U.S. Department of Housing and
Urban Development,
Washington, DC
Compliance With the Improper Payments Elimination
and Recovery Act
Office of Audit, Financial Audits Division Audit Report Number: 2015-FO-0005
Washington, DC May 15, 2015
To: Brad R. Huther, Chief Financial Officer, F
/s/
From: Thomas R. McEnanly, Director of Financial Audits Division, GAF
Subject: HUD Did Not Comply With IPERA Due to Significant Deficiencies in Its
Reporting and Risk Assessment Processes
Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our audit of HUD’s fiscal year 2014 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.
Audit Report Number: 2015-FO-0005
Date: May 15, 2015
HUD Did Not Comply With IPERA Due to Significant Deficiencies in Its
Reporting and Risk Assessment Processes
Highlights
What We Audited and Why
We audited the U.S. Department of Housing and Urban Development’s (HUD) fiscal year 2014
compliance with the Improper Payments Elimination and Recovery Act of 2010 (IPERA).
IPERA was enacted to eliminate and recover improper payments by requiring agencies to
identify and report on programs that are susceptible to significant improper payments. IPERA
also requires each agency’s inspector general to perform an annual review of the agency’s
compliance with IPERA. Our audit objectives were to (1) determine HUD’s compliance with
IPERA reporting and improper payments reduction requirements; (2) determine whether HUD’s
reporting of improper payments data, including the agency’s performance in reducing and
recapturing improper payments, was complete and accurate; and (3) determine whether HUD’s
assessment of the level of risk associated with high-priority programs and the quality of the
improper payments estimates and methodology were reasonable.
What We Found
HUD did not comply with IPERA for fiscal year 2014. Specifically, HUD did not adequately
report on its supplemental measures and its risk assessment did not include a review of all
relevant audit reports nor did it consider the dollar amounts associated with OIG and GAO audit
reports or HUD’s program monitoring findings. Additionally, HUD’s estimate of improper
payments for the billing error component was based on out-of-date information, and the
methodology for developing the estimate did not include an evaluation of all types of errors that
could lead to significant improper payments. Finally, HUD’s noncompliance with IPERA
reported in fiscal year 2013 continued and 18 recommendations from our fiscal year 2013
IPERA compliance report remained open.
What We Recommend
We recommend that HUD (1) implement procedures to ensure that all required improper
payments reporting elements are included in its annual financial report and all relevant OIG and
GAO audit reports are considered in its risk assessments, (2) consider the dollar amounts related
to OIG and GAO audit reports and HUD’s program monitoring findings in its risk assessment,
and (3) reevaluate the types of errors previously identified to determine whether there are new
causes of significant improper payments that would require reporting.
Table of Contents
Background and Objectives ....................................................................................3
Results of Audit ........................................................................................................5
Finding 1: HUD Did Not Comply With IPERA ............................................................ 5
Finding 2: HUD Did Not Completely and Accurately Report All Information on
Improper Payments and Its Recovery Efforts ............................................................... 8
Finding 3: HUD’s Improper Payments Risks Assessments Had Deficiencies .......... 10
Finding 4: HUD’s Improper Payments Estimate Was Based on Outdated
Information ...................................................................................................................... 13
Scope and Methodology .........................................................................................15
Internal Controls ....................................................................................................17
Follow-up on Prior Audits.....................................................................................18
2
Background and Objectives
The Improper Payments Information Act of 2002 (IPIA) required the head of each agency to (1)
annually review all programs and activities the agency administered, (2) identify all programs and
activities that might be susceptible to significant improper payments, (3) estimate the annual amount
of improper payments for each program or activity identified as susceptible, and (4) report those
estimates. For programs with estimated improper payments exceeding $10 million, IPIA required
agencies to report the causes of the improper payments, actions taken to correct those causes, and
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 responsibilities and reporting requirements to
eliminate and recover improper payments. It also required each agency inspector general to
determine whether the agency complied with IPERA.
