USDA RD TRAINING TRACK

FINANCIAL MANAGEMENT YEAR END REPORTING REQUIREMENTS

ANNUAL REPORTS (PART 1)

USDA is an equal opportunity provider, employer, and lender

Agenda

10:30 – 10:33 Opening Remarks/Introductions/Preview of RD Track 10:33 – 10:50 CFR & 3560 Handbook Financial Reporting Regulations 10:50 – 11:10 Required submission documents 11:10 – 11:15 Borrower Certification of Performance Standards 11:15 – 11:20 GAGAS / A-133 "Single" Audit / OMB “Super-Circular 11:20 – 11:30 Agency Audit Review

FINANCIAL MANAGEMENTYEAR END REPORTING REQUIREMENTS USDA is an equal opportunity provider, employer, and lender

To understand USDA Rural Development (RD) MFH annual financial reporting requirements as one of the Key Asset Management Activities of RD.

At conclusion of the Annual Reports training sessions, participants should be able to:

Identify why annual financial reports are required by RD.

Identify when annual financial reports are due.

Identify the components of an annual reports complete “package”.

Understand how to complete RD financial statements (3560-7 & 3560-10)

Understand basic principles of RD review of financial reports.

Annual Agency Actions:o Review project worksheets(MINC -> CSC);

o Review of project annual financial report;

o Annual review of project reserve account ;

o Annual physical review (if physical findings);

o Review &approval of project budget for the coming year;

o Respond to evidence of potential compliance concerns (e.g., substantiated tenant complaints, reports by other Agency staff, info provided by public, etc. );

o Respond to servicing requests from borrowers.

Periodic Agency Actions:

o Perform physical inspection of project;

o Perform occupancy review of project;

o Perform supervisory visit; and

o Conduct compliance reviews.

Agency Actions for New Projects:

o Conduct pre-occupancy meeting;

o Conduct post occupancy review;

o Review project worksheets; and

o Review of quarterly/monthly reports.

o Mortgage or deed of trust;o Promissory Note;o Loan agreement/resolution;o Grant agreement;o Interest credit agreement;o Rental assistance agreement;o Management plan;o Management certification;o Management agreement;

o Affirmative Fair Housing Marketing Plan;

o Project worksheet;o Utility allowance documentation;o Tenant certification;o Dwelling lease;o Project budget;o Annual financial report for project;

ando Agency Monitoring Forms.

Key Sources of Information for Agency Monitoring

Agency RecordsoProject Case FileoLoan agreement/resolution

o Interest credit agreemento RA agreemento Affirmative Fair Housing Marketing Plano Leaseo Management certificationo Management plano Form RD 3560-52, Promissory Noteo Annual financial statementso Borrower organizational

documentso Plans and Specificationso Automated Systems

AMASMFIS

Other sourceso On-site visits by Agency staffo Reports from other Agency staffo Tenant reports/complaintso Reports/Information from local officialso Reports/Information from

community memberso Compliance monitoring and

inspection reports receivedfrom other financing orsubsidy sources involved

with the property

Project Recordso Notice of Payment Due Reporto Project budgets/Utility Allowanceo Annual financial reporto Financial recordso Tenant files (eligibility

documentation)o Marketing records and

applicationso Waiting listso Maintenance recordso Occupancy policieso Occupancy ruleso Tenant Certifications

Why does the Agency collect & review these?

Required by 7 CFR §3560.308 to ensure that the project is in sound financial condition and is complying with the program financial management requirements.

The review of the annual financial reports provides the most detailed information on the status of project accounts.

All borrowers who have a Section 515 Rural Rental Housing loan or a Section 514 Off-Farm Labor Housing loan must comply with the financial reporting requirements.

FINANCIAL MANAGEMENT

YEAR END REPORTING REQUIREMENTS

7 CFR PART 3560 and Subpart G 3560.308

HB-2-3560, Section 5, 4.32

Regulations vs. Agency administrative rules

• The regulation for Multi-Family Housing programs is provided in 7 CFR Part 3560. The text of that regulation is included in Appendix 1 of the RD Handbooks. To help readers locate the regulatory authority for procedures described in the handbooks, references in paragraph headings to this regulation appear in italicized brackets, for example [7 CFR 3560.51]. Other regulations or RD Instructions are simply referenced

• Always cite the Regulation by giving the Chapter (7), the Part (3560), and any applicable Paragraph (i.e., a, b, c), and Subparagraphs (i.e., 1,2,3).

• For example:

“7 CFR 3560.576(b)(2)(i)(A) requires that…..” • CFR = Code of Federal Regulations

Code of Federal Regulations (CFR)

\

STATUTE

Statute

Title 42 – Public Health

& WelfareSec. 1480-

Administrative powers of Secretary.

