oversight

HUD's Fiscal Year 2013 Compliance With the Improper Payments Elimination and Recovery Act of 2010

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-04-15.

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

OFFICE OF AUDIT
FINANCIAL AUDIT DIVISION
WASHINGTON, DC




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

          Compliance With the Improper Payments
           Elimination and Recovery Act of 2010




2014-FO-0004                                APRIL 15, 2014
11111111
     *   *   OFF[CE   * *
                                                                  IssueDate: April 15,2014
     NSPECTOR GENERAL

 •               ••‘•
                            I                                     Audit Report Number: 2014-FO-0004




TO:                         David Sidari, Acting Chief Financial Officer, F
                            Benjamin Metcalf, Deputy Assistant Secretary for Multifamily Housing, HT
                            Sandra Henriquez, Assistant Secretary for Public and Indian Housing, P
                            Donald Lavoy, Deputy Assistant Secretary Real Estate Assessment Center, PX Kurt
                            Usowski, Deputy Assistant Secretary, Policy Research and Development, RE


FROM:                       Thomas R. McEnan, Director of Financial Audits Division, GAF


SUBJECT:                    HUD’s Fiscal Year 2013 Compliance With the Improper Payments Elimination
                            and Recovery Act of 2010


    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 fiscal year 2013 compliance with
the Improper Payments Elimination and Recovery Act of 2010.

    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
202-402-8216.
                                             April 15, 2014
                                             HUD’s Compliance With the Improper Payments
                                             Elimination and Recovery Act of 2010




Highlights
Audit Report 2014-FO-0004


 What We Audited and Why                      What We Found

We conducted an audit of the U.S.            HUD did not comply with IPERA reporting
Department of Housing and Urban              requirements because it did not sufficiently and
Development’s (HUD) fiscal year 2013         accurately report its (1) billing and program
compliance with the Improper                 component improper payment rates; (2) actions to
Payments Information Act of 2002 as          recover improper payments; (3) accountability; or (4)
amended by the Improper Payments             corrective actions, internal controls, human capital,
Elimination and Recovery Act of 2010         and information systems as required by IPERA. In
(IPERA). IPERA was enacted to                addition, HUD’s supplemental measures and
eliminate and recover improper               associated corrective actions did not sufficiently target
payments by requiring agencies to            the root causes of its improper payments because they
identify and report on programs that are     did not track and monitor processing entities to ensure
susceptible to significant improper          prevention, detection, and recovery of improper
payments. IPERA also requires each           payments due to rent component and billing errors,
agency’s Inspector General to perform        which are root causes identified by HUD’s contractor
an annual review of the agency’s             studies.
compliance with IPERA. Our audit
objectives were to (1) determine HUD’s
compliance with IPERA reporting and
improper payment reduction
requirements and (2) determine whether
corrective action plans addressed the
root causes of HUD’s improper
payments and were effectively
implemented.

 What We Recommend

We recommend HUD (1) enhance its
IPERA reporting process to ensure that
it accurately reports on its improper
payments and actions it took to reduce
and recover improper payments and (2)
reassess its supplemental measures and
corrective actions to ensure that they
target all root causes of error identified
in the quality control studies.

                                                     
                           TABLE OF CONTENTS

Background and Objectives                                                     3

Results of Audit
      Finding 1: HUD Did Not Comply With IPERA Reporting Requirements         5

      Finding 2: HUD’s Supplemental Measures and Corrective Actions Did Not
                 Target the Root Causes of HUD’s Improper Payment             12

Scope and Methodology                                                         19

Internal Controls                                                             21

Follow-up on Prior Audits                                                     23

Appendixes
     A. Auditee Comments and OIG’s Evaluation                                 24




                                          2
                         BACKGROUND AND OBJECTIVES

The Improper Payments Information Act of 2002 (IPIA) required the head of each agency to
annually review all programs and activities the agency administered, identify all such programs
and activities that might be susceptible to significant improper payments, and report estimated
improper payments for each program or activity identified as susceptible. For programs with
estimated improper payments exceeding $10 million, IPIA required agencies to report the causes
of the improper payments, actions taken to correct the causes, and the results of the actions
taken. IPIA was amended in July 2010 by the Improper Payments Elimination and Recovery Act
(IPERA). IPERA decreased the frequency with which each agency was required to review all of
its programs but increased the Federal agencies’ responsibilities and reporting requirements to
eliminate and recover improper payments and required each agency inspector general to
determine whether the agency complied with IPIA. The Office of Management and Budget
(OMB) issued Circular A-123, Appendix C, Requirements for Effective Measurement and
Remediation of Improper Payments, to provide implementation guidance for agencies.

The U.S. Department of Housing and Urban Development’s (HUD) Secretary designated the
Chief Financial Officer as the lead official for overseeing HUD actions to address improper
payment issues and complying with the requirements of IPERA. The responsibility for
conducting an agency wide IPERA program risk assessment is jointly shared by the Federal
Housing Administration’s (FHA) and the Office of the Chief Financial Officer (OCFO).
Historically, none of the FHA programs have been determined to be susceptible to improper
payments.

HUD previously identified the Community Development Block Grant (CDBG) entitlement and
State or small cities programs as susceptible to improper payments; however, HUD found that in
2 consecutive years, CDBG improper payments were below the $10 million threshold. In 2007,
OMB approved HUD’s request for relief from annual improper payment reporting for those
programs. Currently, HUD reports only public housing, tenant-based voucher,1 and project-
based assistance2 programs (collectively referred to as HUD’s rental housing assistance
programs) as susceptible to improper payments. In these programs, beneficiaries pay 30 percent
of their adjusted income toward the market rent, and HUD’s subsidy payments cover the
remainder of the rental cost (or the operating cost in the case of public housing).

HUD has identified the following three sources of errors and improper payments in rental
housing assistance programs:



1
  The HUD Office of Public and Indian Housing (PIH) is the office responsible for the oversight of the Public
Housing Operating Fund and the Section 8 tenant-based voucher rental housing assistance programs. PIH allocates
and disburses the funding to the State and local public housing agencies that administer the program in accordance
with program eligibility requirements.
2
  The HUD Office of Multifamily Housing (Multifamily Housing) is responsible for the Section 8, 202, and 236
project-based rental housing assistance programs. It allocates and disburses the funding to multifamily projects’
owners or their agents, which administer the program in accordance with each program eligibility requirements.

                                                        3
       Program administrator error – The program administrator’s failure to properly apply
        income exclusions and deductions and correctly determine income, rent, and subsidy
        levels;
       Tenant income reporting error – The tenant beneficiary’s failure to properly disclose all
        income sources and amounts upon which subsidies are determined; and
       Billing error – Errors in the billing and payment of subsidies due between HUD and third-
        party program administrators or housing providers.

