HUD Single-Family and Multifamily Property Programs: Inadequate
Controls Resulted in Questionable Payments and Potential Fraud
(03-MAR-04, GAO-04-390).
In our 2003 performance and accountability report on the
Department of Housing and Urban Development (HUD), we continued
to identify HUD's single-family (SF) mortgage insurance program
as highrisk --an area we have found to be at high risk for fraud,
waste, abuse, and mismanagement. Also, for years, GAO and HUD's
Office of Inspector General (OIG) have reported weaknesses in
HUD's contract administration and monitoring for both SF and
multifamily (MF) programs. Given these known risks and the
millions of dollars in disbursements made by the agency each
year, GAO was asked to review payments related to the
single-family property program and determine whether (1) internal
controls provide reasonable assurance that improper payments will
not be made or will be detected in the normal course of business
and (2) payments are properly supported as a valid use of
government funds. We also assessed HUD's monitoring of a major
multifamily project with a state housing agency.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-390
ACCNO: A09417
TITLE: HUD Single-Family and Multifamily Property Programs:
Inadequate Controls Resulted in Questionable Payments and
Potential Fraud
DATE: 03/03/2004
SUBJECT: Fraud
Contract administration
Internal controls
Erroneous payments
Risk management
Program management
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GAO-04-390
United States General Accounting Office
GAO Report to the Chairman, Committee on Government Reform, House of
Representatives
March 2004
HUD SINGLE-FAMILY AND MULTIFAMILY PROPERTY PROGRAMS
Inadequate Controls Resulted in Questionable Payments and Potential Fraud
a
GAO-04-390
Highlights of GAO-04-390, a report to the Honorable Tom Davis, Chairman,
Committee on Government Reform, House of Representatives
In our 2003 performance and accountability report on the Department of
Housing and Urban Development (HUD), we continued to identify HUD's
single-family (SF) mortgage insurance program as highrisk-an area we have
found to be at high risk for fraud, waste, abuse, and mismanagement. Also,
for years, GAO and HUD's Office of Inspector General (OIG) have reported
weaknesses in HUD's contract administration and monitoring for both SF and
multifamily (MF) programs. Given these known risks and the millions of
dollars in disbursements made by the agency each year, GAO was asked to
review payments related to the single-family property program and
determine whether (1) internal controls provide reasonable assurance that
improper payments will not be made or will be detected in the normal
course of business and (2) payments are properly supported as a valid use
of government funds. You also asked us to assess HUD's monitoring of a
major multifamily project with a state housing agency.
GAO is making 24 recommendations to strengthen HUD's internal controls
over SF and MF property programs, decrease questionable payments and
improve contractor oversight. In responding to a draft of our report, HUD
agreed with some of GAO's findings and disagreed with others. In
particular, HUD disagreed with GAO classifying certain payments as
questionable. GAO reaffirms its position on its findings and all
recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-04-390.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Linda Calbom at (202)
512-9508 or [email protected].
March 2004
HUD SINGLE-FAMILY AND MULTIFAMILY PROPERTY PROGRAMS
Inadequate Controls Resulted in Questionable Payments and Potential Fraud
Significant internal control weaknesses in the process used to pay for SF
property expenses made HUD vulnerable to and in some cases resulted in
questionable payments and potential fraud. These weaknesses included (1)
delegation of oversight functions in a manner that weakened the control
environment, (2) lack of key control activities, including proper
documentation and approvals and (3) limited monitoring of contractor
performance. These weaknesses likely contributed to the $16.5 million in
questionable and potentially fraudulent payments that we identified using
data mining, document analysis and other forensic auditing techniques.
GAO classified $16.3 million of payments as questionable because they were
not supported by sufficient documentation to determine their validity. GAO
also classified $181,450 of payments as potentially fraudulent after
visiting single-family properties being managed by a certain contractor.
At all the properties visited, GAO noted discrepancies between what was
represented on paid invoices and what was actually received. The
photographs below were taken at one of the occupied properties after HUD
paid $2,060 for bathroom repairs. These potentially fraudulent payments
for single-family properties were made to the same contractor that was
engaging in potentially fraudulent billing practices related to our
earlier work on the HUD MF property program. HUD paid this contractor $2
million in fiscal year 2002 and $2.5 million in fiscal year 2003 for SF
property expenses.
Source: GAO.
GAO also identified insufficient HUD monitoring of a major MF program with
a state housing agency. While HUD provided all the funding for the
program, it provided little oversight and instead relied on the state
housing agency to perform oversight functions. Ten years into the program,
actual cost totaled over $500 million dollars, almost triple the original
development budget.
Contents
Letter
Results in Brief
Background
Internal Controls Over SF Property Payments Were Inadequate
Lack of Controls Contributed To Questionable and Potentially
Fraudulent Payments Insufficient Monitoring of a Major Multifamily Program
Conclusions Recommendations for Executive Action Agency Comments and Our
Evaluation
1 3 6 10
17 52 56 57 60
Appendixes
Appendix I:
Appendix II:
Appendix III:
Scope and Methodology
Comments from the Department of Housing and Urban Development
GAO Comments
GAO Contacts and Staff Acknowledgments
GAO Contacts Acknowledgments
64
67 74
77 77 77
Tables Table 1: Type, Number, and Amount of Questionable Payments 19 Table
2: HUD Spending Related to Multifamily Program 55
Figures Figure 1:
Figure 2: Figure 3:
Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9:
Geographical Jurisdictions of HUD's Four
Homeownership Centers
Four-Step SF Property Payment Process
Single-Family Properties Average per Property
Expenses-Fiscal Year 2002
Invoice for Contract Change Orders
Chain-Link Fence
Records Management Invoice
Relocation Invoice
Agreement to Vacate
E-mail Approving Payment
8 11
16 21 24 26 27 28 29 31 34 35 35 Figure 10: Falsified Work Order Figure
11: Property 1-"New" Ceiling Figure 12: Property 1-"New" Bathroom Floor
Figure 13: Property 1-"New" Sheetrock(R) Walls
Contents
Figure 14: Property 1-"$1,590 Kitchen Cabinet" 36 Figure 15: Property
2-Bathroom "Repairs" 37 Figure 16: Property 2-More Bathroom "Repairs" 38
Figure 17: Property 2-"$1,082 Wooden Dowels" 38 Figure 18: Property
3-"New" Kitchen Ceiling 39 Figure 19: Property 3-"New" Dining Room Ceiling
on Floor 40 Figure 20: Property 3-"New" Living Room Floor 40 Figure 21:
Property 4-$2,292 "New" Metal Door 41 Figure 22: Property 4-$3,978 in
Stoop "Repairs" 42 Figure 23: Property 5-"Repaired and Painted" Public
Hall 43 Figure 24: Property 5-"Plastered and Painted" Ceiling 44 Figure
25: "Repaired" Bathroom 46 Figure 26: "Repaired" Bathtub 47 Figure 27:
"Newly Tiled" Stairway 48 Figure 28: "New" Ceramic Bathroom Floor 49
Figure 29: "New" Bathroom Floor 50 Figure 30: Timeline of HUD's
Relationship with Contractor 51
Abbreviations
AC Allocated cost
FHA Federal Housing Administration
GTM Government Technical Monitor
GTR Government Technical Representative
HUD U.S. Department of Housing and Urban Development
MF multifamily
SAMS Single-Family Acquired Asset Management System
SF single-family
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A
United States General Accounting Office Washington, D.C. 20548
March 3, 2004
The Honorable Tom Davis Chairman Committee on Government Reform House of
Representatives
Dear Mr. Chairman,
A strong system of internal controls provides checks and balances against
waste, fraud, abuse, and mismanagement and is an important component of an
organization's ability to operate efficiently and effectively. This is
particularly important to the Department of Housing and Urban Development
(HUD), which depends heavily on contractors to accomplish its mission.
These contractors deliver program services and perform many functions that
used to be done by HUD's staff, including those in its mortgage insurance
program area. HUD mortgage insurance programs are dependent on the actions
of many third parties, including the contractors who market and manage the
HUD single-family (SF) properties that HUD acquires when borrowers default
on their mortgages.1
In our 2003 performance and accountability report on HUD, we continued to
identify HUD's single-family mortgage insurance program as high risk- an
area we have found to be at high risk for fraud, waste, abuse, and
mismanagement.2 Also, for years, we and HUD's Office of Inspector General
(OIG) have reported weaknesses in HUD's contract administration and
monitoring for both SF and multifamily (MF) programs. These weaknesses,
together with significant growth in HUD's contracting activity, increased
the department's vulnerability to and in some cases resulted in fraud,
waste, and abuse. Furthermore, HUD expects contracting to increase even
more.
In light of these concerns, you requested that we review internal controls
over fiscal year 2002 payments to contractors and other vendors related to
SF properties. During fiscal year 2002, HUD reported that it paid more
than $310 million for various goods and services, including management
fees
1HUD single-family properties consist of one to four units or apartments.
2U.S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Housing and Urban Development, GAO-03-103
(Washington, D.C.: Jan. 2003).
and property repairs for its SF property portfolio. For these payments,
our objectives were to determine whether (1) internal controls provided
reasonable assurance that improper payments would not be made or would be
detected in the normal course of business and (2) payments were properly
supported as a valid use of government funds. In addition, you requested
that we continue our review of HUD's multifamily program. Therefore, we
assessed HUD's monitoring of a major MF program being carried out with a
state housing agency that has payments of over a half billion dollars from
its inception in 1994 through September 30, 2003.
To identify and assess internal controls, we obtained an understanding of
HUD disbursement processes; conducted interviews with HUD headquarters,
four homeownership centers, and three contractor offices, and performed
walk-throughs of transactions. We also reviewed HUD policies and
procedures; property management and marketing contracts and amendments,
and reviewed our own reports, those by HUD's OIG, and others. In addition,
we tested a statistical sample of transactions to evaluate key internal
control activities. To test for validity of payments, we selected
transactions using forensic auditing techniques, including data mining and
document analysis. We then physically inspected selected properties to
determine if the services or goods HUD paid for had been fully performed
and the tangible goods received.
In June 2003, based on the results of the above described work, we
communicated to HUD and members of your office that we had identified
certain potentially fraudulent payments. At your request, we expanded our
work to (1) determine whether HUD had made changes to its internal
controls to address the causes of the potentially fraudulent payments that
we had identified in June 2003 and (2) test for additional potentially
fraudulent payments. To accomplish this additional work, we interviewed
HUD officials and used forensic auditing techniques to test for additional
potentially fraudulent payments made in fiscal years 2002 and 2003.
To assess HUD's monitoring of the MF program with a state housing agency,
we reviewed HUD's MF policies and procedures, the state agency's policies
and procedures, and HUD's interagency agreement with the state housing
agency. We also conducted walk-throughs of transactions and interviewed
officials at HUD headquarters, one field office, and the state housing
agency. In addition, we analytically reviewed payment activity since
inception of the project in 1994 through September 30, 2002.
While we identified some potentially fraudulent and questionable payments,
our work was not designed to identify all fraudulent or questionable
payments. Appendix I provides a more detailed discussion of our scope and
methodology. We conducted our work from December 2002 through January
2004, in accordance with generally accepted government auditing standards
as well as with the investigative standards established by the President's
Council on Integrity and Efficiency. We requested comments on a draft of
this report from the Secretary of HUD or his designee. HUD's written
comments are reprinted in appendix II.
