oversight

FHFA's Controls to Detect and Prevent Improper Payments

Published by the Federal Housing Finance Agency, Office of Inspector General on 2012-03-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

          FEDERAL HOUSING FINANCE AGENCY
            OFFICE OF INSPECTOR GENERAL



                             FHFA’s Controls to
              Detect and Prevent Improper Payments




Audit Report: AUD-2012-002                        Dated: March 9, 2012
                             OFFICE OF INSPECTOR GENERAL
                                         Federal Housing Finance Agency

                                 400 7th Street, S.W., Washington DC 20024


                                                March 9, 2012


TO:              Mark Kinsey, Chief Financial Officer


FROM:            Russell A. Rau, Deputy Inspector General for Audits


SUBJECT:         FHFA’s Controls to Detect and Prevent Improper Payments
                 (Audit Report No. AUD-2012-002)


Summary

The Improper Payments Information Act of 2002 (IPIA),
                                                  1 as amended by the Improper Payments
Elimination and Recovery Act of 2010 (IPERA),
                                       2 requires Federal agencies 3 to periodically
review, estimate, and report programs and activities that may be susceptible to significant
improper payments. Office of Management and Budget (0MB) Memorandum M- 11-16,
Issuance ofRevised Parts land II to Appendix C of 0MB Circular A-] 23, dated April 14, 2011,
defines an “improper payment” as follows:

        An improper payment is any payment that should not have been made or that was made
        in an incorrect amount under statutory, contractual, administrative, or other legally
        applicable requirements. Incorrect amounts are overpayments or underpayments that are
        made to eligible recipients (including inappropriate denials of payment or service, any
        payment that does not account for credit for applicable discounts, payments that are for
        the incorrect amount, and duplicate payments). An improper payment also includes any
        payment that was made to an ineligible recipient or for an ineligible good or service, or
        payments for goods or services not received (except for such payments authorized by
        law). In addition, when an agency’s review is unable to discern whether a payment was



‘Public Law No. 107-300,31 U.S.C. § 3321 note.
2
 Public Law No. 111-204,31 U.S.C. § 3321 note.
 FHFA is an executive agency and therefore subject to the IPIA. However, not all IPIA provisions are applicable to
FHFA, for the reasons discussed herein.

          Federal Housing Finance Agency Office of Inspector General   •   AUD-2012-002   •   March 9, 2012
            proper as a result of insufficient or lack of documentation, this payment must also be
            considered an improper payment.
                                      4

The IPIA, as amended by IPERA, also requires Inspectors General to determine whether the
agency is in compliance with the statute each fiscal year and submit a report to the head of the
agency, Congressional oversight committees, the Comptroller General of the United States, and
0MB, regarding such compliance.
                      5 The Federal Housing Finance Agency (FHFA), Office of
Inspector General (FHFA-OIG) conducted a performance audit to assess FHFA’s 2011
compliance with the IPIA. This is the first FHFA-OIG improper payments report and covers
fiscal year 2011. FHFA comments on a draft of this report are included in Appendix A.

Background

Federal agencies regularly make payments to program beneficiaries, grantees, vendors, and
contractors or on behalf of program beneficiaries. Some of these payments are “improper” in
one or more respects. For example, they may be made to the wrong recipients in the wrong
amounts, at the wrong times, or for the wrong reasons. Therefore, per IPIA requirements,
Federal agencies should intensify efforts to eliminate payment errors, waste, fraud, and abuse,
including reducing and recapturing erroneous payments. In accordance with 0MB
Memorandum M- 11-16, the head of each agency shall periodically review all programs and
activities that the relevant agency head administers, and identify, estimate, report, and publish all
programs and activities that may be susceptible to significant improper payments.
                                                                          6 Additionally,
for improper payments estimated in excess of $10 million, the agency must report the potential
actions it is taking to reduce and recapture improper payments.
                                                      7

To comply with IPIA requirements, each fiscal year, FHFA-OIG is required to review FHFA’s
improper payment reporting in its annual Performance and Accountability Report (PAR) or
Annual Financial Report (AFR) and accompanying materials; to determine whether FHFA is in
compliance with the IPIA; and to report its findings.
                                            8 FHFA-OIG is expected to complete its