Before IPIA, HUD established the Rental Housing Improvement Integrity Project3 to reduce
improper payments . In 2010, HUD implemented supplemental measures to comply with IPERA
and Executive Order 13520. Executive Order 13520 required agencies to provide their inspector
general an accountable official report, describing (1) the agency’s methodology for identifying and
measuring improper payments; (2) the agency’s plans, together with supporting analysis, for
meeting the reduction targets for improper payments in the agency’s high-priority programs
susceptible to improper payments; and (3) the agency’s plans, together with supporting analysis, for
ensuring that initiatives undertaken pursuant to the order do not unduly burden program access and
participation by eligible beneficiaries.

In consultation with OMB, HUD developed supplemental measures to track and report on
intermediaries’ efforts in addressing improper payments. HUD provided the details of these
supplemental measures in its accountable official report to the Office of Inspector General (OIG) as
required. All of HUD’s supplemental measures are reported quarterly on OMB’s payment accuracy
Web site.

HUD has made substantial progress in reducing erroneous payments, from an estimated $3.2 billion
in fiscal year 2000 to $1.23 billion in fiscal year 2011, however; in 2012 improper payments
increased from the previous year to $1.32 billion. However, all three rental assistance programs still
exceed IPERA’s significance threshold of 1.5 percent of program outlays. HUD calculated its
estimated annual improper payment amount using a quality control study, an income match study,
and a billing study, conducted by independent contractors. These quality control and income match
studies were conducted using data from the prior fiscal year. However, the billing studies used
estimates from fiscal year 2004 for public housing and fiscal year 2009 for the owner administrator
program.

Our audit objectives were to (1) determine HUD’s compliance with IPERA reporting and
improper payment reduction requirements and (2) determine whether the Office of Public and
Indian Housing’s (PIH) and Office of Housing’s corrective action plans addressed the root
causes of HUD’s improper payments and were effectively implemented.



3
  In fiscal year 2001, before enactment of IPIA and IPERA, HUD established the Rental Housing
Integrity Improvement Project to reduce an acknowledged improper payment problem in its rental assistance
programs. HUD implemented the Project as a comprehensive strategy to correct program errors in HUD’s high-risk
rental housing subsidy programs and related management control deficiencies. This plan included upfront income
verification, rental integrity monitoring reviews, training and technical assistance, program guidance, error
measurement, and incentives and sanctions. HUD no longer follows all aspects of this plan.

                                                      4
                                                        
                                    RESULTS OF AUDIT


Finding 1: HUD Did Not Comply With IPERA Reporting Requirements

HUD did not sufficiently and accurately report its (1) billing and program component improper
payment rates; (2) actions to recover improper payments; (3) accountability; or (4) corrective
actions, internal controls, human capital, and information systems as required by IPERA and
OMB Circular A-123, Appendix C. OCFO relied on the information from a few program
officials in PIH and Multifamily Housing and HUD did not prioritize IPERA reporting within the
agency. In addition, the Chief Financial Officer did not take an active role in the reduction or
recapture of improper payments. It only coordinated program office responses to update the
previous reports and did not perform procedures to verify the information provided.
Consequently, reports provided to OMB, OIG, and Congress were not a complete and accurate
representation of HUD’s improper payments or HUD’s actions to reduce improper payments.


    HUD Did Not Accurately Report
    on Billing and Component Errors
    or Meet its Annual Reduction
    Target

                HUD did not accurately report on its billing error for two programs and did not
                report at all on its billing error for another program as required by OMB Circular
                A-123, Appendix C, which states that agencies must include the gross estimate of
                the annual amount of improper payments. HUD’s billing error estimates were
                based on fiscal year 2004 data for public housing and fiscal year 2009 data for
                owner administrators. These studies were conducted several years ago, and HUD
                had not reevaluated them to consider changes in inflation, programmatic changes,
                or population changes. Therefore, they did not reflect HUD’s true annual billing
                error. Additionally, HUD did not report billing error for the tenant-based Section
                8 program because PIH believed it had eliminated billing error when the program
                changed to budget-based, using predetermined payments. However, OIG believes
                that while traditional billing error may not exist, since the predetermination of
                payments was based on expenses that were self-reported by public housing
                agencies (PHA) through HUD’s Voucher Management System, HUD is still at
                risk of paying PHAs improperly. An error could occur if a PHA reported its
                expenses incorrectly and was given funding over the amount of its actual
                expenses. The OIG fiscal year 2013 financial statement audit4 noted that controls
                over the Voucher Management System were not sufficient to ensure that the
                PHAs reported their expenses correctly.

4
 2014-FO-0003 - Additional Details To Supplement Our Report on HUD’s Fiscal Year 2013 and 2012 (Restated)
Financial Statements, issued December 16, 2013.


                                                     5
                                                      
                  HUD inaccurately reported on program component errors. OMB Circular A-123
                  prohibits agencies from grouping programs or activities in a way that masks
                  improper payment rates. However, public housing, Section 8, and owner
                  administrator improper payment rates were all reported together in HUD’s agency
                  financial report. Although HUD considers all of these programs as rental housing
                  assistance programs, these three programs were reported separately on HUD’s
                  financial statements and were administered by different offices and systems.
                  Although OMB approved this combination, the large size and scope of this
                  grouping masked the 5 percent increase in public housing in fiscal year 2013.
                  This combination may also mask other underperformers in later years and makes
                  it difficult for the reader to differentiate between programs. The error rates from
                  2010 to 2012 were as follows.5

                           Total improper program payments and percent of total program payments
                                   Public housing     Section 8       Owner administator      Total
                  2010 total      $4,407,169,564    $16,550,252,896     $9,735,505,288 $30,692,927,748
                  Percentage                5.34%               2.59%              3.04%           3.13%

                  2011 total        $4,766,492,020             $17,135,626,692      $10,048,770,703 $31,950,889,415
                  Percentage                 5.61%                       4.10%                2.59%           3.85%

                  2012 total        $4,177,551,692             $16,505,784,146      $10,265,702,263 $30,949,038,101
                  Percentage                10.62%                       3.63%                2.74%           4.28%

                  HUD’s improper payment reduction target for fiscal year 2012 was 3.8 percent,
                  however as noted in the table above, HUD’s actual rate was 4.28 percent.
                  Therefore, HUD missed its annual reduction target rate. Per OMB Circular A-123
                  guidance, since HUD did not meet its annual reduction target, it is not in
                  compliance with IPIA, as amended by IPERA 2010. 6




5
  We used HUD’s contractor’s quality control and income match studies, and its billing error reported in HUD’s
fiscal year 2013 AFR to calculate the improper payment rates. We divided the improper payments by HUD’s
expenditures provided to us by OCFO. OCFO took out certain technical assistance, administrative, and grant
expenditures to calculate 2012 expenses because they were for rental housing and were not part of the quality
control and income match studies. For consistency, OIG took these same amounts out in 2011 and 2010 (these
amounts should be similar each year).
6
  OMB Circular A-123 states that if an agency does not meet one or more of the following requirements, it is not in
compliance with IPIA, as amended by IPERA 2010: published an AFR, conducted a risk assessment, published
improper payment rates, published corrective action plans in the AFR, published and has met annual reduction
targets, reported gross improper payments of less than 10 percent, and reported information on its recapture efforts.

