oversight

FHFA Complied with Applicable Improper Payment Requirements During Fiscal Year 2014

Published by the Federal Housing Finance Agency, Office of Inspector General on 2015-05-14.

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

         Federal Housing Finance Agency
             Office of Inspector General




FHFA Complied with Applicable
Improper Payment Requirements
    During Fiscal Year 2014




 Audit Report  AUD-2015-001  May 14, 2015
               Executive Summary

               Why OIG Did This Report
               OIG is required by the Improper Payments Information Act of 2002 (IPIA), as
               amended by the Improper Payments Elimination and Recovery Act of 2010
               (IPERA) and the Improper Payments Elimination and Recovery Improvement
               Act of 2012 (IPERIA) (collectively, “IPIA, as amended”), to determine
AUD-2015-001   annually whether the Federal Housing Finance Agency (FHFA) complied with
               the IPIA, as amended, during the prior fiscal year. OIG is further required to
May 14, 2015
               submit a report regarding such compliance to the head of FHFA,
               Congressional oversight committees, the Comptroller General of the United
               States, and the controller of Office of Management and Budget (OMB). OIG
               conducted a performance audit to assess FHFA’s compliance with the IPIA, as
               amended, for fiscal year 2014.

               What OIG Found
               OIG concluded that FHFA complied with the applicable provisions of the
               IPIA, as amended, as well as related criteria established in OMB Memorandum
               M-15-02. FHFA has opined that not all provisions of the IPIA, as amended, are
               applicable because they apply to federal funds, and FHFA does not finance its
               operations with federal funds.

               OIG, however, recognizes that FHFA is acting to achieve the intent of the
               IPIA, as amended, and the related OMB Memorandum M-15-02, regardless of
               its determination that it is not required to do so.

               This audit was led by Jude Koval, Audit Manager, who was assisted by Jacob
               Trewe, Senior Auditor, and Darryl Stephens, Senior Writer/Editor. We
               appreciate the cooperation of FHFA staff, as well as the assistance of all those
               who contributed to the preparation of this report.

               This report has been distributed to the Congress, OMB, and others and will be
               posted on OIG’s website, www.fhfaoig.gov.




               Heath Wolfe
               Assistant Inspector General for Statutory Audits
               Office of Audits
TABLE OF CONTENTS ................................................................
EXECUTIVE SUMMARY .............................................................................................................2

ABBREVIATIONS .........................................................................................................................4

CONTEXT .......................................................................................................................................5
      Definition of Improper Payment ...............................................................................................5
      Legislative Controls to Prevent and Detect Improper Payments ..............................................5
      Requirements Under IPIA, as Amended ..................................................................................6
      FHFA Has Determined that Not All Requirements Under IPIA, as Amended, Are
      Applicable to FHFA .................................................................................................................8
      FHFA’s Internal Controls over Financial Reporting ..............................................................10

CONCLUSIONS............................................................................................................................11

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................12
      Objective .................................................................................................................................12
      Scope.......................................................................................................................................12
      Methodology ...........................................................................................................................12

APPENDIX A ................................................................................................................................14
      FHFA’s Comments .................................................................................................................14

ADDITIONAL INFORMATION AND COPIES .........................................................................15




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ABBREVIATIONS .......................................................................

AFR                Annual Financial Report

FHFA               Federal Housing Finance Agency

IPERA              Improper Payments Elimination and Recovery Act of 2010

IPERIA             Improper Payments Elimination and Recovery Improvement Act of 2012

IPIA               Improper Payments Information Act of 2002

OGC                Federal Housing Finance Agency, Office of General Counsel

OIG                Federal Housing Finance Agency, Office of Inspector General

OMB                Office of Management and Budget

PAR                Performance Accountability Report

U.S.C.             United States Code




                          OIG  AUD-2015-001  May 14, 2015                             4
CONTEXT ..................................................................................

Definition of Improper Payment

Federal agencies regularly make payments to program beneficiaries, grantees, vendors, and
contractors, or on behalf of program beneficiaries. Some of these payments may be
“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. OMB defines an
improper payment as:

          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, [footnote omitted] payments that are for an 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 proper as a result of insufficient or lack of
          documentation, this payment must also be considered an improper payment.1

Legislative Controls to Prevent and Detect Improper Payments

IPIA was enacted on November 26, 2002, to provide for estimates and reports of improper
payments by federal agencies.2 IPIA was amended by IPERA on July 22, 2010, to help
prevent the further loss of billions in taxpayer dollars.3 IPIA, as amended by IPERA, requires
federal agencies to periodically review, determine, estimate, and report programs and
activities that may be susceptible to significant improper payments. IPERIA, enacted on