Handbook “Authorization”

STATUTE

Statute

http://www.rd.usda.gov/publications/regulations-guidelines/handbooks

Annual Report Required Submissions:

4.4 MONITORING THE ACCOUNTING SYSTEM F. Annual Financial Reports

The review of the annual financial reports provides the most detailed information on the status of project accounts. The annual financial report looks specifically at the accounting system to confirm that the required accounts are properly maintained and tracked separately. The annual financial report also looks at each account to make sure that deposits and withdrawals comply with programs rules—that funds were expended for proper purposes and all required payments and deposits were made. In reviewing the annual financial report, the Loan Servicer is able to obtain information about the financial stability of the project. If the report indicates that there is a negative trend in the project’s finance, this alerts the Loan Servicer to review project operations more closely.

When are year end reports due?

Current 3560 regulations– Due within 90 days of the end of the project’s fiscal year

(this would be April 1 for most borrowers with fiscal year ending December 31).

– Borrower can request 30 day extension only if delay is due to the auditor and requested by the auditor.

– Projects with 8 units or more must transmit the 3560-7 Actuals and the Balance Sheet through MINC

– Can make an exception to electronic transmission if borrower submits documentation that associated costs would pose a financial hardship to the project.

Annual Report Required Submissions:

SECTION 5: REPORTING AND FINANCIAL EXAMINATIONS

ENGAGEMENTS AND PREPARATION OF ANNUAL FINANCIAL REPORTS

[7 CFR 3560.308 and 7 CFR 3560.578]

A. General Requirements for All Borrowers: Annual Financial Reports

The requirements for fiscal years ending 12-31-07 and thereafter are to follow the reporting requirements outlined here in Section 4.32. Attachment 4-B, Audit Program has been modified by the financial reporting requirements below.

All borrowers who have a Section 515 Rural Rental Housing loan or a Section 514 Off-Farm Labor Housing loan must comply with the financial reporting requirements of this section.

Exhibit 4-6 outlines the financial reporting requirements for the specific types of properties.

Annual Report Required Submissions:

What is submitted?

Form RD 3560-7, Project Budget

Form RD 3560-10, Balance Sheet

CPA Engagement Report (16 units or more) consisting of :

Agreed Upon Procedures (AUPs) – (for properties 16 units or more), and, if applicable; Audit (for properties 24 units or more);

OR A-133 Audit - (State & Local Governments, Tribes & Non-Profits with loan balances in excess

of $500,000)*

HB-2-3560, Attachment 4-C, Performance Standards Borrower Self-Certification Letter

Optional (Best Practice) – Narrative for budget variances & Findings.

(Technically not required as is for proposed budgets.)

Year End Financial Reporting Requirements Projects with 1-15 Units

3560-73560-10Borrower Certification of Performance StandardsNo Agreed Upon Procedures required.No Audit required.

Year End Financial Reporting RequirementsProjects with 16-23 Units

3560-73560-10Agreed-Upon ProceduresBorrower Certification of Performance StandardsNo Audit required.

Attachment 4-E Engagement Letter(Projects with 16 or more units)

Prepared by the CPA as exhibited in:Attachment 4-E (for 16-23 units)

Attachment 4-G, Combined Audit & AUP (for 24 or more units)

Engagement letter should include the agreed-upon procedures to be performed and the fees associated with the service

Servicing office may be required to provide the auditor information for third party verification

Servicing office should receive a complete copy of the signed Engagement letter prior to releasing information to the CPA

Agreed-Upon Procedures(Projects with 16 or more units)

Purpose of the tests are to determine whether the borrower/management is in compliance with applicable Agency requirements in the management and operation of the project.

Each agreed-upon procedure must be addressed

1.) Examine selected receipts, invoices, cancelled checks, (or check imaging on original bank statement) etc. that support administrative; and operating and maintenance expenses presented on Form RD 3560-7, Part II, line items 1-10 and 19-32 to determine they were incurred as part of the ongoing operations of the project.

2.) Confirm the balance in the replacement reserve account presented on Form RD 3560-7, Part III and confirm that no amounts were encumbered by the financial institution that holds the accounts. Determine that all balances are within the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC) insurance limits, as applicable. Determine that the total withdrawals from the bank statements agree to the total withdrawals authorized by Rural Development on Form RD 3560-12. Compare the invoices and cancelled checks (or check imaging on original bank statement) to the approved withdrawals

.

3.) Obtain an Identity of Interest (IOI) company listing and Form RD 3560-31 from Rural Development and determine that the services provided and approved fees, if applicable, agree to the actual service and fees charged to the project.

Agreed-Upon Procedures(Projects with 16 or more units)

Must be submitted with the Budget and Balance Sheet

Agreed-Upon Procedures is certified by the CPA as performing these engagements in accordance with Attachment 4-D.

Attachments 4-F and 4-H (Combined Audit & AUP) are sample reports for CPA to utilize.

