oversight

Additional Details To Supplement Our Fiscal Years 2015 and 2014 (Restated) U.S. Department of Housing and Urban Development Financial Statement Audit

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-11-18.

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

   Office of the Chief Financial Officer,
              Washington, DC
   Additional Details To Supplement Our Fiscal Years
  2015 and 2014 (Restated) U.S. Department of Housing
   and Urban Development Financial Statement Audit




Office of Audit, Financial Audits Division   Audit Report Number: 2016-FO-0003
Washington, DC                                               November 18, 2015
To:            Joseph Hungate, Deputy Chief Financial Officer, F


               /signed/
From:          Thomas McEnanly, Director, Financial Audits Division, Washington DC, GAF
Subject:       Additional Details To Supplement Our Fiscal Years 2015 and 2014 (Restated)
               U.S. Department of Housing and Urban Development Financial Statement Audit




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) additional details to supplement our audit of HUD’s internal controls over
financial reporting and compliance with applicable laws, regulations, and governmentwide
policy requirements and provisions of contracts and grant agreements.
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: 2016-FO-0003
                    Date: November 18, 2015

                    Additional Details To Supplement Our Fiscal Years 2015 and 2014 (Restated)
                    U.S. Department of Housing and Urban Development Financial Statement
                    Audit



Highlights
What We Audited and Why
We are required to audit the consolidated financial statements of the U.S. Department of Housing
and Urban Development (HUD) annually in accordance with the Chief Financial Officers Act of
1990 as amended. This report supplements our independent auditor’s report on the results of our
audit of HUD’s principal financial statements for the fiscal years ending September 30, 2015 and
2014. Provided are assessments of HUD’s internal controls and HUD’s compliance with
applicable laws, regulations, and governmentwide policy requirements and provisions of
contracts and grant agreements.

What We Found
We issued a disclaimer of opinion on HUD’s consolidated financial statements for fiscal years
2015 and 2014 (restated). We took this action because there were many unauditable material
financial statement line items due to departures from U.S. generally accepted accounting
principles (GAAP) and other deficiencies in internal controls over financial reporting. This
report provides additional details on five material weaknesses, five significant deficiencies, and
five instances of noncompliance with applicable financial management laws and regulations.
Details of the results of our audit of HUD’s component entities, the Federal Housing
Administration and Government National Mortgage Association (Ginnie Mae) can be found in
separate audit reports.

Primarily, HUD (1) did not account for the Office of Community Planning and Development’s
formula grant programs’ commitments and disbursements in accordance with GAAP, (2)
inadequately accounted for assets and liabilities resulting from the Office of Public and Indian
Housing’s (PIH) cash management process, (3) lacked proper validation procedures for its grant
accrual estimates, (4) could not provide auditable data to support Ginnie Mae’s budgetary
resources, and (5) lacked adequate financial management systems to ensure accurate and reliable
financial reporting. Our findings reflect deficiencies in HUD’s (1) control environment, (2)
internal controls over and oversight of Ginnie Mae, and (3) oversight and the lack of a senior
assessment team or equivalent to assess financial transactions and their compliance with GAAP.

What We Recommend
Most significiantly, we recommend that HUD (1) properly account for all financial transactions
occuring from PIH’s cash management process in accordance with U.S. GAAP and transition as
much as $507.5 million in excess funding, (2) validate grant accrual estimates to ensure reliable
and accurate financial reporting, and (3) implement adequate resources and controls to ensure the
reliable and accurate reporting of Ginnie Mae’s budgetary resources.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Material Weaknesses ........................................................................................................ 4
         Finding 1: CPD’s Formula Grant Accounting Did Not Comply With GAAP,
         Resulting in Misstatements on the Financial Statements .............................................. 4
         Finding 2: HUD Did Not Account for Assets and Liabilities in Its Public and Indian
         Housing Programs in Accordance With GAAP and FFMIA ....................................... 7
         Finding 3: CPD’s Grant Accrual Estimates Were Not Validated ............................. 13
         Finding 4: Ginnie Mae’s Systems Data To Account for Its Budgetary Resources
         Were Not Auditable ........................................................................................................ 15
         Finding 5: HUD’s Financial Management System Weaknesses Continued in 2015 18
         Significant Deficiencies ................................................................................................... 24
         Finding 6: HUD’s Financial Management Governance Structure and Internal
         Controls Over Financial Reporting Were Ineffective ................................................. 24
         Finding 7: Weaknesses in HUD’s Administrative Control of Funds System
         Continued......................................................................................................................... 35
         Finding 8: HUD Continued To Report Significant Amounts of Invalid Obligations
         ........................................................................................................................................... 41
         Finding 9: The Emergency Homeowner’s Loan Program Loan Data Was Not
         Auditable.......................................................................................................................... 49
         Finding 10: HUD’s Computing Environment Controls Had Weaknesses ............... 51

Compliance With Laws and Regulations.............................................................56
         Finding 11: HUD’s Financial Management System Did Not Comply With the
         Federal Financial Management Improvement Act ...................................................... 57
         Finding 12: HUD Continued To Not Comply With the HOME Investment
         Partnership Act ............................................................................................................... 59




                                                                         2
         Finding 13: HUD Did Not in Comply With Treasury’s Financial Manual Rules on
         Cash Management or 2 CFR Part 200 .......................................................................... 63
         Finding 14: HUD Reported 14 ADA Violations in October 2015, and OIG Referred
         One Potential ADA Violation to HUD .......................................................................... 66
         Finding 15: HUD Did Not Comply With the Improper Payments Elimination and
         Recovery Act of 2010 ...................................................................................................... 68

Scope and Methodology .........................................................................................71

Followup on Prior Audits ......................................................................................73

Appendixes ..............................................................................................................88
              A. Schedule of Funds To Be Put to Better Use ...................................................... 88
              B. Departmentwide Obligation Review – Schedule of Recommended
                 Deobligations ....................................................................................................... 89
              C. Federal Financial Management Improvement Act Noncompliance,
                 Responsible Program Offices, and Recommended Remedial Actions ........... 90
              D. Auditee Comments and OIG’s Evaluation ....................................................... 92
Background and Objective
We are required by the Chief Financial Officers Act of 1990, as amended by the Government
Management Reform Act of 1994 and implemented by Office of Management and Budget
(OMB) Bulletin 15-02, Audit Requirements for Federal Financial Statements, to audit the U.S.
Department of Housing and Urban Development’s (HUD) principal financial statements or select
an independent auditor to do so. The objective of our audit was to express an opinion on the fair
presentation of these principal financial statements.
Management is responsible for

      Preparing the financial statements in conformity with accounting principles generally
       accepted in the United States of America;
      Establishing, maintaining, and evaluating internal controls and systems to provide
       reasonable assurance that the broad objectives of the Federal Financial Management
       Improvement Act of 1996 (FFMIA) are met; and
      Complying with applicable laws and regulations.

In auditing HUD’s principal financial statements, we were required by Government Auditing
Standards to obtain reasonable assurance about whether HUD’s principal financial statements
were presented fairly, in accordance with generally accepted accounting principles (GAAP), in
all material respects. We believe that our audit provides a reasonable basis for our opinion.
In planning our audit of HUD’s principal financial statements, we considered internal controls
over financial reporting by obtaining an understanding of the design of HUD’s internal controls,
determined whether these internal controls had been placed into operation, assessed control risk,
and performed tests of controls to determine our auditing procedures for expressing our opinion
on the principal financial statements. We are not providing assurance on the internal controls
over financial reporting. As a result, we do not provide an opinion on internal controls. We also
tested compliance with selected provisions of applicable laws, regulations, and government
policies that may materially affect the consolidated principal financial statements. Providing an
opinion on compliance with selected provisions of laws, regulations, and government policies
was not an objective, and, accordingly, we do not express such an opinion.
This report is intended solely for the use of HUD management, OMB, and Congress. However,
this report is a matter of public record, and its distribution is not limited.




                                                3
Results of Audit

Material Weaknesses

Finding 1: CPD’s Formula Grant Accounting Did Not Comply
With GAAP, Resulting in Misstatements on the Financial
Statements
HUD’s Office of Community Planning and Development’s (CPD) formula grant program
accounting continued to depart from GAAP because of its use of the first in, first out (FIFO)
method1 for committing and disbursing obligations. Since 2013, we have reported that the
information system used, the Integrated Disbursement Information System (IDIS) Online, a
grants management system, was not designed to comply with Federal financial management
system requirements. Further, HUD’s plan to eliminate FIFO from IDIS Online was applied
only to fiscal year 2015 and future grants and not to fiscal years 2014 and earlier. As a result,
budget year grant obligation balances continued to be misstated, and disbursements made using
an incorrect U.S. Standard General Ledger (USSGL) attribute resulted in additional
misstatements. Although FIFO has been removed from fiscal year 2015 and forward grants,
modifications to IDIS are necessary for the system to comply with FFMIA and USSGL
transaction records. The inability of IDIS Online to provide an audit trail of all financial events
affected by the FIFO method prevented the financial effects of FIFO on HUD’s consolidated
financial statements from being quantified. Further, because of the amount and pervasiveness of
the funds susceptible to the FIFO method and the noncompliant internal control structure in IDIS
Online, the combined statement of budgetary resources and the consolidated balance sheet were
materially misstated. The effects of not removing the FIFO method retroactively will continue to
have implications on future years’ financial statement audit opinions until the impact is assessed
to be immaterial.




1
  The Federal Accounting Standards Advisory Board (FASAB) Handbook defines FIFO as a cost flow assumption.
The first goods purchased or produced are assumed to be the first goods sold (FASAB Handbook Version 13,
appendix E, page 30, dated June 2014). In addition, the Financial Audit Manual (FAM) states that the use of “first-
in, first-out” or other arbitrary means to liquidate obligations based on outlays is not generally acceptable (GAO-
PCIE (U.S. General Accountability Office-President’s Council on Integrity and Efficiency) FAM, Internal Control
Phase, Budget Control Objectives, page 395, F-3). In the context of HUD’s use of this method, the first funds
appropriated and allocated to the grantee are the first funds committed and disbursed, regardless of the source year
in which grant funds were committed for the activity.




                                                          4
IDIS Online’s Accounting for Transactions Departed From GAAP and Accounting
Standards
CPD’s inadequate budget controls and disregard for USSGL attributes at the transaction level
when making commitments and disbursements for CPD’s formula grants as well as CPD’s use
of the FIFO method resulted in

   A departure from Federal financial accounting standards and GAAP,
   Noncompliance with budgetary internal control requirements, and
   Noncompliance with the overall conceptual framework established by the Federal
    financial management laws and guidance issued by the standard setters.
During fiscal years 2015 and 2014, $4.4 billion and $4.8 billion, respectively, in disbursements
were susceptible to this FIFO method and were reported in HUD’s consolidated financial
statements. Also during this time, $6.3 billion and $10.1 billion, respectively, in undisbursed
obligations were impacted. These material amounts, which impact the combined statement of
budgetary resources and consolidated balance sheet, were not presented in conformity with
GAAP.

CPD’s Steps To Eliminate the Use of FIFO for Fiscal Year 2015 and Future Grants Were
Halted
Steps to eliminate the FIFO logic from IDIS Online were halted in the spring of 2015 because of
budget shortfalls that impacted this project. As of September 30, 2015, CPD was waiting for the
expenditure plan to be approved by the Office of the Chief Information Officer (OCIO) so that
the information technology (IT) contractor could continue the remaining work on the FIFO
elimination plan. The expenditure plan budget was $1.85 million, which left a funding gap of
$150,000 from the estimated a cost of $2 million to complete the project.

Although FIFO was removed from fiscal year 2015 and forward grants, modifications to IDIS
are necessary for the system to comply with FFMIA and the USSGL at the transaction level.
Among the remaining work, CPD must ensure that IDIS ties disbursements to specific
commitments and that historical data at the transaction level are maintained by the system. This
includes transactions to account for subgranted amounts, collections, program income, and
manual disbursements.

CPD’s plan at fiscal yearend was to continue work on the IDIS project by November 2015. As
noted above, CPD will likely need additional funding to complete the FIFO conversion. In
October 2016, CPD plans to give the Office of Inspector General (OIG) its assessment of the
status of the FIFO conversion and any remaining work.

While CPD had taken steps to eliminate the FIFO method for commitments and disbursements
on future grants, these steps will not be sufficient to eliminate this deficiency as a material
weakness and clear the basis for disclaimer reported in the independent auditor’s report for fiscal
year 2015 and future independent auditor’s reports. Specifically, since the plan did not address
fiscal year 2014 and prior grants, there will continue to be a material amount of funding



                                                 5
susceptible to the FIFO logic. The effects of not removing the FIFO logic retroactively will have
implications for future years’ financial statement audit opinions until the impact is assessed to be
immaterial.

We will continue to work with CPD and the Office of the Chief Financial Officer (OCFO) to
monitor the progress of HUD’s FIFO elimination plan. During the next fiscal year, we will also
continue to ensure that IDIS uses a non-FIFO method to commit and disburse fiscal year 2015
and 2016 CPD formula grant funds and that there is an appropriate audit trail available for
review.
Conclusion
We continue to report that the use of the FIFO method (1) departed from Federal
accounting standards and (2) was noncompliant with budgetary internal control
requirements and the overall conceptual framework established by the Federal financial
management laws and guidance issued by the standard setters. Specifically, the use of
FIFO by the information system, IDIS Online, made it noncompliant with Federal
financial management system requirements because of inadequate budget controls and
the misuse of USSGL attributes at the transaction level for CPD’s formula grant
disbursements. While steps were underway to remove the FIFO method, these changes
applied to fiscal year 2015 and future grants for disbursements only and will not be
applied retroactively. Additional work is needed to match disbursements to
commitments and to make IDIS compliant with the USSGL and FFMIA. The effects of
not removing the FIFO method retroactively will continue to have implications for
future years’ financial statement audit opinions until the impact is assessed to be
immaterial.

During fiscal year 2015, $4.4 billion in disbursements was susceptible to this FIFO method,
which is not in accordance with GAAP. Due to this material amount, the combined statement of
budgetary resources and the consolidated balance sheet were not prevented from containing
material misstatements.
Recommendations
Prior-year recommendations regarding this finding remained open and can be referred to in the
Follow-up on Prior Audits section of this report. We have no new recommendations in this
report.




                                                 6
Finding 2: HUD Did Not Account for Assets and Liabilities in Its
Public and Indian Housing Programs in Accordance With GAAP
and FFMIA
HUD did not properly account for advances (PIH prepayment),2 receivables, and payables in its
Office of Public and Indian Housing (PIH) programs in accordance with GAAP and FFMIA.
First, HUD accounted for prepayments to Moving to Work (MTW) public housing agencies
(PHA) for fiscal year 2015 through manual fiscal-yearend adjustments that were based on self-
reported data, not transactional data. It also did not recognize a comparative amount for fiscal
year 2014. Second, HUD’s accounting for its cash management process was untimely and
incomplete because it did not include the recognition of receivables and payables when incurred.
Third, HUD did not recognize a prepayment for funds advanced to its Indian Housing Block
Grant (IHBG) grantees used for investment. These problems occurred because of HUD’s
continued weak internal controls over the cash management process, including the lack of an
automated process. Additionally, OCFO did not have a mechanism to routinely communicate
with program offices to evaluate GAAP compliance of program transactions. As a result, several
significant financial statement line items were misstated or could not be audited as of September
30, 2015. Specifically, (1) $466.5 million recorded for MTW PHAs housing assistance
prepayment could not be audited; (2) HUD’s PIH prepayments and accounts receivable on its
balance sheet were understated by $232 million3 and $41 million, respectively; (3) HUD’s
expenses on its statement of net costs were overstated by $273 million; and (4) HUD’s accounts
payable were understated by an unknown amount.

HUD’s Adjustments for Prepayments to MTW PHAs for Excess Housing Choice Voucher
Funds Were Not Auditable or Comparative
In response to a prior-year material weakness,4 HUD recognized a prepayment on its fiscal year
2015 financial statements for funds advanced to MTW PHAs in excess of their immediate
disbursement needs. HUD determined the amount it recognized on the financial statements by
asking its MTW PHAs to confirm (self-report) their balances as of September 30, 2014, and
March 31, 2015. MTW PHAs reported holding $573 million and $529 million as of September
30, 2014, and March 31, 2015, respectively. To estimate a balance as of September 30, 2015,
PIH also asked its MTW PHAs to self-report non-housing-assistance-payment (HAP) expenses
from April 1, 2015, through September 30, 2015. PIH used this information, along with
disbursement information from the HUD Central Accounting and Program System (HUDCAPS),
to estimate that as of September 30, 2015, MTW PHAs held $466.5 million in excess funds in
their reserve accounts.

To recognize the excess funds on the financial statements, HUD manually adjusted its fiscal year
2015 prepayment balance on September 28, 2015, so that the balance as of September 30, 2015,

2
  HUD accounts for advances in its public and Indian housing program as PIH prepayments.
3
  $232 million = $273 million in prepayments not recorded for IHBG minus $41 million in receivables not recorded
in the Housing Choice Voucher program. This should have reduced the prepayment.
4
  Audit Report 2015-FO-0002, Interim Report on HUD’s Internal Controls Over Financial Reporting, issued
December 8, 2014



                                                        7
matched PIH’s $466.5 million estimate. However, HUD did not restate its fiscal year 2014
financial statements for comparability, although a prepayment balance existed at the time.

HUD recorded the fiscal year 2015 balance late in the fiscal year and did not restate its 2014
financial statements because it did not have the information necessary to recognize the activity
on the financial statements as required by GAAP. This condition occurred because HUD did not
require MTW PHAs to report information on their reserve balances until July 2015, and the
information it requested could not be validated by PIH until the end of September 2015 or used
to restate HUD’s fiscal year 2014 financial statements.

Due to the timing of PIH’s validation reviews and the material manual adjustments performed,
we did not have sufficient time to perform the audit procedures necessary for the balances
recorded. As a result, we could not provide a reasonable basis for an opinion regarding the
activity and balances recognized on HUD’s financial statements related to this activity.

HUD’s Accounting for Its Non-MTW PHA Cash Management Process for the Housing
Choice Voucher Program Was Incomplete, Untimely, and Not in Compliance With GAAP
and FFMIA
For non-MTW PHAs, PIH had a cash management process5 to reconcile the prepayment
provided by HUD with actual expenses incurred by the PHA. However, this process did not
allow HUD to account for the changes in financial activity in accordance with GAAP or
complete proper adjustments in a timely manner.

Based on reconciliations completed, PIH performed offsets6 or provided additional funding to
cover shortages. When PIH determined the excess amount it planned to offset or the shortage it
planned to provide, OCFO should have recognized a receivable or payable, respectively, and
reduced its prepayment by the amount of the receivable in accordance with Statements of Federal
Financial Accounting Standards (SFFAS) 1, Accounting for Selected Assets and Liabilities.
Further, OCFO should have adjusted its prepayment balance as HUD provided additional
advanced payments or as PHAs used their excess funds to pay for actual HAP expenses.
However, HUD did not recognize receivables or payables and adjustments to record prepayment
activity were untimely.

For example, in its June 30, 2015, cash reconciliation, PIH determined to offset $94 million of
the funding it prepaid to certain PHAs and provide $78 million in additional funding to other
PHAs it underpaid. However, OCFO did not recognize these as receivables or payables in the
general ledger or interim financial statements. While PIH offset a portion of the $94 million
before fiscal year end, it had not offset the remaining balance of $41 million as of September 30,
2015. This balance represented an account receivable, which HUD did not recognize on the
financial statements. This understated HUD’s accounts receivable and overstated HUD’s


5
  PIH performed quarterly cash management reconciliations to identify excess accumulations, which were collected
through offsets against future monthly Housing Choice Voucher program disbursements.
6
  When PIH determined that a PHA received a prepayment in excess of its immediate disbursement need, it offset
future disbursements to collect the excess funding provided.



                                                        8
prepayment balances on its September 30, 2015, balance sheet by $41 million. Further, since
OCFO did not record the $78 million payable, HUD’s accounts payable were also understated.
We could not determine the appropriate account payable balance as of September 30, 2015,
because HUD did not track the additional disbursements made to liquidate the payable.

Additionally, instead of adjusting its financial statements as additional prepayment activity
occurred, OCFO manually determined prepayment activity by subtracting its previous
prepayment balance from PIH’s most recent quarterly calculation.7 This practice was
problematic because (1) prepayments and expenses were not recognized at the transaction level
and (2) PIH’s quarterly calculations were not completed until several months after the end of the
quarter, which did not allow for timely financial reporting. For example, OCFO accounted for
prepayment activity that occurred through March 31, 2015, by manually adjusting its prepayment
balance by $153 million8 on July 10, 2015, more than 3 months after the activity occurred.
Further, as a result of the untimeliness, PIH had to estimate its September 30, 2015, balance
based on its June 30, 2015, calculation.

HUD did not record receivables or payables or adjust its prepayment balance in a timely manner
because it did not have systems that captured PHA monthly HAP expenses. As a result, it relied
on PHA-reported expense information, which was not in real time and required HUD
verification. The expense information also did not flow to HUD’s financial system, which is
necessary to recognize activity at the transaction level. Second, HUDCAPS operates on the U.S.
Government fiscal year, while PHA funding is based on calendar years. This prevented
automation of the cash reconciliation process to identify accounts receivable and accounts
payable9 and record prepayment activity in a timely manner. As a result, HUD’s cash
management and accounting process did not comply with FFMIA because adjustments were not
at the transaction level and were not recognized when incurred.

In our fiscal year 2013 report, we recommended that this process be automated, and management
generally concurred. HUD was working on implementing a new system, the Next Generation
Management System, which would contain a “Housing Choice Voucher Payment Processing -
Payment Calculation” module that should allow HUD to calculate PHA expenses on its own.
However, as of the date of this report, management had not made a decision on our
recommendation because PIH had not provided an action plan for how the recommendation
would be implemented.


7
  PIH used a net restricted assets report to manually calculate PHA prepayment and reserve balances. The report
used each PHA’s most recent audit submission as a beginning balance and added self-reported Voucher
Management System expenses and HUDCAPS disbursements to determine the ending balance. The report was
maintained on an Excel spreadsheet. Since PHAs have different fiscal years, this report used different beginning
balances.
8
  This balance was determined by OCFO by subtracting the previous PIH prepayment balance of $64 million from
the March 31, 2015, net restricted assets report balance of $217 million.
9
  PIH performed these manual calculations outside HUD’s financial systems using Excel spreadsheets and data from
the Financial Assessment Subsystem, HUDCAPS, and the Voucher Management System for approximately 2,200
PHAs.




                                                       9
HUD’s Accounting for Its Indian Housing Block Grant Prepayments Was Not in
Accordance With GAAP
HUD did not properly account for approximately $273 million in advanced payments to its
IHBG grantees for investment. HUD authorizes grantees to invest funds under the IHBG
program for up to 5 years. These grantees must spend the funds on eligible, affordable housing
activities by the 5-year deadline or return the funds to their line of credit in HUD’s Line of Credit
Control System (LOCCS). As of June 30, 2015, 43 grantees authorized to invest funds drew
down approximately $273 million for investment activities. However, HUD accounted for these
funds as disbursements and recorded an expense on the financial statements. These
disbursements did not represent actual expenses because the grantees had not yet provided goods
or services in return. Therefore, they should be recognized instead as an advanced payment on
HUD’s financial statements, in accordance with SFFAS 1. Additionally, PIH did not monitor
these advanced payments centrally.

