COMMUNITY PARTNERS, INC.

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2016 RSM US Alliance provides its members with access to resources of RSM US LLP, RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP, RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP, RSM US Alliance products and services are proprietary to RSM US LLP.

2 TABLE OF CONTENTS INDEPENDENT AUDITOR S REPORT CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET... 4 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS... 5 CONSOLIDATED STATEMENT OF CASH FLOWS... 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION CONSOLIDATING BALANCE SHEET CONSOLIDATING STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS... 23

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors Community Partners, Inc. Tucson, Arizona Report on the Financial Statements We have audited the accompanying consolidated financial statements of Community Partners, Inc. (the Organization ), which comprise the consolidated balance sheet as of September 30, 2016, and the related consolidated statements of activities and changes in net assets, and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Organization s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organization s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 To the Board of Directors Community Partners, Inc. Page 2 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Organization as of September 30, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating balance sheet and consolidating statement of activities is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated April 26, 2017 on our consideration of the Organization s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering of the Organization s internal control over financial reporting and compliance. Tucson, Arizona April 26,

5 CONSOLIDATED FINANCIAL STATEMENTS

6 CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2016 Assets Current assets Cash and cash equivalents $ 13,846,757 Accounts receivable 1,789,954 Beneficial interest in assets held by others 1,058,244 Asset held for sale 1,861,830 Prepaid expenses and other current assets 349,306 Assets of discontinued operations 2,721,756 Total current assets 21,627,847 Deposits 258,422 Property and equipment, net 15,003,873 Total assets $ 36,890,142 Liabilities and Net Assets Current liabilities Accounts payable and accrued expenses $ 851,154 Accrued salaries and benefits 759,600 Deferred revenue 97,321 Other current liabilities 1,156 Liabilities of discontinued operations 7,593,679 Total current liabilities 9,302,910 Unrestricted net assets 25,749,932 Temporarily restricted net assets 1,837,300 Total liabilities and net assets $ 36,890,142 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 4

7 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED SEPTEMBER 30, 2016 Temporarily Unrestricted Restricted Total Revenues Net client service $ 4,444,969 $ - $ 4,444,969 Housing grant and tenant rental income 3,615,137-3,615,137 Commercial rental income 697, ,683 Contracted services, net 374, ,963 Other income 1,160,399-1,160,399 Net investment income 957, ,381 Total revenues 11,250,532-11,250,532 Expenses Salaries and wages 8,115,396-8,115,396 Payroll taxes and benefits 1,662,790-1,662,790 Professional fees and outside services 1,381,383-1,381,383 Occupancy 1,479,800-1,479,800 Administrative and operating 1,359,035-1,359,035 Travel 149, ,618 Training 18,584-18,584 Equipment 264, ,929 Supplies 168, ,183 Tenant assistance 2,322,095-2,322,095 Depreciation 2,340,032-2,340,032 Bad debt 1,405-1,405 Loss on sale of property and equipment 47,374-47,374 Total expenses 19,310,624-19,310,624 Loss from continuing operations (8,060,092) - (8,060,092) Loss from discontinued operations (27,805,973) - (27,805,973) Change in net assets (35,866,065) - (35,866,065) Net assets, beginning of year 61,615,997 1,837,300 63,453,297 Net assets, end of year $ 25,749,932 $ 1,837,300 $ 27,587,232 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 5

8 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30, 2016 Cash Flows from Operating Activities Change in net assets $ (35,866,065) Adjustments to reconcile change in net assets to net cash used in operating activities Depreciation 2,340,032 Loss on sale of property and equipment 47,374 Net realized/unrealized gain on investments (548,751) Changes in operating assets and liabilities Accounts receivables 12,053,215 Prepaid expenses and other current assets (141,239) Assets of discontinued operations (660,482) Deposits (21,503) Accounts payable and accrued expenses (1,042,618) Accrued salaries and benefits (1,483,823) Deferred revenue (1,097,272) Other current liabilities (17,271) Liabilities of discontinued operations (29,585,425) Net cash used in operating activities (56,023,828) Cash Flows from Investing Activities Purchases of property and equipment (952,883) Proceeds from sale of property and equipment 1,750,000 Purchases of investments (5,915,068) Proceeds from sale of investments 19,891,276 Contribution of beneficial interest in assets held by others (1,034,083) Distribution of beneficial interest in assets held by others 12,661 Net cash provided by investing activities 13,751,903 Change in cash and cash equivalents (42,271,925) Cash and cash equivalents, beginning of year 56,118,682 Cash and cash equivalents, end of year $ 13,846,757 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 6

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Nature of Operations Community Partners, Inc. ( CPI ), a non-profit 501(c)3, located in Tucson, Arizona is an Arizona nonprofit corporation incorporated in June 2013 with operations that began October 1, CPI was formed to support the provision and promotion of the delivery of quality behavioral healthcare services to indigent and other persons who are seriously mentally ill, children who are at risk of or suffering from drug abuse, alcohol abuse, mental health disorders, or domestic violence and is operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of Community Partnership of Southern Arizona, Inc. ( CPSA ), Community Partners in Integrated Health, Inc. ( CPIH ), Mental Health Resources, Inc. ( MHRI ), and Community Partnership Care Coordination, LLC ( CPCC ). CPCC, a single member limited liability company, was organized in April 2012 with CPI as the only member, providing an array of outpatient behavioral healthcare to adults, children and families with commercial healthcare coverage. CPIH, a for-profit and a wholly owned subsidiary of CPI, was organized in March 2014, with operations commencing in October 2015, for the purpose of providing healthcare consulting, administrative services, conference center, catering and environmental services. MHRI, non-profit 501(c)3, a wholly controlled entity of CPI, acquired on January 9, MHRI is the owner of multi-unit housing facilities located in Pima County, Arizona which are used in part to provide reduced cost re-entry housing to individuals coping with a variety of health and behavioral problems. CPSA, a wholly controlled entity of CPI, was incorporated in February Through a contract with the Arizona Department of Health Services ( ADHS ), which expired on September 30, 2015, CPSA had been designated as the Regional Behavioral Health Authority ( RBHA ) for the geographic service area of Pima County. CPSA was responsible for managing and maintaining an organized, comprehensive behavioral healthcare delivery system for the benefit of eligible members within its geographic service area. Direct behavioral healthcare services were provided to eligible, enrolled members by subcontracted providers. Substantially all of CPSA s revenues and cash flows were from its contract with ADHS (see Note 15). CPSA continues its role as the Collaborative Applicant and U.S. Department of Housing and Urban Development recipient; established as the grant applicant for the Organization. Under CPSA, the following wholly controlled entities were formed to hold real estate: (1) Community Behavioral Health Properties of Southern Arizona, LLC ( CBHP ) was organized in July 2002 for the purpose of acquiring and holding real estate and; (2) Sonrisa Apartments, Inc. ( Sonrisa ), a non-profit 501(c)3, was organized in March 2009 for the purpose of developing, owning, improving, and operating housing that is affordable to low and moderate income young adults receiving behavioral health services. 2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of CPI, CPCC, CPIH, MHRI, and CPSA and its wholly controlled entities (collectively, the Organization ). Except where the context otherwise indicates or requires, all references to the Organization in these footnotes means the consolidated entity. All intercompany balances and transactions have been eliminated in consolidation. 7

