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We audited Sutton Irvine Residence, Inc.’s Section 202-funded project based on concerns expressed by the U.S. Department of Housing and Urban Development’s (HUD) Office of General Counsel, Departmental Enforcement Center, regarding the management of the project.  The concern was that Sutton Irvine had defaulted on its mortgage payments to HUD and may have diverted project funds for nonproject expenses.  Our audit objective was to determine whether Sutton Irvine operated its project in accordance with HUD rules and requirements.

Sutton Irvine did not operate its project in accordance with HUD rules and requirements.  It failed to maintain an adequate financial management system and disbursed project funds for ineligible loans and unsupported expenses.  In addition, it failed to manage its tenant rents and security deposits, submit required financial reports to HUD, and maintain the required number of board members.  As a result, it used $26,189 in project funds for ineligible expenses and did not ensure that at least $159,843 in unsupported expenses was used for eligible program activities, including mortgage payments.

We recommend that the Acting Director of the Los Angeles Office of Multifamily Housing require Sutton Irvine to (1) hire a HUD-approved management agent and develop and implement written policies and procedures to strengthen its controls to ensure compliance with HUD rules and requirements, (2) repay ineligible costs charged to the project, and (3) provide documentation for unsupported income and costs.  If Sutton Irvine cannot provide support, HUD should require it to repay the unsupported amount from nonproject funds and correct the appropriate general ledger accounts.