Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 10 until they pass to the finance part of HUD Furthermore, the two systems routinely show large differences in the number of properties FHA owns at any given time, and only recently have attempts been made to try to explain these differences Collectively the problems with the property systems cause uncertainties about the number and dollar value of the properties FHA actually owns, leave questions about how property can be properly managed and sold with no information about its true value, and further exacerbates the cash management problems should properties not picked up by either system be sold without HUD’s knowledge The cash management problems resulted, in our view, from a lack of appreciation for the need to closely control cash transactions, particularly those that have been delegated Insufficient management emphasis on the need to perform very basic Treasury reconciliation functions thoroughly and timely was also a contributing factor However proper control was also constrained by a split between responsibility for cash and property management functions and accountability over them Moreover, the use of case level information by those primarily responsible for property management, and then later dollarizing property transactions when another group needed to report property transactions constitutes an unjustifiable split between those responsible for property management and sales and those whose job it is to report this information We understand that HUD is now implementing a new automated system which will eliminate the two redundant property systems and which will facilitate better cash control and more timely reconciliation to Treasury information However, this new system will not be fully operational for several more months, and we believe that HUD must take some near term action to address the problems that still exist in cash and property management Therefore, until the new system is fully operational we suggest that the Secretary direct FHA management to: (1) Perform a complete physical inventory, perhaps on a region by region basis, of FHA-owned single family properties This will allow HUD to identify properties which should be in its inventory but are not, and will also facilitate the identification of properties which may have been sold without I-IUD’s knowledge Furthermore, obtaining an accurate property inventory is essential to ensuring that the new system will contain accurate property information; (2) Prepare a report on a quarterly basis of property held in inventory for longer than one year The regional offices should then research each case to determine if the identified property has really been sold but not reported as such to HUD or, absent that, they should identify the problems causing the identified properties to remain in inventory for an excessively long period of time; and (3) Require headquarters management to prepare a monthly summary of properties sold for which no proceeds have been received, together with a summary actions being taken to recoup missing cash This is trial version www.adultpdf.com Page 22 GAO/AFMD-90-26 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 11 Our review of the HUD’s multifamily claim payments process indicated that multifamily claims for insurance benefits are not being paid in a timely manner and that the existing claim review and examination process is inadequate in detecting misrepresentations by mortgagees/lenders Both GAO and OMB require that internal controls provide reasonable assurance that government resources are protected from fraud, waste and mismanagement With respect to payment delays there is a significant backlog of claims cases awaiting final settlement and payment These are cases where the mortgagee has complied with all HUD filing requirements and for which legal clearance has been received from the Office of General Counsel but which have simply not been paid because of delays in final processing Since the delays in processing are due to reasons not controllable by mortgagees, HUD has to pay interest on the claim We have estimated that HUD has incurred additional interest costs ranging from $6 to $10 million as a result of these delays The inadequacies in claim review process pertain to the fact that HUD does not verify all fiscal data provided by mortgagees with the claim submission For example, we noted an instance where a mortgagee failed to disclose information about a special escrow account when submitting the claim for insurance benefits As a result, the claims examiners failed to reduce the claim amount by the remaining balance in this escrow account and the claim was eventually overpaid by some $2.8 million Delays in processing claims were caused by insufficient staffing levels, which were not quickly addressed and which caused the backlog of cases awaiting settlement to build to unacceptable levels Shortcomings in the claims examination process were caused by a lack of diligence in verifying all submitted information In the interest of saving time, some claim examiners did not verify all claim financial data to supporting documents submitted by mortgagees Some steps have been taken to address the staff shortages that caused the claim backlog HUD is seeking to hire ten additional accountants to augment the claim payment staff and there have been organizational realignments to ensure better supervisory control over the process In addition outside help is being sought to bolster the claims examination function However, over the longer term, this problem can only be eliminated with improved financial information at the individual program level which would indicate (1) impending defaults which may require allocating more resources to the claim examination and payment functions, (2) excessive interest cost being incurred, and (3) unusual increases in claims costs relative to insurance in force This is trial version www.adultpdf.com Page 23 GAO/AFMD-!