“0MB Memorandum M- 11-16, Issuance ofRevised Parts I and II to Appendix C of 0MB Circular A-123 (April 14,
2011) at Appendix C, Part I(A)(2).
  IPERA § 3(b). Prior to enactment of IPERA, Executive Order 13520, Reducing Improper Payments, included
requirements for agencies and Inspectors General. For purposes of this order, FHFA was not designated by 0MB as
operating a high-priority program that required additional agency reporting and Inspector General review.
6
O  MB Memorandum M-l1-16 at Appendix C, Part l(A)(7). M-ll-16 provides that the amended IPIA requires
agencies also to review vendor payments as part of their annual risk assessment process. Id. at Part I(A)(5) note 4.
If these risk assessments determine that contract or vendor payments are susceptible to significant improper
payments (as defined in Part 1(A)(7) Step 1), then agencies are required to establish an annual improper payment
measurement for these vendor payments (as required by I(A)(7), Step 2). However, agencies also have the
opportunity to pursue alternative measurements of these contract or vendor payments and may follow the steps
outlined in I(A)(1 1).
    IPERA § 2(c).
8
    IPERA § 3(b).

             Federal Housing Finance Agency Office of Inspector General   •   AUD-2012-002   •   March 9, 2012
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review and determination within 120 days after FHFA’s publication of its PAR or AFR. 9 In
addition, as part of its review, the Inspectors General should confirm that the agency:

      •   Published a PAR or AFR for the most recent fiscal year and posted that report and any
          accompanying materials required by 0MB on the agency website;

      •   Conducted a program specific risk assessment for each program or activity that conforms
          with section 2(a) of the IPIA (if required);

      •   Published improper payment estimates for all programs and activities identified under
          section 2(b) of the IPIA that have been found to be susceptible to significant improper
          payments by its risk assessment (if required);

      •   Published programmatic corrective action plans under section 2(c) of the IPIA in the
          PAR or AFR (if required);

      •   Published, and has met, annual reduction targets established under section 2(c) of the
          IPIA for each program assessed to be at risk and measured for improper payments;

      •   Reported a gross improper payment rate of less than 10% for each program and activity
          for which an improper payment estimate was obtained and published under section 2(b)
          of the IPIA; and

      •   Reported information on its efforts to recapture improper payments as provided in 0MB
          Memorandum M-1 1-16.

In the event it is determined that an agency does not meet one or more of the requirements, then
it is not compliant with IPIA. Agencies determined to be noncompliant are required to submit a
plan to Congress describing the actions the agency will take to come into compliance.’
                                                                          0 The
plan shall include:

      •   Measurable milestones to achieve compliance for each program or activity;
      •   Designation of a senior agency official who shall be accountable for the progress in
          achieving compliance for each program or activity; and
      •   Establishment of an accountability mechanism, such as a performance agreement, with
          appropriate incentives and consequences tied to the success of the senior agency official
          in leading agency efforts to achieve compliance for each program and activity.”

Further, 0MB will notify agencies of additional required actions as needed based on the
compliance level of each agency. 0MB Memorandum M- 11-16 provides detailed information

FHFA issued
9                 its   PAR on November 14, 2011, and issued a correction to it on January 19, 2012.
10
     IPERA   § 3(c)(I)(A).
Jd. §3(c)(1)(B).

             Federal Housing Finance Agency Office of Inspector General     •   AUD-2012-002   •   March 9, 2012

                                                              3
on agency compliance planning and related efforts to become compliant. The IPIA and 0MB
Memorandum M- 11-16 define the term “payment” as any payment or transfer of Federal funds
(including a commitment for future payment, such as cash, securities, loans, loan guarantees, and
insurance subsidies) to any non-Federal person or entity that is made by a Federal agency, a
Federal contractor, a Federal grantee, or a governmental or other organization administering a
Federal program or activity.

In its FY 2011 PAR, dated November 15, 2011, FHFA stated that:

           The Improper Payments Information Act of 2002 requires that agencies: (1) review
           activities susceptible to significant erroneous payments; (2) estimate the amount of
           annual erroneous payments; (3) implement a plan to reduce erroneous payments; and
           (4) report the estimated amount of erroneous payments and the progress to reduce it. The
           Act defines significant erroneous payments as the greater of 2.5 percent of program
           activities or $10 million. FHFA has implemented and maintains internal control
           procedures that ensure disbursement of Federal funds for valid obligations. FHFA has
           identified no activities susceptible to significant erroneous payments that meet the Act’s
           2
           thresholds.’