IPIA was further amended by the Improper Payments Elimination and Recovery Improvement Act
of 2012 (IPERIA). IPERIA further strengthened the reporting requirements of IPIA and IPERA by
setting standards for agencies to follow in determining the validity of sampled payments to ensure
that amounts being billed, paid, or obligated for payment were proper. Under IPERIA, the inspector
general is required to review (1) the assessed level of risk associated with high-priority programs as
determined by the Office of Management and Budget (OMB), (2) the quality of the improper
payments estimates and methodology, and (3) the agency’s oversight or financial controls to
identify and prevent improper payments. The inspector general is then required to submit to
Congress recommendations for modifying any agency plans relating to improper payments
determination and estimation methodology. IPERIA also established the Do Not Pay Initiative,
requiring each agency to review prepayment and preaward procedures to ensure that a thorough
review of available databases with relevant information on eligibility is performed to determine
program or award eligibility before the release of Federal funds. OMB issued Circular A-123,
Appendix C, Requirements for Effective Estimation and Remediation of Improper Payments, to
provide guidance for agencies in the implementation of IPIA, IPERA, and IPERIA requirements.
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 payments
issues and complying with IPERA requirements. The responsibility for conducting an agencywide
IPERA program risk assessment is jointly shared by the Federal Housing Administration’s (FHA)
Office of the Comptroller and the Office of the Chief Financial Officer (OCFO). Historically, none
of the FHA programs has been determined to be susceptible to improper payments.
3
HUD identifies the public housing, tenant-based voucher,1 and project-based assistance2 programs
(collectively referred to as the rental housing assistance programs (RHAP)) as susceptible to
significant improper payments. In these programs, beneficiaries pay 30 percent of their adjusted
income toward the market rent and HUD subsidizes the remainder of the rental cost (or the
operating cost in the case of public housing).
HUD has identified the following three sources of error and improper payments in RHAP:
• 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 subsidies due between HUD and third-party
program administrators or housing providers.
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).
All of HUD’s supplemental measures are reported quarterly on OMB’s payment accuracy Web site.
HUD calculated its estimated annual improper payments amount using a quality control study, an
income match study, and a billing study conducted by independent contractors. The quality control
and income match studies were conducted using data from the prior fiscal year (fiscal year 2013).
However, the billing studies used estimates from fiscal year 2004 for public housing and fiscal year
2009 for the owner-administrator program.
Due to the increased scrutiny and requirements for agencies to report on their improper payments,
OIG plans to start identifying and tracking potential improper payments identified in its audits for
fiscal year 2015 and forward.
Our objectives were to (1) determine HUD’s compliance with IPERA’s reporting and improper
payments reduction requirements, (2) evaluate the accuracy and completeness of HUD’s reporting
of improper payments data, and (3) evaluate HUD’s assessment of the level of risk associated with
high-priority programs and the quality of the improper payments estimates and methodology.
1
HUD’s 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 RHAP. PIH allocates and disburses funding to the State and
local public housing agencies that administer the program in accordance with program eligibility requirements.
2
HUD’s Office of Multifamily Housing (Multifamily Housing) is responsible for the Section 8, 202, and 236
project-based RHAP. It allocates and disburses funding to multifamily project owners or their agents that administer
the program in accordance with the applicable eligibility requirements.
4
Results of Audit
Finding 1: HUD Did Not Comply With IPERA
HUD did not comply with the IPERA reporting and improper payments reduction requirements
for fiscal year 2014. HUD did not include all information required by OMB in its agency
financial report in accordance with IPERA, and there were significant deficiencies related to the
accuracy, completeness, and quality of HUD’s improper payments risk assessments and
improper payments estimate. HUD did not include all information required by OMB in its
agency financial report because it did not have documented procedures to ensure the reporting of
complete and accurate information. HUD’s risk assessments did not comply with IPERA
requirements because HUD relied on a management report that did not include the most recently
issued OIG audit report and the risk assessments were performed using a template that did not
take into account the dollar amounts associated with OIG and U.S. Government Accountability
Office (GAO) audit reports nor the dollar amounts associated with HUD’s program monitoring
reviews. As a result, HUD’s risk assessments may have underestimated the risk of significant
improper payments, and its estimate of improper payments may have been misstated.
HUD’s Published Agency Financial Report Did Not Include All IPERA Required
Reporting Elements
HUD did not comply with section 3(a)(3)(A) of IPERA which requires agencies to publish an
agency financial report and any accompanying materials required under OMB guidance on their
Web site. While HUD published an agency financial report and accompanying materials,
entitled “IPIA (as amended by IPERA) Reporting Details,” on March 3, 2015, HUD did not
include all of the information required by OMB Circular A-123, appendix C. Specifically, HUD
did not include an adequate discussion of its supplemental measures. This deficiency is
discussed in finding 2.
