oversight

HUD's Oversight of Its Multifamily Housing Subsidy Payment Review Process Needs Improvement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-06-06.

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

                                                                Issue Date
                                                                         June 6, 2011
                                                                
                                                                Audit Report Number
                                                                        2011-CH-0002




TO:        Deborah K. Lear, Director, Office of Housing Assistance Contract
             Administration Oversight, HTC


FROM:      Kelly Anderson, Acting Regional Inspector General for Audit, 5AGA

SUBJECT: HUD’s Oversight of Its Multifamily Housing Subsidy Payment Review Process
           Needs Improvement

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the U.S. Department of Housing and Urban Development’s (HUD)
             multifamily housing subsidy payment review process based upon a HUD
             employee’s complaint. The complaint alleged that HUD lacked controls over its
             multifamily housing subsidy payment review process and voucher specialists
             were understaffed and underpaid. Our audit objective was to determine whether
             HUD had adequate controls over its multifamily housing subsidy payment review
             process.

 What We Found

             HUD’s oversight of its multifamily housing subsidy payment review process
             needs improvement. Specifically, the review and processing of HUD’s
             multifamily housing subsidy payments relating to the vouchers that exceeded the
             threshold amount, were submitted manually, or were submitted at least 1 year
             later than the voucher date were inadequate. The Financial Operations Division
             of HUD’s Multifamily Office of Housing Assistance Contract Administration
             Oversight did not comply with its written voucher review procedures. Of the 85
             vouchers reviewed, the required information was not present in the system to
           support $588,869 of the more than $1.2 million in housing assistance payments
           for 30 vouchers. In addition, more than $28.5 million was provided for 12
           vouchers that were not in HUD’s Tenant Rental Assistance Certification System
           (system), and lacked a valid waiver for not being in system, and a review of these
           vouchers was not conducted as required by HUD’s regulations.

           As of May 13, 2010, the Financial Operations Division had paid 106 vouchers for
           contracts administered by the traditional contract administrators that totaled more
           than $2.5 million in housing assistance for the period October 1, 2008, through
           November 30, 2009, without conducting a review as required by its system. In
           addition, based on our review of four vouchers for contracts administered by the
           performance-based contract administrators, all four vouchers did not have the
           required information in the system to support more than $131,000 in housing
           assistance payments.

           The system generated an incorrect message requiring a review of the vouchers by
           the Financial Operations Division for contracts administered by the performance-
           based contract administrators. As of January 27, 2010, 1,472 vouchers for the
           period October 1, 2008, through November 30, 2009, had been identified by the
           system as requiring a review by the Financial Operations Division. Also, the
           system did not select nine vouchers for which the voucher amount exceeded the
           contract’s threshold amount, contrary to the voucher selection process. Further,
           staff other than the voucher specialists released payments on 34 vouchers for
           contracts administered by traditional contract administrators without a review. As
           a result, HUD lacked assurance that housing assistance payments totaling more
           than $77,600 were provided in accordance with its regulations.


What We Recommend

           We recommend that the Director of Office of Housing Assistance Contract
           Administration Oversight (1) require the property owners and/or contract
           administrators to correct deficiencies identified or offset subsidy payments
           totaling more than $830,000 and (2) implement adequate procedures and controls
           to address the findings cited in this audit report to correct an error in voucher
           processing at the rate of 26.8 percent or 1,054 of 3,932 vouchers.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response




                                            2
We provided our review results, supporting schedules, and discussion draft audit
report to the Director of the Office of Housing Assistance Contract
Administration Oversight and HUD’s staff during the audit. We held an exit
conference with the Director on April 22, 2011.

We asked the Director of the Office of Housing Assistance Contract Administration
Oversight to provide comments on our discussion draft audit report by May 5, 2011.
The Director provided written comments, dated May 5, 2011. The Director
disagreed with the findings and recommendations. The complete text of the written
comments, along with our evaluation of those comments, can be found in appendix
B of this report.




                                 3
                            TABLE OF CONTENTS

Background and Objectives                                                           5

Results of Audit
      Finding 1: HUD’s Oversight of Multifamily Housing Subsidy Review Process      7
                 Needs Improvement

      Finding 2: HUD Failed to Review All Multifamily Housing Subsidy Payments
                 Selected by Its System for Contracts Not Administered by It       11

      Finding 3: HUD Did Not Monitor Its System and Staff’s Authority for Making
                 Voucher Payments                                                  16

Scope and Methodology                                                              19

Internal Controls                                                                  21

Appendixes
   A. Schedule of Questioned Costs                                                 23
   B. Auditee Comments and OIG’s Evaluation                                        24
   C. Federal Requirements                                                         33




                                            4
                     BACKGROUND AND OBJECTIVES

The U.S. Department of Housing and Urban Development (HUD) operates a variety of project-
based rental assistance programs through which it pays subsidies, or housing assistance
payments, to private owners of multifamily housing that help to make this housing affordable for
lower-income households. HUD entered into long-term contracts, often 20 to 40 years,
committing it and the property owners to providing long-term affordable housing. Under these
contracts, tenants generally pay 30 percent of their adjusted income toward their rents, with the
HUD subsidy equal to the difference between what the tenants pay and the contract rents that
HUD and the owners negotiate in advance.

To receive their monthly housing assistance payments, owners must submit monthly vouchers to
account for changes in occupancy and households’ income that affect the actual amount of
subsidy due. However, the manner in which the owners submit these vouchers and the process
by which they get paid varies depending on the type of contract administrator handling their
contract.

For HUD-administered contracts, the owner submits a monthly voucher to HUD for verification,
and HUD in turn pays the owner based on the amount in the voucher. For contracts administered
by performance-based and traditional contract administrators, the owner submits a monthly
voucher to the contract administrators, which verify the voucher and forward it to HUD for
payment. HUD then transfers the amount verified on the voucher to the contract administrators
electronically, which in turn pays the owner. As of January 5, 2011, HUD administered an
estimated 5,886 contracts, performance-based contract administrators administered an estimated
15,825 contracts, and traditional contract administrators administered an estimated 1,889
contracts.