1
 OMB Memorandum M-15-02, Appendix C to Circular No. A-123, Requirements for Effective Estimation and
Remediation of Improper Payments (October 20, 2014) [hereinafter OMB Memo M-15-02, App. C], Part I ¶¶ 2
and 3. OMB Circular A-123, Management’s Responsibility for Internal Control (December 31, 2004), provides
guidance to federal agencies on improving the accountability and effectiveness of federal programs and
operations by establishing, assessing, correcting, and reporting on internal control.
2
    Public Law No. 107-300, 31 U.S.C. § 3321 note.
3
    Public Law No. 111-204, 31 U.S.C. § 3321 note.



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January 10, 2013, further amended IPIA and IPERA to intensify efforts to identify, prevent,
and recover payment error, waste, fraud, and abuse within federal spending.4

IPIA, as amended, defines the term “payment” as:

          [A]ny transfer or commitment for future transfer of Federal funds such as
          cash, securities, loans, loan guarantees, and insurance subsidies to any non-
          Federal person or entity or a Federal employee, 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.5

Requirements Under IPIA, as Amended

Pursuant to the requirements in the IPIA, as amended, federal agencies should intensify
efforts to eliminate payment errors, waste, fraud, and abuse, including reducing and
recapturing erroneous payments.

In accordance with OMB Memorandum M-15-02—which implements the requirements of the
IPIA, as amended—agencies must follow a four-step process:

          Step 1: Review all programs and activities and identify those that are susceptible to
                  significant improper payments.

          Step 2: Obtain a statistically valid estimate of the annual amount of improper
                  payments in programs and activities that are identified in Step 1.

          Step 3: Implement a plan to reduce improper payments.

          Step 4: Report annually on improper payments in a performance accountability report
                  (PAR) or annual financial report (AFR).6, 7

Additionally, to comply with the IPIA, as amended, each fiscal year, Inspectors General are
required to review their establishments’ improper payment reporting in their annual PARs or
AFRs to determine whether they are in compliance with the IPIA, as amended, and to report

4
    Public Law No. 112-248, 31 U.S.C. § 3321 note.
5
 Public Law No. 111-204, 31 U.S.C. § 3321 note; see also OMB Memorandum M-15-02, Appendix C, supra
note 1, at Part I ¶¶ 2 and 3.
6
    OMB Memo M-15-02, App. C, supra note 1, at Part I ¶ 9.
7
  A PAR provides both financial and performance information that enables the President, the Congress, and the
public to assess the performance of an agency relative to its mission and to demonstrate accountability. An
AFR provides similar information, but excludes performance information. See OMB Circular A-136 p. 10
(revised, October 21, 2013).



                                     OIG  AUD-2015-001  May 14, 2015                                          6
their findings.8 Inspectors General are expected to complete their reviews and determinations
within 180 days after their establishments’ publication of their PARs or AFRs.9 In addition, as
part of his/her review, an Inspector General should confirm that the establishment has:

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

      b. Conducted a program specific risk assessment for each program or activity that
         conforms with Section 3321 note of Title 31 U.S.C. [i.e., IPIA, as amended] (if
         required);

      c. Published improper payment estimates for all programs and activities identified as
         susceptible to significant improper payments under its risk assessment (if required);

      d. Published programmatic corrective action plans in the AFR or PAR (if required);

      e. Published, and is meeting[footnote deleted], annual reduction targets for each program
         assessed to be at risk and estimated for improper payments (if required and
         applicable); and

      f. Reported a gross improper payment rate of less than 10 percent for each program and
         activity for which an improper payment estimate was obtained and published in the
         AFR or PAR.10

In the event it is determined that an agency does not meet one or more of the requirements,
then the agency is not compliant with the IPIA, as amended. Agencies determined to be
noncompliant are required to submit a plan to the Congress describing the actions the agency
will take to come into compliance.11 Further, OMB will notify agencies of additional required
actions as needed based on the compliance level of each agency. OMB Memorandum M-15-
02 provides detailed information on agency compliance planning and related efforts to
become compliant.




8
    IPERA § 3(b), see 31 U.S.C. § 3321 note.
9
  OMB Memo M-15-02, App. C, supra note 1, at Part II § A(2). FHFA issued its PAR on November 17, 2014,
so the 180-day deadline falls on May 15, 2015.
10
     OMB Memo M-15-02, App. C, supra note 1, at Part II § A(3).
11
     IPERA § 3(c)(1)(A), see 31 U.S.C. § 3321 note.