HUD did not record these prepayments because OCFO was unaware that payments were being
advanced to IHBG grantees. This condition occurred because OCFO did not regularly
communicate with program offices and use GAAP to identify and evaluate financial events that
occurred in a program that could impact financial reporting (such as through a senior assessment
council or team). Without this function, program offices operate according to their program
regulations and are generally not aware of how program activity impacts the financial statements.
Further, without this function, OCFO could not objectively use GAAP to evaluate financial
events in HUD’s programs. Once we notified OCFO about the advances and the need to
properly account for them, OCFO consulted with the program office and used the IHBG
program regulation instead of accounting standards to defend its position on expensing IHBG
investments instead of recognizing them as advances on the financial statements. OCFO stated
that it expensed IHBG investments because program regulations10 allowed for investment of
Federal cash and therefore were used for statutory purposes. This position conflicts with SFFAS
1 because it does not consider the timing of actual expenses, which occur when the grantee
provides goods or services,11 not when it invests Federal cash. While the grantees are authorized
to invest Federal cash, this activity does not meet the criteria of an expense for financial
accounting and reporting purposes. Additionally, grantees report the balances invested on
OMB’s Standard Form (SF)-425,12 which requires them to report advances of Federal cash to the



10
   Regulations at 24 CFR (Code of Federal Regulations) 1000.58 permit IHBG grantees to invest their funding for
up to 5 years.
11
   According to SFFAS 1, “…advances are cash outlays made by a Federal entity to its employees, contractors,
grantees, or others to cover a part or all of the recipients’ anticipated expenses or as advance payments for the cost
of goods and services the entity acquires. Examples include travel advances disbursed to employees prior to
business trips, and cash or other assets disbursed under a contract, grant, or cooperative agreement before services or
goods are provided by the contractor or grantee.”
12
   SF-425 is a Federal financial reporting standard form prescribed by OMB (OMB approval number 0348-0061).
The form is completed by grantees and submitted to the Federal agency. Grantees report their investments on line
10c, Cash on Hand. The instructions for this line item state, “A recipient must compute the amount of Federal Cash
on Hand due to undisbursed advance payments using the same basis that it uses in requesting the advances.”



                                                           10
agency. This government document further supports that these funds are considered advanced
funds according to OMB rules.

In addition to the causes noted above, program offices and OCFO reported that they did not have
the systems to capture the information needed for reliable financial reporting. Although not
having adequate systems may hinder HUD’s ability to record these prepayments, it does not
exempt HUD from accurate financial reporting.

Conclusion
OCFO did not have a function in place that facilitated recurring communications with program
offices that would enable them to critically evaluate financial events or financial systems that
could have an impact on financial reporting. Therefore, HUD did not account for prepayments,
receivables, and payables in its PIH programs in accordance with GAAP and FFMIA. As a
result, as of September 30, 2015, (1) $466 million recorded for MTW PHAs housing assistance
prepayments could not be audited, and an opinion on this balance could not be provided; (2)
HUD’s PIH prepayments and accounts receivable on its balance sheet were understated by $232
million13 and $41 million, respectively; (3) HUD’s expenses on it statement of net costs were
overstated by $273 million; and (4) HUD’s accounts payable were understated by an unknown
amount.

Recommendations
Several prior-year recommendations regarding the Housing Choice Voucher program portion of
this finding remained open and can be referred to in the Followup on Prior Audits section of this
report. We have the following new recommendations.

We recommend that the Deputy Chief Financial Officer

        2A.      Evaluate the IHBG investment process and implement a proper accounting
                 treatment in accordance with Federal GAAP.


        2B.      Work with the Office of Native American Programs to calculate the amounts
                 advanced to grantees and restate HUD’s financial statements to recognize the
                 prepayments on the financial statements.

        2C.      Develop standard operating procedures for routinely obtaining information on
                 grantee investment activity and accurately reporting amounts in HUD’s general
                 ledger and financial statements.




13
  $232 million = $273 million in prepayments not recorded for IHBG minus $41 million in receivables not recorded
in the Housing Choice Voucher program. This should have reduced the prepayment.



                                                       11
We recommend that the Deputy Assistant Secretary for Public and Indian Housing

       2D.    Establish a process to track the amount HUD owes to PHAs to cover prepayment
              shortages and provide the information to OCFO so that it can be properly
              recognized as accounts payable.

       2E.    Develop a tracking function for the payments advanced to IHBG recipients to
              facilitate financial reporting and monitoring compliance with grant time
              restrictions.




                                              12
Finding 3: CPD’s Grant Accrual Estimates Were Not Validated
CPD did not validate its estimated accrued grant liabilities. This deficiency was due to a lack of
procedures and relevant grantee reporting. As a result, CPD could not ensure that its
assumptions and, therefore, its estimates were accurate. Additionally, we were unable to obtain
sufficient, appropriate audit evidence on CPD’s fiscal year 2015 estimated accrued grant
liabilities. Therefore, we could not form an opinion on CPD’s grant accrual estimate for fiscal
year 2015.

We Could Not Form an Opinion on CPD’s Fiscal Year 2015 Accrued Grant Liabilities
The fiscal year 2015 estimated accrued grant liabilities for CPD’s programs were $2 billion.
This amount accounted for 84 percent of HUD’s $2.4 billion in total accrued grant liabilities.
We did not have sufficient time to perform all of the audit procedures we deemed necessary to
obtain sufficient, appropriate audit evidence to form an opinion on CPD’s fiscal year 2015
accrued grant liabilities because CPD did not have adequate internal controls in place.
Specifically, CPD did not have a validation process for estimating its accrued grant liabilities.
There were no other compensating audit procedures that could be performed to obtain reasonable
assurance regarding the $2 billion estimate. As a result, we were unable to obtain sufficient,
appropriate audit evidence for CPD’s fiscal year 2015 accrued grant liabilities. Therefore, we
could not form an opinion on CPD’s accrued grant liabilities for fiscal year 2015.

CPD Did Not Have Procedures To Validate Its Grant Accrual Estimates
HUD first prepared estimates of its accrued grant liabilities for inclusion in its financial
statements in 2014. Our audit of those financial statements identified a material weakness that
HUD did not validate the estimates of its accrued grant liabilities.14 Our work on HUD’s fiscal
year 2015 financial statements found that there were still no validation procedures for CPD’s
estimates. This deficiency was due in part to a lack of relevant grantee reporting. CPD was
working with a contractor to develop a statistical sampling plan to validate its estimates in
accordance with the requirements of Federal Accounting Standards Advisory Board (FASAB)
Technical Release (TR) 12, Accrual Estimates for Grant Programs, but the validation process
had not been implemented as of September 30, 2015. As a result, CPD could not ensure that its
estimates and their underlying assumptions were reliable.

Conclusion
CPD did not have validation processes for its estimated accrued grant liabilities because of a lack
of procedures and relevant grantee reporting. It could not ensure that the assumptions it used to
produce its estimates were accurate because of this lack of internal controls. This condition
resulted in a high risk that CPD’s estimates could have been misstated. Additionally, because of
the lack of internal controls, we were unable to perform all of the audit procedures necessary to
obtain sufficient, appropriate audit evidence regarding CPD’s fiscal year 2015 accrued grant
liabilities. Therefore, we could not form an opinion on CPD’s accrued grant liabilities for fiscal
year 2015.


14
   Audit Report 2015-FO-0004, Fiscal Years 2014 and 2013 Consolidated Financial Statements Audit, issued March
6, 2015



                                                       13
Recommendations
Prior-year recommendations regarding this finding remained open and can be referred to in the
Followup on Prior Audits section of this report. We have no new recommendations in this
report.




                                               14
Finding 4: Ginnie Mae’s Systems Data To Account for Its
Budgetary Resources Were Not Auditable
In response to our fiscal year 2013 recommendation15 regarding a material internal control
weakness in financial reporting, the Government National Mortgage Association (Ginnie Mae)
implemented a system to account for its budgetary resources; however, the implementation was
problematic, and the system’s data were not reliable. Therefore Ginnie Mae reverted to its old
manual processes for reporting its budgetary resources to the consolidated financial statements.
During fiscal year 2015, we were not able to audit the budgetary resource activity because
Ginnie Mae (1) manually adjusted most of its budgetary accounts,16 (2) lacked proper controls or
an adequate audit trail to support its material adjustments, and (3) did not provide its budgetary
resources trial balances and detailed supporting documentation within the timeframe needed to
conduct adequate audit procedures. This condition occurred because Ginnie Mae’s management
did not devote sufficient resources to system implementation. As a result, we could not provide
reasonable assurance regarding the status of $19.8 billion in budgetary resources that HUD
reported for Ginnie Mae as of September 30, 2015.

Ginnie Mae’s Accounting for Its Budgetary Activity Required Material Manual
Adjustments and Lacked Adequate Internal Controls
In fiscal year 2013, we reported that there were material internal control weaknesses in Ginnie
Mae’s accounting for its budgetary resources because it did not use the USSGL to record
budgetary events at the transaction level as required by FFMIA and GAAP. Instead, Ginnie Mae
manually calculated its budgetary resources using OMB apportionments, proprietary data,
obligation records maintained on Excel spreadsheets, and its interpretation of how all of this
information should be reflected in its statement of budgetary resources. To comply with FFMIA
and GAAP, Ginnie Mae implemented a budgetary module within in its core financial system and
in fiscal year 2015, it assured us that this would be the system of record for financial reporting.
However, the system produced incorrect balances that did not agree with Ginnie Mae’s control
totals, causing it to perform material manual adjustments to its September 30, 2015, budgetary
resource balances totaling $17.7 billion. In essence, Ginnie Mae used its previous manual
process for financial reporting and manually adjusted its system’s data to equal its manual
calculations. The manual calculation to determine the final balances was performed by one staff
member, and the journal vouchers used to adjust the balances did not include sufficient support
for proper supervisory review. The staff member performing the calculation also had access to
both budget and general ledger functions within Ginnie Mae’s Financial Accounting System
(GFAS), which is an inappropriate segregation of duties.




15
   Audit report 2014-FO-0003, recommendation 3B, Develop and implement plans to ensure that Ginnie Mae’s core
financial system is updated to include functionality in the system to perform budgetary accounting at a transaction
level using the USSGL to comply with FFMIA.
16
   Ginnie Mae adjusted 8 accounts, which affected 10 of the 11 accounts it reported as its status of budgetary
resources in its trial balance. These accounts adjusted made up 98 percent of Ginnie Mae’s total status of budgetary
resources and totaled $20.4 billion.



                                                          15
Ginnie Mae Did Not Provide Documentation in the Required Timeframe
Ginnie Mae assured us that it knew the cause of all of the differences between systems data and
its manual calculation; however, it could not provide sufficient support for the adjustments or
systems data in a reasonable timeframe for us to obtain reasonable assurance regarding the
adjustments or the balances recorded. For example, Ginnie Mae could not provide any fiscal
year 2015 financial data from the general ledger system until August 3, 2015.17 Additionally,
Ginnie Mae did not provide its complete contract activity report18 or support for all of the
obligations in our sample within the timeframe required. Further, Ginnie Mae did not provide its
September 30, 2015, trial balance until October 30, 2015, 9 business days after the agreed-upon
due date. This delay prevented us from adequately reviewing Ginnie Mae’s adjustments and
auditing the Ginnie Mae component of HUD’s consolidated statement of budgetary resources.

Insufficent Resources Devoted to System Implementation
Ginnie Mae worked with a contractor to develop its budgetary module within its core financial
system; however, it did not gather sufficient information to ensure that the system would capture
all of its budgetary requirements, develop edit checks or review processes to identify incorrect
transactions, or dedicate enough time and staff to user acceptance testing and contract
conversion. Ginnie Mae’s management allocated only one staff member for system
implementation, which was inadequate for the size of the project. As a result, several
transactions were coded incorrectly, the system improperly accounted for several of Ginnie
Mae’s budgetary events, and Ginnie Mae had to perform time-consuming reconciliations to
ensure that contracts were correctly valued in the system. After implementation, Ginnie Mae
recognized that system balances were incorrect; however, the problems causing the incorrect
balances could not be promptly reconciled, researched, and resolved by the one staff member
allocated to implementation. Additionally, since Ginnie Mae did not start regularly producing
system data until August 2015, it had limited time to reconcile, research, and correct these issues.
While Ginnie Mae assured us that all causes for the discrepancies had been identified, we found
additional problems with the system that Ginnie Mae was unaware of. Specifically, we noted
double counting of transactions due to proprietary reversals that did not flow to the budgetary
general ledger.

Lack of adequate system requirements gathering, inadequate time for user acceptance testing and
data conversion, and insufficient resources allocated to implementation contributed to a system
that did not produce reliable information for financial reporting. In addition, due to the intensive
effort required to reconcile, research, and correct issues within the system, Ginnie Mae
maintained poor documentation and a weak audit trail and could not deliver prepared-by-client
items on time. This problem contributed to our inability to obtain reasonable assurance about the
reliability of the balances reported for Ginnie Mae’s status of budgetary resources.



17
  Ginnie Mae provided its second quarter trial balance (March 31, 2015) and supporting data on August 3, 2015.
18
  The contract activity report that we received did not contain several purchase orders that were included in the
system. Ginnie Mae stated that it may not have provided us the full report. We received additional portions of the
contract activity report on October 6, 2015, but this was not in the timeframe required to complete our audit. We
need the full report to validate purchase orders recorded in the system.



                                                         16
Conclusion
Ginnie Mae is responsible for managing a substantial amount of budgetary resources. Proper
accounting for these budgetary resources requires a system that can recognize individual
transitions at the transaction level in accordance with GAAP and FFMIA. In fiscal year 2014,
Ginnie Mae implemented a system to account for its budgetary resources; however, during fiscal
year 2015, the system’s data were not auditable. This deficiency was due to the many material
manual adjustments to most of its budgetary accounts,19 the weak controls in place over the
adjustments, and Ginnie Mae’s inability to provide the trial balances within the timeframe
required to perform adequate audit work. This condition occurred because Ginnie Mae’s
management did not devote sufficient resources to system implementation. As a result, we could
not provide reasonable assurance regarding the accuracy of the status of $19.8 billion in
budgetary resources that HUD reported for Ginnie Mae as of September 30, 2015.

Recommendations
We recommend that Ginnie Mae’s Acting Chief Financial Officer

        4A.      Assign adequate resources to identify and resolve incorrect transactions in GFAS
                 so that the system can be used for reliable financial reporting of Ginnie Mae’s
                 budgetary resources.

        4B.      Promptly complete all reconciliation processes to determine the root causes of
                 incorrect balances.

        4C.      Based on root causes identified, make necessary adjustments to the system
                 configurations in GFAS to ensure proper and accurate budgetary resource
                 reporting that complies with FFMIA and OMB A-11.

        4D.      Review user roles in GFAS and assign additional staff to ensure that proper
                 segregation of duties is maintained.




19
  Ginnie Mae adjusted 8 accounts, which affected 10 of the 11 accounts it reported as its status of budgetary
resources in its trial balance. These adjusted accounts made up 98 percent of Ginnie Mae’s total status of budgetary
resources and totaled $20.4 billion.



                                                          17
Finding 5: HUD’s Financial Management System Weaknesses
Continued in 2015
Financial system limitations and deficiencies remained a material weakness in fiscal year 2015,
although there were efforts to modernize HUD’s financial management system through the
transition of key financial management functions to a Federal shared service provider. These
system limitations and deficiencies existed because of HUD’s inability to modernize its legacy
financial systems and the lack of an integrated financial management system, which we have
reported on annually since 1991. Program offices compensated for system limitations by using
less reliable manual processes to meet financial management needs. These system issues and
limitations inhibited HUD’s ability to produce reliable, useful, and timely financial information.

HUD’s Financial Systems Lacked Key Functionality
Several of HUD’s financial systems used to support significant balances on the financial
statements lacked key functionality or system requirements. This deficiency prevented HUD
from relying on the data output provided and reporting key financial statement balances in
accordance with GAAP.

        Ginnie Mae did not have systems in place to adequately record and account for the loan
        accounting and processing of activity in its defaulted issuers’ portfolio. During our 2014
        audit, we identified material weaknesses related to Ginnie Mae’s complete and accurate
        recording of and accounting for key financial statement line items. Also identified were
        weaknesses in internal control over financial reporting that impeded Ginnie Mae’s ability
        to produce complete, accurate, and reliable financial statements. These material
        weaknesses resulted in our inability to validate the completeness, accuracy, and reliability
        of $6.6 billion in nonpooled loan assets and the understatement of the mortgage-backed
        securities loan liability account. These material weaknesses remained unresolved as of
        September 30, 2015.

        Ginnie Mae did not have an accounting system to account for and track servicing costs at
        a loan level. As a result, it was reliant on third-party master subservicer data, which we
        found unreliable because of completeness and accuracy weaknesses. We concluded that
        Ginnie Mae failed to adequately establish and maintain accounting systems to manage
        and control the loan accounting and processing of the activities related to its defaulted
        issuers’ portfolios. Refer to the relevant material weaknesses and associated
        recommendations for additional details.20

        System configuration issues within the budgetary accounting module of the GFAS
        application impeded our ability to obtain assurance regarding key financial statement
        line items. System configuration and posting logic deficiencies in the GFAS budgetary
        module resulted in inaccurate budgetary account balances. Although Ginnie Mae
        attempted to compensate for system configuration deficiencies with ad hoc manual

20
  Audit Report 2015-FO-0003, Audit of the Government National Mortgage Association’s Financial Statements for
Fiscal Years 2014 and 2013, issued February 27, 2015



                                                      18
        adjustments, it was unable to resolve these errors in a timely manner, and manual journal
        vouchers were insufficiently supported. Additionally, we noted issues regarding the
        segregation of duties within GFAS. Specifically, accounting personnel had inappropriate
        access to multiple roles that should be separated to maintain effective internal control.

        The GFAS budgetary module was implemented with incomplete system requirements
        and inadequate user acceptance testing. In addition, the completeness and accuracy of
        data migration were insufficiently validated before deployment into the production
        environment, and manual attempts to correct system weaknesses were unsuccessful and
        insufficiently supported. As a result, we were unable to validate $17.7 billion of the
        manual adjustments recorded.

        We also found that Ginnie Mae was unable to provide adequate audit evidence to support
        transactional data in the unpaid obligation and allotment accounts or provide adequate
        documentation to support its unpaid, undelivered orders and allotment activity. This
        deficiency ultimately inhibited our ability to adequately audit Ginnie Mae’s budgetary
        resources and obtain reasonable assurance regarding the status of its budgetary
        resources.21

        Updates to the IDIS system remained in process and continued to hinder CPD’s ability to
        properly account for formula grant transactions in accordance with GAAP and comply
        with FFMIA. CPD uses IDIS to manage its formula grant programs. CPD was midway
        through executing the IT project to eliminate the FIFO method of funds attribution from
        IDIS, which did not comply with GAAP. While CPD had made progress in addressing
        this issue, updating the application to specifically identify grants initiated during 2015
        and going forward, funding constraints delayed further remediation and compliance with
        accounting standards and FFMIA. See further discussion of this issue above in the
        related material weakness.22

        Emergency Homeowner’s Loan Program data in HUD’s Loan Accounting System was
        not reliable.23 We noted that Emergency Homeowner’s Loan Program (EHLP) data in
        HUD’s Loan Accounting System (LAS) were not reliable because of system and process
        internal control weaknesses. Specifically, EHLP loan data initially entered into LAS
        were inaccurate and incomplete, the data correction process was ineffective, and loan-
        level transaction details in LAS were lost during a database rebuild effort. EHLP was
        implemented quickly, with existing systems and processes, and did not have a centralized
        office responsible for administering and managing the program in its entirety. The EHLP
        data in LAS on September 30, 2014, were unreliable and did not support the loans
        receivable balances in the general ledger. HUD made additional efforts during 2015 to
        fix EHLP data, but balances remained unauditable at yearend.


21
   Finding 4: Ginnie Mae’s System Data To Account for Budgetary Resources Were Not Auditable
22
   Finding 1: CPD’s Formula Grant Accounting Did Not Comply With GAAP, Resulting in Misstatements on the
Financial Statements
23
   Audit Report 2015-DP-0004, Loan Accounting System, issued December 9, 2014



                                                     19
        HUD did not have a working property inventory system in place. HUD did not have a
        functional, automated property management system during fiscal year 2015 (as required
        by Title 40 of the United States Code), which established executive agencies’
        responsibilities to maintain adequate inventory controls and accountability systems.
        HUD initially implemented the Facilities Integrated Resource Management System
        (FIRMS) to consolidate, automate, and provide reports on furniture, equipment, personal
        property, and space. While we have reported on FIRMS’ FFMIA noncompliance since
        2010, technical issues caused by a lapsed maintenance contract had rendered FIRMS
        nonfunctional since 2012. Since then, HUD had been unable to return FIRMS to an
        operational state. To address FIRMS’ FFMIA noncompliance and meet business
        requirements regarding property management, the Office of Administration was working
        with OCIO on a two-phase plan to replace FIRMS and move to an automated property
        management application hosted by the Federal Aviation Administration during fiscal year
        2016.

        Legacy procurement applications that do not comply with financial system requirements
        could not be decommissioned due to longstanding data migration challenges. HUD
        implemented a new procurement application, the HUD Integrated Acquisition
        Management System (HIAMS), in 2012. Although this system had been in production
        for more than 3 years, HUD was unable to decommission the legacy HUD Procurement
        System (HPS) and Small Purchase System (SPS) as of September 30, 2015, because of
        technical issues associated with the transfer of data to HIAMS. HPS and SPS are legacy
        procurement applications that do not meet Federal financial system requirements.

        A lack of system integration and automated controls increased the risk associated with
        HUD’s payment management process. In an audit conducted in fiscal year 2013,24 we
        found that the HIAMS procurement application did not interface with the payment
        processing function of the HUDCAPS application. The lack of automated validation
        controls increased the risk associated with the payment management function. This
        condition remained in fiscal year 2015.
HUD Did Not Have Financial Systems in Place To Meet Financial Management Needs
In addition to weaknesses and limitations associated with HUD’s financial systems, HUD did not
have systems in place to meet other financial management needs.

        HUD lacked an effective cost accounting system. In fiscal year 2006, the U.S.
        Government Accountability Office (GAO) reported25 that HUD’s financial systems did
        not have the functionality to provide managerial cost accounting across its programs and
        activities. HUD lacked an effective cost accounting system that was capable of tracking


24
   2014-DP-0005, Information Systems Controls in Support of the Financial Statements Audit, issued April 30,
2014. This was a limited distribution report due to the sensitive nature of the information reported and was,
therefore, not made available to the public.
25
   GAO-06-1002R, Managerial Cost Accounting Practices, dated September 21, 2006



                                                         20
        and reporting the costs of HUD’s programs in a timely manner to assist in managing its
        daily operations. This lack of functionality resulted in the lack of reliable and
        comprehensive managerial cost information on HUD’s activities and outputs. This
        deficiency rendered HUD unable to produce reliable, cost-based performance
        information. This condition remained in fiscal year 2015.

        PIH’s manual cash management processes did not allow recognition of financial
        transactions or timely adjustments to PHA disbursements. PIH’s cash management
        process was not automated. The cash reconciliation master file used to determine
        appropriate adjustments was manual. It was maintained on an Excel spreadsheet on a
        shared drive, and the integrity of the data was not properly protected or secured. The
        process to perform adjustments to future disbursements in HUDCAPS was also manual.
        Due to HUDCAPS’ functional limitations, HUD could not capture and recognize
        financial transactions resulting from the quarterly reconciliations. With more than 2,200
        PHAs that require a quarterly reconciliation and potential adjustment of future
        disbursements, the amount of resources available to complete the work was limited. This
        lack of an automated process substantially increased the risk of error. Further, a lengthy
        manual reconciliation process prevented timely and accurate financial transaction
        recognition.26

        HUD did not adequately design or implement financial systems for the Section 108 and
        Section 184 loan guarantee programs. Program offices continued to rely on Excel
        spreadsheets and Access databases to account for more than $2 billion in CPD loan
        guarantees and approximately $5.1 billion in PIH loan guarantees as of September 30,
        2015. Without a financial system to record detailed program transactions, HUD could
        not adequately monitor loan guarantee programs. HUD was also unable to monitor loan
        commitments and note issuances and repayment amounts, which could result in
        unreliable data affecting the financial statements.

        CPD’s Section 108 loan guarantee program did not have a system to perform its financial
        management processes. There was no automated interface to obtain associated grant data
        from the program application. When a guaranteed loan became delinquent or in default,
        program staff had to request that OCFO accounting personnel manually reduce the funds
        available, greatly increasing the risk of error.

        PIH’s Section 184 loan guarantee program used a system of four separate Microsoft
        Access database tables to process and maintain data on loan guarantees, defaults, and
        lender claims. The program office had noted the risk of duplication across these
        databases, and overpayments on claims had occurred because of payment duplication.




26
 Finding 2: HUD Did Not Account for Its Assets and Liabilities for Its Public and Indian Housing Programs in
Accordance With GAAP and FFMIA



                                                       21
HUD Continued To Move Forward With the Implementation of a New Core Financial
System
While HUD had made efforts to modernize its financial systems since 2003, many disparate
legacy financial systems remained in place during fiscal year 2015. In the fall of 2012, the New
Core project was initiated to move HUD forward in implementing a new financial system. New
Core, moved significant HUD financial management functions to the U.S. Department of the
Treasury, Bureau of Fiscal Service’s Administrative Resource Center (ARC).