The Financial Operations Division of HUD’s Multifamily Office of Housing Assistance Contract
Administration Oversight, formerly known as the Voucher Processing HUB, was established in
fiscal year 1996 in Kansas City, MO. The voucher processing function transferred from HUD’s
Office of Public and Indian Housing to its Office of Housing in July 2007, following a
memorandum of agreement executed in November 2006 between the two offices. As of
December 2009, the Financial Operations Division included offices in Washington, DC,
Chicago, IL, Kansas City, MO, Atlanta, GA, Hartford, CT, and Boston, MA. One of the
responsibilities of the Financial Operations Division includes reviewing and processing the
multifamily housing subsidy payments for the projects located throughout the United States and
its territories, as selected by HUD’s Tenant Rental Assistance Certification System (system)
relating to the Financial Operations Division’s responsibilities.

The system assigns discrepancy codes and selects vouchers to be reviewed by the Financial
Operations Division in the following scenarios. For HUD-administered contracts, the voucher is
assigned a discrepancy code of T31 if the amount requested on the voucher exceeds the threshold
amount for the contract as calculated by the system based on the contract’s previous 12 months’
voucher payments multiplied by 180 percent. The voucher is assigned a discrepancy code of
T52 if it is submitted for payment at least 1 year late. All vouchers submitted manually for

                                                5
processing and payment are assigned a discrepancy code of T51. If the amount requested on the
voucher for contracts administered either by the traditional or performance-based contract
administrator exceeds the threshold amount for the contract, the voucher is assigned a
discrepancy code of T91. Lastly, the voucher for contracts administered by the traditional or the
performance-based contract administrator is assigned a discrepancy code of T92 when submitted
for processing and payment at least one year late.

For the period October 1, 2008, through November 30, 2009, 337,414 vouchers totaling more
than $10 billion in housing assistance payments were processed through HUD’s system. For the
same period, only 4,077 (1.2 percent) vouchers totaling just under $52 million (0.5 percent) were
selected by the system to be reviewed by the Financial Operations Division.

Our audit objectives were to determine whether HUD (1) ensured that its system contained the
required information to support voucher payments, (2) reviewed all multifamily housing subsidy
payments for contracts it did not administer, and (3) monitored its system and staff’s authority
for making voucher payments. This is the first of two audit reports on HUD’s process for
making multifamily housing subsidy payments.




                                                6
                                RESULTS OF AUDIT

Finding 1: HUD’s Oversight of Its Multifamily Housing Subsidy
               Review Process Needs Improvement
The review and processing of multifamily housing subsidy payments relating to the vouchers
that exceeded the threshold amount, were submitted manually, or were submitted at least 1 year
later than the voucher date, were inadequate. The Financial Operations Division of HUD’s
Multifamily Office of Housing Assistance Contract Administration Oversight lacked quality
controls and supervision over the voucher processing function. As a result, HUD’s Tenant
Rental Assistance Certification System (system) lacked information to support more than
$588,000 in housing assistance for 30 vouchers that totaled $1.2 million in housing assistance
payments for the period October 1, 2008, through November 30, 2009.


 Vouchers Were Not Adequately
 Reviewed

              We statistically selected 98 vouchers from a universe of 3,944 vouchers that
              exceeded the respective contract’s threshold limit, were submitted manually, or
              were submitted at least 1 year late as of January 27, 2010, using data mining
              software. However, we reviewed 85 (98 minus 13) vouchers because not enough
              information was available to perform a review of the remaining 13 vouchers. The
              vouchers were reviewed to determine whether the Financial Operations Division
              accurately reviewed and processed the vouchers in accordance with its procedures
              for the period October 1, 2008, through November 30, 2009. Our review was
              limited to the reports received from the Financial Operations Division,
              information provided by project owners and/or agents, and information available
              in the system.

              From a review of the 85 statistically selected vouchers, we noted that required
              information was not present in the system to support $588,869 of the more than
              $1.2 million in housing assistance for 30 vouchers. The Financial Operations
              Division failed to ensure that the system included the required information for the
              30 vouchers as follows. The deficiencies noted are not independent of one
              another as one voucher may have contained more than one deficiency.

                     15 vouchers did not include certifications that were completed within the
                      required timeframe for all households,
                     10 vouchers did not include matching subsidy amount for at least 90
                      percent of the households,
                     8 vouchers did not include adjustment errors that did not exceed 15
                      percent of regular assistance,

                                               7
                5 vouchers did not include all households meeting program eligibility,
                4 vouchers did not include assistance payments based on appropriate
                 contract rents and utility allowances for all households,
                1 voucher did not include supporting certifications for the miscellaneous
                 accounting requests claimed, and
                1 voucher did not include subsidy amount agreeing with the electronic
                 payment request.

          In addition, the Financial Operations Division failed to provide 8 of the 98
          selected vouchers. Nonetheless, we obtained copies of seven vouchers from the
          property owner and/or agent directly. One voucher was not available for our
          review due to changes in the property manager. The Financial Operations
          Division failed to provide a copy of one voucher totaling $12,452 in housing
          assistance.

