HUD Management: Status of Actions to Resolve Serious Internal Control
Weaknesses (Letter Report, 10/16/2000, GAO/GAO-01-103).
This report discusses the Department of Housing and Urban Development's
(HUD) efforts to resolve serious internal control weaknesses. During the
past several years serious internal control weaknesses and other
deficiencies have plagued the management of HUD's activities. In 1997,
HUD announced its 2020 Management Reform Plan to overcome the
Department's problems. HUD has made reasonable progress toward resolving
material internal control weaknesses but more remains to be done. Major
steps that remain include bringing core financial systems into
compliance with federal financial systems requirements, ensuring that
rental subsidies are based on correct tenant income, improving the
Federal Housing Administration's (FHA) multifamily project monitoring,
improving budgetary and financial accounting controls, and enhancing
support in the FHA business processes.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GAO-01-103
TITLE: HUD Management: Status of Actions to Resolve Serious
Internal Control Weaknesses
DATE: 10/16/2000
SUBJECT: Housing programs
Internal controls
Financial management systems
Risk management
Auditing standards
Public administration
IDENTIFIER: HUD 2020 Management Reform Plan
HUD Central Accounting and Program System
HUD Multifamily Tenant Characteristics System
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GAO-01-103
A
The Secretary of Housing and Urban Development
October 2000 HUD MANAGEMENT Status of Actions to Resolve Serious Internal
Control Weaknesses
GAO- 01- 103
Letter 3 Appendixes Appendix I: Objectives, Scope, and Methodology 30
Appendix II: HUD and FHA Must Continue to Address Resource Management
Weaknesses 32 Appendix III: Status of HUD's Material Internal Control
Weaknesses as of May 18, 2000 37 Appendix IV: Comments From the Department
of Housing and Urban
Development 74 Appendix V: GAO Contacts and Staff Acknowledgments 91
Tables Table 1: Summary of the Material Internal Control Weaknesses Reported
by HUD's Inspector General in the Fiscal
Year 1998 Financial Statement Audits and Changes Reported in the Fiscal Year
1999 Audits 10 Table 2: Status of Corrective Actions for the 1998 Material
Weakness: HUD's Financial Management Systems 39 Table 3: Plans to Address
Fiscal Year 1999 Material Weakness:
HUD's Financial Management Systems 45 Table 4: Estimated Excess Subsidy
Payments, Fiscal Years 1996- 99 48 Table 5: Status of Corrective Actions for
the 1998 Material
Weakness: Tenant Income Verification 51 Table 6: Status of Corrective
Actions for the 1998 Material
Weakness: Multifamily Project Monitoring 57 Table 7: Status of Corrective
Actions for the 1998 Material
Weakness: FHA's Budgetary and Financial Accounting 65 Table 8: Status of
Corrective Actions for the 1999 Material Weakness: FHA's Budgetary and
Financial Accounting 67
Table 9: Status of Corrective Actions for the 1998 Material Weakness: FHA
Information and Financial Management Systems 70 Table 10: Plans to Address
Fiscal Year 1999 Material Weaknesses:
FHA's Information and Financial Management Systems 72 Figures Figure 1:
HUD's Financial Systems Are Not Fully Compliant With
Federal Financial Standards 14 Figure 2: HUD Needs to Do More to Ensure That
Rental Subsidies
Are Based on Correct Tenant Income 15
Figure 3: Improvements Needed in Multifamily Project Monitoring 16 Figure 4:
FHA's Budgetary and Financial Accounting Controls Must Be
Improved 16 Figure 5: FHA's Information Systems Must Be Enhanced to More
Effectively Support FHA's Business Processes 17
Abbreviations
CFO Chief Financial Officer CIO Chief Information Officer FHA Federal
Housing Administration FMFIA Federal Managers' Financial Integrity Act FSI
financial systems integration GAO General Accounting Office HUD Department
of Housing and Urban Development HUDCAPS HUD's Central Accounting and
Program System HEREMS Housing Enterprise Real Estate Management System IRS
Internal Revenue Service I- TIPS Information Technology Investment Portfolio
System JFMIP Joint Financial Management Improvement Program MTCS Multifamily
Tenant Characteristic System NAPA National Academy of Public Administration
OIG Office of Inspector General OMB Office of Management and Budget PA
program administrator PAS Program Accounting System PHA public housing
authority PIH Office of Public and Indian Housing QHWRA Quality Housing and
Work Responsibility Act REAC Real Estate Assessment Center REMS Real Estate
Management System SAAMS Single Family Acquired Asset Management System SFFAS
Statement of Federal Financial Accounting Standards SGL standard general
ledger SS Social Security SSA Social Security Administration SSI
Supplemental Security Income TRACS Tenant Rental Assistance Certification
System
Lett er
October 16, 2000 The Honorable Andrew M. Cuomo The Secretary of Housing and
Urban Development
Dear Mr. Secretary: A strong system of internal controls provides internal
checks and balances against waste, fraud, abuse, and mismanagement and is an
important component of any organization's ability to operate efficiently and
effectively. Over the past several years, the Department of Housing and
Urban Development's (HUD) Office of Inspector General, independent public
accountants, and we have identified serious internal control weaknesses and
other deficiencies in the management of HUD's activities.
Taken together, these weaknesses and deficiencies have led us to designate
HUD's programs as high risk since 1994. In 1997, HUD announced its 2020
Management Reform Plan, a set of proposals intended to, among other
things, strengthen the Department's internal controls and correct its
management deficiencies. In January 1999, we reported that HUD was making
credible progress in correcting its internal control and other management
problems and was demonstrating commitment to improving its operations. 1
Nevertheless, HUD's Inspector General and independent public accountants
have concluded that material internal control weaknesses- weaknesses that
significantly increase the risk of undetected errors, fraud, or
noncompliance in amounts that could be material- still exist at HUD. 2 These
weaknesses negatively affect HUD's efforts to accomplish its
mission efficiently and effectively. Accordingly, we evaluated the process
HUD used during the 14- month period ending May 18, 2000, to address its
material internal control weaknesses. We also assessed HUD's progress in
1 Major Management Challenges and Program Risks: Department of Housing and
Urban Development (GAO/ OCG- 99- 8, Jan. 1999). 2 A material weakness is a
condition in which the design or operation of one or more internal control
components does not reduce to a relatively low level the risk that errors,
fraud, or noncompliance in amounts that would be material to an
organization's financial statements may occur and may not be detected on a
timely basis by employees in the normal course of performing their duties.
resolving these weaknesses, determined what remains to be done, and
identified obstacles HUD has encountered.
As such, this report summarizes the actions HUD has taken since March 1999
to resolve its material internal control weaknesses, including the actions
it has taken since March 1, 2000, the date of the Inspector General's latest
audit of HUD's financial statements. Additionally, the report presents our
views on whether HUD's current strategy for addressing such weaknesses helps
ensure their resolution. 3 Such a strategy is important because, as we
reported in January 1999, resolving the weaknesses is an
important aspect of addressing HUD's management deficiencies. Internal
control weaknesses that are not considered material also adversely affect
HUD, as they do many organizations; however, this report focuses primarily
on the internal control deficiencies that were identified in reports by
HUD's Inspector General on HUD's financial statements and meet the
definition of “material weakness” for financial reporting
purposes. Other internal control weaknesses may also exist that have not yet
been identified by HUD, HUD's Inspector General, or us. (See app. I for a
discussion of our scope and methodology.)
Our overall objective was to examine HUD's efforts from March 1999 through
May 18, 2000, to address the eight material internal control weaknesses
identified in the Inspector General's audits of HUD's fiscal year 1998
financial statements, including the results from the Inspector General's
audits of the fiscal year 1999 financial statements. 4 To accomplish this
objective, we addressed the following issues:
3 HUD's Inspector General contracts with independent public accountants to
audit the financial statements of HUD's Federal Housing Administration
(FHA). The Inspector General's report on HUD's consolidated financial
statement audit includes the material internal control weaknesses identified
by the independent public accountants at FHA, as well as the material
weaknesses identified by the Inspector General at HUD. Because the Inspector
General is responsible for the FHA audit and reports on both FHA's and HUD's
material weaknesses, this report refers to both sets of material weaknesses
as material weaknesses identified by the Inspector General in its audits of
HUD.
4 See Federal Housing Administration Audit of Fiscal Year 1998 Federal Basis
Financial Statements, Office of Inspector General (99- FO- 131- 0002, Mar.
12, 1999); Federal Housing Administration Audit of Fiscal Year 1999 Federal
Basis Financial Statements, Office of Inspector General (00- FO- 131- 0002,
Feb. 29, 2000); U. S. Department of Housing and Urban Development Audit of
the Fiscal Year 1998 Financial Statements, Office of Inspector General (99-
FO- 177- 0003, Mar. 29, 1999); and U. S. Department of Housing and Urban
Development Attempt to Audit the Fiscal Year 1999 Financial Statements,
Office of Inspector General (00- FO- 177- 0003, Mar. 1, 2000).
What has HUD accomplished in resolving its material internal control
weaknesses and what remains to be done? Does HUD have a process for
resolving its material internal control
weaknesses and overseeing the actions taken to address them? What obstacles
has HUD encountered, if any, in addressing its material
internal control weaknesses? Results in Brief Through May 2000, HUD made
reasonable progress toward resolving all eight material internal control
weaknesses. One material weakness was
downgraded on the basis of corrective actions taken, and major corrective
actions have been completed for others. Other actions are still under way or
planned. In the audit of HUD's fiscal year 1998 consolidated financial
statements, the Inspector General identified the following eight material
internal control weaknesses. The Inspector General expressed these
weaknesses as actions that needed to be taken to correct identified
problems:
HUD needs to complete improvements to its financial systems. Effective
management of HUD's resources depends on successful completion of
organizational changes.
HUD needs to do more to ensure that rental subsidies are based on correct
tenant income. Improvements [are] needed in multifamily project monitoring.
HUD's Federal Housing Administration (FHA) must address staff and
administrative resource issues. FHA must continue to place more emphasis on
early warning and loss prevention for insured mortgages.
FHA must improve federal basis and budgetary accounting. FHA's information
systems must be improved in order to support
business processes more effectively. Most notable among HUD's
accomplishments in addressing these eight weaknesses were the improvements
it made in monitoring the insured mortgage portfolio. Because of these
improvements, the Inspector General downgraded the material weakness on
early warning and loss prevention for insured mortgages to a less severe
category- an internal control deficiency. We also identified other
significant accomplishments, including
improvements related to the multifamily project monitoring weakness that
focused on developing a standard physical inspection process and
substantially completing the first- ever physical inspection and financial
assessment of HUD's multifamily housing inventory and improvements related
to the HUD and FHA staff and administrative resource management weaknesses,
including awarding contracts to
acquire Section 8 contract administrators for multifamily housing and
assigning management and marketing functions for single- family properties
to contractors to free HUD staff for other work.
In addition to downgrading one material internal control weakness, HUD's
Inspector General reassessed and no longer reports two material weaknesses
related to resource management-( 1) effective management of HUD's resources
depends on successful completion of organizational changes and (2) FHA must
address staff and administrative resource issues. However, the Inspector
General still regards these two weaknesses as contributing causes to the
other material weaknesses and a less severe category of internal control
deficiency. For the five remaining material internal control weaknesses, we
identified significant actions that are
under way or remain to be done. For example, we found HUD has actions under
way or planned to (1) bring core financial systems into compliance with
federal financial systems requirements, (2) fully reconcile accounting and
budget systems for loan guarantees to ensure that all credit subsidy amounts
are recorded properly, (3) continue efforts to effectively verify
tenant income to ensure that units are occupied by eligible families and
that those families are paying the correct rents, and (4) continue
modernizing FHA's information and financial management systems and
reduce reliance on older systems, called legacy systems. We also found that
HUD's process for addressing its material internal control weaknesses
includes developing corrective action plans for each weakness and tracking
the resolution of the weaknesses in a centralized system. Each of the eight
corrective action plans we reviewed contained activities to be accomplished,
estimated completion dates, and strategies for addressing the cause of the
weakness. HUD's Office of the Chief Financial Officer is responsible for
overseeing the development of such plans and tracking and monitoring
corrective actions. As such, the office
tracks action items from corrective action plans, has recently initiated
meetings with the Deputy Secretary to increase top- level management's
involvement, and has developed a new automated tracking system that is
intended to enhance management's attention to correcting material
weaknesses. Since HUD has linked its actions to resolve some material
internal control weaknesses to the implementation of its management reform
plan, the resolution of such weaknesses depends, in part, on the
successful completion of HUD's reform plan. HUD has also addressed its
material internal control weaknesses in its annual performance plans.
Despite HUD's progress, our analysis showed that HUD has encountered
obstacles in addressing some of its material internal control weaknesses.
These obstacles included difficulties in implementing improvements to
information and financial management systems, the identification of new
problems related to some material weaknesses, and delays in some actions.
Because of these obstacles, HUD did not make as much progress as it had
planned in resolving some of its material internal control weaknesses.
According to HUD, the complex nature of some of the problems and aggressive
time frames set for some actions contributed to the delays.
Nevertheless, HUD's strategy- which focuses on correcting identified
material weaknesses, updating corrective action plans continually, linking
action plans to management reform efforts, and tracking the Department's
progress in resolving the material internal control weaknesses- should help
HUD continue to make progress in resolving its remaining material
weaknesses. HUD agreed with our assessment of the obstacles it has
encountered and the progress it has made in addressing its material internal
control weaknesses, noting that our draft report provided a generally
current, accurate, and balanced assessment of its efforts to address these
weaknesses. HUD commented that it was pleased with our
draft report's acknowledgement that its strategy should help it continue to
make progress in resolving the weaknesses. Background For many years, we
have been concerned about the effectiveness of federal
agencies' internal controls. We have brought problems that increase the risk
of waste, fraud, abuse, and mismanagement to the attention of federal
agencies and the Congress. We also have issued standards for internal
control that provide the overall framework for establishing and maintaining
internal control and for identifying and addressing major performance and
management challenges and areas at great risk of fraud, waste, abuse, and
mismanagement. Our Standards for Internal Control in the Federal Government
defines internal controls as an integral part of an
organization's management that provides reasonable assurance that the
organization operates effectively and efficiently, provides reliable
financial reporting, and is in compliance with applicable laws and
regulations. 5 Internal controls comprise the plans, methods, and procedures
used to meet an agency's mission, goals, and objectives, and they support
performance- based management. They also serve as the first line of
defense in safeguarding assets and preventing and detecting errors and
fraud. In short, internal controls help managers achieve desired results
through the effective stewardship of public resources.
For financial statement audits required by the Chief Financial Officers Act
of 1990 (P. L. 101- 576), an agency's internal controls over its financial
reporting must also be assessed. To assist auditors in assessing internal
controls, we issued applicable standards in our publication entitled
Government Auditing Standards, and the Office of Management and Budget (OMB)
issued guidance on audit requirements for federal financial statements,
including a definition of material internal control weaknesses. 6 For the
purposes of financial statement preparation, internal control is a process
designed to provide reasonable assurance that the financial results reported
are reliable, the agency is in compliance with laws and regulations, and
performance reporting is reliable. When the design of internal controls is
weak, errors, fraud, or noncompliance with laws may occur that elevate the
weakness to a material internal control weakness.
OMB defines a material internal control weakness as a reportable condition
in which the agency's internal controls do not reduce to a relatively low
level the risk that errors, fraud, or noncompliance involving significant
amounts may occur and may not be detected within a timely period by
employees in the normal course of performing their assigned functions. 7
Material Weakness The Chief Financial Officer's Act of 1990 required that
HUD, like other Reporting Requirements
federal agencies, begin preparing agencywide financial statements beginning
with fiscal year 1991. The financial statements were to be audited by the
agencies' inspectors general, who could contract for this work with
independent public accountants. The act, as amended, requires that the
financial statement audits be completed by March 1, following the
5 Standards for Internal Control in the Federal Government (GAO/ AIMD- 00-
21.3.1, Nov. 1999). 6 Government Auditing Standards: 1994 Revision (GAO/
OCG- 94- 4, June 1994) and Audit Requirements for Federal Financial
Statements (OMB Bulletin No. 98- 08, Aug. 24, 1998). 7 A reportable
condition is defined by OMB as a matter coming to an auditor's attention
that should be communicated because it represents significant deficiencies
in the design or operation of internal controls that could adversely affect
the organization's ability to provide reasonable assurance of the
reliability of its financial reporting, performance reporting, and
compliance with laws and regulations. It is a significant, yet less severe,
category of internal control deficiency than a material weakness.
end of the fiscal year. Since 1991, HUD's Office of Inspector General has
used independent public accountants to audit FHA's financial statements and,
since fiscal year 1995, has itself audited HUD's consolidated financial
statements.
HUD's Audit Management System handbook provides guidance to its program
managers for responding to the Inspector General's financial audits and
requires the development of corrective action plans to respond to all audit
recommendations, including those related to material internal control
weaknesses. The handbook requires that HUD develop a proposal
to respond to the audit recommendations, including time frames to resolve
the recommendations, and obtain a management decision from the Inspector
General that the actions proposed will address the recommendations. This
proposal and management decision form the basis for HUD's corrective action
plans.
HUD's Material Internal Table 1 summarizes the material internal control
weaknesses reported by
Control Weaknesses HUD's Inspector General for fiscal years 1998 and 1999
and identifies the
year each was first reported as a material weakness.
Table 1: Summary of the Material Internal Control Weaknesses Reported by
HUD's Inspector General in the Fiscal Year 1998 Financial Statement Audits
and Changes Reported in the Fiscal Year 1999 Audits 1998 Eight material
1999 Year first weaknesses Five material weaknesses Reasons for 1999
changes, if any identified a
HUD needs to complete HUD's financial systems are not fully Refined to focus
on the impact of 1991 improvements to its financial compliant with federal
financial
systems problems on financial management systems.
standards. management. Effective management of HUD's
Not applicable. No longer a separate material weakness 1992 resources
depends on successful because of corrective actions taken. completion of
organizational Reassessed as a contributing cause of changes.
other material weaknesses and reportable conditions.