Results in Brief Significant internal control weaknesses in the HUD SF
property payment process made the agency vulnerable to and in some cases
resulted in questionable and potentially fraudulent payments. These
weaknesses included (1) the delegation of oversight functions in a manner
that weakened the control environment, (2) a lack of key control
activities, such as proper approvals and clear documentation to support
all payment transactions, and (3) limited monitoring of contractor
performance.
On the basis of a statistical sample, we estimated that about 42 percent3
of the total population of SF property payments for fiscal year 2002 were
not adequately supported and 58 percent4 were not properly approved.
Further, HUD's monitoring of contracted activities did not include the
detailed analytical review of the contractors' performance or any
augmentation of control activities in response to previously identified
risks. The aggregate effect of these internal control weaknesses was that
HUD did not and still does not have reasonable assurance that improper
payments would be prevented or detected in the normal course of business.
These weaknesses contributed to the $16.5 million in questionable and
potentially fraudulent payments made during fiscal years 2002 and 2003 to
contractors and others that we identified using data mining, document
analysis, and other forensic auditing techniques, including physical
inspection of properties to test for whether the goods and services billed
and paid for had actually been delivered or satisfactorily performed.
These
3We are 95 percent confident that the actual proportion of payments
lacking key supporting documentation is between 35 and 49 percent.
4We are 95 percent confident that the actual proportion of payments not
properly approved is between 51 and 65 percent.
improper payments occurred and were not detected in the normal course of
business even though HUD paid contractors $11 million during fiscal year
2002 for assistance in reviewing and processing payments and performing
quality control oversight of management contractor performance.
The questionable payments included $15.2 million to contractors for
contract change orders that lacked adequate supporting documentation to
substantiate the validity of the payments. Payments were made without
basic support, such as standard contract modification agreements signed by
the contractors and HUD officials or identification of the specific HUD
properties covered by the payments.
We also questioned eight payments totaling $268,800 for partial
reimbursement of a contractor's claimed expenses for developing a
leadbased paint abatement program. The support for these payments did not
include a signed contract modification or other agreement for the
contractor to develop such a program, an indication of the total amount to
be paid by HUD to satisfy the claim, or the basis for reimbursing the
contractor for these types of costs that, according to HUD's management
agreement with the contractor, were not allowable unless approved by HUD
in advance. We questioned an additional 65 payments totaling $844,466 for
such things as utility services, "For Sale" signs, and chain-link fences
when the support for the payments was not adequate to enable us to
determine if the payment was a valid use of government funds.
Deficient HUD monitoring resulted in potentially fraudulent single-family
program payments to a property management contractor for work that was
substandard or not performed at all. For example, in performing an
inspection of an occupied apartment where a bathroom renovation had been
billed and paid for by HUD, we found a rusted out, broken sink on the
floor and an inoperable toilet. We visited 18 properties for which HUD had
disbursed $181,450 for renovations that we determined by physical
inspection that a substantial portion of the work was either overcharged
or not performed. This work was billed by and paid to the same contractor
we identified previously in our multifamily work as having engaged in
potentially fraudulent billing practices.5 Through data mining, we
identified
5U.S. General Accounting Office, Financial Management: Strategies to
Address Improper Payments at HUD, Education, and Other Federal Agencies,
GAO-03-167T (Washington, D.C.: Oct. 3, 2002).
$476,104 of fiscal year 2002 payments to the same contractor for
construction renovations that had the same characteristics of the
fraudulent billing scheme in the multifamily program on which we testified
during October 2002. HUD held several meetings with this contractor over
several years to discuss performance concerns and ultimately "heldback"
payment for certain billed work. However, we did not find evidence of
additional controls over the millions of dollars in payments made to this
contractor subsequent to the time that questionable billing practices were
identified. After months of discussion, HUD and the contractor agreed to
end the contract as of October 31, 2003.
In addition, we identified a lack of monitoring by HUD of a MF pilot
program with a state housing agency. While providing all funding for the
program, HUD delegated almost all of its oversight functions, despite the
fact that the program costs continued to escalate significantly higher
than the original development budget approved by HUD. Ten years into the
program, actual costs totaled over a half a billion dollars, almost triple
the original development budget. Additional oversight by HUD may have
helped to prevent at least some of this cost escalation.
Without significant improvements in its internal controls, HUD's ability
to detect and prevent improper payments will continue to be severely
limited. We make 24 recommendations in this report to address the internal
control and improper payment issues we identified.
In written comments on a draft of this report from HUD's Assistant
Secretary for Housing-Federal Housing Commissioner, HUD agreed with some
of our findings and recommendations and disagreed with others. In
particular, HUD disagreed with our classification of certain payments,
including $15.2 million of inadequately supported payments for contract
change orders, as questionable payments. However, because HUD did not
provide documentation needed to support the validity of the payments, they
remain questionable.
Regarding our recommendations related to the MF pilot program, HUD agreed
to examine opportunities to enhance its oversight over the remaining life
of this particular program, but it did not agree to ask the HUD IG to
review the propriety of the use of the funds at this time, but said it may
elect to refer specific issues to the IG for review. HUD did not
specifically comment on the other 22 recommendations related to its SF
program. We continue to believe that our report is accurate and that all
of the recommendations should be implemented. Our response to HUD's
comments is provided in the Agency Comments section of the report and in
appendix II.
Background HUD, through its Federal Housing Administration (FHA), helps
finance home purchases by insuring private lenders against losses on
mortgages for single-family and multifamily homes. If a borrower defaults
on a loan and the loan is subsequently foreclosed, the lender may file a
claim for most of its losses with HUD. After an insurance claim is paid
from one of HUD's various mortgage insurance funds, HUD assumes title to
the property and the property becomes part of the HUD property inventory.
HUD's mortgage insurance funds support a wide variety of MF and SF insured
loan activities, including management of HUD properties until they are
sold. HUD's mortgage insurance funds are financed by annual appropriations
from the Congress, upfront and periodic mortgage insurance premiums from
transactions with the public, or interest revenue.
In 1994, we first designated HUD's programs as high risk due to serious,
long-standing, departmentwide management problems. In January 2001, we
reduced the number of programs deemed to be high risk from all HUD
programs to two of its major program areas. One of the two programs was SF
mortgage insurance, which includes the management of property inventory.
In fiscal year 2003, we designated HUD's acquisitions management, to
include contractor monitoring, as a new major management challenge because
of extensive and growing reliance on contractors.
Our initial evaluation of payments related to HUD properties was first
discussed in our October 2002 testimony on our review of, among other
things, fiscal year 2001 payments to a contractor responsible for managing
HUD multifamily properties. We reported that this contractor engaged in
questionable billing practices that resulted in potentially fraudulent
payments. The contractor split construction renovation charges into
multiple projects to stay below the $50,000 threshold of HUD-required
approval. We identified about $10 million of this contractor's invoices
that individually were less than $50,000. We also found cases for which
HUD paid this contractor for goods or services that were not received.
Single-Family Program In its SF property program, HUD contracts with six
property management firms who are responsible for all activities
associated with managing and
marketing properties. Each of the contracts includes (1) having the
properties appraised; (2) securing the properties to prevent unauthorized
entry; (3) inspecting the properties to ensure that they are clean and in
presentable condition; (4) performing routine maintenance, as well as
repairs and renovations necessary to preserve and protect the property;
(5) listing the properties for sale, and (6) selling them. Each contract
covers a different geographic area that is under the jurisdiction of what
are referred to as HUD's homeownership centers. Contractors may have
agreements in more than one geographical area. HUD also contracts with a
support services contractor to facilitate payment to these management
firms and other vendors.
The homeownership centers are located in Atlanta, Georgia; Denver,
Colorado; Philadelphia, Pennsylvania; and Santa Ana, California. Figure 1
shows the geographical jurisdiction of each of the four centers. The
centers report directly to HUD's Deputy Assistant Secretary for
Single-Family Housing who, in turn, reports to the Assistant Secretary for
Housing- Federal Housing Commissioner.
rating of low, medium, or high to the contractor's performance on each of
11 performance dimensions such as claims review, property maintenance, and
sales procedures. According to agency data, payments for SF property
expenses totaled more than $310 million in fiscal year 2002. The SF
Acquired Asset Management System (SAMS) payment process reimburses
management contractors for costs incurred in managing and marketing HUD
properties, and makes direct payments to certain other vendors, such as
oversight contractors, and pays management fees to the management
contractors. The HUD payment process, as designed, includes four key
steps: (1) the preparation of the payment request by the property
management contractor or other vendor seeking funds, (2) initial review of
the payment request by a support services contractor, (3) HUD approval, to
include a technical review by a person appointed as the government
technical monitor (GTM),6 and final authorization by a government
technical representative (GTR),7 and (4) payment either by electronic
transfer or paper check.
Multifamily Project In its MF program, HUD contracts for property
management services, such as on-site management, rent collection, and
maintenance for the multifamily properties it acquires through the
foreclosure process. In 1994, due to a substantial increase in HUD's
inventory of MF properties, HUD entered into an agreement with a state
housing agency for the renovation, disposition, and interim management of
certain MF properties located in one geographical region.
HUD officials told us this program was intended to be a demonstration or
pilot program, to determine if this type of agreement is feasible as a
common practice within HUD. Under this pilot, HUD is responsible for
providing all the money needed to fund the program, and the state agency
is responsible for developing and monitoring the project.
6The GTM serves as a technical adviser to the GTR.
7HUD -Government Technical Representative Handbook states that the GTR is
responsible for being the principal judge of a contractor.
Internal Controls Over SF Property Payments Were Inadequate
HUD's internal controls did not provide reasonable assurance that improper
payments would not occur or would be detected in the normal course of
business. We identified fundamental weaknesses in the four-step process
used to pay for SF property expenses. Our Standards for Internal Control
in The Federal Government include (1) establishing a positive control
environment throughout the organization, (2) performing of control
activities, which are an integral part of an entity's accountability for
stewardship of government resources, and (3) monitoring to assess the
quality of performance over time. However, we found HUD did not delegate
functions in a way that supported a positive control environment;
specifically, the agency routinely relied on a support services contractor
to prepare management contractors' and other vendors' payment requests and
perform technical reviews of payment requests. HUD also routinely failed
to require or ensure that all transactions were clearly documented, which
is a control activity that helps ensure accountability for resources. HUD
monitoring of contractors' performance, particularly the review of the
nature and amount of expenses incurred, was also inadequate. In addition,
HUD did not respond appropriately to identified vulnerabilities that
increased the risk of unsatisfactory performance. These internal control
weaknesses made the HUD SF property program highly susceptible to fraud,
waste, and abuse.
Process for Payment of SF Property Expenses Relied Extensively on Contractor
HUD delegated oversight functions in a manner that weakened its control
environment and resulted in established controls not being followed. We
found that HUD routinely relied on a support services contractor to
perform key elements of the first three steps in the four-step payment
process (fig. 2) for SF property expenses. These delegated oversight
functions included preparing payment requests (step 1), performing the
administrative review (step 2) and performing a technical review (step
3.1) of payment requests.