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies (continued) Basis of Presentation The Organization follows accounting standards set by the Financial Accounting Standards Board ( FASB ). The FASB sets accounting principles generally accepted in the United States of America ( U.S. GAAP ) that the Organization follows to ensure the consistent reporting of its financial position, changes in net assets and cash flows. References to U.S. GAAP issued by the FASB are to the FASB Accounting Standards Codification ( ASC ). The Organization s consolidated financial statements have been prepared on the accrual basis of accounting in accordance with the provisions of ASC 958, Not-for-Profit Entities. Under the authoritative guidance of ASC 958, the Organization is required to provide consolidated financial statements which are prepared to focus on the Organization as a whole and to present balances and transactions according to the existence or absence of donor-imposed restrictions. Resources are reported for accounting purposes in separate classes of net assets based on the existence or absence of donor-imposed restrictions. In the accompanying consolidated financial statements, net assets with similar characteristics have been combined as follows: Unrestricted net assets Net assets that represent the portion of expendable funds, which are available for support of the Organization s operations and are not subject to donor-imposed restrictions. Temporarily restricted net assets Net assets whose use by the Organization is subject to donorimposed stipulations that can be fulfilled by actions of the Organization pursuant to those stipulations or that expire through the passage of time. Expenses are generally reported as decreases in unrestricted net assets. Expirations of donor-imposed stipulations that simultaneously increase one class of net assets and decrease another are reported as releases between the applicable classes of net assets. However, if a restriction is fulfilled in the same reporting period in which the funds are received, the Organization reports the support as unrestricted. Contributions of long-lived assets not having donor-imposed purpose or time restrictions are reported as unrestricted contributions in amounts equal to the fair value of the contributed assets. Cash and Cash Equivalents Cash and cash equivalents include all bank deposits and highly liquid investments with an initial maturity of three months or less. Cash equivalents include investments in money market accounts, which approximates fair value and are classified as Level 1 inputs in the fair value hierarchy. The Organization places its cash and cash equivalents with high credit-quality institutions. At times, such deposits may be in excess of the Federal Deposit Insurance Corporation ( FDIC ) insurance limit (see Note 13); however, management does not believe it is exposed to any significant credit risk on cash and cash equivalents. All such accounts are monitored by management to mitigate risk. Receivables Receivables primarily consist of amounts due from the Organization s funding sources, service providers and governmental agencies. The carrying amount of the receivables is reduced by a valuation allowance that reflects management s best estimate of amounts that will not be collected. The allowance is based on management s assessment of the collectability of specific accounts and the aging of the receivables. Management considers the 8

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies (continued) Receivables (continued) following factors when determining the collectability of specific receivables: past transaction history, current economic trends, and changes in payment terms. Based on management s assessment, the Organization provides for estimated uncollectible amounts through a charge to operations and a credit to the allowance. Recoveries of receivables previously written off are recorded when received. Management determined no allowance was necessary as of September 30, Property and Equipment Property and equipment are stated at cost or, if donated, at fair value measured on the date the asset is donated. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements Furniture and equipment Leasehold improvements 5 40 years 3 5 years 3 years Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements and is included in depreciation expense. Generally, expenditures for major improvements in excess of $5,000 to property and equipment are capitalized and expenditures for repairs and maintenance are expensed as incurred. When items are retired or disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reported in the consolidated statement of activities and changes in net assets. The Organization records property and equipment classified as held for sale at the lower of its carrying amount or fair value less cost to sell. Once the criteria for held for sale treatment is met, the Organization ceases depreciating the held for sale asset. In accordance with ASC , Property, Plant and Equipment, management periodically reviews the carrying value of long-lived assets held and used, and assets to be disposed of, for possible impairment when events and circumstances warrant such a review. As of September 30, 2016, the Organization had not experienced an impairment loss on its long-lived assets. Beneficial Interest in Assets Held by Others The Organization transferred CPSA funds to the Community Foundation for Southern Arizona ( CFSA ) to be held and managed as agency advised funds for CPSA. Under the terms of the agency fund agreement, CPSA named itself as the beneficiary. Distributions from the agency advised funds will be made available to the Organization at least annually, and as recommended by the fund s advisory committee, as defined by the agreement. The fair value of beneficial interest in assets held by others totaled $1,058,244 as of September 30, In accordance with ASC , Not-for-Profit Entities Revenue Recognition, the Organization measures the fair value of the funds held by CFSA using the fair value of the underlying assets. Subsequent changes in the fair value of the underlying assets are reported as a component of net investment income, net in the accompanying consolidated statement of activities and changes in net assets. CFSA on behalf of the 9

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies (continued) Beneficial Interest in Assets Held by Others (continued) Organization invests in professionally managed portfolios that contain equity and fixed income securities. Such investments are exposed to various risks such as market and credit. Due to the level of risk associated with such investments and the level of uncertainty related to changes in the value of such investments, it is at least reasonably possible that changes in risks in the near term would materially affect the fund balance and the amounts reported in the accompanying consolidated financial statements. Revenue Recognition Client Service Revenue - The Organization has an agreement with the RBHA in Pima County, Arizona, to provide behavioral health services to assigned eligible participants within its geographic service area. This agreement is in the form of an at-risk block-purchase contract, which is paid at a monthly rate of 1/12 th of the total contract value. The Organization reports revenue from this contract based on the monthly contract amount in the month payments are received and service delivery is made available and therefore accounts for this contract as an exchange transaction. The Organization is required to submit encounter claims for all services rendered. The contract is subject to specified minimum service delivery requirements. A revenue reserve and corresponding liability is recorded for any anticipated shortage of encounter value compared to the contract requirements. The contract also has specified profit limitations. Housing Grant and Tenant Rental Income Housing grants, including subsidized tenant assistance revenue, is generated through contracts directly with the U.S. Department of Housing and Urban Development ( HUD ) or passed through funds from the City of Tucson ( COT ) or Arizona Department of Housing ( ADOH ) for qualified low-income tenants. The Organization accounts for its government funded contracts as exchange transactions, and all revenue received from governmental agencies is recognized when services are provided. Rental income is recognized as rents become due. Revenue is generated through monthly rental payments from qualified low-income tenants. All revenue received from tenants is recognized when services are provided. Rental receipts received in advance are deferred until earned. Commercial Rental Income Rental income from commercial real estate is recognized as rents become due. Revenue is generated through monthly rental payments. All revenue received from commercial tenants is recognized when services are provided. Rental receipts received in advance are deferred until earned. Contracted Services Contracted services revenue consists primarily of food catering and housekeeping services offered mainly to third party organizations. Revenue is recognized when services are provided. Contracted services are shown net of cost of goods sold of $1,331,792 for the year ended September 30, In-Kind Contributions - Donated services are recognized as in-kind contributions, if the services (a) create or enhance non-financial assets, or (b) require specialized skills and are performed by people possessing those skills, and (c) would otherwise need to be purchased by the Organization if not provided by contribution. Although the Organization utilizes the services of outside volunteers to perform a variety of tasks that assist the Organization, the fair value of all these services are not reflected in the accompanying consolidated financial statements because the above criteria are not met. Contributed services are valued at the estimated fair value of such contributions at the date of contribution, and are reported as revenues and expenses. 10