Manual Vouchers Were Not
Reviewed

          The Financial Operations Division did not review 12 vouchers totaling more than
          $28 million for a contract administered by the New York City Department of
          Housing Preservation and Development, a traditional contract administrator.
          These vouchers were submitted manually for review and payment and were
          required to be reviewed by the Financial Operations Division. Based on the field
          office’s letter dated December 3, 2007, HUD’s system could not accommodate
          the contract’s submission of tenant data because the contract included varying
          income limits and had a concession program that preserved affordability for
          tenants. However, based on the field office’s letter dated April 29, 2010, HUD’s
          system could accommodate the contract’s submission of tenant data as it could be
          set up to generate discrepancies as opposed to fatal errors for income limits and
          the concession program component should have been included in the tenant’s
          income. According to the voucher specialist, the vouchers were released for
          payment without a review based upon a waiver granted by the multifamily field
          office in New York. However, the waiver expired on January 1, 2008, before the
          vouchers’ release for payment between July 6 and October 28, 2009. The
          Chicago Division Director of the Financial Operations Division said that the New
          York field office may have conducted a review as it was mainly involved in
          resolving the project’s issues relating to HUD’s system. Further, the project
          manager at the field office said that the traditional contract administrator
          conducted the reviews, if any.

          According to 42 U.S.C. (United Sates Code) 3535(q)(1), HUD requirements may
          be waived by the HUD Secretary or the Deputy Assistant Secretary or an
          individual of equivalent rank. Contrary to United States Code and HUD
          requirements, no such delegation was present to grant a waiver of HUD’s
          regulations at 24 CFR (Code of Federal Regulations) 108(c)(2) that requires a

                                          8
             submission of household data in the system. As a result, HUD paid more than
             $28.5 million in housing assistance without ensuring a valid waiver was
             maintained, requiring that the supporting information was transmitted
             electronically to HUD’s system, or a review of the vouchers was completed by the
             Financial Operations Division.

The Voucher Processing Function
Lacked Supervision and Quality
Controls

             The voucher processing function of the Financial Operations Division lacked
             supervision and quality controls. The voucher processing function lacked
             segregation of duties. Before March 2010, the voucher specialists reviewed and
             approved the same vouchers for payment. As a result of our audit, the Financial
             Operations Division segregated the voucher processing function in March 2010.
             Nonetheless, the 30 vouchers incorrectly processed were reviewed by two
             voucher specialists and one financial analyst during the period September 29,
             2008, to May 18, 2010.

             In addition, the system used by the voucher specialists to track their workload was
             not accessible by management. As a result, management lacked assurance that all
             vouchers selected for review were reviewed and the reviews were conducted in a
             timely manner. Further, the Financial Operations Division failed to maintain a
             functional filing system. Although the Financial Operations Division reviewed
             the vouchers when requested, it obtained the vouchers directly from the project
             owner and/or manager. As mentioned previously, the Financial Operations
             Division failed to provide all of the vouchers requested.

             Since the transfer of the voucher processing function from HUD’s Office of
             Public and Indian Housing to the Office of Housing in 2007, a quality control
             review had not been conducted.

             As of October 2010, the Financial Operations Division was implementing a new
             review process and tracking system for vouchers reviewed. Also, the Financial
             Operations Division was in the process of going paper-less to maintain the
             vouchers electronically.

Conclusion

             As a result of the Financial Operations Division’s lack of quality controls and
             supervision over the voucher processing function, housing assistance totaling
             $588,869 of the more than $1.2 million was provided without the required
             supporting information for 30 vouchers cited in this finding.



                                              9
          Based on the review results, we are 95 percent confident that at least 26.8 percent
          or 1,054 of the 3,932 (3,944 vouchers in the universe minus 12 vouchers relating
          to the New York traditional contract administrator) vouchers in the audit universe
          had similar errors. Our methodology for this estimate is explained in the Scope
          and Methodology section of this audit report.

          According to HUD’s regulations at 24 CFR 208.108(c), contract administrators
          must accept the electronic transmission of the HUD forms to include data from
          the form HUD-50059 or the family report from the projects they administer, and
          electronically transmit the data to HUD in a HUD specified format after
          appropriate review and correction of the data. Contrary to its procedure, the
          Financial Operations Division provided housing assistance totaling more than
          $28.5 million for 12 vouchers for the period October 1, 2008, through September
          30, 2009, for which the contract administrator did not transmit electronic data to
          HUD or maintained a valid waiver.

Recommendation

          We recommend that HUD’s Director of the Office of Housing Assistance
          Contract Administration Oversight

          1A.    Require the property owners and/or contract administrators to correct
                 deficiencies identified or offset subsidy payments totaling $588,869 for
                 the 30 vouchers cited in this finding.

          1B.    Obtain and maintain a valid waiver until such time as HUD’s system can
                 accept the electronic submission of the supporting information, and
                 ensure that the vouchers are reviewed in accordance with HUD’s
                 requirements for the 12 vouchers cited in this finding.

          1C.    Require the property owner and/or agent to provide a copy of the voucher
                 totaling $12,452, conduct a review and provide owner and/or agent with
                 deficiencies for correction and offset payments if not corrected within 30
                 days.

          1D.    Implement adequate procedures and controls to ensure that housing
                 assistance is provided in accordance with its regulations.

          1E.    Implement an adequate tracking system to ensure that voucher reviews are
                 tracked throughout the process.

          1F.    Implement a quality control plan to ensure that housing assistance is
                 provided in accordance with its regulations.




                                          10
Finding 2: HUD Failed to Review All Multifamily Housing Subsidy
  Payments Selected by Its System for Contracts Not Administered by It
A review of all multifamily housing subsidy payments selected for review by HUD’s system for
contracts administered by traditional and performance-based contract administrators was not
conducted by HUD. For the period October 1, 2008, through November 30, 2009, 106 vouchers
for contracts administered by traditional contract administrators were paid without being
reviewed in accordance with the system requirements. In addition, four vouchers reviewed by
the performance-based contract administrators and one that was reviewed by a HUD contract
administration oversight monitor contained errors. This condition occurred due to the lack of
quality controls over the voucher processing function relating to contracts not administered by
HUD. As a result, more than $2.5 million in housing assistance was improperly provided for
contracts administered by traditional contract administrators, and more than $131,000 was
improperly provided in housing assistance for contracts administered by performance-based
contract administrators.