HUD needs to do more to ensure HUD needs to do more to ensure that Not
applicable. 1995 that subsidies are based on correct rental subsidies are
based on correct tenant income.
tenant income. Improvements [are] needed in Improvements [are] needed in Not
applicable. 1991 multifamily property monitoring. multifamily property
monitoring. FHA must address staff and Not applicable. No longer a separate
material 1992
administrative resource issues. weakness. Reassessed as a contributing cause
of other material weaknesses and reportable conditions. FHA must continue to
place more Not applicable. Reduced to a reportable condition. 1991 emphasis
on early warning and loss prevention for insured mortgages.
FHA must improve federal basis and FHA's budgetary and financial
Refocused to consider improvements 1998 budgetary accounting. accounting
controls must be improved. made and provide more detail on remaining issues.
FHA's information systems must be FHA's information systems must be Refined
to focus more on financial
1991 improved in order to support enhanced to more effectively support
management improvement. business processes more effectively. FHA's business
processes.
a Fiscal year 1991 was the first year that HUD's financial statements were
audited under the Chief Financial Officer's Act of 1990. Source: GAO's
presentation of information reported by HUD's Inspector General.
Importance of Internal Sound internal controls are important to HUD for
several reasons. HUD is Controls to HUD one of the largest financial
institutions in the United States. As of September 30, 1999, HUD was
responsible for managing about $508 billion
in insured mortgages and $570 billion in guarantees of mortgage- backed
securities. It had about $33 billion in budget authority for fiscal year
2000. Equally important, directly or indirectly, HUD affects millions of
Americans as it carries out the federal government's missions, policies, and
programs
for housing and community development. These wide- ranging missions
include making housing affordable by insuring loans for multifamily rental
housing properties and providing assistance for about 4.5 million lowincome
residents, helping revitalize over 4,000 localities through community
development programs, and encouraging homeownership by providing mortgage
insurance to about 7 million homeowners who might
not have been able to qualify for loans without federal support. In
addition, the management control tool of monitoring is particularly critical
for HUD because its housing and community development programs rely
extensively on the integrity of thousands of diverse entities and
individuals, such as cities, public housing authorities, mortgage
lenders, contractors, and property owners. For example, about 1,000 local
governments throughout the United States administer HUD's $6- billion- ayear
Community Planning and Development program. In fiscal year 1999 alone, about
10,000 lending institutions approved 1.3 million FHA- insured
single- family mortgages valued at about $124 billion. About a third of
these lenders have the authority to underwrite loans and determine
eligibility for FHA mortgage insurance without prior HUD review. 8 HUD also
relies on contractors to monitor some of its activities that are carried out
by third parties, such as FHA mortgage lenders and Section 8 contract
administrators. These contracts represent a significant amount of resources
and workload. For fiscal year 2000, HUD requested $209 million
for Section 8 contract administrators to manage about 13,600 of its 21, 000
Section 8 contracts representing about 993,000 multifamily housing units.
Additionally, the management of HUD's inventory of about 50,000 singlefamily
homes was assigned to management and marketing contractors in 1999 and is
estimated to cost about $927 million over 5 years.
HUD Has Made HUD made reasonable progress from March 1999 through May 18,
2000, in Progress in Addressing
implementing the action plans it had developed to resolve its eight material
internal control weaknesses. In its March 1, 2000, report on HUD's financial
Its Material Internal
statements, HUD's Inspector General found that five material weaknesses
Control Weaknesses,
remained as of the end of fiscal year 1999. The Inspector General but More
Remains to downgraded one of the eight material weaknesses reported in the
fiscal year 1998 financial statements audit to a reportable condition
because of
Be Done improvements in FHA's ability to monitor its insured multifamily and
singlefamily
loans. Consequently, this weakness continues to represent a 8 Single- Family
Housing: Stronger Oversight of FHA Lenders Could Reduce HUD's Insurance Risk
(GAO/ RCED- 00- 112, Apr. 28, 2000).
significant internal control deficiency but no longer represents a weakness
that can materially affect HUD's financial position. The Inspector General
also reassessed two other material weaknesses on resource management,
reported in fiscal year 1998, and reclassified them as contributing factors
to the remaining weaknesses and reportable conditions. The reclassification
occurred because of improvements made by HUD and FHA in resource management
and monitoring. However, the Inspector General noted that it is critical for
the Department to continue addressing these issues through
the successful completion of ongoing plans. Major actions are under way to
resolve the five remaining material internal control weaknesses. HUD is
continuing to address these weaknesses by completing its planned actions.
Significant actions we identified that remain include continuing to follow
up on health and safety issues at multifamily properties and bringing core
financial systems into compliance with federal financial systems
requirements. In addition to material internal control weaknesses, we and
HUD's Inspector General have reported on
other internal control weaknesses at HUD that are not considered material
for financial statement purposes but can nevertheless adversely affect HUD's
operation.
HUD's Accomplishments From March 1999 through May 18, 2000, HUD's progress
in addressing the and Major Actions
eight material internal control weaknesses included major Remaining
accomplishments. The most significant achievement was that the early warning
and loss prevention weakness was downgraded to a reportable condition
because of improvements FHA made in monitoring its insured mortgage
portfolio. Among these improvements were efforts by FHA to begin collecting
multifamily delinquency data from mortgagees electronically, substantially
increase the number of physical inspections at insured multifamily
properties, increase the number of quality assurance reviews, and expand the
use of loss mitigation tools in managing singlefamily loans. 9 9 According
to the Inspector General, this weakness remains a reportable condition
because, among other things, FHA had not, at the time of the audit, fully
implemented new initiatives
to identify and manage risks in its insured portfolios and needed to
increase its use of other data to identify and resolve its underwriting
practices for high- risk single- family loans.
Other major accomplishments we identified that HUD made in addressing the
eight material weaknesses from March 1999 through May 18, 2000, include the
following:
For the multifamily property monitoring and early warning weaknesses, HUD
developed a standardized physical inspection process for multifamily
properties and substantially completed physical inspections of its
multifamily housing inventory-28, 306 inspections of multifamily
properties had been completed as of May 18, 2000. For the HUD resource
management weakness, HUD accepted a study by
the National Academy of Public Administration (NAPA) on its resource
estimation practices that resulted in a resource estimation and allocation
methodology that HUD plans to implement over the next 18 months. For the HUD
and FHA resource management weaknesses, HUD selected single- family
management and marketing contractors that began to manage and sell HUD's
inventory of homes. Despite some problems, the
number of sales of single- family properties increased, and the net recovery
from those sales rose from 79. 7 percent to 80.2 percent. 10 HUD assigned
responsibility for the income verification material weakness to its Real
Estate Assessment Center (REAC) and began a
large- scale computer matching effort using federal income tax data. Public
housing authorities' rate of reporting tenant information to HUD's
Multifamily Tenant Characteristic System (MTCS) database also improved,
rising from 64 percent to 90 percent, partly because of increased monitoring
of the housing authorities' reporting. This information on tenants is
essential for the income- matching project.
HUD's Inspector General did not separately report two material weaknesses on
HUD's and FHA's management of resources as material weaknesses in its fiscal
year 1999 reports. Instead, the Inspector General reassessed these problems
in light of improvements HUD made in addressing its resource issues. Among
these improvements, the Inspector General cited the Department's continued
contracting for labor- intensive functions, which allows HUD staff to focus
more on monitoring. The Inspector General recategorized the weaknesses as
causes contributing to the remaining material weaknesses and reportable
conditions. However, the Inspector General noted that significant problems
remain associated 10 Single- Family Housing: Stronger Measures Needed to
Encourage Better Performance by Management and Marketing Contractors (GAO/
RCED- 00- 117, May 12, 2000).
with these issues. For example, the FHA audit report cited ongoing issues
related to the monitoring of financial and operational processes in FHA's
management of its insurance portfolio, notes, and acquired property.
According to the Inspector General, it is critical for the Department to
continue to address the previously identified problems by completing
ongoing plans. Appendix II contains a detailed description of the resource
management weaknesses and their significance. After downgrading one material
weakness and recategorizing two others, the Inspector General reported that
five material internal control weaknesses remained at HUD at the end of
fiscal year 1999. Our analysis showed that significant actions remain to
resolve these material weakness. Among other things, HUD needs to continue
to follow up on health and
safety issues at multifamily projects, bring core financial systems into
compliance with federal financial systems requirements, and complete the
conversion of FHA's systems from a commercial to a federal basis. The major
HUD accomplishments we identified for the five material weaknesses remaining
as of May 18, 2000, and the major actions remaining for each, are summarized
in the following figures. (See app. III for more detailed information.)
Figure 1: HUD's Financial Systems Are Not Fully Compliant With Federal
Financial Standards
Accomplishments Major actions remaining
Completed the benefit- cost analysis Bring core financial systems into
update and resolved issues compliance with federal financial
associated with the financial systems systems requirements.
integration project's scope, strategy, and management changes.
Standardized financial management systems data elements and began cleaning
up these data.
Established a structure to address the lack of integration between program
and accounting systems that resulted in duplicate data entry.
Figure 2: HUD Needs to Do More to Ensure That Rental Subsidies Are Based on
Correct Tenant Income
Accomplishments Major actions remaining
Assigned responsibility for the Complete the mailing of income
income verification project to REAC. discrepancy letters to tenants and
property owners/ agents. Increased the monitoring of public housing
authorities' reporting of
Study the long- term design of tenant characteristics.
income- reporting requirements. Began a large- scale computer matching
effort using federal income tax data.
Note: HUD reported to us that as of October 2000 it had send letters to 211,
000 tenants or substantially all of the tenants it plans to contact.
Figure 3: Improvements Needed in Multifamily Project Monitoring
Accomplishments Major actions remaining
Completed 98 percent of the Follow up on the remaining
physical inspections and almost all multifamily properties that did not
of the first- year financial submit financial statements.
assessments that were received. Complete the implementation of the Awarded
the first 24 contracts for
contracts for Section 8 contract administrative functions for
administrators. project- based Section 8 rental assistance.
Continue to follow up on health and safety issues identified by physical
inspections at multifamily properties.
Continue to resolve deficiencies identified through annual financial
statements.
Note: HUD reported to us that a total of 37 contracts were awarded as of
October 2000.
Figure 4: FHA's Budgetary and Financial Accounting Controls Must Be Improved
Accomplishments Major actions remaining
Documented and trained staff on Enhance the multifamily insurance
the cost allocation time survey underwriting system to ensure the
process. Conducted the semiannual proper recording of credit subsidy
cost allocation survey. commitments and endorsements,
and automate the process for Revised cash flow models to
recording credit subsidy obligations. incorporate additional improvements
that reduced the risk
Modify financial systems to include of errors.
budgetary accounting at the transaction level by standard general Documented
the federal basis
ledger account and continue training financial statement and SF- 133
staff on financial statement preparation process and trained
preparation. staff in these processes.
Updated FHA's contracts database and removed terminated contracts from the
list of active contracts.
Performed monthly reconciliations of accounting and budget data and resolved
differences.
Figure 5: FHA's Information Systems Must Be Enhanced to More Effectively
Support FHA's Business Processes Accomplishments Major actions remaining
Developed the Real Estate Complete the integration of REMS
Management System (REMS) to with other systems, specifically
support multifamily housing. those at REAC.
Implemented the single- family Complete the implementation of a
mortgage collection subsystem to subsidiary ledger for converting
maintain detailed, case- level FHA's financial management
information on the receipt of reporting from a commercial to a
mortgage insurance premiums on federal accounting basis.
single- family loans.
Potential of Internal Control While material internal control weaknesses
identified during financial Weaknesses That Are Not
statement audits can significantly affect an organization's financial
Material to Affect HUD's position, other internal control weaknesses that
(1) are not determined to Operations be material or (2) pertain to
management control systems also exist. These problems also warrant attention
because of their potential to adversely affect an agency's operations.
Both we and HUD's Inspector General have reported on internal control
problems that have not been classified as material weaknesses in the
Inspector General's financial statement audits. In a letter dated March 10,
2000, to the Secretary of HUD, we stated that 22 recommendations from our
past work with major relevance to HUD's management deficiencies had not yet
been fully implemented. Ten of these unimplemented recommendations related
to internal control weaknesses in the operations of departmental programs.
11 For example, we reported on recommendations to implement a monitoring
system to ensure that HUD's risk- sharing partners comply with demonstration
programs' procedures,
regulations, or risk- sharing agreements and require the Chief Financial
Officer (CFO) to provide sufficient oversight to determine whether HUD's
annual review of unexpended balances is adequate to identify unneeded
balances and to ensure that they are deobligated. We have also pointed out
that weak management controls have compromised the integrity of four HUD
grant programs whose annual expenditures total about $6 billion.
In reporting on the fiscal year 1999 financial statements, HUD's Inspector
General pointed out 12 reportable conditions at HUD and FHA that represent
significant deficiencies in the design or operation of internal controls.
These conditions include weaknesses in (1) controls over HUD's computer
system environment and security, (2) HUD's processes for reviewing contract
obligation balances, (3) FHA's review process for estimating reserves for
the insured portfolio, and (4) the design and operation of security and data
integrity controls over FHA's information systems.
The Federal Managers' Financial Integrity Act (FMFIA) requires management
control programs and annual reports for federal agencies that (1) indicate
whether management control systems provide reasonable assurance that the
requirements of FMFIA are being met, (2) identify any
11 Status of GAO's Recommendations Related to High- Risk Issues at the
Department of Housing and Urban Development (B- 284624, Mar. 10, 2000).
new material weaknesses and instances of nonconformance, and (3) include any
corrective actions taken on previously identified material weaknesses. HUD
reports on its compliance with the act's requirements in its annual
accountability report, including a discussion of its material internal
control weaknesses. In its fiscal year 1999 accountability report, HUD again
certified that, except for the material weaknesses and certain other issues,
its management controls are in compliance with the act's requirements. This
certification means that, according to HUD, its controls are sufficient to
provide reasonable assurance that obligations and costs
are in compliance with applicable laws, funds and assets are properly
safeguarded, and revenues and expenditures are properly accounted for and
reported. HUD also stated that it was not in full compliance with FMFIA's
systems requirements because it still needs to complete the conversion to an
integrated financial management system and to ensure full compliance with
capturing standard general ledger information at the
transaction level. Even though HUD certified that its management controls
are in compliance with FMFIA's requirements, the Inspector General reported
that it continues to believe that HUD is not in compliance, given the
magnitude of the problems that remain and the difficulties with the core
financial systems.
HUD Has Developed HUD's process for addressing its material internal control
weaknesses
Plans to Address Its includes developing a corrective action plan for each
weakness and a
centralized system to track its progress in resolving the weakness. Each
Material Internal corrective action plan contains activities to be
accomplished, estimated Control Weaknesses
completion dates, and strategies for addressing the cause of the material
weakness as identified by the Inspector General, as well as by HUD
management and us. The planning and oversight process involves various HUD
entities, and each plan is routinely updated.
In addition, HUD's corrective action plans include linkages to the
Department's 2020 Management Reform Plan, and its material internal control
weaknesses are addressed in its annual performance plans, prepared under the
Government Performance and Results Act of 1993
(Results Act). 12 12 The Results Act seeks to shift the focus of government
decision- making and accountability from activities to results.
HUD's Action Plan Process We reviewed the action plans that HUD developed to
corrects its material internal control weaknesses in August 1999, February
2000, and April/ May 2000 (when such plans were available for weaknesses
that remained after the fiscal year 1999 audit). The earlier plans contained
actions to address the eight material weaknesses identified in the fiscal
year 1998 financial statement audit reports. Five of the eight plans, which
were developed by the Office of Housing (Housing), included (1) management
strategies built around the audit recommendations and implementation
strategies contained in HUD's 2020 Management Reform Plan, (2) corrective
actions to implement the strategies, (3) estimated dates for completion, and
(4) status information. One of the eight plans on verifying tenant income
was
developed by a project task force led by HUD's CFO with participation from
REAC, Housing, and the Office of Public and Indian Housing (PIH). When the
responsibility for tenant income verification was transferred to REAC in
February 1999, REAC revised the plan to provide for a large- scale
computer matching effort with specific tasks and status information for each
task. The remaining two plans on HUD's financial management systems and
resource management material weaknesses were developed by the CFO and the
Office of Departmental Operations and Coordination, with input from other
HUD offices. The CFO's corrective action plan for HUD's financial management
systems weakness described the deficiencies,
corrective actions taken and planned, and estimated completion dates for
some activities. The resources management plan was updated specifically for
this review, according to officials from the Office of Departmental
Operations and Coordination. It consisted of excerpts from the fiscal year
1998 financial statement audit report, with charts showing interim steps and
completion dates for each of the recommendations, and a separate narrative
description for two of the four recommendations.
All eight corrective action plans noted that some actions had been completed
and some showed actions that would not be completed until late 2000,
including one whose actions would not be completed until 2005. For example,
the multifamily property monitoring action plan notes that some actions,
such as the establishment of REAC and the Department's Enforcement Center,
have been completed, as discussed above. However, it also showed that
existing guidance related to multifamily operations will not be completely
updated until September 30, 2001. The plan for HUD's financial systems
weakness included interim dates for completing planning projects and the
core financial system but did not report when the mixed systems transferred
from the CFO to the Chief Information Officer (CIO)
were expected to be completed. HUD officials estimated that the mixed
systems would be completed several years in the future. Also, some of the
activities described in the plans overlapped, indicating the
interrelationship of the problems underlying the material weaknesses. For
example, four of the plans cited the establishment of REAC as important to
addressing the related material weakness.
As of May 2000, the corrective action plans for the five remaining material
internal control weaknesses were being updated to incorporate information
and recommendations from the Inspector General's audit of the fiscal year
1999 financial statements. We obtained updated corrective action plans,
where available, and discussed the planned actions with the responsible
officials. Besides describing the major accomplishments and actions that
remain for these five weaknesses, appendix III discusses the actions planned
and the actions remaining for those new plans.
