October 25, 2012
By: James Hill
As the president or owner of a management company, your goal is to run an efficient, profitable business. Your portfolio consists of properties that you either own or third-party manage for a fee. These properties may have market rents, or they may participate in various federal and state assistance programs. The latter group is governed by regulatory agreements which dictate how you manage them and when an audit is required. Such mandatory audits are compliance driven, so your objective going into the process must be to minimize findings which may increase the costs of your audit.
Chapter 3 of the Consolidated Audit Guide outlines HUD’s requirements for conducting the compliance portion of the annual audit, detailing the required testing areas. Auditors typically create their testing around these procedures and their associated risk factors. A key area that can generate significant non-compliance findings is in the Tenant Application, Eligibility and Recertification process.
Here are some guidelines to avoid some common pitfalls of these audits:
- Review all move-in certifications. Move-in certification is the key document in every file since it establishes the initial eligibility for a tenant at your property. An improperly completed certification could allow a non-eligible applicant to move in, creating possible non-compliance findings in the future. Management companies will use questionnaires to assist with completing the certification. The information provided by applicants on assets, income and expenses needs to be verified by a third party, and the certification will need to be updated. This step can easily be overlooked because the certification is already populated with amounts from the questionnaire, so make sure you take a close look at each one.
- Perform random file reviews. Regional property managers should select a sampling of tenant files to review during site visits. This will keep your property managers “on their toes” and will alert you to potential problems before they lead to non-compliance findings.
- Provide training, training & more training. Management companies should mandate training for their property managers. Accountants are required to have annual training to perform a HUD Audit, and there are many qualified organizations that provide it. Discuss this training with your audit firm and see who they recommend. Managers take great pride in their properties, and they want their files to be perfect. Give them all of the tools they need to succeed.
- Establish proper file organization. A consistent layout for the tenant files at your properties will allow for a quick and efficient review process. Files should not contain any loose documents, as this will slow down the review and create the possibility of misplaced paperwork. Also, any documentation that is in excess of 3 years old can be moved to a secondary file because it is not required for the current review. However, the initial move-in documentation should always remain in the current file as it is part of the suggested audit procedures.
- Create your own custom checklists. Customized checklists are a great tool for your property manager to follow. Providing a checklist for the Tenant Application, Eligibility & Recertification requirement (is this a formal requirement? If not, lower case and then plural ‘requirements’) assists the manager by focusing on the necessary paperwork for this compliance step. This helpful guideline can help you avoid any potential finding due to incomplete tenant files.
As you go through this process, you will also find Chapter 3 of the Consolidated Audit Guide to be a useful resource. The Consolidated Audit Guide can be downloaded from www.hud.gov. It lists the compliance requirements and it details the suggested procedures for each of the audit areas.
HUD compliance audits can be stressful, but by preparing yourself properly, you can avoid findings. Follow these practical procedures, and you will be on your way to a successful, cost-efficient audit of your property.