 Housing Subsidies Were
 Provided Without a Review for
 Contracts Administered by
 Traditional Contract
 Administrators
              We reviewed all 133 of the vouchers for the period October 1, 2008, through
              November 30, 2009, for contracts administered by the traditional contract
              administrators that had been flagged by the system to be reviewed by the
              Financial Operations Division as of January 27, 2010. The vouchers were
              reviewed to determine whether the Financial Operations Division complied with
              HUD’s requirements in processing the vouchers. Our review was limited to the
              reports received from the Financial Operations Division, information available in
              the system, information provided by the contract administration oversight
              monitors, and contract administrators.

              Although the payments were released by voucher specialists and other HUD staff
              for all 133 vouchers, only 27 vouchers were marked as reviewed before payment.
              According to the Office of Program Systems Management, following the system’s
              selection for review, the vouchers for contracts administered by traditional
              contract administrators are not paid until the voucher specialist conducts a review.
              However, according to the voucher specialist, the 106 vouchers totaling more than
              $2 million were released for payment without a review based on management’s
              verbal instructions. Further, the voucher specialist stated that the vouchers for
              contracts administered by traditional contract administrators were not reviewed if
              the subsidy amount requested by the project did not match the amount approved
              by the traditional contract administrator. This was because the voucher specialists
              did not have support for why the traditional contract administrator recommended


                                               11
a different amount. Conversely, the voucher specialist stated that a limited review
of the voucher was conducted when the subsidy amount requested by the project
matched the amount approved by the contract administrator.

Of the 133 vouchers, we noted the following to be true based on the information
present in the system and reports provided by the Financial Operations Division.

      For 118 vouchers, the amount requested by the owner matched the amount
       approved by the contract administrator. However, 96 vouchers were not
       marked as reviewed.
      For 15 vouchers, the amount requested by the owner did not match the
       amount approved by the contract administrator. However, five vouchers
       were marked as reviewed.

According to the Chicago Division Director of the Financial Operations Division,
while the voucher specialist’s statement in regards to the limited review is
accurate, there was no way to determine whether any of the 133 vouchers had
been reviewed.

According to the HUD Occupancy Handbook for subsidized multifamily housing
programs, to obtain assistance payments, the owner must submit a monthly
subsidy billing to HUD or the property’s contract administrator. Nonetheless, the
Financial Operations Division did not review 7 of the 106 vouchers it received,
based on the report provided by the voucher specialist on voucher reviews
completed for the period October 1, 2008, through November 30, 2009. As
mentioned earlier, the payments for the 106 vouchers were released by voucher
specialists and other HUD staff. The Appendix C of this report includes a more
detailed description of the appropriate requirements used for the findings.

We reviewed two randomly selected vouchers totaling $204,373 that were for
contracts administered by traditional contract administrators and noted that the
vouchers should not have been paid based on the incomplete information present
in the system. These two vouchers were not reviewed by the voucher specialist.
We noted the following discrepancies in one or both of the vouchers:

      The amount of housing assistance requested by the owner did not match
       the electronic submission of the request,
      Confirming certifications were not present in the system for at least 90
       percent of the households included on the voucher,
      The system did not include current certifications for all households
       included on the voucher, and
      Inappropriate rent amounts were used in determining the housing
       assistance amount.




                                12
                   Both of the vouchers were reviewed by the traditional contract administrators.
                   Nonetheless, housing assistance totaling $19,779 was provided without the
                   required supporting information for the two vouchers.

    The Vouchers for Contracts
    Administered by Performance-
    Based Contract Administrators
    Were Not Reviewed


                   According to the draft guidebook for Section 8 Contract Administration Initiative,
                   dated March 15, 2001, the contract administration oversight monitor (monitor)
                   conducts a monthly random sample of voucher processing in the system to test
                   how accurately the contract administrators have processed vouchers. We
                   contacted the 24 monitors throughout the Nation and noted that only 75 of the
                   1,485 vouchers had been reviewed by the monitors. Further, one of the four
                   monitors in Region V1 stated that he did not conduct a monthly random sample of
                   voucher processing because vouchers underwent many edits in the system.

                   We reviewed four randomly selected vouchers totaling $863,424 in approved
                   payment amounts that were for contracts administered by performance-based
                   contract administrators and noted that the vouchers should not have been paid
                   based upon the information available in the system. At least one of the following
                   discrepancies was noted in all four vouchers reviewed:

                           Confirming certifications were not present in the system for at least 90
                            percent of the households included on the voucher;
                           The system did not include current certifications for all households
                            included on the voucher and/or certifications were not completed within
                            the required timeframe for all households included on the voucher: and
                           Adjustment errors exceeded 15 percent of regular assistance.

                   All four of the vouchers were initially reviewed by the performance-based
                   contract administrators. Further, one of the four vouchers was also reviewed by a
                   monitor; however, no discrepancies were noted by the monitor.

    HUD Lacked Controls Over Its
    Multifamily Section 8 Housing
    Voucher Processing


                   Contrary to HUD’s requirements, 106 (133 minus 27) vouchers totaling more than
                   $2.7 million were not reviewed due to the lack of quality controls. In addition,
                   management provided instructions to the voucher specialists reviewing the

1
    HUD Region V includes Indiana, Illinois, Michigan, Minnesota, Ohio, and Wisconsin.

                                                        13
             vouchers for contracts administered by the traditional contract administrators that
             were contrary to HUD’s requirements.