Figure 2: Four-Step SF Property Payment Process
Sources: GAO and HUD's Controls for M&M Contractors Disbursements.
HUD relied on the support services contractor to perform the functions in
both step 1 and step 2 of the payment process when HUD staff or the
support service contractor determined that the original request needed to
be modified. When payment requests received by HUD from the property
management firms or other vendors needed modification to either the amount
requested or property to be charged with the expense or other information,
the support service contractor would make the change and prepare a revised
payment request. This function is analogous to voiding and then replacing
a check in a manual payment system. HUD's written policies require that
the management contractor create its own payment requests and those
needing modification be returned to the requesting
"The control environment is affected by the manner in which the agency
delegates responsibilities."a
contractor for any changes.8 That is, the contractor requesting the
payment was responsible for resubmitting the payment request after
addressing the issues that caused the need for modification.
However, HUD regional officials advised us and were aware that this
control was not followed primarily to avoid delays in processing payments.
In these cases, the support service contractor, using the same transmittal
number that was used for the original request, created the revised payment
requests.
HUD also relied on the support service contractor to prepare payment
requests (step 1) and perform the administrative review (step 2) of
payment requests when the vendors requesting payment did not have access
to the electronic payment system-HUD SAMS. While the property management
contractors have access to SAMS, other vendors who routinely request
payment from HUD, for example closing agents, do not. In some of the
cases, the vendors without access to SAMS were submitting requests for
payments directly to the support services contractor, rather than to the
property manager of the underlying property or a HUD official who would be
in a better position to monitor the completion and quality of work.
In addition, HUD requires that vendors provide a signed request form, as
assurance that the information submitted on payment requests is true and
accurate. We found numerous requests created by the support services
contractor that did not have this signature. Instead, the support services
contractor signed the request form.
The third step of the HUD payment process, as designed, is HUD approval
that includes a technical review by a HUD-appointed employee. However, on
the basis of the results of our statistical sample of payment
transactions, we estimate that about 58 percent9 of the total population
of single-family payment transactions to contractors and other vendors at
the four
8Housing and Urban Development, Controls for Management & Marketing (M&M)
Contractors Disbursements (Washington, D.C.).
9We are 95 percent confident that the actual proportion of HUD payments
not properly approved is between 51 and 65 percent.
aThis text box as well as those following in this section of the report
are quotes from the U.S. General Accounting Office, Standards for Internal
Control in the Federal Government, GAO/AIMD-00-21.31.1. (Washington, D.C.:
Nov. 1999).
homeownership centers were not properly approved due to a lack of
technical review. Specifically, we found that the support services
contractor was routinely performing the technical review (step 3.1)
reserved for the HUD-appointed GTM at two of the four HUD homeownership
centers.10 In these situations, HUD permitted the support services
contractor to act outside the contractor's scope of authority granted
through the HUD control structure by conducting the review, which requires
a HUD-appointed individual with specific technical expertise. That is, the
request for payment should not have been approved due to the absence of
the GTM technical review.
HUD's delegation of the oversight functions for three of the four steps of
the SF property payment process significantly weakened the control
environment. The overreliance on the support service contractor resulted
in a control environment where the controls over rejected payment requests
and the approval of requests were not followed. When oversight functions
are delegated in a manner that does not support a positive control
environment, the control process may not be effective in detecting and
preventing improper payments.
"Transactions and other significant events should be executed by persons
acting within the scope of their authority."
HUD Payments Lacked Adequate Support
On the basis of our statistical sample, we estimated that about 42
percent11 of the total number of SF property payments at the four
homeownership centers were not adequately supported. That is, the minimum
support necessary for a third party to determine the validity of the
payment was not included in the documentation provided with the payment.
Control activities, such as clearly documenting all transactions, are an
integral part of an entity's accountability for stewardship of government
resources.
HUD did not enforce consistent program wide documentation requirements,
but rather allowed each HUD approving official to determine the adequacy
of supporting documentation. As a result, the nature and extent of
acceptable supporting documentation was inconsistent from region to
region. For example, two of the four HUD homeownership
10Housing and Urban Development: Government Technical Representative
Handbook 2210.3 Chapters 11 & 12 (Washington, D.C.: 2003) states, in order
to act as the GTM for a contract and perform the duties of one, an
individual must be formally appointed by HUD, have basic knowledge of the
contracting process, and complete certain minimum training.
11We are 95 percent confident that the actual proportion of payments
lacking key supporting documentation is between 35 and 49 percent.
"All transactions need to be clearly documented."
centers accepted "manual" payment requests that were created outside of
the HUD automated system. This deviation from the written internal control
policy created inconsistencies in the payment request process among the
contractors for that region as well as across the four homeownership
centers. These "manual" payment requests did not have all the supporting
data elements (e.g., payee Social Security number or tax identification
number, address, remittance address) that the systemgenerated payment
request included. Therefore, edit checks in the automated system, such as
limitations on who was authorized to change the payment remittance
address, were lost when manual payment requests were created.
We found payments that also lacked adequate support, such as evidence that
goods or services had been received, and that competitive bids had been
obtained prior to the work being performed. Some supporting documentation
lacked evidence of any validation of the charges. For example, payments to
the contractor responsible for spot inspections of properties typically
would be based on an invoice that reflected a fixed rate per property
inspected and a list of the properties inspected. However, the support for
these payments was devoid of any indication that the reviewer had verified
the rate used, HUD's ownership of the properties inspected, or otherwise
determined the validity of the amount and relevant terms of the payment
request. We also found that invoices and other supporting documentation
were not effectively canceled to prevent unauthorized or inadvertent reuse
as support for subsequent billings, and that other than original documents
were used to support payments without any indication as to why other than
an original invoice was accepted.
We advised HUD officials when adequate supporting documentation was
missing and we could not determine the validity of a payment selected for
review. HUD management advised us that the support for certain amounts
paid was not included with the payment documentation; however, the
reviewing, approving and certifying officials were to simply review the
contract file to verify the accuracy of the charges. We did not see
evidence of this contract review. For example, as discussed later, through
data mining we identified $15.2 million in payments for contract
modifications with insufficient supporting documentation. The support for
these payments was typically limited to copies of e-mails to the
homeownership center from headquarters directing that payment be made,
incomplete standard contract modification forms, and spreadsheets
detailing by property only an insignificant portion of the total amount
paid. We also identified cases where the HUD approving official at one of
the
homeownership centers was not requiring a contractor to provide specific
support for payments to subcontractors, even though certain minimum
support was required by the terms of the management contract, such as
evidence that the contractor had paid the subcontractor before requesting
reimbursement from the government. Adequate support for these amounts is
critical because the payment is a reimbursement for the amount paid by the
contractor to the subcontractor. Later in this report, these and other
examples of payments without adequate support that were identified through
data mining will be discussed in more detail.
HUD Failed to Monitor Contractors Adequately
Neither HUD headquarters personnel, nor the regional staffs,
systematically performed detailed analytical reviews of the millions of
dollars in expenses generated by payments to contractors and other
vendors. Monitoring the quality of performance over time is a critical
control activity. Detailed analytical review of expenses focusing on key
data elements is a way for management to assess performance and identify
areas of risk. Although monitoring was deficient, HUD did perform some
program wide analysis of certain financial performance indicators and
limited analysis was done on a region-by-region basis. For example, the
average holding costs per property12 and average time held in inventory
were calculated. HUD headquarters officials stated that when a region had
a "spike" in one of its performance indicators, a conversation to identify
potential causes will take place. However, without specific analytical
review of expenses, the real causes of the "spikes" may not be identified.
Analytical reviews include focusing on key data elements, such as property
number, vendor name, and expense classification, to identify patterns or
anomalies that may require further inquiry or analysis. The results of
detailed reviews can lead to cost-saving opportunities, the identification
of usual patterns, and ultimately the discovery of instances of fraud,
waste, and abuse. The automated SF payment system captures expenses by (1)
case number and (2) expense category. These system features have the
potential to assist HUD in strengthening its oversight of contractors. For
example, totaling expenses by property provides HUD with the ability to
compare and analyze property expenses over time from acquisition through
sale of the property in a variety of ways, including by geographical
region and contractor. Further, analyzing expenses by category, such as
12Holding costs represent total costs incurred from the date of
acquisition through sale of the property.
board-up, general repair, and clean-up expenses, would provide HUD with
meaningful oversight information. Also, HUD management may find focused
expense analysis work, similar to that which we performed for this review,
to be an effective and efficient method for assisting in preventing and
detecting improper payments. Our detailed analytical reviews of HUD
payment data identified patterns that led us to specific improper
payments. For example, figure 3 illustrates one of the basic types of
analyses we performed to determine areas of high risk that allowed us to
focus on the areas we viewed as most vulnerable to improper payments.
Figure 3: Single-Family Properties Average per Property Expenses-Fiscal
Year 2002
Dollars 18,000
16,388
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0 Santa Ana Denver Atlanta Philadelphia New York City contractor
Source: GAO analysis.
Our analysis, as depicted at figure 3, focused our attention on
determining the reason for the relatively high expense per property in the
Philadelphia homeownership center, and then on one particular contractor
within that center, when compared to other regions. We ultimately
identified significant potentially fraudulent payments made at the New
York City properties that are discussed later in the report. Our Executive
Guide: Strategies to Manage Improper Payments13 explains how data mining
and
13U.S. General Accounting Office, Strategies to Manage Improper Payments:
Learning from Public and Private Sector Organizations, GAO-02-69G
(Washington, D.C.: Oct. 2001).
other forensic auditing techniques analyze data for relationships that
have not previously been discovered. The guide also provides examples of
various federal and state agencies that had performed such analysis. HUD
officials indicated that lack of resources was the primary reason that
they did not perform detailed expense analysis.
We found that one potential roadblock to a meaningful detailed analytical
review was HUD's lack of control over expenses that it classified as
allocated costs (AC). This expense category was intended to be used to
accumulate expenses that could not be directly charged to a property and
then allocate those expenses over all properties or those that received
some benefit from the expense. For instance, the expense incurred for
bonding coverage and file reviews for the entire program would be properly
chargeable to AC and then allocated to all properties. However, HUD
routinely used AC for expenses that should have been charged to specific
properties. For example, we identified renovation charges for a specific
property being classified as allocated costs. The accountability for HUD
resources and ultimately the monitoring of the contractors' performance
were negatively affected when expenses were not consistently and
accurately classified.
HUD's internal control monitoring of its contractors did not ensure timely
and effective action in response to identified risks. For example, we
found there was not an effective property inspection program that linked
physical inspections to work billed. We also found that HUD made payments
in its single-family program to a contractor for 1 year after we testified
that the same contractor was engaging in abusive billing practices in
HUD's multifamily program. Although HUD held numerous meetings with the
contractor over several years since shortly after the inception of the
contract in June 2001, HUD did not promptly or effectively address the
identified risk by implementing compensating controls over this
contractor's activities. We will discuss these issues in greater detail
later in this report.
