Tips for a Successful Affordable Housing Audit
Affordable housing audits come with unique challenges – tight reporting deadlines, complex partnership structures, and stringent compliance requirements from investors and agencies like PHFA, HUD, or the IRS. Whether you’re managing a first-year project, or a well-established property, preparation and proactive communication can make the audit process smoother and more efficient.
Here are several key tips to help ensure a successful and stress-free audit season.
Review Prior-Year Adjusting Entries
A great starting point for audit preparation is reviewing the prior year’s adjusting journal entries. If the auditors proposed adjustments during the previous audit, ensure those entries have been recorded in the current year.
Affordable housing audits often operate under tight turnaround times – leaving little room for last minute corrections. When prior year adjustments are already booked, auditors can begin with accurate opening balances, which reduces unnecessary back-and-forth during fieldwork.
It’s also best practice to be proactive in reviewing recurring audit entries. For instance, if an auditor maintains an organization’s depreciation schedules, providing invoices ahead of time can expedite the process.
Maintain Timely Bank Reconciliations
Maintaining a monthly reconciliation process provides a solid foundation for accurate financial reporting. A consistent close process helps detect errors promptly, ensuring that interim financial statements are materially accurate. Delaying reconciliations until year-end can cause small discrepancies to compound and become harder to resolve.
In affordable housing partnerships, investors may request quarterly reports, making timely reconciliations even more critical. Implementing a monthly close checklist can promote consistency, strengthen internal controls, and streamline the audit process – allowing auditors to focus on higher-risk areas instead of tracing cash activity.
Review and Capitalize Repairs Appropriately
Every organization should have and follow a formal capitalization policy that outlines the distinction between capitalized assets and items that should be expensed. As highlighted in McKonly & Asbury’s previous blog, “To Capitalize or Not to Capitalize”, the firm’s Entrepreneurial Accounting Solutions (EAS) team provided valuable guidance on determining whether an expenditure should be expensed as a repair or capitalized as an asset.
Before the audit, an organization should ensure they review major repairs or improvements to confirm proper treatment under the policy. Misclassification of capital assets can distort depreciation, taxable income, and projected operating losses – metrics that are often monitored by investor limited partners.
Investor limited partners expect operating losses to align with initial projections used to determine return on investment and tax credit eligibility. Consistently applying one’s capitalization policy helps maintain accurate depreciation schedules and reliable projections.
Record Equity and Partnership Transactions
Be sure to record all equity contributions and surplus cash distributions in accordance with the partnership agreement. During the development phase, limited partners typically contribute equity as milestones are achieved, and surplus cash may be distributed when operations generate positive cash flow.
If a project has PHFA or other regulatory financing, ensure compliance with their surplus cash and distribution requirements. Also, don’t forget to post any prior year audit adjusting journal entries related to these activities to maintain accurate opening balances for equity and balance sheets accounts.
Provide Up-to-Date Agreements to Your Auditor
Make sure that the audit team has access to the most current version of key agreements, including loan documents, partnership agreements, management agreements, and any amendments executed during the year.
Providing these documents early allows the auditor to evaluate how changes in ownership, financing, or regulatory requirements may impact one’s financial statements and disclosures. Early access also helps prevent last-minute document requests and delays during fieldwork.
Confirm Deadlines with Investors and Stakeholders
Affordable housing audits often operate under strict reporting deadlines established by investors, state housing agencies, and other regulatory bodies. If challenges are anticipated – such as turnover in accounting staff, system changes, or are in the first year of operations – it is important to communicate these matters to the limited partner and agencies as early as possible.
Proactive communication allows all parties to plan accordingly, set realistic expectations, and, if necessary, arrange for deadline extensions in advance. Early discussions help avoid last-minute complications that can delay audit completion or disrupt reporting to regulatory agencies.
Maintain Timely Communication with Your Auditor
Finally, keep an open line of communication with the audit team throughout the audit. Inform the auditors in advance of significant developments, such as new financing arrangements or unusual transactions.
If there are any questions about specific entries or accounting guidance, reach out to the auditor before fieldwork beings. The more the auditors understand an organization’s operations, the smoother and more efficient the audit process will be.
Final Thoughts
A successful affordable housing audit depends on preparation, organization, and collaboration. By following these best practices, those in the affordable housing industry can save time, strengthen internal controls, and reduce audit-related stress.
For additional guidance on preparing for your affordable housing audit, tune into our Affordable Housing Audit and Financial Statement Essentials webinar.
McKonly & Asbury, LLP has extensive experience serving affordable housing entities and understands the unique compliance and reporting requirements in this industry. To learn more about our affordable housing services, visit our Affordable Housing page, and don’t hesitate to contact us.
About the Author
Zach D’Arcangelo is an Assurance Staff Accountant, where he provides audit and assurance services to nonprofit organizations and affordable housing entities. He is part of the firm’s specialized team servicing clients, such as charitable organizations, foundations, associations, and social service providers and Low-Income Housing Tax Credit (LIHTC) developments.
Zach assists with financial statement audits and compliance testing. He is familiar with nonprofit reporting requirements, Uniform Guidance and Generally Accepted Government Auditing Standards (GAGAS). He is committed to delivering high-quality service through attention to detail, clear communication, and a strong understanding of each client’s mission and operations. His dedication and growing technical expertise make him a valuable member of the client engagement team.