                                                          6
                                                            
    HUD Did Not Accurately and
    Sufficiently Report on its
    Actions to Recover Improper
    Payments

                   IPERA requires recovery audits, if cost effective, for programs or activities that
                   expend more than $1 million and justification if the agency has determined that
                   performing recovery audits is not cost effective. However, HUD did not perform
                   recovery audits for all programs that expended more than $1 million or provide an
                   accurate justification for its determination in its agency financial report.

                   HUD’s fiscal year 2013 agency financial report states, “HUD is still in the process
                   of implementing the recovery audit requirements under the IPERA.” However,
                   interviews with OCFO indicated that HUD did not intend to implement formal
                   recovery audits; instead, it used an informal recovery audit plan. This practice did
                   not comply with IPERA for several reasons: (1) HUD did not mention this plan
                   as its alternative to formal recovery audits in its accountable official report or
                   agency financial report; therefore, HUD did not accurately report on its actions to
                   recover improper payments; (2) this plan described the recovery audit processes
                   for more than 40 programs; however, only 5 of the processes were tracked and
                   reported in the agency financial report; and (3) the plan had not been updated
                   since February 2011. Since HUD’s AFR contained insufficient and inaccurate
                   information on its efforts to recapture improper payments, per OMB Circular A-
                   123 guidance, HUD is not in compliance with IPIA, as amended by IPERA of
                   20107.

                   In addition to its informal recovery audit plan, in December 2013, HUD sent a
                   white paper to OMB describing why recovery audits would not be cost effective
                   for Multifamily Housing’s and PIH’s rental assistance programs; however, HUD
                   did not submit this analysis for its other programs that spent more than $1 million.
                   As of March 14, 2014, OMB had not reached a decision on whether these
                   programs were exempt from this requirement.

    HUD Did Not Include All
    Required Elements of
    Accountability

                   IPERA requires that when agencies report on improper payments, they include a
                   description of the steps taken to ensure that managers, programs, States, and
                   localities are held accountable through annual performance appraisal criteria for
                   (a) meeting applicable improper payments reduction targets; and (b) establishing
                   and maintaining sufficient internal controls, including an appropriate control
                   environment, that effectively prevent, detect, and recover improper payments.

7
    See footnote #6 for information on the OMB guidance we used to make our determination of non-compliance

                                                        7
                                                          
                  However, HUD’s fiscal year 2013 agency financial report did not explain how
                  program officials or processing entities were held accountable. Neither
                  Multifamily Housing nor PIH had formal processes in place to review and if
                  necessary, penalize its processing entities for significant improper payments or
                  noncompliance with its Enterprise Income Verification (EIV) system
                  requirements. Multifamily Housing formally issued penalties during management
                  and occupancy reviews; however, these reviews were conducted for only 14
                  percent of the properties.8

    HUD Did Not Accurately
    Report on Its Corrective
    Actions, Internal Controls,
    Human Capital, and
    Information Systems

                  OMB Circular A-123, Appendix C, states, “Agencies must report on their
                  corrective action plans in their annual PARs and AFRs according to the reporting
                  instructions in Circular A-136.” HUD’s fiscal year 2013 agency financial report
                  states, “HUD’s corrective action plans will include addressing this issue during
                  the Management and Occupancy Reviews (MORs)9 and Rental Integrity
                  Monitoring (RIM) reviews10.” However, MORs were not performed in 42 states
                  and only 2 RIM reviews were performed. At the time of the report, HUD was in a
                  lawsuit with performance-based contract administrators11 (PBCA) and therefore,
                  PBCAs, could not conduct management and occupancy reviews in 42 States. The
                  agency financial report should have discussed this obstacle or barrier. Further,
                  PIH had conducted too few rental integrity monitoring reviews in recent years for
                  this review to be considered an effective tool in reducing improper payments;
                  therefore, it should not be considered and reported as a corrective action. The
                  accountable official report also reports on HUD’s corrective action plans;
                  however, HUD did not have several of the corrective actions in place. The
                  accountable official report stated that PIH initiated monthly and quarterly

8
   This is further explained in finding 2, HUD’s Supplemental Measures and Corrective Actions Did Not Target the
Root Causes of HUD’s Improper Payment.
9
   A Management Occupancy Review (MOR) is an on-site review of a Section 8 project by a PBCA or HUD. It is a
comprehensive assessment of the owner’s procedures for directing and overseeing project operations, and the
adequacy of the procedures for carrying out day to day activities. Some examples of the areas that the PHA must
audit are: maintenance, security, leasing, occupancy, certification and recertification of family income, and
determination of the family payments, financial management, Management Improvement and Operating (MIO)
Plans, and general maintenance practices. The results of the on-site review may result in enforcement actions against
the owner by the PBCA or HUD.
10
    Rental integrity monitoring reviews (RIM) are ongoing quality control monitoring reviews to determine whether
and to what extent public housing agencies (PHA) thoroughly and clearly determined family income and rent for the
purpose of reducing subsidy errors. This includes gathering PHA income and rent information, identifying income
and rent errors, and assessing PHA policies and procedures. The reviewer analyzes this information to establish root
causes of income and rent errors and recommends necessary corrective actions for PHA improved performance.
11
   The lawsuit is regarding the 2011 performance-based contact administrator competitive rebid. Forty-two States
filed a lawsuit against HUD.

                                                         8
                                                           
                 monitoring to reduce the number of egregious income discrepancies and the
                 Public and Indian Housing Information Center system (PIC) nonreporting rate;
                 however, PIH did not perform this monitoring. Since HUD’s AFR contained
                 insufficient and inaccurate information on its corrective actions, per OMB
                 Circular A-123 guidance, HUD is not in compliance with IPIA, as amended by
                 IPERA of 201012.

                 IPERA also requires agencies to report on “whether the agency has what is
                 needed with respect to (a) internal controls; (b) human capital; and (c) information
                 systems and other infrastructure; if not sufficient resources, a description of the
                 resources the agency has requested in its budget submission to establish and
                 maintain internal controls.” The agency financial report states, “The internal
                 controls, human capital, information systems, and other infrastructure are
                 sufficient to reduce improper payments to the levels targeted by HUD.”
                 However, HUD did not have internal controls in place to monitor rental
                 component and billing errors, which were responsible for the majority of its
                 improper payments as identified by HUD’s quality control, income match, and
                 billing studies. HUD’s corrective actions focused on supplemental measures it
                 developed around its EIV system. However, the EIV system did not match data
                 for several rental components or billing components, and PIH management could
                 not use EIV effectively to monitor the income discrepancy rent component
                 matched in EIV.13 Additionally, PIH and Multifamily Housing reported to OIG
                 that their efforts had been hampered by limited staff, EIV limitations, and
                 funding. However, the agency financial report did not address these issues or
                 discuss funding requests that Multifamily Housing discussed in the accountable
                 official report as required.