However, by a recent memorandum, FHFA stated that the IPIA and implementing guidance
relating to the following statutory provisions are not applicable to FHFA:

       •   IPIA subsection 2(a) regarding periodic reviews of programs and activities that may be
           susceptible to significant improper payments;
       •   IPIA subsection 2(b) regarding estimating the amount of annual improper payments; and
       •   IPIA subsection 2(c) on reporting the estimates to Congress, including planned actions to
           reduce and recapture erroneous payments.’
                                           3

FHFA agreed that these sections are applicable to payments made with Federal funds, but noted
that FHFA funds are not to be construed as Government or public funds.’
                                                                    4 Hence, FHFA
reasoned that the payments FHFA makes, such as payments to vendors, are not transfers of
Federal funds.’
        5 Also, because FHFA does not make “payments” with Federal funds, FHFA
concluded further that it is not required to conduct program specific risk assessments even if the
payments FHFA makes were to fall within the specified dollar thresholds that trigger program




12
     FHFA FY201 1 PAR at 45.
13
  See February 7, 2012 Isabella Sammons Memorandum to Debbie Olejnik (updated February 15, 2012)
(hereinafter Sammons Memo).
14
     Sammons Memo at 2, citing 12 U.S.C.   § 4516(f).
15
     Id.

            Federal Housing Finance Agency Office of Inspector General   •   AUD-2012-002   •   March 9, 2012

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assessments. FHFA contends that actions to achieve IPIA compliance involving requests to
16
Congress for reprogramming, transfer, and reauthorization of programs and activities are not
actions that are available to FHFA in light of its status as an independent regulatory agency that
does not seek authorization or appropriations for its activities.

Audit Objective

FHFA-OIG’s audit objective was to determine whether FHFA is in compliance with the IPIA, as
amended by the IPERA, as well as criteria established in 0MB Memorandum M-11-16.

Scope and Methodology

This audit covered FHFA’s efforts to comply both with IPIA as amended by IPERA and with
0MB Memorandum M- 11-16 as that memorandum pertains to actions taken to detect, prevent,
and report improper payments during the period October 1, 2010 to September 30, 2011. To
accomplish the audit objective, FHFA-OIG reviewed applicable statutes, Executive Orders, and
other related compliance requirements on improper payments; reviewed various Government
Accountability Office (GAO) audit reports; interviewed key FHFA officials; obtained sufficient
and appropriate evidence on compliance actions taken; and reviewed and assessed improper
payment element requirements and related activities. FHFA-OIG concluded its field work and
issued its report in time to ensure compliance with the 0MB requirement for Inspectors General
to review and make a determination of the agency’s compliance with IPIA within 120 days of
publication of the FHFA PAR.

FHFA-OIG’s review of FHFA’s internal controls designed to comply with IPIA requirements
was limited. FHFA-OIG reviewed FHFA’s written documentation and legal opinions related to
its determination that IPIA provisions and therefore most improper payment compliance
                                             —




elements are not applicable to FHFA. FHFA-OIG confirmed the posting of the 2011 PAR and
            —




accompanying materials on FHFA’s external website in accordance with 0MB guidance and the
inclusion of appropriate language that FHFA has established and maintains internal control
procedures for handling improper payments.

FHFA has stated that it follows the spirit of the three subsections of the IPIA that are not
applicable to FHFA in that FHFA has established and maintains internal controls over payments
to detect and prevent improper payments made to vendors.’
                                                     8 FHFA provided FHFA-OIG with
relevant vendor invoice and payment desktop procedures that FHFA implemented to ensure that
a system of internal controls is followed to mitigate the potential for fraud, misuse, and
delinquency in payment. GAO provides an opinion on the effectiveness of FHFA’ s internal
16
  Id. at 3. 0MB guidance at Part Il.A of Appendix C of 0MB Circular A-123, states the agency should conduct “a
program specific risk assessment for each program or activity that conforms with Section 3321 [note] of Title 31
U.S.C. (if required).”
17
     Sammons Memo at 2.
18
     Sammons Memo at 2.

            Federal Housing Finance Agency Office of Inspector General   •   AUD-2012-002   •   March 9, 2012

                                                         5
control over financial reporting as of September 30 of each fiscal year. Thus, GAO determined
whether such internal controls are properly designed and operating effectively. Specifically,
GAO, in its Management Report: Opportunities for Improvement in the Federal Housing
Finance Agency’s Internal Controls andAccounting Procedures, GAO-11-398R, dated April 29,
2011, found that FHFA did not always properly verify vendor invoice amounts prior to
9 GAO indicated that deficiencies in controls over FHFA’s invoice payment
payment.’
processing procedures can increase the risk of it making improper payments and misstating
expenses in its financial statements.
                           20 GAO recommended that FHFA include detailed
instructions in its Invoice and Payment Desktop Procedures on how to verify the accuracy of
invoice amounts prior to payment.
                           ’
                           2

In response to GAO’s recommendation, FHFA stated that it agreed that additional guidance
needs to be given to invoice approvers/contracting officer technical representatives and cited
actions it has taken, or intends to take, to address this internal control issue.
                                                                           22 On April 4, 2011,
FHFA issued supplemental guidance on invoice approval procedures in response to the GAO
recommendation.