HUD Did Not Conduct Compliant Program Specific Risk Assessments
HUD did not comply with section 3(a)(3)(B) of IPERA which states that if required, agencies
must conduct a program-specific risk assessment for each program or activity that conforms with
section 2(a) of IPIA (31 U.S.C. (United States Code) 3321). While HUD performed program-
specific risk assessments, there were significant deficiencies in the completeness and quality of
the risk assessments performed by HUD’s OCFO that were significant enough to not comply
with section 3(a)(3)(B) of IPERA. Specifically, the Office of Community Planning and
Development’s (CPD) formula grant programs were not appropriately considered in HUD’s risk
assessment, based on material findings reported in OIG audit reports. These deficiencies are
discussed in detail in finding 3.
FHA conducted a comprehensive risk assessment for all of its disbursement programs in fiscal
year 2013. During fiscal year 2014 FHA conducted a review of internal control documents,
performed statistical sampling and a review of statistically sampled case binders, and analyzed
disbursement programs.
5
HUD Published Improper Payments Estimates
HUD complied with section 3(a)(3)(C) of IPERA, which states that agencies must publish
improper payments estimates for all programs identified as being susceptible to significant
improper payments, if required. HUD published an improper payments estimate for RHAP, the
only programs it identified as susceptible to significant improper payments, in its fiscal year
2014 agency financial report.
While HUD published an improper payments estimate for RHAP, there were deficiencies in the
methodology for preparing the estimate, which are discussed in finding 4.
HUD Published Programmatic Corrective Action Plans
HUD complied with section 3(a)(3)(D) of IPERA, which requires agencies to publish corrective
action plans, prepared under section 2(c) of IPIA, for programs identified as susceptible to
significant improper payments. For RHAP, HUD included in its fiscal year 2014 agency
financial report a discussion of the causes of improper payments, actions taken to correct those
causes, and results of the actions taken to address those causes.
HUD Published and Met Its Annual Reduction Target
HUD complied with section 3(a)(3)(E) of IPERA, which requires agencies to publish and meet
annual improper payment reduction targets for programs identified as susceptible to significant
improper payments. HUD published an improper payments rate for RHAP of 3.2 percent, which
was lower than its published reduction target of 4.2 percent.
HUD Reported an Improper Payments Rate of Less Than 10 Percent
HUD complied with section 3(a)(3)(F) of IPERA, which requires agencies to report improper
payments rates of less than 10 percent for each program for which an estimate was published.
HUD published an improper payments rate of 3.2 percent for RHAP in its fiscal year 2014
agency financial report, well below the threshold of 10 percent.
HUD’s IPERA Noncompliance for Fiscal Year 2013 Continued, and Recommendations
Remained Open
OIG cited HUD as noncompliant with IPERA for its fiscal year 2013 reporting. 3 Specifically,
HUD was noncompliant with IPERA because it did not (1) meet its annual reduction target; (2)
accurately report on billing and component error rates; (3) accurately and sufficiently report on
its efforts to recover improper payments; (4) include all required elements of accountability; and
(5) report accurately on its corrective actions, internal controls, human capital, and information
systems. OIG’s report on HUD’s fiscal year 2013 IPERA compliance contained 21
recommendations, 18 of which remained open as of the date of this report. Further detail on the
open recommendations can be found in the Follow-up on Prior Audits section of this report.
3
Audit report 2014-FO-0004, Compliance With the Improper Payments Elimination and Recovery Act of 2010.
6
Conclusion
HUD did not comply with IPERA for fiscal year 2014. Specifically, HUD did not comply with
sections 3(a)(3)(A) or 3(a)(3)(B) as it did not include all information required by OMB in its
agency financial report and there were significant deficiencies in its risk assessments. HUD did
comply with the remaining four elements of compliance with IPERA. We also noted
deficiencies in the completeness and quality of HUD’s methodology for estimating improper
payments. These instances of noncompliance and deficiencies are discussed in detail later in this
report. Additionally, HUD’s fiscal year 2013 IPERA noncompliance issues were not completely
resolved.
Recommendations
There are no recommendations associated with this finding. Recommendations related to the
deficiencies that led to HUD’s noncompliance are included in findings 2 and 3, where the
deficiencies are discussed in detail.