     OCFO Did Not Oversee HUD
     Actions to Address Improper
     Payment Issues and Bring HUD
     Into Compliance with IPERA
     Requirements

                 As the agency accountable official, HUD’s Secretary designated the Chief
                 Financial Officer (CFO) as the lead official for overseeing HUD actions to
                 address improper payment issues and bring HUD into compliance with IPERA
                 requirements. However, the CFO did not oversee PIH or Multifamily Housing’s
                 efforts to reduce or report on its improper payments. Instead, the CFO relied on
                 the information from a few program officials in PIH and Multifamily Housing to
                 determine if it needed to update its billing study, and to complete the accountable
                 official report and IPERA section of the agency financial report (AFR). OCFO

12
 See footnote #6 for information on the OMB guidance we used to make our determination of non-compliance.
13
  This is explained further in finding 2, HUD’s Supplemental Measures and Corrective Actions Did Not Target the
Root Causes of HUD’s Improper Payment.


                                                       9
                                                        
                  did not have formal procedures in place to ensure complete and accurate
                  information was collected from program staff or perform any procedures to verify
                  the accuracy of the information provided. Further, OCFO did not serve as a
                  facilitator for tracking and resolving EIV system issues14 or for reevaluating PIH
                  and Multifamily Housing supplemental measures to compensate for the lack of
                  MOR and RIM reviews. Overall, OCFO did not take an active role in the
                  reduction or recapture of improper payments; it simply coordinated program
                  office responses to update the previous reports.

     Conclusion

                  HUD did not comply with IPERA and OMB Circular A-123, Appendix C,
                  because it did not sufficiently and accurately report on the required elements. In
                  addition to misreporting several sections in its AFR, HUD did not comply with
                  the following three fundamental requirements, which are all mandatory to be
                  considered compliant with IPERA: 1) HUD did not meet its annual reduction
                  target rate, 2) HUD inaccurately reported on its corrective actions in its AFR, and
                  3) HUD did not report on its recapture efforts for all programs that disbursed
                  more than $1 million. Since HUD did not report correctly, it did not provide OIG,
                  OMB, and Congress with information to correctly evaluate HUD’s efforts and
                  barriers toward reducing improper payments.

     Recommendations

                  We recommend the Acting Chief Financial Officer

                  1A. Work with PIH and Multifamily Housing to accurately identify and report on
                      all corrective actions in place at the time of the report and periodically verify
                      that these actions are performed during the year.

                  1B. Work with PIH and Multifamily Housing to identify and report on all human
                      capital and information system limitations that hamper reduction efforts and
                      track progress in addressing and overcoming these obstacles.

                  1C. In the agency financial report and accountable official report, report on PIH
                       and Multifamily Housing plans to hold program officials and processing
                       entities (PHAs and owner administrators) accountable for improper
                       payments.

                  1D. In fiscal year 2015, conduct a current billing study for Multifamily and
                      Public Housing to accurately determine 2014 improper payment billing rate
                      errors.


14
 See Finding #2- HUD’s Supplemental Measures and Corrective Actions Did Not Target the Root Causes of
HUD’s Improper Payments for more information regarding the EIV system issues.

                                                    10
                                                      
1E. For fiscal year 2015, conduct a study to assess improper payments arising
    from Housing Choice Voucher program PHAs misreporting their 2014
    expenses to HUD.

1F. In future years, if a billing study is not performed annually, explain the
    reason for not doing so in the agency financial report and update the billing
    error for inflation, programmatic, or population changes and any other
    factors that may change the billing error previously reported.

1G. Report on Multifamily, Public Housing, and Section 8 program improper
    payment rates separately in the agency financial reports.

1H. Update its recovery audit plan annually and for each program that expends
    more than $1 million, report in the agency financial report on the amount
    recovered using the corresponding activity mentioned in the plan. If
    recovery activities are not cost effective for a particular program, explain
    why they are not cost effective in the agency financial report.

1I.   Develop and implement formal procedures to collect and verify information
      provided by program offices to ensure information reported is accurate and
      in compliance with IPERA reporting requirements.

We recommend the Assistant Secretary for Public and Indian Housing

1J. Coordinate with all appropriate program officials when responding to OCFO’s
    information requests to ensure that all statements are accurate for the current
    fiscal year, to include but not be limited to updates to corrective action plans,
    internal controls in place, and information on any barriers the agency is
    experiencing.

1K. Develop and execute formal plans to hold accountable program officials and
    processing entities (PHAs) responsible for improper payments.

We recommend the Deputy Assistant Secretary for Multifamily Housing

1L. Coordinate with all appropriate program officials when responding to
    OCFO’s information requests to ensure that all statements are accurate for the
    current fiscal year, to include but not be limited to updates to corrective action
    plans, internal controls in place, and information on any barriers the agency is
    experiencing.

1M. Develop and execute formal plans to hold accountable program officials and
    processing entities (owners or administrators) responsible for improper
    payments.




                                  11
                                    
Finding 2: HUD’s Supplemental Measures and Corrective Actions Did
Not Target the Root Causes of HUD’s Improper Payment

HUD’s supplemental measures and associated corrective actions did not sufficiently target the
root causes of the improper payments its contractors identified15 and as HUD reported in its
fiscal year 2013 agency financial report as required. Specifically, HUD’s supplemental measures
and associated corrective actions did not track or monitor processing entities’16 efforts in
preventing, detecting, and recovering improper payments arising from rent component and
billing errors. This condition occurred because HUD’s supplemental measures were based on
the EIV system; however, the system did not match data for several rental and billing
components. Additionally, other EIV system limitations prevented PIH and Multifamily
Housing management from effectively monitoring processing entities. Without supplemental
measures and corrective actions that are directly related to the root causes of HUD’s improper
payments, HUD’s monitoring system was ineffective, and HUD could not hold appropriate
officials accountable or accurately evaluate its efforts. Consequently, HUD’s improper
payments increased and it missed its improper payment target rate.


     HUD’s Supplemental Measures
     Did Not Target Rent Component
     or Billing Errors

                  HUD’s supplemental measures and associated corrective actions did not
                  sufficiently target the root causes of the improper payments identified in the
                  quality control, income match, and billing studies performed by HUD’s
                  contractor. According to the studies performed, 92 percent of HUD’s improper
                  payments occurred because processing entities calculated tenant rent using
                  incorrect rent components17 and 8 percent occurred because processing entities
                  billed HUD incorrectly. However, HUD’s supplemental measures did not address
                  rent and billing component errors identified in the quality control study, the
                  income match study, and previous billing studies. OMB Circular A-123,
                  Appendix C, states that agencies should use the results of their statistical sampling
                  measurements to identify the root causes and implement robust corrective action

15
   To calculate its annual improper payments, HUD used a contractor to identify errors in the calculation of tenant
rent for a statistical sample of households. The study tested both administrative errors and errors that resulted from
intentional tenant misreporting. Based on the rent errors identified, HUD estimated its annual administrative and
income reporting improper payments. HUD also used contracted studies to calculate its billing error; however, these
were from fiscal year 2004 for operating subsidy and fiscal year 2009 for multifamily programs.
16
   Processing entities are PHAs for tenant-based Section 8 and public housing programs and owners or management
agents for Multifamily Housing owner-administered projects.
17
   Forty-nine percent are from earned income, and 43 percent are from the total of other rental components: pension,
asset income, other income, public assistance and five allowances: medical, dependent, elderly disabled, child care,
and disability.