Year End Financial Reporting RequirementsProjects with 24 or more units

3560-73560-10Agreed-Upon ProceduresBorrower Certification of Performance StandardsAudit

Completed by a CPA in accordance with Generally Accepted Government Audit Standards (GAGAS) in accordance with RD Handbook 3560-2, Chapter 4, Section 5 at 4.32 D and Attachments 4-G & 4-H.

GAGAS AUDIT –THINGS YOU NEED TO KNOW

• Yellow Book = GAGAS = Generally Accepted Government Audit Standards = Government Auditing Standards

• Applies to audits of government entities, programs, activities, and functions and of government assistance administered by contractors, not-for profit entities, and other nongovernmental entities, when required by statute or other rules or regulations, or when the auditors hold themselves out as following these standards

GAGAS AUDIT –THINGS YOU NEED TO KNOW

• You will receive 1 of 3 types:• Unqualified – means it is a clean audit with no exceptions (this is good)

• Report will have 4 paragraphs in opinion • Introductory paragraph• Scope paragraph• Opinion paragraph• Explanatory paragraph (optional)

• Qualified – means they are making an opinion but there are exceptions. You should review the exceptions very carefully as this could mean something is wrong.

• Contains an exception that is stated in the opinion paragraph• Provides an explanation of the item that is not fairly presented • It will say in the paragraph “except for…”• The financial statements are presented fairly

GAGAS AUDIT –THINGS YOU NEED TO KNOW

• No Opinion – this means the auditor cannot give an opinion for whatever reason, i.e. the records were so bad they could not analyze them, no records at all, etc.

We accept any of the above audits but if it is qualified or no opinion audit, we need to address the exceptions or problems in the letter to the borrower.

Yearend Financial Statements(Projects with 24 or more units)

Independent Auditor’s Report should consist of the following items at a minimum:

Independent Accountant’s Report on Applying Agreed-Upon Procedures that includes three Agreed-Upon Procedures.

Financial Statements

o Balance Sheets

o Statements of Operations

o Statements of Changes in Partner’s Equity (Deficit)

o Statements of Cash Flows

Yearend Financial Statements(Projects with 24 or more units) cont’d

Notes to the Financial Statements

Supplemental Informationo Management Fee Calculationo Insurance Disclosureo Return To Owner (RTO)

Report on Internal Control Over Financial Reporting Compliance and Other Matters Based on an Audit of Financial Statements Performed in accordance with Government Auditing Standards

Audit Findings on Compliance

Yearend Financial Statements(Projects with 24 or more units) cont’d

Form RD 3560-7, Multiple Family Housing Project Budget

Form RD 3560-10, Multi-Family Housing Borrower Balance Sheet

Supporting documentation to forms RD 3560-7 and 3560-10o Accounts Receivableo Notes Payableo Othero Miscellaneouso Accrual To Cash Adjustment

Attachment 4-C Performance StandardsBorrower Self Certification Letter

All financials must include a Borrower Certification of Performance Standards

The 9 Performance Standards must be addressed by the CPA

Owner is to certify to these standards:

1. Accounts properly maintained and tracked separately;

2. Operating account payments disclosed and accurately represented

Performance Standards

3. Reserve account is at authorized level and there are no encumbrances;

4. Tenant security deposit accounts are fully funded, and maintained in separate accounts;

5. Owner return payment consistent with loan agreement terms;

6. Proper insurance is maintained;

Performance Standards

7. Financial records are adequate and suitable for examination;

8. No changes in project ownership other than those approved by the Agency. Non-Profit organizations must certify that the board is active;

9. Real Estate taxes are current and meet State and local requirements

Other Financial Reports

State and local governments, Indian Tribes and Nonprofit Organizations must comply with Office of Management and Budget (OMB) Circular A-133 requirements per 7 CFR 3052.o Conducted in accordance with Government Auditing Standards (GAS)o Covers entire operations of the organizationo Fairly presented financial statementso Adequate internal control structureo Compliance with laws and regulationso Follow-up on prior audit findings

Circular A-133 generally requires reporting by non-Federal entities with loan balances in excess of $500,000.

Organizations subject to A-133 submit the A-133 “single audit”, borrower’s certified performance standards, Forms RD 3560-7 & 3560-10.

BUT WAIT…FORGET SOME OF WHAT I JUST TOLD YOU ABOUT A-133

A-133 has been replaced by the “Super/Omni Supplement”

Federal Register /Vol. 79, No. 244 / Friday, December 19, 2014 /Rules and Regulations 75871

http://www.gpo.gov/fdsys/pkg/FR-2014-12-19/pdf/2014-28697.pdf

Background

This joint interim final rule implements for all Federal awardmaking agencies the final guidance Uniform Administrative Requirements,Cost Principles, and Audit Requirements for Federal Awardspublished by the Office of Management and Budget (OMB) on December 26, 2013 in 2 CFR part 200 (Uniform Guidance—available at 78 FR 78589).The Uniform Guidance followed on a Notice of Proposed Guidance issued February 1, 2013 (available at 78 FR 7282), and an Advanced Notice of Proposed Guidance issued February 28, 2012 (available at 77 FR 11778).