7
Finding 2: HUD Did Not Completely and Accurately Report All
Information on Improper Payments and Its Recovery Efforts
HUD did not completely and accurately report information on supplemental measures or its
actions to recover improper payments in its agency financial report in accordance with IPERA
and OMB Circular A-123, appendix C. This condition occurred because HUD did not have
documented procedures and did not adhere to the reporting guidance in OMB circulars A-123,
appendix C and A-136. As a result, HUD officials and other users, including Congress and
OMB, did not have a complete and accurate picture for making decisions regarding HUD’s
internal controls over improper payments and efforts to recover improper payments.
Accordingly, HUD did not comply with the reporting requirements of section 3(a)(3)(A) of
IPERA.
HUD Did Not Include All Required Reporting Elements for Supplemental Measures in its
Agency Financial Report
HUD’s fiscal year 2014 agency financial report did not include a summary of its supplemental
measures that included all elements required by OMB Circular A-123, appendix C, part III
Requirements for Implementing Executive Order 13520. Appendix C, part III, states that
agencies shall ensure their agency financial reports contain a basic summary discussing the
supplemental measures, the frequency of each supplemental measure (that is, how often will the
area be measured and reported on PaymentAccuracy.gov), the measurement baseline, a
discussion of how information from this measurement will help the program reduce improper
payments, and the actual (or planned) targets, including any reasons for meeting, exceeding, or
failing to meet the supplemental targets. HUD lacked documented procedures to ensure the
reporting of complete and accurate information, causing the information HUD reported to
Congress, OMB, and other users to be incomplete and inaccurate.
Additionally, Section 3(a)(3)(A) of IPERA states that compliance with IPERA means the agency
published annual financial statements for the most recent fiscal year and posted that report and
any accompanying material required by OMB on the agency Web site. Because HUD did not
include a summary of its supplemental measures in its agency financial report as required by
OMB Circular A-123, appendix C, HUD did not in comply with IPERA.
HUD Did Not Report Completely on Its Actions To Recover Improper Payments
As noted in our report on HUD’s fiscal year 2013 compliance with IPERA, 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 2014
report stated that HUD was in the process of implementing the recovery audit requirements
under IPERIA and that it was still in discussions with OMB regarding the cost effectiveness of
recovery audits for the RHAP programs. However, communications we obtained between OMB
and HUD showed that OMB believed HUD needed to further research options for performing
recovery audits. Additionally, in the fiscal year 2014 agency financial report, there was no
discussion of methods for recovering overpayments or summary of how recovered amounts were
disposed of. As a result, HUD’s reporting of its efforts to recover improper payments was
incomplete and inaccurate, causing users to have an incomplete picture of HUD’s efforts to
recover improper payments.
8
Conclusion
HUD did not include all information required by OMB in their agency financial report and,
therefore, did not comply with IPERA. Additionally, due to the deficiencies in HUD’s reporting
on improper payments, HUD officials and other users of the AFR, including Congress and OMB,
did not have a complete and accurate picture of HUD’s improper payments and recovery efforts
for use in policy-making decisions. Accurate reporting is necessary to convey to Congress,
OMB, and the public HUD’s progress in preventing and recovering improper payments.
Recommendations
We recommend that the Chief Financial Officer
2A. Develop, document, and implement procedures to ensure that all required
improper payments reporting elements are included in HUD’s agency financial
report, including but not limited to the requirements in OMB Circular A-123,
appendix C and OMB Circular A-136.
9
Finding 3: HUD’s Improper Payments Risks Assessments Had
Deficiencies
In performing its fiscal year 2014 improper payments risk assessments, HUD did not consider
relevant OIG audit reports or the dollar amounts associated with OIG audit reports or program
monitoring findings. This condition occurred because HUD relied on a management report that
did not include the most recently issued OIG audit report and the risk assessments were
performed using a template that did not consider the dollar amounts associated with OIG and
GAO audit reports or the dollar amounts associated with HUD’s program monitoring reviews.
As a result, significant audit findings were not considered, and HUD may have understated the
susceptibility of its programs to significant improper payments. As a result, HUD did not
comply with IPERA.