                                                         12
                                                            
                 plans to address those root causes. While OMB required agencies to continuously
                 use their improper payment measurement results to identify new and innovative
                 corrective actions to prevent and reduce improper payments, HUD determined its
                 supplemental measures in 2010 and had not reevaluated them. We found the
                 following disconnects between HUD’s supplemental measures and the errors
                 related to rent and billing component errors identified as root causes by the
                 studies:

                 Failed identity verification supplemental measure - Correcting failed identity
                 errors in HUD’s EIV system is important to verify tenants’ identity and eligibility
                 so that a tenant’s income can be matched with the National Directory of New
                 Hires and Social Security Administration (SSA) data. However, this measure did
                 not ensure that when the identity verification was corrected, the processing
                 entities would use the income discrepancy report to take action on any
                 discrepancies identified. Additionally, for PIH, PHAs are required to recertify
                 tenants every 12 months. However, if the PHA failed to recertify the tenant in the
                 last 15 months, the tenant will fail the pre-screening and will not be sent to SSA
                 for verification or included in this measure. However, tenants that have not been
                 recertified in 15 months would be the most likely to cause errors in the subsidized
                 rent calculation because the income they reported would not have been updated or
                 verified in more than 15 months. Further, Multifamily Housing did not routinely
                 follow up with owners and management agents that appeared on this report.

                 Usage and access supplemental measures - EIV usage and access supplemental
                 measures showed that the owner administrator had access to EIV and had used it
                 in the last 6 months. This is a good measure to identify processing entities not
                 using the system, however; this measure fell short because it did not show how it
                 was used. Therefore, these measures provided no assurance that the system was
                 used in a timely and effective manner to correct income discrepancies and other
                 rent component errors. Further, Multifamily Housing’s usage rate was not based
                 on the entire population but solely on the results of management occupancy
                 reviews conducted in each quarter. This is problematic because these reviews
                 were conducted on only 14 percent of the properties in fiscal year 2013 due to the
                 lawsuit with performance-based contract administrators. Although, this only
                 impacts the calculation during the lawsuit, in fiscal year 2013, Multifamily
                 Housing did not implement alternative procedures to collect data for the entire
                 population. Therefore, this measure was not effective in assessing the usage rate
                 of the entire population, and there was no assurance that the majority of owner
                 administrators used EIV.

                 Income discrepancy supplemental measure - Multifamily Housing did not have
                 supplemental measures that measured income discrepancies or other rent
                 component discrepancies and, therefore, is not addressing this root cause
                 identified in the improper payment study.18 For PIH, this supplemental measure

18
  In our audit report 2012-FO-0003, dated November 15, 2012, we recommended that Multifamily Housing report
on income discrepancies at the 100 percent threshold level as a supplemental measure since income discrepancy was

                                                       13
                                                         
                 measured a discrepancy only when the tenant reported zero income; all tenants
                 that reported some amount of income were excluded. Further, the report
                 supporting this measure contained many false positives19and did not report on
                 processing entity action to investigate the discrepancies. Therefore, PIH
                 management could not use it to effectively monitor its processing entities.

                 Deceased tenants supplemental measure - HUD’s quality control study and
                 income match study did not report on deceased tenant payments; therefore, these
                 improper payments were not included in HUD’s improper payments estimate.
                 Consequently, reducing deceased tenant payments will not reduce the amounts
                 reported in the study and by HUD. Further, Multifamily Housing did not
                 routinely follow up with owners or management agents that appeared on this
                 report, and its calculation of this supplemental measurement was primarily
                 manual. Multifamily Housing manually removed 25-50 percent of the single-
                 member household tenants identified by EIV due to false positives, move-outs,
                 terminations, inactivity in HUD’s Tenants Rental Assistant Certification System,
                 and duplicated Social Security numbers. Therefore, the reliability and timeliness
                 of this report was not sufficient to ensure that it met the goal to reduce improper
                 payments.

                 PIC reporting rate supplemental measure - This measure tracks the participating
                 tenant data reported by PHAs. However, PIH management did not use this
                 measure to monitor PHAs. While a high PIC reporting rate is necessary to ensure
                 PHAs’ ability to verify tenant income, this measure did not ensure the timeliness
                 or accuracy of the information entered into PIC or that the PHA performed
                 income verification. Further, the report used for this supplemental measure was
                 unreliable because it did not accurately count the number of PIC submissions
                 required for each PHA. The quarterly reports showed that several PHAs
                 submitted more forms HUD-5005820 than required, some PHAs were not required
                 to submit these forms but appeared as noncompliant in the report, and a few
                 PHAs appeared to have to be required to submit a negative ramount of forms in
                 the report.

                 Lastly, PIH and Multifamily Housing did not have supplemental measures
                 regarding the level of billing errors made by processing entities. In HUD’s fiscal
                 year 2013 agency financial report, HUD reported that billing errors occurred in
                 the public housing and multifamily rental housing assistance programs and
                 estimated the error to be $106 million (8 percent of total error) from prior billing
                 studies. HUD stated that billing errors were eliminated in the Section 8 tenant-
                 based program after implementing the fixed-budget formula allocation process in


the major root cause for improper payments. Refer to the Follow-up on Prior Audits section in this report for an
update.
19
   False positives are further discussed under the next section - HUD’s Management Could Not Effectively Monitor
PHAs and Owners’ Performance for Addressing Rent or Billing Component Errors
20
   Form 50058 is the Family Report, where all information about the family is collected. This form should be
updated when family/income information changes.

                                                       14
                                                         
                 2005. However, billing errors could still occur at the PHA level. HUD had not
                 conducted a billing study since 2004 for PIH and 2009 for Multifamily Housing
                 programs to confirm assumptions and reassess the materiality of billing errors.

     HUD Management Could Not
     Effectively Monitor PHAs’ and
     Owners’ Performance for
     Addressing Rent or Billing
     Component Errors

                 Previously, HUD used rental integrity monitoring (RIM) and management
                 occupancy reviews (MOR) to reduce its improper payments. These reviews
                 addressed rent component errors as well as billing errors. However, due to
                 limited resources and agency priorities, PIH reviewed only a few PHAs using
                 RIM reviews in fiscal year 2013. Further, Multifamily Housing’s performance-
                 based contract administrators did not use MORs to review owners in 42 States
                 because HUD was in a lawsuit with the contract administrators regarding the
                 rebid in 2011. In the absence of these reviews, HUD’s corrective actions were
                 limited to supplemental measures it developed around the EIV system; however,
                 PIH and Multifamily Housing management could not use EIV to monitor rent or
                 billing component errors.