Phase 1 of the New Core implementation has consisted of three releases to date. Release 1 of
phase 1 of New Core included deployment of the New Core Interface Solution (NCIS) to
facilitate the processing of travel and relocation transactions. Release 2 was implemented in
2015 and covered the time and attendance function. Release 3 will be implemented in the first
quarter of fiscal year 2016 and will transition key financial management functions to ARC.
During 2015, we performed a review of release 1 and a preimplementation review of release 3
and noted several significant deficiencies.

        Application control weaknesses related to NCIS data processing resulted in data
        completeness and accuracy issues in the general ledger.27 NCIS is middleware that
        supports the automated transfer of data between HUD’s existing accounting system,
        HUDCAPS, and ARC’s Oracle Financial system. We noted that application control
        weaknesses included insufficient monitoring controls over interface processing,
        ineffective controls to prevent duplicate transactions, and a lack of effective data
        reconciliations, which enabled unresolved errors to continue for 6 months. We found
        inaccurate financial data in HUDCAPS and the Oracle Financial system and
        discrepancies between HUD’s general ledger and Treasury systems.

        We also found that the issues with release 1 were related to incomplete system
        requirements, inadequate training and controls, and insufficient postdeployment review.
        We noted that while HUD had taken some action to address recommendations made after
        our review of release 1 and preimplementation review of release 3, the extent of process
        changes must be carefully managed. The scope for future releases and phases was being
        evaluated as HUD determined the best path forward. Details regarding this release had
        not been finalized, and there was no scheduled date for implementation.

Conclusion
Complete and reliable financial information is critical to HUD’s ability to accurately report on
the results of its operations to both internal and external stakeholders. During fiscal year 2015,
system limitations and weaknesses continued to contribute to the possibility that a material
misstatement of HUD’s financial statements would not be prevented or detected and corrected in
a timely manner.




27
  Audit Report 2015-DP-0007, New Core Project: Release 1of Phase 1 New Core Interface Solution, issued
September 3, 2015



                                                      22
Until these weaknesses are fully remedied, HUD’s ability to produce reliable, useful, and timely
financial information needed for accountability, performance reporting, and decision making will
remain a departmental material weakness. Therefore, we will continue to monitor HUD’s
progress in addressing our concerns in this area.

Recommendations
Prior-year recommendations regarding this finding remained open and can be referred to in the
Followup on Prior Audits section of this report. Any new recommendations can be found after
each finding referenced.




                                               23
Significant Deficiencies

Finding 6: HUD’s Financial Management Governance Structure
and Internal Controls Over Financial Reporting Were Ineffective
HUD’s financial management governance remained ineffective. While HUD and its components
took steps in fiscal year 2015 to address some of the weaknesses in its financial management
governance structure and internal controls over financial reporting, deficiencies continued to
exist. Specifically, OCFO needs to provide stronger direction to program office accounting and
improve financial management and governance issues at Ginnie Mae. Additionally, HUD needs
to be more consistent in its control and monitoring activities, including front-end risk
assessments (FERA), management control reviews (MCR),28 and reconciliation activities. These
conditions stemmed from HUD’s inadequate implementation of the Chief Financial Officers Act
of 1990 (CFO Act) and the lack of a senior management council. These shortcomings limited
the ability of OCFO to stress the importance of financial management and facilitate internal
control over financial reporting throughout HUD. Additionally, as we have reported in prior-
year audits, HUD did not have reliable financial information for reporting and was in the process
of replacing its outdated legacy financial systems. Weaknesses in program and component
internal control that impacted financial reporting were able to develop in part due to a lack of
financial management governance processes. Entity-level controls could improve HUD’s
governance and enable the prevention, detection, and mitigation of significant program and
component-level internal control weaknesses. As a result of control weaknesses, there were
multiple deficiencies in HUD’s internal controls over financial reporting, resulting in
misstatements on the financial statements and noncompliance with laws and regulations.

An Independent Organizational Assessment of HUD OCFO Recommended Ways To
Improve HUD’s Financial Management Governance
We made several recommendations to HUD’s Deputy Secretary to improve HUD’s financial
management governance during our audit of HUD’s 2013 financial statements.29 These
recommendations included conducting a study of HUD OCFO as well as creating and chairing a
senior management council or equivalent.

During fiscal year 2015, HUD took steps to address these recommendations and several of the
weaknesses in its financial management governance structure. In one of these steps, HUD
contracted with the National Academy of Public Administration (NAPA) to conduct a study,
which was completed in March 2015.30 NAPA made three high-level recommendations,
concluding that HUD should


28
   An MCR is a detailed evaluation of the complete system of management controls in a functional area. Such a
review will produce extensive documentation of controls and will include the testing of most, if not all, controls.
29
   Audit Report 2014-FO-0003, Additional Details To Supplement Our Report on HUD’s 2013 and 2012 (Restated)
Financial Statements, issued December 16, 2013
30
   Department of Housing and Urban Development, Office of the Chief Financial Officer, Organizational
Assessment; http://napawash.org/images/reports/2015/HUD_OCFO_Study_Final_Report.pdf



                                                         24
     1. Improve financial management oversight and governance,
     2. Address concerns associated with the transition to the Federal shared service provider,
         and
     3. Strengthen the finance workforce.

HUD did not formally document its evaluation of the impact of financial governance weaknesses
identified by NAPA within any system of record. Additionally, HUD did not formally identify
or document corrective actions to address the recommendations identified by NAPA in any
system of record. As a result, many of the issues that we discussed in 2014 remained.

Specifically, HUD lacked a senior management council and senior assessment team or
equivalent committees responsible for (1) assessing and monitoring deficiencies in internal
control resulting from the Federal Managers’ Financial Integrity Act (FMFIA) assessment
process, (2) advising the HUD Secretary of the status of corrections to existing material
weaknesses, and (3) apprising the Secretary of any new material weaknesses that may need to be
reported to the President and Congress through the annual financial report. While establishment
of a senior management council and senior assessment team is not required by OMB Circular A-
123, Management’s Responsibility for Internal Control, it is recommended and is a best business
practice.31

While the lack of a senior management council and senior assessment team or equivalents was
not the sole cause of the deficiencies in the structure of HUD’s OCFO and financial management
systems, HUD’s ability to identify the need for and make significant changes was impaired.

Stronger Direction and Involvement With Program Accounting Was Needed From OCFO
HUD’s financial management structure relied on the delegation of several key financial
management functions to HUD’s program offices, including review and approval of vouchers,
reviews of unliquidated obligations, and some budgetary functions. However, program-related
issues, concerns, and decisions often took a higher priority than financial management and the
requirements for proper financial accounting. Previous audits indicated that accounting
procedures were often determined by program office preference without the guidance and
oversight of OCFO or a regard for federally mandated accounting standards. While HUD had
taken initial steps to address these issues, substantial work remained. HUD’s initial efforts
included an effort to develop a memorandum of understanding between OCFO and program
offices to improve collaboration with program offices on important accounting issues. However,
this issue has been the root cause of several deficiencies identified in our audits. We noted the
following instances in which this environment, combined with a lack of communication, led to
deficiencies.




31
  According to OMB Circular A-123, the chief financial officer should be a member of the senior management
council, and the senior assessment team should report to the chief financial officer. The senior assessment team
provides oversight and accountability for the agency’s internal controls over financial reporting and should include
executives from areas responsible for maintaining controls over key processes and systems.



                                                          25
        CPD’s budgetary accounting for grants. The material weakness associated with CPD’s
        budgetary accounting for grants,32 which contributed to our 2015 disclaimer of opinion,
        occurred within the environment of substantial delegation and deferral to program office
        priorities. This deficiency occurred because OCFO was not involved in the development
        of the mixed financial system (IDIS Online) to ensure that it complied with FFMIA and
        GAAP. This deficiency will exist for several years because the programing changes to
        the CPD formula grant programs system will be on a prospective basis for fiscal years
        2015 going forward and not apply to prior-year grant funds. As of September 30, 2015,
        approximately $6.3 billion and $10.1 billion, respectively, in undisbursed obligations
        were impacted.

        PIH cash management. As we first reported during the 2013 financial statement audit,33
        HUD did not account for transactions resulting from a congressional requirement to
        implement Treasury regulations on cash management for the Section 8 Housing Choice
        Voucher program. This condition occurred because OCFO was not consulted when PIH
        implemented the cash management process in fiscal year 2012. Since a basic
        understanding of the business processes and financial transactions impacted by the cash
        management process was not established and continued in fiscal year 2015, significant
        delays between the occurrence and recognition of financial events in the general ledger
        continued in fiscal year 2015.34 As much as $507 million in excess funds continued to be
        held at PHAs and was not accounted for and moved back to HUD in a timely manner.
        Another $41 million in receivables and $78 million in payables were not recognized on
        the financial statements in a timely manner. This condition could occur in other HUD
        programs without OCFO’s knowledge.

        Accounting for property plant and equipment. Weaknesses in accounting for internal use
        software continued. OCFO was not provided adequate documentation from OCIO to
        accurately account for the cost of software projects. This condition occurred because
        OCFO and the OCIO lacked adequate internal controls to ensure the timely exchange of
        information needed for accurate financial reporting. While OCFO recently implemented
        procedures requiring OCIO to provide timely and reliable information, other
        recommendations remained open. As a result, the $250 million balance for internal use
        software recognized in the property plant and equipment financial statement line item
        remained at risk of possible misstatement.

        Additionally, the Office of the Chief Procurement Officer (OCPO) did not properly
        recognize leasehold improvements and liabilities on the financial statements resulting
        from energy saving improvements totaling $46 million.35 The total value of the contract

32
   Refer to finding 1 for more detail.
33
   Audit Report 2014-FO-0003, Additional Details To Supplement Our Report on HUD’s Fiscal Years 2013 and
2012 (Restated) Financial Statements, issued December 16, 2013
34
   See finding 2 for more detail.
35
   The U.S. General Services Administration delegated to HUD the management of the energy savings performance
contract in its entirety because the improvement project costs will be paid back to the contractor using HUD’s
administrative funds saved from the future energy savings over 20 years.



                                                       26
        was $86 million to be paid over 19 years. This condition occurred because OCPO did not
        notify OCFO about the agreement authorizing the improvements. As a result, the
        statement of budgetary resources and balance sheet could have been misstated.

        Lastly, OCPO did not properly classify the acquisition of furniture and equipment as
        capitalized expenses. HUD paid vendors dedicated to sell furniture, fixtures, and
        equipment a total of $1.2 million and $3.6 million in fiscal year 2014 and as of June 30,
        2015, respectively. These purchases were not capitalized because of OCPO’s incorrect
        application of HUD’s capitalization policy when obligating the contracted funds. OCFO
        then paid invoices without verifying that funds obligated were properly classified as a
        capitalized acquisition. As a result, HUD’s financial statements were misstated for
        furniture not properly capitalized.

The lack of adequate OCFO oversight of these and other financial management functions
contributed to these deficiencies. The lack of oversight was the result of OCFO’s not having a
position or division responsible for overseeing and coordinating financial management functions
handled by the program offices. As a result, HUD’s statements may have been misstated.

Ginnie Mae’s Financial Governance Weaknesses Continued
In fiscal year 2015, Ginnie Mae failed to maintain a governance framework that allowed
appropriate policies, people, systems, and controls to ensure the reliability and integrity of
Ginnie Mae’s financial and accounting information. This failure in governance was the
underlying cause of the problems cited in the Ginnie Mae financial statement audit report36 and
in this report.37 Ginnie Mae (1) failed to adequately identify, analyze, and respond to changes in
the control environment and risk associated with the acquisition of a multi-billion-dollar
servicing portfolio; (2) failed to adequately establish accounting policies, procedures, and
accounting systems to manage and control the loan accounting and processing of the activities
related to its defaulted issuers’ portfolio; and (3) failed to adequately oversee the implementation
of the budgetary accounting module in its financial system to ensure accurate reporting of
budgetary activity. This condition occurred because of finance staff turnover and insufficient
internal controls to manage the risks associated with business decisions and changes in its
business environment. Additionally, Ginnie Mae’s executive leadership failed to backfill a
number of critical financial management positions, including the deputy chief financial officer,
controller, and the economic modeling director, all of which have significant financial reporting
roles. However, as noted in fiscal year 2014, these positions had been vacant for an extended
period, and Ginnie Mae relied heavily on contractors to compensate for finance staffing
deficiencies. As a result, serious financial reporting deficiencies occurred at Ginnie Mae, which
impacted HUD consolidated financial reporting. Most recent was the lack of coordination and
poor communication regarding the discovery of material accounting errors due to misapplication
of GAAP that resulted in $1.9 billion of restatement adjustments to HUD’s fiscal year 2014
consolidated financial statements after the fiscal yearend. On October 23, 2015, Ginnie Mae


36
   Audit Report 2015-FO-0003, Audit of the Government National Mortgage Association’s Financial Statements for
Fiscal Years 2014 and 2013, issued February 27, 2015
37
   Refer to finding 4.



                                                       27
provided the financial statements to HUD and notified OIG about an additional restatement
needed. On October 28, Ginnie Mae provided HUD the restatement or error correction
adjustment entries for HUD’s consolidated financial statements. On November 4, 2015 Ginnie
Mae provided HUD a second set of restatement or error correction adjustment entries for HUD’s
consolidated financial statements. However, due to Ginnie Mae’s late notification, inadequate
communication, and lack of transparency, HUD encountered difficulties in preparing
consolidated financial statements within the timeframes required and OIG was not able to gather
sufficient appropriate evidence to validate the accuracy of the accounting adjustments.

Ginnie Mae’s management of risks associated with (1) handling complex and changing financial
management operations without the appropriate accounting policies and procedures in place and
(2) monitoring the work performed by third-party service providers (such as master subservicers)
on Ginnie Mae’s multi-billion-dollar servicing portfolio will challenge Ginnie Mae’s inadequate
financial management staff. These governance weaknesses contributed to Ginnie Mae’s inability
to produce auditable financial statements.

To address these issues, additional oversight is needed from OCFO to ensure that the policies
and guidance it provides are properly implemented.

Reconciliations of Significant Account Balances Were Not Performed in a Timely Manner
OCFO did not perform required cash reconciliations in a timely manner or have a reconciliation
process that included verifying that HUD’s monthly, quarterly, and annual obligation reports to
Treasury and OMB agreed with HUD’s obligation control accounts for each open appropriation
account as required. Additionally, HUD did not perform intragovernmental transaction (IGT)
reconciliations as required.

        Cash reconciliations were not performed in a timely manner. During our review of cash
        reconciliation status reports, we found that cash reconciliations for one appropriation,
        0163, were not performed between October 2014 and February 2015. Additionally, we
        found that 2 months of reconciliations for 14 other appropriations were performed more
        than 60 days after the end of the applicable month. This condition occurred because of a
        lack of supervisory monitoring of the cash reconciliation status report. As of June 30,
        2015, the Public Housing Operating Subsidy fund, fund 0163, and the other 14
        appropriations had fund balances with Treasury of $2.3 billion and $520 million,
        respectively. Reconciliations that are not performed in a timely manner increase the risk
        that financial activity will not be accurately reported to Treasury as well as the risk of
        fraud, waste, or mismanagement of funds.

        The subsidiary ledger was not reconciled to the obligation balances in the general ledger
        for all of HUD’s open appropriations accounts. In fiscal year 2014, we reported that
        HUD’s obligation controlling accounts were not reconciled to the supporting records for
        HUD’s open appropriations accounts.38 This condition continued in fiscal year 2015.

38
 Audit Report 2015-FO-0002, Interim Report on HUD’s Internal Controls Over Financial Reporting, issued
December 8, 2014



                                                      28
         Management continued to lack a formal process to ensure that periodic reconciliations
         took place and were formally reviewed for HUD’s subsidiary ledgers and the general
         ledger and that monthly, quarterly, and annual obligation reports to Treasury and OMB
         agreed with HUD’s obligation control accounts for each open appropriation account as
         required by GAO Title 7, chapter 3.7. Reconciliations were performed only when
         requested during routine audit procedures. As a result, differences between the two
         ledgers were not identified and resolved in a timely manner. Our review of the
         reconciliations performed identified the differences shown in table 1.39

                                                     Table 140
                          Program                                Appropriation            Differences
          Community Development Block Grant                          0162                 $15.8 million
          HOME Investment Partnerships Program                       0205                  $5.0 million
          Homeless Emergency and Rapid                               0192                 $11.2 million
          Transition to Housing Continuum of Care
          Public Housing Capital Fund                                   0304               $29.9 million
          Total                                                                            $61.9 million

         We noted several deficiencies with the reconciliations reviewed, such as that (1)
         differences between the systems were not explained or reconciled and required extensive
         research, (2) reconciliations were not completed in a timely manner, and (3) there was no
         evidence of a supervisory review.

         Without formal procedures to require the completion of periodic reconciliations, the
         differences between the subsidiary and general ledger systems may not be identified and
         resolved in a timely manner, causing the amount of transactions, time, and research
         needed to reconcile the differences to increase. Additionally, potential misstatements
         could not be detected in a timely manner.

         There was poor oversight of intragovernmental activity at the consolidated level. HUD
         did not perform required IGT reconciliations, such as HUD’s fiduciary borrowings with
         Treasury’s Bureau of Fiscal Service and reconciliations for transfers of budget authority
         and transfers of assets among Federal agencies, including Treasury’s General Fund.
         Further, HUD could not provide evidence that research and resolution efforts had been
         made to reconcile IGT differences reported on the agency’s quarterly consolidated IGT
         scorecard issued by Treasury.41 This condition occurred because (1) OCFO’s IGT

39
   Community Development Block Grant, HOME Investment Partnerships Program, and Hearth program differences
are as of June 30, 2015. Capital Fund differences are as of March 31, 2015. We requested reconciliations of
obligation balances for a sample of appropriations as of September 30, 2015, but they were not provided in time for
review because of a lack of staff resources and technical issues with related systems impacted their ability to pull
timely reports.
40
   Differences presented as absolute values
41
   Fiscal Service has established a set of performance metrics and scorecards to help identify and resolve root causes
of IGT differences. The scorecards are at a governmentwide and agency-specific level and are sent to significant
entities within 90 calendar days after the end of a quarter. The scorecard will focus on differences by trading



                                                          29
        reconciliation procedures had not been updated to reflect the recent changes from the
        Governmentwide Treasury Account Symbol Adjusted Trial Balance System
        implementation and updated Treasury Financial Manual chapters, (2) HUD’s IGT point
        of contact did not know what reports were available to perform oversight of IGT at the
        consolidated level, and (3) the IGT point of contact had not collaborated with HUD’s
        component entities to resolve differences reported on HUD’s scorecard.42 As a result,
        material IGT differences between HUD records and Treasury’s records remained
        unresolved. Table 2 shows the differences according to the specific IGT subcategories.

                                         Table 243
                                HUD IGT scorecard differences
      General Fund                     Q1              Q2                                Q3
      FBWT (RC 29)*                    $0.2 million    $0 million                        $0 million
      Authority                        $0 million      $8.9 million                      $1.1 million
      Nonentity                        $2.4 billion    $1.9 billion                      $3.9 billion
      Other General Fund RCs           $0 million      $10 million                       $0 million
      Subcategory total                $2.4 billion    $1.9 billion                      $3.9 billion
      IGT                              Q1              Q2                                Q3
      Investments                      $24.1 million $109.4 million                      $18.7 million
      Borrowings                       $20.9 million $40.4 million                       $16 million
      Benefits: U.S. Department of
                                       $0.1 million    $7.4 million                      $.05 million
      Labor
      Benefits: Office of Personnel
                                       $4.7 million    $1.5 million                      $2.2 million
      Management
      Buy-sell                         $33.1 million $31.8 million                       $409 million
      Transfers                        $14.9 million $2.8 million                        $2.8 million
      Subcategory total                $97.8 million $193.3 million                      $448.7 million
      Grand total                      $2.5 billion    $2.1 billion                      $4.3 billion
     *Fund Balance with Treasury (Reciprocal Category)

        Reconciling IGT balances is a key internal control, which ensures that Federal agencies
        make routine efforts to resolve IGT differences. Additionally, completion of targeted
        difference and root cause-corrective action plan forms is essential to ensure that agencies
        research and resolve root causes of IGT differences. If this reconciliation is
        compromised, accounting differences could occur at the agency and governmentwide
        financial reporting levels. Further, because HUD maintains a difference of more than




partner, IGT subcategory, USSGL account, and reciprocal category. Fiscal Service will monitor the quarterly
scorecards to assess how well agency corrective actions resolve problematic areas.
42
   HUD’s scorecard includes FHA, Ginnie Mae, and HUD amounts combined.
43
   Differences presented as absolute values



                                                        30
        $100,000 for investments and borrowings, Treasury considers HUD to be noncompliant
        with the policies in the IGT guide.

Completion of Front-End Risk Assessments Continued To Be Delayed or Not Completed
HUD continued to not complete and approve FERAs44 in a timely manner. As of September 30,
2015, there were seven FERAs in process with an additional FERA noted as an exception
because the funds for that program were spent before the FERA was finalized. These
assessments ranged from 1 to 7 years since their start. While HUD Handbook 1840.1,
Departmental Management Control Program, requires that FERAs be conducted and provides
criteria that trigger when a FERA must be performed, it does not provide periods for completion
of the assessments by the program offices or completion of the review process by OCFO.
Additionally, the handbook lacks an escalation process to address program offices that are
nonresponsive to requests to complete assessments. For example, OCFO was not consulted
regarding the development of a FERA for the National Disaster Resilience Competition,45 which
will award nearly $1 billion to eligible communities. The competition was announced in June
2014. Due to the lack of procedures in this area, OCFO did not have the authority to enforce the
timely completion of the assessments, allowing the program offices to complete them at their
convenience. A lack of timely FERAs can lead to undetected risks and corresponding internal
control gaps or weaknesses that can adversely impact efficient and effective operations and
financial reporting and result in noncompliance with laws and regulations.

Completion of the MCR Process Was Inconsistent Across HUD’s Program Areas
HUD’s status report indicated that it did not conduct routine or timely MCRs46 for its program
areas as required by HUD Handbook 1840.1. Only one MCR was conducted for CPD, and one
was conducted for the Office of Single Family Housing between 2014 and 2015. However,
OCFO explained that it tracked and monitored only the MCRs it asked to be performed. The
office further explained that many MCR’s were conducted throughout the year and could be
shared with OCFO during the data call for each office’s FMFIA statement of assurance, but most
MCRs were initiated and tracked at the program office level.

Although OCFO encouraged the program offices to perform MCRs, the handbook does not
specify how often HUD’s program offices must conduct and finalize an MCR, nor does it
include clear instructions or a timeframe for OCFO to obtain, review, and track the MCR
process. But it does state that the Chief Financial Officer is responsible and accountable for
managing and overseeing HUD’s Management Control Program. This responsibility includes
developing policies and procedures to be used throughout HUD to ensure consistent application


44
   The assessment’s purpose is to detect conditions that may adversely affect the achievement of program objectives
and provide reasonable assurance that the goals of safeguarding assets, effectiveness and efficiency of operations,
reliability of financial reporting, and compliance with applicable laws and regulations are met.
45
   We were informed by CPD that it would amend the approved FERA for Hurricane Sandy to include an assessment
of this competition. Of the nearly $1 billion available through the Disaster Relief Appropriations Act of 2013 (part
of Public Law 113-2-Hurricane Sandy), about $820 million is designated for all States and local governments that
experienced a major declared disaster in 2011, 2012, and 2013.
46
   An MCR is a detailed evaluation of the complete system of management controls in a functional area. Such a
review will produce extensive documentation of controls and will include the testing of most if not all controls.



                                                         31
of the development of an effective monitoring program. Additionally, the Chief Financial
Officer is responsible for addressing crosscutting departmental issues; that is, matters involving
more than one primary organization head.

