be more involved than a standard financial statement audit, understanding the key areas of auditor focus allows owners and management to approach the audit with greater confidence and preparation.

For more insight into the requirements of HUD programs, owners and management can access Housing Handbooks for their respective program directly from HUD’s website. In addition, the HUD Audit Guide can be accessed directly from the HUD Office of Inspector General’s website.

McKonly & Asbury, LLP is a leader in accounting for affordable housing entities. Our team has the specialized knowledge to help you ensure you comply with industry requirements. For more information on these services and more, be sure to visit our Affordable Housing page, and don’t hesitate to contact us.

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