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies (continued) Health Care Service Cost Recognition CPCC contracts with various health care agencies for the provision of behavioral health care services to its clients. These services are provided on a fee for service or cost reimbursement basis. The costs for these services are accrued in the period in which the service is provided to an eligible participant. Income Taxes CPI, MHRI, CPSA and Sonrisa are Section 501(c)(3) organizations exempt from taxation under Internal Revenue Code Section 501(a). CPCC and CBHP are single-member limited liability companies which are disregarded entities for income tax purposes. Accordingly, no provision for federal or state income taxes has been reflected in the accompanying consolidated financial statements for the aforementioned entities. However, certain unrelated business income may be subject to income tax. Management is not aware of any matters which would cause these entities to lose their tax-exempt status. CPIH is a C Corporation and, as a result, is subject to corporate federal and state income taxes. CPIH accounts for income taxes in accordance with ASC 740, Income Taxes ( ASC 740 ). Under ASC 740, the CPIH recognizes deferred tax assets and liabilities for the expected future tax consequences of events that are recognized differently in its financial statements as compared with its income tax return. Under this method, deferred tax liabilities and assets are determined based on the difference between the its financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates. When necessary, deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. CPIH has estimated federal net operating loss tax carryforwards available of approximately $63,000 to offset future taxable income (deferred tax asset) which will expire over the next 20 years. Because of the lack of objective evidence of future taxable income required under ASC 740, CPIH has recorded a $63,000 valuation allowance representing the estimated amount of deferred tax assets for which realization is uncertain. When CPIH demonstrates the consistent ability to generate taxable income, management will re-evaluate the valuation allowance. Management has considered its tax positions and believes that all of the positions taken in its federal and state tax returns are more likely than not to be sustained upon examination. The Organization s returns are subject to examination by federal and state taxing authorities, generally for three years and four years respectively, after they are filed. From time to time, the Organization may be subject to penalties and interest assessed by various taxing authorities, which are classified as administrative and operating expenses when they occur. During the year ended September 30, 2016, the Organization did not recognize any interest and penalties. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include potential liabilities for RBHA under-delivery of service encounter requirements, and the Organization s allowance for doubtful accounts. In addition, CPSA considers the estimate of its behavioral healthcare services payable and its provider receivables (included in discontinued operations) to be critical accounting estimates requiring extensive subjective management judgement. CPSA bases its estimate on historical experience and other assumptions believed to be reasonable under the circumstances. 11

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Recent Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update ( ASU ) No , Revenue from Contracts with Customers (Topic 606). The amendments in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance, and creates Topic 606 Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU No which defers the effective date of ASU one year making it effective for annual reporting periods beginning after December 15, Early adoption is permitted with certain restrictions. The Organization has not yet selected a transition method and is currently evaluating the effect this standard will have on the consolidated financial statements. In March 2016, the FASB issued ASU No , Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. Topic 606 Revenue from Contracts with Customers requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (i.e., the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (i.e., the entity is an agent). The amendments amend certain existing illustrative examples and add additional illustrative examples to assist in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and transition of ASU , Revenue from Contracts with Customers (Topic 606). In April 2016, the FASB issued ASU No , Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition of these amendments is the same as the effective date and transition of ASU , Revenue from Contracts with Customers (Topic 606). In May and December 2016, the FASB issued Accounting Standards Updates No , Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients and No , Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients. The effective dates and transition of these amendments is the same as the effective date and transition of ASU , Revenue from Contracts with Customers (Topic 606). 12

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements (continued) In August 2014, the FASB issued ASU No , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU explicitly requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity's ability to continue as a going concern and to provide related disclosures. ASU is effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. Management is currently evaluating the effect this standard will have on the consolidated financial statements and disclosures. In February 2016, the FASB issued ASU , Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. The Organization is currently evaluating the effect this standard will have on the consolidated financial statements and disclosures. In August 2016, the FASB issued ASU No , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The amendments in ASU change presentation and disclosure requirements for not-for-profit entities to provide more relevant information about their resources (and the changes in those resources) to donors, grantors, creditors, and other users. These include qualitative and quantitative requirements in the following areas: Net Asset Classes; Investment Return; Expenses; Liquidity and Availability of Resources; and Presentation of Operating Cash Flows. ASU is effective for not-forprofit organizations for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, Application to interim financial statements is permitted but not required in the initial year of application. Early application of the amendments is permitted. The Organization is currently evaluating the effect this standard will have on the consolidated financial statements and disclosures. 4. Investment Income Net investment income for the year ended September 30, 2016 consists of the following: Interest and dividends $ 460,324 Realized/unrealized gains 548,751 Investment fees (51,694) Net investment income $ 957,381 13

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Property and Equipment Property and equipment consists of the following as of September 30, 2016: Land and improvements $ 3,338,664 Buildings and improvements 17,356,487 Leasehold improvements 162,447 Furniture and equipment 14,745,897 Construction in progress 19,365 35,622,860 Less accumulated depreciation (20,618,987) Total $ 15,003, Fair Value Measurements The Organization utilizes the fair value hierarchy required by ASC 820 which prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 Level 2 Level 3 Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Organization has the ability to access at the measurement date. Valuations based on quoted prices in markets that are not active or for which significant inputs are observable, directly or indirectly. Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The assets held at the CFSA are categorized as Level 3 due to the lack of a market in which the Organization s units of participation in CFSA s pooled investments could be bought or sold. The Organization measures the fair value of its beneficial interest by taking its proportionate share of the fair value of the underlying assets. The following table represents the Organization s financial assets that are measured at fair value on a recurring basis as of September 30, 2016: Description Level 3 Beneficial interest in assets held by others $ 1,058,244 Total $ 1,058,244 The Organization did not have any Level 1 or Level 2 financial assets as of September 30, There were no financial assets measured at fair value on a non-recurring basis as of September 30,

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value Measurements (continued) The following table presents a reconciliation of the Level 3 beneficial interest in assets held by others measured at fair value for the year ended September 30, 2016: Description Fair value, beginning of year $ - Contributions and reinvestments to fund beneficial interest in assets held by others 1,034,083 Net investment gain included in change in net assets 36,822 Distributions (12,661) Fair value, end of year $ 1,058, Line of Credit The CPI has a $750,000 revolving line of credit with a bank. The revolving line of credit requires monthly interest-only payments with interest at the bank s prime rate (3.5% as of September 30, 2016) plus 1.5%, as specified in the revolving line of credit agreement. The line of credit is guaranteed by the assets of CPCC and CBHP. Unless extended, the revolving line of credit expires on August 15, There was no balance outstanding as of September 30, Performance Bonds Until the close out of CPSA s contract with ADHS, ADHS requires a performance bond to fund any potential contract losses as specified in the contract. The ADHS performance bond requirement for the period ending December 31, 2017 of approximately $18 million has been obtained, with the renewal of surety bonds through December 31, 2017 of approximately $9 million, with International Fidelity Insurance Company, and approximately $9 million with Argonaut Insurance Company. No amount was drawn on the bonds as September 30, Related Party Transactions Insurance Reciprocal In fiscal year 2015, the Organization subscribed to a reciprocal insurance exchange, organized as an unincorporated captive insurance company, known as Arizona Health Reciprocal Insurance Company (the Insurance Reciprocal ) for the purpose of providing health insurance coverage to eligible employees. Pursuant to the subscribers agreement and power of attorney, as amended, the Organization has one vote and one board of director seat. The board of directors of the Insurance Reciprocal appointed an independent third party to serve as the designated attorney-in-fact ( AIF ) for the Insurance Reciprocal. The AIF is responsible for the management and administration of the Insurance Reciprocal. The board of directors in consultation with the AIF establishes underwriting criteria, premium amounts and other terms and conditions. The primary goal of the Insurance Reciprocal is to reduce health insurance costs through pooling self-insured risk and smoothing volatility as well as improving the health and wellness of the eligible employees. 15