Inconsistent performance and tracking of MCRs may prevent HUD from achieving its internal
control monitoring goal of detecting conditions that may adversely affect the achievement of
program objectives. This inconsistency decreased the potential for HUD to achieve the intended
results of its programs and administrative functions by minimizing risks of fraud, waste, abuse,
and mismanagement of funds. It also could decrease the reliability of HUD’s financial reporting
and its ability to comply with applicable laws and regulations. For example, MCRs provide a
basis for the HUD Secretary to report annually to the President and Congress, as required by
FMFIA, on the adequacy of management controls within HUD. Insufficient monitoring and
tracking of this process for all of HUD’s program offices could prevent the Secretary from
having an adequate basis when reporting on FMFIA.

HUD Worked To Issue Policy Guidance, But There Were Deficiencies in Implementation
HUD took steps during fiscal year 2015 to provide policy guidance for all agency financial
management personnel, activities, and operations as required by the CFO Act. HUD had also
made progress in establishing and updating financial management handbooks and policies and
procedures. However, some HUD financial management handbooks remained outdated or
incomplete, and further development of policies and procedures is needed. To improve
continuity of accounting policies and procedures in a changing environment, financial
management policy should be centrally located and easily accessible by staff. OCFO’s
significant turnover in the past 5 years, combined with the lack of a policy framework,
contributed to issues related to compliance with accounting standards and other regulations.
HUD must continue to establish and implement accounting policies and procedures in a
permanent and easily accessible manner.

As of September 30, 2015, policies for estimating grant accruals, purchase card expenditures,
and services or contracts were in place, and HUD had updated its Accounting Policies
Handbook. These policies were created to address findings in our 2013 audit.47

Adequate Accounting and Financial Systems Had Not Been Implemented and Maintained
The CFO Act states that the responsibilities of an agency chief financial officer include
developing and maintaining adequate accounting and financial systems and implementing
agency asset management systems, including systems for cash management, debt collection, and
property and inventory management and control. While HUD was nearing its move to New Core
on September 30, 2015, it had not developed and maintained adequate financial systems as of
that date. As a result, OCFO did not maintain financial systems as required by the CFO Act as
discussed in finding 5 of this report. HUD’s system issues resulted in its inability to provide
reliable financial information consistently, accurately, and uniformly.



47
  Audit report 2014-FO-0003, Additional Details To Supplement Our Report on HUD’s Fiscal Years 2013 and
2012 (Restated) Financial Statements, issued December 16, 2013



                                                     32
Conclusion
Despite the progress made during fiscal year 2015, deficiencies in HUD’s financial management
governance structure continued. Specifically, insufficient OCFO guidance to and collaboration
with program offices as well as inadequate monitoring contributed to internal control weaknesses
in financial reporting and noncompliance with laws and regulations. Insufficient collaboration
between OCFO and program offices led to a number of material weaknesses and significant
deficiencies in HUD’s internal controls over financial reporting.

Recommendations
We recommend that the Deputy Chief Financial Officer

       6A.    Evaluate the weaknesses identified by NAPA, as well as OCFO’s disagreement
              with those weaknesses and recommendations, and identify what corrective actions
              will be taken and when those actions will be taken.

       6B.    Develop a process to ensure that issues and recommendations from all evaluations
              and audits, including those performed by third parties like NAPA, are adequately
              documented and tracked and properly evaluated by senior management to ensure
              that HUD’s FMFIA structure remains compliant. HUD should also ensure that
              corrective actions are agreed upon and responsibility for implementing corrective
              actions is appropriately delegated.

       6C.    Develop procedures to provide oversight of OCPO procurement activities to
              ensure that those with financial accounting and reporting impact are properly
              captured and reflected in HUD’s financial statements.

       6D.    Review projects and acquisitions to determine whether the proper accounting
              treatment was applied and determine whether corrections to HUD’s financial
              statements are needed.

       6E.    Contact all other HUD program offices to determine whether any other programs
              authorize or are aware of grantees holding funds in advance of their immediate
              disbursement needs and determine financial statement impact on and compliance
              with Treasury cash management requirements of any found.

       6F.    Distribute the workload among available accountants when staff is unavailable to
              ensure that all cash reconciliations are performed in a timely manner.

       6G.    Ensure that standard operating procedures for IGT activity are updated, to include
              reconciling IGT balances for all transactions required by the Federal
              Intragovernmental Transactions Accounting Policies Guide included in the
              Treasury Financial Manual 2-4700. HUD should also include procedures to
              promptly reconcile, research, and resolve differences identified in the Treasury
              quarterly scorecard.




                                               33
6H.   Provide training on IGT reporting to ensure that responsible staff is sufficiently
      trained to allow reconciliations to be promptly performed and differences
      identified to be identified, researched, and resolved in a timely manner.

6I.   Ensure that the agency’s key IGT point of contact is responsible for overseeing
      and coordinating efforts with component entities to ensure that Treasury quarterly
      scorecard differences are promptly researched and resolved.

6J.   Revise policies and procedures to ensure that MCRs are routinely monitored and
      completed for all program areas and establish a timeframe for completion of the
      MCR reports. Further, HUD should ensure that an escalation process is included
      to address untimely completion of the MCR process.




                                        34
Finding 7: Weaknesses in HUD’s Administrative Control of Funds
System Continued
We have reported on HUD’s administrative control of funds in our audit reports and
management letters since fiscal year 2005. HUD continued to not have a fully implemented and
complete administrative control of funds system that provided oversight of both obligations and
disbursements. Our review noted instances in which (1) the Office of Multifamily Housing
Programs did not follow HUD’s administrative control of funds, (2) program codes were not
included in funds control plans, (3) funds control plans were out of date or did not reflect the
controls and procedures in place, and (4) OCFO staff processed accounting changes without
proper review, approval, and sufficient supporting documentation. These conditions existed
because of (1) decisions made by HUD OCFO, (2) failures by HUD’s allotment holders to
update their funds control plans and notify OCFO of changes in their obligation process before
implementation, (3) a lack of compliance reviews in prior years, and (4) a lack of policies and
procedures requiring documentation of system accounting changes. As a result, HUD could not
ensure that its obligations and disbursements were within authorized budget limits and complied
with the Antideficiency Act (ADA).

The Office of Multifamily Housing Programs Did Not Comply With the Administrative
Control of Funds Policies and Procedures
HUD’s Office of Multifamily Housing Programs did not ensure that it complied with OCFO’s
administrative control of funds policies and procedures48 in administering its Section 8 project-
based rental assistance program. It (1) implemented substantial changes to the Section 8 project-
based program obligation process in fiscal year 2011 without OCFO’s approval49 and (2) could
not provide the appropriate obligating documents as stated in its 2011 funds control plan to
support that obligations and disbursements complied with legal authorization and contract
requirements.50 This deficiency was reported in our prior-year audit report,51 and the Office of
Multifamily Housing Programs agreed to implement changes. However, this weakness
continued in fiscal year 2015.

In fiscal year 2011, the Office of Multifamily Housing Programs changed the process used to
authorize, record, and notify Section 8 multifamily projects without obtaining approval from
OCFO. Approval is required to ensure that the obligation process meets ADA and GAO


48
   HUD’s policies require OCFO to review and approve funds control plans to ensure that internal controls for
processing obligations and disbursements comply with OMB Circular A-11, Budget Execution Manual,
requirements. Controls should provide evidence of government officials’ authorization for each transaction in which
program funds are used, preventing or minimizing ADA violations at all levels of the budget process.
49
   Under Section 902 of the CFO Act, the agency chief financial officer is charged with overseeing all financial
management activities relating to the programs and operations of the agency; developing and maintaining an
integrated agency accounting and financial management system, including financial reporting and internal controls;
and directing, managing, and providing policy guidance and oversight of agency financial management personnel,
activities, and operations.
50
   The housing assistance payments contract renewal, along with the notification of funding, is required for
authorizing the project’s continued participation and for authorizing the obligation of funds the first year.
51
   Audit Report 2015-FO-0002, Interim Report on HUD’s Internal Controls Over Financial Reporting, issued
December 8, 2014



                                                         35
appropriation law’s legal requirements. The unapproved plan stated that the program offices
could use the “Funding Notification for Field Office – S8 Budget Authority Change” form or the
“Funding Notification Letter” to notify the recipients to be used as the point of obligation. The
S8 Budget Authority Change did not identify the funding recipient’s project name, address, type
and number of units with the respective rent rates, and the periods covering the funding
allocated. More importantly, the form did not provide for the name and signature of HUD’s
delegated official authorized to review and authorize the obligation.

The latest approved funds control plan for the Office of Multifamily Housing Programs’ Section
8 program required it to demonstrate that the funds were obligated or disbursed in accordance
with legal requirements, such as (1) a signed notification of funding of Section 8 contract rents
and funding form for budgetary increases on HUD-administered contracts,52 (2) a signed
transaction annual contributions contract amendment for budgetary increases on project-based
contract-administered contracts,53 or (3) a signed agreement to enter into a housing assistance
payments contract renewal (if any) and the attached notification of funding.54 The approved
forms were designed to provide the project name, address, number and types of units, rent rates,
covered period, amount of funding allocated, and signature of the approving HUD official.

In fiscal year 2015, we found that 150 obligations and disbursements (75 obligations and 75
disbursements) from a sample of 236 (114 of obligations and 122 disbursements), or 63.6
percent, were not supported with proper obligating documentation as prescribed in the latest
approved housing control of funds requirements. These 150 obligation and disbursement
transactions were $137.9 million and $6.8 million, respectively.

This condition occurred because the Office of Multifamily Housing Programs misunderstood the
use of the Section 8 budget authority change form as the obligation point. The funds control
plans specifically stated that “…funding notification may be in the form of the Funding
Notification Letter, which is the obligating document, or the Funding Notification for Field
Office – S8 Budgetary Authority Change.” The forms used to process obligations did not
provide assurance regarding whether the obligations were accurately processed and approved by
the authorized official. Also the Office of Multifamily Housing Programs replaced the funding
notification letter to the projects with an email to the projects.

In July 2015, we asked the Office of Multifamily Housing Programs to provide the email
notifications or any other documentation showing that obligations were reviewed and approved
by the HUD authorized officials. It dismissed our request, indicating it may not have backups to
retrieve the notifications.



52
   The notification of funding of Section 8 contract rents and funding form is required for authorizing obligation of
funds to a housing assistance payments contract administrated by HUD at least annually.
53
   The transaction annual contributions contract amendments form is required for authorizing obligations to a
contract administrated by a contractor acting on HUD’s behalf at least annually.
54
   The housing assistance payments contract renewal, along with the notification of funding, is required for
authorizing the project’s continued participation and for authorizing the obligation of funds the first year.



                                                           36
In October 2015, the Office of Multifamily Housing Programs provided OCFO a funds control
plan for its review. OCFO is expected to review the plan in fiscal year 2016.

Not All HUD Programs Had a Funds Control Plan
Our review of HUD’s funds control plans found 112 program codes that were not documented in
a funds control plan. HUD’s program codes are used to identify funds obligated and spent for
specific programs and activities in its financial systems. During the first 6 months of fiscal year
2015, expenditures of $2.2 billion and obligations of $2.4 billion were made from these program
codes.

This condition was reported in prior years. In the past, HUD decided to not create funds control
plans for programs or accounts that were only spending funds and not incurring new obligations.
However, OMB Circular A-11, section 150, Administrative Control of Funds, states that the
purpose of an agency’s funds control system is to restrict both obligations and expenditures from
each appropriation of fund account to the lower of the amount apportioned by OMB or the
amount available for obligation or expenditure in the appropriation or fund account.

Additionally, HUD Handbook 1830.2, REV-5, Administrative Control of Funds, states that
proper execution of a funds control plan should provide reasonable assurance that obligations
and expenditures will not exceed the authorized limits of the allotted funds. It also states that
funds control plans must contain detailed information for the program line item or other activity
included in the allotment, broken down to the lowest level of any corresponding assignment of
funds, and list the hierarchy of accounting codes associated with each funded activity covered in
the allotment to show how funded activities are controlled and rolled up to the allotment level as
a required element of a funds control plan.

Further, OCFO did not have controls over the process for establishing new program codes in
HUD’s accounting system. Program offices were able to request a new program code without
the review and approval of the respective funds control officer, allotment holder, or OCFO.
Therefore, program codes were established without confirmation that an adequate funds control
plan had been approved. This practice resulted in decreased assurance that HUD’s funds were
obligated and disbursed in compliance with applicable laws and regulations.

FMFIA states that internal accounting and administrative controls of each executive agency must
be established in accordance with standards prescribed by the Comptroller General and must
provide assurance that obligations and costs comply with applicable law.

As a result of the lack of funds control plans for all activities and program codes, HUD did not
have documented internal controls over the obligation and disbursement of all of its funds. As a
result, it could not monitor the internal controls to ensure that they functioned effectively. This
condition caused HUD to lose traceability of transactions with the corresponding authority and
program law.




                                                 37
Funds Control Plans Were Not Kept Up to Date
We previously reported that all of HUD’s funds control plans were not updated in a timely
manner. This condition continued in fiscal year 2015. OCFO requires allotment holders to
recertify annually that internal controls to administer funds have not changed and to submit
updated plans before implementing changes. We noted the following:

      Not all offices submitted the annual certification. Specifically, only 4 of the 16 offices
       (or 25 percent) submitted their annual certification. This deficiency resulted in 66 funds
       control plans not being recertified for fiscal year 2015.

      30 of 32 salaries and expenses funds control plans had not been updated to reflect the
       implementation of HIAMS, which occurred during fiscal year 2012.

      The salaries and expenses funds control plans did not reflect the December 2012
       rescission of forms HUD-718, Funds Reservation and Contract Authority, and HUD-720,
       Requests for Contract Services, formerly used to request contract actions through OCPO.

      The funds control plan for the Office of the Chief Human Capital Officer had not been
       updated since its reorganization and renaming from the Office of Administration in 2009.
       As a result, the plan referenced divisions and offices that no longer exist.

      The funds control plans for the Section 184 Loan Guarantee program were inconsistent
       with the procedures in use. Revisions to these plans were in process during fiscal year
       2015.

These conditions existed because HUD’s allotment holders did not update their funds control
plans or notify the Chief Financial Officer in a timely manner after changes occurred. HUD
Handbook 1820.2, REV-5, states that an allotment holder must immediately advise the Chief
Financial Officer of any changes to its funds control plan during the fiscal year. Administrative
changes to the funds control plans must be communicated in writing, including the precise
timing of any changes, to the persons or positions authorized to initiate, approve, and process
actions that commit, obligate, or spend funds.

Another factor leading to the out-of-date funds control plans was OCFO’s lack of oversight and
monitoring of the program offices’ compliance with their funds control plans in prior years. The
CFO Act states that the responsibilities of an agency chief financial officer include directing,
managing, and providing policy guidance and oversight of all agency financial management
personnel, activities, and operations. Because of the lack of oversight and monitoring, OCFO
was not aware that changes within the program offices were going unreported and, therefore,
could not correct the behavior. During fiscal year 2013, OCFO’s Funds Control Assurance
Division began performing reviews of program office compliance with the funds control plans
and completed its first year of a 5-year cycle in fiscal year 2014.




                                                 38
OCFO concurred with prior-year recommendations and was implementing corrective actions. In
July 2015, OCFO identified funds control plans that required updates and requested the allotment
holders and funds control officers to provide updated plans for its review.

CFO Systems Division Did Not Document Changes To The Accounting Data
During our review, we found instances where the OCFO Systems division made changes to
accounting data that resulted in unsupported general ledger transactions. As a result, we could
not validate these transactions compliance with the program funds control process and
consistency with Federal accounting standards.
In the first instance, accounting data changes were made in September 2015 to correct $2.4
billion of Disaster program funds that were misallocated in the wrong organization code by CPD
staff in March 2015. The second instance occurred due to HUDCAPS system limitations when
OCFO, following Congressional authorization, administratively transferred Housing for the
Elderly and Disabled program funds from one appropriation fund to another.55 While our sample
found that OCFO made accounting data changes to transfer $50 million in budgetary authority
between funds, there may be additional transfers. Last year, OCFO performed similar entries for
$531 million, but did not have documentation available for review until January 2015.
In neither instance did the sample selected have a user name or the transaction description that
would enable another accountant or program staff to identify the source document and who
performed the transaction. Furthermore, the documentation provided did not support (1) that
transactions were reviewed and approved by the responsible official, (2) that accounting changes
were accurately processed; and (3) how the general ledger was impacted by the data changes
processed. This condition occurred because OCFO did not have policies or procedures requiring
staff to document the system data changes or entries affecting the Program funds general ledger
and that it be reviewed and approved. These controls are important in order to comply with
GAO Standards for Internal Control in the Federal Government which includes a standard for
performing control activities, such as proper management review and authorizations and
documentation of transactions, to ensure the establishment and maintenance of internal control in
an organization. Additionally, OMB Circular A-11 Section 150 states that per the
Antideficiency Act agencies are required to establish funds control regulations that would enable
identifying the person responsible for any obligation or expenditure.

Conclusion
HUD did not have a fully implemented and complete administrative control of funds system
during fiscal year 2015. As a result, it did not have adequate assurance that its obligations and
disbursements complied with applicable laws and limitations. HUD’s ability to determine the



55
  P.L. 112-10, Department of Defense and Full-Year Continuing Appropriations Act, 2011 approved April 15,
2011. SEC. 2256. The first proviso under the heading ‘‘Housing for the Elderly’’ and under the heading ‘‘Housing
for Persons with Disabilities’’ in division A of Public Law 111–117 are each amended to read as follows:
‘‘Provided, That amounts obligated for initial project rental assistance contracts from amounts appropriated in fiscal
year 2003 and thereafter shall remain available for the purpose of paying such obligations incurred prior to the
expiration of such amounts for a 10 year period following such expiration:’’



                                                           39
responsible parties in the event of an ADA violation was also hindered as a result of its
incomplete funds control system.

In addition, processing disbursements before the documented point of legal obligation may lead
to violations. Statistically projecting our results for the Multifamily Section 8 Rental Housing
Assistance disbursements in fiscal year 2015, we can be 95 percent confident that at least $6.06
billion in obligations and $5.42 billion in disbursements were processed without properly
authorized supporting documentation. Consequently, we were not able to validate multiple
obligation and disbursement samples to determine whether obligations incurred and
disbursements made were properly approved by the authorized official with the correct projects,
number of units, rent rates and the amount allocated.

Recommendations
Prior-year recommendations regarding this finding remained open and can be referred to in the
Followup on Prior Audits section of this report. We have one new recommendation in this
report.

We recommend the Deputy Chief Financial Officer

       7A.     Develop policies and procedures to ensure that any data changes and accounting
               adjustments processed by OCFO Systems staff that impact the general ledger are
               sufficiently documented, identifying a description of the event, the preparers of
               the adjustment, the approving officials of the adjustment, and dates when
               adjustments occurred.




                                                 40
Finding 8: HUD Continued To Report Significant Amounts of
Invalid Obligations
Deficiencies in HUD’s process for monitoring its unliquidated obligations and deobligating
balances tied to invalid obligations continued to exist. Specifically, some program offices did
not complete their obligation reviews in a timely manner, and we discovered $200.4 million56 in
invalid obligations not previously identified by HUD. We discovered another $331.1 million in
obligations that had been inactive for at least 2 years, indicating potentially additional invalid
obligations. We also discovered $30.7 million in obligations that HUD determined needed to be
closed out and deobligated during the fiscal year that remained on the books as of September 30,
2015. These deficiencies were attributed to ineffective monitoring efforts and the inability to
promptly process contract closeouts. We also noted that, as of September 30, 2015, HUD had
not implemented prior-year recommendations to deobligate $106.3 million in funds. As a result,
HUD’s unpaid obligation balances on the statement of budgetary resources were potentially
overstated by $668.5 million.

HUD Did Not Sufficiently Monitor Obligations To Ensure Timely Expenditures for Its
Disaster Recovery Program
HUD’s Disaster Recovery and Special Issues Division did not sufficiently monitor the timeliness
of expenditures within its disaster recovery program.57 As a result, grant funds were retained for
funding lines with either no disbursement activity or no disbursements within the last 2 years.58
We found 10 obligations under HUD’s disaster recovery program that met this criteria for
potentially slow-moving or stalled projects, with total undisbursed obligations of $331.1 million
as of September 30, 2015.

Of the 10 obligations, 9 funding lines from the fiscal year 2008 appropriation59 for Hurricane Ike
disaster funds showed no disbursement activity had occurred since the funds were obligated.
These funding lines were allocated in 2011, and the total undisbursed obligations totaled $263.4
million. We also identified one allocation funded by the fiscal year 2012 supplemental
appropriation60 of disaster funds with no disbursement activity since September 7, 2013. This
project was allocated more than $71.6 million and had an undisbursed obligation amount of more
than $67.6 million as of September 30, 2015.




56
   $104.3 million in homeless assistance funds, $90 million in housing obligations, and $6.1 million in
administrative obligations
57
   Federal Register, 74 FR 7244 Vol. 74, No.29, states HUD expects each state grantee to expeditiously obligate and
expend all funds, including any recaptured funds or program income, and to carry out activities in a timely manner.
58
   Federal Register, 74 FR 7244 Vol. 74, No.29 and 77 FR 22583 Vol. 77, No. 73 state funds available until
expended unless, in accordance with 31 U.S.C. 1555, HUD determines the purposes for which the appropriation has
been made have been carried out and no disbursement has been made against the appropriation for 2 consecutive
fiscal years. In such a case, HUD shall close out grant prior to expenditure of all funds.
59
   Funds appropriated under Public Law 110-329, issued September 30, 2008, 122 STAT. 3599
60
   Funds appropriated under Public Law 112-55, issued November 18, 2011, 125 STAT.



                                                         41
HUD’s interpretation of the law and related guidelines regarding the disaster programs was that
any expenditure requirements should be measured against the grant as a whole.61 HUD stated
that there was no formal requirement regarding the review of expenditure activity for separate
funding allocations under one grant. HUD generally relied on the needs assessment conducted
during the initial allocation process. No formal procedures had been developed or consistently
implemented to identify, monitor, and review these allocations to determine whether a bona fide
need62 existed for these funds as required by the Federal Register.63

We also found discrepancies in the funding status for these grants between the Disaster Recovery
Grant Reporting (DRGR) system and two of HUD’s financial systems, the Financial DataMart
and LOCCS. There were significant differences in the total reported as disbursed and
undisbursed amounts for the disaster recovery funds at fiscal yearend.

As a result, $331.1 million in obligated disaster grant funds was tied up in potentially stalled
projects instead of being used to further the purposes of the program and reallocated to eligible
States in need.

If disaster recovery funds are obligated for stalled projects, the goals of HUD’s disaster recovery
program to rebuild the affected areas and provide crucial seed money to start the recovery
process will not be achieved. Additionally, these stalled activities may represent obligations
with no bona fide need, also referred to as an invalid obligation, resulting in HUD’s unpaid
obligation balances being overstated on its consolidated statement of budgetary resources.

Unliquidated Obligations on Expired Homeless Assistance Grants Had Not Been
Recaptured by CPD
Expired Homeless Emergency and Rapid Transition to Housing – Continuum of Care (HEARTH
CoC) grants were not closed within the 90-day period after the expiration date as required by
either the program’s funds control plans or the Code of Federal Regulations.64 The Office of
Special Needs Assistance Programs (SNAP) did not implement or enforce policies and


61
   One grant may consist of several activities or projects funded by several different allocations or obligations. For
example, funding for Hurricane Ike was provided to the grantees in multiple allocations.
62
   GAO, Principles of Federal Appropriations Law, 3rd edition, chapter 5, section A, states that the concept of the
“legal availability” of appropriations is defined in terms of purpose, time, and amount. Section B states that the
bona fide needs rule is one of the fundamental principles of appropriations law. A fiscal year appropriation may be
obligated only to meet a legitimate, or bona fide, need arising in or in some cases, arising prior to but continuing to
exist in the fiscal year for which the appropriation was made.
63
   Federal Register 77 FR 22583 Vol. 77 states, “During the course of the grant, HUD will monitor the grantee’s
actions and use of funds for consistency with the plan, as well as meeting the performance and timeliness objectives
therein. The Action Plan must contain: (1) An impact and unmet needs assessment. Development of a needs
assessment to understand the type and location of community needs will enable grantees to target limited resources
to areas with the greatest need. Remaining recovery needs also evolve over time as they are met by dedicated
resources. As a result, the needs assessment and Action Plan may be considered as a living document, which
grantees may need to periodically update over time.”
64
   24 CFR 84.71(b) – “Unless HUD authorizes an extension, a recipient shall liquidate all obligations incurred under
the award not later than 90 calendar days after the funding period or the date of completion as specified in the terms
and conditions of the award or in HUD instructions.”



