HUD Single-Family and Multifamily Property Programs: Inadequate Controls Resulted in Questionable Payments and Potential Fraud

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. As of November 2006, HUD included terms in its revised management contracts that require the contractors to prepare all payment requests for which they are the payee, including revised payment requests when the initial requests are found to be deficient. In addition, HUD developed a financial control manual for use by all its homeownership centers in processing payment requests for management contractors. The manual requires management contractors to prepare payment requests for which they are the payee and requires that HUD return all payment requests that require revision to the contractors for correction and resubmission to HUD.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. As of November 2006, HUD developed a financial control manual. The manual is used by HUD payment review and approval officials and includes procedures to be followed and minimum acceptable documentation requirements for the preparation, review and approval of payment requests. These policies apply to vendors that do not have access to HUD's automated payment system.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. As of November 2006, HUD developed a financial control manual that, among other things, requires that government technical representatives perform initial reviews of payment requests from management contractors. In addition, HUD provided formal training to its employees in the policies and procedures contained in the manual. November 2006 Update: In response to this recommendation, HUD developed a financial control manual that, among other things, requires that government technical representatives perform initial reviews of payment requests from management contractors. In addition, HUD provided formal training to its employees in the policies and procedures contained in the manual.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. In addition, HUD is developing a quality assurance process for management control and oversight of its disposition program specific to the requirements of the new contract. Oversight of the disbursement process by HQ is being incorporated into the control process under development. In the interim, HQ staff will review a random sampling of SAMS transmittals to determine adherence to invoice review process. As of November 2006, HUD is contracting for the services of an independent public accountant to review compliance with the manual requirements at prescribed time intervals and to recommend corrective actions as needed.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. In addition, HUD is developing a quality assurance process for management control and oversight of its disposition program specific to the requirements of the new contract. Oversight of the disbursement process by HQ is being incorporated into the control process under development. In the interim, HQ staff will review a random sampling of SAMS transmittals to determine adherence to invoice review process. As of November 2006, HUD included terms in its revised management contracts that detailed minimum documentation requirements that must be met for all payment requests. Additionally, HUD implemented procedures for reviewing and processing these payment requests as part of its new financial control manual and utilized the services of an independent public accountant to assess the effectiveness of these controls at selected payment locations.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. In addition, HUD is developing a quality assurance process for management control and oversight of its disposition program specific to the requirements of the new contract. Oversight of the disbursement process by HQ is being incorporated into the control process under development. In the interim, HQ staff will review a random sampling of SAMS transmittals to determine adherence to invoice review process. As of November 2006, HUD included terms in its revised management contracts that require the contractors to include with all payment requests documentation to support the quantity and cost for the goods or services billed. HUD also developed a financial control manual for use by all its homeownership centers in the review and approval of contractor payment requests. The manual stipulated that all documentation is to be reviewed by HUD officials prior to authorizing payment, including evidence that the goods or services billed had been received. In addition, HUD provided formal training to its employees in the policies and procedures contained in the manual.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. In addition, HUD is developing a quality assurance process for management control and oversight of its disposition program specific to the requirements of the new contract. Oversight of the disbursement process by HQ is being incorporated into the control process under development. In the interim, HQ staff will review a random sampling of SAMS transmittals to determine adherence to invoice review process. As of November 2006, HUD developed a financial control manual for use by all its homeownership centers in processing payment requests for management contractors. The manual requires that documentation and justifications, including a valid contract or modification for any disbursements, be contained in one place for the approving officials to review when needed. Additionally, HUD utilized the services of an independent public accountant to assess the effectiveness of these policies and processes.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. In addition, HUD is developing a quality assurance process for management control and oversight of its disposition program specific to the requirements of the new contract. Oversight of the disbursement process by HQ is being incorporated into the control process under development. In the interim, HQ staff will review a random sampling of SAMS transmittals to determine adherence to invoice review process. As of November 2006, HUD included terms in its revised management contracts that require documentation to support that all payments are for valid obligations of the program, such as property number and other details. In addition, HUD developed a financial control manual for use by all its homeownership centers in processing payment requests for management contractors. The manual includes guidance on what constituted acceptable documentation in order to review and approve items for payment. Additionally, HUD is contracting for the services of an independent public accountant to assess the effectiveness of these procedure.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. In addition, HUD is developing a quality assurance process for management control and oversight of its disposition program specific to the requirements of the new contract. Oversight of the disbursement process by HQ is being incorporated into the control process under development. In the interim, HQ staff will review a random sampling of SAMS transmittals to determine adherence to invoice review process. As of November 2006, HUD included terms in its revised management contracts that detailed minimum documentation requirements, including competitive bids, that must be met for all payment requests. In addition HUD implemented procedures, as part of its financial control manual that stipulated that all procurements above $2,500 must be supported by at least two written quotations (bids) from subcontractors and other vendors. Additionally, HUD's financial control manual now requires that payment officials review evidence of the bids and that they determine that the bids were obtained from competitive sources, the prices quoted were reasonable, and were for identical services or goods.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. In addition, HUD is developing a quality assurance process for management control and oversight of its disposition program specific to the requirements of the new contract. Oversight of the disbursement process by HQ is being incorporated into the control process under development. In the interim, HQ staff will review a random sampling of SAMS transmittals to determine adherence to invoice review process. As of November 2006, HUD's financial control manual now requires that payment officials review supporting documentation for payments to confirm that the goods or services are for a legitimate government need. In addition, HUD provided formal training to its employees in the policies and procedures contained in the manual.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. In addition, HUD is developing a quality assurance process for management control and oversight of its disposition program specific to the requirements of the new contract. Oversight of the disbursement process by HQ is being incorporated into the control process under development. In the interim, HQ staff will review a random sampling of SAMS transmittals to determine adherence to invoice review process. As of November 2006, HUD implemented new procedures as part of its financial control manual to be used by officials at the homeownership centers. The new procedures stipulated that immediately after invoices are approved for payment by the certifying officer, all invoices and supporting documentation must be stamped as "PAID" to prevent reuse of these documents. In addition, HUD provided formal training to its employees in the policies and procedures contained in the manual.