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Related Party Transactions (continued) Insurance Reciprocal (continued) The Organization s subscribers agreement and power of attorney required that they pay an initial surplus contribution of $220,258, which represented its portion of the Insurance Reciprocal s minimum capitalization requirements as mandated by the Arizona Department of Insurance, and is included as a component of other assets in the accompany consolidated balance sheet as of September 30, The Organization may be required to make future additional surplus contributions in the event of a material increase in the number of its enrollees and/or if the board of directors of the Insurance Reciprocal mandates additional surplus contributions due to unforeseen adverse occurrences. Subject to the conditions specified in the subscribers agreement and power of attorney this amount is refundable within four years following the effective date of the Organization s termination. The Organization has a subscriber savings account ( SSA ) with the Insurance Reciprocal, which represents the Organization s proportionate share (based on average enrollment) of the Insurance Reciprocal statutory net income or loss reduced by any cash distributions. There was $16,504 credited to the Organization s SSA for its proportionate share of the Insurance Reciprocal net income during 2016, and the Organization s SSA balance as of September 30, 2016 totaled $236,762. No amounts from the SSA were distributed during fiscal year The Organization s at-risk amount is limited to its surplus contributions and amounts held in its SSA. Premiums paid to the Insurance Reciprocal were $521,335 for the year ended September 30, Employee Benefit Plans 401(k) Defined Contribution Plan CPI maintains a 401(k) defined contribution plan (the Plan ) with a profit sharing element that covers all eligible employees, as defined by the Plan. Eligible participants may make contributions to the Plan not to exceed specified annual ceiling amounts. Contributions to the Plan are made by the participants to their individual accounts through payroll withholdings. The Plan allows for employer safe harbor contributions equal to 3% of the participant s compensation. Participants are immediately vested in both the employer safe harbor contributions and their individual contributions. CPI s contribution to the Plan totaled $254,636 for the year ended September 30, Additionally, CPI may make discretionary profit sharing contributions to be allocated ratably among participants. Vesting with respect to CPI s profit sharing contributions takes place ratably over a period of three years. There were no profit sharing contributions during the year ended September 30, Supplemental Executive Retirement Plan CPI has established a supplemental executive retirement plan ( SERP ) for its president and chief executive officer. Contributions to the SERP are made annually at the discretion of the board of directors. CPI s contribution to the SERP totaled $28,919 for the year ended September 30, Operating Leases The Organization leases various equipment and vehicles under non-cancelable operating lease agreements. The leases expire at various dates through October 2019, some of which have early termination clauses. 16

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Operating Leases (continued) The following is a schedule by year of future minimum rental payments required under the operating lease agreements: Year Ending September 30th Amount 2017 $ 110, , , $ 129,920 Rental expense totaled $169,410 for the year ended September 30, Lessor Agreements CPSA leases commercial space to tenants under non-cancelable operating leases expiring on various dates through September 30, Total carrying amount and accumulated depreciation of buildings and related improvements held for lease as of September 30, 2016 totaled $4,518,570 and $1,582,887, respectively. Depreciation expense relating to the buildings and related improvements under the operating leases totaled $196,919. Future minimum rental payments to be received from the leases are as follows: Year ending September 30, 2017 $ 375,906 Rental income totaled $673,101 for the year ended September 30, Commitments, Contingencies and Concentrations of Credit Risk Economic Dependency The Organization received a substantial amount of its support from government grants and contracts during the year ended September 30, A significant reduction in the level of support from these sources could have a material effect on the Organization s continuing operations. Litigation The Organization is party to certain pending or threatened lawsuits arising out of or incident to the ordinary course of business for which it carries general liability and other insurance coverages. In the opinion of management and based upon consultation with legal counsel, there are no pending or threatened lawsuits that would have a material adverse effect on the Organization s consolidated financial statements. Compliance with Laws and Regulations The Organization is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse regulations. Government activity continues with respect to investigations and allegations concerning possible violations of fraud and abuse statues and regulations by 17

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commitments, Contingencies and Concentrations of Credit Risk (continued) Compliance with Laws and Regulations (continued) healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs, together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes the Organization was in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future review and interpretation, as well as regulatory actions unknown or unasserted at this time. Participating Provider Agreement CPCC s funding is received under an annual contracted block purchase payment model from the Pima County RBHA, whereby CPCC receives funding upfront on a monthly basis, and is required to provide covered services to eligible participants, with certain service delivery encounter requirements. The agreement includes a provision for the potential payback of funding if the established minimum service delivery thresholds are not met and/or contractual profit limitations are exceeded during the contract year. As of April 26, 2017, there has been no discussion with the Pima County RBHA regarding a recoupment of the under encountered funding related to the contract year ended September 30, The CPCC had some minor findings concerning noncompliance with certain documentation requirements as specified in its RBHA contract and as required under the Medicaid rules and regulations. While only minor questioned costs resulted from these instances of noncompliance, the RBHA, at their discretion, may levy sanctions and/or request return of funds that might be significant. CPCC has not been advised of any such request by the RBHA, and in management s opinion such occurrence is unlikely. Additionally, the State of Arizona and/or the contract funding source may, at their discretion, review or audit claims filed, and based on these audits determine that CPCC had not complied with these or other requirements. Low Income Housing Promissory Notes During 2012, Sonrisa received a section 811 supportive housing grant from HUD and the COT. Sonrisa signed two contingent promissory notes in connection with the housing grants. The note with HUD, in the amount of $1,337,300, matures September 1, This note bears no interest and does not require repayment as long as the housing remains available for low income persons. The note with the COT, in the amount of $500,000, matures August 10, This note will be forgiven by the COT upon expiration as long as it is used for the designated purpose. In the event Sonrisa discontinues these services, both notes become due and payable. As management intends to continue to provide low income housing through the maturity dates of the promissory notes, these amounts have been recorded as temporarily restricted net assets until the terms have been fulfilled. Deposits at Financial Institutions Financial instruments that potentially subject the Organization to concentrations of credit risk consist principally of cash deposits and money market accounts. Accounts at each banking institution are insured by the FDIC up to $250,000. As of September 30, 2016, the Organization had approximately $12.7 million in excess of FDIC insured limits, respectively. 18