Since the above audit dealt with FY 2010, FHFA-OIG also followed up on the implementation of
GAO’s recommendation with FHFA. GAO issued FHFA’s FY20 11 Financial Statements Audit
Report, on November 15, 2011 and concluded that: (1) FHFA’s FY 2011 financial statements
are fairly presented in all material respects; (2) FHFA had effective internal control over
financial reporting as of September 30, 2011; and (3) GAO found no reportable instances of
noncompliance with the laws and regulations it tested.
                                                   23 In its report, GAO stated that it noted
matters involving FHFA’s internal control that were less significant than a material weakness or
significant deficiency, but which nonetheless merit management’s attention.
                                                                     24 GAO indicated it
would report separately to FHFA management on these matters but a report has not been
25 FHFA-OIG confirmed with GAO that it included invoice payment processing in its
issued.
FY 2011 audit and followed up on its prior recommendation.

Although FHFA-OIG was not required by IPIA and 0MB Memorandum M- 11-16 to assess
compliance with FHFA’ s internal controls over payments to detect and prevent improper

19
  GAO-I I-398R at 4. This report was issued by GAO to provide additional information on the internal control and
accounting procedure issues that were identified during their audit of FHFA’s FY 2010 financial statements and to
provide recommendations to address those issues.
20
     Id. at 5.
21
     Id.
22
     GAO-I I-398R at 5.
23
   GAO- 12-161, Federal Housing Finance Agency’s Fiscal Years 2011 and 2010 Financial Statements (originally
issued November 15, 2011, revised on November 29, 2011 and January 26, 2012) at 4-6.
1d at6.
24
25
     Id

                 Federal Housing Finance Agency Office of Inspector General   •   AUD-2012-002   •   March 9, 2012

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payments made to vendors, FHFA-OIG reviewed and relied on the above work of GAO
concerning the vendor invoice payment processing procedures as part of this audit.

FHFA-OIG conducted this performance audit in accordance with Generally Accepted
Government Auditing Standards. Those standards require that audits be planned and performed
to obtain sufficient, appropriate evidence to provide a reasonable basis for FHFA-OIG’s findings
and conclusions based on the audit objective. FHFA-OIG believes that the evidence obtained
provides a reasonable basis for the findings and conclusions included herein, based on the audit
objectives.

FHFA-OIG Conclusion

FHFA-OIG concluded that FHFA complied with applicable provisions of the IPIA, as amended
by the IPERA, as well as criteria established in 0MB Memorandum M-ll-16. A summary of
FHFA-OIG’s conclusions on IPIA compliance by compliance element is given in the table
26
below.

Table 1. FHFA’s Status of Improper Payments Information Act Compliance for FY 2011


             Compliance Element                                     FHFA-OIG Conclusion
(A) The agency has published an annual                FHFA published the 2011 PAR and has included
performance and accountability report (PAR)           relevant information pertaining to improper
or financial statement for the most recent            payments.
fiscal year (AFR) and posted that report and
any accompanying materials required under
guidance of the Office of Management and
Budget on the agency website.

(B) If required, the agency has conducted a
program specific risk assessment for each
                                                      FHFA determined that section 2(a) of IPIA is not
                                                      applicable because FHFA funds are not Federal
                                                                                                            I
program or activity that conforms with                funds for purposes of this provision.
section 2(a) of the Improper Payments
Information Act of 2002 (31 U.S.C. § 3321
note).

(C) The agency has published improper                 FHFA determined that section 2(b) of IPIA is not
payments estimates for all programs and               applicable because FHFA funds are not Federal
activities identified as susceptible to               funds for purposes of this provision.
significant improper payments under its risk
assessment (if required).
                                            -    —-   f

26
     0MB Memorandum M-11-16 at Appendix C, Part II(A)(4).