Management Oversight of HUD has several mechanisms to oversee corrective
actions taken in Action Plans
response to audit report recommendations, including those for the material
weaknesses. Responsibilities for developing action plans, monitoring
actions, and reporting on the progress made in resolving material
weaknesses are shared by the CFO, program offices and individual units, the
Office of the Deputy Secretary, and HUD's Inspector General. The CFO is
responsible for overseeing the development of all material weakness action
plans and tracking and monitoring corrective actions. The CFO's Risk
Management Division tracks the status of corrective action
plans. The Division also frequently discusses the status of plans, as well
as problems encountered in implementing the plans, with the responsible
program officials and with the Deputy Secretary, when warranted. The Risk
Management Division has developed and implemented a new automated system to
track material weakness corrective actions to replace the previous tracking
system, as part of the Deputy Secretary's initiative to further enhance
management's attention to correcting material weaknesses. This system is
intended to track action items from the
corrective action plans and automatically notify responsible staff when
specific actions are due. In addition, on February 16, 2000, the Deputy
Secretary announced a new process for monitoring material weaknesses, which
began in May 2000. The new process will require program offices to update
status information monthly to enable the CFO to prepare a monthly
consolidated corrective action status report for the Deputy Secretary's use
in overseeing progress. The responsible program official will meet with the
CFO and Deputy Secretary monthly to review the plans and progress. A working
group, the Council of Comptrollers, will work with the CFO and act as a
focal point for resolving material weaknesses and other financial and
management control issues. The first monthly meeting of the Council of
Comptrollers was held on May 4, 2000.
In addition to the CFO's monitoring of corrective action plans, HUD and the
Inspector General maintain a centralized database for tracking audit
findings and recommendations, including those related to the material
weaknesses. HUD has a Departmental Automated Audits Management System that
tracks and monitors all of the Inspector General's audit findings,
recommendations, and corrective actions. It identifies trends and
patterns and produces reports and data for use by the Inspector General and
the CFO.
At the program level, Housing was responsible for five of the material
weaknesses we reviewed, and it has a separate tracking and oversight process
for the corrective action plans related to these weaknesses. As part of
Housing's audit- tracking responsibilities, the Audit Liaison Officer
maintains a consolidated material weakness action plan, which she sends out
bimonthly to the multifamily and single- family program staff for update.
Within the program offices, the information necessary to update the action
plans is obtained, and responses are prepared. Housing provides data from
its tracking system to the CFO for inclusion as part of the departmentwide
tracking and reporting system. HUD reported to us that Housing's system will
be replaced by the new automated tracking system
once that system is implemented. Link Between Correction of
In the most recent financial statement audit reports, the Inspector General
Material Weaknesses and noted that HUD's ability to address its management
problems will improve
Implementation of HUD's if it completes its implementation of the 2020
Management Reform Plan. Management Reform Plan
HUD announced the management reform plan in June 1997 to, among other
things, address identified management weaknesses, including those involving
internal controls. The reform plan outlined six major reforms, including
reorganizing by function, consolidating similar functions within and across
the agency's main program areas, and developing state- of- theart financial
management systems. In addition to increasing efficiency, the management
reform plan is expected to increase HUD's effectiveness. For example, fewer
public housing authorities and multifamily properties are
expected to become “troubled” if staff can better focus on
monitoring and improving the performance of authorities and properties that
are
potentially troubled. The management reform plan noted that HUD must refocus
its energy and resources on eliminating waste, fraud, and abuse in all of
its programs and recognized that implementing stringent internal controls
was essential to permanently improving HUD's management. Seven of the eight
action plans we reviewed were designed to correct longstanding material
weaknesses and were linked to HUD's 2020 Management Reform Plan, making the
resolution of these material internal control weaknesses dependent on the
implementation of that effort. Five of these
seven plans cited a strategy or plan to implement some aspect of the
management reforms to address the applicable material weakness. The two
remaining corrective action plans included actions that were fundamental to
the overall implementation of HUD's management reform plan. Specifically,
the plan for correcting the financial management systems weakness is
consistent with one of the major reforms under the management reform plan-to
modernize and integrate outdated financial management systems. Similarly,
the plan for correcting the resources material weakness included steps HUD
has undertaken to implement the
management reform's structural changes, such as establishing REAC and
increasingly contracting for functions that HUD does not have the capacity
to handle properly, such as the management and marketing of HUD- owned
properties. The eighth corrective action plan, for the weakness that was
newly identified in the audit report for FHA's fiscal year 1998 financial
statement, relates to FHA's continuing effort to conform its accounting
systems from the private- sector accounting standards that it had
historically followed to federal accounting standards. Although FHA cited
the importance of this issue in supporting HUD's and FHA's systems
integration efforts, it did not specifically include strategies related to
HUD's management reforms.
Relationship of Material HUD has also addressed its material internal
control weaknesses in its Weakness Plans to the
annual performance plans, required under the Results Act. Most recently,
Results Act HUD's fiscal year 2001 annual performance plan included a
separate section on HUD's management challenges that described the
Department's material internal control weaknesses and reported the current
status of efforts to address them. 13 HUD's performance plans also include
13 U. S. Department of Housing and Urban Development: Fiscal Year 2001
Annual Performance Plan (Mar. 1, 2000).
performance measures related to issues associated with the material internal
control weaknesses, although not directly related to addressing the
weaknesses themselves. For example, in its fiscal year 2001 performance
plan, HUD included measures under the strategic goal to “ensure public
trust” that its data systems (1) are rated highly for usefulness, ease
of use, and reliability and (2) will earn data quality certifications based
on
objective criteria. The performance plan also includes other measures
related to physical inspections of multifamily properties and housing
authorities' verification of tenant income.
HUD Has Encountered Although HUD has made progress in implementing its
corrective action
Obstacles in plans, it has encountered various obstacles in trying to
resolve the related
material internal control weaknesses. These include problems in improving
Addressing Its Material the Department's information and financial
management systems, the Internal Control identification of new problems
related to some material weaknesses, and
Weaknesses delays in implementing some components of the action plans. As a
result,
HUD did not make as much progress from March 1999 through May 18, 2000, as
it had planned in resolving some of its material internal control
weaknesses. According to HUD, the complex nature of some of the issues,
particularly the information and financial management systems, and the
aggressive time frames set for some of the actions contributed to these
delays. Information and Financial HUD has experienced a variety of problems
in the course of improving its Management Systems
information and financial management systems. The most significant problem
occurred when it converted its accounting records to a new general ledger
system, a project it has been working on for several years. HUD had
developed a new general ledger for use departmentwide- called the HUD
Central Accounting and Program System, or HUDCAPS- which complies with
Standard General Ledger requirements, and deployed 10 other new financial
management systems. 14 However, when HUD
implemented HUDCAPS as the departmentwide general ledger system, it
encountered serious problems. Numerous transactions were rejected or
incorrectly posted and had to be manually researched and corrected. 14 The
U. S. Government Standard General Ledger establishes a standard chart of
accounts, including account titles, definitions, and uses. The primary
purpose is to standardize federal agencies' accounting to support the
external reports and financial statements required by OMB and Treasury and
to provide comparable information among agencies.
Furthermore, no automated program was available to help reconcile the
general ledger cash accounts to the Department of the Treasury's account
balances. The reconciliation process to identify discrepancies fell behind
schedule, and HUD made numerous adjustments to its general ledger fund
balances to make them agree with Treasury's records. About 240 adjustments
totaling about $59. 6 billion were made to adjust HUD's fiscal
year 1999 activities, but significant unexplained differences remained
between HUD's fund balance and Treasury's records. HUD officials reported to
us that, as of May 18, 2000, the Department was continuing to address data
integration issues. According to the officials, HUDCAPS will be compliant
with federal financial systems requirements by November
2000. 15 On March 1, 2000, the Inspector General issued a disclaimer of
opinion on HUD's consolidated fiscal year 1999 financial statements because
the problems experienced by HUD in preparing auditable financial statements
and reconciling fund balances prevented the Inspector General from
completing the audit by the legislatively mandated reporting deadline. While
the disclaimer on HUD's financial statements is an issue of concern for HUD
management, the more significant issue from an internal control perspective
is the need to correct the systems problems so that HUD can
consistently produce the timely, reliable management and financial
information necessary to manage its programs. HUD officials reported to us
in May 2000 that the Department had completed the fiscal year 1999 fund
balance reconciliation and has other actions under way to address the
problems that resulted in the disclaimer. For example, HUD had initiated
studies to improve its procedures for (1) posting corrective adjustments
during the year and (2) reconciling its fund balances with Treasury's
records. In its July 13, 2000, comments on this report, HUD reported that
the Department had completed the fiscal year 1999 reconciliation of funds
balance with the U. S. Treasury and no material adjustments were identified
that would result in a need to restate the fiscal year 1999 financial
statement balances.
HUD encountered other obstacles in improving its information and financial
management systems. According to HUD CFO officials, the major obstacles to
completing HUD's financial systems integration project are
15 These requirements are detailed in the Financial Management Systems
Requirements series issued by the Joint Financial Management Improvement
Program and in OMB Circular A- 127, Financial Management Systems.
FHA's deficient general ledger and subsidiary systems and HUD's continuing
reliance on legacy systems. They also stated that legacy systems are
becoming more difficult and costly to maintain and consume resources that
are needed for implementing new systems. Moving from these systems to HUD's
general ledger is complex and requires substantial resources, according to
these officials. In May 2000, HUD officials told us that HUD has finished
defining functional requirements for a new FHA subsidiary ledger and
developed a plan for selecting and implementing the new system. Finally, FHA
officials told us that many of the resources they had planned
to allocate to developing and improving their information and financial
management systems were redirected to the Year 2000 computing issue. They
explained that many of FHA's technical staff resources were focused on Year
2000 compliance during this time, limiting the resources available to work
on systems development and integration. In fact, a moratorium was placed on
the implementation of new systems from October 1999 through March 2000 to
reduce the risks during the rollover to the millenium
and the leap year day, February 29, 2000. Because of its efforts, HUD
achieved full Year 2000 compliance and experienced no significant system
failures.
New Issues Identified HUD's progress toward correcting its material
weaknesses was further complicated by the Inspector General's identification
of new problems that needed to be addressed. Specifically, in auditing the
fiscal year 1999 financial statements, the Inspector General identified new
problems and made new recommendations for four of the five remaining
material weaknesses. For example, FHA officials initially told us they
expected that the material weakness related to FHA's control over budgetary
funds would
be downgraded to a reportable condition as a result of improvements FHA made
during fiscal year 1999. However, the weakness was not downgraded because,
although FHA fully implemented some of the fiscal year 1998 recommendations,
the Inspector General found other problems related to
the weakness that resulted in its continued classification as a material
weakness. The fiscal year 1999 audit report stated that FHA must (1) fully
reconcile the accounting and budget systems for loan guarantee
commitments and endorsements to ensure that all credit subsidy estimates are
recorded properly and (2) implement the systems necessary to ensure
compliance with federal accounting standards at the transaction level.
According to HUD, the new problems relate to credit subsidy and federal
basis budget and accounting requirements that are new to FHA's traditional
accounting requirement. HUD officials reported to us that these deficiencies
are being addressed in that the current system is being phased out in fiscal
year 2000 and will be replaced with a system that supports transaction-
level detail in compliance with standard general ledger requirements.
Delays in Implementing HUD experienced some delays in completing planned
corrective actions Some Planned Actions related to its material weaknesses.
For example, a large- scale computer matching effort using income tax data
to verify tenant incomes is currently about 7 months behind schedule. HUD's
corrective action plan called for letters to be sent to tenants notifying
them of possible income
discrepancies in October 1999; however, few such letters had been sent as of
May 18, 2000. 16 Several issues contributed to this delay, including
problems with the contractor that was to mail the letters, concerns by
industry groups about the tone of the letter, and technological problems.
HUD officials reported to us in May 2000 that REAC has modified its schedule
to accommodate changes in the process and that some of the delays have been
beyond its control.
HUD also experienced delays in awarding contracts to administer its Section
8 housing assistance contracts. HUD's multifamily monitoring plan called for
the contracts to be awarded by December 1999, but because of delays in
originally announcing the request for proposals during the summer of 1999
and in reviewing the proposals, the first contracts were not awarded until
February 2000. HUD officials reported to us that as of October 2000, HUD had
awarded 37 of the contracts, implemented a contract administration
monitoring and oversight strategy, and moved the oversight of these subsidy
contracts to a newly created Office of Subsidy
Contract Administration in Housing. HUD officials also reported that HUD had
assigned housing assistance contracts to 12 of the contract administrators.
Additional HUD staff are being hired in headquarters and in the field to
improve and support the administration of the subsidy
contracts. In its comments on this report, HUD attributed the delays in
implementing its large- scale computer matching program and in awarding
contracts for 16 HUD stated that about 900 discrepancy letters had been sent
as of May 18, 2000; by October 2000, the number of letters sent had
increased to 211,000 or substantially all of the tenants it planned to
contact.
administering its Section 8 housing assistance contracts to its having
underestimated the time needed to develop, market, and implement these
initiatives. Among other things, HUD said it had not allowed enough time for
the housing industry and program participants to comment on and buyinto the
initiatives. Agency Comments We provided copies of a draft of this report to
HUD for its review and
comment. HUD commented that the draft report provided a generally current,
accurate, and balanced assessment of its efforts to address eight material
internal control weakness issues during the 14- month period from March 1999
through May 18, 2000. In addition, HUD commented that despite some
acknowledged setbacks and delays, it was pleased with our acknowledgement
that its overall strategy for addressing its material internal control
weaknesses should help it continue to make progress in resolving those that
remain. While acknowledging that it did not make as much progress as it had
planned in resolving some of its material internal control weaknesses, HUD
commented that our conclusion needs to be put in the context of the
longstanding and significant nature of the problems it is trying to correct
and the aggressive initial timetable it established for implementing the
2020 Management Reform Plan and other corrective actions. We modified the
report to more clearly reflect HUD's concerns and the difficulties the
Department confronts in resolving these issues; however, we did not change
our observation that HUD did not make as much progress as it had planned.
HUD also provided detailed comments on our report. The complete text of
HUD's comments and our responses are included in appendix IV.
We are sending copies of this report to the appropriate Senate and House
committees and to the Honorable Jacob Lew, Director, Office Management and
Budget. We will make copies available to others on request. If you or your
staff have any questions about this report, please call me at (202) 5127631.
Key contacts and major contributors to this report are listed in appendix V.
Stanley J. Czerwinsk Associate Director, Housing and
Community Development Issues
Appendi Appendi xes x I
Objectives, Scope, and Methodology Because we have reported that the
resolution of the Department of Housing and Urban Development's (HUD)
material internal control weaknesses is an important aspect of addressing
the Department's longstanding management deficiencies, we reviewed HUD's
efforts to correct these weaknesses so that we could present our views on
whether HUD's
current strategy for addressing such weaknesses helps ensure their
resolution. Our overall objective was to examine HUD's efforts from March
1999 through May 18, 2000, to address the eight material internal control
weaknesses reported by HUD's Inspector General in its fiscal year 1998
financial statements audit, including the results of the fiscal year 1999
financial statement audits. We also updated certain information through
October 2000. To do this, we addressed the following issues:
What has HUD accomplished in resolving its material internal control
weaknesses and what remains to be done? Does HUD have a process for
resolving the material internal control weaknesses and overseeing the
actions taken to address them?
What obstacles has HUD encountered, if any, in addressing its material
internal control weaknesses?
Internal control weaknesses that are not considered material also affect
HUD, as they do many organizations; however, this report focuses primarily
on the internal control deficiencies, identified in reports by HUD's
Inspector General on HUD's financial statements, that meet the definition of
“material weakness” for financial reporting purposes. To
identify what HUD did to resolve its material weaknesses from March 1999
through May 18, 2000, we reviewed the action plans developed by HUD to
resolve the eight material internal control weaknesses reported by the
Inspector General in its audit reports for fiscal year 1998. We obtained
copies of the most current corrective action plans available at the time we
initiated this review in September 1999 for the eight material internal
control weaknesses identified by the Inspector General in its fiscal year
1998 audit report. We also obtained and reviewed the updated plans for these
weaknesses in February 2000 and April/ May 2000. To identify the work that
remained to be done, we limited the scope of our review to the most up- to-
date information- the five material internal control weaknesses remaining at
the end of fiscal year 1999, as identified by the Inspector
General's audit. To identify and describe HUD's accomplishments on the eight
material weaknesses and the work that remained for the five material
weaknesses, we obtained information from HUD's action plans, centralized
systems that track progress in resolving such weaknesses, and fiscal year
1999 Business and Operating Plan Results, as well as other audits by HUD's
Inspector General and relevant GAO products. We interviewed HUD officials
who had been designated as our contacts for each weakness about the content
of the action plans and their oversight responsibilities. We met with the
independent public accountants who performed the fiscal year
1999 Federal Housing Administration (FHA) audit under contract to the
Inspector General to discuss the results of their audit. We also met with
senior HUD management in May 2000 to discuss the results of the fiscal year
1999 audit and HUD's plans to respond to the issues raised. We updated HUD's
accomplishments and work that remained using
information provided by senior HUD officials on May 18, 2000. To identify
HUD's process for resolving its material internal controls weaknesses, we
reviewed HUD guidance and procedures pertaining to audit recommendations and
its management control program. We also interviewed HUD officials of the
Office of the Chief Financial Officer and its Risk Management Division,
Office of the Inspector General, and Office of Housing on their roles and
responsibilities in responding to audit recommendations and monitoring the
corrective actions taken. We also
reviewed HUD's 2020 Management Reform Plan to obtain information on the
impact of the reforms on HUD's internal control environment.
In identifying the problems and obstacles HUD encountered in addressing its
material weaknesses, we limited our review to problems that arose in
addressing the five material internal control weaknesses reported on
March 1, 2000. We reviewed the Inspector General's financial statement
reports for fiscal years 1998 and 1999 and interviewed HUD officials who
were responsible for the corrective actions. We also interviewed officials
from the Office of the Chief Financial Officer to obtain their insights on
delays and obstacles experienced in implementing the planned corrective
actions and the causes of the disclaimer of opinion resulting from the
fiscal year 1999 audit. We also obtained information on other work performed
by
HUD's Inspector General and GAO on issues related to the material internal
control weaknesses.
HUD and FHA Must Continue to Address
Appendi x II
Resource Management Weaknesses Since 1992, HUD's Inspector General has
identified HUD's and FHA's management of staffing and administrative
resources as a material weakness. 1 Specifically, in its 1999 audit reports
on the agencies' fiscal year 1998 financial statements, the Inspector
General reported that (1) the effective management of HUD's resources
depends on the successful completion of organizational changes and (2) FHA
needs to address staffing and administrative resources. Both reports,
however, noted that HUD has recognized the need to address its resource
shortcomings. The audit report on HUD's consolidated financial statements
noted that HUD has put extensive effort into restructuring its operations.