                                     OIG  AUD-2015-001  May 14, 2015                                   7
FHFA Has Determined that Not All Requirements Under IPIA, as Amended, Are
Applicable to FHFA

In its fiscal year 2014 PAR, dated November 17, 2014, FHFA states that:

           IPIA 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 them.
           IPIA defines significant erroneous payments as the greater of 2.5% of
           program activities and $10 million.

           FHFA, in the spirit of compliance and as part of a sound internal control
           structure, has established controls to detect and prevent improper vendor
           payments. FHFA has identified no activities susceptible to significant
           erroneous payments that meet IPIA’s thresholds. Additionally, FHFA pursues
           the recovery of all improper payments.12

Although FHFA states that it has established controls to detect and prevent improper
payments in the spirit of the IPIA, as amended, FHFA maintains that most requirements of the
IPIA, as amended, and guidance such as OMB Memorandum M-15-02, are not applicable to
FHFA.13 Table 1 summarizes the requirements of the IPIA, as amended, and OMB
Memorandum M-15-02 that FHFA considers inapplicable to its operations.




12
     Page 105 of FHFA’s fiscal year 2014 PAR cited actions regarding erroneous payments.
13
  FHFA, Associate General Counsel Memorandum, originally dated February 7, 2012, updated February 15,
2012, and subsequently reconfirmed on December 16, 2013, and January 8, 2015.



                                     OIG  AUD-2015-001  May 14, 2015                                  8
               TABLE 1. FHFA’S COMPLIANCE UNDER IPIA, AS AMENDED, FOR FISCAL YEAR 2014

                 Compliance Element                                          FHFA Action
 The agency has published an annual PAR or AFR            FHFA published its 2014 PAR and included
 for the most recent fiscal year and posted that          relevant information pertaining to improper
 report and any accompanying materials required           payments.
 under guidance of OMB on the agency website.
 The agency has conducted a program specific risk         FHFA determined that this section of the IPIA, as
 assessment for each program or activity that             amended, is not applicable.
 conforms with the IPIA, as amended (31 U.S.C.
 § 3321 note) (if required).
 The agency has published improper payments               FHFA determined that this section of the IPIA, as
 estimates for programs and activities identified         amended, is not applicable.
 as susceptible to significant improper payments
 under its risk assessment (if required).
 The agency has published programmatic                    FHFA determined that this section of the IPIA, as
 corrective action plans in its PAR or AFR (if            amended, is not applicable.
 required).
 The agency has published, and is meeting,                FHFA determined that this section of the IPIA, as
 improper payments reduction targets for each             amended, is not applicable.
 program assessed to be at risk and estimated for
 improper payments (if required and applicable).
 The agency has reported a gross improper                 FHFA determined that this section of the IPIA, as
 payment rate of less than 10% for each program           amended, is not applicable.
 and activity for which an estimate was obtained
 and published in its PAR or AFR.


FHFA’s Office of General Counsel (OGC) has concluded that various subsections of the
IPIA, as amended, are only applicable to payments made with federal funds, and that FHFA
funds are not to be construed as government or public funds.14 Hence, OGC reasons that the
payments FHFA makes, such as payments to vendors, are not transfers of federal funds.15
Further, because FHFA does not make payments with federal funds, OGC concludes that
FHFA is not required to conduct program specific risk assessments even if the payments
FHFA makes fall within the specified dollar thresholds that trigger program assessments.16
Finally, OGC contends that actions to achieve compliance with the IPIA, as amended (e.g.,
Congressionally directed reprogramming, transfer, and reauthorization of programs and




14
     Id., citing 12 U.S.C. § 4516(f).
15
     Id.
16
     Id.



                                        OIG  AUD-2015-001  May 14, 2015                                     9
activities), are not actions that are available to FHFA in light of its status as an independent
regulatory agency that does not seek appropriations for its activities.17

OIG’s Office of the Chief Counsel assessed whether OGC’s analysis of the applicable legal
authorities is reasonable. Upon due consideration of that analysis and the authorities in
question, it determined that OGC’s analysis is reasonable, so OIG does not contest the OGC
conclusions referenced above.

FHFA’s Internal Controls over Financial Reporting

With respect to FHFA following the spirit of the IPIA, as amended, FHFA reports that it has
established and maintains internal controls over payments to detect and prevent improper
payments made to vendors.18 FHFA provided 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 payment delinquency. OIG reviewed
the procedures and noted no design flaws within the control.

