oversight

HUD's Procedures Do Not Always Ensure the Proper Use and Timely Reimbursement of Public Housing Agency Interfund Transaction Balances

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-03-21.

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

OFFICE OF AUDIT
   ?
REGION 1
BOSTON, MA




        The U.S. Department of Housing and Urban
              Development, Washington, DC

    Oversight of Public and Indian Housing Program
                 Interfund Transactions




2014-BO-0001                             MARCH 21, 2014
                                                          Issue Date: March 21, 2014

                                                          Audit Report Number: 2014-BO-0001




TO:            Lindsey Reames,
               Acting Deputy Assistant Secretary for Field Operations, PQ

               Donald J. Lavoy,
               Deputy Assistant Secretary for the Real Estate Assessment Center, PX

               Milan Ozdinec,
               Deputy Assistant Secretary for the Office of Public Housing and Voucher
               Programs, PE;

               //SIGNED//
FROM:          Edgar Moore,
               Regional Inspector General for Audit, Boston Region, 1AGA

SUBJECT:       HUD’s Procedures Do Not Always Ensure the Proper Use and Timely
               Reimbursement of Public Housing Agency Interfund Transaction Balances

    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of HUD’s oversight of Public and Indian
housing program interfund transactions.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
212-264-4174.
                                                          March 21, 2014

                                                          HUD’s Procedures Do Not Always Ensure
                                                          the Proper Use and Timely
                                                          Reimbursement of Public and Indian
                                                          Housing Interfund Transaction Balances

Highlights
Audit Report 2014-BO-0001

 What We Audited and Why                    What We Found

As part of the Office of Inspector         HUD officials adequately identified interfund balances,
General’s (OIG) mission to promote         communicated this information to field offices, and
economy and efficiency, we audited the     adequately evaluated annual contributions contracts and
U.S. Department of Housing and Urban       regulatory restrictions on interfunds. However, they did
Development (HUD), Office of Public        not always take timely and effective action to enforce
and Indian Housing. Our objective was      program fund restrictions by notifying PHAs to
to determine whether HUD (1) had           reimburse interfunds in a timely manner, maintain
adequate procedures to identify,           proper accounting controls and avoid recurring
monitor, and evaluate public housing       interfunds. We attribute this condition to HUD’s lack
agencies (PHA) with interfunds, and (2)    of adequate procedures and sanctions to control the
took appropriate actions to curtail        misuse of restricted program funds. As a result, there
improper practices when borrowing          were recurring interfund balances at 161 PHAs
from restricted HUD programs was           involving the use of restricted Section 8 funds for
found.                                     nonprogram purposes. The most serious of these
                                           deficiencies were at two PHAs, where more than $2.2
                                           million in Section 8 program interfund transaction
 What We Recommend
                                           balances continued to exist.

We recommend that HUD officials
develop and implement standard
procedures to ensure the timely and
effective control of PHAs use and
reimbursement of interfunds, and ensure
the reimbursement of $2.2 million to the
appropriate programs by two PHAs.
                           TABLE OF CONTENTS

Background and Objective                                                    3

Results of Audit
      Finding: HUD Did Not Enforce Policies to Ensure the Proper Use and    5
               Timely Reimbursement of PHA Interfund Transaction Balances

Scope and Methodology                                                       12

Internal Controls                                                           13

Appendixes
A.    Schedule of Questioned Costs                                          15
B.    Auditee Comments and OIG’s Evaluation                                 16
C.    Criteria                                                              24




                                           2
                          BACKGROUND AND OBJECTIVE
The United States Housing Act of 1937, as amended, established the first Federal framework for
Government-owned affordable housing. The Housing Act authorized loans to local public
housing agencies (PHA) for low-rent public housing construction expenses. The Quality
Housing and Work Responsibility Act of 1998 amended the Housing Act to create the Housing
Choice Voucher program and give PHAs more flexibility and discretion in using funding to
address the needs of low-income families. The U.S. Department of Housing and Urban
Development (HUD) enters into agreements with PHAs under separate annual contributions
contracts1 to disburse low-income public housing and Section 8 Housing Choice Voucher
program funds.