Similarly, the audit report on FHA's statements noted that FHA had completed
several critical milestones addressing staffing and administrative resource
issues.
As a result, in the reports on HUD's and FHA's fiscal year 1999 financial
statements, the Inspector General reassessed the resource management
material weaknesses, recategorizing them as contributing causes to other
weaknesses or reportable conditions. The reports recognized that HUD and
FHA have made some progress in addressing resource issues; however, the
Inspector General noted that it is critical that HUD continue with the
implementation of ongoing plans.
HUD and FHA took steps during fiscal years 1999 and 2000 to address the
Inspector General's concerns related to both weaknesses reported as material
in the fiscal year 1998 financial statements reports. Our review
identified a number of corrective actions HUD has completed or is
implementing. These actions, aimed at addressing the recommendations
contained in the 1999 audit reports on HUD's and FHA's fiscal year 1998
financial statements, include the following:
HUD is awarding contracts for third- party contractors to administer its
project- based Section 8 housing assistance payments contracts. By
contracting for this work, HUD plans to free its staff for other functions,
such as monitoring the portfolio. As of May 2000, HUD had awarded 24
contracts and expected to award other contracts by the end of fiscal year
2000. 2
1 The HUD resource issue was first reported as a material weakness in the
fiscal year 1992 financial statements audit report, was not separately
reported as such in fiscal years 1993 and 1994, and has been reported as a
material weakness since fiscal year 1995. The FHA resource weakness has been
reported as a material weakness since fiscal year 1992. 2 As of October
2000, HUD had increased the number of contracts awarded to 37.
As of May 2000, the Real Estate Assessment Center (REAC) had completed 98
percent of the physical inspections of the multifamily properties in its
portfolio. REAC had also received about 84 percent of the first- year annual
financial statement submissions from these
properties, processed financial assessments for almost all of them, and sent
follow- up letters to those whose financial statement submissions were
overdue.
In response to widespread problems with the maintenance of singlefamily
properties, HUD began contracting for the management and marketing of its
single- family property inventory in March 1999. Despite some problems, the
number of sales of single- family properties increased, and the net recovery
from those sales rose from 79. 7 percent to 80.2 percent.
HUD transferred its income verification program from the Office of Public
and Indian Housing (PIH) to REAC in March 1999. Staff from REAC, along with
former PIH staff in Seattle and Chicago, are now responsible for this
program's functions. According to the Inspector General, prior efforts to
carry out income verification activities have
been fragmented, with different headquarters organizations carrying out
various activities and HUD staff in two field offices providing the majority
of the staff support. Of the 72 staff required for the computer matching
income verification program in all three locations, 48 were on board as of
April 23, 2000, and, according to REAC, this staffing is sufficient for the
program's initial implementation. The majority of these 48 staff members
were previously assigned to PIH and had experience
with the computer matching income verification program. In addition, they
have all received some training. According to HUD, Chicago and Seattle staff
have received a combined total of about 5 weeks of classroom and on- the-
job training in the functions that support the
large- scale income verification project. Two monitoring initiatives that
HUD officials consider important are the
Compliance and Monitoring Initiative and the Quality Management Review
Initiative. The Compliance and Monitoring Initiative is designed to provide
extensive training to about 2,000 Public Trust Officers in the field on the
new Departmental Monitoring Desk Guide. As of May 2000, training was
conducted for 1,200 Public Trust Officer staff in 34 field offices covering
issues such as risk assessment and monitoring activities. In January 2000,
HUD launched the Quality Management Review Initiative aimed at reviewing and
supporting proficiency levels
for performance in field office operating functions, especially monitoring
activities. HUD conducted 5 reviews covering 11 field offices in fiscal year
2000 and plans additional reviews for fiscal year 2001.
In addition, HUD contracted with the National Academy of Public
Administration (NAPA) to develop a departmentwide resource management model
(Resource Estimation and Allocation Process), which, according to a HUD
official, was accepted by the Deputy Secretary in March 2000 and will take
about 18 months to implement departmentwide. This model is designed to
assess staffing needs under HUD's current organization. HUD reported that
the model will be implemented in three phases. Phase 1 will cover PIH,
Administration, Housing, and Community Planning and Development from August
2000 to November 2000. Phases 2 and 3 will cover the remainder of the
Department and will last until November 2001.
According to a HUD official, the most significant accomplishment aimed at
eliminating the material weakness related to the Department's resource
management is the implementation of HUD's 2020 Management Reform Plan, which
consolidated similar operations in centralized locations. This official told
us that all major organizations within the Department have been restructured
and realigned in conformity with the plan and are
carrying out HUD's mission. HUD considers the management reform plan to be
fully implemented because the organization's mission, functions, staffing,
control systems, and oversight systems are in place.
An FHA official told us that the most significant accomplishment aimed at
eliminating the material weakness related to FHA's staffing and resources
issues is the full implementation of REAC, as well as of the Departmental
Enforcement Center and the management and marketing contracts. She said that
FHA's goal was to realign its resources to free staff for other functions.
According to a recent report by FHA on its management reforms, FHA continued
to address this material weakness through five steps related to implementing
HUD's 2020 Management Reform Plan 3 . The five steps include reorganizing
and consolidating functions by establishing specialized
processing centers; reengineering and streamlining processes; increasing
staff capacity by providing comprehensive training to both
experienced and newly hired staff; 3 Building the Public Trust: A Report to
Congress on FHA Management Reform (Feb. 2000).
increasing the use of technology by expanding the use of certain
applications and developing new systems, re- engineering existing systems,
and cleaning up data; and increasing the use of contracting to complement a
smaller, highly skilled, efficient workforce. Even though their resource
management weaknesses are no longer reported as material, HUD and FHA need
to complete a number of actions to resolve problems related to these
weaknesses. The Inspector General noted, in its March 2000 report on HUD's
fiscal year 1999 financial statements, that it is still critical for HUD to
address its resource issues through the successful completion of ongoing
plans. Moreover, according
to the Inspector General, many of HUD's weaknesses, especially those
involving the monitoring of program recipients, are exacerbated by HUD's
resource management shortcomings. While HUD continues to implement
significant organizational changes to overhaul and improve its operations
under the 2020 Management Reform Plan, HUD's critical structural changes
need to be fully implemented before the new organization can effectively
address these weaknesses, according to the Inspector General. The Inspector
General also identified key HUD initiatives that were delayed, and continued
to report on three recommendations from a prior report 4 that were reopened
because corrective actions had not been fully implemented. The key
initiatives that the Inspector General reported as
delayed at that time were (1) transferring the workload associated with
housing assistance contracts to contract administrators; (2) using REAC's
physical and financial assessments to ensure the adequacy of HUD's housing
portfolio; (3) demonstrating successful efforts to streamline and outsource
activities related to the management and disposition of HUDowned single
family properties and notes; and (4) staffing the newly organized income
verification program and demonstrating its effectiveness in reducing
overpaid assistance.
The three reopened recommendations pertain to (1) establishing a more
systematic approach for determining staffing requirements; (2) holding field
offices and headquarters accountable for work accomplishments in
line with available resources and established standards; and (3) ensuring
that once greater efficiencies are implemented, staffing standards are
realigned to be consistent with the revised workload.
4 The Office of Inspector General's Fiscal Year 1991 Financial Statements
(92- TS- 179- 0011).
Similarly, the fiscal year 1999 audit report for FHA noted that although FHA
is now more focused on monitoring initiatives, its staffing and
administrative resource issues are not yet fully resolved, primarily because
of the continued outsourcing of labor- intensive functions.
Recommendations in the audit report included the need for FHA to continue to
(1) train multifamily property mangers in REAC's financial assessments and
release financial statement data on all multifamily properties for use in
the field, (2) expand the use of loss mitigation through training and
outreach programs with single- family approved lenders, and (3) develop
comprehensive oversight tools and management reports to facilitate effective
monitoring of the management and marketing contractors while providing
practical and useful feedback to the contractors. In our review of HUD's s
new single- family management and marketing contractors, we reported that
since the program started in April 1999, HUD has experienced problems,
including the termination of its largest contractor. 5 Although HUD selected
replacement contractors from among
the remaining firms, it then had performance problems with some of them. We
found, among other things, that property maintenance and security remain
significant problems. While monitoring improvements have strengthened HUD's
ability to detect such problems, HUD has limited tools
available to enforce contractors' compliance and improve performance.
According to a HUD official, the Department is working toward resolving its
staffing and administrative resource issues throughout the organization. For
example, HUD addressed the Inspector General's three reopened
recommendations, stating that it (1) successfully pilot- tested the Resource
Estimation and Allocation Process, in conjunction with NAPA, and expects
full implementation by November 2001; (2) instituted the Business and
Operating Plan in fiscal year 1999, which it will further support by
implementing the new Performance Accountability and Communications System
and Quality Management Review Program in fiscal year 2000; and (3) will use
the Resource Estimation and Allocation Process to realign staffing so that
it is consistent with the revised workload, with a target date of November
2001 for the realignment.
5 Single- Family Housing: Stronger Measures Needed to Encourage Better
Performance by Management and Marketing Contractors (GAO/ RCED- 00- 117, May
12, 2000).
Status of HUD's Material Internal Control
Appendi x I II
Weaknesses as of May 18, 2000 This appendix summarizes the background for
and our observations and analysis of the five material internal control
weaknesses remaining at HUD as a result of the Inspector General's audit of
HUD's fiscal year 1999 consolidated financial statements. The appendix also
includes updated
information HUD reported to us on its accomplishments in resolving these
five weaknesses from the issuance of the Inspector General's report on March
1, 2000, through May 18, 2000, with further updates provided
through October 2000, where applicable. Material Weakness: HUD's Financial
Systems Are Not Fully Compliant With Federal Financial Standards
The Problem In its audit report on the fiscal year 1999 financial
statements, HUD's Inspector General stated that the Department's core
financial system did not fully comply with federal financial systems
requirements because the departmental general ledger was not updated with
data from FHA each month and the data entry process was not timely or
efficient. In addition, the departmentwide implementation of the general
ledger in fiscal year 1999 adversely affected HUD's ability to prepare
auditable financial statements and related disclosures in a timely manner.
These implementation problems delayed financial reconciliation processes and
resulted in numerous adjustments to make HUD's general ledger balances agree
with the U. S. Treasury's records. 1 According to the Inspector General's
report, HUD has not yet corrected significant financial management systems
deficiencies identified in previous years. Specifically, the report notes,
HUD's financial systems 1 According to HUD's Inspector General-- see U. S.
Department of Housing and Urban Development Attempt to Audit the Fiscal Year
1999 Financial Statements (00- FO- 177- 003, Mar. 1, 2000)-- there were 42
adjustments totaling about $17. 6 billion to adjust fiscal year 1998 ending
balances and 242 adjustments totaling about $59. 6 billion to adjust fiscal
year 1999 activity balances.
integration (FSI) project (1) has not addressed 13 FHA/ Office of Housing
financial systems (out of a total of 18 HUD systems) that do not conform
with the Federal Managers' Financial Integrity Act's requirements and (2)
still suffers from frequent changes in scope, strategy, and management.
Other uncorrected deficiencies include insufficient information on
individual multifamily loans (including information needed to financially
monitor the insured portfolio), deficient FHA general ledger and subsidiary
systems, inadequate assurance about the propriety of Section 8 rental
assistance payments, lack of integration between program and accounting
systems necessitating duplicate data entry, inability to support adequate
funds control for FHA, and inability to fully support the timely
identification of unneeded excess funds remaining on expired projectbased
Section 8 contracts. Status of Corrective Actions
Modernizing and integrating HUD's financial management systems with an and
What Remains to Be
efficient, state- of- the- art system is one of the six principal management
Done reforms set forth in HUD's 2020 Management Reform Plan. The Chief
Financial Officer's (CFO) most recent corrective action plan describes
financial management systems deficiencies, corrective actions taken and
planned, and estimated completion dates for some actions. This plan, issued
in February 2000, shows that HUD's program offices continue to work on
improving and replacing deficient systems, as well as integrating their
program systems with HUD's core accounting (general ledger) system to
eliminate duplicate data entry and provide program and financial information
to management. Table 2 describes the major components of the CFO's February
2000 corrective action plan; HUD's accomplishments through May 18, 2000; and
the work remaining, as of the same date, to complete the planned corrective
actions. The Office of the CFO provided the updated information
through May 18, 2000.
Table 2: Status of Corrective Actions for the 1998 Material Weakness: HUD's
Financial Management Systems Major components of the February What remains
to be done to complete the 2000 plan Accomplishments as of May 18, 2000
corrective actions as of May 18, 2000
HUD's FSI project has not addressed In coordination with HUD's CFO, FHA has
defined FHA, in coordination with HUD's CFO, will 13 FHA/ Office of Housing
financial a corrective action plan with milestones for
have to execute its corrective action plan to systems (out of a total of 18
HUD implementing a new subsidiary ledger system conform its systems with the
Federal systems) that do not conform with the that complies with the Joint
Financial Managers' Financial Integrity Act's Federal Managers' Financial
Integrity
Management Improvement Program's (JFMIP) requirements.
Act's requirements. requirements. FHA has also developed functional
requirements for the subsidiary ledger and This weakness was again reported
in initiated a market survey of available system the Inspector General's
March 1, solutions. 2000, report on HUD's fiscal year 1999 financial
statements.
Develop and document an updated On March 1, 2000, Arthur Anderson, LLP,
Fully implement corrective action plans to project strategy and an completed
a benefit- cost analysis for the revised bring the HUDCAPS general ledger
into implementation plan for completing 1997 FSI strategy and identified
options for
compliance with JFMIP's requirements and the FSI project. completing the FSI
project. HUD's acting CFO ensure that posting models are accurate and
redefined the objective and scope of the FSI
interfaces from systems providing subsidiary This weakness was again
reported in project to provide a JFMIP- compliant core ledger summaries
function properly. the Inspector General's March 1, general ledger system by
November 2000. 2000, report on HUD's fiscal year 1999 financial statements.
Other components of the project, previously included as part of the FSI
project, such as the Departmental Grants Management System and Enterprise
Data Warehouse, have been removed from the project and transferred to the
Chief
Information Officer for completion. The CFO will continue participation to
ensure compliance with requirements and integration with HUD's Central
Accounting and Program System (HUDCAPS) general ledger. Develop and document
a plan to HUD continues to address the integration of Implement improvements
to the interface and address how the core financial
HUDCAPS and the Program Accounting System bring HUDCAPS into full compliance
with system, program accounting systems, (PAS) and is currently improving
the PAS- toHUDCAPS JFMIP's core financial management system and consolidated
database will be interface to enhance core financial requirements, beginning
with those implemented and integrated.
system integration as required by JFMIP and the requirements that have
causal relationships Office of Management and Budget's (OMB)
with the material weaknesses. This weakness was again reported in Circular
A- 127. Other systems, such as FHA's the Inspector General's March 1,
general ledger, will also be integrated with the 2000, report on HUD's
fiscal year HUDCAPS general ledger to facilitate closings 1999 financial
statements.
and reconciliations. The data warehouse will be used to produce financial
management reports once the general ledger in HUDCAPS is stabilized.
(Continued From Previous Page)
Major components of the February What remains to be done to complete the
2000 plan Accomplishments as of May 18, 2000 corrective actions as of May
18, 2000
Control changes to the FSI project's As noted above, Arthur Anderson, LLP,
identified As noted, HUD will have to fully implement
scope, strategy, and management. options for completing the FSI project.
HUD's corrective action plans to bring the
acting CFO substantially reduced the scope and HUDCAPS general ledger into
compliance This weakness was again reported in revised the strategy and
management of the FSI with JFMIP's requirements and ensure that the
Inspector General's March 1, project. The project is expected to be
completed posting models are accurate and interfaces 2000, report on HUD's
fiscal year by November 2000.
with subsidiary ledger systems function 1999 financial statements. The
report properly. noted that the frequent changes have made it difficult for
the department to measure performance and progress, and control costs.
Develop performance management HUD developed a comprehensive project plan No
further action required. reports for individual tasks to better
that included schedules, procedures, and costtracking monitor and control
the FSI project.
tools to assess the progress of the project. In fiscal year 1999, analyses
were This weakness was no longer
performed for each project task, and earned value discussed in the Inspector
General's reports have been prepared since the first quarter March 1, 2000,
report on HUD's fiscal of that year. year 1999 financial statements.
Develop information systems HUD implemented software releases for the Real
Implement the corrective action plan to capability to provide sufficient
Estate Management System, Financial
develop an accurate database for evaluating information on individual
multifamily Assessment Subsystem, and Multifamily Section 8 project- based
obligations. loans. The lack of information makes Development Application
Processing System, assessing and quantifying credit risk and implemented the
Housing Enterprise Real difficult and adversely affects efficient, Estate
Management System database and the ongoing reporting of credit risk to
Multifamily Delinquency and Default System.
senior management and effective monitoring of multifamily properties.
Systems have been implemented to address all the deficiencies cited with the
exception of the
This weakness was again reported in need to develop an accurate database for
the Inspector General's March 1, evaluating Section 8 project- based
obligations. 2000, report on HUD's fiscal year This was classified as a
reportable condition in 1999 financial statements.
the Inspector General's March 1, 2000, audit report. A corrective action
plan has been developed to address this remaining deficiency.
(Continued From Previous Page)
Major components of the February What remains to be done to complete the
2000 plan Accomplishments as of May 18, 2000 corrective actions as of May
18, 2000
Develop information systems FHA addressed the fiscal year 1997 financial No
further action required. capability to correct deficient FHA
statement audit qualification on the need to general ledger and subsidiary
comply with Statement of Federal Financial systems that impede better case-
level
Accounting Standards (SFFAS) No. 2, Accounting reporting, budgetary
accounting, and
for Direct Loans and Loan Guarantees. compliance with credit reform
legislation.
In fiscal year 1999, HUD implemented the Single Family Premium Collection
Subsystem- Periodic This weakness was no longer
to address noncompliance with credit reform discussed in the Inspector
General's legislation. HUD also implemented a consolidated March 1, 2000,
report on HUD's fiscal departmentwide general ledger. year 1999 financial
statements.