Lack of Controls The lack of fundamental internal controls over the
process used to pay SF
property expenses likely contributed to $16.3 million of questionable
andContributed To $181,450 of potentially fraudulent payments that we
identified through the Questionable and use of forensic auditing
techniques, including data mining and document Potentially Fraudulent
analysis. We found questionable payments for invoices that had not been
appropriately reviewed and authorized, that lacked adequate support
andPayments documentation, and where one person falsified a key support
document. In
addition, HUD did not monitor contractor performance and take prompt
action to correct known deficiencies. As a result, we found a number of
instances where HUD paid for contractor services that were substandard or
not performed at all. These potentially fraudulent billings were all made
by a contractor we identified in our previous work on certain fiscal year
2001 MF property payments as carrying out highly questionable billing
practices. HUD recently took action to end its use of this contractor. The
$16.5 million of questionable and potentially fraudulent payments made to
contractors and other vendors during fiscal years 2002 and 2003
demonstrates the unacceptably high vulnerability of the program to
questionable and potentially fraudulent payments.
Questionable Payments We classified payments as questionable if they were
not supported by sufficient documentation to enable an objective third
party to determine if each payment was a valid use of government funds.
For the $16.3 million in payments we classified as questionable, we could
not determine, as applicable, one or more of the following: (1) the nature
of the goods or services HUD was paying for, (2) if the quantity and cost
for the goods or services was correct for each item purchased, (3) if the
government received the goods or services, (4) if a valid contract or
other agreement existed to support the payment, (5) if the payment was for
a valid obligation of the program, (6) if competitive bids had been
obtained for the work, and (7) if there was a legitimate government need
for the goods or services. Table 1 summarizes these questionable payments.
Table 1: Type, Number, and Amount of Questionable Payments
Number of
Types of payment payments Amount
Contract change orders
Inadequate support 23 $ 15,180,098
Water and sewer services
HUD did not own the
properties at the time of service 1 206,597
Lead-based paint abatement program
Inadequate support 8 268,800
Signs and airfreight delivery
Competitive bids not obtained 10 58,343
Chain-link fences
Competitive bids not obtained 5 30,366
Records management services
No evidence of an agreement for the services 3 296,087
Relocation fee
No justification or verification 1 1,300
Lawn service and repairs
Falsified work orders 23 23,000
Other
Inadequate support 22 228,773
Total questionable payments 96 $ 16,293,364
Source: GAO analysis of payments for fiscal year 2002.
For illustrative purposes, we provide specific examples of actual
support14 for eight payments. The documents that are reproduced in the
examples were provided to us by HUD as support for these payments and are
the same support that HUD officials relied on to review and approve the
payments.
Example 1-Contract Change Orders
We identified $15.2 million of questionable payments to contractors for
contract change orders with inadequate support for the payments. For
example, five property management contractors received $10.6 million in
payments for change orders when either no standard contract modification
agreement supported the payments or the modification agreement was not
14We have redacted identifying information by "blacking-out" such
information in the following figures.
signed by one or both parties. In addition, details of the amount charged
for each property were not provided for most of the amounts included in
each payment. Frequently, the payments were for services performed over
long periods of time prior to the date of payment and the supporting
documentation did not address why. For example, a change order issued
March 2001 led to payments over a year later of fixed amounts totaling in
the millions without an adequate explanation for the delay in payment
included in the supporting documentation.
In January 2004, HUD headquarters officials advised us that fully executed
contract modification agreements existed at the time each of the payments
was made. While HUD officials acknowledged that the agreements and
underlying detail support by property were not in the payment files, they
stated that the reviewer, approver, and certifying official reviewed all
documentation in order to verify the accuracy of the charges. We found no
evidence that the reviewers, approvers, or certifying officials had
located these documents to validate payments.
Figure 4 shows that the only support for a single payment of $1,318,692 in
June 2002 was an invoice that included two lines of explanation for
$452,000 and $862,661 with the description: "Lump sum Payment for Change
Order." No other support was provided for these two line items, such as a
copy of a contract modification agreement signed by both parties, a list
of the property numbers for the properties that received the goods or
services, the time period covered by the payments, or an explanation as to
what the government was paying for. Allocated costs, a pooled expense
category, was charged with $1,314,661 of the total payment. The balance of
$4,031 was charged to specific properties. HUD internal control policies
require that specific properties be charged for all identifiable expenses.
Further, there was no indication that the approver sought to determine the
time period of the charges and relate that period to the dates HUD owned
the properties for which the payments were made.
Figure 4: Invoice for Contract Change Orders
Source: HUD.
Example 2-Water and Sewer Services
We identified a $206,597 payment to one contractor for water and sewer
charges related to 31 HUD properties for an average of $6,664 per
property. HUD acquired the majority of the properties in 2001 or 2002.
Substantially all the $206,597 paid was for services provided prior to
HUD's ownership. We considered this payment as questionable because the
support was inadequate.
HUD regional officials informed us that payments were made to protect the
properties from liens by the water authority. We found no indication in
the payment support as to why HUD was paying for services provided even
before the period of ownership covered by the most recent HUD-insured
mortgage. While recognizing HUD's concern to protect the property from
liens, we found no indication that HUD pursued why these charges had not
been identified at the time of settlement and acquisition of the
properties, or that the contractor or HUD had pursued negotiating a
settlement with the water authority. Further, our review of the charges
indicated numerous large amounts given the nature of the property and the
time period involved. For example, one invoice dated July 2002 was for
$35,756 for water and sewer services from May 1995 through June 2002 for a
property HUD acquired in June 2001. Our research identified three prior
owners of this property during the period covered by the bill paid by HUD.
Another invoice was for $18,530 for services from January 1999 through May
2002 on a property HUD acquired in May 2002. Furthermore, at least two of
the prior owners received FHA loans to purchase this property, even though
at the time of purchase there were outstanding water and sewer bills
related to the property. Yet, HUD's payment files contain no indication
that HUD officials reviewed the charges for accuracy, despite the
unusually large amounts.
Example 3-Lead-Based Paint Abatement Program
Our review found eight payments totaling $268,800 that HUD headquarters
directed its regional offices to make to a contractor for partial
reimbursement of claimed expenses of $529,682 to develop a lead-based
paint abatement program. The contractor claimed that the lead-based paint
abatement program was developed in response to a HUD request. Support for
these payments did not include a signed contract modification form or
other agreement for the contractor to develop such a program, or any
indication of the amount or basis for settlement against the claimed
expense of $529,682. The support provided to us for two payments totaling
$99,000 had no signatures by HUD officials indicating the requests had
been reviewed, approved or certified for payment.
Further, the entire amount of the payments was charged to allocated costs,
a pooled expense category, and not to specific properties as required by
HUD policy.
Although we started asking for support for these payments in August 2003
and received some information from HUD over time, it was not until January
2004, HUD headquarters provided us with documentation that included emails
from a HUD contracting official to the contractor that indicate that the
contractor agreed to accept $240,000 as the remaining payment on the
lead-based paint services, that invoices for this amount will be handled
as pass-through expenses similar to what was done for the initial payment
of $300,000 and that "we won't need to issue contract modifications this
way."
No explanation was provided as to how the $540,000 settlement was reached
or why such amount exceeded the total amount claimed by the contractor.
Further, the management contract provides that all costs of performance
are at the expense of the contractor unless otherwise specifically
identified as pass-through cost in the contract. HUD must approve any
additional pass-through expenses prior to the expense being incurred. We
found no evidence that development of a lead based paint abatement program
was specifically identified as a pass-through cost or that HUD granted
approval prior to the contractor incurring the expense.
Example 4-Signs and Airfreight Delivery
We identified 10 payments totaling $58,343 for the purchase and shipping
of over 14,950 "for sale" signs for use by contractors on HUD properties.
The airfreight fee to ship the signs from Texas, the contractor's home
office, to field offices in various states including California,
Tennessee, and Illinois, totaled $6,805. The contractor did not obtain the
required competitive bids.15 Further, we found no evidence that (1) local
supply sources had been considered, (2) the quantity of signs paid for was
reviewed for reasonableness, or (3) the large air freight charges had been
questioned. Also, we could not reconcile some amounts paid to the invoices
used to support the payments. In January 2004, HUD headquarters officials
advised
15HUD requires written bids for property expenses anticipated to exceed
$2,000.
us that they agreed to be responsible for all costs incurred by the
contractor for developing the signs and for the accelerated delivery and
that a contract modification agreement was executed. However, they did not
provide an explanation as to why local supply sources had not been
considered, nor did they address the other issues described above.
Example 5-Chain-Link Fences
We identified five payments totaling $30,366, to reimburse a management
contractor for fencing installed at multiple locations by a single vendor.
Figure 5 shows one such fence. There was no evidence that the contractor
obtained the required written competitive bids. The representatives of the
contractor that we interviewed in August 2003 told us that a city
ordinance requires this particular fencing vendor be used. In January
2004, HUD headquarters officials advised us that the vendor was awarded
the work after a competitive bidding process. However, HUD could not
locate the supporting documentation as the bidding process had occurred
some years earlier.
Figure 5: Chain-Link Fence
Source: GAO.
Example 6-Records Management Services
We identified one payment of $98,695 and two subsequent payments of
$98,696 each for a total of $296,087 to a contractor for "Records
Management." The support for the first payment (fig. 6) was the billing
from the contractor and an annotation from a HUD employee indicating that
it was "OK to pay." There was no contract included with the support for
any of the payments. There also was no indication that the amount of the
payments had been compared to a contract. HUD regional staff advised us
that the "OK to pay" notation on one of the invoices by the division
director was sufficient to process the payment. In January 2004, HUD
headquarters officials advised us that a valid agreement for the services
was in place at the time of payment, but neither the contract for the
services, nor the modification to the agreement with the contractor, is
required to be attached to the payment. However, we found no evidence that
these documents were reviewed or considered prior to payment of the
invoices.
Figure 6: Records Management Invoice
Source: HUD.
Example 7-Relocation Fee
We identified a payment of $1,300 to reimburse a contractor for a fee paid
to an individual to vacate a property not in the HUD inventory. The
support for the payment was an internal e-mail questioning if the property
was in HUD's inventory, a generic invoice that was unsigned and did not
include the FHA property number-a HUD requirement for all payments (fig.
7), an unsigned "Agreement to Vacate" (fig. 8), and a final approval
e-mail (fig. 9) without explanation. HUD regional staff subsequently told
us that a signed "Agreement to Vacate" existed; however, we found no
evidence of the signed agreement with the support for the payment. HUD
charged the payment to Allocated Costs, a category for pooled expenses.
The property located at the address on the form did not have a FHA
property number, which is required to submit expenses for a HUD property.
In January 2004, HUD regional officials confirmed that at the time of
payment the property was not in the HUD automated payment system.
Figure 7: Relocation Invoice
Source: HUD.
Figure 8: Agreement to Vacate
Source: HUD.
Figure 9: E-mail Approving Payment
Source: HUD.
Example 8-Lawn Service and Repairs
During our document analysis work we identified suspicious documents
supporting a number of payments. Specifically, we found numerous work, one
of which is illustrated by figure 10, that were initialed three times by
the same person certifying (1) receipt of competitive bids, (2) completion
of the work by the subcontractor, and (3) inspection of the work
performed. During our site visit to Santa Ana, California, we interviewed
representatives of the contractor and asked for an explanation for the
initials on these work orders. We were told that they had not noticed the
similarity in the initials and did not know the identity of "S. C", the
person whose initials were on the work orders. Later the same day, the
contractor advised HUD by phone that the work orders had been falsified to
support disbursement requests.