HUD Did Not Consider All Relevant OIG Audit Reports
HUD did not include all relevant OIG audit reports in its fiscal year 2014 improper payments
risk assessment. Specifically, OIG audit report 2014-FO-0003, Additional Details To
Supplement Our Report on HUD’s Fiscal Year 2013 and 2012 (Restated) Financial Statements,
was not considered during the risk assessment of the CPD formula grant programs. This report
included a material weakness regarding CPD’s formula grant accounting departure from
generally accepted accounting principles, a finding on HUD’s noncompliance with the HOME
Investment Partnership Act, and a noncompliance with Federal financial management system
requirements on the information system that is used in formula grant program disbursements.
These findings indicated potentially significant improper payments.
The material weaknesses related to the CPD formula grant accounting’s departure from generally
accepted accounting principles was not included in HUD’s risk assessments. HUD prepared an
analysis which identified the amount of budget outlays affected by the first in, first out (FIFO)
method 4 of accounting for CPD’s formula grant programs. This analysis, prepared in late fiscal
year 2013 and updated in fiscal year 2014, identified $46 billion in budget outlays impacted by
FIFO. The analysis indicated that payments of approximately $18 billion were made in fiscal
years 2013 and 2014 and payments of $5.9 billion were estimated to be made in fiscal year 2015.
Further, OIG reported that the information system CPD used to process these transactions did not
meet Federal financial management system requirements. A finding of this significance should
have been properly assessed by HUD to determine whether the program was susceptible to
significant improper payments.
The finding on HUD’s noncompliance with the HOME Investment Partnership Act reported that
the use of the cumulative method 5 to determine compliance with the commitment requirement
4
Under the FIFO method, disbursements for CPD’s formula grant programs were made using the oldest (first in)
funds available, rather than matching the disbursement to the specific funds that were obligated for it.
5
HUD used the cumulative method to determine a grantee’s compliance with section 218(g) of the HOME
Investment Partnership Act. HUD measured compliance with the commitment requirement cumulatively,
disregarding the allocation year used to make the commitments.
10
was not appropriate. This noncompliance was due to HUD not implementing a legislative
change to the HOME Investment Partnerships Program, which took effect in 2002. In fiscal year
2013, OIG estimated that for the 2011 annual allocation commitment requirement, $54.86
million could have possibly been recaptured and reallocated if HUD had used a noncumulative
calculation. As a result of the OIG audit report, in fiscal year 2014, HUD agreed to implement
the legislative change for fiscal year 2015 grants and forward. This change in practice should
have resulted in the reassessment of the susceptibility of improper payments in the HOME
program in HUD’s risk assessment. Further, OIG believes HUD’s consideration of its findings
would have resulted in the HOME program meeting the requirements to be considered
susceptible to significant improper payments; therefore, it should have been included in HUD’s
overall improper payments estimate.
Section 2(a)(3)(B)(vii) of IPERA states that significant deficiencies in the audit report of the
agency or other relevant management findings that might hinder accurate payment certification
should be considered in conducting the improper payments risk assessments. OMB Circular,
appendix C, which implements the requirements of IPERA, states that agencies should consider
significant deficiencies in the audit reports of the agency, including but not limited to, the agency
inspector general or GAO audit report findings or other relevant management findings, that
might hinder accurate payment certification. It further states that for programs deemed to be at
low risk of significant improper payments, agencies must perform risk assessments at least once
every 3 years. However, if a low-risk program experiences a significant change in legislation or
a significant increase in its funding level, agencies are required to reassess the program’s risk
susceptibility during the next annual cycle, even if it is less than 3 years from the last risk
assessment. Additionally, appendix C states that recent major changes in program funding,
authorities, practices, or procedures must be considered when performing a risk assessment.
HUD staff stated that OIG audit report 2014-FO-0003 was not included in the management
report used to identify relevant audit reports and findings for its fiscal year 2014 improper
payments risk assessment. Additional steps were not taken to identify OIG audit reports that
were recently issued but not included in the management report. As a result, HUD may have
understated the susceptibility of its programs to significant improper payments.
HUD Did Not Consider the Dollar Amounts Associated With OIG or GAO Audit Reports
or Program Monitoring Findings
HUD did not consider the dollar amounts associated with OIG or GAO audit reports or program
monitoring reviews conducted by HUD management when performing its improper payments
risk assessments. HUD considered only the number of audit reports issued when determining a
program’s susceptibility to improper payments. HUD staff members stated that they followed
the risk assessment format developed by a contractor after the enactment of IPIA and the criteria
used to assess the level of risk of significant improper payments did not include the consideration
of the total dollar amounts associated with audit reports or program monitoring findings.