In Federal fiscal year 2003, with the enactment of the Appropriations Act of 2003 (Public Law
108-7), Congress prohibited the use of the reserves for overleasing costs, but PHAs retained the
right to use them for other housing purposes. In Federal fiscal year 2004, after the enactment of
the Appropriations Act of 2004 (Public Law 108-199), Congress further restricted the use of the
reserves to activities related to the provision of rental assistance under the Section 8 Housing
Choice Voucher program, including related development activities. Because of this provision, it
is generally interpreted that before Federal fiscal year 2004, administrative fee reserves could be
used for “other housing purposes” and beginning in Federal fiscal year 2004, administrative fee
reserves were “restricted.”

Although Section 8 Housing Choice Voucher program regulations require that housing
assistance payments and program administrative fees be restricted only to uses within the
program, these regulations do not specifically preclude their use in a revolving fund. Therefore,
most PHAs pool their unrestricted reserves with PHA program funds and pay their expenses
through a revolving fund account. Since many PHAs that use a revolving fund also have the
ability to track interfunds2 in real time, their unrestricted reserves usually cover temporary
shortages until program funds are received and reimbursements are posted. When
reimbursements arrive after a reporting period closes, an interfund balance is created.

Through various notices and training, HUD has made PHAs aware that the use of Federal grant
funds for other than the fiduciary purpose of the fund is not authorized. Interfund imbalances
result when PHAs do not have sufficient reserves to cover the temporary shortages until program
funds are reimbursed. A cash shortfall occurs in a program when there are insufficient reserves
and program expenses are paid with the funds of another program. Since program funds are
normally received and posted within a few days of disbursement, most PHAs reimburse their
interfunds within the same few days. However, although inefficient collection and

1
  HUD’s annual contribution contract is a contract between HUD and the PHA that provides administrative services
for covered units. Format and content of the contracts vary depending on the program and year implemented.
2
  The Financial Data Schedule (FDS) Line Definition Guide, published by the Office of Public Housing, Real Estate
Assessment Center, and revised in May 2012, provides that in relation to FDS line 144, “inter-program - due from,”
“Inter-program due to and due from should be reported where the program has incurred expenses through the use of
a centralized revolving fund/working capital account but does not have the cash and investments to reimburse the
account at year-end ... Inappropriate use of funds, even a temporary loan, are ineligible costs resulting in non-
compliance.”

                                                        3
reimbursement procedures are a common reason for interfund imbalances, there are others as
well. Before this audit, OIG conducted several external audits in which PHAs did not perform
interfund reconciliations or knowingly used restricted program funds to pay the expenses of
other programs, for which reimbursements were collected. In prior audits, OIG allowed PHAs
30 days to improve accounting and collection procedures and post reimbursements.

From April 1, 2009, to March 31, 2011, OIG conducted eight external audits of PHAs, which
specifically involved interfunds. In these audits, OIG found that restricted Federal program
funds were used to pay the expenses of other Federal or non-Federal programs. The total costs
that OIG questioned in these interfund audits, relating to the Financial Data Schedule (FDS) Line
Definition Guide, line 144, “due from,” amounted to more than $20 million. These amounts
represent restricted Federal funds that were owed or due back to the Housing Choice Voucher
and other HUD programs.

Specifically, seven external audits examined interfunds and questioned more than $20 million.
These audits were

                                                              Type of Questioned
                PHA Name                      Report no                                       Amount
                                                                     Cost
   Stamford, CT, Housing Authority           2012-BO-1002        unsupported              $7.505,433
   Brockton MA, Housing Authority            2011-BO-1002        unsupported                  $885,852
   Housing Authority of DeKalb County        2010-AT-1010            ineligible           $2,583,244
   New Rochelle, NY, Housing Authority       2010-NY-1010            ineligible                $38,355
   Waltham MA, Housing Authority             2010-BO-1006        unsupported              $3,995,635
   New London CT, Housing Authority          2010-BO-0001            ineligible               $524,879
   Quincy MA, Housing Authority              2009-BO-1006        unsupported              $4,599,160


Two other external audits examined interfunds and found that additional controls were needed.
These audits were

                         PHA Name                       Report no       Control Weakness
                                                      2012-BO-1004      Was not reconciled
           Lawrence, MA, Housing Authority
                                                                         prior to the audit
                                                      2011-BO-1009      Was not reconciled
           Weymouth MA, Housing Authority
                                                                         prior to the audit

Based on these external audits and U.S. Government Accountability Office report 09-33 “HUD’s
Oversight of Housing Agencies Should Focus More on Inappropriate Use of Program Funds”
issued on June 11, 2009, we determined that an internal audit to review the oversight of
interfunds by HUD might be warranted. Our objective was to determine whether HUD (1) had
adequate procedures to identify, monitor, and evaluate PHAs with interfunds and (2) took
appropriate actions to curtail improper practices when borrowing from restricted HUD programs
was found.