             HUD did not have controls over the vouchers for contracts administered by the
             traditional contract administrators. According to the multifamily field offices in
             Chicago, IL, and Columbus, OH, very little monitoring was conducted of the
             traditional contract administrators in their jurisdiction. This lack of monitoring
             was because the contracts administered by the traditional contract administrators
             were expected to be transferred to the performance-based contract administrators.
             However, as of September 10, 2010, there were 1,900 active contracts
             administered by traditional contract administrators. Further, 988 of these
             contracts would not be eligible to be transferred to the performance-based
             contract administrators in the next 5 years based on the contract expiration date.
             Further, HUD had paid nearly $16 million in administrative fees to 34 traditional
             contract administrators for the 988 contracts for the period October 1, 2008,
             through November 30, 2009, as of October 5, 2010.

             While voucher processing is an outsourced function relating to the contracts
             administered by the performance-based contract administrators, the monitors
             reviewed these vouchers randomly on a monthly basis. Consequently, not all of
             the vouchers selected by the system would be reviewed by HUD. As mentioned
             previously, only 75 of the 1,485 vouchers for the period October 1, 2008, through
             November 30, 2009, were reviewed by the monitors.

Conclusion

             Due to the lack of quality controls, HUD provided housing assistance totaling
             $2,570,783 ($2,775,156 relating to 106 vouchers minus $204,373 relating to 2
             vouchers) for 104 of the 106 vouchers without review. For 2 of the 106 vouchers,
             housing assistance totaling $19,779 was provided without the required supporting
             information.

             In addition, housing assistance totaling $131,459 was provided without the
             required supporting information for four vouchers for contracts administered by
             performance-based contract administrators cited in this finding.

Recommendation

             We recommend that the Director of Office of Housing Assistance Contract
             Administration Oversight

             2A.    Conduct a review of the remaining 104 vouchers, provide owners and/or
                    traditional contract administrators with deficiencies for correction, and
                    offset payments if not corrected within 30 days.

                                              14
2B.   Implement adequate procedures and controls to ensure all vouchers for
      contracts administered by traditional contract administrators are reviewed
      as selected by the system. This should include developing a system of
      quality controls for management to verify that flagged vouchers are
      reviewed.

2C.   Require the property owners and/or traditional contract administrator to
      correct deficiencies identified or offset subsidy payments totaling $19,779
      from non-Federal funds for the two vouchers cited in this finding.

2D.   Require the property owners and/or performance-based contract
      administrators to correct deficiencies identified or offset subsidy payments
      totaling $131,459 from non-Federal funds for the four vouchers cited in
      this finding.

2E.   Implement adequate procedures and controls regarding its voucher
      processing to ensure that housing assistance is provided in accordance
      with HUD’s regulations. This should include establishing written
      policies/procedures for its voucher specialists.




                               15
Finding 3: HUD Did Not Monitor Its System and Staff’s Authority for
                   Making Voucher Payments
The system generated an incorrect message indicating that a review by the Financial Operations
Division was needed for the 1,472 vouchers for contracts administered by performance-based
contract administrators. Further, staff not responsible for approving multifamily housing subsidy
vouchers had access to release vouchers for payment. This condition occurred because HUD
failed to monitor its system and staff’s authority for making voucher payments. As a result, the
Financial Operations Division’s workload was falsely inflated, and vouchers were paid without
being reviewed.


 HUD Did Not Monitor Its
 System and Staff’s Access To
 Release Payments

              We reviewed 337,414 vouchers processed for payment regardless of being
              selected by the system to be reviewed by the Financial Operations Division for
              the period October 1, 2008, through November 30, 2009. The vouchers were
              reviewed to determine whether the system appropriately selected vouchers based
              on the contract’s threshold amount. Also, the vouchers were reviewed to confirm
              that the system generated a message requiring a review by the Financial
              Operations Division for 1,472 vouchers. Our review was limited to the
              information available in the system and reports provided by the Financial
              Operations Division.

              Voucher processing for contracts administered by the performance-based contract
              administrators is an outsourced function and the Financial Operations Division is
              not required to review the vouchers, according to the Office of Program Systems
              Management and the Multifamily Office of Housing Assistance Contract
              Administration Oversight. However, the system generated a message requiring a
              review by the Financial Opeartions Division for all of the 1,472 vouchers.
              According to the Office of Housing Assistance Contract Administration
              Oversight’s Director, the system incorrectly generated the message, and it would
              be corrected once funding became available. Nonetheless, the system generated
              the incorrect messages thereby requiring a review of the vouchers at least since
              July 2007, according to the voucher specialist.

              In addition, the system failed to select nine vouchers for which the voucher
              amount exceeded the contract’s threshold amount, a condition that requires a
              voucher review. The threshold amount is determined automatically by the system
              based on the contract’s average payments of the previous 12 vouchers multiplied
              by 180 percent according to the Office of Program Systems Management. In
              addition, the threshold amount can be set manually. Specifically, staff having


                                               16
           access to release vouchers for payment also had access to manually set the
           contract’s threshold amount to any number. At the same time, the same staff had
           knowledge of the system-calculated threshold amount. If the contract’s voucher
           amount was below the threshold amount, a payment was automatically processed.

           Five of the nine vouchers totaling $77,646 were automatically processed for
           payment. According to the Office of Program Systems Management the vouchers
           were not selected for review due to inconsistencies between the program type and
           contract number. Further, the Office of Program Systems Management stated that
           it was working with the multifamily housing policy to validate prepayment
           decisions for the rental assistance payment programs. Nonetheless, the Chicago
           Division Director of the Financial Operations Division said that the Financial
           Operations Division reviewed vouchers for the rental supplement and rental
           assistance payment programs as selected by the system for review.

           Lastly, four non-Financial Operations Division staff released 34 vouchers totaling
           $322,234 for the period October 1, 2008, through November 30, 2009. These
           payments were released between September 15, 2008, and November 2, 2009.
           The four staff members included an asset manager, funding analyst, financial
           analyst, and supervisor project manager. The four staff members stated that the
           reason for releasing voucher payments was that the two voucher specialists
           charged with the voucher review function at the time were overburdened and that
           the contracts involved unique situtations. Further, on July 27, 2010, only one of
           the four staff members stated that she no longer had access to release voucher
           payments. Nonetheless, based on the responses received from the four
           individuals, it seems that two continued to have access to release payments.

