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 2 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 4 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 6 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 9 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: firstname.lastname@example.org • 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 10
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)