         Federal Housing Finance Agency Office of Inspector General   •   AUD2O12-OO2   •   March 9, 2012

                                                      7
            Compliance Element                             FHFA-OIG Conclusion
(D) The agency has published programmatic FHFA determined that section 2(c) of IPIA is not
corrective action plans in the PAR or AFR (if applicable because FHFA funds are not Federal
required).                                    funds for purposes of this provision.

(F) The agency published, and has met,               FHFA determined that section 2(c) of IPIA is not
improper payments reduction targets                  applicable because FHFA funds are not Federal
established under section 2(c) of the                funds for purposes of this provision.
Improper Payments Information Act of 2002
(31 US.C. § 3321 note) in the accompanying
materials to the annual financial statement
for each program assessed to be at risk and
measured for improper payments.

(F) The agency has reported a gross                  FHFA determined that section 2(b)ofIPIA is not
improper payment rate of less than 10% for           applicable because FHFA funds are not Federal
each program and activity for which an               funds for purposes of this provision.
estimate was obtained and published in the
PAR or AFR.

(G) Thegency has reported information on             FHFA stated in its PAR that it has established and
its efforts to recapture improper payments.          maintains internal control procedures for handling
                                                     improper payments. Furthermore, FHFA stated it
                                                     pursues the recovery of any improper payments
                                                     with its vendors. Also, it should be noted that
                                                     FHFA-OIG can perform contract audits to
                                                     determine if payments made to contractors are
                                                     proper.




FHFA-OIG recognizes that FHFA is acting to achieve the intent of IPIA, IPERA, and the related
0MB Memorandum M-1l-16, in spite of its determination that it is not required to do so.
Specifically, in the spirit of compliance and as part of a sound internal control structure, FHFA
has established controls to detect and prevent improper vendor payments. FHFA’s invoice
payment processing procedures include detailed instructions on properly verifying the accuracy
of vendor invoice amounts prior to payment.

FHFA-OIG appreciates the courtesies and cooperation extended to us by FHFA staff during this
audit. FHFA’s response is included in Appendix A of this report.



         Federal Housing Finance Agency Office of Inspector General   •   AUD-2012-002   •   March 9, 2012

                                                      8
Appendix A
FHFA ‘s Comments on the Audit



                       Federal Housing Finance Agency

                                          MEMORANDUM



   TO:           Russell A. Rau, Deputy Inspector General for Audits

   FROM:        Mark Kinsey, Chief Financial Offlc

   SUBJECT: FHFA’s Controls to Detect and Prevent Improper Payments
            (Audit Report No. AUD-2012-004)

   DATE:        March 1, 2012



  Thank you for the opportunity to respond to the Federal Housing Finance Agency-Office of
  Inspector General’s (FHFA-OIG) draft audit report titled, FHFA’ s Controls to Detect and
  Prevent Improper Payments, Audit Report No. AUD-201 2-004. This report presents the results
  of FHFA-OIG’s performance audit to assess FHFA’s compliance with the Improper Payments
  Information Act of 2002 (IPIA).

  I am pleased that FHFA-OIG concluded that FHFA complied with the applicable provisions of
  the IPIA, as amended by the Improper Payments Elimination and Recovery Act of 2010
  (IPERA), as well as criteria established in the 0MB Memorandum M- 11-16. The FHFA-OIG
  audit report recognized that in the spirit of compliance and as part of a sound internal control
  process, FHFA had established controls to detect and prevent improper vendor payments; and
  FHFA’ s invoice payment processing procedures include detailed instructions on properly
  verifying the accuracy of vendor invoice amounts prior to payment.

  I would like to acknowledge the dedicated FHFA-OIG staff that worked with FHFA during this
  audit.

  If you have any questions relating to our response, please do not hesitate to call me at (202) 649-
  3780.




         Federal Housing Finance Agency Office of Inspector General   •   AUD-2012-002   •   March 9, 2012

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ADDITIONAL INFORMATION AND COPIES


For additional copies of this report:
      •   Call the Office of Inspector General (OIG) at: (202) 730-0880
      •   Fax your request to: (202) 318-0239
      •   Visit the OIG website at: www.fhfaoig.gov


To report alleged fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:
      •   Call our Hotline at: 1-800-793-7724
             •   Fax us the complaint directly to: (202) 318-0385
             •   E-mail us at: oighotline@ffifa.gov
             •   Write to us at: FHFA Office of Inspector General
                                 Attn: Office of Investigation Hotline —




                                 400 7th Street, SW
                                 Washington, DC 20024




          Federal Housing Finance Agency Office of Inspector General   •   AUD-2012-002   •   March 9, 2012

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