                                                  4
                                      RESULTS OF AUDIT


Finding: HUD Did Not Enforce Policies to Ensure the Proper Use and
         Timely Reimbursement of PHA Interfund Transaction
         Balances
HUD officials adequately identified interfund balances, communicated this information to field
offices, and adequately evaluated annual contributions contracts and regulatory restrictions on
interfunds. However, they did not always take timely and effective action to enforce program
fund restrictions by notifying PHAs to reimburse interfunds in a timely manner, maintain proper
accounting controls, and avoid recurring interfunds. We attribute this condition to HUD’s lack
of adequate procedures and sanctions to control the misuse of restricted program funds. As a
result there were recurring interfund balances at 161 PHAs involving the use of restrictive
Section 8 funds for nonprogram purposes. The most serious of these were at two PHAs, where
more than $2.2 million in Section 8 program interfund transaction balances continue to exist.



    HUD Adequately Identified and
    Communicated Interfund
    Balances.

                 HUD’s Real Estate Assessment Center (REAC) had implemented procedures that
                 identified questionable interfund balances and adequately communicated these
                 concerns to local field offices for follow-up and resolution. Thus, HUD had
                 adequate procedures to identify material instances of noncompliance with annual
                 contributions contracts and other regulatory restrictions on the use of program
                 funds through the annual audits conducted by independent public accountants.
                 REAC staff identified interfund problems through review of Financial
                 Assessment Subsystem for Public Housing (FASS-PH) data, documented PHAs
                 that had a balance of more than 5 percent of net assets in interfund account 1443
                 and communicated this information to local field offices. Field office public
                 housing staff followed up on identified interfund balances and took action to
                 recover restricted funds. In addition, the Office of Public Housing was proactive
                 in developing procedures to assist field office staff in determining how to analyze
                 the ability of individual PHAs to repay the funds that should not have been used
                 for nonprogram purposes. However, HUD’s actions were not always effective in
                 preventing PHAs from using restricted funds for nonprogram purposes or did not
                 always result in timely reimbursement of these funds.

3
  This account, as described in the Financial Data Schedule (FDS) Line Definition Guide, represents amounts,
normally not fungible between different Federal programs that are due from other PHA projects, programs and
funds.
                                                        5
HUD Did Not Always Take
Timely and Effective Action To
Curtail Improper Practices of
PHAs Borrowing Restricted
Funds

            There were recurring Section 8 interfund balances at 161 PHAs. The balances
            were deficient because these PHAs used their restricted Section 8 program funds
            in violation of Section 8 program regulations. Section 8 regulations require that
            these funds be restricted only to uses within the program. In 2011, which was the
            most current full year of reported data, 93 of these 161 PHAs had current Section
            8 interfund balances that totaled more than $54.4 million. We reviewed 14 of the
            PHAs that had current interfund balances of greater than 15 percent of assets and
            targeted those PHAs with large recurring balances in at least 3 of the last 4 years.

            Interviews conducted with the PHAs and HUD field office financial analysts and
            directors indicated that many of these PHA interfund balances were due to timing
            differences and that the funds were reimbursed within a few months. However,
            not all interfund balances were due to timing. Many of the PHAs that had
            interfund balances borrowed from programs that had annual contributions
            contract restrictions on the use of their funds and several PHAs maintained
            interfund balances from year to year for multiple years. Often when the balances
            due to these restricted HUD programs were identified, HUD did not obtain
            repayment in a timely manner partly because HUD’s instructions for interfund
            accounts, as explained in appendix C, were not restrictive enough and allowed
            PHAs to transfer and borrow restricted program funds. Since PHAs were not
            sanctioned for using restricted funds in their revolving accounts, which created
            the interfund balances, temporary imbalances seems to have become the
            norm. Therefore, when field office officials identify these imbalances on the
            PHA books, the issue of collection and reimbursement need to be addressed, and
            sanctions should be considered if restrictive funds were used.

            Office of Public Housing and Voucher Program officials provided updated
            information for some PHA interfund accounts; however, after considering this
            data, we still had unreimbursed Section 8 interfund balances for 8 of the 14 PHAs
            reviewed. As a result, these PHAs did not make timely reimbursements to the
            Section 8 program for the funds due or transferred additional restricted Section 8
            funds to other programs in violation of their annual contributions contracts and
            program regulations. Thus, controls need to be strengthened to prevent
            recurrences, and reconciliations for the current month should be required to show
            that the interfund imbalance that resulted in noncompliance has been eliminated.