           All 34 vouchers were selected by the system to be reviewed by the Financial
           Operations Division. Also, the contracts relating to the 34 vouchers were
           administered by traditional contract administrators as of May 13, 2010.

           According to the Chicago Division Director of the Financial Operation’s
           Division, a review of the 34 vouchers was conducted only by the traditional
           contract administrators and not by HUD as required by the system. Further, these
           34 vouchers were included in the 133 vouchers included in finding 2 of this
           report.

HUD Lacked Adequate
Controls Over the Voucher
Selections and Payments


           The system incorrectly included vouchers in voucher specialists’ workloads.
           Voucher specialists were only required to review vouchers for contracts
           administered by traditional contract administrators. However, there was no
           distinction in the system between the vouchers for contracts administered by

                                           17
             traditional and performance-based contract administrators when flagged for
             review. The vouchers for contracts administered by the performance-based
             contract administrators were included in the voucher specialists’ workload but did
             not require a review. When these vouchers were released automatically by the
             system , the voucher specialists did not know why some of the vouchers from
             their workload were automatically released while others were not. The incorrect
             selection and subsequent release for payment of the vouchers administered by
             performance-based contractors falsely inflated the workload of the Financial
             Operations Division and did not allow voucher specialists to easily determine
             their workload at any given time or keep from reviewing vouchers not needing
             review.

Conclusion


             As a result of the Financial Operations Division’s failure to maintain adequate
             controls, its workload was falsely inflated, and vouchers were paid by
             unauthorized employees. In addition, HUD lacked assurance that housing
             assistance payments totaling $77,646 were provided in accordance with its
             regulations.

Recommendations

             We recommend that the Director of Office of Housing Assistance Contract
             Administration Oversight

             3A.    Conduct a review of the five vouchers totaling $77,646, provide owners
                    with deficiencies for correction, and offset payments if not corrected
                    within 30 days.

             3B.    Implement adequate procedures and controls to prevent the Financial
                    Operations Division’s workload from being falsely inflated until such time
                    as funds are available to correct the system.

             3C.    Implement adequate monitoring procedures and policies regarding the
                    system’s selection of vouchers for review to ensure consistency and
                    relevancy.

             3D.    Implement adequate procedures and controls to prevent the approval of
                    vouchers by unauthorized individuals.




                                             18
                         SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed

      Applicable laws; regulations; HUD’s program requirements at 24 CFR Parts 5 and 208;
       VoucherCity guidebook; Tenant Rental Assistance Certification System Internet User Guide
       and Monthly Activity Transmission User Guide; Draft Guidebook for Section 8 Contract
       Administration Initiative, dated March 15, 2001; HUD’s voucher review procedures, dated
       April 20, 2009; the annual contributions contract; HUD’s Housing Guidebook 4350.3; and
       42 U.S.C. 3535(q).

      HUD’s organizational chart and program vouchers.

We also interviewed the complainant and HUD’s staff.

In addition, we relied in part on data maintained by HUD in its Tenant Rental Assistance
Certification System (system). Although we did not perform a detailed assessment of the
reliability of the data, we performed a minimal level of testing and found the data to be
adequately reliable for our purposes.

Finding 1

Using data mining software, we statistically selected 98 of the vouchers from the 3,944 vouchers
exceeding the contract’s threshold amount, submitted at least a year later than the voucher date,
or submitted manually as of January 27, 2010. The 98 vouchers were reviewed to determine
whether they were accurately processed and paid. Our sampling criteria used a 90 percent
confidence level with a 20 percent estimated error rate.

Unless the Financial Opeartions Division improves its procedures and controls regarding the
voucher processing function, we estimate that 26.8 percent, or 1,054, of the 3,932 (3,944 less 12
vouchers relating to the New York traditional contract administrator) vouchers would be
processed inaccurately. During the execution of the audit, a randomly selected, stratified sample
of vouchers showed an error rate of 13 of 43 for vouchers totaling $4,000 or less in size and an
error rate of 17 of 42 in vouchers ranging from $4,001 to $1 million. Using variance-based
modeling of proportions and a one-sided 95 percent confidence interval level, we are 95 percent
confident that at least 26.8 percent or 1,054 of the 3,932 vouchers in the audit universe had
similar errors, and the actual number could be more.

The projection of how many of the 3,932 vouchers are likely to have miscalculation errors was
made by dividing the vouchers, based on size, into two different strata, and taking a random
sample from each. The total number of voucher errors within the univerese of 3,932 was
estimated using a stratified attribute projection by means of a statistical computer program
written in SAS®. We deducted the t-score of 1.663 corresponding to a one-sided 95 percent
confidence interval at 83 degrees of freedom from the mean rate of error based on the stratified


                                               19
sample of 1,388. We then multiplied this result by the standard error of 200.8 to account for
statistical variance (1,388 – 1.663 X 200.8 = 1,054).

We performed our on-site audit work between December 2009 and March 2010 at HUD’s
Kansas City office located at 2345 Grand Boulevard, Room 1150, Kansas City, MO and the
Chicago Financial Operations Division office located at 77 West Jackson Boulevard, 25th Floor,
Chicago, IL. The audit covered the period October 1, 2008, through November 30, 2009, but
was expanded when necessary to include other periods.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               20
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls

               We determined that the following internal controls were relevant to our audit
               objectives:

                     Effectiveness and efficiency of operations – Policies and procedures that
                      the audited entity has implemented to provide reasonable assurance that a
                      program meets its objectives, while considering cost-effectiveness and
                      efficiency.

                     Reliability of financial reporting – Policies and procedures that
                      management has implemented to provide reasonable assurance regarding
                      the reliability of financial reporting and the preparation of financial
                      statements in accordance with generally accepted accounting principles.