                                                           42
procedures to ensure that expiring contracts were closed within the 90-day period. The expired
grants with an available balance report as of October 7, 2015,65 showed that approximately 2,308
contracts, which expired between July 1, 2014, and June 30, 2015, were not closed within the 90-
day period. In addition, the remaining undisbursed obligation balances of approximately $104.3
million had not been recaptured.

Newly drafted procedures to automate and expedite the deobligation and recapture process were
still being tested because of the creation of the Office of Policy Development and Coordination
(OPDC) in October 2014. This office was created to focus on grant closeouts and audit
responses for CPD programs. SNAP had worked diligently during the fiscal year to close out
and recapture remaining funds on expired grants identified in prior-year audit reports. However,
the field offices continued to be overwhelmed with running multiple fiscal year funding
competitions simultaneously because of the cumulative effect of delays from prior years. In
addition, employee turnover and inadequate training of field staff and grantees continued to be
an issue. HUD was (1) reviewing the effectiveness of pilot processes implemented in fiscal year
2015 regarding the recapture and closeout process, (2) training field office staff, and (3)
assigning clear roles and responsibilities in the closeout and recapture process. HUD stated that
these tasks should enable SNAPS and OPDC to more regularly monitor and track the financial
status of its grants and field office compliance with the newer and more automated program
procedures to close out and recapture unexpended funds on expired contracts.

As a result, $104.3 million in grant funds was not recaptured and reallocated to be used to further
the purposes of the program or returned to Treasury. Additionally, HUD’s unpaid obligation
balances were overstated on the statement of budgetary resources.

Housing Obligations Were Inactive or Expired
As of September 30, 2015, we noted $54.4 million in project-based Section 8 funds, $36.2
million in Section 235-236 funds, and $1.3 million in Section 202-811 funds that were identified
to be deobligated but were not. HUD did not adequately monitor and deobligate unliquidated
balances from these obligations, resulting in the unpaid obligation balance on HUD’s statement
of budgetary resources being potentially overstated by $90 million. See table 3 for details.

                                                  Table 3
                                        Invalid housing obligations
                                                                         $                #
                  Project-based Section 8                          $52.5 million         228
                  Section 235-236                                  $36.2 million         477
                  Section 202-811                                   $1.3 million         29
                  Total                                             $90 million          734




65
 We used the report, dated October 7, 2015, because it accounted for transactions made within the 7 days during
which the accounting system was held open for any remaining yearend transactions.



                                                        43
Program Offices Did Not Complete Their Deobligation Certifications in a Timely Manner
and Did Not Complete Deobligations Identified During the Departmental Review
The annual departmentwide obligation review and certification process is an essential part of
HUD’s internal controls over its funding and accurate financial reporting. This review gives
OCFO assurance that its fiscal yearend obligation balance is valid and accurately valued. To
ensure adequate time for the deobligation of any invalid obligations by the end of the fiscal year,
OCFO required program offices to review and certify their obligations by June 30, 2015. We
noted that a number of program offices completed their review and certified their obligations
after the June 30 deadline. As a result, offices may be unable to process deobligations before the
end of the fiscal year (September 30).

Several offices did not complete the deobligation of the invalid obligations they identified.
During the fiscal year 2015 review, offices marked 2,105 obligations with remaining balances of
$107.9 million for deobligation. Of these, 556 obligations with remaining balances of $30.7
million were not closed out and deobligated by the end of the fiscal year.66 We attributed HUD’s
inability to process all of the closeouts and deobligations by the end of the fiscal year to delayed
certifications and a lack of monitoring of obligations throughout the year. Several HUD program
offices relied on the annual OCFO-coordinated open obligations review to assess all of their
obligations and deobligate any invalid obligations. As we have reported in prior years, while the
OCFO-coordinated review is an important internal control, it was not designed to be the sole
control over open obligations because (1) the period for review and deobligation is limited and
(2) only obligations above the predetermined threshold are required to be reviewed.

As a result, HUD’s unpaid obligation balances on the statement of budgetary resources were
overstated by $30.7 million. HUD was working to close and deobligate these obligations, and
the associated funding should be recaptured during fiscal year 2016.

HUD’s Administrative Obligation Monitoring Improved in 2015
HUD’s administrative obligations are a result of contracts entered into for the goods and services
necessary to operate, such as employee training, printing services, subscriptions, IT support, and
other service contracts. Most of these administrative obligations are made using annual
appropriations that must be used to meet a bona fide need of the fiscal year in which they were
appropriated. After the year passes and the terms of the contract have been fully executed, the
remaining balances are invalid.67 HUD’s monitoring of these obligations improved in 2015, and
$6.1 million in inactive or expired obligations had been identified as of September 30, 2015,
down from $46.1 million as of September 30, 2014. We attribute this improvement to every
program office’s certifying its obligations before September 30 this year, while three program
offices did not in 2014.




66
  Refer to Appendix B – Departmentwide Obligation Review – Schedule of Recommended Deobligations.
67
  In our review, we considered an obligation invalid if it had not had a disbursement in the last 2 years. We assume
that if the obligation has not had a disbursement in 2 years, the contract has been fully executed and it is unlikely
that future adjustments would be needed.



                                                          44
As a result, HUD’s September 30, 2015, unpaid obligation balances on the statement of
budgetary resources were potentially overstated by $6.1 million. Because most of HUD’s
administrative obligations are made using annual appropriations, not periodically reviewing their
validity throughout the fiscal year can cause HUD to lose the opportunity to use funds tied to
obligations that become invalid during the year.

Prior-Year Recommendations Had Not Been Implemented
We noted that as of September 30, 2015, prior-year recommendations regarding deobligation
amounts of $106.3 million were outstanding. Therefore, HUD’s unpaid obligations on the
statement of budgetary resources related to prior-year unimplemented recommendations were
overstated by $106.3 million. See table 4 for details.

                                             Table 4
                    Office                Program                        $
                   Office of
                                            EHLP                   $76.8 million
                   Housing
                    CPD             Homeless assistance           $29.5 million
                                    Total:                      $106.3 million

Conclusion
HUD’s processes for (1) monitoring the validity and need for its unliquidated obligations and (2)
timely closeout of expired grants continued to not be fully effective during fiscal year 2015. As
a result, we identified $531.5 million tied to expired or inactive obligations or grants that had not
completed the closeout process. Additionally, HUD did not close out all of the obligations
identified as invalid by the end of the fiscal year. This deficiency resulted in $30.7 million in
invalid obligations remaining on HUD’s books at yearend. In total, HUD’s unliquidated
obligation balance on the statement of budgetary resources was potentially overstated by $562.2
million. We also noted that as of September 30, 2015, HUD had not implemented prior-year
recommendations of $106.3 million, which also caused a potential overstatement on the
statement of budgetary resources.

HUD’s lack of an established process to reconcile the subsidiary and general ledger systems
caused differences between obligations controlling accounts and supporting records to not be
identified on a timely basis, if at all. This deficiency left unsupported or incomplete balances in
the general ledger, which were at risk of being transferred to the new accounting system.

Recommendations
We recommend that the Principal Deputy Assistant Secretary for Community Planning
Development

       8A.     Close out and deobligate the remaining balances on 2,308 expired homeless
               assistance contracts of $104,347,996. HUD should also deobligate $3,602,342 in
               102 program obligations marked for deobligation during the departmentwide open
               obligations review. Lastly, HUD should review the 57 obligations with remaining



                                                  45
              balances of $188,176 and close out and deobligate amounts tied to obligations
              that are no longer valid or needed.

       8B.    Review the open obligations totaling $331,136,395 for the 10 funding lines in
              question and determine whether a bona fide need still exists. If the funds are no
              longer needed, HUD should deobligate, recapture, and reallocate the funds to
              eligible States with a current need.

       8C.    Develop and implement a monitoring plan to review outstanding disaster grant
              activity to ensure that the expenditure rates are consistently tracked and evaluated
              and that there are specific criteria to identify slow-moving projects. The
              procedures should include a process to follow up and recommend corrective
              actions for the slow-moving projects identified, to include recapturing funds if
              necessary.
       8D.    Design and implement a policy to ensure that reconciliations of expenditure
              activity between HUD’s financial management systems and DRGR are
              periodically performed for all active disaster grant balances to ensure that
              expenditure activity is accurate in DRGR. The policy should also include
              procedures for followup and resolution of identified differences.

We recommend that the Principal Deputy Assistant Secretary for the Office of Housing-Federal
Housing Commissioner

       8E.    Deobligate all obligations marked for deobligation during the departmentwide
              open obligations review, including as much as $19,634,263 in 209 administrative
              obligations and $2,224,807 in 24 program obligations marked for deobligation as
              of September 30, 2015. Additionally, HUD should review the 225 obligations
              with remaining balances of $285,024 and close out and deobligate amounts tied to
              obligations that are no longer valid or needed.

       8F.   Review and if necessary deobligate the 228, 477, and 29 expired or inactive
             project-based Section 8, Section 235-236, and Section 202-811 projects totaling
             $52.5 million, $36.2 million, and $1.3 million, respectively.

We recommend that the Principal Deputy Assistant Secretary for Public and Indian Housing

       8G.    Deobligate all obligations marked for deobligation during the departmentwide
              open obligations review, including as much as $3,269,289 in 16 program
              obligations marked for deobligation as of September 30, 2015. Additionally,
              HUD should review the 14 obligations with remaining balances of $146,320 and
              close out and deobligate amounts tied to obligations that are no longer valid or
              needed.




                                                46
We recommend that the Chief Information Officer

       8H.    Deobligate all obligations marked for deobligation during the departmentwide
              open obligations review, including as much as $430,942 in 44 administrative
              obligations and $135,957 in 2 program obligations marked for deobligation as of
              September 30, 2015. Additionally, HUD should review the 17 obligations with
              remaining balances of $1,486,191 and close out and deobligate amounts tied to
              obligations that are no longer valid or needed.

We recommend that the Acting Chief Human Capital Officer

       8I.   Deobligate the $290,591 in 101 administrative obligations marked for
             deobligation during the departmentwide open obligations review. Additionally,
             HUD should review the 307 obligations with remaining balances of $3,761,645
             and close out and deobligate amounts tied to obligations that are no longer valid
             or needed.

We recommend that the Chief Administrative Officer

       8J.    Review the 216 obligations with remaining balances totaling $1,506,233 and
              close out and deobligate amounts tied to obligations that are no longer valid or
              needed.

We recommend that the Assistant Secretary for Fair Housing and Equal Opportunity

       8K.    Deobligate $140,165 in 41 administrative and $125,166 in 3 program obligations
              marked for deobligation during the departmentwide open obligations review.

We recommend that the Assistant Secretary for Departmental Equal Employment Opportunity

       8L.    Review the 20 obligations with remaining balances of $77,807 and close out and
              deobligate amounts tied to obligations that are no longer valid or needed.

We recommend that the Assistant Secretary for Policy Development and Research

       8M.    Deobligate $78,230 in one administrative obligation and $193,265 in five
              program obligations marked for deobligation during the departmentwide open
              obligations review.

We recommend that the Deputy Chief Financial Officer
       8N.     Review the seven administration obligations with remaining balances of
              $115,035 and close out and deobligate amounts tied to obligations that are no
              longer valid or needed.




                                                47
We recommend that the Acting Ginnie Mae Chief Financial Officer

      8O.    Deobligate the $587,198 in eight administrative obligations marked for
             deobligation during the departmentwide open obligations review.




                                              48
Finding 9: The Emergency Homeowner’s Loan Program Loan Data
Was Not Auditable
Loan balances related to EHLP were incomplete, unreliable, and not available for audit during
the fiscal year 2015 audit. This condition occurred because the loan data in HUD’s systems was
not reliable and HUD did not complete a review of the data in time for inclusion in the fiscal
year 2015 financial statements. As a result, we were unable to perform all of the audit
procedures necessary to obtain sufficient, appropriate audit evidence regarding the accuracy of
loans receivable balances related to EHLP. However, loans with a total principal of at least $116
million had not been recorded in the subsidiary ledger as of the end of fiscal year 2015,
increasing the risk of misstatement.

The EHLP Loans Receivable Balance Was Not Auditable
The direct loan and loan guarantees line item on HUD’s balance sheet did not include all loans
receivable for EHLP. The total principal amount of the EHLP loan portfolio was $246 million.
HUD did not correct the loan-level data in LAS, a subsidiary ledger that supports its general
ledger and financial statements, because of reliability problems with the EHLP loan data and the
ongoing efforts to correct them. Accordingly, there were loans with total principal of at least
$116 million that were not recorded for fiscal years 2014 and 2015. Further, we were unable to
determine other errors in the recorded balances because the data was unavailable.

We could not obtain assurance that the EHLP loans receivable balance included in HUD’s direct
loan and loan guarantees line item was accurate or complete because we were unable to perform
all of the audit procedures for the EHLP loan balances that were necessary.

EHLP Loan Data Was Incomplete and Not Reliable
Our audit of HUD’s fiscal year 2013 financial statements found that HUD did not have an
adequate subsidiary ledger with sufficient loan-level detail to support the general ledger balances
for EHLP.68 In an attempt to correct this deficiency, HUD entered loan-level detail data into
LAS in September 2014. However, a comparison of the data in the National Service Center’s
Single-Family Mortgage Asset Recovery Technology system (SMART), where the EHLP loan
files were maintained, with the data in LAS identified differences in the loan principal amounts
between the two systems. Specifically, we identified $116 million related to loan records in
SMART that were not in LAS. These differences were caused by corrupted data in LAS and an
unsuccessful attempt to correct the corruption. As we reported last year,69 this deficiency
resulted in data in LAS that was not accurate and complete and did not support the EHLP loans
receivable balances in the general ledger.

During fiscal year 2015, HUD attempted to correct the data reliability issue by performing a
“scrub” of the loan-level detail data for the 7,960 open loans in the EHLP portfolio. The scrub


68
   Audit Report 2014-FO-0003, Additional Details To Supplement Our Report On HUD’s Fiscal Years 2013 and
2012 (Restated) Financial Statements, issued December 16, 2013
69
   Audit Report 2015-FO-0004, Fiscal Years 2014 and 2013 Consolidated Financial Statements Audit, issued March
6, 2015



                                                       49
was meant to ensure the accuracy and completeness of the EHLP loan data in SMART before
another attempt was made to enter the data into LAS. The scrub included validation of the
completeness of the loan files, including the payment histories that had the final loan principal
amounts. The results of the scrub were compared to the data in SMART to identify
discrepancies. This effort began on August 19, 2015, and was not complete as of the date of this
report. We received the results to date of the scrub on September 4, 2015, and noted that 1,941
loans were missing loan files. Of the 6,019 remaining loans, there were 219 with discrepancies
in their loan amounts. HUD estimated that all discrepancies regarding loan amounts versus
payment histories would be corrected by the end of September 2015. However, HUD also stated
that it could not estimate when the 1,941 missing loan files would be located.

As a result of the incomplete loan files and unreliable data, we were unable to perform all of the
audit procedures necessary to obtain sufficient, appropriate audit evidence regarding EHLP loan
balances.

Conclusion
Loan balances for EHLP were not accurate or complete; therefore, we could not audit the
balances reported on HUD’s financial statements. This condition occurred because of a lack of
reliable loan-level data. HUD was attempting to correct this problem by performing a scrub of
the EHLP loan files. As of the date of this report, work was ongoing. As a result, we were
unable to perform all of the audit procedures necessary to obtain sufficient, appropriate audit
evidence regarding the reasonableness of EHLP loan balances reported on HUD’s financial
statements. However, we know that at least $116 million in loan principle had not been recorded
as of the end of the fiscal year.
Recommendations
Prior-year recommendations regarding this finding remained open and can be referred to in the
Follow-up on Prior Audits section of this report. We have no new recommendations in this
report.




                                                 50
Finding 10: HUD’s Computing Environment Controls Had
Weaknesses
HUD’s computing environment, data centers, networks, and servers provide critical support to
all facets of its programs, mortgage insurance, financial management, and administrative
operations. In fiscal year 2015, we audited general controls over the IBM mainframe general
support system (GSS), which houses applications that support the preparation of HUD’s
financial statements. HUD did not ensure that general controls over its computing environment
fully complied with Federal requirements. Specifically, (1) some accounts on the IBM
mainframe were not properly managed, and (2) vulnerabilities were not reported in system
security documentation. These weaknesses occurred because policies were not always followed.
In addition, although HUD had taken action to address information system control weaknesses
reported in prior years, several of those weaknesses remained. Without adequate general
controls, there was no assurance that financial management applications and the data within them
were adequately protected.
Information System Control Weaknesses Were Identified in the IBM Mainframe
The IBM mainframe houses many of HUD’s applications used to facilitate day-to-day
operations. The mainframe includes communication functionalities on multiple platforms that
provide information exchange services between users and applications. It permits authorized
HUD users to access data maintained on multiple applications and integrate the data into other
applications or process the information in its current form. In addition, the mainframe acts as a
gateway for authorized external organizations and agencies to access HUD-maintained data.
Major financial applications that operate on the IBM platform include (1) HUDCAPS, (2) the
Single Family Insurance Claims Subsystem, and (3) the Tenant Rental Assistance Certification
System.
During our review, we found70 that HUD did not ensure that information system controls over the
IBM mainframe fully complied with Federal requirements and its own security policies.
Specifically,
     1. User accounts on the IBM mainframe were not properly managed. Members of the Help
        Desk had access to a powerful system utility, although they had no business need for it.
        Additionally, two users had update privileges to datasets that were part of the IBM
        mainframe’s security application. These users had no business purpose for modifying
        these datasets. Users had these unnecessary privileges in their profiles because reviews
        of user access to the IBM mainframe did not include reviewing the user accounts to
        determine whether they followed the policy of least privilege. This failure to follow
        HUD’s IT security policy increased the risk that sensitive information could be exploited
        by malicious individuals, system integrity could be compromised, and data could be
        corrupted or disclosed.



70
 Work performed as part of our review of information system controls in support of the fiscal year 2015 audit of
HUD’s financial statements



                                                         51
     2. Vulnerabilities were not reported in system security documentation. This condition
        occurred because of an oversight by HUD’s IT support contractor. Failure to properly
        document open findings in risk assessments and security authorization documentation
        presents an inaccurate risk profile for the information system.

We Followed Up on Information System Control Weaknesses Previously Identified in the
Program Accounting System
The Program Accounting System (PAS) provides fund accountability and an integrated
subsidiary for HUD’s grant, subsidy, and loan programs. PAS interfaces nightly with
HUDCAPS and LOCCS. PAS maintains accounting records based on transactions received
from HUDCAPS and provides fund control information to LOCCS, which is used to disburse
payments for more than 100,000 projects. Together, PAS and LOCCS control outlays of more
than $30 billion annually. PAS also provides daily extracts to the Financial Data Mart and
monthly extracts to the Tenant Rental Assistance Certification System. PAS data are critical to
the success of HUD’s monthly, quarterly, and annual external reporting and audited financial
statements. PAS processes more than 66 percent of the monthly accounting transactions handled
by OCFO.

Our review in fiscal year 201471 found that HUD did not ensure that general and application
controls over PAS fully complied with Federal requirements and its own security policies. We
identified weaknesses related to access controls, error handling, processes for transaction
overrides, outdated documentation, and segregation of duties.
We followed up on the status of these weaknesses during fiscal year 2015. HUD planned to
develop and document error handling procedures and establish a documented process for
transaction overrides during the first quarter of fiscal year 2016.
We Followed Up on Information System Control Weaknesses Previously Identified in LAS
LAS is based on a commercial-off-the-shelf product and was implemented in August 2006. LAS
is a mixed financial system that performs the direct loan servicing activities required to support
HUD’s Section 202 Housing for the Elderly and Handicapped Loan Program, Section 201
Flexible Subsidy Program, Section 236 Excess Rental Income Program, Green Retrofit Program,
and EHLP. The system maintains the loan amortization schedules, generates the monthly
interest amounts due and principal amounts due, and applies collections to the interest and
principal amounts due, and all excess amounts are recorded in the project-loan suspense account.
In an audit conducted in fiscal year 2014,72 we found that the EHLP data in LAS was incomplete
and inaccurate. Specifically, (1) the loan data in LAS was incomplete, (2) the loan data initially
entered into LAS was inaccurate, and (3) the process used by HUD to correct the data for the
HUD direct loan portion of the program may not have resulted in accurate data. Controls over
the data transfer process for EHLP loan data were not secure. While a secure Web site had been
established for the fiscal agents and States to send EHLP loan information to the Office of

71
   2014-DP-0006, Information System Control Weaknesses Identified in the Program Accounting System, issued
September 23, 2014
72
   2015-DP-0004, Review of the Loan Accounting System, issued December 9, 2014



                                                      52
Housing and OCFO, the fiscal agent and State grantees, which administered the program, were
not required to transmit data via the secure Web site. In addition, controls to lock out a user after
three failed login attempts had not been implemented.
Data changes were not adequately controlled in LAS. Some access controls in LAS were not
effective. Specifically, (1) the user recertification process did not ensure that all users were
included, (2) formal procedures for granting and removing user access were not always followed,
(3) excess privileges were granted to two users, and (4) audit logs were not reviewed. Our audit
revealed that the LAS configuration management plan was outdated, documentation for
application interfaces with LAS was not consistent, and technical details required to operate the
interfaces were not included in the documentation.

We followed up on the status of these weaknesses during fiscal year 2015. HUD took actions
during the fiscal year to address the weaknesses identified with the process to make data
changes, the configuration management plan, and access controls. HUD continued to address the
weaknesses identified related to the EHLP data, the data transfer process, the review of audit
logs, and revision of the interface documentation. These actions were scheduled to be completed
during fiscal year 2016.
We Followed Up on Information System Control Weaknesses Previously Identified in
LOCCS
LOCCS is HUD’s primary system for disbursement, cash management, and postaward of
financial grants. It is a mission-critical system, with approximately 20,000 users. LOCCS is an
integral part of OCFO’s core financial management system. It manages disbursements for most
HUD programs. LOCCS is available 7 days a week to service the funding needs of HUD’s
grant, loan, and subsidy clients. Users typically access LOCCS through Web-enabled modules
or by using the Voice Response System (VRS). VRS is a hardware component relied upon by
approximately 5,000 users. It allows recipients to request payments via a question and answer
session using a touch-tone telephone.

Our fiscal year 2013 audit of LOCCS73 found that (1) the LOCCS VRS was not covered by a
hardware maintenance agreement, (2) LOCCS disaster recovery testing did not include all of the
essential components, (3) LOCCS access controls needed updates, (4) some of the LOCCS
system documentation was outdated, and (5) the separation of duties between the LOCCS
voucher processing and banking groups had not been fully achieved.

We followed up on the status of these weaknesses during fiscal year 2015. HUD had addressed
four of the five weaknesses identified during the audit and was working to ensure that future
LOCCS disaster recovery testing includes all of the essential components.




73
  2014-DP-0001, Information System Control Weaknesses Identified in the Line of Credit Control System, issued
November 7, 2013. This was a limited distribution report due to the sensitive nature of the information reported,
and was, therefore, not made available to the public.



                                                         53
We Followed Up on Information System Control Weaknesses Previously Identified in
HUD’s Intranet GSS
In an audit we conducted in fiscal year 2014,74 we reviewed controls over HUD’s Intranet GSS.
We found that OCIO did not have documentation that sufficiently defined the segregation of
duties or procedures for evaluating compliance with the segregation of duties for users with
above-read access to the Intranet GSS and its interconnected systems. We also found that
security management documentation was not always complete, accurate, or current. Not all
security management program documents were updated to reflect current conditions; some
information on HUD’s IT security Web site was outdated, inaccurate, or unavailable; and minor
applications did not have valid authorizations to operate.
We followed up on the status of these weaknesses during fiscal year 2015. HUD had taken
action to correct segregation of duties weaknesses and planned to address the security
management weaknesses by the third quarter of fiscal year 2016.