Source: HUD.
Page 31 GAO-04-390 HUD Single-Family and Multifamily Property Programs
We suggested to HUD that it perform an extensive review of payments
meeting certain criteria to identify any additional potentially improper
payments. HUD advised us in August 2003 that it was seeking reimbursement
of approximately $23,000 in payments that had been made based on similar
falsified work orders. However, approximately 2 months later, HUD reversed
its position and decided not to seek reimbursement for these payments
because the contractor assured them the work had been performed. In
January 2004, HUD headquarters officials advised us that they supported
the decision to not seek reimbursement from the contractor because the
work was "verified for completion." However, the verification of
performance of the work was provided-months after the date of payment-by
the contractor that had falsified the documentation; HUD has not
independently verified that the work was performed.
In addition to the previous eight examples, we identified 22 other
questionable payments totaling $228,773. These included payments for steel
roll-up doors, appraisal services, newspaper advertising, and utilities.
The common issue with these payments, like others classified as
questionable, was the lack of adequate supporting documentation included
with the payment. Without this support, we could not determine whether
these payments were a valid use of government funds.
Because we tested only a small portion of the transactions that appeared
to be high risk and HUD internal controls did not provide reasonable
assurance that improper payments would not occur or would be detected in
the normal course of business, there are likely other questionable
payments that we have not identified.
Potentially Fraudulent Payments
HUD's failure to monitor contractor performance and institute additional
control activities in response to known risks resulted in at least
$181,450 of potentially fraudulent payments. We identified $163,965 of
potentially fraudulent payments made in fiscal year 2002 and $17,485 made
in fiscal year 2003. We classified payments as potentially fraudulent when
the scope or quality of the work appeared to be misrepresented by the
contractor or the work appeared not to have been done at all.
Through data mining, we initially identified 287 invoices, totaling
$476,104, for single-family construction renovations that were submitted
to HUD by the contractor that our prior work identified as using highly
questionable billing practices, including (1) alleging that construction
renovations were emergencies, thus not requiring HUD preapproval, and (2)
splitting
renovations into multiple projects to stay below the dollar threshold
requiring HUD approval. Each of the 287 invoices supported fiscal year
2002 payments and was for an amount less than the $2,500 threshold16
requiring HUD approval. We selected properties to test the validity, by
physical inspection, of some of these $476,104 in payments, focusing on
those that appeared to be for tangible goods that we could readily
identify. In total, we tested the validity of payments totaling $136,264.
In June 2003, we visited nine HUD-owned single-family properties in New
York City being managed by the contractor referred to above. HUD staff
responsible for oversight of this contractor accompanied us to the
properties. At each of the nine properties we visited, we noted
discrepancies between what was represented on select invoices17 and what
was actually received, and determined that all of the $136,264 payments
tested were potentially fraudulent payments. We took photographs to
support our observations, when possible.
All of the invoices that we tested indicated that the work performed was
purported to have been for emergency repairs, meaning that no HUD
preapproval was required, nor was the property manager required to obtain
competitive bids for the work. Many of the work projects for the same
addresses were split among multiple invoices, most likely to stay below
the dollar threshold requiring HUD approval-as in the case we reported
last year about the multifamily construction renovation work performed by
this contractor. The labor charge was always $91 an hour-whether for clean
up and debris removal or a project typically requiring a mastered skill,
such as masonry.
We noted serious discrepancies between what was represented on invoices
and what was actually received at each of the nine properties we visited.
For illustrative purposes, we are providing specific examples of some of
the discrepancies noted at five of the nine properties.
16Under the terms of the contract, the contractor was required to obtain
HUD approval for all repairs anticipated to exceed $2,500.
17It was not practical for us to test whether all of the other goods or
services paid for were actually received due to the nature of the goods or
services.
Property 1
On the basis of physical inspection, we determined that HUD paid at least
$30,701 in fiscal year 2002 for goods or services related to this property
that were incomplete or do not appear to have been provided at all by the
contractor. For example, HUD paid (1) over $4,000 for replacement of the
entire apartment floor, including the bathroom, (2) $2,320 for a new
ceiling and bathroom door, (3) $2,170 to have four workers repair and
install new Sheetrock(R), and (4) $1,590 for a small kitchen cabinet. The
photographs (figs. 11 through 14) show little or no evidence that this
work was performed.
Source: GAO.
Source: GAO.
Figure 13: Property 1-"New" Sheetrock(R) Walls
Source: GAO.
Source: GAO.
As illustrated in figures 11 through 14, we saw no evidence of new
flooring in the apartment, and in fact, most of the floors were missing
tiles or otherwise very worn. The "new" ceiling was severely damaged and
caved in, and there was no new bathroom door. We found no new
Sheetrock(R), but about two square feet of wall had been roughly patched.
While there was a new cabinet, we found a cabinet similar to the one
pictured at a large retailer for a price of less than $50.
Property 2
On the basis of our physical inspection, we determined that HUD paid at
least $11,176, in fiscal year 2002, for goods or services related to this
occupied property that were incomplete or do not appear to have been
provided at all by the contractor. For example, HUD paid $2,060 for
"emergency repairs" to a bathroom and $1,082 for repairs to a stairway.
The photographs (figs. 15 through 17) show the condition of the "repaired"
bathroom and minimal work performed in the stairway at the time of our
physical inspection.
Source: GAO.
Source: GAO.
Source: GAO.
Page 38 GAO-04-390 HUD Single-Family and Multifamily Property Programs
As illustrated in figure 17, the bathroom was in total disrepair. The
repairs to the stairway were merely two wooden dowels that replaced
missing balusters.
Property 3
On the basis of physical inspection, we determined that HUD paid at least
$9,538 for goods or services related to this property that were incomplete
or do not appear to have been provided at all by the contractor.
Specifically, HUD paid (1) $2,265 for new ceilings, (2) $3,560 for
repairing and painting walls and ceilings, (3) $3,162 for floor repairs
and replacement, and (4) $551 for a new refrigerator. The photographs
(figs. 18 through 20) show the general condition of the ceilings, walls,
and floors throughout this property after the repairs.
Source: GAO.
Source: GAO.
Source: GAO.
As shown in the preceding pictures, it appeared that new Sheetrock(R) was
installed on the kitchen ceiling, however the job was not completed-the
ceiling had not been sanded or painted. The dining room ceiling was caved
in and the floors were old and in poor condition. In addition, the new
refrigerator was missing.
Property 4
On the basis of a physical inspection, we determined that HUD paid at
least $32,677 for goods or services related to this property that were
incomplete or do not appear to have been provided at all by the
contractor. For example, HUD paid $2,292 for four new metal doors and
installation. We only found one metal door in the basement, shown in
figure 21, which does not appear to be new.
Source: GAO.
In addition, HUD reimbursed the contractor for five invoices, totaling
$8,407, for additional work performed in the basement, including clean up
and debris removal and replacement of a wooden floor. The occupant we
spoke with said the only work he was aware of being done to the basement
was the installation of the one old metal door. HUD also paid $3,978 for
repairs to the front entrance stoop (fig. 22).
Source: GAO.
Although we did observe patches of relatively new concrete, it appears
that HUD was overcharged for this work. In addition, HUD paid $3,200 for
cleaning and removing debris from the backyard. The occupant said no one
had cleaned the backyard and we noted that the backyard was currently
covered with debris, including old broken bicycles and large broken slabs
of concrete.
Property 5
On the basis of physical inspection, we determined that HUD paid at least
$5,021 for goods or services related to this property that were incomplete
or never received. The contractor was reimbursed $1,048 for "emergency"
repair and painting of the public hall. The photograph (fig. 23) is of the
public hall.
Source: GAO.
As shown in figure 23, only portions of the walls were roughly painted. In
addition, HUD paid $2,167 for repairs, including plastering and painting
the walls and ceiling in the living room and dining room of one of the
apartments on this property. The photograph (fig. 24) shows the condition
of the ceiling and part of the wall in one of the rooms where this work
was
said to have been performed. Similar conditions were observed in the other
rooms purported to have been repaired.
Source: GAO.
We noted similar discrepancies, totaling $47,151, at the other four
properties we visited. In total, based on our June 2003 physical
inspection, our work indicated that 82 invoices, totaling $136,264, were
most likely fraudulent.
In June 2003, we met with HUD officials in headquarters to discuss the
results of our June visit. The HUD Philadelphia office officials that
accompanied us on our physical inspection were teleconferenced in on the
meeting. We used the photographs included in this report to help
communicate the severity of the deficiencies we noted.
We also discussed the results of our June visit with Committee staff,
which resulted in an expansion of our work (1) to determine whether HUD
had made changes to its internal controls to address the causes of the
potentially fraudulent payments that we had identified in June 2003 and
(2) to test for additional potentially fraudulent payments. Our work
included additional tests for receipt of goods and services for payments
made in fiscal year 2002, as well as certain payments made in fiscal year
2003. As a result, we found another $45,186 in potentially fraudulent
payments, consisting of $25,657 of fiscal year 2002 payments and $19,529
of fiscal year 2003 payments.
We determined that HUD had not implemented new controls or modified
existing controls to address weaknesses previously identified. For
example, HUD did not institute monitoring policies that would increase the
frequency or scope of the inspection to verify that goods or services paid
for had, in fact, been received. Furthermore, HUD officials told us that
the contractor had not been directed to perform the services for which HUD
had paid $136,264 and received little in return.
In November 2003, we attempted to physically inspect the same apartments
in each of the nine previously visited properties. However, we only had
access to the apartments within each property where the occupants allowed
us to enter. In total, we gained access to seven of the nine properties
that we visited in June. At these seven properties, we saw no evidence
that any attempt was made to correct the work that HUD paid $39,686 for
and we previously identified as having been incomplete or not performed at
all. The additional $45,186 in potentially fraudulent payments that we
found included $13,138 for repairs and renovations to the properties we
visited in June. The remaining $32,048 of additional potentially
fraudulent payments was related to nine additional properties that we
visited. The same contractor managed these properties.
During this second visit, we again noted numerous discrepancies between
what was represented on invoices and what was actually received. For
illustrative purposes, we are providing specific examples of a few of the
discrepancies noted.
At one of the properties that we revisited, HUD paid a total of $2,759 for
"emergency" repairs to a bathroom wall and floor tiles ($1,756) and
bathtub repairs ($1,003). As evidenced by the photograph (fig. 25), the
only indication that the bathroom wall or floor tiles had been repaired
was that a few tiles on the wall by the toilet had been replaced.
Source: GAO.
As shown in the photograph (fig. 26), the "repaired" bathtub was old and
rusted and did not appear to have received $1,003 in repairs.
Source: GAO.
At yet another revisited property, we found an additional $2,977 that HUD
paid the contractor for repairs to the entrance lobby and public hallway.
As discussed previously in this section, the entrance lobby had not been
repaired and only portions of the public hall had been roughly painted. It
was not evident that any further work had been done.