                     Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

               We assessed the relevant controls identified above.

               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, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.


                                                 21
Significant Deficiency

            Based on our review, we believe that the following item is a significant deficiency:
             HUD lacked adequate procedures and controls to ensure that multifamily
              housing subsidy payments were accurately processed, payments were made
              only after a review, and authority to release payments was limited to the
              individuals charged with the voucher approval function (see findings 1, 2, and
              3).




                                             22
               APPENDIXES

Appendix A

               SCHEDULE OF UNSUPPORTED COSTS


                            Recommendation
                                number            Unsupported 1/
                                  1A                   $588,869
                                  1C                     12,452
                                  2C                     19,779
                                  2D                    131,459
                                  3A                     77,646
                                  Totals               $830,205


1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit work. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             23
Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         24
Ref to OIG Evaluation   Auditee Comments




                         25
Ref to OIG Evaluation   Auditee Comments




Comment 2




                         26
Ref to OIG Evaluation   Auditee Comments




Comment 3



Comment 4
Comment 5




Comment 6




Comment 7




                         27
Ref to OIG Evaluation   Auditee Comments




Comment 8



Comment 9




Comment 10


Comment 11


Comment 12



Comment 13



Comment 14

Comment 15




                         28
Ref to OIG Evaluation   Auditee Comments




                         29
Ref to OIG Evaluation   Auditee Comments




                         30
                         OIG Evaluation of Auditee Comments

Comment 1   The findings relate to the implementation of adequate procedures and controls.
            While we noticed significant changes implemented in the voucher review process
            to include segregation of duties in reviewing and approving the vouchers, and
            implementation of a new tracking and filing system, our findings relate to the
            adequate procedures and controls over the voucher review process. Specifically,
            a quality control plan was not implemented.

Comment 2   According to the Office of Program Systems Management, the tenant and voucher
            data in HUD’s Tenant Rental Assistance Certification System (system) is
            archived and accessible. Our review of the spreadsheet mentioned in the Office
            of Housing Assistance Contract Administration Oversight’s comments did not
            provide any information that warranted any change in the housing assistance
            payments questioned in recommendation 1A.

Comment 3   According to HUD’s housing guidebook 4350.3, owners must keep a signed
            paper copy of the subsidy vouchers for at least five years after HUD or the
            Contract Administrator action. If the document cannot be located, the owner
            should recreate the voucher and repay what he cannot recreate/support or the full
            amount of the voucher should be returned.

Comment 4   A listing of the 104 vouchers was provided to the Financial Operations Division
            on November 29, 2010, via email. During our review, we obtained 2 of the 106
            vouchers from a traditional contract administrator and due to the time needed to
            obtain them we did not attempt to obtain the remaining 104 vouchers from the
            respective traditional contract administrators that maintained them. We noted the
            Financial Operations Division received at least 7 of the 104 vouchers, based on
            the reports provided by the Financial Operations Division. To implement the
            recommendation, the Financial Operations Division should obtain the appropriate
            vouchers and complete a review.

Comment 5   A detailed schedule of all vouchers reviewed by us was provided to the Financial
            Operations Division on November 29, 2010, via email, although not in Excel,
            which included all of the fields requested by the Office of Housing Assistance
            Contract Administration Oversight’s comments. We provided the information in
            Excel format via email on May 18, 2011.

Comment 6   Documentation was not provided to show that there was a system error and that
            corrective actions were taken.

Comment 7   Because the voucher review is the responsibility of the Financial Operations
            Division, it needs to ensure all vouchers flagged for review are paid only after
            being reviewed by its staff.




                                             31
Comment 8     The title to Finding 2 states HUD did not review vouchers for contracts not
              administered by it. These contracts include contracts administered by the
              performance-based contract administrators as well as the traditional contract
              administrators. As such, the finding includes discrepancies noted relating to both
              contract administrators. In addition, the audit scope related to all vouchers
              marked by HUD’s system to be reviewed by the Financial Operations Division as
              of January 27, 2010, which included vouchers administered by performance-
              based contract administrators as well. Therefore, no changes are warranted to the
              discussion of the finding.

Comment 9     The narrative was revised to reflect that the system generated an incorrect
              message indicating that a review was needed, not required, for the vouchers for
              contracts administered by performance-based contract administrators. However,
              no documentation was provided to verify that corrective actions were taken to
              ensure that vouchers for contracts administered by performance-based contract
              administrators were not marked by the system indicating that a review by the
              Financial Operations Division was needed.

Comment 10 The voucher review procedures refer to the Financial Operations Division’s
           voucher review procedures dated April 20, 2009, partially included in Appendix
           C of this report. This document was provided to us by the Financial Operations
           Division. We provided a copy of the written voucher review procedures to the
           director of Multifamily Housing Office of Contract Administration Oversight.

Comment 11 We provided a copy of the letter dated April 29, 2010, issued by Multifamily
           Housing Office of Contract Administration Oversight’s multifamily field office in
           New York.

Comment 12 We revised the background section of the report.

Comment 13 Because the vouchers were submitted manually for HUD’s staff to input, we feel
           revision to the section is not warranted.

Comment 14 We identified the 96 vouchers marked as not reviewed by conducting a basic
           analysis of the report provided by the Financial Operations Division. A listing
           was provided as requested.

Comment 15 We identified the seven vouchers that were marked as received but not reviewed
           by the Financial Operations Division by conducting a basic analysis of the report
           provided by the Financial Operations Division. A listing was provided as
           requested.