21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Functional Expenses Certain direct, indirect, and administrative expenses are incurred that benefit more than one of the Organization s programs. Such common expenses are allocated based upon a cost allocation plan using management s estimates, which are primarily based on enrollment, claims, and costs by lines of business. Functional expenses from continuing operations are as follows: Program service expenses $ 10,234,847 Management and general 9,075,777 Total $ 19,310, Discontinued Operations CPSA s RBHA contract with ADHS terminated on September 30, As a result, the results of operations from this contract have been classified as losses from discontinued operations for the year ended September 30, A summary of the results of operations of the discontinued RBHA contract for the year ended September 30, 2016 are as follows: Revenues from discontinued operations $ 7,781,797 Expenses from discontinued operations (35,587,770) Loss from discontinued operations $ (27,805,973) The assets and liabilities of discontinued operations are presented separately in the accompanying consolidated balance sheet as of September 30, 2016, and consist of the following: The major classes of assets included as part of discontinued operations: Receivables: Due from providers $ 812,076 Due from ADHS 1,909,680 Total $ 2,721,756 The major classes of liabilities included as part of discontinued operations: Behavioral healthcare services payable $ 394,053 Risk Pool payable 950,543 Recoupment liabilities due to ADHS 6,249,083 Total $ 7,593, Subsequent Events Management evaluated subsequent events through April 26, 2017, the date the consolidated financial statements were available to be issued. With the exception of the matter discussed below, there were no material subsequent events that required recognition or additional disclosure in these consolidated financial statements. 19

22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Subsequent Events (continued) On March 1, 2017, the Organization completed the acquisition of Assurance Health & Wellness Center ( AHW ), Inc. an Arizona corporation from Assurance Healthcare Innovations, Inc. ( AHI ) for approximately $4 million, which was funded through a combination of long-term borrowings and the transfer of real property. The acquisition will be recorded as a business combination under ASC 805, Business Combinations with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the acquisition date. Under the acquisition method of accounting, CPI was treated as the accounting acquirer and AHW was treated as the acquired company for financial reporting purposes. Fair value adjustments related to the transaction will be pushed down to AHW, resulting in assets and liabilities being recorded at fair value as of March 1, The initial accounting for the business combination is not complete as of the date of this report. The Organization expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. 20

23 SUPPLEMENTARY INFORMATION

24 CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2016 Elimination CPI CPIH CPSA CPCC MHRI CBHP Sonrisa Total Entries Consolidated Assets Current assets Cash and cash equivalents $ 547,527 $ 274,108 $ 11,584,437 $ 883,418 $ 374,755 $ 124,391 $ 58,121 $ 13,846,757 $ - $ 13,846,757 Accounts receivable 277, , ,406 83, ,476 26,297 23,463 1,789,954-1,789,954 Due from related parties 316, , ,696 (320,696) - Beneficial interest in assets held by others - - 1,058, ,058,244-1,058,244 Asset held for sale ,861,830-1,861,830-1,861,830 Prepaid expenses and other current assets 93,174 36, ,957 57,186 6, , ,306 Assets of discontinued operations - - 2,721, ,721,756-2,721,756 Intercompany due to/due from 172,917 6,889 (104,566) (76,163) Total current assets 1,407, ,552 16,086, , ,086 2,018,117 82,069 21,948,543 (320,696) 21,627,847 Investment in Affiliates 4,726,693-11,095, ,822,528 (15,822,528) - Deposits 236, , , ,422 Property and equipment, net 50,351-1,614, ,202 4,572,608 6,607,009 2,021,542 15,003,873-15,003,873 Total assets $ 6,421,025 $ 738,552 $ 28,796,230 $ 1,086,469 $ 5,240,694 $ 8,625,126 $ 2,125,270 $ 53,033,366 $ (16,143,224) $ 36,890,142 Liabilities and Net Assets Current liabilities Accounts payable and accrued expenses $ 163,127 $ 106,338 $ 696,070 $ 22,022 $ 71,284 $ 82,230 $ 30,779 $ 1,171,850 $ (320,696) $ 851,154 Accrued salaries and benefits 378,533 21,287 29, ,908 28, , ,600 Deferred revenue ,554-11,364 9, ,321-97,321 Other current liabilities ,156 1,156-1,156 Liabilities of discontinued operations - - 7,593, ,593,679-7,593,679 Total current liabilities 541, ,625 8,395, , ,052 91,625 31,943 9,623,606 (320,696) 9,302,910 Unrestricted net assets 5,879, ,927 20,400, ,539 5,129,642 8,533, ,027 41,572,460 (15,822,528) 25,749,932 Temporarily restricted net assets ,837,300 1,837,300-1,837,300 Total liabilities and net assets $ 6,421,025 $ 738,552 $ 28,796,230 $ 1,086,469 $ 5,240,694 $ 8,625,126 $ 2,125,270 $ 53,033,366 $ (16,143,224) $ 36,890,142 REFER TO INDEPENDENT AUDITOR'S REPORT 22

25 CONSOLIDATING STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED SEPTEMBER 30, 2016 Elimination CPI CPIH CPSA CPCC MHRI CBHP Sonrisa Total Entries Consolidated Revenues Net client service $ - $ - $ - $ 4,444,969 $ - $ - $ - $ 4,444,969 $ - $ 4,444,969 Housing grant and tenant rental income - - 2,399,355-1,599,777-63,034 4,062,166 (447,029) 3,615,137 Commercial rental income , ,523,369-1,646,310 (948,627) 697,683 Contracted services, net - 374, , ,963 Other income 280, , , ,638 6, ,160,399-1,160,399 Net investment income 508, ,056 16,387 21, , ,381 Management fee 2,510,173-2,510,173 (2,510,173) - Total revenues 3,298, ,196 3,457,289 4,697,994 1,627,296 1,523,893 63,236 15,156,361 (3,905,829) 11,250,532 Expenses Salaries and wages 3,496, , ,685 3,718, , ,115,396-8,115,396 Payroll taxes and benefits 710,143 50,521 87, ,150 69, ,662,790-1,662,790 Professional fees and outside services 764,249 10,309 30, ,975 79, ,084 55,102 1,381,383-1,381,383 Occupancy 667, ,594 45, , , ,643 33,784 2,428,427 (948,627) 1,479,800 Administrative and operating 444,588 47, , ,665 14, , ,359,035-1,359,035 Travel 32, ,681 87,246 15, , ,618 Training 18, ,584-18,584 Equipment 111,157 50,415 (200) 95,304-8, , ,929 Supplies 48,334 58,870 3,643 24,738 32, , ,183 Tenant assistance - - 2,122, , ,769,124 (447,029) 2,322,095 Management and general , ,708 (625,708) - Depreciation 43,891-1,007,550 52, , ,947 65,884 2,340,032-2,340,032 Bad debt - 1, ,405-1,405 Loss on sale of property and equipment ,374-47,374-47,374 Total expenses 6,337, ,269 4,258,102 6,868,997 1,453,328 1,601, ,779 21,331,988 (2,021,364) 19,310,624 (Loss) income from continuing operations (3,039,389) (169,073) (800,813) (2,171,003) 173,968 (77,774) (91,543) (6,175,627) (1,884,465) (8,060,092) Loss from discontinued operations - - (29,690,438) (29,690,438) 1,884,465 (27,805,973) Change in net assets (3,039,389) (169,073) (30,491,251) (2,171,003) 173,968 (77,774) (91,543) (35,866,065) - (35,866,065) Net assets/retained earnings, beginning of year 8,918, ,000 50,891,710 2,933,542 4,955,674 8,611,275 2,184,870 79,275,825 (15,822,528) 63,453,297 Net assets/retained earnings, end of year $ 5,879,365 $ 610,927 $ 20,400,459 $ 762,539 $ 5,129,642 $ 8,533,501 $ 2,093,327 $ 43,409,760 $ (15,822,528) $ 27,587,232 REFER TO INDEPENDENT AUDITOR'S REPORT 23

26 SINGLE AUDIT REPORTS AND SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED SEPTEMBER 30, 2016 RSM US Alliance provides its members with access to resources of RSM US LLP, RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP, RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP, RSM US Alliance products and services are proprietary to RSM US LLP.