            The Baytown Housing Authority and the Lansing Housing Commission were the
            most significant examples of the inappropriate use of interfunds and untimely

                                              6
                  reimbursement of transferred restricted funds. Although field office staff had
                  contacted the PHAs to resolve these balances, additional actions would be needed
                  to achieve timely repayment and prevent the recurrence of using interfund
                  transactions to avoid not complying with restrictions on the use of HUD program
                  funds. The details of our review of these two entities follow:

                  Baytown Housing Authority

                  Our Fort Worth office audited the Baytown Housing Authority in Baytown, TX,
                  more than 7 years ago and recommended that the Authority repay the applicable
                  Federal programs the outstanding interfund balances of $627,206 and these
                  amounts were reported as having been recovered in HUD’s Audit Resolution and
                  Corrective Action Tracking System. 4 However, there were more recurring
                  interfund balances that resulted from transfers from the Section 8 program and the
                  Authority needed to reimburse the Section 8 program $945,680. Further, the
                  Authority had not complied with a prior agreement to repay $328,000 in interfund
                  balances in monthly installments of $500. A review of the repayment agreement
                  did not show a breakdown of the amounts to be repaid, the programs from which
                  repayments were to be made, or whether payments could be expected monthly. It
                  should be noted that the Authority was not listed as troubled and was not in a
                  negative equity situation; thus it should have been able to repay these funds. We
                  made several attempts to obtain additional repayment information, but none was
                  received.

                  As shown in the table that follows, the Authority reported deficient “due from”
                  fund balances in its restricted Section 8 programs year after year. The Authority’s
                  component units were the beneficiaries.

                              Line item 144 - amounts due from other programs
                                                     Section 8 Housing
                       PHA name and      Fiscal                                  Total
                                                      Choice Voucher
                         number         yearend                            (all programs)
                                                          program
                      Baytown Housing
                                             6/30/2009            $1,064,053     $4,447,800
                      Authority-TX012
                                             6/30/2010            $1,040,407     $3,919,986
                                             6/30/2011              $961,426     $1,876,573
                                             6/30/2012              $945,680     $1,935,980


                  As of June 30 2012 the Authority had over $945,000 in restricted funds that was
                  used by its component units, and was owed to the Section 8 Housing Choice
                  Voucher program. Thus, HUD needs to address this problem of recurring
                  interfund balances.



4
    Audit Report number 2006-FW-1002, issued December 13, 2005.
                                                         7
           Lansing Housing Commission

           The Lansing Housing Commission in Lansing, MI, had interfund balances dating
           back to 2009, which the field office had not been able to resolve. Commission
           officials stated that although they accounted for interfund transactions, they had
           neglected to transfer the cash between the programs. They stated that they
           worked with the HUD Detroit field office to reconcile the 2010 and 2011 Section
           8 interfund balances and clear out the 2011 balances. HUD field office staff
           members stated that the Commission went back 18 months in an effort to
           reconcile the imbalances; however, they believed that it needed to go back as far
           as its records would allow or at least to December 2009 to provide a better
           understanding of the interfund transactions that caused the problem. More than
           $1.2 million was being repaid to the Section 8 program.

           As shown in the table that follows, the Commission also reported deficient “due
           from” fund balances in its restricted Section 8 programs year after year. The
           Commission’s business-type activities were the beneficiaries.

                      Line item 144 - amounts due from other programs
                                             Section 8 Housing
               PHA name and      Fiscal                                 Total
                                              Choice Voucher
                 number         yearend                            (all programs)
                                                  program
             Lansing Housing
                                   6/30/2009               $2,393,132     $4,758,199
             Commission-MI058
                                   6/30/2010               $1,298,851     $2,436,523
                                   6/30/2011               $1,280,989     $1,558,770
                                   6/30/2012               $1,270,641     $3,748,099


           As of June 30, 2012 the Commission had more than $1.2 million in restrictive
           funds that was used by its business type activities, and was owed to the Section 8
           program. When PHAs have recurring interfund balances as these did, HUD needs
           to take more action.