%36 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 12 BOU’I’INE ACCOUNTING F-IJ-NCrrONS NOT BEING PEFWOAny operation the size of FHA has a number of routine accounting functions that must be continually performed to ensure that financial statements and other financial reports are accurately produced Routine accounting functions include very basic procedures - reconciling accounts to supporting records, diligent record keeping, controlling funds held on behalf of others, and making sure transactions are properly recorded to name just a few The need to perform these procedures would appear obvious and further, GAO’s policy and procedures manual specifically requires that they be performed However, HUD staff who perform FHA accounting functions have been deficient in performing many of these functions, and our audit identified nearly 100 adjustments that were necessary to correct resultant errors More specifically, we noted that: Documentation supporting several account balances was missing or incomplete Among the many unsupported balances, for example, there was inadequate support for $10.8 million of interest payable balances and for S1.l million of accounts payable to the public Reconciliations of general ledger balances to supporting records were not performed timely, and in some cases not at all Virtually every account in the financial statements had transactions that were neither reconciled nor explained There was very poor accountability of distributive share payments -Payments were made without proper support or justification In some cases payments were made with no evidence that the individuals receiving them had, in fact, insured their mortgages through PHA Forbearance agreements, agreements which restructure the terms of defaulted mortgages in the interest of providing some sort of work out, were not properly recorded in the loan system, thus misreporting mortgagor account balances - Escrow accounts maintained by HUD to fund repairs on properties financed by HUD mortgages were not properly accounted for Account balances shown by the banks holding the funds, recorded in the PHA’s records, and reported to mortgagors on the yearly statement all differed without explanation It is unclear why these functions have not been performed There was not enough emphasis placed on properly performing them in prior years, and now errors emanating from the past, and old, unexplained transactions have built This is trial version www.adultpdf.com Page 24 GAO/AFMD&XM Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 13 up and will be difficult to correct There was a similar lack of emphasis, in our view, on financial and accounting matters and on financial statements in general, and it is for this reason that we believe problems in performing very basic and fundamental accounting functions have persisted NormaIly shortcomings in some accounting functions would not necessarily cause significant problems, but because these shortcomings were so pervasive in FHA’s case, they could cause material misstatements in financial reports Moreover, in certain cases significant adjustments had to be made to reflect a more accurate situation Performance of these procedures should be a continuous process, and attention to them should not just be devoted in anticipation of a financial audit To correct these problems, responsibilities for performing accounting functions must be firmly established Supervisory reviews should then be initiated to ensure accounting functions are properly performed and on a timely basis Year-end closing procedures should be enhanced to include developing specific requirements for the year end close out, with a subsequent supervisory review of the closing process to ensure all closing procedures have been properly carried out All this should be done before financial reports are released to other Federal Agencies or to the public * l * * l Our consideration of the internal control structure would not necessarily disclose all matters in the structure that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above We also noted other matters involving the internal control structure and its operation that we have reported to FHA’s management in a separate letter This report is intended for the information of the Congress, the U.S General Accounting Office and the management of the Department of Housing and Urban Development This restriction is not intended to limit the distribution of this report, which is a matter of public record September 15, 1989 This is trial version www.adultpdf.com Page 25 GAO/AFMD-90.36 Federal Housing Administration Auditors’ Report on Compliance With Laws and Regulations 0th~ of Governmn: Sewes 180' K Slree! lu W WasMglo: DC 20006 Bite Telen3w2022960800 Ibterhouse To the Comptroller General of the United States and the Secretary of Housing and Urban Development We were engaged to audit the consolidated financial statements of the Federal Housing Administration (FHA), a fund of the Department of Housing and Urban Development (HUD), as of and for the year ended September 30, 1988, and have issued our report thereon dated September 15, 1989, except as to Note 14 to those financial statements, which is as of December 20, 1989 Compliance with laws and regulations applicable to FHA is the responsibility of FHA’s management We performed tests of FHA’s compliance with certain provisions of applicable laws and regulations However, our objective was not to provide an opinion on overall compliance with such provisions Material instances of noncompliance are failures to follow requirements, or violations of prohibitions, contained in applicable laws and regulations that cause us to conclude that the aggregation of the misstatements resulting from those failures or violations is material to the financial statements While the following instance of noncompliance may not necessarily be material to the financial statements, it is, nevertheless, reported herein because it could significantly impact FHA’s ability to effectively collect money it is owed ULD PURSUE FULL IMPLEMENTATION EBT COJJ,ECTlON Aa OF During fiscal year 1988, FHA did not achieve full implementation of the Debt Collection Act of 1982 (Public Law 97-365) with respect to how it applies collection procedures to claims emanating from FHA-insured mortgage defaults When FHA-insured mortgages default, claim payments are made for the unpaid principal balance plus any costs (principally unpaid interest) incurred by the insured mortgagee between the time of default and foreclosure In most cases, the claim payment made by FHA exceeds the amount recovered when the foreclosed property is subsequently sold However, the shortfall between claim payment and the amount ultimately recovered is not recorded in the accounting records as a claim of the U.S Government, and thus very