27 TABLE OF CONTENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY THE UNIFORM GUIDANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS... 20

28 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITOR S REPORT To the Board of Directors Community Partners, Inc. We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of Community Partners, Inc. (the Organization ), which comprise the consolidated balance sheet as of September 30, 2016, and the related consolidated statements of activities and changes in net assets, and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated April 26, Internal Control over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the Organization s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Organization s consolidated financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. We did identify a deficiency in internal control, described as item in the accompanying schedule of findings and questioned costs that we consider to be significant deficiency. 1

29 To the Board of Directors Community Partners, Inc. Page 2 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization's consolidated financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of consolidated financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Organization s internal control over compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Tucson, Arizona April 26,

30 REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY THE UNIFORM GUIDANCE INDEPENDENT AUDITOR S REPORT To the Board of Directors Community Partners, Inc. Report on Compliance for Each Major Federal Program We have audited Community Partners, Inc. s (the Organization ) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the Organization s major federal programs for the year ended September 30, The Organization s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of the Organization s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ( Uniform Guidance ). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Organization s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Organization s compliance. 3

31 To the Board of Directors Community Partners, Inc. Page 2 Opinion on Each Major Federal Program In our opinion, the Organization complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended September 30, Other Matters The results of our auditing procedures disclosed instances of noncompliance, which are required to be reported in accordance with the Uniform Guidance and which are described in the accompanying schedule of findings and questioned costs as items through Our opinion on each major federal program is not modified with respect to these matters. The Organization s responses to the noncompliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The Organization s responses were not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the responses Report on Internal Control Over Compliance Management of the Organization is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Organization s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be a material weakness. However, material weakness may exist that have not been identified. However, we identified certain deficiencies in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as items through , that we consider to be significant deficiencies. 4

32 To the Board of Directors Community Partners, Inc. Page 3 The Organization s responses to the internal control over compliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The Organization s responses were not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the responses The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance We have audited the consolidated financial statements of the Organization as of and for the year ended September 30, 2016, and have issued our report thereon dated April 26, 2017, which contained an unmodified opinion on those consolidated financial statements. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditure of federal awards is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Tucson, Arizona April 26,

33 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016

34 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 SECTION I SUMMARY OF AUDITOR S RESULTS Financial Statements 1. Type of auditor s report issued.... Unmodified 2. Internal control over financial reporting: a. Material weakness(es) identified?... No b. Significant deficiency(ies) identified?... Yes 3. Noncompliance material to financial statements noted?... No Federal Awards 1. Internal control over major program: a. Material weakness(es) identified?... No b. Significant deficiency(ies) identified?... Yes 2. Type of auditor s report issued on compliance for major programs.... Unmodified 3. Any audit findings disclosed, which are required to be reported in accordance with section 2 CFR (a)?... Yes 4. Identification of major programs: CFDA Number Title of Federal Program or Cluster Continuum of Care Program 5. Dollar threshold used to distinguish between type A and type B programs.... $750, Auditee qualified as low-risk?... Yes 7

35 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) SECTION II FINANCIAL STATEMENT FINDINGS This section identifies the significant deficiencies, material weaknesses, fraud, illegal acts, violations of provision of contracts and grant agreements, and abuse related to the consolidated financial statements for which Government Auditing Standards require reporting : Enhance Controls over Manual Journal Entries and Review Roles for Proper Segregation of Duties (Significant Deficiency) During our audit of Manual Journal Entries, we noted the majority of journal entries posted to the general ledger are done through manual journal entries. In addition, all employees within the accounting department have the ability to prepare and post manual journal entries with no entity or transactional limitations. In most instances the employee preparing the manual journal entry is the same employee posting the journal entry to the general ledger. We did note a peer review is performed prior to posting the entry to the system and the Director of Accounting reviews all manual journal entries printed and provided for review; however, no review of journal entries posted within the general ledger system is performed to ensure all entries posted have been provided for review, were posted without error, or no changes to the journal entries were made after peer review or Director of Accounting review. In addition, during our audit, we noted the Director of Accounting has super user access to the accounting system as well as the ability to both initiate and print checks and has access to the blank check stock. While checks require two signatures and are printed on an imprinting machine which requires a key, signatures for the Chief Executive Office and the Chief Financial Officer ( CFO ) are on a signature plate and the Director of Accounting has the key to turn on the imprinting machine. Only checks over $10,000 are reviewed by the CFO prior to printing checks. Unauthorized journal entries or improper segregation of duties may result in error or facilitate the concealment of fraud. An effective system of internal controls would require journal entries be reviewed within the accounting system after they are posted by the appropriate levels of management, including review of journal entries posted to the general ledger by the Director of Accounting as well as implementing the appropriate segregation of duties related to the Director of Accounting s super user access to the accounting system and ability to print checks. This would assist in minimizing the risk of error or fraud. We recommend management implement policy and procedures over who in the accounting department can prepare and post manual journal entries to certain entities or accounts. In addition, we recommend the appropriate level of management review the manual journal entries posted within the general ledger through a system-generated listing on a monthly or at least quarterly basis to ensure the policy and procedures implemented are being appropriately followed. This review should be evidenced via signature (or initial) and date and maintained to evidence the control is operating as intended. In addition, we recommend management review the roles of all employees within the accounting department including the Director of Accounting for proper segregations of duties and either limit access or implement review procedures to ensure controls are in place to mitigate the risk of error or fraud. 8

36 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) SECTION II FINANCIAL STATEMENT FINDINGS (CONTINUED) : Enhance Controls over Manual Journal Entries and Review Roles for Proper Segregation of Duties (Significant Deficiency) (continued) Managements Response: Prior to the Regional Behavioral Health Authority (the RBHA ) contract ending on September 30, 2015, it had been the position of the CFO that the accountant assigned to a specific entity was responsible for preparing all month-end general journal entries for the entity and generating the financial statements. The reasoning was so the accountant would be familiar with the activity affecting the entity, so that the financial statements would be properly footnoted. At the time the process was put into place, CPSA was the RBHA for Pima County, and had sufficient staffing to properly separate the duties of preparing general journal entries and posting into the accounting system, by having a support level accountant whose responsibility was to enter/post the journal entries prepared by the other accountants. With the RBHA contract ending September 30, 2015, significant staffing cuts and/or turnover occurred, requiring the same amount of tasks be divided between fewer staff. This resulted in the inability to continue the same level of separation of duties. 9