HUD’s Procedures Were Not
Always Adequate To Eliminate
Restricted PHA Interfund
Balances

           HUD’s treatment of PHAs with interfund balances was not always consistent.
           HUD had no specific procedures that required the field offices to ensure that (1)
           PHA directors were notified to set deadlines for imminent reimbursement of
           interfunds; (2) appropriate accounting, accurate reconciliations, and timely
           posting of interfund reimbursements were made; (3) PHAs would be able to stem
           the creation of new interfunds; and (4) timely and specific steps would be taken if

                                               8
                 it was determined that funds had been diverted from restricted programs to pay
                 for nonprogram activities.

                 Annual contributions5 contracts define the relationships between HUD and the
                 PHA for programs such as the Section 8 and the low-income housing programs.
                 REAC’s FDS Line Definition Guide; PHA GAAP [generally accepted accounting
                 principles] Flyers (No 1-6), PIH [Office of Public and Indian Housing]-REAC:
                 PHA-GAAP Accounting Briefs (No 1-20) and notices such as the Appropriations
                 Act implementation notices provide additional guidance to PHAs on financial
                 accounting and reporting to include interfunds. Since 2004, the Appropriations
                 Act for the Section 8 program and its implementation notices (such as Notice
                 PIH-2012-9) prohibit the use of post-fiscal year 2005 administrative funding for
                 non-Section 8 purposes.

                 REAC’s FDS Line Definition Guide, covering Federal yearend June 30, 2008, to
                 the present (last updated in May 2012), defines FDS line 144, “inter-program -
                 due from,” as representing “amounts due from other PHA projects, programs and
                 funds. The balance represents interprogram transactions resulting in a decrease of
                 expendable resources of the transferring PHA program and funds that are
                 expected to be repaid within a reasonable time.” The FDS Line Definition Guide
                 warns against the use of restricted funds, but it may be confusing to PHAs as it
                 does not require the immediate repayment of interfunds, and as we have
                 documented, some PHA officials failed to follow the guidance and repeatedly
                 used the interfund accounts to transfer restricted funds to other programs.
                 Therefore, this definition needs to be clarified and made more restrictive to
                 specify a reasonable reimbursement period.

                 OIG reported findings on loans against restricted funds in prior audits. In these
                 audits, we required reimbursement within 30 days. We allowed the 30-day period
                 because the Section 8 program does not contain language that precludes the use of
                 a revolving fund for income and expenses and because in many cases, PHAs
                 needed time to establish a reconciliation process, proper accounting procedures,
                 and collection controls to deal with interfund transfer balances. Also, collection
                 documentation, and evidence of prior reconciliations may have been needed to
                 determine why interfund transaction balances remained on the books and were
                 being reported. To maintain good controls over interfunds, HUD must not only
                 assure that PHAs timely reimburse their “due from” balances, but they should
                 also determine why these PHAs continue to generate interfund transaction
                 balances using restrictive funds, and address the causes. Thus, it is not acceptable
                 to create a “due from” balance using restricted funds, especially if the reason why
                 a PHA continues to generate these interfund transaction balances is not
                 determined and addressed. Further, field officials should begin sanctioning PHAs
                 that create a “due from” balance using restricted funds. Therefore, HUD’s

5
  HUD’s annual contributions contract is a contract between HUD and the PHA that provides administrative services
for covered units. Format and content of the contracts vary depending on the program and year implemented.
                                                       9
             controls need to be strengthened to prevent recurrences and reconciliations for the
             current month should be required to show that the interfund imbalance that
             resulted in noncompliance has been eliminated.

Conclusion

             Although HUD adequately identified PHA interfund transaction balances and
             communicated this information to field offices, HUD officials did not always take
             timely, effective, and decisive action to curtail the improper practice of creating
             interfunds, resulting in the untimely repayment of improperly transferred funds.
             HUD’s lack of adequate procedures for requiring field offices to enforce PHA
             program fund restrictions, obtain the timely reimbursement of funds, and curtail
             the improper use of restricted program funds contributed to ongoing problems
             regarding the timely reimbursement of interfund transaction balances. As a result,
             there were recurring interfund balances at PHAs involving the use of restricted
             Section 8 funds for nonprogram purposes. The most serious of these were at two
             PHAs, where more than $2.2 million in Section 8 program interfund transaction
             balances continued to exist.

Recommendations

             We recommend that HUD’s Acting Deputy Assistant Secretary for Field
             Operations

             1A.    Require that the Baytown Housing Authority reimburses the applicable
                    Federal program the improper interfund transaction balance of $945,680 in
                    a reasonable period, considering the financial condition and resources of
                    the Authority and applicable program requirements.

