oversight

FHFA Complied with Applicable Improper Payment Requirements During Fiscal Year 2015

Published by the Federal Housing Finance Agency, Office of Inspector General on 2016-05-05.

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 2015




 Audit Report  AUD-2016-003  May 5, 2016
               Executive Summary
               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), requires federal agencies
               periodically to review, estimate, and report programs and activities that may
               be susceptible to significant improper payments. The IPIA was amended by
AUD-2016-003
               IPERA to direct federal Inspectors General to determine annually whether the
May 5, 2016    agency is in compliance with the statute and to submit a report to the head of
               FHFA, Congressional oversight committees, the Comptroller General of the
               United States, and the controller of the Office of Management and Budget
               (OMB).

               The Federal Housing Finance Agency (FHFA), through its Office of General
               Counsel (OGC), maintains that most requirements of the IPIA, as amended, are
               not applicable to FHFA because those requirements apply only to payments
               made with federal funds and FHFA does not finance its operations with federal
               funds. Nevertheless, FHFA asserts that it has put into place internal controls
               to achieve the intent of the IPIA, as amended. FHFA’s Office of Inspector
               General (OIG) conducted a performance audit to assess FHFA’s compliance
               with the IPIA, as amended, for fiscal year 2015. We found that FHFA
               complied with the applicable provisions of the IPIA, as amended, as well as
               related criteria established in OMB Memorandum M-15-02.

               This audit was conducted by Tara Lewis, Audit Director, and Philip Noyovitz,
               Senior Auditor. We appreciate the cooperation of FHFA staff, as well as the
               assistance of all those who contributed to the preparation of this report,
               including Anya Philbert and Julio Santos.

               We distributed this report to the Congress, OMB, and others and posted it at
               www.fhfaoig.gov.




               Stacey Nahrwold
               Acting Deputy Inspector General for Audits
TABLE OF CONTENTS ................................................................
EXECUTIVE SUMMARY .............................................................................................................2

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

BACKGROUND .............................................................................................................................5

FACTS AND ANALYSIS...............................................................................................................7
      Not All IPIA Requirements Are Applicable to FHFA .............................................................7

CONCLUSION ..............................................................................................................................10

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................11

APPENDIX A ................................................................................................................................12
      FHFA’s Comments .................................................................................................................12

ADDITIONAL INFORMATION AND COPIES .........................................................................13




                                             OIG  AUD-2016-003  May 5, 2016                                                              3
ABBREVIATIONS .......................................................................

AFR                Agency Financial Report

FHFA               Federal Housing Finance Agency

GAO                Government Accountability Office

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 and Accountability Report

U.S.C.             United States Code




                           OIG  AUD-2016-003  May 5, 2016                             4
BACKGROUND ..........................................................................

Because federal agencies regularly make payments to program beneficiaries, grantees,
vendors, and contractors, or on behalf of program beneficiaries, there is a possibility that
some of these payments may be “improper” in one or more respects. To provide estimates
and report improper payments by federal agencies, Congress enacted the IPIA in 2002,1
which it amended in 2010 with the IPERA and again in 2013 with the IPERIA. The IPIA, as
amended by the IPERA, requires federal agencies to periodically review, determine, estimate,
and report programs and activities that may be susceptible to significant improper payments.2
According to the IPIA, as amended, the term “payment” means: “[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.”3

To provide further guidance to federal agencies on the improper payments covered by the
IPIA, as amended, the Office of Management and Budget (OMB) issued a memorandum in
2014 that provides a more robust definition of the term “improper” payment:

          [A]ny 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.4



1
    Public Law No. 107-300, 31 U.S.C. § 3321 note.
2
    Public Law No. 111-204, 31 U.S.C. § 3321 note.
3
    Id.
4
 OMB Memorandum M-15-02, Appendix C to Circular No. A-123, Requirements for Effective Estimation and
Remediation of Improper Payments (Oct. 20, 2014) [hereinafter OMB Memo M-15-02, App. C], at Part I ¶¶ 2
and 3.