                 First, PIH and Multifamily Housing management could not use the EIV system to
                 effectively monitor the income discrepancy rent component because the EIV
                 report showing income discrepancies contained many false positives. The false
                 positives existed because the EIV system reports all discrepancies between
                 HUD’s determined income21 and the amount reported by the National Directory
                 of New Hires (NDNH); however, due to a 6-month time lag in the National
                 Directory data22 and the possibility of identity theft, not all differences were true
                 errors. From a management perspective, there was no way to determine the
                 validity of each discrepancy in the EIV system; therefore, management could not
                 determine whether processing entities used the reports to identify, investigate, and
                 either correct the income or record the discrepancy as a false positive. PIH and
                 Multifamily Housing notices and handbooks instruct processing entities to use
                 EIV to identify and investigate possible income discrepancies; however, EIV does
                 not track or warehouse actions taken by processing entities. Without a tracking
                 mechanism, management could not use EIV to determine the extent of the income
                 discrepancy problem or hold appropriate officials accountable.




21
   PHAs and owners of multifamily projects are required to verify and report to HUD the tenant’s income via PIC or
the Tenants Rental Assistant Certification System. These systems feed into the EIV system, and tenant information
is matched with the latest National Directory of New Hires and Social Security Administration data.
22
   NDNH data is 6 months behind the tenants current income. Therefore, HUD’s tenant income may not match
NDNH income because the tenant lost a job during the 6 month period or the tenant obtained a new job.

                                                       15
                                                          
                  Second, PIH designed EIV to reduce improper payments, but it should not be
                  PIH’s only corrective action because it was not designed to measure administrator
                  error23 arising from several rental components such as most pensions, welfare
                  benefits, and allowances.24 EIV does not have the means to acquire data for these
                  components and cannot detect errors that occur when the PHA has the correct
                  information but calculated rent incorrectly. This is especially problematic
                  because PIH’s and Multifamily’s administrative pension and allowance errors
                  were responsible for 53 percent of the administrator error. Additionally, the EIV
                  system does not have the means to review the amount that the processing entity
                  billed HUD, so PIH and Multifamily Housing management could not use EIV to
                  track and monitor their billing error. These limitations do not represent problems
                  with EIV, but shortcomings with HUD’s corrective action plan, which relies on
                  EIV to identify improper payments.

                  Lastly, Multifamily Housing continued to be unable to use EIV to accurately
                  measure three of its supplemental measures: EIV usage rate, EIV access rate, and
                  deceased tenants. We reported this issue in our fiscal year 2012 IPERA audit
                  report.25 Since HUD’s Real Estate Assessment Center (REAC) designed the EIV
                  system for the PIH platform, the system needed several enhancements to
                  accommodate the Multifamily Housing platform. This process began several
                  years ago, and a lack of communication between Multifamily Housing REAC and
                  insufficient oversight by Multifamily Housing management and the IPERA lead
                  official, the Chief Financial Officer, hampered its progress. Several program and
                  system offices and contractors should have been involved in this process;
                  however, since one Multifamily Housing program office and one system
                  contractor handled the majority of the work, several EIV releases failed to
                  produce reports that Multifamily Housing could use to accurately measure its
                  supplemental measures. As of the end of our audit fieldwork, REAC was
                  working with the Integrated Real Estate Management System team to resolve this
                  issue and believed that since the appropriate systems and systems personnel were
                  involved, the issue would be resolved in a timely manner.


     Conclusion

                  HUD did not fully implement OMB Circular A-123, Appendix C, the
                  implementing guidance of IPERA requirements, because it did not use the results
                  of its statistical sample to identify the root causes of improper payments and
                  implement corrective actions to prevent and reduce associated improper

23
   Administrator error occurred when the processing entity 1) had access to the correct information but calculated
income incorrectly, 2) failed to conduct a recertification, or 3) failed to verify tenant reported information.
24
   Allowance includes medical allowance, dependent allowance, elderly disabled allowance, child care allowance,
and disability allowance.
25
   Audit report number 2012-FO-0005, U.S Department of Housing and Urban Development, Washington DC,
Compliance With the Improper Payments Eliminations and Recovery Act of 2010, issued March 15, 2013.


                                                         16
                                                           
          payments. Without this link, HUD could not determine whether its corrective
          actions were effective or accurately measure or track its efforts. Further, HUD
          could not hold appropriate officials accountable. Consequently, HUD’s gross
          improper payment error rate increased, and it missed its improper payment
          reduction goal. Public Housing’s error rate increased by 5 percent, while Section
          8 and owner administrator rates stayed approximately the same. All three
          programs remained above OMB’s threshold, and were, therefore, considered risky
          programs that were susceptible to significant improper payments.


Recommendations

          We recommend that the Assistant Secretary for Public and Indian Housing, in
          coordination with OCFO and the Office of Policy Development and Research

          2A. Reassess existing supplemental measures and corrective actions, and enhance
              or develop new supplemental measures and corrective actions to ensure that
              they target the root causes of error identified in the improper payment
              studies.

          2B. Periodically reevaluate the supplemental measures and corrective actions so
              that new and innovative ways to reduce improper payments are identified
              and implemented.

          2C. Work with REAC to develop management-level reports in EIV that will
              allow PIH management to efficiently and effectively identify processing
              entities that are responsible for improper payments and develop policies and
              procedures to hold PHAs identified accountable.


          We recommend that Deputy Assistant Secretary for Multifamily Housing, in
          coordination with OCFO and the Office of Policy Development and Research

          2D. Reassess existing supplemental measures and corrective actions, and enhance
              or develop new supplemental measures and corrective actions to ensure that
              they target the root causes of error identified in the improper payment
              studies.

          2E. Periodically reevaluate the supplemental measures and corrective actions so
              that new and innovative ways to reduce improper payments are identified
              and implemented.




                                          17
                                            
2F. Work with REAC to develop management-level reports in EIV that will
    allow Multifamily Housing management to efficiently and effectively
    identify processing entities that are responsible for improper payments and
    develop policies and procedures to hold owners/administrators identified
    accountable.

We recommend that the Deputy Assistant Secretary for the Real Estate
Assessment Center

2G. Work with PIH and Multifamily Housing management to develop
    management-level reports in EIV that will allow PIH and Multifamily
    Housing management to efficiently and effectively identify processing
    entities that are responsible for improper payments.

We recommend that the Acting Office of Chief Financial Officer

2H. Work with PIH and Multifamily Housing to determine annual improper
    payments HUD made to deceased tenants, and report this amount as an
    additional source of improper payments in its AFR.