             1B.    Require that the Lansing Housing Commission reimburses the applicable
                    Federal program the improper interfund transaction balance of $1,270,641
                    in a reasonable period considering the financial condition and resources of
                    the Commission and applicable program requirements.

             1C.    Develop procedures to ensure that field officials issue sanctions to PHAs
                    or their managers that knowingly override PHA controls, and use
                    restricted funds to create interfund balances.

             1D.    Develop procedures that will ensure that field offices closely monitor PHA
                    use of revolving funds used in the creation of interfund balances, created
                    from restricted funds, and work with the PHA to develop a plan for
                    repaying and eliminating interfund balances without recurrences.

             1E.    Ensure that training or technical assistance is provided to PHAs with
                    recurring significant improper interfund transaction balances to emphasize
                                              10
       that interfunds are not to be used for temporary interprogram loans since
       program regulations restrict the use of program funds to the programs and
       for the purposes for which these funds are provided.

We recommend that HUD’s Acting Deputy Assistant Secretary for Field
Operations and Deputy Assistant Secretary for the Office of Public Housing and
Voucher Programs

1F.    Implement procedures to ensure that restricted Federal funds are not
       improperly used by other programs and funds used in interfund
       transactions are reimbursed to the applicable HUD programs monthly.

We recommend that HUD’s Deputy Assistant Secretary of the Real Estate
Assessment Center

 1G.   Take action so that the FDS line definition for interfunds, line 144, “due
       to,” is clarified to prevent the use of restrictive funds, and ensure that
       financial activities related to interfund accounts are timely and accurately
       recorded, and reported.




                                11
                         SCOPE AND METHODOLOGY

We performed the audit between September 2012 and June 2013. The audit scope included a
review of interfund accounts from data in HUD’s Financial Assessment Subsystem for Public
Housing Agencies (FASS-PH), which includes all PHAs reporting during the audit period from
July 1, 2008, through June 30, 2012.

We designed, distributed, and analyzed questionnaires and conducted interviews with HUD
headquarters staff in Washington, DC, field office staff and PHA officials. We analyzed
interfund correspondence obtained from HUD headquarters, including correspondence sent from
HUD headquarters to field offices and PHAs

We requested and reviewed PHA records to verify information that was obtained through
interviews with HUD and PHA officials. We identified all relevant policies and procedures
through interviews with HUD officials and obtained REAC procedures for identifying PHAs
with potential interfund deficiencies.

Over the 4-year audit period from July 1, 2008, through June 30, 2012, we collected financial
information on 3,586 PHAs from the FASS-PH financial database. We sorted and analyzed the
database and identified 1,950 PHAs with interfund account balances in at least 1 year of our
audit period. We determined that there were recurring interfund balances at 161 of the PHAs
that had interfunds in at least 3 of the 4 program years in our audit period. We performed a
complete detailed review of 14 PHAs that had Section 8 interfund balances in excess of 15
percent of net assets. We verified the amount of funds transferred by the PHAs, the percentage
of interfunds in relation to total net assets, the type of program funds transferred, the number of
years that interfund balances continued to exist, and previous noncompliance involving interfund
balances at these PHAs.

We analyzed the financial data using computer-assisted audit tools and techniques for data
analytics, particularly ACL (Audit Command Language) and Excel. We tested the integrity of
the financial data by verifying in ACL, that; all fields matched the field definition guide, no data
validity errors existed, control totals were run on each numeric account, the "isblank" test
returned no blank fields and the “count if” command identified only financial statements in our
audit period, We determined that the data were adequate for use in our audit of interfunds.

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
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                 12
                              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
               objective:

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

                  Safeguarding of resources – Policies and procedures that management has
                   implemented to ensure that resources are safeguarded against waste, loss, and
                   misuse.

               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 the effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiency

               Based on our review, we believe that the following item is a significant deficiency:



                                                 13
   HUD officials did not have adequate controls to ensure compliance with laws
    and regulations and to safeguard resources, because they did not always have
    adequate policies and written procedures to ensure that field offices (1) took
    action to curtail improper interfund transactions and practices that used
    restrictive funds, and (2) encourage PHAs to repay interfund balances in a
    timely manner (see finding).