By considering only the number of audit reports issued and not the dollar amounts associated
with any relevant findings a program’s susceptibility to significant improper payments might be
understated. For example, a program could have only one relevant audit report or finding, but
that audit report or finding could identify potential improper payments that are considered
11
significant based on the definition in OMB Circular A-123, appendix C. 6 For example, one OIG
audit report, 7 2015-KC-0001, identified an estimated $448 million in public housing operating
subsidies for units occupied by tenants who did not comply with the community service and self-
sufficiency requirement.
Conclusion
HUD may have underestimated the susceptibility of its programs to significant improper
payments by not considering all OIG audit reports and the dollar amounts associated with
findings and recommendations. As a result, programs may not be identified as susceptible to
significant improper payments. When performing its fiscal year 2014 improper payments risk
assessments, HUD relied on a management report that did not contain the most recently issued
audit report on HUD’s financial statements. Additionally, it used a template that considered only
the number of audit reports issued relating to each program and did not take into account the
dollar amounts associated with those audit reports or the dollar amounts identified in HUD’s
program monitoring findings.
Recommendations
We recommend that the Chief Financial Officer
3A. Implement procedures to ensure that all relevant OIG audit reports are identified
and included in the improper payments risk assessments, including those that
were recently issued.
3B. Consider the dollar amounts associated with relevant OIG and GAO audit reports
and findings, as well as the dollar amounts associated with program monitoring
findings conducted by HUD management, when determining a program’s
susceptibility to significant improper payments.
3C. Reassess the susceptibility of significant improper payments for the CPD
entitlement, non-entitlement, HOME Investment Partnerships Program, and other
formula grant programs based on the results of audit report 2014-FO-0003 as well
as the community service and self-sufficiency requirement in public housing
subsidiaries identified in OIG audit report 2015-KC-0001.
6
OMB Circular A-123, appendix C, defines significant improper payments as gross annual improper payments (that
is, the total amount of overpayments and underpayments) in the program exceeding (1) both 1.5 percent of program
outlays and $10 million of all program or activity payments made during the fiscal year report or (2) $100 million
(regardless of the improper payment percentage of total program outlays).
7
Audit report 2015-KC-0001, Monitoring of the Community Service and Self-Sufficiency Requirement, issued
February 13, 2015
12
Finding 4: HUD’s Improper Payments Estimate Was Based on
Outdated Information
HUD’s methodology for developing its estimate of improper payments for RHAP used estimates
of billing error based on data from fiscal year 2004 for the public housing program and fiscal
year 2009 for the owner-administrator program. Additionally, HUD may not have included all
types of errors that lead to significant improper payments when developing its improper
payments estimate. HUD did not update the billing error studies because it believed billing error
made up a small portion of improper payments and performing new billing studies would be too
expensive. Additionally, HUD did not reassess the types of errors that occur in RHAP. As a
result, HUD’s estimate of improper payments may have been misstated.
HUD Reported on Its Billing Error Using Outdated Information
HUD did not report on its billing error, as required by section 2(b)(1) of IPERA, which states
that agencies must produce a statistically valid estimate or an estimate that is otherwise
appropriate, using a methodology approved by OMB, of the improper payments made by each
program. HUD’s billing error estimates were based on studies using fiscal year 2004 data for the
public housing program and fiscal year 2009 data for the owner-administrator program. As we
reported last year, 8 these studies were conducted several years ago, and they had not been
evaluated for changes in the environment, including inflation, programmatic changes, and
population changes, despite recommendations from OIG, HUD staff, and the contractor hired to
conduct HUD’s quality control and income match studies. HUD did not update the billing error
studies because it believed that billing error was a small component of the total amount of
improper payments and that performing new billing error studies would be too expensive.
Using data from fiscal years 2004 and 2009 for the billing error studies detracted from the
accuracy and completeness of HUD’s estimate of improper payments for RHAP and led to
improper payments estimates and related information that was unreliable and not useful in
evaluating the programs for effectiveness of internal controls or necessary policy changes.
HUD Did Not Consider All Errors That Lead to Improper Payments
HUD did not consider all possible types of errors when evaluating programs to identify those
susceptible to significant improper payments or when preparing estimates of improper payments.