Compliance supplement means Appendix X Part 75 (previously known as the Circular A–133)

Appear to be effective for Audits beginning with Auditee Fiscal Year 2015.

Borrowers/Management should consult with their auditors on this.

AGENCY REVIEW OF ANNUAL FINANCIAL REPORTS

_______ 3560-7 budget actuals (submitted through MINC if more than 8 units)

_______ 3560-10 (submitted through MINC if more than 8 units)

_______ Performance Standards, Borrower Self-Certification Letter

(Attachment 4-C of HB-2-3560)

_______ Agreed-Upon Procedures (projects with 16 units or more except for

projects subject to A-133 requirements)

_______ Audit (projects with 24 or more units)

_______ Audit (projects subject to A-133 requirements)

Non-profits or public bodies (such as housing authorities)

with loan balances in excess of $500,000 are required to complete A-133

audits – see HB-2-3560 Chapter 4 Section 4.32 E for additional

information on requirements

DETAIL ANY FINDINGS OR COMMENTS FOUND DURING THE REVIEW OF THE FINANCIAL

REPORTS AND INDICATE ANY FOLLOW-UP REQUIREMENTS

A. Analysis of actual income and expenses. Using the actual budget submitted, note any unexpected variances.

Review the MFIS Budget Analysis. Address the following:

Did the expenses in any of the main categories – O&M, utilities, administration and taxes and insurance – OR the income differ by more than 10% from their proposed levels? If so, why?

____________________________________________________________________

What was the vacancy for the year? _________________ What was the proposed budgeted vacancy allowance? __________________ Any problems with vacancy?

____________________________________________________________________

Verify the following:

Were reserve payments / withdrawals correct? YES NO

Was non-operational cash use reasonable and approved? YES NO

Was the cash flow positive? YES NO

If the project is on a workout plan, is the Plan current? YES NO

If not, why not?

____________________________________________________________________

B. Account maintenance, tracking and disclosure. Confirm that the Performance Standards (#1 and #2) state that:

Required accounts are maintained and tracked separately ___________________

Payments from operating accounts are disclosed and accurately represented ____________

C. Reserve account status. Confirm the Performance Standards (#3) state that the reserve account is current and that there are no encumbrances on the reserve account funds _________. Did the CPA identify any concerns in Agreed-Upon Procedure #2? __________ Verify reserves are on schedule with our records. List any discrepancies or findings.________________________________________________________________________D. Tenant security deposit account status. Record the tenant security account balance from the Balance Sheet ($ ) and confirm that the balance sheet shows that the tenant security deposit asset meets liabilities _____________ and that the funds are maintained in a separate account and in accordance with state law (Performance Standards #4) _____________.E. Payment of return to owner. Confirm that the Performance Standards (#5) state that the payment of the owner’s return was IAW Agency’s requirements __________. If 24 units or more, did auditor show RTO disbursements? ___________ List any discrepancies or findings.________________________________________________________________________F. Insurance status. Confirm that the Performance Standards (#6) state that all relevant insurance requirements were met.________________________________________________________________________G. Taxes and other assessments. Confirm that the Performance Standards (#9) states that taxes and other assessments are current _____________. List any taxes and assessments that are not current.________________________________________________________________________H. Issues of financial compliance and conditions. Confirm in the financial report that any funds for unauthorized purposes have been repaid (such as unearned management fees or unapproved reserve withdrawals).________________________________________________________________________I. Payment of management fees. Using the actuals in the budget or the CPA’s Management Fee Calculation in audits of properties with 24 units or more, confirm that the management fee was paid in accordance with the management certification.

J. Agreed-Upon Procedures. Review the CPA’s responses and indicate any problems or concerns noted.

#1:_____________________________________________________________________

#2:_____________________________________________________________________

#3:_____________________________________________________________________

REVIEW OF THE AUDIT (Required for any complex with 24 or more units)

STUDY THE FINANCIAL PROGRESS: Compare current financial condition with previous years to discover any trends, for example:

A. Has cash carryover increased or decreased?

B. Are the debts greater or less?

C. Are accounts receivable greater or less?

D. Are accounts payables greater or less?

E. Are there any related party transactions of concern?

Auditor’s opinion (circle appropriate type): Qualified Unqualified No Opinion

Auditor’s Report on Compliance and Auditor’s Report on Internal Controls

– List any compliance findings

_____________________________________________________________________

List any uncorrected Prior Audit Findings:

_____________________________________________________________________

Audit concerns not listed elsewhere:

_____________________________________________________________________

Questions?