                               14
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                          Recommendation
                                                  Ineligible 1/
                              number
                          1A                            $945,680
                          1B                          $1,270,641
                          TOTAL                       $2,216,321


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.




                                            15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1



Comment 2




Comment 3




                         16
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 5




                         17
Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 7




                         18
Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 9




Comment 10




                         19
Ref to OIG Evaluation   Auditee Comments




Comment 11




Comment 12




                         20
                         OIG Evaluation of Auditee Comments

Comment 1   We revised the report’s addressees to also include the DAS for REAC and the
            DAS for Public Housing and Voucher Programs. Also the order of the
            recommendations was revised in the final report as the individual
            recommendations are addressed to the appropriate DAS for resolution.

Comment 2   HUD officials stated that the risk associated with improper interfund activity issue
            is low relative to program size and that they are not prepared to devote significant
            additional resources to address this issue at the expense of other high risk areas.
            HUD officials also indicated that they are willing to better implement existing
            procedures in identifying and following up on due from balances. We believe
            HUD officials have done a good job in identifying due from balances and
            communicating these results to field offices and public housing authorities.
            However, they can and should focus on the high risk PHAs with significant
            amounts of balances due from restricted accounts that have repeated violations
            without impacting the oversight provided other high risk areas.

Comment 3   We agree that the financial statements indicate that Housing Choice Voucher
            (HCV) programs nationally owe more money than they are owed collectively, but
            we do not agree that these “owed” amounts can simply be netted out because the
            funds are not always due to and from the same programs that borrowed from the
            restricted Section 8 programs. Further, although the balances have been reducing
            over the years substantial amounts owed to the HCV programs, still may be at risk
            and should be eliminated.

Comment 4   HUD officials indicate that the funds exposed to the risk of improper loans are not
            material in relation to the total amount of funding and that PHA reserves have
            been drastically reduced through the use of HUD’s cash management policy.
            HUD officials also indicated that HUD currently holds 40 percent of a
            significantly smaller national HAP reserve and will hold almost all of the balance
            within the next six months, further reducing the funds that can be used for
            interfunds. However, it should be noted that the amount of funds at risk of
            improper use was material during our audit period, as in 2011, which was the
            most current full year of reported data. Thus, 93 PHAs with large recurring
            interfund balances in at least three of the last four years had current Section 8
            interfund balances that totaled more than $54.4 million. Therefore, we agree that
            reducing the funds available for interfund transfers significantly reduces the
            problem with recurring improper interfund transfers; however, it has not stopped
            the practice and should not prevent HUD from properly monitoring interfund
            transactions.

Comment 5   We have revised the background section of the report to clarify that for the seven
            external audits that questioned over $20 million in interfunds, the $20 million in
            interfund balances represented restricted Federal funds that were owed or due
            back to the Housing Choice Voucher and other HUD programs. Thus, the prior
                                             21
              audits reported on the improper use of all available restricted funds, while the
              current audit, presented more specific examples and focused on the improper use
              of Housing Choice Voucher restricted funds.

Comment 6     HUD officials disagreed with implementing controls to ensure that the Baytown
              Housing Authority reimburses the applicable federal program the improper
              interfund transfers within a reasonable time, because repayment is being pursued
              and the funds are being collected. Despite HUD officials’ disagreement with the
              recommendation we believe that the actions taken to reimburse the interfund
              balance at Baytown are responsive to the recommendation. However, during the
              audit resolution process, documents should be submitted for review to confirm
              that the funds have been properly repaid, not improperly written-off, and that
              additional interfund transactions are not reoccurring.

Comment 7     Regarding our recommendation requiring the Lansing Housing Commission to
              reimburse the interfunds, HUD officials disagreed and believe that the report is
              misleading because it does not consider the “due to account #347” and the
              amounts have been offset and/or repaid. We do not agree with HUD because
              there is no explanation on why funds are due to the Authority. As mentioned in
              the finding, these items need to be reconciled by Authority officials. Therefore,
              HUD officials should obtain and provide documentation as part of the audit
              resolution process to show that the questioned costs have been recovered through
              proper offsets or by reimbursement.

Comment 8     HUD officials indicated that HUD cannot monitor monthly financial activity.
              However, this recommendation did not require monthly monitoring, but sought
              implementing procedures to ensure that when PHAs improperly use restricted
              Section 8 funds for other programs, these funds should be reimbursed to the
              applicable program within a one month time frame.