The remaining $32,048 of additional potentially fraudulent payments was
related to the nine new properties that we visited. We determined that HUD
paid at least $19,763 for goods and services related to one of these
properties that did not appear to have been delivered. For example, HUD
paid $1,813 for installing new tiles to the stairs pictured (fig. 27).
Source: GAO.
As evidenced by the photograph above, the stairway was not retiled. At
this same property, HUD paid the contractor $2,008 to install a new
ceramic tile bathroom floor, a shower rod, and a medicine cabinet. The
floor we saw (fig. 28) appeared to be several years old. Furthermore, the
occupant stated that he purchased and installed the medicine cabinet.
Source: GAO.
At another property, we determined that HUD paid at least $7,420 in
potentially fraudulent payments, including $1,847 for installing a new
bathroom floor. As indicated in the photograph (fig. 29), portions of the
bathroom floor were missing, and clearly had not been recently replaced.
Source: GAO.
Our analysis of supporting documentation indicated that the contractor
might have used the same scheme in the SF payment process that it had used
to circumvent controls in the MF payment process, which we reported in
October 2002. The scheme involved (1) alleging that construction
renovations were emergencies, thus not requiring multiple bids or HUD
preapproval, and (2) splitting renovations into multiple projects to stay
below the dollar threshold of HUD-required approval. We referred the
improprieties that we previously identified to the HUD OIG. A HUD OIG
investigator told us that these improprieties have been referred to the
U.S. Attorney's Office.
As illustrated in figure 30, HUD hired the contractor in July 1997 to
manage a portfolio of MF properties. During the first year of the
contract, HUD became concerned about the contractor's billing practices.
HUD questioned the contractor about the rotation of vendors, determination
of fair pricing, and reasonableness of work orders issued. HUD documented
its many concerns, including that "it is evident that a great amount of
money is being spent with little control in place." In June 2001, despite
serious performance deficiencies, including questionable procurement
practices, HUD increased the contractor's responsibilities by modifying
the contract to include certain SF properties in New York City. In
November 2001, HUD began to question the contractor about its billing
practices related to the SF properties. In October 2002, we testified
about the potentially fraudulent fiscal year 2001 billing practices of
this contractor. According to HUD officials, the MF contract expired in
February 2003.
Source: GAO analysis.
According to HUD officials, the agency aggressively monitored the
contractor's performance; identified performance deficiencies from the
onset of the task order; and identified deficiencies in services,
products, and billings to the contractor management. A HUD memorandum
summarizing its efforts to improve the contractor's performance indicated
that in November 2001, it began meeting with the contractor to review
issues of concern about the SF properties. HUD noted that one of the
obstacles to the contractor's successful performance was that the contract
did not clearly define the details of work to be performed. In addition,
the statement of work for the contract did not take into account the
special nature of the 203(k) property challenges, such as sites dispersed
throughout New York City and extensive legal and municipal involvement.
The memorandum also stated that HUD considered terminating the contract.
However, since the agency (1) had not issued any formal notices of concern
to the contractor and (2) difficulty existed in quickly finding a
qualified replacement contractor, HUD agreed to one final effort to
improve the contractor's performance. HUD and the contractor agreed to
revise the statement of work to reflect a clearer and mutually agreed upon
basis by which to measure the contractor's performance. The new statement
of work was issued in June 2003. Within 60 days of the issuance of the new
statement of work, HUD noted serious findings, including unacceptable
work, unreasonable prices, and some work that appeared not to have been
done at all. Throughout all of this period, HUD continued to pay bills
from this contractor.
On October 23, 2003, HUD issued an amendment to the contractor's task
order to end the contractor's management responsibilities on October 31,
2003. A new contract was put in place on October 17, 2003, which requires
the new contractor to absorb the cost of all routine maintenance and
repairs. HUD officials stated that the agency held back the payment of
recently submitted billings from the prior contractor that HUD deemed
questionable. However, HUD officials also told us that the agency was not
seeking reimbursement for any previously paid billings, including those
identified by our audit for which HUD received little in return. HUD paid
this contractor $2 million in fiscal year 2002 and over $2.5 million in
fiscal year 2003 for SF property expenses.
Insufficient Monitoring of a Major Multifamily Program
We found HUD's monitoring of a major multifamily pilot program with a
state housing agency to be insufficient. HUD entered into an agreement
that made it responsible for providing all the money needed to complete
the program, while the state agency was responsible for developing and
monitoring the program. HUD viewed the program as a way for the state
agency to employ innovative management and disposition methods and entered
into a sole source agreement with an initial development budget in the
amount of $187.5 million.18 However, HUD did not fully assess the
program's inherent risks under the terms of the agreement and design
compensating internal controls to address these risks. In addition, HUD
did not implement internal controls appropriate for monitoring the
escalating risks, while the cost of the program, borne by one of HUD's
mortgage insurance funds, climbed to over $537 million from inception in
1994 through September 30, 2003. Additional oversight by HUD may have
helped prevent at least some of the more than half a billion dollars in
program
18The development budget is based on rehabilitation costs of $100,000 per
apartment units.
costs-$286,400 expended per apartment unit-for the renovation, interim
management, and ultimate disposition of 1,875 apartment units.
The National Housing Act authorizes the Secretary of HUD to delegate to
state agencies the performance of management and disposition-related
functions.19 HUD determined that it was in the public interest for it to
enter into a sole source agreement with a state housing agency for interim
property management, to include renovation and ultimate disposition of 18
HUD-owned multifamily properties within the agency's home state. HUD is
providing all the money for the program and the state agency is
responsible for all spending, including amounts for construction,
renovation, and dayto-day operations of the properties. Although the
program agreement did not list an expected completion date, HUD officials
told us that the program was intended to take approximately 3 years. It is
currently in its 10th.
Our publication, Standards for Internal Control in The Federal Government,
states that (1) management needs to comprehensively identify risks and
should consider all significant interactions between the entity and other
parties, (2) internal control monitoring be performed to assess the
quality of performance over time, and (3) appropriate internal controls
should be implemented to improve accountability. However, we found that
HUD's monitoring was limited to the approval of property budgets. Internal
controls should be designed to ensure that ongoing monitoring occurs in
the course of normal operations. When, as here, the terms of the agreement
charge one party with authority over virtually all spending decisions,
including to whom, in what amount, and under what terms large construction
contracts will be let, and the other party is responsible for paying all
the bills, strong monitoring controls are necessary to control spending
and encourage financial accountability.
In spite of the inherent risks that stemmed from the terms of the
underlying agreement with the state housing agency, HUD did not analyze
these risks and design controls to address them either initially or in
reaction to escalating costs over a 9-year period. HUD did not incorporate
adequate spending controls that may have served to limit its financial
exposure before entering into the program agreement with the state agency.
Spending controls that may have been appropriate considering the terms of
the agreement with the state agency include: specifying performance
1912 U.S.C. S: 1702.
penalties for missed completion dates, requiring that feasibility studies
be conducted prior to undertaking major contractual commitments, providing
a cost-sharing formula that would assign some economic risk to the program
developer, and limiting the amount that HUD would pay for specific line
items by project, such as a ceiling on the amount that would be reimbursed
for tenant upgrades by property. Furthermore, despite significant spending
in excess of the original budget, HUD's oversight of the program never
evolved beyond approval of the properties' initial development budgets.
HUD also did not establish processes to routinely estimate and compare
projected development costs to total estimated costs per the program
agreement or to consider the impact of unanticipated occurrences, such as
expenses to mitigate environmental hazards.
The largest categories of expenditures were for general construction and
other contractor charges. The state agency was responsible for all aspects
of the contracting process including the competition plan, which typically
is a key function in ensuring that the government receives the best
combination of price and quality. These general construction payments
totaled approximately $178 million of the total incurred cost of $481
million through September 30, 2002. The state agency awarded 23 separate
construction contracts to rehabilitate the 16 properties in the program
that ranged in amount from $49,600 to over $45 million. The construction
contractors received periodic payments based on the percentage of work
completed, which was reflected in monthly requisitions. The state agency
was solely responsible for reviewing and approving the monthly
requisitions and construction contractors' periodic payment requests. HUD
paid all of these expenses, while providing no oversight of the
construction contractor's monthly payments beyond the approval of initial
development budgets.
HUD paid significant amounts for expenses in excess of amounts in the
original contract award due to unforeseen natural conditions, tenant
requests, and other contract amendments for changes in the architectural
scope of work. For example, HUD paid an additional $8.9 million in
contract amendments at one property, which had an initial construction
contract of over $45 million. Contract amendments were granted when the
architectural specifications included in the original construction
contract did not include certain work being performed by the construction
contractor. These payments were for unforeseen conditions, such as the
need to address environmental hazards and requests from tenants for tenant
upgrades. Tenant upgrades at one 236-unit property included the following:
installation of molding on stairs, $101,779 ($431 per unit); labor
and materials for two coats of varnish on stair molding, $115,000 ($487
per unit); upgrades to ceiling light fixtures, $114,648 ($189 per
bedroom); ceramic tile back splashes, $71,775 ($304 per unit); soap
dispensers at sinks for $19,430 ($82 per unit); and upgrades of door
hardware from satin chrome to satin brass for $18,650 ($79 per unit). HUD
was not in a position, due to its limited monitoring of the program, to
challenge or otherwise determine the validity of these payments.
HUD also granted the state agency the flexibility to make payments
"offbudget." The expenses designated as off-budget included such costs as
environmental hazards, consulting and monitoring, and tenant relocation
expenses. The state agency's annually adjusted asset management fee was
also considered off budget. In addition, for one property we found that
HUD directed the classification of charges associated with extraordinary
site development and building demolition as environmental hazard expenses.
This classification allowed the costs to be considered as off budget.
Since inception of the program, payments made by HUD that were classified
as off-budget totaled over $241 million (see table 2), including
environmental hazard expenses of approximately $58 million, and expenses
related to tenant relocation of $46 million. When HUD granted the state
agency the ability to charge off-budget items and then did not define or
limit this type of spending, it substantially weakened the effectiveness
of the limited control stemming from its approval of the original
development budget for each property.
Improper payments result in hidden Table 2: HUD Spending
expenses that must be Related to Multifamily
Program
paid for by either decreases in Dollars in millions
program spending or increases
in appropriations or mortgage Program spending through Amounts
insurance premiums paid by the fiscal year 2002
public. Budget costs
Original budget $187.5
Amendments 52.0
$239.5
Off-Budget costs
Environmental hazard abatement 57.6
Tenant relocation expenses 45.5
State agency management fee 15.1
Operating cost (security, payroll, etc.) 123.3
241.5
Total $481
Source: GAO analysis.
As of the close of fiscal year 2002, the program has cost HUD in excess of
$481 million, almost $300 million more than the original development
budget, and remains a work in progress. In addition, HUD reported that an
additional $56 million was expended for this program in fiscal year 2003.
HUD officials have advised us that they do not plan on entering into any
future agreements with similar terms. Internal controls tailored to
address the inherent risk, including additional oversight by HUD, may have
prevented some of the cost escalation and would have provided management
with a reasonable basis for ensuring that the more than half a billion
dollars in program payments were properly supported as a valid use of
government funds.