                                      OIG  AUD-2016-003  May 5, 2016                                    5
The IPIA, as amended, directs federal agencies to put into place internal controls designed
to eliminate payment errors, waste, fraud, and abuse, including reducing and recapturing
erroneous payments. OMB Memorandum M-15-02 establishes a four-step process for
agencies to follow to identify those operations subject to the IPIA, as amended, and to design
and implement appropriate internal controls to reduce the risk of improper payments:

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

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

    3. Develop and implement a plan sufficient to reduce improper payments; and

    4. Report annually on improper payments in its performance and accountability report
       (PAR) or agency financial report (AFR) to Congress.5

To validate the accuracy of agency reporting on improper payments in its annual PAR or
AFR, the IPIA, as amended, requires Inspectors General to conduct an annual review which
includes six elements:

    1. A determination that the agency has 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;

    2. A determination that the agency has 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.,
       the IPIA, as amended] (if required);

    3. A determination that the agency has published improper payment estimates for all
       programs and activities identified as susceptible to significant improper payments
       under its risk assessment (if required);

    4. A determination that the agency has published programmatic corrective action plans in
       the AFR or PAR (if required);



5
  OMB Memo M-15-02, App. C, supra note 1, at 9-16. 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 a
Performance section is not included. See OMB, Circular A-136, Financial Reporting Requirements, at 11-13
(Sept. 18, 2014).




                                    OIG  AUD-2016-003  May 5, 2016                                          6
      5. A determination that the agency has published, and is meeting, annual reduction
         targets for each program assessed to be at risk and estimated for improper payments (if
         required and applicable); and

      6. A determination that the agency has 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.6

Inspectors General are expected to complete their annual compliance reviews within 180 days
after their respective agencies issue their PARs or AFRs and report their findings.7 If an
Inspector General finds that an agency has not met one or more of the six elements, that
agency is required by the IPIA, as amended, to submit a plan to the Congress describing
the actions it will take to come into compliance.8 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.

FHFA issued its fiscal year 2015 PAR on November 16, 2015. Pursuant to the IPIA, as
amended, OIG conducted this performance audit.


FACTS AND ANALYSIS ...............................................................

Not All IPIA Requirements Are Applicable to FHFA

In its most recent PAR, FHFA reports:

           The Improper Payments Elimination and Recovery Act 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.9




6
    OMB Memo M-15-02, App. C, supra note 1, at Part II § A(3).
7
    OMB Memo M-15-02, App. C, supra note 1, at Part II § A(2).
8
    IPERA § 3(c)(1)(A), see 31 U.S.C. § 3321 note.
9
    See FHFA, Fiscal Year 2015 Performance and Accountability Report, at 111 (Nov. 16, 2015).




                                      OIG  AUD-2016-003  May 5, 2016                             7
FHFA makes no representations in this PAR that it is covered by the IPIA. Since 2012,
FHFA’s Office of General Counsel (OGC) has advised OIG that it has concluded that various
subsections of the IPIA, as amended, are only applicable to payments made with federal
funds, and that these subsections do not apply to FHFA because it is an independent
regulatory agency that does not seek appropriations for its operations. As a consequence,
OGC reasons that payments made by FHFA, such as payments to vendors, are not transfers of
federal funds.10

Figure 1 summarizes the requirements of the IPIA, as amended, and the elements that FHFA
considers inapplicable to its operations.