37 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) SECTION III FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARDS This section identifies audit findings required to be reported by the 2 CFR b(a), including significant deficiencies, material weaknesses, and material instance of noncompliance, including questioned costs, and material abuse : Activities Allowed or Unallowed, Control Activities (Significant Deficiency) and Compliance Federal Agency: U.S. Department of Housing and Urban Development (HUD) Program Title: Continuum of Care Program CFDA Number: Federal Award Source: Pass-Through Pass-Through Entity: Arizona Department of Housing Pass-Through Identifying Number: Contracts , , , , and Criteria HUD s continuum of care program rules state that the Organization is required to maintain separate case records for each individual serviced by the program, including specific items such as initial eligibility documentation, program application, executed lease agreements, and documentation related to required annual re-certification of tenant income and safety inspection of the rental property. In addition, the Uniform Guidance requires entities receiving Federal awards to establish and maintain internal controls that are designed to reasonably ensure compliance with Federal laws, regulations, and program compliance. Further, the Uniform Guidance defines internal control as a process, effected by an entity s management and personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) Effectiveness and efficiency of operations; (2) Reliability of financial reporting; and (3) Compliance with applicable laws and regulations. Condition We identified the following during our testing of activities allowed or unallowed: (a) case file documentation was incomplete with respect to required items, including documentation related to required annual re-certifications of tenant income for 5 of the 42 tenant case files tested and documentation of annual re-inspection of the rental property for 1 of the 42 tenant case files tested; and (b) monthly billings under the contracts, although they contained evidence of review and approval by an appropriate member of management, 4 of the 42 tenant case files tested contained minor billing errors where either rent amounts or the tenant portion of income did not match supporting documentation contained in the case files. Cause and Effect - This finding was the result of an internal control breakdown with respect to the retention of case records and documentation in accordance with the program requirements and the review and approval of monthly billings. Not maintaining appropriate case records for each individual in the program and lack of a detailed review and approval of monthly billings could lead to unsupported and/or fraudulent amounts billed under the contracts. Questioned Costs Not applicable. 10

38 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) SECTION III FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARDS (CONTINUED) : Activities Allowed or Unallowed, Control Activities (Significant Deficiency) and Compliance (continued) Recommendation We recommend the Organization implement policies and procedures to improve the retention and maintenance of tenant files. Also, we recommend that one individual be responsible for preparing each monthly billing and that a separate individual be responsible to perform an independent review and approval of each billing comparing amounts billed to source documents for accuracy and that this review and approval be evidenced via signature (or initials) and the date of review on the billing. A copy of each billing should be maintained to evidence the control is operating as intended. View of Responsible Officials It is understood that some of the case files lacked documentation. CPSA administers nine HUD grants and 250 cases for RBHA funding, approx. 600 cases altogether, and there are occasions when paperwork gets mis-filed. However, this is not a situation we endorse nor want to continue. We have developed a multi-prong approach to ensure that this type of finding does not occur in the future: 1) A checklist spreadsheet which each Housing Specialist will use to update his/her cases. The checklist identifies all required standards and ensures that each one is met currently. The Housing Manager will review this checklist with the Specialists during supervision sessions. 2) A report that can now be pulled from our tenant data base showing all inspections and annual recertifications due within the next 90 days. This information will be used by both the Specialists to schedule needed appointments with the tenants and by the Housing Manager as a double-check that the spreadsheets are being kept current. 3) An audit tool to be used by administrative Housing Specialists on a monthly basis to ensure that the charts have current documentation and that it is filed correctly. Each month 1-2 grants will be audited : Eligibility, Control Activities (Significant Deficiency) and Compliance Federal Agency: U.S. Department of Housing and Urban Development (HUD) Program Title: Continuum of Care Program CFDA Number: Federal Award Source: Pass-Through Pass-Through Entity: Arizona Department of Housing Pass-Through Identifying Number: Contracts and Criteria HUD s continuum of care rules state that the Organization is required to maintain separate case records for each individual serviced by the program, including specific items such as initial eligibility documentation. In addition, the Uniform Guidance requires entities receiving Federal awards to establish and maintain internal controls that are designed to reasonably ensure compliance with Federal laws, regulations, and program compliance. Further, Uniform Guidance defines internal control as a process, effected by an entity s management and personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) Effectiveness and efficiency of operations; (2) Reliability of financial reporting; and (3) Compliance with applicable laws and regulations. 11

39 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) SECTION III FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARDS (CONTINUED) : Eligibility, Control Activities (Significant Deficiency) and Compliance (continued) Condition During our testing of eligibility we identified 1 of 42 tenant case files tested, where the supporting documentation of the individual s disability was not maintained in the case file. In order to be eligible for the program, an individual must be homeless and disabled. The disability must be documented by a credentialed medical professional trained to make such a determination. Cause and Effect - This finding was the result of an internal control breakdown with respect to retention of case file records in accordance with the contract and HUD requirements. Not maintaining separate case records for each individual in the program could lead to unsupported and/or fraudulent amounts billed to under the contract. Questioned Costs Out of the $170,701 of costs tested, we noted $5,309 in known questioned costs that were not adequately supported due to the missing documentation related to eligibility. Furthermore, we estimated additional likely questionable costs to be $40,509 after extrapolating the known questioned costs over $1,302,500 of the total untested program costs related to the contracts selected for testing for the year ended September 30, Recommendation We recommend the Organization implement policies and procedures to improve the retention and maintenance of case files, including documentation related to the eligibility of the individual. View of Responsible Officials It is believed that the one chart missing the disability documentation was the result of mis-filing, as no recipients would receive a rental subsidy without an evidenced disability as defined by HUD. This is a standard part of the entry documentation checklist for the Housing Specialists who perform the engagement and placement of individuals for grant subsidies. But we verified that the paperwork was missing in this particular chart. The steps that are being taken and as defined in section should ensure that this finding does not occur again in the future : Sub-Recipient Monitoring Control Activities (Significant Deficiency) and Compliance Federal Agency: U.S. Department of Housing and Urban Development (HUD) Program Title: Continuum of Care Program CFDA Number: Federal Award Source: Direct and Pass-Through Pass-Through Entity: Arizona Department of Housing Pass-Through Identifying Number: Contracts , , , , and Criteria HUD s continuum of care rules state that the Organization is required to maintain executed agreements with all sub-recipients. In addition, Uniform Guidance requires entities receiving Federal awards to establish and maintain internal controls that are designed to SECTION III FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARDS (CONTINUED) 13

40 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) : Sub-Recipient Monitoring Control Activities (Significant Deficiency) and Compliance (continued) reasonably ensure compliance with Federal laws, regulations, and program compliance. Further, Uniform Guidance defines internal control as a process, effected by an entity s management and personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) Effectiveness and efficiency of operations; (2) Reliability of financial reporting; and (3) Compliance with applicable laws and regulations. Condition During our testing of sub-recipient monitoring we noted that there were no executed agreements with sub-recipients for the period under audit where sub-recipients were utilized to administer the grant from October 2015 through December Cause and Effect - This finding was the result of an internal control breakdown with respect to updating, amending, executing, and retaining agreements with sub-recipients. Not maintaining executed agreements for each sub-recipient could lead to unsupported and/or fraudulent amounts billed to under the contract. Questioned Costs Not applicable. Recommendation We recommend that the Organization implement policies and procedures to improve the updating, amending, executing, and retaining of agreements with sub-recipients. View of Responsible Officials The finding is understood. CPSA had intended to take over the grant administration from the subrecipients effective at the end of the contract which would have been Sept. 30, However, our internal financial process was not completely in place, and we negotiated with the sub-recipients on a monthly basis for them to continue paying the subsidies until CPSA could pick up which finally occurred January, At that time it was an oversight that contracts were not extended. We have a Housing Manager on staff now who has been provided the information on the policies and procedures in these instances. He will monitor to ensure that there are no future findings such as this. At this time only one of the nine grants has a sub-recipient, and that contract is current. But we want to be fully compliant if sub-recipients are utilized again in the future. 14