We Followed Up on Weaknesses Identified During the Fiscal Year 2013 Review of
Information Systems Controls in Support of the Financial Statements Audit
During fiscal year 2013, we reviewed policies and processes applicable to HUD’s continuous
monitoring program.75 Continuous monitoring is maintaining ongoing awareness of information
security, vulnerabilities, and threats to support organizational risk management decisions.
HUD’s continuous monitoring program needed improvements in its design to strengthen the
collecting and reporting of information security data. The improvements would also increase
assurance of the accuracy and reliability of the business and financial processes that the IT
systems support. We followed up on the status of these weaknesses and found that HUD had
developed and implemented a schedule to perform vulnerability scans for applications that
support the financial statements. Additionally, HUD completed the development of its
Information Security Continuous Monitoring Strategy and Program and the HUD Security
Assessment Authorization Continuous Monitoring Guide during fiscal year 2014. These
documents clarify HUD’s continuous monitoring policies. HUD completed the corrective
actions for the remaining weaknesses during fiscal year 2015.
While observing the semiannual disaster recovery exercise in April 2013, we noticed that
telecommunication links were not in place for transmitting data to Treasury from the recovery
site. OCIO had a memorandum of understanding with Treasury to allow HUD applications to
transfer business and budgetary information for action required by Treasury. The “Disasters and
Other Contingencies” clause in the memorandum required the designated technical staff to
immediately notify the designated counterpart in the event of a disaster or other contingency that
disrupts the normal operation of the connected systems. The memorandum did not contain
alternate provisions for the connection to be resumed at an alternate site. Upon further inquiry,
we determined that there were no contingency plans in place for resuming operation of the
telecommunication links to Treasury during a disaster recovery event.

74
   2015-DP-0005, Fiscal Year 2014 Review of Information Systems Controls in Support of the Financial Statements
Audit, issued February 24, 2015
75
   2014-DP-0005, Fiscal Year 2013 Review of Information Systems Controls in Support of the Financial Statements
Audit, issued April 30, 2014



                                                       54
We followed up on the status of this weakness during fiscal year 2015. HUD planned to work
with Treasury to develop, implement, and document the plan for resuming telecommunication
links to Treasury when HUD is processing from the alternate site. HUD expected to complete
this action during the first quarter of fiscal year 2016.
Conclusion
HUD’s computing environment provides critical support to all facets of its programs, mortgage
insurance, financial management, and administrative operations. During fiscal year 2015, as in
prior years, we continued to identify information systems control weaknesses that could
negatively affect HUD’s ability to accomplish its assigned mission, protect its data and IT assets,
fulfill its legal responsibilities, and maintain its day-to-day functions. As a result, we continued
to report a significant deficiency for HUD’s computing environment.
Recommendations
Recommendations were included in separate OIG audit reports. Therefore, no recommendations
are reported here.




                                                  55
Compliance With Laws and Regulations
In fiscal year 2015, we found instances in which HUD did not ensure that transactions were
executed in accordance with laws governing the use of budget authority and with other laws and
regulations that could have a direct and material effect on the financial statements and any other
laws, regulations, and governmentwide policies identified in OMB audit guidance.




                                                 56
Finding 11: HUD’s Financial Management System Did Not Comply
With the Federal Financial Management Improvement Act
We have reported on HUD’s lack of an integrated financial management system annually since
1991. In fiscal year 2015, we noted a number of instances of FFMIA noncompliance with
HUD’s financial management system. HUD’s continued noncompliance was due to a reliance
on financial system limitations and information security weaknesses. While HUD continued to
work toward financial management system modernization in 2015, significant challenges
remained.

Agency and OIG FFMIA Compliance Determinations
FFMIA, section 803(a), requires chief financial officer agencies to establish and maintain
financial management systems that comply substantially with (1) Federal financial management
systems requirements,
                    
                      (2) applicable Federal accounting standards, and (3) the USSGL at the
transaction level. FFMIA also requires agencies and their auditors to determine annually
whether an agency’s financial management system (including primary or general ledger
accounting systems and subsidiary or “mixed” systems) complies with those requirements.

As of September 30, 2015, we noted multiple instances in which HUD did not substantially
comply with the three section 803(a) elements of FFMIA. We tested compliance with FFMIA in
accordance with OMB Circular No. A-123, Appendix D, Compliance with the Federal Financial
Management Improvement Act of 1996.76

HUD also concluded that the agency and its financial management system did not substantially
comply with each element of FFMIA. Refer to table 5 for details.

                                          Table 5
                     Compliance with Section 803(a) elements of FFMIA
                                           Agency                 Auditor
                                      Lack of substantial    Lack of substantial
            1. System requirements
                                      compliance noted       compliance noted
                                      Lack of substantial    Lack of substantial
            2. Accounting standards
                                      compliance noted       compliance noted
            3. USSGL at transaction   Lack of substantial    Lack of substantial
            level                     compliance noted       compliance noted


As of Septemer 30, 2015, HUD reported that 5 of 40 financial systems did not comply with the
requirements of FFMIA. For areas of FFMIA noncompliance, each agency must identify
remediation activities that are planned and underway, describing target dates and offices


76
  OMB Memorandum M-13-23 (OMB Circular A-123, appendix D) (October 21, 2013, accessed October 8, 2015);
http://www.whitehouse.gov/sites/default/files/omb/memoranda/2013/m-13-23.pdf




                                                   57
responsible for bringing systems into substantial compliance with FFMIA.77 Refer to HUD’s
2015 agency financial report for additional details.

In addition, when auditors disclose a lack of substantial compliance with one or more of the
section 803(a) requirements, FFMIA requires that auditors provide additional details regarding
the noncompliance.78 Refer to appendix C for additional details.

As the combined impact of HUD’s system limitations expands beyond the scope of the updated
FFMIA framework, the system flaws identified as instances of FFMIA noncompliance are
further described in the internal control section of this report as deficiencies contributing to a
related material weakness.

Entity-Wide Non-Compliance With Federal Financial Management System Requirements
We noted that HUD is not substantially compliant with Federal financial management system
requirements because of pervasive information security weaknesses at the entity-level and within
various financial systems identified by the FISMA review and other separate evaluations. The
heads of agencies and their offices of inspectors general or independent auditors, as applicable,
are required to annually report on the adequacy and effectiveness of information security
policies, procedures, and practices, including any "major information security incident" or
"related sets of incidents." FISMA requires agencies to provide information security controls
commensurate with the risk and potential harm of not having those controls in place. The heads
of agencies and offices of inspectors general are required to annually report on the compliance
and effectiveness of the agency program.4 The fiscal year 2015 independent evaluation of the
HUD IT security program found weaknesses in multiple areas which is discussed further in a
limited distribution report issued to HUD.

Conclusion
We reviewed HUD’s compliance with FFMIA as of September 30, 2014, and found instances of
substantial noncompliance with each of the section 803(a) elements within HUD’s financial
management system. Despite legacy system modernization efforts in 2015, we continued to
report that HUD’s financial systems did not substantially comply with FFMIA as of September
30, 2015.

Recommendations
There are no new recommendations in this area.




77
   OMB Circular A-136, Revised (August 4, 2014, accessed October 8, 2015);
https://www.whitehouse.gov/sites/default/files/omb/assets/OMB/circulars/a136/a136_revised_2015.pdf
78
   OMB Bulletin 15-02, Audit Requirements for Federal Financial Statements, (August 4, 2015, accessed October 8,
2015); https://www.whitehouse.gov/sites/default/files/omb/bulletins/2015/15-02.pdf




                                                        58
Finding 12: HUD Continued To Not Comply With the HOME
Investment Partnership Act
HUD continued to not comply with section 218(g) of the HOME Investment Partnership Act
(also known as the HOME Statute) regarding grant commitment requirements. HUD’s
misinterpretation of the plain language in the Act, the implementation of the cumulative method
and the FIFO technique, and the current recapture policies continued to result in HUD’s
noncompliance with HOME Statute requirements. Further, HUD’s corrective action plan to
modify IDIS to assess grantee compliance on a grant-by-grant basis for fiscal year 2015 and later
grants was halted due to budget shortfalls. As a result, HUD incorrectly permitted some
jurisdictions to retain, commit, and disburse HOME Investment Partnerships Program grant
funds beyond the statutory deadline. HUD will continue to be noncompliant with related laws
and regulations until the cumulative method is no longer used to determine whether grantees
meet commitment deadlines required by the HOME Statute. Additionally, we concluded that
these conditions created the potential for an ADA violation, which was reported to OCFO in an
audit memorandum.79 Lastly, allowing grantees to disburse funds from commitments made
outside the 24-month statutory period may have caused HUD to incur improper payments.

HUD Policies Did Not Comply With the HOME Statute
The HOME Statute required HUD to establish a HOME Investment Trust Fund for each
participating jurisdiction (grantee), with a line of credit that included the grantee’s annual
allocation. The Statute also required each grantee to place all of its annual allocation’s funds
under a binding commitment within 24 months after it received its line of credit. Failure to do
so would result in the grantee’s losing its right to draw any funds that were not placed under
binding commitment within the 24 months and required HUD to make such reductions and
reallocate the funds as soon as possible.

HUD implemented a flawed process, called the cumulative method, to determine a grantee’s
compliance with the requirements of section 218(g) of the Statute and determine the amount to
be recaptured and reallocated with section 217(d). HUD measured compliance with the
commitment requirement cumulatively, disregarding the allocation year used to make the
commitments.

Further, as discussed in finding 1 of this report, HUD also implemented the FIFO method to
commit HOME program funds, which made it difficult to determine which commitments were
made during the 24-month period. We continued to find this FIFO method to be a departure
from Federal GAAP.

Our audit results indicated that the use of a noncumulative method would result in a number of
grantees that would not meet the 24-month commitment deadline, resulting in grant funds that
could possibly have been recaptured and reallocated. We determined the commitment status,
based upon a noncumulative approach, for 309 grantees for the 2013 annual allocation

79
  Audit Memorandum 2015-FO-0801, Potential Antideficiency Act Violation HOME Investment Partnerships
Program, issued June 16, 2015



                                                    59
commitment requirement and noted that 185 grantees had met the commitment requirement
based upon HUD’s cumulative method but did not meet the requirement based upon OIG’s
noncumulative method. We also noted that 37 grantees did not meet the requirement based on
either method. This discrepancy resulted in a total net difference of $38.6 million, which should
have been recaptured and reallocated if HUD had used the noncumulative calculation and
grantees did not provide evidence to support commitments that were not entered into IDIS
Online.

Use of the Cumulative Method May Have Caused Improper Payments
During the fiscal year 2013 audit, we identified three grantees that committed grant funds
beyond the 24-month statutory deadline using the noncumulative commitment method. The
three grantees were recipients of the fiscal year 2010 grant year allocation of HOME program
funds, which had a 24-month commitment deadline that fell in fiscal year 2012. We followed up
on the status of these grantees during the fiscal year 2015 audit. We obtained disbursement data
for these three 2010 grantees as of July 31, 2015, and determined that they had disbursed
approximately $950,000 from the commitments they made after their 24-month commitment
deadline expired in fiscal year 2012. We believe that the $950,000 disbursed from commitments
outside the 24-month statutory period meets the criteria of an improper payment. According to
OMB Circular A-123, appendix C, an improper payment is any payment that should not have
been made or that was made in an incorrect amount under statutory, contractual, administrative,
or other legally applicable requirements.

Use of the Cumulative Method May Have Caused ADA Violations
We reported to HUD in an audit memorandum80 in June 2015 that these conditions met the
criteria for an ADA violation. ADA prohibits Federal agencies from making or authorizing an
expenditure or obligation exceeding an amount available in an appropriation or fund for the
expenditure or obligation. It also prohibits HUD from obligating the Government to pay money
before funds have been appropriated for that purpose unless otherwise allowed by law (31 U.S.C.
(United States Code) 1341(a)(1)(B)). Additionally, it prohibits HUD from accepting voluntary
services for the United States or employing personal services not authorized by law, except in
cases of emergency involving the safety of human life or the protection of property (31 U.S.C.
1342), or making obligations or expenditures in excess of an apportionment or reapportionment
or in excess of the amount permitted by agency regulations (31 U.S.C. 1517(a)).

We determined that the cumulative method to determine compliance with the HOME Statute’s
24-month commitment deadline incorrectly permitted some jurisdictions to retain and commit
HOME program funds beyond the statutory commitment deadline. If funds are retained by
grantees beyond the statutory deadline, HUD may incur an ADA violation if the funds that are
inappropriately retained and not recaptured remain available for obligation or expenditure by the
grantee. OCFO opened an investigation to review this matter after reviewing our June 2015
memorandum.



80
  Audit Memorandum 2015-FO-0801, Potential Antideficiency Act Violation HOME Investment Partnerships
Program, issued June 16, 2015



                                                    60
Changes To Eliminate the Cumulative Method Were Underway But Were Halted
In fiscal year 2013, CPD agreed to implement changes to IDIS Online to eliminate the FIFO
method for fiscal year 2015 CPD formula grants (including the HOME program) beginning
September 30, 2014. CPD stated that once the applicable changes were made to the HOME
regulations and IDIS Online, HUD would stop using the cumulative method for determining
compliance with the HOME 24-month commitment requirement for fiscal year 2015 grants. In
doing so, CPD would comply with section 218(g) of the HOME Statute for grants obligated after
the system changes are implemented. Despite our position to have changes applied prospectively
as well as retroactively, CPD decided that compliance with the 24-month statutory commitment
requirement for funds obligated before the system and regulatory changes would still be
determined on a cumulative basis. For funds obligated after the system and regulatory changes,
compliance would be determined on a grant-specific basis.

However, in fiscal year 2015, steps to eliminate the FIFO logic from IDIS Online were halted
due to budget shortfalls that impacted this project. Although FIFO had been removed from fiscal
year 2015 and forward grants, modifications to IDIS were still necessary for the system to
comply with FFMIA and the USSGL at the transaction level. Among the remaining work, CPD
must ensure that IDIS ties disbursements to specific commitments for the HOME program and
that historical data at the transaction level are maintained by the system. This requirement
includes transactions to account for subgranted amounts, collections, program income, and
manual disbursements.

As of September 30, 2015, CPD was waiting for the expenditure plan to be approved by OCIO
so that the IT contractor could start work on the elimination plan. The expenditure plan was for
more than $1.8 million, which would leave a funding gap of $150,000 because the IT contractor
estimated a cost of $2 million to complete the project.

CPD’s plan as of the date of this report was to start work again on the IDIS project by November
2015. CPD would provide the workplans from the IT contractor to explain the plan for
completing the remaining work to make IDIS compliant with the USSGL and FFMIA.

Conclusion
Although FIFO had been removed from fiscal year 2015 and forward grants, modifications to
IDIS were still necessary for the system to comply with FFMIA and the USSGL at the
transaction level. Among the remaining work, CPD must ensure that IDIS ties disbursements to
specific commitments for the HOME program so that compliance with the HOME Statute can be
made on a grant-by-grant basis. We also concluded that these conditions created the potential for
an ADA violation and improper payments.

We will continue to work with CPD and OCFO to monitor the progress of HUD’s plan to
eliminate the FIFO and cumulative methods. During the next fiscal year, we will ensure that
IDIS uses a non-FIFO method to disburse fiscal year 2015 and 2016 CPD formula grants and
commit HOME funds and that the cumulative method for determining compliance with the
HOME Statute is no longer being used. Further, we will continue to ensure that there is an




                                                61
appropriate audit trail for these processes and that OCFO continues to investigate the potential
for an ADA violation due to these conditions.

HUD will continue to be noncompliant with the HOME Statute until the cumulative method is
no longer used to determine whether commitment deadlines required by the Statute are met by
the grantees. As a result, we will continue to report that HUD is noncompliant with related laws
and regulations until the cumulative method is no longer used.

Recommendations
Prior-year recommendations regarding this finding remained open and can be referred to in the
Follow-up on Prior Audits section of this report. We have provided new recommendations
below.

We recommend that the Deputy Chief Financial Officer

       12A.    Implement a payment recapture audit for the HOME program, specifically to
               identify and recapture improper payments made as a result of the continued use of
               the cumulative method.


       12B.    Include the HOME program in the next annual improper payment risk assessment
               and ensure that the impact of the cumulative method to meet commitment
               deadlines is included in the risk assessment process to evaluate the susceptibility
               to significant improper payments.




                                                 62
Finding 13: HUD Did Not in Comply With Treasury’s Financial
Manual Rules on Cash Management or 2 CFR Part 200
HUD did not comply with Treasury’s cash management regulations81 and 2 CFR (Code of
Federal Regulations) Part 20082 because HUD’s PHAs maintained Federal cash in excess of their
immediate disbursement need. Specifically, MTW PHAs reported maintaining $573 million and
$466.5 million as of September 30, 2014, and September 30, 2015, respectively. In addition,
non-MTW PHAs held between $81 million and $106 million for up to 6 months before these
funds were transitioned back to HUD. This condition occurred because HUD could not quantify
the amount of MTW accumulations that existed or how much it should move. Additionally,
HUD did not have a system to perform (1) cash reconciliations to identify accumulations and (2)
offsets to transition accumulations back to HUD in a timely manner. Since PHAs maintained
these funds in excess of their immediate disbursement needs for extended periods, HUD did not
comply with Treasury’s cash management regulations or the related CFR regulations, and it
could not ensure that these funds were properly safeguarded against fraud, waste, and abuse.

MTW PHAs Continued To Maintain Housing Choice Voucher Funds in Excess of
Immediate Disbursement Need
HUD provided HAPs to its MTW PHAs to cover monthly voucher expenses. However, HUD
disbursed HAPs that far exceeded PHAs’ HAP expenses. In fiscal year 2013, PIH
acknowledged this problem and worked to address it. However, PHAs reported holding $573
million as of September 30, 2014, and PIH’s most recent estimate showed that as of September
30, 2015, MTW PHAs still held approximately $466.5 million. These reserves accumulated
because HUD’s HAPs were estimated based on the PHAs’ prior quarter expenses, and when
estimated HAP expenses exceed actual HAP expenses, reserves accumulate.

In fiscal year 2013, PIH implemented procedures to track and offset excess funding provided to
its non-MTW PHAs. Unfortunately, this process did not include MTW PHAs. PIH did not
include MTW PHAs in the offset process because, unlike non-MTW PHAs, HUD had not
tracked MTW PHAs’ accumulations and did not receive information on their total actual
expenses. Without this information, HUD could not estimate and monitor accumulations. In our

81
   Treasury Financial Manual Vol. 1, Part 4A, Section 2045.10, Cash Advances Establishing Procedure for Cash
Advances, section 3, states, “It is the responsibility of grantor agencies to monitor the cash management practices of
their recipient organizations to ensure that Federal cash is not maintained by them in excess of immediate disbursing
needs. Agencies must establish systems and procedures to assure that balances are maintained commensurate with
immediate disbursing needs, excess balances are promptly returned to the Treasury; and advance funding
arrangements with recipient organizations unwilling or unable to comply are terminated.”
82
   Regulations at 2 CFR 200.305 state, “For non-Federal entities other than States, payments methods must minimize
the time elapsing between the transfer of funds from the United States Treasury or the pass-through entity and the
disbursement by the non-Federal entity whether the payment is made by electronic funds transfer, or issuance or
redemption of checks, warrants, or payment by other means.” The regulations further state, “Advance payments to a
non-Federal entity must be limited to the minimum amounts needed and be timed to be in accordance with the
actual, immediate cash requirements of the non-Federal entity in carrying out the purpose of the approved program
or project. The timing and amount of advance payments must be as close as is administratively feasible to the actual
disbursements by the non-Federal entity for direct program or project costs and the proportionate share of any
allowable indirect costs.”



                                                          63
fiscal year 2014 audit, we recommended that HUD quantify and move funding in excess of
MTW PHA immediate disbursement needs. However, since HUD waited until July 2015 to
collect information on MTW reserves, it still could not quantify the amount it should transition.83
Additionally, since HUD did not require MTW PHAs to report non-HAP expenses,84 PIH could
not perform the procedures established in 2013 to offset new MTW reserve accumulations.

PIH’s Cash Management Process Did Not Offset Excess Accumulations in a Timely
Manner
PIH’s cash management process for non-MTW PHAs continued to be manual, which did not
allow for offsets of excess accumulations in a timely manner.85 For example, HUD provided
$106 million in excess funding from October to December for non-MTW PHAs in 2014 but did
not offset it until May and June 2015. HUD also identified $81 million in excess funding
provided from January to March but did not offset it until July and September 2015. Finally, as
of September 30, 2015, PIH had not offset $41 million it identified as excess funding provided
from April to June 2015, and it had not completed cash reconciliations from July to September
2015 to identify newly accumulated excess reserves. This condition occurred because PIH’s
cash management process was still manual86 despite our recommendation in fiscal year 2014. As
discussed in finding 2, we previously recommended that PIH implement a system to automate
the process. However, as of the date of this report, HUD had not provided an adequate
management decision on how it planned to address this recommendation.
Conclusion
HUD did not comply with Treasury’s cash management regulations and 2 CFR Part 200 because
HUD’s PHAs maintained cash in excess of their immediate disbursement need totaling and
approximately $507 million87 as of September 30, 2015. This condition occurred because HUD
could not quantify the amount of MTW accumulations it should transition and it did not have a
system to perform cash reconciliations and offsets in a timely manner. This system is essential
in identifying and recovering funds advanced in excess of immediate disbursement needs. Since
PHAs maintained these funds, HUD did not comply with Treasury’s cash management
regulations or the related CFR regulations, and it could not ensure that these funds were properly
safeguarded against fraud, waste, and abuse.




83
   See finding 2 for more information on PIH’s process for valuing MTW PHA reserves. Additionally, although
PIH estimated an amount for financial reporting purposes, it reported that before transitioning any funds, it needed
to conduct comprehensive reviews in 2016 to validate the amounts held and the amounts that should be transitioned.
84
   PIH must know the PHAs’ HAP and non-HAP expenses to perform cash reconciliations. PIH reported that it
could not require such reporting because of the Paperwork Reduction Act. In fiscal year 2015, HUD submitted the
Paperwork Reduction Act exemption to OMB but had not received approval.
85
   See finding 2 for more information on the manual process and system limitations.
86
   See finding 2 for more information on PIH’s manual cash reconciliation process.
87
   As of September 30, 2015, PIH estimated that MTW PHAs held $466 million and non-MTW PHAs held $41
million that were not offset from cash reconciliations. $466.5 million + $41 million = $507.5 million



                                                          64
Recommendations
Several prior-year recommendations regarding this finding for the Housing Choice Voucher
program remained open and can be referred to in the Follow-up on Prior Audits section of this
report. In addition to the prior-year findings, we have the following new recommendation.

We recommend that the Assistant Secretary of Public and Indian Housing

       13A. Complete any outstanding validation reviews and transition back as much as
            $466.5 million in Housing Choice Voucher program funding from MTW PHAs
            and $41 million from non-MTW PHAs.




                                               65
Finding 14: HUD Reported 14 ADA Violations in October 2015,
and OIG Referred One Potential ADA Violation to HUD
In fiscal year 2015, HUD OCFO88 made demonstrable progress and remedied longstanding issues
related to reporting requirements of ADA in October 2015.89 As of September 30, 2015, all
confirmed ADA violations were with OMB for review and approval. We noted that in October
2015, HUD reported 14 ADA violations that occurred between 2004 and 2014 to the President,
GAO, and Congress. Additionally, during the course of our 2015 audit, we noted a potential
ADA violation regarding the HOME Investment Partnerships Program.

ADA Violation Reports Remained in Process at OMB
While ADA cases associated with probable violations had not been reported to the President,
Congress, and the Comptroller General as of September 30, 2015, HUD reported 14 ADA
violations that occurred between 2004 and 2014 in October 2015.

Since fiscal year 2009,90 we have reported on HUD’s slow-moving progress in conducting,
completing, and closing the investigation of potential ADA violations. During the audit, we
noted that HUD had made substantial headway in reviewing old cases and reporting on
confirmed ADA violations. HUD reported these issues to the President, Congress, and GAO in
October 2015. This is an important milestone and going forward without the legacy ADA
backlog, HUD should continue to perform timely review and reporting of potential ADA
violations.

HUD’s ADA case processing timeframe policy is to complete the end-to-end review within 1
year of referral or notification.