For example, HUD did not report a billing error for the Section 8 tenant-based program because
HUD believed billing error was eliminated when the program changed to a budget-based
approach, using predetermined payments. As reported last year, 9 while traditional billing error
may not exist because the predetermination of payments was based on expenses that were self-
reported by public housing agencies (PHA) through HUD’s Voucher Management System
8
Audit report 2014-FO-0004, Compliance With the Improper Payments Elimination and Recovery Act of 2010
9
Audit report 2014-FO-0004, Compliance With the Improper Payments Elimination and Recovery Act of 2010
13
(VMS), HUD is still at risk of paying PHAs improperly. Other OIG audit reports 10 indicated that
reviews of VMS data were not sufficiently verified to reasonably ensure the accuracy of the
PHA-reported data and noted millions of dollars in discrepancies and adjustments.
Another example reported in an OIG audit report 11 identified an estimated $448 million in public
housing operating subsidies for units occupied by tenants who did not comply with the
community service and self-sufficiency requirement, a type of error that could lead to significant
improper payments, which had not been identified by HUD. As a result HUD may not have
considered all causes of error that would result in significant improper payments, and its estimate
of improper payments may have been understated.
Conclusion
HUD’s estimate of improper payments for RHAP may have been misstated. HUD did not
update its billing error studies or reevaluate RHAP for different causes or types of errors that
could lead to significant improper payments.
Recommendations
We recommend that the Chief Financial Officer
4A. For HUD’s high priority programs, 12 reevaluate the types of errors previously
identified to determine whether new causes of errors exist that would lead to
significant improper payments and require reporting in accordance with the
improper payments categories outlined in OMB Circular A-123, appendix C, for
fiscal years 2015 and beyond.
4B. For fiscal year 2015 reporting and beyond, evaluate all other HUD programs and
the causes and types of errors associated with each program and activity and
identify all types of errors included in OMB’s new improper payments categories
when assessing a program’s susceptibility to improper payments and reporting on
improper payments, in accordance with OMB Circular A-123, appendix C.
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Audit reports 2015-FO-0002, Interim Report on HUD’s Internal Controls Over Financial Reporting, and 2014-
FO-0003, Additional Details To Supplement Our Report on HUD’s Fiscal Year 2013 and 2012 (Restated) Financial
Statements
11
Audit report 2015-KC-0001, Monitoring of the Community Service and Self-Sufficiency Requirement, issued
February 13, 2015
12
High priority programs are those identified by OMB as the programs with the most egregious cases of improper
payments. HUD’s RHAP was identified as high-priority by OMB.
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Scope and Methodology
We conducted our audit from January to April 2015 at HUD headquarters in Washington, DC,
and followed OMB Circular A-123 guidance on OIG’s responsibility. OMB Circular A-123
states,
To determine compliance with IPERA, the agency Inspector General should review the
agency's PAR [performance and accountability report] or AFR [agency financial report] (and
any accompanying information) for the most recent fiscal year. Compliance with IPERA
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 APR (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 APR; and
If an agency does not meet one or more of these requirements, then it is not compliant
under IPERA. In addition, as part of its review of these improper payment elements, the
agency Inspector General may also evaluate the accuracy and completeness of agency
reporting and evaluate agency performance in reducing and recapturing improper
payments.
Finally, as part of the annual compliance review, for agencies that have high-priority
programs, the agency Inspector General shall: evaluate the agency’s assessment of the
level of risk associated with the high-priority programs and the quality of the improper
payment estimates and methodology; determine the extent of oversight warranted; and
provide the agency head with recommendations, if any, for modifying the agency’s
methodology, promoting continued program access and participation, or maintaining
adequate internal controls.
To accomplish our audit objectives, we reviewed HUD’s fiscal year 2014 improper payments
risk assessment, which did not identify any new programs as susceptible to significant improper
payments. We focused our review on RHAP, which HUD had previously identified as
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susceptible to significant improper payments and for which it annually reported an improper
payments estimate. To complete this work, we interviewed appropriate personnel from OCFO,
the Office of Public and Indian Housing (PIH), Multifamily Housing, and HUD’s Real Estate
Assessment Center. In addition, we reviewed the information HUD reported in its fiscal year
2014 accountable official report and fiscal year 2014 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.