Comment 9     HUD officials indicated that it was not necessary to issue separate sanctions or
              develop procedures to ensure field officials issue separate guidance for sanctions
              to PHA’s or their managers who knowingly override PHA controls and use
              restricted funds to create interfund balances, as they believe that sanctions are an
              option to address egregious behavior. HUD officials also indicated that additional
              guidance on handling interfund referrals from REAC will be developed.
              Therefore, we will work with HUD officials during the audit resolution process to
              ensure that the guidance provided field staff is adequate to address willful
              noncompliance with HUD’s requirements on the use of restricted funds.

Comment 10 HUD officials believe that the FDS definition for line 144 Inter-program - due
           from is accurate under General Accepted Accounting Principles. Officials also
           indicated that they have taken action to prevent and identify inappropriate uses of
           HCV funds and have issued guidance and provided training regarding these
           issues. In addition, HUD officials are taking action to reduce and eliminate the
           HCV reserves at PHAs, which should result in HCV funds being used for the
                                               22
              intended purposes and in accordance with Treasury cash management
              requirements. Therefore during the audit resolution process, Officials should
              provide evidence of the guidance and actions taken so that we can determine if it
              is enough to adequately resolve this recommendation.

Comment 11 HUD officials indicated that it was not possible to closely monitor PHAs as HUD
           only has year end balances to review. Officials also indicated that their
           repayment protocol has formalized the process of recouping funds from PHAs
           and they envision improving the effectiveness of this procedure. However,
           recommendation 1F did not require frequent monitoring, but was directed toward
           field office officials closely monitoring those PHAs that had a serious interfund
           problem to ensure that interfund borrowing of restricted funds is corrected and
           does not frequently reoccur. Nevertheless, we will evaluate HUD’s repayment
           protocol and any subsequent revisions submitted as part of the audit resolution
           process.

Comment 12 HUD officials’ comments are responsive to the recommendation; however, any
           additional guidance to the field staff reviewing interfund transactions will have to
           be reviewed during the audit resolution process to close this recommendation.




                                              23
Appendix C
                                            CRITERIA

The authority for recommendations in this report comes from the laws and regulations
cited in the Background and Objective section of this report and the sources below.

The FDS Line Definition Guide, published by PIH REAC and last revised in May 2012, defines
“FDS line 144 Inter-program - due from” in the current assets section under current investments.
It states:
        This FDS line represents amounts due from other PHA projects, programs and funds.
        This balance represents inter-program transactions resulting in a decrease of expendable
        resources of the transferring PHA program and funds that are expected to be repaid
        “within a reasonable time.” ... Reasonable time is a matter of professional judgment, but
        typically should not exceed the annual operating cycle of the PHA. Transactions between
        funds may be classified as: (1) loans and advances, (2) quasi-external transactions, and
        (3) reimbursements.
        Some PHAs in their day to day operations maintain and use a centralized revolving
        fund/working capital account (including the use of one program’s cash that is
        subsequently reimbursed by other programs) for more efficient cash management.
        During the year this line item is used by the revolving fund/working capital account and
        the individual program funds to ... show a claim on cash held by the revolving
        funds/working capital account on behalf of the individual program funds.
        However, for year-end reporting the cash and investment balances that are maintained in
        a revolving or working capital account must be reconciled, settled, and disaggregated and
        the balances reported on the FDS in the program that provided the cash...
        Inter-program due to and due from should be reported where the program has incurred
        expenses through the use of a centralized revolving fund/working capital account but
        does not have the cash and investments to reimburse the account at year-end...
        Inappropriate uses of funds, even a temporary loan, are ineligible costs resulting in non-
        compliance.

HUD’s General Depository Agreement, form HUD-51999, paragraph 2, provides, “All monies
deposited by the PHA/IHA6 with the Depository shall be credited to the PHA/IHA in a separate
interest bearing deposit or interest bearing accounts, designated “Accounts”. Additionally,
regulations at 24 CFR (Code of Federal Regulations) 982.156, Section 8 Tenant Based
Assistance: Housing Choice Voucher Program, Depositary for Program Funds, provide that “(a)
Unless otherwise required or permitted by HUD, all program receipts must be promptly
deposited with a financial institution selected as depositary by the PHA in accordance with HUD


6
 The General Depository Agreement uses the abbreviation PHA/IHA in place Public Housing Agency/Indian
Housing Authority.
                                                    24
requirements. (b) The PHA may only withdraw deposited program receipts for use in connection
with the program in accordance with HUD requirements.”




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