                                18
                                  
                         SCOPE AND METHODOLOGY

We conducted this audit of HUD’s fiscal year 2013 compliance with the reporting requirements
of IPIA, as amended by IPERA, and Executive Order 13520, Reducing Improper Payments. The
objectives of this audit were to (1) determine HUD’s compliance with IPERA reporting and
improper payment reduction requirements and (2) determine whether PIH’s and Multifamily
Housing’s corrective action plans addressed the root causes of HUD’s improper payments and
were effectively implemented.

We conducted our review from January 2014 to April 2014 at HUD headquarters in Washington,
DC, and followed OMB Circular A-123 guidance on OIG responsibility. OMB Circular A-123,
Appendix C, states:

To determine compliance with IPIA, the agency Inspector General should review the agency's
PAR or AFR (and any accompanying information) for the most recent fiscal year. Compliance
with IPIA means that the agency has:
          a. Published a PAR or AFR for the most recent fiscal year and posted that report
              and any accompanying materials required by OMB on the agency website;
          b. Conducted a program specific risk assessment for each program or activity that
              conforms with Section 3321 of Title 31 U.S.C. (if required);
          c. Published improper payment estimates for all programs and activities identified
              as susceptible to significant improper payments under its risk assessment (if
              required);
          d. Published programmatic corrective action plans in the PAR or AFR (if
              required);
          e. Published, and has met, annual reduction targets for each program assessed to
              be at risk and measured for improper payments;
          f. Reported a gross improper payment rate of less than 10 percent for each
              program and activity for which an improper payment estimate was obtained and
              published in the PAR or AFR; and
          g. Reported information on its efforts to recapture improper payments.

If an agency does not meet one or more of these requirements, then it is not compliant with IPIA.
In addition, as part of its review of these improper payment elements, the agency Inspector
General should also::
            o Evalulate the accuracy and completeness of agency reporting
            o Evaluate agency performance in reducing and recapturing improper payments.
            o Determine if the corrective action plans are robust and focused on the appropriate
                root causes of improper payments, effectively implemented, and prioritized within
                the agency, to allow it to meet its reduction targets.
            o As part of its report, the agency Inspector General should include its evaluation of
                agency efforts to prevent and reduce improper payments, and any
                recommendations for actions to further improve the agency's or program's
                performance in reducing improper payments.


                                               19
                                                  
To determine HUD’s compliance with IPERA, we evaluted HUD on the required elements
above. First, we reviewed HUD’s fiscal year 2013 improper payment risk assessment, which did
not identify any new programs as susceptible to improper payments. Next, we focused our
review on the rental housing assitance programs, which HUD previously identified as susceptible
and for which it annually reported improper payments above OMB’s threshold. To complete this
work, we interviewed appropriate personnel from OCFO, PIH, Multifamily Housing, and REAC.
We also reviewed the information HUD reported in its 2013 accountable offical report and fiscal
year 2013 agency financial report and assessed the validity of the information provided. In
addition, we reviewed HUD’s internal controls, policies, procedures, and practices and evaluated
HUD’s efforts in preventing, reducing, and recovering improper payments.

During our review, we also analyzed the fiscal year 2013 quality control study and income match
study, which measured HUD’s improper payments by calculating rental errors in a statistical
sample of rental housing assistance projects for fiscal year 2012. We also met with HUD quality
control study and income match study contractors to gather sufficient information to evaluate
HUD’s plans and the accuracy of the underlying improper payment data. Addtionally, we
reviewed the 2004 and 2009 billing studies.

Lastly, we reviewed the applicable Federal laws, Executive Order 13520, and the implementing
guidance in OMB Circular A-123, Appendix C, that govern actions needed by the agency to
address the issue of improper payments. OMB Circular A-123, Appendix C, parts I and II,
provide guidance on the implementation of IPIA as amended by IPERA. Part II requires each
agency’s Inspector General to review the agency’s improper payment reporting in its annual
performance and accountability report or annual financial report and accompanying materials in
conjunction with its fiscal year 2013 financial statement audit. OMB Circular A-123, Appendix
C, part III, requires each agency Inspector General to review the accountable official annual
report required under section 3(b) of Executive Order 13520.

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 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:

                     HUD’s design and implementation of controls to prevent, detect, and recover
                      improper payments.
                     HUD’s reporting controls between program offices and OCFO.

               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.

 Significant Deficiencies

               Based on our review, we believe that the following items are significant deficiencies:

                     Finding #1- Monitoring of program offices to ensure that recovery audit
                      plans reported to OCFO are in place and yielding results.
                     Finding #1- OCFO’s process for ensuring that the accountable official report
                      and agency financial report are complete and accurate.



                                                 21
                                                   
   Finding #2- Monitoring of processing entities to ensure that they use EIV to
    prevent, detect, and recover improper payments related to income
    discrepancies.
   Finding #2- Monitoring of rental components that are not included in EIV
    but are used in the rent calculation and are a root cause of improper
    payments.




                             22
                                
                  FOLLOW-UP ON PRIOR AUDITS


2012-FO-0003
Additional Details To
Supplement Our Report on
HUD’s Fiscal Year 2011 and
2010 Financial Statements

           We reviewed the recommendations for audit report 2012-FO-0003 covering
           HUD’s financial statement audit for fiscal year 2012. This report had two
           recommendations (5A and 5B) for improving the improper payment monitoring
           activities of PIH and Multifamily Housing. We recommended that PIH conduct
           remote monitoring and onsite monitoring as necessary to ensure that PHAs have a
           review process in place to prevent consistency and transcription errors and to
           ensure that income and allowance amounts used in the rent calculation are correct.

           In fiscal year 2013, we inquired about the status of PIH monitoring reviews of
           public housing agencies. PIH responded that only 2 monitoring reviews were
           related to rental integrity monitoring, and about 50 were related to the Section
           Eight Management Assessment Program or its components. Despite the
           agreement to perform reviews, PIH did not conduct a sufficient number of
           reviews in fiscal year 2013.

           We recommended that Multifamily Housing report on income discrepancies at the
           100 percent threshold level as a supplemental measure; assign staff to review the
           deceased single-member household and income discrepancy reports at least
           quarterly and follow up with owners and management agents listed on these
           reports. We also recommended that Multifamily Housing include in the contract
           between HUD and the owners and management agents a provision for improper
           payments that requires the owners and management agents to resolve in a timely
           manner income discrepancies, failed identity verifications, and cases of deceased
           single-member households.

           This recommendation had a final action target date of April 1, 2014. However, this
           recommendation is dependent on EIV enhancements discussed in finding 1 of this
           report. Since REAC designed EIV for the PIH platform, the system needed several
           enhancements to accommodate the Multifamily Housing platform. This process
           began several years ago, and lack of communication and proper oversight severely
           hampered its progress. As of this report, REAC was working with the Integrated
           Real Estate Management System team to resolve this issue and believed that since
           the appropriate systems and systems personnel were involved, the issue would be
           resolved in a timely manner.