FHA has developed functional requirements for the subsidiary ledger, which,
according to HUD's CFO, address case- level reporting, single general ledger
requirements, and compliance with credit
reform legislation. Develop information systems Release 1 of the Tenant
Assessment Subsystem
Release 2 of the Tenant Assessment capability to provide adequate
was implemented in November 1999 and Subsystem is expected to be implemented
in assurance about the propriety of provides the ability to conduct large-
scale July 2000 to provide additional functionality. a Section 8 rental
assistance payments.
computer matching of income and federal tax data, follow- up, resolution of
identified This weakness was again reported in discrepancies, and recovery
of funds.
the Inspector General's March 1, 2000, report on HUD's fiscal year 1999
financial statements. The report stated that HUD's control structure does
not provide reasonable assurance that subsidies paid under these programs
are valid and correctly calculated considering tenant income and contract
rents.
(Continued From Previous Page)
Major components of the February What remains to be done to complete the
2000 plan Accomplishments as of May 18, 2000 corrective actions as of May
18, 2000
Develop information systems The Real Estate Management System was No further
action required. capability to provide complete enhanced to provide
capability for integrating data information on FHA's operations by from a
variety of systems and provide complete program, geographical area, or other
information to project managers for effective relevant components.
monitoring and risk management of their portfolios. This weakness was no
longer
discussed in the Inspector General's Twenty- nine standard reports were
implemented March 1, 2000, report on HUD's fiscal nationwide for property-
and portfolio- level year 1999 financial statements.
reporting. Multiple data elements can be used as selection criteria for each
report. Selection criteria include program categories (e. g., section of
act, client group), geographic location (e. g., field office, city, state,
zip code, census tract), and other significant data (e. g., property status,
Section 8 contract number, FHA number, financing type, owner/ management
agent). Since the implementation of the Single- Family Data Warehouse in
fiscal years 1996- 97, FHA
has had an integrated single- family database. This warehouse is a
repository/ history of all single- family records and contains various
geographic indicators, as well as program and subprogram identifiers.
Data extracts of both single- family and multifamily records containing
program, geographic, and many other data elements now make a key
contribution to HUD's systems integration by feeding to the departmental
Empowerment Information System, one of HUD's 2020 management initiatives.
Develop information systems HUD continues to improve the scope and quality
No further actions were listed in the February capability to blend financial
and
of the performance measures it develops under 2000 corrective action plan,
and HUD program data to develop meaningful the Government Performance and
Results Act of
provided no updates. performance measures.
1993. This weakness was no longer discussed in the Inspector General's March
1, 2000, report on HUD's fiscal year 1999 financial statements.
(Continued From Previous Page)
Major components of the February What remains to be done to complete the
2000 plan Accomplishments as of May 18, 2000 corrective actions as of May
18, 2000
Develop information systems HUD implemented the prototype of the Enterprise
No further actions were listed in the February capability to provide
integration Information System and data warehouse using
2000 corrective action plan, and HUD between program and accounting selected
Community 2020 and financial data. A
provided no updates. systems to avoid duplicate data entry.
data interface was established with the HUD Geographic Information System to
use the This weakness was again reported in consolidated data. the Inspector
General's March 1, 2000, report on HUD's fiscal year 1999 financial
statements.
Correct security weaknesses in HUD continued action to strengthen computer
Implement actions to address the Inspector general and specific application
security controls to address the Inspector General's remaining audit
recommendations b
controls. General's remaining audit recommendations.
This weakness was again reported in the Inspector General's March 1, 2000,
report on HUD's fiscal year 1999 financial statements. The report
acknowledged some improvements but stated that progress in improving
computer security controls has been slow.
a In its July 13, 2000, comments on this report, HUD stated that release 2
of the Tenant Assessment Subsystem was implemented in June 2000 to provide
additional functionality. b In its July 13, 2000, comments on this report,
HUD stated that its corrective actions include
establishing configuration management for all critical systems by December
31, 2000, and for all systems by September 30, 2001; implementing a network
monitoring tool by August 31, 2000; completing business resumption plans for
all field locations by August 31, 2000; and strengthening personnel security
policies and practices. Source: GAO's presentation of information provided
by HUD. HUD completed a number of corrective actions from March 1999 through
May 2000 to address the material weaknesses. According to CFO officials, the
most significant financial management systems accomplishments since the
issuance of the Inspector General's audit report on HUD's fiscal year 1998
financial statements are the following:
HUD completed the implementation of HUDCAPS as the departmentwide general
ledger and budget execution system. HUD completed initial releases of some
key systems related to
multifamily loans. This action includes implementing software releases for
the Real Estate Management System (REMS) and the Multifamily Development
Application Processing System and implementing the Housing Enterprise Real
Estate Management System (HEREMS) database and the Financial Assessment
Subsystem. According to CFO
officials, these actions start to address the insufficiency of information
for quantifying credit risk and establish a basis for the effective
monitoring of multifamily projects. HUD implemented computer- matching
enhancements that enable it to
(1) conduct large- scale federal tax data computer matching and (2)
identify, track, and follow up on discrepancies when investigating tenant
eligibility. This capability will strengthen assurances that Section 8 and
public housing tenants receive appropriate levels of rental assistance,
according to CFO officials. HUD updated the benefit- cost analysis for the
FSI effort and narrowed
the scope of the effort to provide a JFMIP- compliant core general ledger
system by November 2000. HUD standardized financial management system data
elements and has efforts under way to clean up financial data.
HUD implemented the prototype of the Empowerment Information System and data
warehouse using selected Community 2020 and financial data.
In addition to these accomplishments, CFO officials stated that HUD has
begun to address the problem of incomplete information for identifying FHA's
operations by program and geographical area, has established a
structure to address the lack of integration between program and accounting
systems that necessitates duplicate data entry, and has developed procedures
to request changes to HUDCAPS software. The officials also said HUD is
meeting concerns about its inability to blend financial and program data to
develop meaningful performance measures by continuing to improve the scope
and quality of its compliance with the Government Performance and Results
Act, addressing security weaknesses in general and specific application
controls, and improving the management of the FSI project.
HUD's Office of Inspector General recognized the Department's efforts to
improve financial management systems in its audit report on the fiscal year
1999 financial statements. However, the material weakness remains
because HUD's core financial system does not fully comply with federal
financial systems requirements and HUD has not yet corrected significant
financial management systems deficiencies that were identified in previous
years.
Plans to Address The Office of Inspector General's March 1, 2000, audit
report on HUD's
Weaknesses Identified in the fiscal year 1999 financial statements
identified new and restated existing
Fiscal Year 1999 Report deficiencies. These issues were not addressed in
HUD's latest corrective
action plan because the Inspector General's report was issued after the
February 2000 corrective action plan. However, the CFO provided information
on HUD's efforts to address these issues.
Table 3 describes the new or restated financial management system
deficiencies, corrective actions taken and planned by the CFO, and work
remaining to complete the planned actions.
Table 3: Plans to Address Fiscal Year 1999 Material Weakness: HUD's
Financial Management Systems Actions taken or planned as of May 18,
What remains to be done to complete the Fiscal year 1999 issues 2000
corrective actions as of May 18, 2000
HUD's core financial system does not fully The CFO reported taking the
following Complete the fund balance reconciliation for the comply with
federal financial systems actions. HUD first two quarters of fiscal year
2000 by June 30, requirements.
2000, reconcile the third quarter by the end of -reduced the number of
rejected July 2000, and perform timely monthly This is not an entirely new
issue. Even Program Accounting System documents
reconciliations of the fund balance with the though an unqualified opinion
was from 11, 777 in January 2000 to 124 in
Treasury, thereafter b . Consider recommendations rendered on HUD's fiscal
year 1998
March 2000. from the comprehensive study of posting and
financial statements, it was noted that adjustments processes, which is to
be completed FHA's general ledger was not fully
-initiated a study to improve procedures in June 2000, and implement
recommendations, compliant with federal standard general for posting
corrective adjustments during as appropriate. a ledger (SGL) requirements.
the year and making and documenting adjustments during financial statement
This material weakness addresses preparation. The study was expected to
several issues, including numerous be completed by the end of June 2000. a
rejections or incorrect transaction postings, adjustments bypassing the
-completed the fiscal year 1999 fund normal general ledger posting process,
balance reconciliation and expected to and delays in reconciling fund
balances complete the reconciliation of all the fund with the U. S.
Treasury's accounts.
balances through the first two quarters of fiscal year 2000 by the end of
June 2000. b
-initiated a study to improve the procedures for reconciling the fund
balance with U. S. Treasury. The study was expected to be completed by
midJune
2000. a
(Continued From Previous Page)
Actions taken or planned as of May 18, What remains to be done to complete
the Fiscal year 1999 issues 2000 corrective actions as of May 18, 2000
Inability to support adequate funds FHA is developing an automated funds In
the long term, FHA plans to implement a new control for FHA. control
process, including detailed subsidiary ledger that will provide for
proprietary
instructions and process maps, to prevent and budgetary accounting, thereby
fully meeting an overexpenditure or overobligation of an funds control
requirements for FHA.
apportionment. As an immediate measure, FHA is working with HUD staff to
incorporate summary- level obligation and disbursement data into HUDCAPS on
a daily basis. Inability to fully support the timely Housing is planning to
implement an Execute the plan to implement an automated identification of
unneeded excess funds
improved automated recapture process. It recapture process.
remaining on expired project- based is expected to be implemented by Section
8 contracts.
January 2001. a HUD officials reported to us that as of October 2000 these
studies had been completed and corrective action initiated.
b HUD officials reported to us that the first three quarters of fiscal year
2000 reconciliations had been completed as of October 2000. Source: GAO's
presentation of information provided by HUD. Material Weakness: HUD Needs to
Do More
to Ensure That Rental Subsidies Are Based on Correct Tenant Income
The Problem In the audit report on HUD's fiscal year 1999 financial
statements, HUD's Inspector General reported that HUD's internal control
structure did not provide reasonable assurance that subsidies paid under its
major rental assistance programs were valid and correctly calculated
considering tenant
incomes and contract rents. As a result, HUD could not ensure that federally
subsidized housing units were occupied by eligible families and that those
families were paying the correct rents.
In fiscal year 1999, HUD estimated, on the basis of a statistical sample,
that tenants failed to report more than $3.5 billion of income and that, as
a result HUD paid approximately $935 million in excess rental subsidies. 2
Although HUD requires housing authorities and property owners/ program
administrators (PA) to verify reported sources of applicant and tenant
income with third parties, these controls do not adequately prevent or
detect cases of unreported income. This condition has been reported since
fiscal year 1991, when the first financial statement audits were performed
under the Chief Financial Officer's Act of 1990. 3 In fiscal year 1999, HUD
spent about $18. 6 billion on rent and operating subsidies that benefited
over 4 million lower- income households through a variety of programs. HUD's
principal rental assistance programs are its Section 8 and public housing
programs. These programs help eligible lowincome
families obtain decent, safe, and sanitary housing by paying a portion of
the rent. Tenants' self- reported income is a major factor affecting
eligibility for housing assistance; the amount of assistance a household
receives; and, indirectly, the amount of subsidy HUD pays. Generally, HUD
pays the difference between 30 percent of a household's adjusted income and
the housing unit's actual rent. When tenants do not report or
underreport income and this reporting problem is not detected, HUD can make
excessive subsidy payments.
HUD began estimating for financial reporting purposes the extent of its
excess subsidy payments in fiscal year 1996. Annually, HUD selects a
statistical sample of tenants and matches income data obtained from the
Internal Revenue Service (IRS) and the Social Security Administration (SSA)
to tenant- certified information captured in its tenant databases. HUD staff
investigate each income discrepancy that exceeds an established threshold to
determine the reasons for differences in the amounts and
whether such differences contributed to the payment of excess subsidies.
Table 4 shows the amount of estimated overpayments that have occurred by
year in relation to program expenditures since HUD began estimating the
extent of its excess subsidy payments.
2 For the financial statement audits, HUD calculates the excess subsidy
amount on the basis of an analysis of the incomes of assisted households
that received rental assistance during the prior calendar year, which is the
most recent year for which data are available for computer matching
purposes. 3 HUD has reported this issue as a material weakness in its annual
Federal Managers' Financial Integrity Act report since fiscal year 1996.
Table 4: Estimated Excess Subsidy Payments, Fiscal Years 1996- 99
Dollars in millions
Fiscal year Estimated excess Program
Percentage of reported a subsidy payments expenditures excess subsidies
1996 $538 b $19, 257 2.8% 1997 $804 $18, 069 4.4% 1998 $857 $18, 600 4.6%
1999 $935 c $18, 606 5.0% a The estimated excess subsidy payments are
reported in footnotes to HUD's annual financial statements for HUD fiscal
years ending September 30 of each year; however, the estimates are
computed from data for the preceding calendar year. b HUD's Inspector
General concluded, in the audit of HUD's fiscal year 1996 financial
statements (97-
FO- 177- 0003), that HUD's $538 million estimate of excess subsidies was
understated because HUD did not include Supplemental Security Income in the
computer matching. In addition, the Inspector General expressed concerns
about the completeness of HUD's tenant databases. HUD reported to us that
subsequent analysis shows that underreported SSI income has a nominal effect
on the estimate of excess subsidies.
c Although HUD's Inspector General disclaimed an opinion on HUD's fiscal
year 1999 financial statements (00- FO- 177- 0003), the reasons for the
disclaimer did not relate to HUD's estimate of its excess subsidy payments.
Status of Corrective Actions HUD is currently engaged using calendar year
1998 data in a large- scale
and What Remains to Be computer matching and income verification program
aimed at detecting
Done and deterring future abuses of its rental assistance programs by
tenants
who do not fully report their income. HUD is also determining whether some
tenants may have overpaid rents. However, at this time, we believe it is too
soon to tell whether HUD's program will fully resolve this material weakness
or whether HUD will need to pursue additional measures to
eliminate this weakness. HUD began laying the groundwork for its current
large- scale computer matching and income verification program in May 1998
when its CFO unveiled a multifaceted corrective action plan. The plan
included steps to (1) continue and expand HUD's income- matching programs,
(2) strengthen recertification policies and procedures, (3) expand computer
matching
with SSA, (4) ensure that HUD's information systems contain complete and
accurate tenant data, (5) institute penalties for overpayments of rental
assistance, and (6) perform monitoring and oversight functions.
The plan broke these broad objectives down into detailed tasks with
associated milestone dates and identified the organizational units
responsible for the various tasks. Some of the tasks in the plan were aimed
at addressing specific recommendations by the Inspector General relating to
this issue, whereas other tasks focused more on long- term refinements to
the income verification process.
To implement this plan, HUD formed the Income Verification Task Force and
placed it under the direction of the CFO. The task force included staff from
PIH, Housing, the offices of the CFO and General Counsel, and REAC. PIH and
Housing carried out various income- matching projects to test a variety of
income- matching methodologies while setting housing policy, including
initial eligibility criteria, recertification policies, and enforcement
measures. PIH, Housing, and REAC focused on improving HUD's
monitoring of PAs. PIH and Housing were also responsible for ensuring that
their respective tenant databases contained complete and accurate
information so as to facilitate HUD's computer matching projects. In January
1999, senior HUD managers from Housing, PIH, REAC, and the
CFO's office met and discussed the task force's progress and additional
actions needed to remedy this material weakness. Building on the efforts and
improvements made by the task force, the group decided that it was both
feasible and necessary for HUD to immediately embark on a largescale
computer matching and income verification program.
In February 1999, HUD's CFO recommended to Secretary Andrew Cuomo that he
approve plans to implement the large- scale matching program and that the
responsibility for this program be transferred from the CFO's office to
REAC. In March 1999, these recommendations were approved, and
REAC assumed the lead responsibility for addressing this material weakness.
PIH and Housing retained their responsibilities for establishing and
enforcing housing policy, and, along with representatives of the CFO's
office, were to coordinate with REAC.
When REAC assumed the lead for this weakness, the CFO's office stopped
tracking the status of the uncompleted segments of its action plan because
it no longer had responsibility for the plan. However, according to HUD
program officials, work continues to this day on certain components of that
plan. Since March 1999, REAC has devoted many of its resources toward
implementing the large- scale matching effort. REAC has developed a detailed
plan and time line for completing the effort but to date has not kept pace
with its original schedule. HUD's Inspector General reported
that, as of March 1, 2000, REAC was already more than 4 months behind
schedule with this project. Further delays have since occurred, primarily
because of concerns raised by tenant and industry groups about the tone of
HUD's income discrepancy letters. HUD redrafted these letters but as of May
31, 2000, had not mailed most of them. 4 HUD initially planned to mail the
letters in October 1999. Additionally, to address other tenant and industry
concerns, REAC has expanded the scope of its large- scale matching effort to
examine instances of tenants' overreporting their income and, as a result,
paying more rent than would be required. REAC
officials told us that they expect the entire income- matching and
verification program, including the expansions, to be implemented in
calendar year 2000. Table 5 summarizes the key actions completed through May
2000 under both the action plan developed by the CFO before the verification
program was transferred to REAC and the current action plan being
implemented by REAC. The table also lists key actions that remain to be
completed and that, according to HUD, the Department still intends to
pursue. Bolded sections of the table represent actions responding to
recommendations made by HUD's Inspector General since fiscal year 1996.
4 According to HUD, 211,000 letters had been mailed to tenants as of October
2000, or substantially all of the tenants HUD plans to contact.
Table 5: Status of Corrective Actions for the 1998 Material Weakness: Tenant
Income Verification Planned actions that have not been Major corrective
actions a Completed actions completed Income verification actions HUD
completed or substantially completed
Issue final reports on prior years' incomematching work on several smaller-
scale income- matching projects. projects aimed at testing various
incomematching methodologies.
Complete the mailing of the income discrepancy letters to tenants and PAs. b
REAC implemented computer matching to compare Social Security (SS) and
Supplemental Security Complete the analysis and report on the Income (SSI)
records with HUD's tenant income results of the large- scale matching
effort. records for Housing's rental assistance programs. By September 1999,
HUD had established a secure Continue to pursue legislation to permit the
Internet facility that provides direct delivery of the redisclosure of
income- matching results to
SS and SSI data to the end user. program administrators.