Potential ADA Violation Regarding HOME Investment Partnerships Program
As discussed in finding 12, we noted a potential ADA violation regarding HOME Investment
Partnerships Program funds based on HUD’s implementation of the cumulative method to meet
commitment deadlines and its use of the FIFO method to commit and disburse funds for this
program.91 We found that HUD’s use of the cumulative method to determine compliance with
the HOME Statute’s 24-month commitment deadline incorrectly permitted some jurisdictions to
retain and commit HOME program grant funds beyond the statutory commitment deadline. If


88
   Public Law 108-7, Division K, Title II, Department of Housing and Urban Development Appropriations, 2003,
granted HUD’s Chief Financial Officer, in consultation with the HUD budget officer, the “sole authority” to
investigate potential or actual violations under ADA and all other statutes and regulations related to the obligation
and expenditure of funds made available in any act. Further, the Appropriations Act provided that the Chief
Financial Officer must determine whether violations occurred and submit the final reports required by law.
89
   31 U.SC. 1341, 1342, 1350, 1517, and 1519. Once it has been determined that there has been a violation of 31
U.S.C 1341(a), 1342, or 1517(a), the agency head “shall report immediately to the President and Congress all
relevant facts and a statement of actions taken” in accordance with 31 U.S.C. 1351 and 1517(b).
90
   See OIG’s fiscal year 2009 audit report 2010-FO-0003 for details.
91
   Audit Report 2015-FO-0801, Potential Antideficiency Act violation HOME Investment Partnerships Program,
issued June 16, 2015




                                                           66
funds are retained by grantees beyond the statutory deadline, HUD may incur an ADA violation
because funds remain available for obligation or expenditure by the grantee. ADA prohibits
Federal agencies from making or authorizing an expenditure or obligation exceeding an amount
available in an appropriation or fund for the expenditure or obligation. In fiscal year 2015, we
found that HUD continued to use the cumulative method for determining compliance with the
commitment requirements of the HOME Statute. Therefore, we concluded that the conditions
remained and the potential for an ADA violation continued to exist. We made recommendations
regarding this potential ADA violation, which remained outstanding as of September 30, 2015.

Conclusion
HUD reported on 14 confirmed ADA violations in October 2015 to the President, GAO, and
Congress. While it was not able to report these violations as of September 30, 2015, HUD had
made significant progress and should continue to review and report on potential ADA violations
in a timely manner.

Recommendations
Many prior-year recommendations regarding this finding will be closed due to the progress made
regarding ADA violation reporting. We have no new recommendations in this report.




                                                67
Finding 15: HUD Did Not Comply With the Improper Payments
Elimination and Recovery Act of 2010
For fiscal year 2014, HUD OIG’s Improper Payments Elimination and Recovery Act (IPERA)
audit92 found that HUD did not comply with IPERA because it (1) did not include all
accompanying materials required by OMB in its published fiscal year 2014 agency financial
report and (2) did not conduct a compliant program-specific risk assessment for each program.
Specifically, HUD did not adequately report on its supplemental measures as required by OMB,
and its risk assessment did not include a review of all relevant OIG audit reports. This is the
second year in a row that HUD did not comply with IPERA. Additionally, significant improper
payments in HUD’s rental housing assistance programs continued during fiscal year 2014.

HUD Did Not Completely and Accurately Report All Information on Improper Payments
and Its Recovery Efforts
HUD must meet six requirements included in IPERA to comply with it. One of these
requirements is to publish an agency financial report for the most recent fiscal year and post that
report and any accompanying material required by OMB on the agency Web site. However,
HUD’s fiscal year 2014 agency financial report did not include a summary of its supplemental
measures, which included all elements required by OMB Circular A-123, Appendix C, Part III,
Requirements for Implementing Executive Order 13520. This condition occurred because HUD
did not have written procedures to ensure the reporting of complete and accurate information.
As a result, HUD did not comply with IPERA.

HUD’s Improper Payments Risk Assessments Had Deficiencies
HUD did not include all relevant OIG audit reports in its fiscal year 2014 improper payments
risk assessments. 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 accounting practices for its formula grant
programs, a finding on noncompliance with the HOME Investment Partnership Act, and a
finding on noncompliance with Federal financial management system requirements for the
system used to make disbursements for CPD’s formula grant programs. These findings indicated
potentially significant improper payments.

Additionally, 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 instead only considered the number of audit reports
issued when determining a program’s susceptibility to improper payments. 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.




92
 Audit Report 2015-FO-0005, Compliance With the Improper Payments Elimination and Recovery Act, issued
May 15, 2015



                                                    68
As a result of these two weaknesses in its improper payments risk assessments, HUD did not
comply with the IPERA requirement to conduct a program-specific risk assessment for each
program or activity.

Significant Improper Payments in Rental Housing Assistance Programs Continued
An improper payment is any payment that should not have been made or that was made in an
incorrect amount under statutory, contractual, administrative, or other legally applicable
requirements. HUD’s rental housing assistance programs, consisting of (1) Public Housing
Operating Subsidy, (2) Section 8 Housing Choice Voucher and Modern Rehabilitation, and (3)
multifamily owner-administered project-based programs, continued to report significant amounts
of improper payments. OMB Circular A-123, Appendix C, Requirements for Effective
Estimation and Remediation of Improper Payments, defines significant improper payments as
gross annual improper payments 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 reported
or (2) $100 million (regardless of the improper payment percentage of total program outlays).

HUD’s most recent contracted quality control study93 for fiscal year 2014 estimated that program
administrator error contributed to gross improper payments of $247.6 million in public housing,
$392.3 million in Section 8 Housing Choice Voucher and Modern Rehabilitation, and $129.5
million in multifamily owner-administered project-based programs. Improper payments due to
tenants intentionally not reporting income amounted to $119.3 million in Public Housing
Operating Subsidy, $221.8 million in Section 8 Housing Choice Voucher and Modern
Rehabilitation, and $63.8 million in multifamily owner-administered project-based programs.
HUD did not conduct a study to estimate improper payments from administrator billing errors for
fiscal year 2014 but instead used a previously estimated amount and adjusted it for inflation for
an estimate of $107.6 million. In total, HUD made an estimated $1.28 billion in improper
payments during fiscal year 2014.

Conclusion
HUD did not comply with IPERA for fiscal year 2014 because (1) it did not include all OMB-
required elements related to its supplemental measures in its agency financial report and (2) the
fiscal year 2014 risk assessment was significantly deficient because it did not include a review of
all relevant audit reports and did not consider the dollar amounts associated with OIG and GAO
audit reports or HUD’s program monitoring findings. As a result, HUD officials and other users
of the agency financial report, 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. Additionally, the deficiencies in its risk assessment process may cause HUD to
underestimate the susceptibility of its programs to significant improper payments.




93
  FY [fiscal year] 2014 Quality Control for Rental Assistance Subsidy Determinations, issued September 25, 2015.
This report was produced for HUD by ICF International. The study was based on analyses of a statistical sample of
tenant files, tenant interviews, and third-party documents verifying income.



                                                        69
Recommendations
Recommendations were included in a separate OIG audit report. Therefore, no
recommendations are reported here.




                                             70
Scope and Methodology
We considered internal controls over financial reporting by obtaining an understanding of the
design of HUD’s internal controls, determined whether these internal controls had been placed
into operation, assessed control risk, and performed tests of controls to determine our auditing
procedures for the purpose of expressing our opinion on the principal financial statements. We
also tested compliance with selected provisions of applicable laws, regulations, and government
policies that may materially affect the consolidated principal financial statements.
We considered HUD’s internal controls over required supplementary stewardship information
reported in HUD’s fiscal year 2015 agency financial report by obtaining an understanding of the
design of HUD’s internal controls, determined whether these internal controls had been placed
into operation, assessed control risk, and performed limited testing procedures as required by the
American Institute of Certified Public Accountants, U.S. Auditing Standards, AU-C, Section
730, Required Supplementary Information. The tests performed were not to provide assurance
on these internal controls, and, accordingly, we do not provide assurance or an opinion on such
controls.
With respect to internal controls related to performance measures to be reported in
management’s discussion and analysis and HUD’s fiscal year 2015 agency financial report, we
obtained an understanding of the design of significant internal controls relating to the existence
and completeness assertions as described in section 230.5 of OMB Circular A-11, Preparation,
Submission, and Execution of the Budget. We performed limited testing procedures as required
by AU-C, Section 730, Required Supplementary Information, and OMB Bulletin 15-02, Audit
Requirements for Federal Financial Statements. Our procedures were not designed to provide
assurance on internal controls over reported performance measures, and, accordingly, we do not
provide an opinion on such controls.
To fulfill these responsibilities, we

   Examined, on a test basis, evidence supporting the amounts and disclosures in the
    consolidated principal financial statements;
   Assessed the accounting principles used and the significant estimates made by management;
   Evaluated the overall presentation of the consolidated principal financial statements;
   Obtained an understanding of internal controls over financial reporting (including
    safeguarding assets) and compliance with laws and regulations (including the execution of
    transactions in accordance with budget authority);
   Tested and evaluated the design and operating effectiveness of relevant internal controls over
    significant cycles, classes of transactions, and account balances;
   Tested HUD’s compliance with certain provisions of laws and regulations; governmentwide
    policies, noncompliance with which could have a direct and material effect on the
    determination of financial statement amounts; and certain other laws and regulations
    specified in OMB Bulletin 15-02, including the requirements referred to in FMFIA;



                                                 71
   Considered compliance with the process required by FMFIA for evaluating and reporting on
    internal controls and accounting systems; and
   Performed other procedures we considered necessary in the circumstances.


We did not evaluate the internal controls relevant to operating objectives as broadly defined by
FMFIA. We limited our internal controls testing to those controls that are material in relation to
HUD’s financial statements. Because of limitations inherent in any internal control structure,
misstatements may occur and not be detected. We also caution that projection of any evaluation
of the structure to future periods is subject to the risk that controls may become inadequate
because of changes in conditions or that the effectiveness of the design and operation of policies
and procedures may deteriorate.
Our consideration of the internal controls over financial reporting would not necessarily disclose
all matters in the internal controls over financial reporting that might be significant deficiencies.
We noted certain matters in the internal control structure and its operation that we consider to be
significant deficiencies under OMB Bulletin 15-02.
Under standards issued by the American Institute of Certified Public Accountants, a deficiency
in internal control exists when the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to prevent or detect and
correct misstatements on a timely basis. A significant deficiency is a deficiency or a
combination of deficiencies in internal control that is less severe than a material weakness yet
important enough to merit attention by those charged with governance.
A material weakness is a deficiency or combination of deficiencies in internal controls, such that
there is a reasonable possibility that a material misstatement of the financial statements will not
be prevented or detected and corrected on a timely basis.
Our work was performed in accordance with generally accepted government auditing standards
and OMB Bulletin 15-02. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objective(s). We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objective.




                                                  72
Followup on Prior Audits
Not included in the recommendations listed after each finding are recommendations from prior
year reports on HUD’s financial statements that have not been fully implemented based on the
status reported in the Audit Resolution and Corrective Action Tracking System (ARCATS).
Specifically, we identified 98 unimplemented recommendations from prior year reports dating
back to the audit of the fiscal years 2010 and 2009 financial statements. 58 of the 98
unimplemented recommendations were overdue for final action as of the date of this report (two
recommendations did not have final action target dates because an agreed upon action plan had
not been determined at the time of this report). Each of these open recommendations and its
status is shown below.

   Audit                                                                         Final
               Program
  Report/                              Open Recommendations                     Action
                Office
   Rec #                                                                      Target Date
Interim Report on HUD’s Internal Controls Over Financial Reporting, 2015-FO-0002
                         Continue to work with CPD’s information
                         technology services contractor and OCFO to
2015-FO-                 ensure that all three phases of the plan to bring
                CPD                                                           N/A
0002-001A                IDIS into compliance with GAAP and applicable
                         Federal system requirements are completed as
                         scheduled.
                         Reinstate cash reconciliations as soon as
2015-FO-                 possible and transition as much as $423 million
                PIH                                                        10/1/2015
0002-002B                that accumulated in PHA NRAs during fiscal
                         year 2014.
                         Submit the Paperwork Reduction Act request to
                         OMB for consideration to allow the collection of
                         information needed to monitor and track MTW
2015-FO-
                PIH      accumulations. If approved, make necessary        10/1/2015
0002-2D
                         changes to policies to require PHAs to report the
                         information needed to monitor and track
                         accumulations.
                         For MTW PHAs, develop a plan to quantify and
2015-FO-                 aggressively transition back to HUD funding
                PIH                                                        10/1/2015
0002-2E                  that exceeds PHAs’ immediate disbursement
                         needs.
                         Establish procedures to track and monitor MTW
                         accumulations to ensure that PHAs do not hold
2015-FO-
                PIH      excess funds in advance of their immediate         4/1/2016
0002-002F
                         disbursement needs, to include the completion of
                         cash reconciliations or a comparable tool.



                                               73
  Audit                                                                     Final
            Program
 Report/                         Open Recommendations                      Action
             Office
  Rec #                                                                  Target Date
                      Issue guidance to MTW PHAs explaining
2015-FO-              Treasury’s cash management rules and require
              PIH                                                         12/8/2015
0002-002G             them to report their unspent funds in the MTW
                      annual report.
                      Reclassify prepayments to accounts receivable
2015-FO-              once PIH determines the amount of the
             OCFO                                                        11/16/2015
0002-002H             prepayment that PIH cannot offset because
                      PHAs have insufficient funds.
                      Review assumptions used to produce grants
2015-FO-              payable accrual estimates and validate the input
             OCFO                                                        11/16/2015
0002-003D             to the models used by each program office as
                      stated in its grant accrual policy.
                      Validate grants payable estimates and any
2015-FO-
             CPD      assumptions used to produce the estimates           9/30/2016
0002-003F
                      against subsequent grantee reporting.
                      Incorporate into their grants payable accrual
                      estimation methodologies steps to appropriately
2015-FO-
             CPD      validate grant accrual estimates and assumptions    10/2/2015
0002-003G
                      used to produce the estimates against subsequent
                      grantee reporting.
                      Validate grants payable accruals and any
2015-FO-              assumptions used to produce their estimates in
              PIH                                                        11/16/2015
0002-003J             accordance with the provisions of FASAB
                      Technical Release 12.
                      Incorporate into their grants payable accrual
2015-FO-              estimation methodology steps to appropriately
              PIH                                                        11/16/2015
0002-003K             validate grants payable estimates and
                      assumptions used to produce the estimates.
                      Work with the Office of Multifamily Housing
                      Programs to evaluate its obligation process for
2015-FO-              the Section 8 project-based program to ensure
             OCFO                                                        11/30/2015
0002-005C             that it complies with HUD, OMB, and GAO
                      legal requirements to have a legal point of
                      obligation.
                      Develop procedures for documenting the results
                      of funds control plan reviews to ensure that all
                      sections comply with OMB Circular A-11, part
2015-FO-
             OCFO     3, section 150, Administrative Control of Funds,   11/30/2015
0002-005D
                      and part 7, appendix H, Checklist for Funds
                      Control Regulation Plans, and that OCFO has
                      approved each plan.


                                         74
  Audit                                                                      Final
            Program
 Report/                         Open Recommendations                       Action
             Office
  Rec #                                                                   Target Date
                      Work with OCFO to revise the funds control
                      plans for the Section 8 project-based programs to
2015-FO-              ensure that the obligation process in place is
            Housing                                                        9/15/2015
0002-005E             sufficient to support a legally binding point of
                      obligation and is reviewed and authorized by
                      designated officials.
                      Review the status of the 2,743 expired contracts,
2015-FO-              which make up the $119.9 million in Homeless
             CPD                                                           9/30/2015
0002-006A             Assistance funds; close out the contracts; and
                      recapture the excess funds.
                      Deobligate $174,168 in 5 administrative
                      obligations and $9,920,926 in 308 program
                      obligations marked for deobligation during the
2015-FO-              departmentwide open obligations review.
             CPD                                                           10/1/2015
0002-006B             Additionally, review the 72 obligations with
                      remaining balances totaling $313,419 and close
                      out and deobligate amounts tied to obligations
                      that are no longer valid or needed.
                      Increase its communication with HUD field
                      offices and grantees to ensure that the field
2015-FO-
             CPD      offices are aware of and comply with updated         9/25/2015
0002-006C
                      deobligation and recapture policies for expired
                      grants.
                      Deobligate all obligations marked for
                      deobligation during the departmentwide open
                      obligations review, including as much as
                      $4,988,326 in 613 administrative obligations and
2015-FO-              $6,395,922 in 79 program obligations marked
            Housing                                                        3/23/2016
0002-006E             for deobligation as of September 29, 2014.
                      Additionally, review the 269 obligations with
                      remaining balances totaling $19,624,446 and
                      close out and deobligate amounts tied to
                      obligations that are no longer valid or needed.
                      Deobligate the 76 expired or inactive Sections
2015-FO-
            Housing   202 and 811 and project-based Section 8 projects     3/4/2016
0002-006F
                      totaling $3,458,166.
                      Review and if necessary deobligate $4,576,896
2015-FO-              in 10 obligations related to HUD’s Emergency
            Housing                                                        3/9/2016
0002-006G             Homeowner Loan Program substantially similar
                      states program.




                                         75
  Audit                                                                      Final
            Program
 Report/                         Open Recommendations                       Action
             Office
  Rec #                                                                   Target Date
                      Develop and implement policies and procedures,
                      including contingency plans to ensure that
2015-FO-
            Housing   Housing meets all future deadlines for the           3/4/2016
0002-006H
                      departmentwide unliquidated open obligations
                      review.
2015-FO-              Deobligate the 36 inactive or expired Sections
            Housing                                                        3/9/2016
0002-006I             235 and 236 funding lines totaling $23.5 million.
                      Deobligate all obligations marked for
                      deobligation during the departmentwide open
                      obligations review, including as much as
                      $3,561,042 in 64 administrative obligations
2015-FO-
             OCIO     marked for deobligation as of September 29,          2/29/2016
0002-006J
                      2014. Additionally, review the 171 obligations
                      with remaining balances totaling $19,730,791
                      and close out and deobligate amounts tied to
                      obligations that are no longer valid or needed.
                      Deobligate $89,237 in 46 administrative
                      obligations marked for deobligation during the
                      departmentwide open obligations review.
2015-FO-
             CAO      Additionally, review the 199 obligations with        7/17/2015
0002-006O
                      remaining balances totaling $4,146,234 and
                      close out and deobligate amounts tied to
                      obligations that are no longer valid or needed.
                      Deobligate the $366,348 in 99 administrative
                      obligations marked for deobligation during the
                      departmentwide open obligations review.
2015-FO-
            CHCO      Additionally, review the 65 obligations with         12/8/2015
0002-006P
                      remaining balances totaling $1,383,565 and
                      close out and deobligate amounts tied to
                      obligations that are no longer valid or needed.
                      Deobligate all obligations marked for
                      deobligation during the departmentwide open
                      obligations review, including as much as
                      $160,998 in 73 administrative obligations and
2015-FO-              $1,182,645 in 24 program obligations marked
              PIH                                                          4/8/2016
0002-006Q             for deobligation as of September 29, 2014.
                      Additionally, review the 34 obligations with
                      remaining balances totaling $151,963 and close
                      out and deobligate amounts tied to obligations
                      that are no longer valid or needed.



                                         76
  Audit                                                                        Final
            Program
 Report/                           Open Recommendations                       Action
             Office
  Rec #                                                                     Target Date
                        Develop and implement oversight procedures to
                        ensure that the level one representative (1)
                        completes all responsibilities related to the
                        departmentwide unliquidated open obligation
2015-FO-
              PIH       review within the timeframe required, (2)            4/8/2016
0002-006R
                        monitors the status of the review, and (3)
                        executes a contingency plan if problems are
                        identified to allow the review to be completed by
                        the established deadline.
                        Deobligate $785 in one administrative obligation
                        marked for deobligation during the
                        departmentwide open obligations review.
2015-FO-
             OCFO       Additionally, review the six obligations with        12/8/2015
0002-006S
                        remaining balances totaling $332,888 and close
                        out and deobligate amounts tied to obligations
                        that are no longer valid or needed.
                        Review the 50 obligations with remaining
2015-FO-                balances totaling $308,793 and close out and
              FPM                                                            1/29/2016
0002-006T               deobligate amounts tied to obligations that are
                        no longer valid or needed.
                        Deobligate $5,210 in two administrative
                        obligations and $109,500 in one program
                        obligation marked for deobligation during the
2015-FO-                departmentwide open obligations review.
             FHEO                                                            12/4/2015
0002-006U               Additionally, review the 17 obligations with
                        remaining balances totaling $26,711 and close
                        out and deobligate amounts tied to obligations
                        that are no longer valid or needed.
                        Deobligate $85,006 in 12 administrative
2015-FO-     Public
                        obligations marked for deobligation during the       9/30/2015
0002-006V    Affairs
                        departmentwide open obligations review.
             CEO,       Deobligate $68,828 in 16 administrative
2015-FO-
            Office of   obligations marked for deobligation during the       9/30/2015
0002-006W
            Secretary   departmentwide open obligations review.
                        Revise its policies and procedures to include a
                        period of completion for front-end risk
                        assessments by program offices and the review
2015-FO-
             OCFO       process by OCFO. Further, OCFO should               11/30/2015
0002-007A
                        ensure that an escalation process is included to
                        address untimely completion of the assessment
                        process.


                                           77
  Audit                                                                       Final
            Program
 Report/                          Open Recommendations                       Action
             Office
  Rec #                                                                    Target Date
                       Periodically reconcile balances with OCIO
2015-FO-
             OCFO      subsidiary records and research and resolve any      3/31/2016
0002-007D
                       identified differences.
                       Increase efforts to quickly complete outstanding
                       front-end risk assessments and coordinate with
2015-FO-
              CPD      OCFO to finalize the review and approval             9/25/2015
0002-007F
                       process even in the absence of policies and
                       procedures with specific deadlines in this area.
                       Increase efforts to quickly complete outstanding
                       front-end risk assessments and coordinate with
2015-FO-
              PIH      OCFO to finalize the review and approval            12/31/2015
0002-007G
                       process even in the absence of policies and
                       procedures with specific deadlines in this area.
                       Develop and implement procedures to ensure
                       that the cost of newly acquired or developed
                       software and historical projects is analyzed in a
2015-FO-
              CIO      timely manner to determine whether cost should       3/6/2016
0002-007H
                       be capitalized or expended based on SFFAS
                       requirements and that information is
                       communicated to OCFO in a timely manner.
                       Develop a subsidiary system to accumulate the
2015-FO-               capitalized cost and related depreciation expense
              CIO                                                           3/31/2016
0002-007I              for each software project under development or
                       placed into production.
              Ginnie
                       Enhance communication to appropriately
2015-FO-      Mae /
                       identify mixed systems and include them in the       6/30/2015
0002-009A   ACFO for
                       inventory of financial systems.
             Systems
              Ginnie   Add the Integrated Pool Management System,
2015-FO-      Mae /    Unclaimed Funds System, and Reporting and
                                                                            7/30/2015
0002-009B   ACFO for   Feedback System to the inventory of FFMIA
             Systems   financial and mixed systems.
2015-FO-               Implement a periodic review process to
             OCFO                                                           4/8/2016
0002-009C              independently evaluate system classifications.




                                          78
  Audit                                                                      Final
            Program
 Report/                           Open Recommendations                     Action
             Office
  Rec #                                                                   Target Date
                     Develop and implement a detailed remediation
                     action plan to ensure that grant management
                     systems eliminate the FIFO methodology in its
                     entirety. The plan should (1) explain how the
                     budget fiscal year-TAFS for each accounting
                     transaction (project and activity setup,
2014-FO-
               CPD   commitment, disbursement, etc.) will be               9/30/2014
0003-001A
                     recorded, remain constant, and be maintained,
                     (2) reference Federal system requirements and
                     criteria, and (3) include resources, specific
                     remedies, and intermediate target dates
                     necessary to bring the financial management
                     system into substantial compliance.
                     Establish controls within the system, which
2014-FO-
               CPD   provide an audit trail of the use of the funds by     9/30/2014
0003-001B
                     the budget fiscal year-TAFS.
                     Provide oversight of CPD’s system
                     implementation or modification to ensure that
                     Federal financial management accounting
                     standards are embedded into the system so that
                     the information transferred from grant
2014-FO-             management systems to HUD’s core financial
              OCFO                                                        10/30/2015
0003-001C            systems comply with these standards, are
                     recorded in HUD’s consolidated financial
                     statements in accordance with Federal GAAP,
                     and ensure that compliant administrative control
                     of funds for its formula grant programs is
                     established.
                     Transition the PHA NRA excess funds, which
2014-FO-             are as much as $643.6 million as of June 30,
            PIH/OCFO                                                       5/9/2015
0003-002A            2013, to HUD’s control as soon as possible to
                     safeguard the program resources.
                     Implement a cost-effective method for
2014-FO-             automating the cash management process to
            PIH/OCFO                                                         N/A
0003-002C            include an electronic interface of transactions to
                     the standard general ledger.
                     Review the cash management process to identify
                     all financial events to be recognized in
2014-FO-
              OCFO   accordance with GAAP. Establish procedures to         4/8/2015
0003-002E
                     account for the cash management activity in a
                     timely manner in compliance with GAAP.