      FIGURE 1. FHFA’S IMPROPER PAYMENTS INFORMATION ACT COMPLIANCE FOR FISCAL YEAR 2015

                      Compliance Element                                  FHFA Action
The agency has published an annual PAR or AFR for the
                                                          FHFA published its 2015 PAR and included
most recent fiscal year and posted that report and any
                                                          relevant information pertaining to improper
accompanying materials required under guidance of
                                                          payments.
OMB on the agency website.
The agency has conducted a program specific risk
assessment for each program or activity that conforms     FHFA determined that this section of the
with the IPIA, as amended (31 U.S.C. § 3321 note) (if     IPIA, as amended, is not applicable.
required).
The agency has published improper payments
estimates for programs and activities identified as       FHFA determined that this section of the
susceptible to significant improper payments under its    IPIA, as amended, is not applicable.
risk assessment (if required).
The agency has published programmatic corrective          FHFA determined that this section of the
action plans in its PAR or AFR (if required).             IPIA, as amended, is not applicable.
The agency has published, and is meeting, improper
payments reduction targets for each program assessed      FHFA determined that this section of the
to be at risk and estimated for improper payments (if     IPIA, as amended, is not applicable.
required and applicable).
The agency has reported a gross improper payment
rate of less than 10% for each program and activity for   FHFA determined that this section of the
which an estimate was obtained and published in its       IPIA, as amended, is not applicable.
PAR or AFR.



We reviewed the information provided by FHFA’s OGC, and our Office of Counsel made an
independent assessment of the reasonableness of the applicable legal authorities on which it




10
     See 12 U.S.C. § 4516(f).



                                   OIG  AUD-2016-003  May 5, 2016                                     8
relied. Based on its review, OIG’s Office of Counsel determined that OGC’s analysis is
reasonable and OIG does not challenge FHFA’s conclusions.

Notwithstanding the inapplicability of these various IPIA subsections, FHFA advises in its
PAR:

          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.11

To test the accuracy of this representation by FHFA, OIG reviewed relevant invoice and
payment desktop procedures implemented by FHFA to mitigate the risks of fraud, misuse, and
payment delinquency. We found no design flaws within the policies and procedures. We
recognize that the Government Accountability Office (GAO) annually assesses, evaluates,
and determines whether FHFA’s internal controls over financial reporting are properly
designed and operating effectively in all material respects.12 In its report Financial Audit:
Federal Housing Finance Agency’s Fiscal Years 2015 and 2014 Financial Statements, GAO
identified deficiencies in FHFA’s internal controls over financial reporting. However, GAO
did not consider any of these deficiencies to be material weaknesses or significant
deficiencies.13 While GAO’s audit expressed no opinion on the effectiveness of FHFA’s
internal controls related to improper payments or FHFA’s compliance with the IPIA, as
amended, GAO did not identify any issues related to the design and effectiveness of FHFA’s
invoice and payment process control, and made no findings relating to the accuracy of
disbursements.




11
     See FHFA, Fiscal Year 2015 Performance and Accountability Report, at 111 (Nov. 16, 2015).
12
   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.
13
   Id. 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. 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.



                                      OIG  AUD-2016-003  May 5, 2016                                             9
CONCLUSION ............................................................................

OIG concludes that FHFA complied with the applicable statutory improper payment
requirements, as well as related criteria established in the related OMB Memorandum
M-15-02 for FY 2015. As to the specific requirements of the IPIA, as amended, that FHFA
has opined are non-applicable, OIG does not contest FHFA’s interpretation.

OIG acknowledges that FHFA is acting to achieve the intent of the IPIA, as amended, and
the related OMB guidance, 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, such as
invoice payment processing procedures that include detailed instructions on properly
verifying the accuracy of vendor invoice amounts prior to payment.




                                OIG  AUD-2016-003  May 5, 2016                               10
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

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. 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, 2014, to September 30, 2015. To accomplish the audit objective, OIG
reviewed applicable statutes, executive orders, and other related compliance requirements on
improper payments reviewed in various GAO audit reports; met with key FHFA officials;
obtained sufficient and appropriate evidence on compliance actions taken (e.g., confirmed that
FHFA’s 2015 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 between December 2015 and April 2016 and issued its report in
accordance with OMB requirements (i.e., within 180 days of publication of FHFA’s PAR).

OIG’s review of FHFA’s internal controls designed to comply with the IPIA, as amended,
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—does not apply to FHFA because the Agency 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
2015 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
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-2016-003  May 5, 2016                                  11
APPENDIX A .............................................................................
FHFA’s Comments




                            OIG  AUD-2016-003  May 5, 2016                         12
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 Investigations – Hotline
                400 Seventh Street SW
                Washington, DC 20219




                                 OIG  AUD-2016-003  May 5, 2016                          13