HUD continued SS and SSI matching for PIH rental Implement a process to
match SS and SSI assistance programs. Currently over 3, 000 housing benefits
for newly approved tenants within 48 authorities receive SS and SSI data via
the Internet, hours of certification.
and others obtain the data through the mail before annual tenant
recertifications.
REAC has been established as the entity responsible for HUD's income-
matching program.
HUD finished staffing the income verification function at headquarters and
in the field.
HUD developed the Tenant Assessment Subsystem to enhance the Department's
federal tax data computer matching capabilities.
REAC matched data for tenants nationwide, identifying approximately 280, 000
potential cases of unreported income exceeding established thresholds. c
(Continued From Previous Page)
Planned actions that have not been Major corrective actions a Completed
actions completed
Supporting actions PIH and Housing agreed on a standard policy for Study the
long- term redesign of incomereporting
when tenants must report increases in their requirements. incomes. However,
the passage of the Quality Housing and Work Responsibility Act (QHWRA) d
Continue to monitor reporting rates in for
has precluded the implementation of this policy. MTCS and TRACS and enforce
administrative sanctions as needed.
HUD significantly increased the rates of reporting to its Multifamily Tenant
Finalize and publish a rule on penalties in the Characteristic System (MTCS)
by (1) correcting Federal Register.
software problems that hampered timely reporting by housing authorities and
(2) Complete hiring and training of REAC increasing its monitoring of
housing auditors who will visit and assess PAs' authorities' reporting.
income verification efforts. HUD established administrative sanctions for
Improve monitoring of current contract
those who fail to report tenant data through
administrators.
MTCS and the Tenant Rental Assistance Certification System (TRACS).
Complete the transfer of monitoring responsibilities for Section 8
properties to HUD drafted a rule outlining penalties and contract
administrators. enforcement measures but never issued a final rule because
of inconsistencies with the newly enacted
Complete PIH- sponsored training planned for QHWRA. the 4th quarter of
fiscal year 2000 of public housing authorities (PHA), resident leaders, HUD
obtained legislation that requires tenants to and HUD field staff on the
implementation of disclose to PAs any income discrepancy letter QHWRA,
including modules devoted to received from HUD.
income verification, tenant and PHA income verification responsibilities,
and best practices REAC established a Quality Assurance Team to review the
adequacy of the independent public accountant's audits required by the
Single Audit Act. e
REAC completed guidance for auditors to use during field reviews of income
discrepancyresolution activities. a These actions include significant
efforts from both the CFO's action plan and HUD's current action plan being
implemented by REAC. b HUD officials reported to us that as of October 2000
tenant mailings had been completed.
c According to HUD, REAC subsequently reduced to 215,000 the number of
tenants to be sent letters, primarily by eliminating the tenants who no
longer receive rental assistance. d QHWRA policies generally took effect on
October 1, 1999, and, among other things, provided housing authorities with
significant flexibility in setting housing policy. However, according to
HUD, some QHWRA provisions, such as minimum rent, were in effect on the date
QHWRA was signed- October 21, 1998. e Single audits are performed annually
for entities meeting certain criteria. These audits examine, among other
things, the entities' compliance with programs' established eligibility
policies and
procedures. Source: GAO's presentation of information provided by HUD.
HUD's large- scale computer matching and income verification program is much
broader in scope than any prior income- matching project. According to REAC
officials, approximately 2.4 million households, or about 60 percent of all
HUD's assisted households, are included in this program. 5 Prior income-
matching efforts have either been conducted on a sample basis or been
limited to specific housing authorities or properties. HUD
officials said they believe the broad scope of this program, coupled with
penalties for failing to fully report incomes, will ultimately have a
significant deterrent effect on tenants who may be inclined to underreport
their incomes. REAC has completed its large- scale computer matching of
calendar year 1998 tenant income data with federal tax information
maintained by IRS and SSA. Through this effort, it initially identified
about 280, 000 cases in which income discrepancies exceeded established
thresholds.
Subsequently, the number of tenants to be sent discrepancy letters was
reduced to 215,000, primarily by eliminating tenants who no longer receive
rental assistance. According to HUD, it had sent letters to about 72,500
tenants as of June 30, 2000, and had temporarily suspended further mailings
until it could resolve further concerns raised by tenant groups and
industry. 6 Upon receiving these notices, tenants are required by law to
contact their PAs to resolve the identified discrepancies or face the
possibility of losing their housing assistance. As discrepancies are
resolved, REAC requires the PAs to report to HUD via the Internet how each
case was resolved, including whether it was determined that HUD had paid
excess subsidies and what actions were being taken to collect these
overpayments. As an additional quality control measure, REAC plans to
recruit auditors who will visit various PAs to ensure that they have
complied with HUD's guidelines for resolving income discrepancies. While we
support HUD's large- scale matching program, it is too soon to tell if this
process will ultimately resolve this material weakness. Currently, a
significant amount of work remains to be done. One of the most critical
steps is to analyze PQA discrepancy resolution past reports. It remains to
be seen whether the deterrent effect HUD anticipates will materialize and 5
REAC purposely excluded certain households from the large- scale match in
order to minimize the number of false positive computer matching results--
i. e., indicators of unreported income that, when analyzed, do not identify
actual abuses.
6 HUD reported to us that as of October 2000 it had send letters to 211,000
tenants or substantially all of the tenants it plans to contact.
whether the PAs will cooperate with HUD or have the resources to pursue and
resolve the income discrepancies.
Another concern we have is that additional measures may ultimately be needed
to resolve this weakness. Many of HUD's efforts so far, including the large-
scale computer matching, have been geared toward detecting
abuses after HUD has provided benefits rather than preventing applicants or
tenants from receiving initial or continued assistance. As prior HUD income-
matching studies have shown, once benefits have been paid, there is little
chance of ever fully recovering these amounts. However, efforts to improve
controls at the front end face significant legal and practical limitations,
such as privacy constraints, complex program requirements,
and the large number (more than 20,000) of local rental assistance program
administrators.
HUD recognizes that to prevent tenants from not reporting or underreporting
income, the ideal solution would be an on- line automated process that would
verify a tenant's income before the tenant is admitted to a rental
assistance program or is recertified 7 to receive further assistance.
However, as a practical matter, HUD officials believe such a system is not
likely to be implemented anytime soon, given current legislative protections
of the personal privacy of housing assistance recipients. 8 For example,
current legislation prohibits HUD from disclosing IRS income data directly
to the PAs responsible for performing income verifications. Similarly,
current law denies HUD access to the National Directory of New Hires
database, a central federal repository of quarterly state wage,
unemployment, and new hires data that could be used to help HUD avoid making
improper payments. In its July 13, 2000, comments on this report, HUD stated
that it has sent letters to all governors encouraging the exchange of state
wage data between state agencies and public housing authorities to improve
up- front verification. HUD also stated that it is planning to develop a
best practices guide on the most effective and viable state income
verification programs.
7 Recertification is the process tenants go through to report changes that
would affect their continued eligibility for a housing program as well as to
adjust the amount of rent they pay. Typically, recertifications are
performed annually except that QHWRA now allows housing
authorities to recertify the incomes of households selecting flat rents
every 3 years. Interim recertifications may also be required under certain
conditions. 8 We are currently performing a separate study on data sharing
across the federal government that focuses on, among other programs, HUD's
public housing and tenant- based Section 8 programs.
HUD has implemented, within current legislative constraints, an up- front
income verification process to be used during tenant recertifications. Each
month, HUD matches a list of tenants scheduled to be recertified within the
next 3 to 4 months to SS and SSI income data maintained by SSA. HUD then
makes this information available to the PAs via a secure Internet facility
or through the U. S. mail. PAs can compare the data with the SS and SSI
benefits that the tenants report at their upcoming recertification.
While this process is a good first step toward improving controls at the
front end, HUD recognizes that SS and SSI benefits are not the major source
of total household income. HUD's analysis of the estimated $538 million in
excess subsidy payments reported in fiscal year 1996 indicated
that just 6 percent of the estimated overpayments were attributable to
unreported SS and SSI benefits. REAC officials acknowledge that earned
income (i. e., wages and salaries from employment) constitutes the majority
of the total tenant income and is therefore the key source of under- or
unreported income. In its July 13, 2000, comments on this report, HUD stated
that REAC would examine other alternative sources for wage data as they
become legally available and practical to use. Material Weakness:
Improvements Needed
in Multifamily Project Monitoring The Problem Since 1991, HUD's Inspector
General has reported that HUD's monitoring of multifamily properties was a
material internal control weakness. In its March 2000 report on HUD's fiscal
year 1999 financial statements, the
Inspector General concluded that because of this weakness, the Department
cannot be sure that the funds it expends to support multifamily grant and
subsidy programs are consistent with the laws and regulations authorizing
them and are provided only to eligible tenants for allowed activities.
Specifically, the Inspector General found that (1) REAC had problems
implementing electronic submissions of annual financial statements from
owners of multifamily properties; (2) the documentation of criteria for
goals and requirements for monitoring the multifamily portfolio was often
outdated, incomplete, inconsistent, or absent; (3) HUD field offices
performed far fewer management and occupancy reviews of troubled and
potentially troubled properties than HUD policy requires; and (4) the field
offices visited during the audit did not review Section 8 contract
administrators (contractors that administer Section 8 housing assistance
payments contracts for HUD) in their jurisdictions. HUD provides rental
assistance to about 21, 000 multifamily property owners who, in turn,
provide housing assistance to benefit primarily lowincome households. This
assistance includes FHA mortgage insurance and funds under several subsidy
programs to benefit low- income households and the elderly and disabled. 9
Status of Corrective Actions To effectively monitor the multifamily
portfolio, Housing's corrective
and What Remains to Be action plan encompasses management strategies and
corrective actions Done
linked to HUD's 2020 Management Reform Plan and to the Inspector General
audit recommendations. As of May 2000, HUD had completed a number of the
planned multifamily tasks, some were in progress, and some were in the
development phase. Estimated time frames to complete individual corrective
actions under the plan range from fiscal year 1998
through late fiscal year 2001, with several actions continuing during and
beyond fiscal year 2001. According to a Housing official, the multifamily
monitoring action plan is aimed at improving internal controls because it
addresses and increases accountability by making certain individuals and
entities responsible for monitoring the multifamily portfolio. In its July
13, 2000, comments on this report, HUD stated that it does not agree with
the Inspector General that the multifamily project monitoring issue should
remain a material internal control weakness. Table 6 describes the major
components of HUD's most recent (Feb. 2000) corrective action plan, HUD's
accomplishments as of May 2000, and the planned actions remaining to be
completed. Some of the accomplishments and remaining actions stem from
updated information HUD provided in
May 2000. 9 In its audit of HUD's fiscal year 1998 financial statements, the
Inspector General reported that for the fiscal year ending September 30,
1998, HUD provided approximately $9. 1 billion in subsidies and grants for
these programs.
Table 6: Status of Corrective Actions for the 1998 Material Weakness:
Multifamily Project Monitoring Major components of the February
Accomplishments as of What remains to be done to complete the 2000 plan May
2000 corrective actions Implement specialized centers- REAC Both centers
were completed in fiscal year
Continue to follow up on the remaining 16 to enhance capacity to improve
1999. REAC has completed 98 percent of the percent of properties that did
not submit financial
property monitoring and the physical inspections of properties. REAC has
statements, determine if they are overdue or if Departmental Enforcement
Center to received 84 percent of the financial
the Real Estate Management System (REMS) centralize and improve enforcement
statements from properties that are required database is not reflecting a
legitimate waiver, and activities on the most troubled to submit them and
has reviewed and
take appropriate action. properties. released nearly all of them. Follow- up
letters have been sent for late submissions. The Departmental Enforcement
Center is reviewing troubled properties for enforcement action.
Establish senior project manager A total of 106 senior project managers have
Completed. positions. been selected, received training, and are
located in field offices. Award third- party contracts for Section
HUD issued a request for proposal for third Award the remaining Section 8
third- party
8 administrators and hire a contractor party Section 8 contract
administrators and contracts and have the contractors on board and to devise
a plan for HUD staff to awarded 24 contracts; completed and
fully functional. oversee them.
implemented the monitoring and oversight strategy; created a new Office of
Subsidy Contract Administration for Multifamily Housing; and is currently
hiring more staff in headquarters and the field to support this effort. a
Increase efforts to conduct Although HUD does not agree that increased This
process will be ongoing.
management and occupancy reviews efforts are needed to conduct management
of troubled and potentially troubled and occupancy reviews a , several steps
have properties, including those with health been taken, including
completing
and safety issues identified by REAC, assessments of most of the financial
occupancy responsibilities, and other
statements that have been submitted; address concerns, such as poor
recording performance /compliance actions financial histories or a lack of
in REMS; putting community builders in place information on the physical
condition of to provide insight on the issue; and awarding properties whose
inspections were Section 8 third- party contracts.
delayed pending the establishment of REAC. Develop a comprehensive strategic
REAC's physical inspection and financial
This process will be ongoing. plan and monitoring goal for fiscal year
assessment data are nearly complete and 2000 that includes using REAC's data
are being delivered. Property managers have to target properties for
monitoring and been trained and are being monitored to corrective action and
completing data ensure that corrective actions occur. REMS verification in
REMS. is being updated on an ongoing basis to verify data accuracy.
(Continued From Previous Page)
Major components of the February Accomplishments as of What remains to be
done to complete the 2000 plan May 2000 corrective actions For fiscal year
1999, develop controls Field offices are taking corrective actions on This
process will be ongoing.
to follow up on critical findings in the deficiencies identified during
REAC's fiscal year 1998 audit when monitoring inspections and are monitoring
contract is conducted by contract
administrators via the development and administrators; establish the
capability
implementation of the Section 8 oversight for field offices to monitor
contract and monitoring strategy and the creation of administrators; and
determine what
the Office of Subsidy Contract Administration controls and tasks should be
included
for Multifamily Housing. Controls and tasks in the contract for oversight of
contract included in the Section 8 request for proposal administrators.
were discussed beforehand with OMB and the Inspector General and were
included in the request for proposal.
Establish the capacity to issue and Responsibility was delegated to HUD's
Office HUD estimates it will develop a plan by March maintain program and
procedural of Business Products. Discussions with 2000 and procure a
contractor to provide
guidance for all criteria, including industry groups and HUD staff are
ongoing. technical assistance and complete all guidance handbooks,
directives, guidance, and HUD plans to award a contract for technical by
September 2001. b
policy statements. services to support this effort.
Set goals in the Management Plan to Training in compliance and monitoring is
Setting goals for monitoring contract monitor contract administrators and
being provided to 100 percent of the administrators is expected to be an
objective of perform timely analyses of annual multifamily staff in field
offices. the fiscal year 2001 Business and Operating financial statements.
Plan goals process. The estimated completion date for finalizing these goals
is November 2000. a In its July 13, 2000, comments on this report, HUD
stated that it had conducted about 2,000 management and occupancy reviews
from the beginning of fiscal year 2000 through June 2000, a 10- fold
increase in the number of such reviews conducted in fiscal year 1999. HUD
reported to us that as of October 2000 it had awarded 37 contracts to
administer Section 8 contracts.
b HUD officials reported to us in October 2000 that this plan has been
altered. However, a contracted resource is still planned to be procured to
supplement Housing's in- house capacity. Source: GAO's presentation of
information provided by HUD. The two major multifamily property monitoring
tools contained in the action plan are (1) establishing REAC and the
associated Departmental Enforcement Center and (2) obtaining third- party
Section 8 contract administrators. HUD established REAC and the Enforcement
Center to
consolidate functions previously performed by individual field offices and
to support the effective monitoring of its multifamily portfolio. For each
multifamily property, REAC provides the appropriate field staff with
physical inspection and financial assessment data derived from a centralized
location using a standardized format. The Enforcement Center focuses on
enforcement activities related to the most troubled properties identified by
the physical inspections and financial assessments. Obtaining third- party
Section 8 contract administrators to administer housing assistance payments
contracts for HUD is aimed at freeing HUD field office
staff so they can perform other functions related to overseeing and
monitoring the contract administrators' performance.
As of May 2000, HUD had completed a number of the multifamily planned tasks
relating primarily to monitoring activities by REAC, awarding some contracts
for Section 8 contract administrators, and procuring a contractor to help
develop a plan for the monitoring and evaluation of these contract
administrators. According to a Housing official, the most significant
accomplishments to date, aimed at addressing this material weakness, are
implementing in fiscal year 1999 the specialized centers to ensure that
housing quality standards are being met and to improve asset management
activities to minimize risks and losses in HUD's multifamily portfolio,
implementing REMS, an integrated system that comprises all of the business
activity related to multifamily asset management on an ongoing basis to
assist field staff in managing the portfolio, and
announcing in fiscal year 1999 a request for proposal for contract
administrators to perform processing and oversight of Section 8 contracts.
Other monitoring improvements that HUD officials consider notable include
the implementation and enhancement of two electronic data systems. The
Multifamily Delinquency and Default Reporting System was implemented in
fiscal year 1999 to shorten the time it takes for HUD staff to identify
mortgage payment problems and take immediate remedial actions, if possible.
In addition, HUD is enhancing the Active Program Participant System, which
is expected to allow multifamily staff to review and approve requests for
participation in multifamily housing programs.
As of February 2000, HUD had begun but not completed several tasks in its
corrective action plan for monitoring multifamily properties. These tasks
relate to (1) correcting the deficiencies identified at individual
multifamily properties through REAC's physical inspections and review of
annual financial statements, (2) continuing to verify the accuracy of REMS
data; (3) monitoring multifamily property mangers to ensure they are
correcting the deficiencies identified by REAC, (4) establishing working
relationships among HUD's multifamily housing program unit and other HUD
program
units to achieve a continuous flow of information and guidance to field
staff and program participants, (5) discussing new procedures and guidance
with industry groups and HUD field staff, and (6) awarding the remaining
contracts for Section 8 contract administrators.
Still under development is the establishment of a team to update and revise
all criteria, such as handbooks, directives, guidance, and policy
statements. This task is not scheduled for completion until 2001. Another
outstanding task, which does not yet have an estimated completion date, is
to develop a strategy to assess the performance of state housing finance
agencies.