41 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) SECTION III FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARDS (CONTINUED) : Sub-recipient Monitoring, Control Activities (Significant Deficiency) and Compliance Federal Agency: U.S. Department of Housing and Urban Development (HUD) Program Title: Continuum of Care Program CFDA Number: Federal Award Source: Pass-Through Pass-Through Entity: Arizona Department of Housing Pass-Through Identifying Number: Contracts , , , , and Criteria HUD s continuum of care rules state that the Organization is responsible for determining the adequacy of performance under sub-recipient agreements and for taking appropriate action when performance issues arise. In addition, the Uniform Guidance requires entities receiving Federal awards to establish and maintain internal controls that are designed to reasonably ensure compliance with Federal laws, regulations, and program compliance. Further, Uniform Guidance defines internal control as a process, effected by an entity s management and personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) Effectiveness and efficiency of operations; (2) Reliability of financial reporting; and (3) Compliance with applicable laws and regulations. Condition During our testing of sub-recipient monitoring we identified 2 of 42 tenant case files tested contained minor billing errors where either rent amounts, or the tenant portion of income, did not match supporting records contained in the tenant case files. All errors identified were under-billings when compared to the supporting records. Cause and Effect - This finding was the result of an internal control breakdown with respect to the review and approval of sub-recipient monthly billings. A lack of a detailed review and approval of monthly billings could lead to unsupported and/or fraudulent amounts billed to under the contract. Questioned Costs Not applicable. Recommendation We recommend that one individual be responsible for reviewing each monthly billing from sub-recipients and that a separate individual be responsible to perform an independent review and approval of each billing comparing amounts billed to source documents for accuracy and that this review and approval be evidenced via signature (or initials) and the date of review on the billing. A copy of each billing should be maintained to evidence the control is operating as intended. View of Responsible Officials It was validated that these errors occurred. CPSA did not have a single individual reviewing the work of the sub-recipients, and we will follow the recommendation as presented above. At this time we have a single sub-recipient on a single grant, so this process will be easy to implement. However, we continue to want to be fully compliant, so if sub-recipients will be utilized in the future, we will ensure that all billings have the two-staff review as described. 15

42 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) SECTION III FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARDS (CONTINUED) : Special Tests and Provisions, Control Activities (Significant Deficiency) and Compliance Federal Agency: U.S. Department of Housing and Urban Development (HUD) Program Title: Continuum of Care Program CFDA Number: Federal Award Source: Direct and Pass-Through Pass-Through Entity: Arizona Department of Housing Pass-Through Identifying Number: Contracts , , , , and Criteria HUD s continuum of care rules state that the Organization is required to maintain separate case records for each individual serviced by the program, including specific documentation related to a special test for the reasonableness of rent charged in accordance with HUD fair market rent values for the applicable geographic area, and comparable rental properties in that area and the annual re-certification of the reasonableness of rent. In addition, Uniform Guidance requires entities receiving Federal awards to establish and maintain internal controls that are designed to reasonably ensure compliance with Federal laws, regulations, and program compliance. Further, Uniform Guidance defines internal control as a process, effected by an entity s management and personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) Effectiveness and efficiency of operations; (2) Reliability of financial reporting; and (3) Compliance with applicable laws and regulations. Condition During our testing of the required special test related to rent reasonableness, 4 of the 42 tenant case files tested were incomplete with respect to required items related to documenting rent reasonableness. Cause and Effect - This finding was the result of an internal control breakdown with respect to retention of case records and documentation for the annual re-certification requirement of the reasonableness of rent. Not maintaining separate case records for each individual in the program could lead to unsupported and/or fraudulent amounts billed to under the contract. Questioned Costs Not applicable. Recommendation We recommend the Organization implement policies and procedures to improve the retention and maintenance of case files, including documentation related to the annual re-certification of rent reasonableness. View of Responsible Officials It is understood that some of the case files lacked documentation. CPSA administers nine HUD grants and 250 cases for RBHA funding, approx. 600 cases altogether, and there are occasions when paperwork gets mis-filed. However, this is not a situation we endorse nor want to continue. We have developed a multi-prong approach to ensure that this type of finding does not occur in the future: 1) A checklist 16

43 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) SECTION III FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARDS (CONTINUED) : Special Tests and Provisions, Control Activities (Significant Deficiency) and Compliance (continued) spreadsheet which each Housing Specialist will use to update his/her cases. The checklist identifies all required standards and ensures that each one is met currently. The Housing Manager will review this checklist with the Specialists during supervision sessions. 2) A report that can now be pulled from our tenant data base showing all inspections and annual re-certifications due within the next 90 days. This information will be used by both the Specialists to schedule needed appointments with the tenants and by the Housing Manager as a double-check that the spreadsheets are being kept current. 3) An audit tool to be used by administrative Housing Specialists on a monthly basis to ensure that the charts have current documentation and that it is filed correctly. Each month 1-2 grants will be audited : Allowable Costs/Cost Principles, Control Activities (Significant Deficiency) and Compliance Federal Agency: U.S. Department of Housing and Urban Development (HUD) Program Title: Continuum of Care Program CFDA Number: Federal Award Source: Pass-Through Pass-Through Entity: Arizona Department of Housing Pass-Through Identifying Number: Contracts and Criteria Title 2 of the Code of Federal Regulations, Part 200, states that costs should be adequately documented in order for them to be allowable. In addition, the Uniform Guidance requires entities receiving Federal awards to establish and maintain internal controls that are designed to reasonably ensure compliance with Federal laws, regulations, and program compliance. Further, the Uniform Guidance defines internal control as a process, effected by an entity s management and personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) Effectiveness and efficiency of operations; (2) Reliability of financial reporting; and (3) Compliance with applicable laws and regulations. Condition We noted 1 of 12 monthly billings selected for testing contained a minor billing error, where a portion of the administrative expenses billed, did not match supporting records. Cause and Effect - This finding was the result of an internal control breakdown with respect to the review and approval of monthly billings. A lack of a detailed review and approval of monthly billings could lead to unsupported and/or fraudulent amounts billed under the contracts. Questioned Costs Not applicable. Recommendation We recommend that one individual be responsible for preparing each monthly billing and that a separate individual be responsible to perform an independent review and approval of each billing comparing amounts billed to source documents for accuracy and that this review and approval be evidenced via signature (or initials) and the date of review on the billing. A copy of each billing should be maintained to evidence the control is operating as intended. 17

44 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2016 (CONTINUED) SECTION III FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARDS (CONTINUED) : Allowable Costs/Cost Principles, Control Activities (Significant Deficiency) and Compliance (continued) View of Responsible Officials We agree that there was a billing error for 1 of the 12 monthly billings and will follow the recommendation as described above. We will document the two-staff verification and maintain the billing to evidence the control is operating as intended. 18

45 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED SEPTEMBER 30, 2016