                                           79
  Audit                                                                     Final
            Program
 Report/                           Open Recommendations                    Action
             Office
  Rec #                                                                  Target Date
                     Ensure that PIH’s automation of its cash
2014-FO-
              OCFO   management process complies with Federal            12/31/2015
0003-002G
                     financial management requirements.
                     Design and Implement a loan guarantee system
                     that complies with the Guaranteed Loan System
                     Requirements. Ensure that the implemented loan
2014-FO-
            PIH/OCFO guarantee system should be integrated with          12/31/2015
0003-003A
                     HUD’s financial management systems and be
                     included in its financial management system
                     plans.
                     Establish an appropriate accounting and
                     financial reporting governance structure within
2014-FO-             OCFO with the appropriate level of accounting,
              OCFO                                                        3/11/2015
0003-004G            experience, and training to support the size and
                     complexity of HUD’s and its component
                     entities’ financial reporting requirements.
                     Enforce already existing internal control
2014-FO-
              OCFO   procedures to ensure proper supervision over         10/1/2014
0003-006C
                     accounting for Section 8 FAF receivables.
                     Perform a thorough analysis of outstanding FAF
                     receivables and fiscal year 2013 collections to
2014-FO-     OCFO /  ensure that the receivables accurately represent
                                                                          3/4/2015
0003-006D    Housing the amounts owed to HUD, including but not
                     limited to positive confirmations of outstanding
                     receivable balances with the trustees.
                     Review the procedures in use for the Section 184
                     Indian Housing Loan Guarantee Program to
2014-FO-             ensure that they provide assurance that
               PIH                                                        4/1/2015
0003-007C            obligations and expenditures do not exceed
                     limitations and update the funds control plans
                     accordingly.
                     Review the status of these 1,855 expired
2014-FO-             contracts, which make up the $50.9 million;
               CPD                                                        9/30/2014
0003-008A            close out the contracts; and recapture the excess
                     funds.
                     Complete the closeout of any remaining CDBG-
2014-FO-             R and HPRP grants and forward all grant
               CPD                                                        9/30/2014
0003-008B            closeout agreement certifications to OCFO for
                     recapture.




                                          80
  Audit                                                                         Final
            Program
 Report/                          Open Recommendations                         Action
             Office
  Rec #                                                                      Target Date
                      Deobligate $14,425,629 tied to 238 program
                      obligations marked for deobligation during the
                      department wide unliquidated obligations
                      review. Additionally, OCFO should review the
2014-FO-              93 obligations with remaining balances totaling
             CPD                                                              4/3/2015
0003-008C             $316,935 and close out and deobligate amounts
                      tied to obligations that are no longer valid, either
                      based on the criteria defining the availability of
                      appropriations at 31 U.S.C. 1301 or the criteria
                      for recording obligations at 31 U.S.C. 1501.
                      Deobligate $12,755,325 tied to 165
                      administrative obligations and $2,734,967 tied to
                      25 program obligations marked for deobligation
                      during the department wide unliquidated
                      obligations review. Additionally, the Office of
2014-FO-              Housing should review the 429 obligations with
            Housing                                                           4/2/2015
0003-008D             remaining balances totaling $5,764,905 and
                      close out and deobligate amounts tied to
                      obligations that are no longer valid, either based
                      on the criteria defining the availability of
                      appropriations at 31 U.S.C. 1301 or the criteria
                      for recording obligations at 31 U.S.C. 1501.
                      Research and deobligate at least $9.3 million
2014-FO-
            Housing   tied to the 115 inactive and/or expired Section         4/2/2015
0003-008E
                      202/811 funding lines.
                      Review and deobligate at least $26 million tied
2014-FO-
            Housing   to 215 inactive and/or expired Section 8                4/2/2015
0003-008F
                      obligations.
                      Review and, if necessary, recapture all 212
2014-FO-
              PIH     operating subsidy (0163) funding lines with            11/30/2014
0003-008H
                      remaining balances totaling $11 million.
                      Deobligate the $2,483,254 tied to 12
                      administrative obligations marked for
                      deobligation during the department wide
                      unliquidated obligations review. Additionally,
2014-FO-
            CHCO      OCHCO should review the 730 obligations with            4/11/2015
0003-008J
                      remaining balances totaling $10,227,309 and
                      close out and deobligate amounts tied to
                      obligations that are no longer valid, either based
                      on the criteria defining the availability of



                                          81
  Audit                                                                       Final
            Program
 Report/                         Open Recommendations                        Action
             Office
  Rec #                                                                    Target Date
                      appropriations at 31 U.S.C. 1301 or the criteria
                      for recording obligations at 31 U.S.C. 1501.
                      Deobligate the $1,419 tied to three
                      administrative obligations marked for
                      deobligation during the department wide
                      unliquidated obligations review. Additionally,
                      OCFO should review the 42 obligations with
2014-FO-
             OCFO     remaining balances totaling $3,115,954 and           12/31/2014
0003-008K
                      close out and deobligate amounts tied to
                      obligations that are no longer valid, either based
                      on the criteria defining the availability of
                      appropriations at 31 U.S.C. 1301 or the criteria
                      for recording obligations at 31 U.S.C. 1501.
                      Design and implement a policy to ensure those
                      reconciliations between the subsidiary ledgers
                      (supporting records) and the obligation balances
                      in the general ledger (controlling accounts) are
2014-FO-
             OCFO     periodically performed for all HUD                    4/1/2015
0003-008M
                      appropriations. The policy should also address
                      the follow-up and clearance of identified
                      differences and the responsibilities for the
                      preparers and reviewers.
                      Work with the program offices to determine the
                      ARRA funds that were not spent by September
                      30, 2013; implement the manual process
2014-FO-              identified; and recapture, to the extent permitted
             OCFO                                                          10/17/2014
0003-008N             by law, the unspent ARRA funds and return
                      them to Treasury, including at least $4.7 million
                      and $2.6 million in unspent grant funds for the
                      CDBG-R and HPRP programs, respectively
                      Deobligate $7,263,662 tied to 178 administrative
2014-FO-              obligations marked for deobligation during the
             CIO                                                            2/13/2015
0003-008O             department wide unliquidated obligations
                      review.
                      Review the 52 obligations with remaining
                      balances totaling $145,060 and closeout and
                      deobligate amounts tied to obligations that are
2014-FO-
             FHEO     no longer valid, either based on the criteria         4/1/2015
0003-008U
                      defining the availability of appropriations at 31
                      U.S.C. 1301 or the criteria for recording
                      obligations at 31 U.S.C. 1501.



                                         82
  Audit                                                                          Final
            Program
 Report/                           Open Recommendations                         Action
             Office
  Rec #                                                                       Target Date
                        Review the 41 obligations with remaining
                        balances totaling $132,080 and close out and
                        deobligate amounts tied to obligations that are
2014-FO-    Office of
                        no longer valid, either based on the criteria         10/31/2014
0003-008Y   Secretary
                        defining the availability of appropriations at 31
                        U.S.C. 1301 or the criteria for recording
                        obligations at 31 U.S.C. 1501.
                        After conclusion of the study, issue a directive or
                        memorandum to HUD, reemphasizing the Chief
                        Financial Officer’s authority and responsibility
2014-FO-     Deputy
                        for department wide financial management and          12/17/2014
0003-009B   Secretary
                        internal controls over financial reporting and
                        changes in any financial management
                        governance.
                        Create and chair a Senior Management Council
                        or equivalent to ensure that HUD remains
2014-FO-     Deputy     committed to implementing and operating the
                                                                              12/17/2014
0003-009C   Secretary   recommendations made in the study and ensure
                        that an appropriate system of internal controls is
                        in place.
                        Ensure that documented policies and procedures
2014-FO-                are in place for all of HUD’s accounting
             OCFO                                                              6/30/2016
0003-009F               processes and that they are periodically
                        evaluated for necessary updates.
                        Review the HUD-administered assistance
                        obligations with remaining balances totaling
2014-FO-
              OPD       $24.3 million and close out and deobligate             4/6/2015
0003-011C
                        amounts tied to obligations that are no longer
                        valid or needed.
                        Review the SSS assistance obligations for each
2014-FO-                State and deobligate as much as $47.9 million
              OPD                                                              4/2/2015
0003-011D               tied to obligations that are no longer valid or
                        needed.
                        Develop and implement procedures to routinely
                        evaluate the assistance and administrative
2014-FO-                obligation balances for the HUD-administered
              OPD                                                              4/6/2015
0003-011E               and SSS subcategories of EHLP to determine
                        whether a valid need still exists and if not,
                        deobligate those balances.




                                            83
   Audit                                                                       Final
               Program
  Report/                             Open Recommendations                    Action
                Office
   Rec #                                                                    Target Date
                          Make the review of ADA cases a priority by
                          enforcing HUD’s ADA case processing
2014-FO-
                OCFO      timeframe policy going forward and commit to a       12/1/2014
0003-014A
                          firm deadline for finalizing the review of the
                          remaining old ADA cases.
                          Make changes to IDIS Online, which will
                          require grantees to specifically identify the grant
                          allocation year to which the commitment should
2014-FO-                  be assigned and include the commitment dates.
                 CPD                                                          10/30/2015
0003-015A                 The system should also allow HUD to ensure
                          that commitments made during overlapping
                          allocations and periods are counted toward only
                          1 year’s compliance requirements.
                          Stop using the cumulative method and the
                          deadline compliance report for determining
                          compliance with the 24-month commitment
2014-FO-
                 CPD      requirement in the HOME Investment                  10/30/2015
0003-015B
                          Partnership Act and use only the commitments
                          made within the 24-month period to determine
                          compliance.
                          In accordance, with the GAO legal decision and
                          opinion, take steps to identify and recapture
2014-FO-
                 CPD      funds that remain uncommitted after the             10/30/2015
0003-015C
                          statutory commitment deadline and reallocate
                          such funds in accordance with the Act.
                          Recapture funds from allocations during the 24-
2014-FO-                  month overlapping period only for grantees that
                 CPD                                                          10/30/2015
0003-015D                 do not comply with the 24-month commitment
                          requirement.
Additional Details To Supplement Our Report On HUD’s Fiscal Years 2012 and 2011
Financial Statements, 2013-FO-0003
                          Ensure that Section 108 Loan Guarantee
                          program financial management system
2013-FO-                  requirements are incorporated into HUD’s core
                OCFO                                                           10/1/2015
0003-001C                 financial system improvement program to get
                          more transparent and complete information for
                          financial and management reports.
                          Develop and implement formal financial
2013-FO-                  management policies and procedures to require
                OCFO                                                          11/29/2013
0003-003C                 an annual evaluation by OCFO and applicable
                          program offices of all allowance for loss rates



                                              84
   Audit                                                                       Final
               Program
  Report/                             Open Recommendations                    Action
                Office
   Rec #                                                                    Target Date
                          and other significant estimates currently in use to
                          ensure appropriateness.
                          Develop internal controls to review field office
                          compliance more frequent than every 4 years,
                          especially when findings have been identified in
2013-FO-
                 CPD      the past, and to ensure that action plans operate    2/14/2014
0003-004B
                          effectively and have addressed the deficiencies
                          noted so that noncompliance is not repeated
                          during the next quality management review.
                          In coordination with the Office of the Deputy
2013-FO-                  Secretary, emphasize the importance of financial
                OCFO                                                           3/15/2014
0003-005A                 management for the administrative control of
                          funds.
                          Review the status of these expired contracts,
2013-FO-                  which make up the $50.6 million, and recapture
                 CPD                                                          10/18/2013
0003-006A                 excess funds for the contracts that have not been
                          granted extensions.
                          Review the 270 obligations with remaining
2013-FO-                  balances totaling $432,147 and close out and
                 CPD                                                           9/30/2014
0003-006B                 deobligate amounts tied to obligations that are
                          no longer valid or needed.
                          Review the 588 obligations with remaining
                          balances totaling $1,912,078 and close out and
                          deobligate amounts tied to obligations that are
2013-FO-
               Housing    no longer valid or needed. Additionally,             3/21/2014
0003-006L
                          $10,565,965 in 209 administrative obligations
                          and $145,006 in eight program obligations
                          marked for deobligation should be deobligated.
                          Review the 69 inactive or expired obligations
                          with $1,202,207 in remaining balances and
2013-FO-
               Housing    coordinate with OCFO to deobligate any funds         3/19/2014
0003-006O
                          that are determined to be expired or inactive
                          after review.
Additional Details To Supplement Our Report On HUD’s Fiscal Years 2011 and 2010
Financial Statements, 2012-FO-0003
                          Review the status of each of its homeless
                          assistance contracts that make up the $32 million
2012-FO-
                 CPD      OIG identified as excess funding and recapture        2/6/2013
0003-002B
                          excess funds for expired contracts that have not
                          been granted extension.




                                              85
   Audit                                                                      Final
               Program
  Report/                            Open Recommendations                    Action
                Office
   Rec #                                                                   Target Date
                          Establish and implement procedures to ensure
2012-FO-                  that the funds control plans are updated to        12/15/2015
                OCFO
0003-004B                 include the new program codes and new
                          appropriation requirements.
                          Office of 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
2012-FO-                  and follow up with owners and management
                 PIH                                                          4/30/2016
0003-005B                 agents (O-A) listed on these reports; and include
                          in the contract between HUD and O-As a
                          provision for improper payments that requires to
                          resolve in a timely manner income
                          discrepancies, failed identity verifications, and
                          cases of deceased single-member households.
Additional Details To Supplement Our Report On HUD’s Fiscal Years 2010 and 2009
Financial Statements, 2011-FO-0003
                          Cease the changes being made to IDIS for the
2011-FO-                  HOME program related to the FIFO rules until
                 CPD                                                          6/15/2015
0003-001A                 the cumulative effect of using FIFO can be
                          quantified on the financial statements.
                          Change IDIS so that the budget fiscal year
2011-FO-
                 CPD      source is identified and attached to each activity  6/15/2015
0003-001B
                          from the point of obligation to disbursement.
                          Cease the use of FIFO to allocate funds (fund
                          activities) within IDIS and disburse grant
                          payments. Match outlays for activity
2011-FO-                  disbursements to the obligation and budget fiscal
                 CPD                                                          6/15/2015
0003-001C                 source year in which the obligation was incurred
                          and in addition, match the allocation of funds
                          (activity funding) to the budget fiscal year
                          source of the obligation.
                          Include as part of the annual CAPER
                          [consolidated annual performance and
                          evaluation report] a reconciliation of HUD’s
2011-FO-
                 CPD      grant management system, IDIS, to grantee           6/15/2015
0003-001D
                          financial accounting records on an individual
                          annual grant basis, not cumulatively, for each
                          annual grant awarded to the grantee.




                                             86
  Audit                                                                      Final
            Program
 Report/                           Open Recommendations                     Action
             Office
  Rec #                                                                   Target Date
                     Review the 510 obligations that were not
                     distributed to the program offices during the
2011-FO-             open obligations review and deobligate amounts
              OCFO                                                        10/31/2011
0003-002C            tied to closed or inactive projects, including the
                     $27.5 million we identified during our review as
                     expired or inactive.
                     Recapture the full amount of obligations from
                     these 434 PIH low-rent grants totaling $174
2011-FO-
            PIH/OCFO million and return to the U.S. Treasury the total     6/30/2012
0003-002N
                     balance of budgetary resources from invalid
                     grants.
                     Review the status of each of its homeless
                     assistance contracts that make up the $97.8
2011-FO-
               CPD   million OIG identified as excess funding and          3/16/2012
0003-004A
                     recapture excess funds for expired contracts that
                     have not been granted extensions.
                     Establish and implement procedures to ensure
2011-FO-
              OCFO   accuracy and completeness of ARRA funds              12/30/2011
0003-005B
                     control plans.




                                           87
Appendixes

Appendix A


                       Schedule of Funds To Be Put to Better Use
                        Recommendation Funds to be put to
                            number             better use1
                                 8A.                $108,138,514
                                 8B.                $331,136,395
                                 8E.                 $22,144,094
                                 8F.                 $90,000,000
                                 8G.                  $3,415,609
                                 8H.                  $2,053,090
                                 8I.                  $4,052,236
                                 8J.                  $1,506,233
                                 8K.                   $265,331
                                 8L.                    $77,807
                                8M.                    $271,495
                                 8N.                   $115,035
                                 8O.                   $587,198
                                13A.                $507,500,000
                               Totals              $1,071,263,037


1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. These amounts include
     reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
     implementing recommended improvements, avoidance of unnecessary expenditures
     noted in preaward reviews, and any other savings that are specifically identified.




                                              88
Appendix B


      Departmentwide Obligation Review – Schedule of Recommended Deobligations

              OIG review of         HUD’s departmentwide unliquidated obligation review –
                 inactive        invalid obligations identified by HUD but not deobligated as of
              administrative                                  9/30/15
                obligations
 Program      Recommended         Administrative           Program
                                                                                  Total
  office        for review          obligations           obligations
              #         $         #         $           #          $         #            $
Office of
             225     $285,024    209   $19,634,263     24     $2,224,807    233     $21,859,070
Housing
PIH          14        146,320                         16      3,269,289    16        3,269,289
OCIO         17      1,486,191   44        430,942     2         135,957    46          566,899
OCHCO        91      2,255,411   101       290,591                          101         290,591
Office of
Admin-       216     1,506,233
istration
FHEO                             41        140,064      3        125,166     44           265,331
DEEO         20       $77,807
PD&R                              1          78,230     5        193,265     6            271,495
OCFO          7       115,035
Ginnie
                                  8        587,198                           8            587,198
Mae
CPD           57      188,176                         102      3,602,342    102       3,602,342
 Total       647   $6,060,198    404   $21,161,289    152    $9,550,826     556     $30,712,115
* Immaterial differences in totals due to rounding
OCHCO – Office of the Chief Human Capital Officer
FHEO – Office of Fair Housing and Equal Opportunity
DEEO – Office of Departmental Equal Employment Opportunity
PD&R – Office of Policy Development and Research




                                               89
Appendix C

 Federal Financial Management Improvement Act Noncompliance, Responsible Program
                     Offices, and Recommended Remedial Actions

This appendix provides details required under FFMIA reporting requirements. We noted
instances in which HUD’s systems did not substantially comply with FFMIA requirements.
Specifically, we noted instances of substantial noncompliance with (1) Federal financial system
requirements, (2) Federal accounting standards, and (3) the USSGL at the transaction level. The
details about non-FFMIA-compliant systems, responsible parties, primary causes, and HUD’s
intended remedial actions are included in the following sections.

Systems That Do Not Comply With Federal Financial Systems Requirements
Facilities Integrated Resources Management System – The FIRMS application does not
comply with Federal financial management systems requirements. While HUD had identified
FIRMS as FFMIA noncompliant since 2010, technical issues, including a lapsed maintenance
contract, have rendered FIRMS non-functional. The Office of the Administration is responsible
for FIRMS (to which responsibility was transferred from the Office of the Chief Human Capital
Officer). We have previously recommended improvements to system interfaces with the
financial system and the acquisition system. To achieve eventual FFMIA compliance and to
meet business requirements regarding property management, HUD was working to
decommission FIRMS and move to a shared service provider, the Federal Aviation
Administration.

HUD Procurement System and Small Purchase System – HPS and SPS are legacy
procurement applications that do not comply with FFMIA because they lack important
functionality. OCPO is responsible for HPS and SPS. As a result of our previous
recommendation, OCPO began implementing a new procurement system, HIAMS, to replace
HPS and SPS beginning in fiscal year 2012. While HUD had planned to decommission HPS and
SPS, technical issues related to data migration have delayed decommissioning of the systems.
HUD planned to decommission the HPS and SPS procurement applications once the technical
issues associated with the migration had been addressed and the data transfer was complete.
This was scheduled to be done by the first quarter of fiscal year 2016.

Systems That Do Not Comply With Federal Accounting Standards and the USSGL
Integrated Disbursement and Information System Online - IDIS does not comply with
applicable Federal accounting standards or the USSGL at the transaction level.
IDIS is noncompliant because the system is configured to account for grants using the attribution
methodology known as FIFO, which does not comply with GAAP. While CPD had made
progress addressing this issue, updating the IDIS application to specifically identify grants
initiated during 2015 and going forward for disbursements only, funding constraints delayed
further remediation and FFMIA compliance. CPD is responsible for IDIS.



                                                90
We have previously recommended that HUD modify IDIS to account for grant disbursements by
the specific identification method and configure the system to record transactions in compliance
with the USSGL. CPD was midway through executing the IT project to eliminate the FIFO
method of funds attribution from IDIS Online. Additional changes need to be made to IDIS to
remedy its FFMIA noncompliance.
Systems That Do Not Comply With Financial System Requirements, Federal Accounting
Standards, and the USSGL
Ginnie Mae Financial and Accounting System
We noted that Ginnie Mae’s GFAS system did not comply with the three elements of FFMIA as
of September 30, 2015. During our fiscal year 2014 audit of Ginnie Mae’s financial statements,
we were unable to obtain sufficient, appropriate evidence to express an opinion on the fairness of
$6.6 billion in nonpooled loan assets from Ginnie Mae’s defaulted issuers’ portfolio and $735
million in liability for loss on the mortgage-backed securities program guaranty. We also noted
four material weaknesses and recommendations to Ginnie Mae management. As a result of the
scope limitation in our audit work and the effects of material weaknesses in internal control, we
were not able to obtain sufficient, appropriate evidence to provide a basis for an audit opinion on
Ginnie Mae’s fiscal year 2014 financial statements.94

In addition, we noted weaknesses related to the budgetary accounting module of the GFAS
application during the course of the 2015 financial statement audit and made recommendations
to Ginnie Mae to address these weaknesses. Specifically, because of system configuration
issues, large manual adjustments were needed to reconcile budgetary balances. To remediate
GFAS’ FFMIA noncompliance, Ginnie Mae will need to address the issues related to the
budgetary accounting module and the four material weaknesses identified during the course of
the 2015 financial statement audit.




94
  Audit Report 2015-FO-0003, Audit of the Government National Mortgage Association’s Financial Statements for
Fiscal Years 2014 and 2013, issued February 27, 2015



                                                      91
Appendix D
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2




                               92
                          OIG Evaluation of Auditee Comments


Comment 1   As required by the American Institute of Certified Public Accountants’
            Codification of Statements on Auditing Standards, AU-C section 260, The
            Auditor’s Communication with Those Charge with Governance, we are required
            to communicate with you timely observations of the issues or audit matters that
            are in the auditor’s professional judgment, significant and relevant to your
            responsibility to oversee the financial reporting process. We satisfied this
            auditing standard by communicating the findings contained within this report to
            the OCFO and applicable program offices through (1) reporting deficiencies to
            the OCFO in the Third Quarter Assessment, issued on September 16, 2015; (2)
            the issuance of notification of findings and recommendations or finding outlines,
            both of which layout the condition, cause, criteria, impact, and proposed
            recommendations, which were issued beginning in September through October
            2015; and (3) periodic status meetings which included briefings on the status of
            work and identification of potential findings prior to the inclusion in the draft
            report. All of these methods of communication occurred prior to the issuance of
            the draft report in an effort to facilitate discussion with the affected offices and to
            determine if the facts which our conclusions were based on were accurate. This
            also allowed affected offices to review and provide comments to the findings for
            consideration prior to their inclusion in the draft report. Further, all but two
            findings cited in this report have been reported in prior years and are long
            standing weaknesses with unresolved prior year recommendations.
Comment 2   As part of the audit resolution process, we are available to meet and discuss
            possible action plans that will satisfactorily resolve the recommendations included
            within this report. We look forward to working with you in this area in an effort
            to resolve the many financial reporting deficiencies facing HUD today.




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