In May 2000, HUD provided us with updated information on its accomplishments
and plans to continue addressing this material weakness: While acknowledging
the need to update its formal handbooks and guidance and recognizing that
this task is a high priority for Housing, HUD reported that it has
continually provided pertinent, timely guidance for property- monitoring
activities since 1998. Examples include incremental guidance and instruction
materials, such as a management review policy, REAC's physical inspections
and financial assessments, REMS, and the
Business and Operating Plan goals. Although Housing recognized the
importance of reviewing properties and resolving problems, it disagreed with
the Inspector General's recent recommendation that it increase efforts to
conduct management and occupancy reviews of multifamily properties. HUD's
policy changed in 1998 when REAC and REMS were created under HUD's 2020
Management Reform Plan. HUD's current policy is to undertake management and
occupancy reviews only when they would generate information that cannot be
obtained from other sources, such as REAC's physical inspections and
financial assessments, the Departmental Enforcement Center, other HUD
program offices, local governments and local housing industry
representatives, and reviews and reports by HUD's Inspector General and GAO.
According to Housing, it has instituted enough field and headquarters
follow- up procedures to ensure the resolution of troubled property
indicators.
Plans to Address The Inspector General's March 2000 report on HUD's fiscal
year 1999
Weaknesses Identified in the financial statements made new recommendations
addressing several
Fiscal Year 1999 Report aspects of HUD's oversight and monitoring of its
multifamily portfolio.
Specifically it recommended that HUD, among other things, finalize plans to
improve the administration of the Section 8 housing assistance payments
contracts that remain HUD's responsibility after the transfer to contract
administrators is completed; design an oversight strategy and establish
organizational responsibilities; and address, among other things,
management and occupancy reviews, rental adjustments, health and safety
issues identified by physical inspections, and deficient annual financial
statements and inspection results.
Housing began to update its multifamily property monitoring action plan in
May 2000. The action plan contains several tasks and milestones to be
completed during calendar year 2000 to address the recommendations from the
Inspector General's March 2000 audit report.
Material Weakness: FHA's Budgetary and Financial Accounting Controls Must Be
Improved The Problem Weaknesses in budgetary and financial accounting
controls were first
reported in the audit of FHA's fiscal year 1998 financial statements and
generally persisted throughout fiscal year 1999. By implementing some of the
1998 audit recommendations, FHA made credible progress during fiscal year
1999 in addressing these weaknesses. However, problems remained
with budgetary funds control and certain aspects of financial reporting.
These problems were primarily caused because FHA's accounting and budgeting
systems are not integrated and the process for reconciling the two is
inadequate. Federal agencies are required to maintain adequate
systems and internal controls to provide reasonable assurance that the
agencies are generating reliable financial and budgetary data. Until the
problems in these areas are corrected, FHA will continue to be at risk of
obligating funds in excess of budgeted amounts, and it will lack accurate,
timely, and properly presented financial information essential for
effectively managing its programs.
As a result of the audit of the fiscal year 1998 financial statements, the
Inspector General reported a material weakness related to FHA's financial
and budgetary accounting. Specifically, FHA's obligations needed to be
reviewed and reconciled to deobligate amounts
related to expired contracts and purchase orders;
general ledger was not compliant with the standard general ledger (SGL) 10
at the transaction level and Report on Budget Execution (SF133) 11 was not
well documented; method for allocating costs in accordance with the
Statement of Federal Financial Standard No. 4 (SFFAS No. 4), Managerial Cost
Accounting,
was not documented and implemented throughout the year; and method for
calculating the liability for loans guaranteed needed to be refined.
As discussed in the following section on the status of corrective actions,
during fiscal year 1999, FHA fully implemented some of the fiscal year 1998
audit recommendations. Specifically, the agency improved its method for
estimating the liability for loans guaranteed and documented and
implemented a method of allocating costs in accordance with the requirements
of SFFAS No. 4. As a result, these problems were no longer considered part
of the material weakness. However, the 1999 audit report continued to
include deficiencies related to (1) reconciling the accounting and budget
systems for loan guarantee commitments and endorsements
and (2) accounting systems that did not comply with the SGL. In addition,
upon completion of the fiscal year 1999 audit, the independent public
accountant reported that FHA lacked adequate funds controls to provide
reasonable assurance that it did not obligate more money than was budgeted.
As determined by the independent public accountant, FHA had no functioning
manual or automated system in place to prevent an overexpenditure or
overobligation of an apportionment. FHA relied solely on manual detective
controls to identify and correct any overexpenditure.
Among the underlying reasons for both the 1998 and 1999 weaknesses was the
lack of integration between FHA's accounting and budgetary systems. Before
1998, FHA followed private- sector accounting standards. As a result, FHA's
financial systems and processes were configured to support
10 The SGL provides a standard chart of accounts and standardized
transactions that agencies must use in all their financial systems. 11 The
Standard Form 133 (SF- 133) Report on Budget Execution is a quarterly report
that agencies are required to file with OMB to report (1) the amount of
budgetary resources available to finance future obligations; (2) the status
of budgetary resources, including the amounts obligated, amounts that
continue to be available for obligation, and amounts not available for
obligation; and (3) the amount of obligations in relation to outlays. The
SF- 133 provides historical data that can be used to help prepare the
President's Budget, as well as program operating plans and estimates of the
rate at which agencies spend their budgetary resources.
this accounting basis. However, in 1998, FHA converted its financial
information to comply with federal accounting standards-sometimes called the
federal basis of accounting-so that FHA's financial data could be more
readily included in HUD's consolidated financial statements. Reconciliation
of Obligations To comply with federal budget guidance and internal control
standards and
and Funds Control generate reliable financial data on an ongoing basis,
agencies with nonintegrated budget and accounting systems should perform
periodic
reconciliations between amounts recorded in the two systems and resolve any
differences. However, a contributing cause of both the 1998 and 1999
weaknesses was that FHA's reconciliation process was inadequate to ensure
that all transactions were properly recorded in both systems. While the
agency staff reconciled current- year activity between the two systems, they
had not reconciled the ending balance of commitments and
obligations resulting from loans guaranteed during years prior to the audit.
At the independent public accountant's request, for fiscal year 1999, FHA
staff reconciled the ending balance and identified several errors, including
(1) recording duplicate obligations for contracts totaling $21 million, (2)
not recording $168 million in obligations, and (3) not recording
expenditures totaling about $16 million and about $19 million in accounts
payable in the financial statements. OMB Circular A- 34, Instructions on
Budget Execution, states that a federal agency shall establish and maintain
a system of accounting and internal controls that provides (1) reliable
accounting for the activities of the
agency, (2) the basis for preparing and supporting the budget requests of
the agency, (3) the financial information required to formulate the
President's budget, and (4) the basis for executing the budget. Furthermore,
Circular A- 34 states that the agency shall maintain records in a manner
that facilitates audits and reconciliations. In addition, the Standards for
Internal Control in the Federal Government states that an agency should
periodically compare its budget resources and recorded transactions to
reduce the risk of errors. Circular A- 34 also establishes requirements for
an agency's system of funds controls to provide reasonable assurance that
the agency does not obligate or expend more money than available, and it
states that the agency's fund control system
must be fully supported by the accounting systems. SGL Noncompliance In its
fiscal year 1999 audit report, as in its fiscal year 1998 report, the
Inspector General stated that FHA's general ledger did not comply with SGL
requirements in that it lacked the transaction- level detail required by OMB
Circular A- 127, Financial Management Systems. Specifically, FHA's
subsidiary accounting systems did not contain transaction details and did
not provide the necessary reports to allow reconciliation with amounts
reported in the general ledger. In addition, FHA did not maintain detailed
reports supporting aggregate amounts recorded in the general ledger and the
Report on Budget Execution.
Status of Corrective Actions As of March 31, 2000, FHA had completed many of
the actions it had
and What Remains to Be planned to address the fiscal year 1998 financial and
budgetary accounting
Done material internal control weakness and had other actions in progress.
Estimated completion dates for the remaining individual corrective actions
ranged from fiscal year 1999 to fiscal year 2001. According to HUD's Deputy
CFO, FHA has closed the action plan to address the fiscal year 1998 material
weakness and has prepared a separate corrective action plan, dated April
2000, to address the revised material weaknesses as described in the fiscal
year 1999 audit report.
The action plan to address the fiscal year 1998 material weakness contained
specific actions to address the recommendations made by the independent
public accountant following the fiscal year financial statement audit,
estimated completion dates, and the status of accomplishments. FHA's
corrective action plan included short- term actions as well as longrange
system improvement initiatives and interim measures that extended beyond the
Inspector General's recommendations. According to FHA, these actions were
aimed at (1) providing the ability to perform real- time funds control and
queries of financial data, (2) eliminating many manual processes that have
been necessary, (3) having improved cost information, and (4) establishing
an SGL- compliant budgetary trial balance for use in generating the SF- 133.
Table 7 describes the February 2000 corrective action plan, which addresses
the status of actions planned to resolve the fiscal year 1998 financial and
budgetary accounting material weakness. This table summarizes the (1) major
components of the action plan, which mirror the fiscal year 1998 audit
recommendations; (2) accomplishments as of March 31, 2000, that FHA
considers to be significant to resolving the material weakness; and (3)
actions that remain to fully address the independent public accountant's
fiscal year 1998 recommendations.
Table 7: Status of Corrective Actions for the 1998 Material Weakness: FHA's
Budgetary and Financial Accounting Major components of the What remains to
be done to complete the February 2000 plan Key accomplishments as of March
31, 2000 corrective action
Implement routine procedures to Developed procedures for a monthly review
and
Completed. analyze unliquidated obligations for
orderly termination of contracts and purchase contracts and purchase orders
and orders. Updated FHA's contracts database and deobligate expired
contracts on a removed the terminated contracts from the list of timely
basis. active contracts during fiscal year 1999.
Reconcile the accounting and Reminded field offices of the requirement to
Enhance the multifamily insurance underwriting budget systems for loan
guarantee request fund reservations from Budget.
system to ensure the proper recording of credit commitments and endorsements
to Performed monthly reconciliations of accounting
subsidy commitments and endorsements and ensure that all credit subsidy and
budget data, researching and resolving
automate the process for recording credit amounts are recorded properly.
discrepancies. subsidy obligations. Estimated completion is
during fiscal year 2000. c Prepare formal documentation of Documented the
federal basis financial
Modify financial systems to include budgetary the process to prepare federal
statement and SF- 133 preparation processes, accounting at the transaction
level by SGL basis a financial statements and the
with all required sources of budgetary system account and continue training
staff in financial SF- 133, including crosswalks of
information and crosswalks identified. Trained statement preparation.
Estimated completion private- sector accounts to the staff in preparing the
financial statement and SF133. date is December 2000.
federal basis accounts and identify all required sources of budgetary system
information. Prepare formal documentation of Documented the cost allocation
time survey Completed. the cost allocation time survey process. Trained
staff in the cost allocation time process b and conduct the survey survey.
Conducted the survey semiannually periodically during the year.
during fiscal year 1999 to comply with SFFAS No. 4.
Implement existing plans to address Revised cash flow models to incorporate
Completed.
identified financial management additional improvements that reduce the risk
of issues related to the liability for loan error. Documented the budget
cash flow models, guarantees.
including detailed operating instructions. Developed formal policies and
procedures that include a formal supervisory review process.
a As previously indicated, the independent public accountant refers to
financial information that complies with federal accounting standards as the
federal basis of accounting. b Because FHA uses HUD employees to run its
programs and does not have its own employees, the cost allocation time
survey is used to allocate the salary and related payroll expenses of HUD
employees to FHA for the work they perform on FHA's programs and functions.
c HUD officials reported to us that as of October 2000 estimated completion
is scheduled for fiscal year 2001.
Source: GAO's presentation of information provided by HUD. As of March 31,
2000, as noted in table 7, FHA had completed most of the planned tasks
relating primarily to (1) analyzing unliquidated obligations, (2)
documenting the methodology for allocating costs in accordance with
SFFAS No. 4, and (3) refining the methodology for calculating the liability
for loan guarantees. Plans to Address
During the fiscal year 1999 audit, the Inspector General reevaluated the
Weaknesses Identified in the
internal controls related to FHA's financial and budgetary accounting.
Fiscal Year 1999 Report
Because of the progress that had been made during fiscal year 1999
addressing the methodologies for allocating costs in accordance with SFFAS
No. 4 and calculating the liability for loan guarantees, the Inspector
General no longer considered these issues part of the material weakness.
However, the Inspector General determined that further improvements in
financial systems and processes are needed to resolve this material
weakness. As a result, the recommendations in the Inspector General's
fiscal year 1999 audit report were revised to provide more detail on the
remaining issues. Specifically, the Inspector General recommended that FHA
reconcile the accounting and budget systems for loan guarantee
commitments and endorsements to ensure that all credit subsidy amounts are
recorded properly and implement the processes or systems necessary to
provide reasonable
assurance of FHA's compliance with the SGL at the transaction level.
Furthermore, the Inspector General issued three new recommendations in the
fiscal year 1999 audit report related to the revised budgetary funds control
material weakness. Specifically, the Inspector General
recommended that FHA implement a reconciliation and review process for the
ending balance of all obligations to related systems, to ensure that
budgetary status and
accounting information is complete, accurate, and timely to prepare both the
SF- 133 and financial statements; complete the plan to implement funds
control in all FHA systems and
processes, submit it to OMB, and implement it; and revise the current
process for preparing the SF- 133 so that the FHA
Comptroller's Office may be part of the preparation and review. Table 8
describes the April 2000 corrective action plan, which addresses the status
of actions planned to resolve the fiscal year 1999 financial and budgetary
accounting material weakness. This table summarizes the (1) major components
of the action plan, which mirror the fiscal year 1999 audit recommendations;
(2) accomplishments as of May 18, 2000, that FHA
considers to be significant to resolving the material weakness; and (3)
actions that remain to fully address the Inspector General's fiscal year
1999 recommendations.
Table 8: Status of Corrective Actions for the 1999 Material Weakness: FHA's
Budgetary and Financial Accounting What remains to be done to complete the
Major components of the plan Key accomplishments as of May 18, 2000
corrective action
Implement a reconciliation and review Reconciliation of monthly activity has
been Adjust prior year- end balances for
process for the ending balance of completed. A review of reconciling items
is commitments and obligations resulting from obligations to ensure that
budgetary status under way.
loans guaranteed during prior years. and accounting information is complete
and Estimated completion date is August 30, accurate.
2000. b Complete the development of a plan to FHA is developing an automated
funds Complete efforts to develop and implement implement funds control in
all FHA systems
control process, including detailed an automated funds control process, and
processes. instructions and process maps. FHA is including implementing a
new subsidiary working with HUD staff to incorporate ledger that will
adequately provide funds summary- level obligation and disbursement control.
Submit plans to OMB. Estimated data into HUDCAPS a on a daily basis.
completion date is December 2005. Revise the SF- 133 preparation process to
Developed a database to import general Completed. include preparation and
review by the
ledger balances monthly and convert Comptroller's Office.
applicable proprietary balances into the SGL budgetary trial balance. The
December 1999 and March 2000 SF- 133s were prepared using this database.
Reconcile the accounting and budget Examine all outstanding unliquidated
systems for loan guarantees to ensure that
obligations and deobligate/ recapture all credit subsidy amounts are
recorded obligations that are no longer valid. Review properly. disbursement
records to determine if undisbursed obligated balances should be deobligated
and expired. Check remaining obligations against obligated balances on the
SF- 133. Estimated completion date is September 30, 2000. b Implement the
processes or systems Identified and documented detailed Identify the system
that best meets FHA's
necessary to ensure compliance with the functional requirements. Budgetary
subsidiary ledger needs. Complete the SGL at the transaction level.
accounts have been established in FHA's conversion of 19 feeder systems.
Define subsidiary system. The antiquated new FHA accounting classification
structure subsidiary system that was primarily values. Define and execute a
detailed responsible for noncompliance at the
implementation plan for the new subsidiary transaction level has been phased
out. ledger. Implement operational feeder systems interfaces. Estimated
completion is December 2005.
a HUDCAPS is HUD's central general ledger, funds control, and program
system. Currently, this system also receives summary- level data from FHA. b
HUD officials reported to us that as of October 2000 these activities had
been completed. Source: GAO's presentation of information provided by HUD.
Material Weakness: FHA's Information Systems Must Be Enhanced to More
Effectively Support FHA's Business Processes
The Problem The Inspector General's audit report on FHA's fiscal year 1999
financial statements stated that FHA's information technology systems must
be enhanced to better support the agency's business processes. The Inspector
General noted that weaknesses have been reported in FHA's financial
management systems environment for a number of years and that FHA's and
HUD's inability to acquire or implement modern information technology has
continued to deter FHA's efforts to be a more efficient and effective
housing credit provider. FHA has made some improvements to its systems
environment, but it still relies on legacy systems to conduct day- today
business, forcing it to collect data and report information in less
efficient ways.
The lack of a modern information technology environment also adversely
affected the internal controls related to accounting and reporting financial
activities. The Inspector General reported that some manual procedures must
be used to process financial transactions through FHA's nonintegrated
systems. The manual procedures could adversely affect internal controls. In
addition, key FHA systems do not provide the functionality required to
adequately manage and account for financial transactions in accordance with
federal regulations on financial systems. Furthermore, the Inspector General
reported that improvements to FHA's financial systems are required to help
ensure that management receives accurate and timely information for funds
control and decision- making
purposes, as well as to address a material weakness that “controls
over budgetary funds must be improved.” FHA recognized the need for
improving its systems in a December 1999 document entitled FHA Vision of
Financial Management. This document provides an overview of the current
state of FHA's financial management
and identifies planned improvements, such as automated interfaces between
FHA's financial systems and general ledger. However, the Inspector General
report notes that detailed plans and completion dates
are needed to achieve the vision. HUD is also currently developing an
enterprise architecture, which is to be the agency's information technology
investment planning methodology. It is important that this effort include an
assessment of where new systems or system enhancements can be implemented to
better support FHA's business and financial operations, according to the
Inspector General's report. Status of Corrective Actions
FHA prepared a corrective action plan to address the material weakness and
What Remains to Be and to help address the goal, set forth in HUD's 2020
Management Reform
Done Plan, of modernizing and integrating HUD's financial management systems
with an efficient, state- of- the- art system. The plan contains management
strategies and summarizes progress to date. The planned corrective actions
are intended to improve financial reporting and information systems
support for multifamily and single- family housing programs. Table 9
describes the major components of FHA's February 2000 corrective action
plan, as well as the accomplishments as of May 18, 2000, and the work
remaining to complete the planned corrective actions.