Conclusions The problems we identified with internal controls and risk
management over HUD single-family and multifamily property programs leave
the agency vulnerable to wasteful, fraudulent, or otherwise improper
payments. This vulnerability was capitalized upon by at least one
contractor and potentially others during the period of our review as
evidenced by the potentially fraudulent and questionable payments we
identified in the SF program. Even after HUD officials became fully aware
of this improper activity, they did not take timely action to stop the
flow of money being paid to this contractor for substandard or nonexistent
services. Further, HUD also failed to establish any kind of control over
money it provided for the major multifamily program, even though costs
escalated to triple the original development budget.
Improper payments increase the expense of program delivery and may reduce
the quality of program services. This additional expense must be funded by
either a decrease in spending-in the affected program area or in other FHA
programs-or by an increase in revenue from congressional appropriations or
mortgage insurance premiums paid by those buying homes through the FHA SF
program. Because of the long-term nature of funding decisions for the HUD
mortgage insurance funds, including the rates charged for mortgage
insurance, the impact of improper payments might not be visible to
policymakers and managers. Such hidden expenses are nevertheless real and
cumulative in effect. HUD must take steps to identify and manage its
improper payments in order to minimize costs to FHA mortgage holders and
taxpayers and maximize funds available to carry out its programs.
Recommendations for Executive Action
Single-Family Property Program
To improve internal controls over HUD's single-family property program, we
recommend that the Secretary for Housing and Urban Development direct the
Assistant Secretary for Housing-Federal Housing Commissioner to take the
following 22 actions to address the weaknesses within the single-family
program discussed in this report.
o Establish policies and procedures that create a positive control
environment for all key steps in the single-family payment process. These
polices and procedures should
o
o
o
o
require management contractors to prepare all payment requests for which
they are the payee, including any revised payment requests that may be
required;
provide adequate controls over preparation, review, and approval of
payment requests for vendors that do not have access to the automated HUD
Single-Family Acquired Asset Management System;
specify that the technical review of payment requests be performed solely
by HUD-appointed individuals with the requisite training and experience;
and
require HUD monitoring at prescribed time intervals to ensure that these
control features are being consistently implemented at all payment review
locations.
o Establish policies and procedures over single-family payments to
contractors and other vendors that ensure all such payments are clearly
documented and the documentation is readily available for appropriate
officials to consider at the time they review and approve payment
requests. Depending on the type of payment, these policies and procedures
should
o necessitate evidence of the nature of the goods or services the payment
is for;
o call for documenting that the quantity and cost for the goods or
services is correct, was received and has been reviewed for each item
purchased;
o require annotated verification that the amount and timing of the
payment is supported by a valid contract or other agreement signed by both
parties;
o require documentation that the payment is for a valid obligation of the
program;
o stipulate that competitive bids be obtained and evaluated before the
work is performed;
o require confirmation that the goods or services are for a legitimate
government need;
o require that all invoices and other supporting documentation be
effectively canceled to prevent reuse; and
o require that only original documents be used to support payments, or
that there be evidence of compliance with policies concerning the use of
reproduced documents.
o Establish policies and procedures over single-family payments to
contractors and other vendors that will improve the effectiveness of HUD's
oversight of contractor performance. These policies and procedures should
o establish standard business metrics for comparing contractor
performance, to include expense data by contractor, total expenses per
property, and per expense classification;
o ensure the preparation and review of these metrics regularly to
identify cost saving opportunities, unusual patterns that require
attention, and potential instances of fraud, waste, and mismanagement; and
o establish specific guidelines for when single-family payments to
contractors and other vendors may be classified as allocated costs.
o Establish consistent practices for single-family payment processes, to
include the preparation of payment requests, review and approval of
payment requests, and minimum supporting documentation standards for all
payments, that will clarify what policies and procedures must be adhered
to by headquarters and all homeownership centers.
o Follow up on each of the payments we identified as questionable or
potentially fraudulent to
o determine if the payments are a valid use of government funds;
o identify the causes for these payments to occur and not be detected in
the ordinary course of business; and
o pursue recovery of amounts paid, as appropriate.
o Perform a risk assessment of single-family payments to contractors and
other vendors to determine the nature and extent of HUD's exposure to
improper payments. The risk assessment should
o include a comprehensive review and analysis of operations to determine
where risks exist and what those risks are, including assessing the need
for linking property inspections with billed amounts for goods and
services provided;
o measure the potential or actual impact of identified risks on program
operations; and
o establish compensating internal controls to address areas of
vulnerability identified through the risk assessment process.
Multifamily Program with a State Housing Agency
o To address the significant internal control weaknesses that we
identified related to monitoring the multifamily program with a state
housing agency under a sole source agreement, we recommend that the
Secretary of Housing and Urban Development direct the Assistant Secretary
for Housing-Federal Housing Commissioner take the following two actions.
o Implement risk-based oversight and monitoring policies and procedures
to reduce HUD's vulnerability to fraud, waste, abuse, and
mismanagement in the multifamily program with the state housing agency.
o Consider requesting the HUD Office of Inspector General to review the
propriety of the use of funds under the program with the state housing
agency.
Agency Comments and Our Evaluation
In written comments on a draft of this report, from HUD's Assistant
Secretary for Housing-Federal Housing Commissioner which are reprinted in
appendix II, HUD agreed with some of our findings and recommendations and
disagreed with others. In particular HUD (1) disagreed with our
classification of certain payments, including $15.2 million of
inadequately supported payments for contract change orders, as
questionable payments; (2) agreed that the contractor for the New York
properties failed to provide certain services or provided unacceptable
services, but stated it had held back certain payments to the contractor
that included amounts we reported as potentially fraudulent; and (3)
regarding our recommendations related to the MF pilot program,
acknowledged that its agreement with the state agency did not contain the
necessary controls and oversight protocols to preclude the types of
problems we identified and agreed to examine opportunities to enhance its
oversight over the remaining life of this particular program; however, it
did not agree to enlist the HUD IG's support to review the propriety of
the use of the funds at this time. HUD did not specifically comment on the
other 22 recommendations related to its SF program.
With regard to contract change orders, HUD stated that it is inappropriate
for us to consider these 23 payments totaling $15.2 million as
questionable. HUD stated that for each of these payments (1) it had
provided us signed copies of the contract modifications, (2) the payments
are clearly supported by contract modifications issued by approved HUD
contracting specialists, (3) agency staff adhered to appropriate
procedures in the review and payment for the services identified in the
modifications, and (4) notations on the respective invoices by the HUD
reviewing official that he or she had looked at the contract modification
to confirm its existence prior to payment [emphasis added] is certainly
not a prescribed procedure and should not cause these payments to be
classified as questionable.
We disagree. We classified payments as questionable if they were not
supported by sufficient documentation to enable an objective third party
to determine if the payment was a valid use of government funds. We found
each of these 23 payments totaling $15.2 million to be inadequately
supported at the time the payment was made. As stated in the report, these
payments were made without basic support such as standard contract
modification or other agreements signed by the contractors and HUD,
indication of the timing, quantity, and nature of the goods and services
provided, and identification of the specific properties covered by the
payments.
In January 2004, several months after our initial request for supporting
documentation for these payments and after our fieldwork was completed,
HUD headquarters officials advised us that fully executed contact
modification agreements existed at the time each of these payments was
made. These officials acknowledged that the agreements and underlying
detail support by property were not in the payment files but that the
reviewing, approving, and certifying officials reviewed all documents in
order to verify the accuracy of the charges. However, we found no evidence
of this during our site visits. In fact not one HUD reviewing, approving,
or certifying official indicated to us that they went beyond the
documentation contained with the payment request to ascertain the
propriety of the payments we reviewed.
Also, in January 2004, HUD headquarters officials forwarded us signed
copies of some, but not all of the contract modifications. That fact that
the signed contract modifications may have existed at the time payments
were made is peripheral to one of our core points that-HUD reviewing,
approving, and certifying officials have available and consider at the
time they review and approve the payment sufficient supporting
documentation to determine that a payment is a valid use of government
funds. It is clear from our review that this did not occur in the case of
these $15.2 million payments for contract change orders. In addition, the
existence of the contract modifications does not negate our other core
point. Without specific documentation, which HUD did not provide,
indicating such things as (1) the properties the charges relate to, (2)
the time period the charges were incurred, (3) an explanation of what
goods or services were provided, and (4) that HUD owned the properties at
the time the goods or services were provided, we could not determine the
validity of these payments. Therefore, they remain questionable.
HUD raised similar issues with regard to each of the other 8 categories of
payments totaling $1,113,266 that we classified as questionable. We
address these other issues in our more detailed comments in appendix II,
where we reaffirm our position that all of these payments are
questionable.
Regarding the potentially fraudulent payments, HUD stated, and we agree,
that the department is obligated by government contracting procedures to
work with a sub-performing contractor to improve performance, rather than
move to immediate termination. However, it is not clear to us why knowing
of these serious performance deficiencies, including questionable
procurement practices that became apparent within the first year of the
contract, HUD continued for over 6 years to pay this contractor over $425
million for charges related to SF and MF properties without instituting
additional controls to determine whether the goods and services billed for
had actually been provided at the properties.
In addition, we disagree with HUD's statement that its "hold back"
included disbursements reported as potentially fraudulent payments in this
report. First, we assume that HUD means that it is recouping some of these
payments by holding back payment on newly received invoices from this
contractor. However, HUD staff responsible for oversight of the contractor
informed us that the held back payments relate to a barrage of old
invoices, some going back 2 or 3 years, that the contractor submitted
during the contract termination process. Many of these invoices had
previously been rejected by HUD, and the contractor merely resubmitted
them. Therefore, holding back payment on these invoices, while helping HUD
avoid making additional potentially fraudulent payments, does not result
in the recoupment of previously made payments for invalid charges.
In regards to our MF program recommendation to consider requesting the HUD
IG to review the propriety of the use of funds under the program, HUD
stated it has already initiated enforcement actions and claims against
certain architects and contractors for failing to perform satisfactorily
and plans to vigorously pursue all necessary enforcement actions that
arise related to this program. However, HUD said it would not consider
requesting the IG to review the propriety of the use of the funds for this
program at this time, as we recommended, but may elect to refer
unsatisfactory performance issues to the IG for further review. HUD also
said that it intends to complete a full evaluation of the program goals
and implementation at the end of the program and that the current HUD
administration would not recommend that the program be repeated. We share
HUD's concern regarding this type of program and continue to believe that
given the hundreds of millions of dollars in budget overruns, and the
minimal oversight by HUD, that an independent review by the IG office
should be considered a part of HUD's fiduciary responsibilities over the
funds.
As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its date. At that time, we will send copies to the Ranking Minority Member
of the House Committee on Government Reform; the Secretary of Housing and
Urban Development; and other interested parties. We will make copies
available to others upon request. In addition, this report will be
available at no charge on GAO's Web site at http://www.gao.gov.
Should you or your staff have questions on matters discussed in this
report, please contact me at (202) 512-9508 or [email protected] or Robert
Owens, Assistant Director, at (202) 512-8579 or [email protected]. Major
contributors to this report are acknowledged in appendix III.
