We audited Stonebrook Apartments Phase I and Phase II (projects) to determine whether the projects' owners complied with the regulatory agreements and U. S. Department of Housing and Urban Development (HUD) regulations. Specifically, we wanted to determine whether the owners (1) made unauthorized distributions of project funds when the projects were in a non-surplus-cash position, (2) fully funded the tenant security deposit accounts, and (3) supported disbursements with invoices or other supporting documentation. We selected the projects for review in accordance with our strategic plan and regional goals. In addition, the audited financial statements of the projects indicated potential unauthorized distributions and transfers.

The owners and/or their management agents did not comply with the regulatory agreements and HUD regulations. Specifically, the owners and/or their management agents paid more than $187,500 in questioned costs. The questioned costs included unauthorized distributions ($81,035) from the projects' operating and tenant security deposit accounts when the projects were in a non-surplus-cash position, underfunded tenant security deposit accounts ($27,514), ineligible ($20,644) and unsupported ($16,945) disbursements, duplicate payments ($7,235), excessive management fees ($26,134), and unreasonable and unnecessary bonuses ($8,000). Further, audit testing disclosed that they did not maintain accurate financial information, did not submit annual audited financial statements in a timely manner, and transferred the management of the projects without HUD's approval.

We recommend that the Director, Houston Multifamily Program Center, require the owners to (1) repay the projects $81,035 for unauthorized distributions, (2) fully fund the tenant security deposit accounts, (3) repay the projects $62,013 for ineligible or unnecessary disbursements and either furnish supporting documentation or repay the projects $16,945 for unsupported expenses, and (4) correct and maintain the projects' accounting records in compliance with the regulatory agreements. We also recommend that HUD's Acting Director of the Departmental Enforcement Center seek civil money penalties and administrative sanctions, as appropriate, against the owners for violating the projects' regulatory agreements.