few collection efforts are made against mortgagors This is trial version www.adultpdf.com Page 26 GAO/AFMD-90-36 Federal Housing Administration Auditors’ Report on Compliance and Regulations With Laws Report on Compliance with Laws and Regulations Page The Debt Collection Act requires that the head of an executive or legislative agency “shall try to collect a claim of the United States Government for money or property arising out of the activities of, or referred to, the agency.” Claims are defined by the Act as including “amounts owing on account of loans nsured o uanteed by the government and other amounts due the kovemme~t” (emphasis added) The Act further stipulates the types of collection procedures that should be applied to such claims including, among other things, administrative offset (such as against IRS refunds), assessing interest and penalties on delinquent amounts, and the use of collection agencies It has been HUD’s general practice to effectively forgive the debt by not taking collection action after the foreclosed property is acquired For example, HUD has not required mortgagees to obtain deficiency judgments in all cases, nor has HUD pursued such judgments on its own We have been informed that HUD has initiated a new policy of pursuing deficiency judgments in certain circumstances, and where they are allowed to so by applicable state law To fully implement the Debt Collection Act, HUD should record the debts as claims in appropriate claims files and document any subsequent decisions to terminate collection action and forgive the debts Where deficiency judgments have been obtained, the claims should be established as receivables in FHA’s accounting records and the collection actions authorized by the Act should be taken This may entail developing systemic means of accounting for numerous claims, but we encourage HUD to so Other agencies, most notably the Department of Veterans Affairs, have done so and have collected some portion of the claim, however small the amount By not fully documenting the debts owed to it and the reasons for taking or not taking collection actions, and by not establishing receivables when deficiency judgments are obtained, FHA may be missing opportunities to take more effective collection action Therefore, we suggest that FHA develop a systemic means of documenting when collection actions are not being taken, of recording deficiency judgments as receivables, and of applying the collection provisions of the Act to such receivables * l l l * The results of our tests indicate that, with respect to the items tested, FHA complied, in all material respects, with the provisions referred to in the second paragraph of this report With respect to the items not tested, except as described below, nothing came to our attention that caused us to believe that FHA had not complied, in all material respects, with those provisions This is trial version www.adultpdf.com Page 27 GAO/AFMD90-36 Federal Housing Administration Auditors’ Report on Compliance and Regulations With Laws Report on Compliance with Laws and Regulations Page There are a number of investigations currently being conducted about alleged improprieties involving HUD’s administration of FHA These investigations could reveal other violations of laws and regulations, but to date, a final determination about such violations has not yet been made The outcome of these investigations could have a material effect on FHA’s financial statements, however HUD is not yet able to determine what the effect might be Nor were we able to satisfy ourselves about the effect of the outcome of these investigations September 15, 1989 This is trial version www.adultpdf.com Page 28 GAO/AFMB9M6 Federal Housing Administration l?inmcid Statements Consolidated Statement of Financial Position SEPTEMBER 30, 1988 AND 1987 (Dollars in Thousands) September30, 1988 1987 ASSETS: Fund Balance with the U.S Treasury Investments in U.S Government Securities Principally Non-marketable (Note 3) Foreclosed Property Held for Sale, Net (Note 4) Mortgage Notes Receivable, Net (Note 6) Appropriations Receivable (Note 7) Other Assets and Receivables % 113.108 $ 175,331 6,651,427 1,432,116 2,808,597 400,586 437,629 $ 11,786,755 $ 11.905.686 628,692 5,411,ooo 3,994,668 119,545 525,759 2.047.392 3.983.749 175,743 35 1,472 142,133 3,993,268 302.775 150,158 3,531.434 14,640,778 Total Assets 6208,004 1,696,364 2,913,127 587,813 268,339 10,717,010 1.806.811 (9.941.681) 5,280,847 3,375,571 (7,117.649) 4,930,754 (2.854.023) 1.188.676 $ 11,786,755 $ 11,905,686 LIABILITIES AND GOVERNMENT EQUITY: Claims Payable Loss Reserves (Note 8) Unearned Premiums (Note 9) Debentures Issued to Claimants (Note i0) Accounts Payable, Accrued Expenses and Other Liabilities Distributive Sharesand Premium Refunds Payable Borrowings from the U.S Treasury (Note 11) Total Liabilities Government Equity (Deficiency) (Note 13): Mutual Funds Equity Subsidized Funds Cumulative Losses Appropriated Capital Total Government Equity (Deficiency) Commitments and Contingencies (Note 12) Total Liabilities and Government Equity The notes to the financial statementsare an integral part of this statement This is trial version www.adultpdf.com Page 29 GAO/AFMD99-36 Federal Housing Administration (EZO‘PSI’Z) S (L6L'Z91) f60’0Sf 9L9’881‘I (S66’6ZZW sasuadx3 JaAo sanuaAa8~0 (sass0-1).bua!syaa SasUadX~ [EJOJ, 6OS'P68'9 asuadxa laq30 asuadxz~ lsamq sasuadx~aAgElqllyIpy pul2!qoS ZZI'IOI 829‘8ff EIZ'SSP 8St7‘06Z 908‘ILZ Pf9‘fLO’Z 809’f9f‘f PIaH SaON ~UMO a%?e%llO&4J UO SaSSm JOJ UO!S!AOld Sa!‘WdOld 1OJ UO!S!AOJd UO SaSSq sayadoq JOsaps uo sass07 pazfpa~ sahlasax sso~ u! astamq iaN :!XSNWX3 sanuahax pot PI S’p99‘Z sanuailaa Iaqo amo3q IsalaiuI 961‘L9 IEL'IZL pauq 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Telen3w2022960800 Ibterhouse To the Comptroller General of the United States and the Secretary of Housing and Urban Development We were engaged to audit the consolidated financial statements of the Federal Housing... involving the internal control structure and its operation that we have reported to FHA’s management in a separate letter This report is intended for the information of the Congress, the U.S General Accounting. .. that the head of an executive or legislative agency “shall try to collect a claim of the United States Government for money or property arising out of the activities of, or referred to, the agency.”