                                            23
                                              
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 1


Comment 2




Comment 3



                                  24
                                    
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 4




Comment 5




Comment 6




                                  25
                                    
Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 8




Comment 9




Comment 10



Comment 11




                                  26
                                    
Ref to OIG Evaluation   Auditee Comments




Comment 12




                                  27
                                    
                           OIG Evaluation of Auditee Comments

Comment 1
         OMB Circular A-123 states that if an agency does not meet one or more of the
         following requirements, it is not in compliance with IPIA, as amended by IPERA
         2010: published an AFR, conducted a risk assessment, published improper payment
         rates, published corrective action plans in the AFR, published and has met annual
         reduction targets, reported gross improper payments of less than 10 percent, and
         reported information on its recapture efforts. We found that in addition to
         misreporting several sections in its AFR, HUD did not comply with three of these
         fundamental requirements, which are all required for compliance: 1) HUD did not
         meet its annual reduction target rate, 2) HUD inaccurately reported on its corrective
         actions in its AFR, and 3) HUD did not report on its recapture efforts for all
         programs that disbursed more than $1 million. Therefore, we concluded that HUD is
         not in compliance with IPERA.

Comment 2
         As reported and detailed in Finding #1, we found several insufficiencies and
         inaccuracies in HUD’s reporting, specifically with: (1) Billing error; (2) Component
         Rates; (3) Actions to recover improper payments; (4) Accountability; (5) Corrective
         Actions; and (6) Internal Controls, Human Capital, and Information Systems. All
         detail supporting these insufficiencies and inaccuracies are included in the report.

Comment 3
         We found several disconnects between HUD’s supplemental measures and
         corrective action and the root causes of HUD’s improper payments, as explained in
         our report. To conduct this audit, we reviewed the applicable Federal laws,
         Executive Order 13520, and the implementing guidance found in OMB Circular A-
         123, Appendix C, that govern actions needed by the agency to address the issue of
         improper payments and how OIG should evaluate agencies. When performing these
         reviews, this guidance states that OIG should review the program improper payment
         rates, corrective action plans, and improper payment reduction targets, to determine
         if the corrective action plans are robust and focused on the appropriate root causes of
         improper payments, effectively implemented, and prioritized within the agency, to
         allow it to meet its reduction targets. We followed this criteria during our review.
         This criteria does not require the OIG to compare HUD’s efforts against other
         agencies. Therefore, this audit was not designed to compare agency performance.

Comment 4
         These recommendations are addressed to different program offices; therefore, they
         must be different recommendations.




                                              28
                                                 
Comment 5
         We changed the language in the report to clarify that the study needs to be conducted
         in 2015 for 2014 expenses. We understand that a thorough review will be required,
         and believe this time frame is reasonable. This recommendation does not include the
         Housing Choice Voucher program. Further, HUD uses a billing study from 2004 to
         report Public Housing billing error in the AFR; this leads the reader to believe that
         there is an error to be reported.

Comment 6
         U.S. Treasury cash management procedures do not decrease the risk of PHA
         misreporting rental housing assistance expenses in VMS because this process relies
         on self-reported PHA data. Also, fraud recovery mentioned in HUD’s response does
         not decrease the risk of misreporting expenses in VMS because this is not related to
         HUD’s identification of fraudulent PHAs; it means that PHAs have collected funds
         from fraudulent tenants. HUD also states that PHAs are paid based on their
         eligibility, however; PHA eligibility is based on previous PHA reported expenses,
         which PHAs could have misreported.

           The Public Housing billing study conducted in 2004 reviewed items such as rent
           rolls and calculations PHAs used to determine the total expenses it reported. Since
           HUD reports billing error for this program, we think the Housing Choice Voucher
           program should be subject to the same kind of review. In addition, there are other
           administrative errors that could cause VMS reporting errors that are not evaluated by
           the quality control study and income match study. These studies determine errors in
           tenant rent, however; they do not review the PHA’s calculation of expenses or verify
           that it correctly entered the expenses in VMS.

Comment 7
         HUD uses Housing Choice Voucher Quality Assurance Division reviews as an
         internal control to identify and correct PHAs that have misreported their expenses in
         VMS;, however, this is HUD’s control. HUD does not use a contractor to perform
         an independent study to determine the extent of the problem and project an overall
         estimate of improper payments arising from these errors. Further, as stated in our
         draft IPERA report, the OIG fiscal year 2013 financial statement audit noted that
         controls over the VMS were not sufficient to ensure that the PHAs reported their
         expenses correctly.

Comment 8
         This program grouping was approved by OMB in 2000. Since then, IPIA has been
         amended by IPERA and OMB Circular A-123 implementation guidance states,
         “Agencies must not put programs or activities into groupings that result in
         significant improper payment rates being masked by the large size or scope of such a
         grouping.” HUD’s current grouping masked the 5 percent increase in Public
         Housing, making it very difficult for the reader to identify this increase. Further,
         these three programs are reported separately on HUD’s financial statements, funded
         separately by Congress, and are administered by different offices and systems.

                                              29
                                                
Comment 9
         We deleted these recommendations and added a recommendation to the OCFO to
         report on the deceased tenant improper payment error as an additional error in its
         AFR.

Comment 10
         We concur; this has been fixed in the report.

Comment 11
         While HUD states that it has reduced improper payments in its rental assistance
         programs by 61 percent, this is unrelated to recovery audits. Recovery audits should
         be performed for all of HUD’s programs that spend more than $1 million annually,
         not just rental assistance programs. The IPERA requires recovery audits, if cost
         effective, for programs or activities that expend more than $1 million and requires
         agencies to report justification if determined not to be cost-effective. HUD sent
         white papers to OMB asking for its rental assistance programs to be exempt from
         this requirement; however, it has not done this for its other programs. Further, HUD
         did not provide an accurate justification for its determination in the AFR.

            During our review, we found that HUD uses an informal recovery audit plan.
            However, we found a significant deficiency with this plan because it described
            recovery audit processes for over 40 programs; however, only five of the processes
            were tracked and reported in the AFR and the plan has not been updated since
            February 2011.

Comment 12
         HUD states that processing entities are using EIV; however, as stated in our report,
         PIH and Multifamily Housing management cannot use the EIV system to effectively
         monitor the income discrepancy rent component. The management-level income
         discrepancy report in EIV contains many false positives and management cannot use
         it to determine whether processing entities are using EIV to identify, investigate, and
         either correct the income or record the discrepancy as a false positive. Further, EIV
         was not designed to measure administrator error arising from several components of
         the rental calculation, such as most pensions, welfare benefits, and allowances.

            Deceased tenant payments are not included in the HUD’s annual improper payment
            rate and therefore, are an independent measure. This control deficiency is not
            related to deceased tenant payments; it is related to payments made due to income
            discrepancies or other rental component errors.




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