Table 9: Status of Corrective Actions for the 1998 Material Weakness: FHA
Information and Financial Management Systems Major components of the
February 2000
What remains to be done to complete the plan Accomplishments as of May 18,
2000 corrective actions
Implement a subsidiary ledger for FHA has defined major steps and milestone
Plan, select, and implement a new JFMIPcompliant converting FHA's financial
management
dates for implementing a new JFMIPcompliant subsidiary ledger system. FHA
reporting from a commercial to a federal subsidiary ledger system. FHA
estimates that it will select a system by accounting basis.
has also completed the development of October 31, 2000 a , and develop a
detailed detailed functional requirements for the
implementation plan by November 30, 2000. subsidiary ledger system and
initiated a
It estimates that it will implement the new market survey of available
system solutions. system interfaced with at least one of the operational
feeder systems by March 2002
and interfaced with all 19 operational feeder systems by December 2005.
Develop the Real Estate Management
According to FHA, the implementation of Integrate REMS with systems being
System (REMS). REMS greatly enhances FHA's ability to developed for the Real
Estate Assessment
manage the multifamily portfolio, reduce staff and Departmental Enforcement
centers. To time entering data, and improve data be completed in the 3rd
quarter of fiscal year integrity. 2000. b Develop and implement the Housing
The database provides information to Completed in November 1999. Enterprise
Real Estate Management
support various functions involving System (HEREMS) database. multifamily
programs, such as enforcement activities and real estate assessment. Enhance
the Single Family Acquired Asset
The enhanced system supports the Improvements are planned to enhance Web
Management System (SAAMS). management and sale of acquired functionality.
Completion date is not properties by HUD's management and estimated.
marketing contractors. Enhance the Single Family Premium Enhancement is
completed. FHA states that
By early 2001, FHA intends to add the Collection Subsystem- Upfront, to
provide
it provides better information on the amount capability to make refunds by
electronic fund better service on the collection of premiums of premiums
owed and received. transfer. at the date of purchase.
Develop the Single Family Premium This subsystem brought FHA into Completed
in September 1999. Collection Subsystem- Periodic to provide
compliance with credit reform requirements. the case- level detail required
to comply with credit reform requirements. a In its July 13, 2000, comments,
HUD stated that FHA now estimates it will select a new JFMIP compliant
subsidiary ledger system by September 30, 2000. b In its July 13, 2000,
comments on this report, HUD stated that the integration of the systems will
be completed by September 30, 2000. Source: GAO's presentation of
information provided by HUD.
FHA completed a number of corrective actions to address the material
weaknesses identified in the Inspector General's March 12, 1999, audit
report on the fiscal year 1998 financial statements. The most significant
accomplishments, according to FHA officials, are that FHA:
Completed detailed functional requirements and initiated a market survey of
available system solutions for a new subsidiary ledger to enable the agency
to perform federal basis and budgetary accounting as required by federal
financial systems standards. According to FHA, the system will provide the
ability to perform real- time funds control. Developed and implemented the
Real Estate Management System
(REMS). According to FHA, the system greatly enhances the ability to monitor
the multifamily portfolio, reduces staff time entering and manipulating
data, and improves data integrity. Developed and implemented the Housing
Enterprise Real Estate Management System (HEREMS) database. This database
provides information to support various functions involving multifamily
programs, such as enforcement activities and real estate assessment.
Enhanced the Single Family Acquired Asset Management System (SAAMS). This
was done to support the management and sale of acquired properties by HUD's
management and marketing contractors. Further improvements are planned for
this system.
Enhanced the Single Family Premium Collection Subsystem- Upfront. This was
done to improve effectiveness in monitoring the receipt of mortgage
insurance premiums paid upon the purchase of a single- family
dwelling. FHA states that this system allows more efficient monitoring of
whether all money owed to FHA has been collected. Developed and implemented
the Single Family Premium Collection
Subsystem- Periodic. This was done to comply with credit reform
requirements, which specify that detailed, case- level information be kept
on FHA's receipt of monthly mortgage insurance premiums on single- family
loans. The Inspector General closed out its recommendation on this matter,
stating that FHA is now in compliance with credit reform requirements. This
system, according to FHA, will also save the agency the approximately
$800,000 a month that it has
been paying for a contractor to collect this information. The Inspector
General recognized, in its audit report on the fiscal year 1999 financial
statements, that FHA has made some improvements to its systems environment.
The material weakness remains, however, because FHA's information systems do
not effectively support its business and financial
operations and FHA has not corrected deficiencies that the Inspector General
has reported for a number of years.
Plans to Address The Inspector General's February 29, 2000, audit report on
FHA's fiscal year
Weaknesses Identified in the 1999 financial statements identified some new
and restated some existing Fiscal Year 1999 Report
weaknesses associated with FHA's information systems environment and
included new recommendations to address them. FHA updated its corrective
action plan on April 27, 2000, to address the new or restated issues.
Table 10 describes the new or restated FHA information and financial
management systems issues, the corrective actions taken or planned by FHA,
and the work remaining to complete the planned corrective actions.
Table 10: Plans to Address Fiscal Year 1999 Material Weaknesses: FHA's
Information and Financial Management Systems Actions taken or planned as of
April
What remains to be done to complete the New or restated issue 27, 2000
corrective actions
Ensure that FHA's systems environment To support the development of the
Complete the analyses of FHA's business is given a high priority during the
drafting enterprise architecture, FHA has
processes and system needs, as well as the costs of HUD's enterprise
architecture, which is initiated analyses of its business and benefits of
current and potential new systems. HUD's information technology investment
processes and systems needs.
Use these analyses to help in the development of planning methodology,
currently under Architecture workshops were held to HUD's enterprise
architecture. development. These planning efforts obtain information on
FHA's business should ensure that the cost and benefits processes and
technology of currently operating FHA systems are
infrastructure. FHA is also analyzing the considered and should assess where
costs and benefits of current and new systems or enhancements to potential
new systems. existing systems can be implemented to better support FHA's
business and
financial operations. Develop detailed FHA systems project FHA is currently
revising information Complete the revision of the information systems
planning information to be included in system project plans and will include
project plans and ensure that the plans HUD's Information Technology them in
I- TIPS. complement HUD's enterprise architecture. Investment Portfolio
System (I- TIPS). This planning information should also complement FHA's
systems included in HUD's enterprise architecture.
(Continued From Previous Page)
Actions taken or planned as of April What remains to be done to complete the
New or restated issue 27, 2000 corrective actions
Develop a complete approach to support FHA has defined major steps and Plan,
select, and implement a new JFMIPcompliant
FHA's Vision of Financial Management milestones for implementing a new FHA
subsidiary ledger system that is and ensure that this plan is linked to
JFMIP- compliant subsidiary ledger
linked to HUD's enterprise architecture. FHA HUD's enterprise architecture.
system. FHA also completed detailed estimates that it will select a system
by October 31,
functional requirements for the system 2000, and develop a detailed
implementation plan and initiated a market survey of by November 30, 2000 a
. It estimates that the new available system solutions.
system will be interfaced with at least one of the operational feeder
systems by March 2002 and interfaced with all 19 operational feeder systems
by December 2005.
In addition, to support its Vision of Financial Management, FHA needs to
continue to develop and implement plans to ensure that its operational
systems are JFMIP- compliant. Ensure that FHA's systems are
FHA's technology division is currently Review systems projects to ensure
compliance with developed and maintained in accordance coordinating
revisions of system project
HUD's system development methodology. with HUD's system development plans
where needed and is stressing the methodology.
need for compliance with HUD's system development methodology. a In its July
13, 2000, comments, HUD stated that FHA now estimates that it will select a
new JFMIP compliant subsidiary ledger sytem by September 30, 2000. Source:
GAO's presentation of information provided by HUD.
Comments From the Department of Housing
Appendi x V I and Urban Development Note: GAO comments supplementing those
in the report text appear at the end of this appendix.
See comment 1.
See comment 2. see comment 3. See comment 4. See comment 5.
See comment 6.
See comment 7. See comment 8.
See comment 9. See comment 10. See comment 11.
See comment 12. See comment 13.
See comment 14. See comment 15.
See comment 16. See comment 17.
See comment 18.
See comment 19. See comment 20.
See comment 21.
See comment 22. See comment 23.
See comment 24.
See comment 25. See comment 26. See comment 27. See comment 28.
See comment 29.
See comment 30. See comment 31.
See comment 32. See comment 33. See comment 34.
See comment 35. See comment 36.
See comment 37. See comment 38. See comment 39. See comment 40.
See comment 41. See comment 42. See comment 43. See comment 44. See comment
45.
See comment 46. See comment 47.
See comment 48. See comment 49.
The following are GAO's comments on the Department of Housing and Urban
Development's letter dated July 13, 2000.
GAO's Comments 1. We modified our report to clarify the complex nature of
some of the obstacles affecting HUD's efforts to resolve its material
internal control
weaknesses. Also see comment 6. 2. We modified our report's title to address
this concern. 3. Our report accurately describes what HUD has accomplished
in resolving its multifamily project monitoring material weakness and what
remains to be done. We added HUD's comment to our report, noting that the
Department disagrees with the Inspector General's assessment that
multifamily project monitoring remains a material weakness. However, HUD's
Office of Inspector General will determine, after auditing HUD's
fiscal year 2000 financial statements, whether this material weakness should
be downgraded in light of HUD's recent actions. An audit report on these
statements will be prepared in the spring of 2001. 4. We modified our
report, where appropriate, to clarify whether we were addressing specific
actions related to single- family or multifamily housing. However, it is
important to note that most of the material internal control weaknesses, as
stated, are addressed to HUD or FHA overall and, except for those involving
rental subsidies and multifamily project monitoring, are
not specific to single- family or multifamily housing. 5. We modified our
report to address this concern. 6. We modified our report, where
appropriate, to include the contributing causes of the delays reported by
HUD. Also see comment 1. 7. We modified our report to clarify that the
resource issues are no longer reported as separate material weaknesses, but
we did not include HUD's
comment that the “remaining deficiencies” were reassessed
because this statement is more specific than the Inspector General's report.
8. We modified our report to clarify that no changes were made in the
Inspector General's description of this material weakness.
9. We modified our report to clarify that no changes were made in the
Inspector General's description of this material weakness.
10. We modified our report to emphasize the need for HUD to continue its
efforts to resolve problems identified by its physical inspections and
financial assessments. Also see comments 12 and 14.
11. HUD provided further information on the Resource Estimation and
Allocation Process, which we included in appendix II of our report.
12. We modified our report to emphasize the need for HUD to continue its
efforts to resolve problems identified by its physical inspections and
financial assessments of multifamily projects. See comments 10 and 14.
13. We modified our report to address this concern. 14. We modified our
report to address this concern. Also see comments 10 and 12.
15. We agree that HUD's nonmaterial internal control weaknesses are not the
primary focus of our report. The purpose of this section of the report is to
indicate that such less severe weaknesses also exist at HUD, as they do
at other organizations, and could affect HUD's operations. Without a
discussion of these nonmaterial internal control weaknesses, our report
could be viewed as incomplete- and therefore misleading- because such
weaknesses could adversely affect HUD's operations. In response to HUD's
comments on duplication, we excluded those open recommendations
related to the material weaknesses. 16. We modified our report to clarify
that HUD considers the recommendations not only of the Inspector General,
but also of GAO and HUD management, when developing the Department's
corrective action plans. 17. We modified our report to address this concern.
18. We modified our report to address this concern. 19. We modified our
report to correct the date. 20. We updated our report to reflect the
information HUD provided. 21. As noted in our report, HUD officials told us
that addressing the Year 2000 computer issue was an obstacle because it
consumed many of the technical staff resources they expected to use on
information systems
improvements. We do not state or imply in our report that HUD made no
improvements in its information systems during the year. 22. We updated our
report to reflect the June 30, 2000, information
provided by HUD. Also see comment 39. 23. Our report states that delays in
implementing the large- scale computer matching were caused by concerns
raised by tenant groups and technological problems. Both the redrafting of
the income discrepancy letters and issues involving the Income Discrepancy
Resolution Guide were the result of concerns raised by tenant groups. We
modified our report to
delete the reference to QHWRA. 24. The purpose of this discussion was to
present information on some of the obstacles HUD has encountered in
addressing its material internal control weaknesses. Other sections of our
report discuss HUD's major accomplishments in resolving its material
internal control weaknesses, including its awarding of contracts for third
parties to administer Section 8 housing assistance contracts. We believe
that the delay HUD experienced in awarding these contracts is significant.
HUD's multifamily monitoring plan called for all of the contracts to be
awarded by December 1999. Although the first contracts were awarded in
February 2000, all contracts had not been awarded as of June 9, 2000. HUD
reported to us that as of June 9, 2000, 35 contracts had been awarded and
that more contracts will be awarded, but it did not specify how many more
such contracts will be
awarded. We revised our report to update the number of contracts awarded to
35 from the 24 noted in our report as of May 18, 2000.
25. We modified our report to acknowledge HUD's accomplishments regarding
the management and marketing of its single- family inventory and clarify the
discussion of problems requiring further attention from HUD.
26. We modified our report to include HUD's comments on the training
received by its Chicago and Seattle staff.
27. We added the information that HUD is planning six reviews covering 13
field offices.
28. We modified our report to clarify that the Inspector General continued
to report on three reopened recommendations from a prior report.
29. We modified our report to clarify that, according to the Inspector
General's report, the initiatives were delayed during fiscal year 1999.
30. We updated our report to include the new name of the system and the
information from HUD that the additional software, expected to be completed
in July 2000, was released in June 2000.
31. We updated the our report to reflect new information on specific actions
HUD is planning to improve computer security.
32. We updated our report to indicate that the Financial Assessment
Subsystem was implemented. 33. We updated our report to show that public
housing tenants would also be included in the computer matching effort.
34. We updated our report to show that the completion date for the
reconciliation of the first two quarters of fiscal year 2000 was changed
from the end of June 2000 to the end of July 2000.
35. We modified our report to show that Housing will implement the recapture
process.
36. We modified our report to focus on the fact that this problem was first
reported in fiscal year 1991.
37. We did not modify our report to indicate that HUD's excess subsidy
estimate may be overstated. This estimate is based on a valid statistical
sample of tenant households. Also, HUD's disclosure of this estimate in the
footnotes to its financial statements gives no indication that this amount
may be overstated for the reasons provided by HUD. 38. While this
information was included elsewhere in the report, we added a note to the
table to specify that the estimated excess subsidy payments are computed
from data that apply to the preceding calendar year.
39. We updated our report to include the number of tenant letters that HUD
had mailed as of June 30, 2000. Also see comment 22.
40. We modified our report to indicate that HUD has encouraged the exchange
of wage data between state agencies and public housing
authorities and that HUD is planning to develop a best practices guide on
the most effective and viable state income verification programs.
41. We updated our report to include the information HUD provided on the
reduction in the number of tenants to be sent discrepancy letters and the
reason for the reduction. Also see comments 39 and 43.
42. We modified our report to indicate that the minimum rent provisions
generally were effective the date the Quality Housing and Work
Responsibility Act was signed.
43. We updated our report to indicate that the number of tenants receiving
letters had been reduced and that about 72,500 letters had been mailed to
tenants as of June 30, 2000. Also see comments 39 and 41.
44. We modified our report to indicate that QHWRA allows housing
authorities, every 3 to 5 years, to recertify the incomes of households
selecting flat rents.
45. We modified our report to clarify that HUD faces significant limitations
in its efforts to ensure that the appropriate amount of rental assistance is
provided to eligible households.
46. We updated our report to include the number of management and occupancy
reviews conducted by HUD in fiscal year 2000 through June 2000.
47. Because HUD agreed with our observations on FHA's financial and
information management systems and suggested no changes, we did not modify
our report.
48. We incorporated the revised completion date of September 30, 2000. 49.
We revised the dates for selecting a new subsidiary ledger system and
developing a detailed implementation plan.
Appendi x V
GAO Contacts and Staff Acknowledgments GAO Contacts Stanley J. Czerwinski,
(202) 512- 7631 Linda M. Calbom, (202) 512- 9508 Joel C. Willemssen, (202)
512- 6408
Acknowledgments In addition to those named above, Shirley L. Abel, Daniel R.
Blair, Marcia L. Carlsen, Jeannie B. Davis, David G. Gill, Diana Gilman,
James C. Houtz,
Phillip W. McIntyre, and Robert S. Procaccini made key contributions to this
report.
(385816) Lett er
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GAO United States General Accounting Office
Page 1 GAO- 01- 103 HUD Management
Contents
Contents Page 2 GAO- 01- 103 HUD Management
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Appendix I
Appendix I Objectives, Scope, and Methodology
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Appendix II
Appendix II HUD and FHA Must Continue to Address Resource Management
Weaknesses
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Appendix II HUD and FHA Must Continue to Address Resource Management
Weaknesses
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Appendix II HUD and FHA Must Continue to Address Resource Management
Weaknesses
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Appendix II HUD and FHA Must Continue to Address Resource Management
Weaknesses
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Appendix III
Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
18, 2000
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix III Status of HUD's Material Internal Control Weaknesses as of May
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Appendix IV
Appendix IV Comments From the Department of Housing and Urban Development
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Appendix IV Comments From the Department of Housing and Urban Development
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Appendix IV Comments From the Department of Housing and Urban Development
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Appendix IV Comments From the Department of Housing and Urban Development
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Appendix IV Comments From the Department of Housing and Urban Development
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Appendix IV Comments From the Department of Housing and Urban Development
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Appendix IV Comments From the Department of Housing and Urban Development
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Appendix IV Comments From the Department of Housing and Urban Development
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Appendix IV Comments From the Department of Housing and Urban Development
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Appendix IV Comments From the Department of Housing and Urban Development
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Appendix V
United States General Accounting Office Washington, D. C. 20548- 0001
Official Business Penalty for Private Use $300
Address Correction Requested Bulk Rate
Postage & Fees Paid GAO Permit No. GI00
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