                                              32
Appendix C

                           FEDERAL REQUIREMENTS

Finding 1
HUD’s regulations at 24 CFR 208.101 state owners of subsidized multifamily projects are
required to electronically submit certain data to HUD. This electronic submission of data is
required by the following HUD forms: Owner’s Certification of Compliance with Tenant’s
Eligibility and Rent Procedure, Worksheets to Compute Tenant Payment/Rent (forms HUD-
50059 and 50059 worksheets), and the Monthly Subsidy Billing Forms, Housing Owner’s
Certification and Application for Housing Assistance Payments (form HUD-52670), Schedule of
Tenant Assistance Payments Due (form HUD-52670A, part 1), Schedule of Section 8 Special
Claims (form HUD-52670A, part 2), and Special Claims Worksheets (form HUD-52671 A
through D), as applicable.

HUD’s regulations at 24 CFR 208.108(a) state projects that currently use an automated software
package to process certifications and recertifications and to provide subsidy billing to HUD must
update their software packages and begin electronic transmission of that data in a HUD specified
format by March 21, 1994. Part 208.108(b)(3) states projects that are nonautomated must begin
electronic transmission by May 20, 1994.

HUD’s regulations at 24 CFR 108(c)(2) require State housing finance and development agencies
and public housing agencies that serve as the subsidy contract administrator to accept the
electronic submission of the HUD forms (forms HUD-50059, 50059 worksheets, 52670 and
52670A, parts 1 and 2 and 52671 A through D) from the projects they administer, and
electronically transmit that data to HUD in a HUD specified format after appropriate review and
correction of the data.

42 U.S.C. 3535(q) states all waivers of HUD regulations: (1) must be in writing and indicate the
grounds for granting the waiver; (2) may be delegated by the HUD Secretary only to an
individual of Assistant Secretary or equivalent rank, who is authorized to issue the regulation be
waived; and (3) must provide notification to the public through a notice published at least
quarterly in the Federal Register.

The Tenant Rental Assistance Certification System’s Monthly Activity Transmission User
Guide, appendix G, part 2, provides a description of system codes and recommended action. For
code VST31, the description states the voucher requires review by HUD/voucher processing
division. The recommended action is to email a signed copy of the voucher to the voucher
processing division. For code VST52, the description states the voucher is over a year old and it
requires a review by HUD/voucher processing division. The recommended action is to e-mail a
signed copy of the voucher to the voucher processing division.




                                                33
The Housing Guidebook 4350.3, chapter 7, section 6 states it is the owner’s responsibility to
process all recertifications in a timely manner. HUD headquarters will terminate assistance
payments if a new recertification is not submitted within 15 months of the previous year’s
recertification anniversary date. HUD has instructed contract administrators to terminate
assistance payments to an owner if a new annual recertification has not been completed and
submitted through the system within 14 months after the previous year’s anniversary date.
Owners must repay, by making an adjustment to the voucher, the assistance collected for the 3-
month period from the date the annual recertification became effective through the end of the
15th month when assistance was terminated.

Record of Voucher Review – System Processing – Revision 4-20-09 includes procedures for
reviewing vouchers. The voucher review procedure includes answering the following seven
questions. (1) Does total subsidy agree with the electronic payment request? (2) Do total units
not exceed total contract units in the system? (3) For project rental assistance contracts, are
households age/income eligible at the time of move-in? (4) Do at least 90 percent of households
have conforming certifications in the system? (5) Are expired recertifications within three
months of current voucher date? (6) Do adjustment errors not exceed 15 percent of regular
assistance? (7) Are assistance payments based on approved contract rents and utility
allowances? If the answer to all questions is “yes”, the voucher is to be recommended for
payment. The voucher is to be put on hold if deficiencies are noted and corrections are to be
made by the owner/agent. The voucher is to be rejected if the owner/agent reports transmission
errors or fails to correct deficiencies within 30 days of the initial review.

Housing Guidebook 4350.3, Chapter 9, Section 7-E(2) states Owners must keep a signed paper
copy of the subsidy vouchers for at least five years after HUD or the Contract Administrator
action.


Finding 2
The Tenant Rental Assistance Certification System’s Monthly Activity Transmission User
Guide, Appendix G, Part 2 provides a description of the system codes and recommended action.
For code VST91, the description states the voucher failed system threshold edit and requires
review by HUD/voucher processing division. The recommended action is to email a signed copy
of the voucher to voucher processing division. For code VST92, the description states the
voucher is a year old, but payment is approved by the traditional or performance-based contract
administrator. However, the traditional contract administrator vouchers will be suspended for
review. For these vouchers, the recommended action is to fax the signed voucher to the voucher
processing division.

Housing Guidebook 4350.3, Chapter 7, Section 7-18B states owners must implement approved
rent changes on the effective date approved by HUD or the contract administrator. In some
cases, this date may reflect a retroactive approval, and the owner must change the tenant
certification and adjust the monthly subsidy voucher. Revised data must be transmitted to the
contract administrator or to the system to reflect the retroactive changes. Chapter 9, Section 9-


                                                34
12B(1) of the Guidebook states that to obtain assistance payments, the owner must submit a
monthly subsidy billing to HUD or the property’s Contract Administrator.
Draft Guidebook for Section 8 Contract Administration Initiative, dated March 15, 2001,
requires the contract administration oversight monitor to conduct a monthly random sample of
voucher processing in the system to test how accurately the contract administrators have
processed vouchers.

Finding 3
The Record of Voucher Review – Systems Processing – Revision 4-20-09 states a voucher
requires a review under code VST31 because the voucher equals or exceeds the dollar threshold.

The memorandum from the Assistant Secretary for Housing to the Deputy Assistant Secretary
for Human Resource Management, dated, February 1, 2007, states the transfer of Financial
Management Center staff from the Office of Public and Indian Housing to the Office of Housing
will improve the efficiency and effectiveness of operations and streamline the payment process
for Housing’s entire rental housing assistance portfolio. In addition, the Financial Operations
Division is responsible for administration of funding, obligations, and payments for all
multifamily housing rental assistance programs.




                                              35