In November 2004, HUD officials informed GAO that staff training to be held in 2005 would include coverage of enhancements to HUD's internal controls over payment processing. In addition, HUD is developing a quality assurance process for management control and oversight of its disposition program specific to the requirements of the new contract. Oversight of the disbursement process by HQ is being incorporated into the control process under development. In the interim, HQ staff will review a random sampling of SAMS transmittals to determine adherence to invoice review process. As of November 2006, HUD included terms in its revised management contracts that detailed minimum documentation requirements that must be met for all payment requests. In addition HUD implemented procedures as part of its new financial manual that stipulate that all payment requests are to be supported by original invoices. In the cases where the contractor or HUD cannot the original invoice, transmittals may be processed only if these are stamped with a "Paid as Original" or "Use as Original" stamp.

On May 20, 2008, HUD issued a memorandum implementing "Single Family Asset Management Data Review Procedures for Expenses related to the Management and Sale of REO (Real Estate Owned) Properties." These procedures provide for the analysis of property specific expenses and establish a standard performance metric to assist HUD managers in their quarterly reviews to identify trends and anomalies in all expense categories.

On September 26, 2007, HUD hired an independent public accountant (IPA) to develop standard standard metrics for conducting analytical reviews focused on comparison of property expenses, pass through expenses, and expense classifications. At the end of each quarter, the IPA is required to prepare a report for HUD management that identifies anomalies if any, and "red flags" items in specific expense categories for review by HUD managers.