Sincerely yours,
Linda M. Calbom Director, Financial Management
and Assurance
Appendix I
Scope and Methodology
Single-Family Property Program
To assess internal controls over HUD SF property payment transactions and
determine whether they provide reasonable assurance that improper payments
will not be made or will be detected in the normal course of business, we
o reviewed HUD SF policies and procedures, property management and
marketing contracts and amendments, our previous reports, and reports
issued by HUD's IG, a financial management consultant, and an independent
contractor.
o conducted walk-throughs of transactions and interviewed officials at
HUD headquarters, each of the four homeownership centers, and three
contractor offices.
o tested internal controls using a statistically selected sample of
transactions. Specifically, we selected a stratified random probability
sample of 145 single-family disbursement transactions from a population of
238,411 fiscal year 2002 transactions. We stratified the population into
HUD's four regions--Atlanta, California, Denver, and Philadelphia--on the
basis of SF disbursement transactions made during fiscal year 2002. The
sampling unit was one disbursement transaction occurring between the
October 1, 2001, and September 30, 2002 posting dates. Our estimates were
calculated using a 95 percent confidence level. In other words, we are 95
percent confident that each of the confidence intervals in the report
includes the true values in the population. We tested the following
attributes: (1) proper approval and (2) validity of payment. We provided
HUD with the transactions selected and obtained and reviewed related
supporting documentation.
To determine whether payments are properly supported as a valid use of
government funds, we
o performed data mining1 on the database of HUD's fiscal year 2002
disbursements for HUD SF properties to identify potentially improper and
questionable payments. We discussed the results of our analysis with HUD
regional and headquarters managers and requested that they provide
specific written responses to the payments that we identified as
1Data mining applies a search process to a data set, analyzing for trends,
relationships, and interesting associations. For instance, it can be used
to efficiently query transaction data for characteristics that may
indicate potentially improper activity.
Appendix I Scope and Methodology
potentially improper and questionable. We considered the responses we
received to assess whether in fact the payments were improper-that is,
questionable or potentially fraudulent and
o nonstatistically selected certain payments described in the payment
records as incurred for tangible goods and services and physically
inspected the properties to test if the work described in the books and
records was fully performed and the tangible goods received.
In June 2003, on the basis of the results of the above-described work, we
communicated to HUD and representatives of your Committee on Government
Reform, that we had identified certain potentially fraudulent payments. In
November 2003, at the request of the Committee, we expanded our work to
(1) determine whether HUD had made changes to its internal controls to
address the causes of the potentially fraudulent payments that we had
identified in June 2003 and (2) test for additional potentially fraudulent
payments. We performed this work by interviews with officials at HUD
headquarters and one homeownership center, data mining and physical
inspection of properties. Our data mining and physical inspection work
included additional tests for receipt of goods and services for payments
made in fiscal year 2002 as well as certain payments made in fiscal year
2003.
To assess internal controls over HUD SF properties and to identify
generally accepted principles and practices for a sound internal control
environment, we used our Standards for Internal Control in the Federal
Government, Internal Control Management and Evaluation Tool, Guide for
Evaluating and Testing Controls Over Sensitive Payments, and Strategies to
Manage Improper Payments.
While we identified some improper payments-questionable and potentially
fraudulent-our work was not designed to identify all improper payments
made in the HUD SF property program.
Multifamily Program with a To assess HUD's monitoring of the multifamily
program with a state State Housing Agency housing agency, we
o reviewed HUD's MF policies and procedures, the state housing agency's
policies and procedures, contracts and agreements including HUD's contract
with the state housing agency, our previous reports, as well as reports
issued by HUD's IG and
Appendix I Scope and Methodology
o conducted walk-throughs of transactions and interviewed officials at
HUD headquarters, a field office, and the state housing agency and its
contractor offices to identify what controls had been established to
manage the inherent risk of the program as well as monitor payments over
time.
We also performed analytical reviews of the payment activity since
inception in 1994 through September 30, 2002. Specifically, we developed a
template of program expenses for each property by expense line items, such
as general construction expense, environmental abatement expenses, and
expense per housing unit. We compared total costs per property to amounts
per the initial contract with the general contractor as well as subsequent
amendments. We discussed the results of our analysis with HUD regional and
headquarters managers and requested that they provide specific written
responses to issues and questions identified by our analysis. We
considered the responses we received - in writing and orally- in assessing
HUD's performance in monitoring the program.
We conducted our review, in accordance with generally accepted government
auditing standards as well as with the investigative standards established
by the President's Council on Integrity and Efficiency, from December 2002
through January 2004 at HUD headquarters, a field office, and
homeownership centers in Atlanta, Ga.; Philadelphia, Pa.; and Santa Ana,
Calif. We also visited contractor offices in Atlanta, Ga.; Philadelphia,
Pa.; Santa Ana, Ca.; and Falls Church, Va.
We requested written comments on this report from the Acting Secretary of
HUD or his designee. Written comments were received from Assistant
Secretary for Housing-Federal Housing Commissioner and are reprinted in
appendix II.
Appendix II
Comments from the Department of Housing 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.
Appendix II
Comments from the Department of Housing
and Urban Development
See comment 3.
Appendix II
Comments from the Department of Housing
and Urban Development
See comment 4.
See comment 5.
See comment 6.
See comment 7.
See comment 8.
Appendix II
Comments from the Department of Housing
and Urban Development
See comment 9.
See comment 4.
See comment 2.
See comment 2.
Appendix II
Comments from the Department of Housing
and Urban Development
See comment 10.
See comment 11.
See comment 2.
Appendix II
Comments from the Department of Housing
and Urban Development
See comment 12.
Appendix II
Comments from the Department of Housing
and Urban Development
Appendix II
Comments from the Department of Housing
and Urban Development
The following are GAO's comments on the Department of Housing and Urban
Development's letter dated February 19, 2004.
GAO Comments 1.
2.
3.
4.
During the course of our work, we considered whether changes had been made
to HUD's processes and procedures. For example, we identified HUD's over
reliance on a support services contractor in the payment process for
fiscal year 2002 payments and determined that this practice continued
through the conclusion of our work. In addition, in November 2003, we
updated our work to determine whether HUD had made changes to its internal
controls to address the cause of the potentially fraudulent payments that
we had identified in June 2003. Again, no changes had been made.
See "Agency Comments and Our Evaluation" section.
We understand that it may be necessary to pay for services provided before
HUD owned the properties in order to avoid liens. However, given the
unusually large amounts involved and the nature of the properties and time
period covered by the bill, we continue to believe that HUD officials
should have questioned these charges before payment. As stated in our
report, we found no indication that HUD attempted to find out why these
charges were so large, or why they had not been identified at the time of
settlement and acquisition of the properties. We also found no indication
that the contractor or HUD had pursued negotiating a settlement with the
water authority or recovery from other parties who may have been
responsible for the charges.
The draft of this report sent for agency comment included 6 payments
totaling $169,800 that were paid to a contractor for developing a lead
based paint abatement program that we classified as questionable because
they were not adequately supported at the time the payments were made.
Based on recently provided HUD documents, we shifted $99,000 previously
included in the "other" questionable payments category to this category
(lead based paint abatement program). We had originally classified it as
"other" because we had received no support for the payments and thus had
no basis for knowing that the $99,000 related to the paint abatement
program. We initially requested support for 2 payments totaling $99,000 in
October 2003. On February 17, 2004-for the first time-HUD provided some
documentation for these two payments which indicated that these were made
to the same contractor for developing the lead based paint
Appendix II
Comments from the Department of Housing
and Urban Development
abatement program. On this basis, we changed our report to clarify that 8
payments totaling $268,800 is the amount of questionable payments to a
single contractor for developing a lead based paint abatement program.
None of the $268,800 in payments were adequately supported because, among
other things, there was no evidence of a contract modification or other
agreement for the contractor to develop such a program. In addition, there
was no indication of the total amount to be paid by HUD to satisfy the
amount claimed by the contractor, or the basis for reimbursing the
contractor for these types of costs that, according to written provisions
in HUD's management agreement with the contractor, were not allowable
unless approved by HUD in advance.
5. Our review found no indication of the emergency nature of the charges
in HUD's supporting documentation for any of these payments. The payments
we identified took place over an extended period of time in fiscal year
2002 and were not limited to a narrow "emergency" period. Our stated
concerns about duplicate invoices used to support payments and invoices
not matching amounts paid also are unresolved. Further, we continue to
question why local supply sources were not considered, which would have
avoided the incurrence of significant airfreight charges.
6. Each of the five payments we tested were made not only without
documentation of the competitive bids, but also without any indication by
the reviewing, approving or certifying official that they were even aware
of the possible existence of competitive bids, or whether the billing
contractor had in fact been the successful bidder. Therefore we continue
to view these payments as questionable.
7. HUD provided us with a copy of the signed modification on January 26,
2004, more than 3 months after our initial request for documentation to
support the payments totaling $296,087 that HUD paid for records
management services. As stated in the report, there was no contract (or
modification) included with the support for these payments or any
indication that the payment had been compared to a contract (or
modification) prior to payment to confirm that HUD had authorized these
services at the amount charged. Rather, HUD regional staff advised us that
the "OK to pay" notation on one of the invoices by the division director
was sufficient to process the payment. Such action
Appendix II
Comments from the Department of Housing
and Urban Development
represents circumvention of HUD's payment process controls and therefore
these payments continue to be questionable.
8. HUD's response does not address the points raised in our report
regarding the lack of proper documentation to support the validity of the
payment including whether HUD owned the property or a related FHA loan
existed at the time of payment.
9. As described in the report it is the actions of the management
contractor that are at issue, not the actions of a subcontractor.
10. Regarding HUD's statement that "it is important to note that in these
two Centers, two of the three internal controls reviews did occur", our
view is that internal controls over payments are not one event, but rather
a sequential process with each action being dependent on the preceding
steps having been satisfactorily performed. The flaw we identified in
these cases relates to a fundamental control for authorizing payments
whether in the public or private sector. Without confidence that payment
requests are justified based on contracts or other agreements for those
specific services at the prices billed and that the work has been
satisfactorily completed, there is no basis for payment.
11. It is unclear what HUD means by "detailed analytical reviews of
vouchers." Our point is that detailed analytical reviews of expenses did
not take place. As stated in our report, such reviews would be an
efficient and effective way of analyzing expenses to identify anomalies
and cost saving opportunities. It was just such review that alerted us to
potential improprieties in payments related to the New York City
properties.
12. Neither our report nor our recommendations address the timing for
completion of construction and rehabilitation of the MF program. However,
given that the program has now extended over 10 years and the costs are in
excess of $500 million dollars through fiscal year 2003, we agree with
HUD's stated goal to complete the program by the end of this year.
Appendix III
GAO Contacts and Staff Acknowledgments
GAO Contacts Linda Calbom, (202) 512-9508 or [email protected] Robert Owens,
(202) 512-8579 or [email protected]
Acknowledgments Staff members who made key contributions to this report
include Sharon Byrd, Stephanie Chen, Lisa Crye, Bonnie Derby, Carmen
Harris, Kelly Lehr, Sharon Loftin, Julia Matta, Irvin McMasters, Andrew
O'Connell, Lien To, Estelle Tsay, and Brooke Whittaker.
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