We analyzed the quality control and income match studies that were used to estimate HUD’s
improper payments by calculating rental errors in a statistical sample of RHAP projects for fiscal
year 2013. We also met with HUD’s contractor that performed the quality control and income
match studies to gather sufficient information to evaluate HUD’s methodologies and the
accuracy of the underlying improper payment data. Lastly, we reviewed the applicable Federal
laws, Executive Order 13520, and the implementation guidance found in OMB Circular A-123,
appendix C, which 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 payments reporting in its agency financial report and
accompanying materials. 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.
HUD was provided a draft copy of this report for review. However, they were not able to
provide a formal response due to time constraints. We met with HUD’s Chief Financial Officer
and Deputy Chief Financial Officer and discussed the audit’s results and recommendations.
HUD’s Chief Financial Officer stated that the OCFO would be fully engaged in resolving the
shortcomings we identified. We look forward to working with OCFO in arriving at management
decisions in order to resolve and correct the issues identified in the audit.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
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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 processes 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:
• HUD did not have documented procedures to ensure the reporting of complete and accurate
information regarding improper payments in its agency financial report (see finding 2).
• HUD’s improper payments risk assesment did not include a review of all relevant audit
reports or consider the dollar amounts associated with OIG and GAO audit reports or
program monitoring findings (see finding 3).
• HUD did not use accurate information to estimate improper payments due to billing error or
evaluate the types of errors that could lead to significant improper payments (see finding 4).
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Follow-up on Prior Audits
We reviewed the recommendations from audit report 2014-FO-0004, Compliance With the
Improper Payments Elimination and Recovery Act of 2010, and found that 18 of 21
recommendations remained open with final action target dates between November 19, 2014, and
August 12, 2015. Of these 18 open recommendations, management decisions had not been
reached on 8. HUD disagreed with these eight recommendations and they had been referred to
the Deputy Secretary as of the date of this report. The 18 open recommendations are listed
below,
We recommended that the Chief Financial Officer
1. 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 all these actions are
performed during the year (referred to the Deputy Secretary).
2. 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 (referred to the Deputy Secretary).
3. In the agency financial report and accountable official’s report, report on PIH and
Multifamily Housing plans to hold program officials and processing entities (PHAs and
owner administrators) accountable for improper payments (final action target date is August
12, 2015).
4. In fiscal year 2015, conduct a current billing study for Multifamily and Public Housing to
accurately determine 2014 improper payment billing rate errors (referred to the Deputy
Secretary).
5. For fiscal year 2015, conduct a study to assess improper payments arising from Housing
Choice Voucher program PHAs misreporting their 2014 expenses to HUD (referred to the
Deputy Secretary).
6. 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 billing error for inflation, programmatic, or
population changes and any other factors that may change the billing error previously
reported (referred to the Deputy Secretary).
7. Report on Multifamily, Public Housing, and Section 8 program improper payment rates
separately in the agency financial report (referred to the Deputy Secretary).
8. 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
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a particular program, explain why they are not cost effective in the agency financial report
(final action target date was November 19, 2014).
9. 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 (referred to the Deputy Secretary).
10. 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 the agency financial report (referred to the Deputy Secretary).
We recommended that the Assistant Secretary for Public and Indian Housing
11. Develop and execute formal plans to hold accountable program officials and processing
entities (PHAs) responsible for improper payments (final action target date was April 30,
2015).
12. 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
errors identified in the improper payment studies (final action target date is September 2,
2015).
We recommended that the Deputy Assistant Secretary for Multifamily Housing
13. 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 (final action target date is May 29,
2015).
14. Develop and execute formal plans to hold accountable program officials and processing
entities (owners or administrators) responsible for improper payments (final action target
date was March 6, 2015).
15. 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
errors identified in the improper payment studies (final action target date was April 30,
2015).
16. Periodically reevaluate the supplemental measures and corrective actions so that new and
innovative ways to reduce improper payments are identified and implemented (final action
target date was April 30, 2015).
17. Work with REAC to develop management-level reports in EIV [Enterprise Income
Verification system] that will allow Multifamily Housing management to efficiently and
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effectively identify processing entities that are responsible for improper payments and
develop policies and procedures to hold owners/administrators identified accountable (final
action target date was April 30, 2015).
We recommended that the Deputy Assistant Secretary for the Real Estate Assessment Center
18. 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 (final
action target date is September 2, 2015).
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HUD Did Not Comply With IPERA Due to Significant Deficiencies in Its Reporting and Risk Assessment Processes
Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-05-15.
Below is a raw (and likely hideous) rendition of the original report. (PDF)