Additionally, GAO annually reviews and provides an opinion on the effectiveness of FHFA’s
internal controls over financial reporting. GAO assesses, evaluates, and determines whether
such internal controls are properly designed and operating effectively in all material
respects.19 In its Financial Audit: Federal Housing Finance Agency’s Fiscal Years 2014 and
2013 Financial Statements report, GAO identified deficiencies in FHFA’s internal controls
over financial reporting (that GAO did not consider to be a material weakness or significant
deficiency).20 However, GAO did not identify any issues related to the design and
effectiveness of FHFA’s vendor invoice and payment process control, and there were no
findings relating to the accuracy of disbursements.




17
     Id.
18
     Id.
19
   GAO’s audit was not designed to express an opinion on the effectiveness of FHFA’s internal controls
related to improper payments or FHFA’s compliance with the IPIA, as amended, specifically, but rather it was
intended to assess controls over financial reporting generally. Consequently, GAO’s audit may not identify all
deficiencies in FHFA’s internal controls over financial reporting that are less severe than a material weakness.
According to the American Institute of Certified Professional Accountants’ Professional Standards, AU-C
§ 265.07, a deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or detect
and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of
deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the
entity’s financial statements will not be prevented, or detected and corrected, on a timely basis.
20
  Id. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less
severe than a material weakness yet important enough to merit attention by those charged with governance.



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CONCLUSIONS ..........................................................................

OIG concludes that FHFA complied with the annual PAR or AFR reporting requirement of
the IPIA, as amended. As to the remaining requirements, FHFA opined that they are not
applicable, and OIG does not contest FHFA’s interpretation.

Nonetheless, OIG recognizes that FHFA is acting to achieve the intent of the IPIA, as
amended, and the related OMB Memorandum M-15-02, regardless 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. For example, FHFA’s invoice payment processing procedures include detailed
instructions on properly verifying the accuracy of vendor invoice amounts prior to payment.




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OBJECTIVE, SCOPE, AND METHODOLOGY .................................

Objective

OIG’s audit objective was to determine whether FHFA is in compliance with the IPIA, as
amended, as well as criteria established in OMB Memorandum M-15-02.

Scope

This audit covered FHFA’s efforts to comply with the IPIA, as amended, and OMB
Memorandum M-15-02 requirements to detect, prevent, and report improper payments during
FHFA’s fiscal year period October 1, 2013, to September 30, 2014. To accomplish the audit
objective, OIG reviewed applicable statutes, executive orders, and other related compliance
requirements on improper payments; reviewed various GAO audit reports; met with key
FHFA officials; obtained sufficient and appropriate evidence on compliance actions taken
(e.g., confirmed that FHFA’s 2014 PAR was posted to its website and reviewed OGC
correspondence); and reviewed and assessed improper payment element requirements and
related activities. OIG conducted its field work during December 2014 through February 2015
and issued its report in accordance with OMB requirements (i.e., within 180 days of
publication of FHFA’s PAR).

Methodology

OIG’s review of FHFA’s internal controls designed to comply with the IPIA, as amended,
requirements was limited. OIG reviewed FHFA’s written documentation and legal opinions
related to its determination that the IPIA, as amended, provisions—and therefore most
improper payment compliance elements—are not applicable to FHFA. OIG also reviewed
IPERIA to ascertain whether FHFA is subject to the Act’s requirements. FHFA determined
that IPERIA—like IPIA and IPERA—do not apply to FHFA because it does not utilize
appropriated funds. For this reason, the funds used by FHFA to make payments do not qualify
as federal funds under applicable law, and therefore most of the various improper payments
requirements set forth by these statutes are not triggered. OIG confirmed the posting of the
2014 PAR and accompanying materials on FHFA’s external website in accordance with OMB
guidance and the inclusion of appropriate language that FHFA established and maintains
internal control procedures for handling improper payments.

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 OIG’s findings and




                              OIG  AUD-2015-001  May 14, 2015                                12
conclusions based on the audit objective. OIG believes that the evidence obtained provides
a reasonable basis for the conclusions included herein, based on the audit objective.




                              OIG  AUD-2015-001  May 14, 2015                              13
APPENDIX A .............................................................................

FHFA’s Comments




                           OIG  AUD-2015-001  May 14, 2015                         14
ADDITIONAL INFORMATION AND COPIES .................................


For additional copies of this report:

      Call: 202-730-0880

      Fax: 202-318-0239

      Visit: www.fhfaoig.gov



To report potential fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:

      Call: 1-800-793-7724

      Fax: 202-318-0358

      Visit: www.fhfaoig.gov/ReportFraud

      Write:

                FHFA Office of Inspector General
                Attn: Office of Investigation – Hotline
                400 Seventh Street, S.W.
                Washington, DC 20024




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