HUD included in version 2 of its Financial Control Manual, which became effective November 1, 2006, an addition to the Cost Allocation to Properties section. This addition requires that upon execution of any contract involving allocated expenses, a written memorandum will be prepared by the Government Technical Representative and delivered to the Director of the Office of Single Family Asset Management, identifying (i) the subset of properties subject to the allocation and (ii) the allocation percentage to each property within the subset. Any changes to the allocation will be documented in the same manner. In addition, if the expense is to be allocated is a non-contract expense and originated at the HUD single family housing, Homeowernership Centers (HOCs) or headquarters, the written allocation instruction must include approval by the appropriate official based on the dollar amount of the expense.

HUD issued a revised Financial Control Manual in September 2006. This revised manual provides the minimum documentation that must be included with contractor payment requests, and describes who in HUD is responsible for reviewing and approving payment requests.

HUD completed its research of the $16,293,364 of questionable payments in November 2006 and provided us with a schedule that, among other things, identified the amount of questionable payments, the action taken by HUD to determine if each payment was a valid use of government funds, and the results of the review performed. HUD concluded that all of the payments were a valid use of government funds.

HUD researched the questionable payments and found that in some cases the documentation was appropriate; however, in other cases, procedures were not followed consistently and documentation was not in a format that would enable an unrelated party to clear understand the transaction. As a result, Version 2 of HUD's Financial Control Manual, which became effective November 1, 2006, was revised to require that the Government Technical Managers (GTMs) and Government Technical Representatives (GTRs) closely review all payment transmittals to ensure that the support for all payment transactions is clearly documented. The GTMs and GTRs are also to verify the review performed by the support service contractors' staff, which require these staff to document on the payment transmittals that the goods and services being paid for are legitimate and accurate.

Version 2 of HUD's Financial Control Manual, effective November 1, 2006, established improved control procedures over single-family housing payments, including procedures requiring review of all payment transmittals to ensure that they are adequately documented and recovered, as appropriate. Specifically, with respect to the recovery of identified amounts, HUD provided data in 2008 showing that GAO identified questionable amounts were offset against amounts owed contractors.

HUD completed its risk assessment of single-family contractor payment transmittals in November 2006. HUD's Financial Control Manual, which became effective November 1, 2006, was revised to require the Government Technical Manager (GTM) to verify "before" and "after" pictures of repairs to gain additional assurance that the repairs were performed before paying the contractors. In addition, the manual requires that GTMs or Government Technical Representatives perform quarterly performance reviews of each single-family contractor including random inspection of major repairs.

In response to GAO's recommendation, and in accordance with the Improper Payments Information Act, HUD began performing annual assessment of payments for key programs in fiscal year 2005, including single-family payments to contractors and other vendors regarding single-family property dispositions. In FY 2005 these payments were subjected to statistical sampling and the results indicated a decrease in the improper payment dollar rate. This improvement has been attributed to better data identification and collection, as well as increased oversight of the payment process by HUD staff. The HUD FY 2005 Performance and Accountability Report showed single-family payments to be below the threshold established by the Improper Payments Information Act and therefore it has been removed from HUD's inventory of activities of at-risk of a significant level of improper payments.

In response to GAO's recommendation, HUD developed and implemented a financial control manual, dated September 2006, that contains detailed procedures for key steps in the single-family payment process. Also, training was conducted in 2006 which headquarters and home ownership center staff attended. This training included coverage of areas of contract administration, monitoring, management controls, and financial controls over disbursements. Additionally, HUD is planning to use an independent public accountant to perform reviews of these controls and make recommendations for improvements as necessary.

As of May 2006, the Disposition Demonstration Program was essentially complete. All multifamily properties in the program were repaired or rebuilt and sold. Consequently, through disposing of all the program's assets, HUD has effectively addressed the intent of our recommendation--reducing HUD's vulnerability to fraud, waste, abuse, and mismanagement.

HUD/OIG conducted a review of the expenses and determined that the costs charged by the MassHousing Agency for the expenses reviewed were supported and reasonable and met the requirements of the agreement between HUD and the Agency.