HUD Single-Family and Multifamily Property Programs
Inadequate Controls Resulted in Questionable Payments and Potential Fraud Gao ID: GAO-04-390 March 3, 2004In our 2003 performance and accountability report on the Department of Housing and Urban Development (HUD), we continued to identify HUD's single-family (SF) mortgage insurance program as highrisk --an area we have found to be at high risk for fraud, waste, abuse, and mismanagement. Also, for years, GAO and HUD's Office of Inspector General (OIG) have reported weaknesses in HUD's contract administration and monitoring for both SF and multifamily (MF) programs. Given these known risks and the millions of dollars in disbursements made by the agency each year, GAO was asked to review payments related to the single-family property program and determine whether (1) internal controls provide reasonable assurance that improper payments will not be made or will be detected in the normal course of business and (2) payments are properly supported as a valid use of government funds. We also assessed HUD's monitoring of a major multifamily project with a state housing agency.
Significant internal control weaknesses in the process used to pay for SF property expenses made HUD vulnerable to and in some cases resulted in questionable payments and potential fraud. These weaknesses included (1) delegation of oversight functions in a manner that weakened the control environment, (2) lack of key control activities, including proper documentation and approvals and (3) limited monitoring of contractor performance. These weaknesses likely contributed to the $16.5 million in questionable and potentially fraudulent payments that we identified using data mining, document analysis and other forensic auditing techniques. GAO classified $16.3 million of payments as questionable because they were not supported by sufficient documentation to determine their validity. GAO also classified $181,450 of payments as potentially fraudulent after visiting single-family properties being managed by a certain contractor. At all the properties visited, GAO noted discrepancies between what was represented on paid invoices and what was actually received. The photographs below were taken at one of the occupied properties after HUD paid $2,060 for bathroom repairs. These potentially fraudulent payments for single-family properties were made to the same contractor that was engaging in potentially fraudulent billing practices related to our earlier work on the HUD MF property program. HUD paid this contractor $2 million in fiscal year 2002 and $2.5 million in fiscal year 2003 for SF property expenses. GAO also identified insufficient HUD monitoring of a major MF program with a state housing agency. While HUD provided all the funding for the program, it provided little oversight and instead relied on the state housing agency to perform oversight functions. Ten years into the program, actual cost totaled over $500 million dollars, almost triple the original development budget.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-390, HUD Single-Family and Multifamily Property Programs: Inadequate Controls Resulted in Questionable Payments and Potential Fraud
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March 2004:
HUD SINGLE-FAMILY AND MULTIFAMILY PROPERTY PROGRAMS:
Inadequate Controls Resulted in Questionable Payments and Potential
Fraud:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-390]:
GAO Highlights:
Highlights of GAO-04-390, a report to The Honorable Tom Davis,
Chairman, Committee on Government Reform, House of Representatives
Why GAO Did This Study:
In our 2003 performance and accountability report on the Department of
Housing and Urban Development (HUD), we continued to identify HUD‘s
single-family (SF) mortgage insurance program as high-risk”an area we
have found to be at high risk for fraud, waste, abuse, and
mismanagement. Also, for years, GAO and HUD‘s Office of Inspector
General (OIG) have reported weaknesses in HUD‘s contract administration
and monitoring for both SF and multifamily (MF) programs. Given these
known risks and the millions of dollars in disbursements made by the
agency each year, GAO was asked to review payments related to the
single-family property program and determine whether (1) internal
controls provide reasonable assurance that improper payments will not
be made or will be detected in the normal course of business and (2)
payments are properly supported as a valid use of government funds. You
also asked us to assess HUD‘s monitoring of a major multifamily project
with a state housing agency.
What GAO Found:
Significant internal control weaknesses in the process used to pay for
SF property expenses made HUD vulnerable to and in some cases resulted
in questionable payments and potential fraud. These weaknesses
included
(1) delegation of oversight functions in a manner that weakened the
control environment, (2) lack of key control activities, including
proper documentation and approvals and (3) limited monitoring of
contractor performance. These weaknesses likely contributed to the
$16.5 million in questionable and potentially fraudulent payments that
we identified using data mining, document analysis and other forensic
auditing techniques.
GAO classified $16.3 million of payments as questionable because they
were not supported by sufficient documentation to determine their
validity. GAO also classified $181,450 of payments as potentially
fraudulent after visiting single-family properties being managed by a
certain contractor. At all the properties visited, GAO noted
discrepancies between what was represented on paid invoices and what
was actually received. The photographs below were taken at one of the
occupied properties after HUD paid $2,060 for bathroom repairs. These
potentially fraudulent payments for single-family properties were made
to the same contractor that was engaging in potentially fraudulent
billing practices related to our earlier work on the HUD MF property
program. HUD paid this contractor $2 million in fiscal year 2002 and
$2.5 million in fiscal year 2003 for SF property expenses.
GAO also identified insufficient HUD monitoring of a major MF program
with a state housing agency. While HUD provided all the funding for the
program, it provided little oversight and instead relied on the state
housing agency to perform oversight functions. Ten years into the
program, actual cost totaled over $500 million dollars, almost triple
the original development budget.
What GAO Recommends:
GAO is making 24 recommendations to strengthen HUD‘s internal controls
over SF and MF property programs, decrease questionable payments and
improve contractor oversight. In responding to a draft of our report,
HUD agreed with some of GAO's findings and disagreed with others. In
particular, HUD disagreed with GAO classifying certain payments as
questionable. GAO reaffirms its position on its findings and all
recommendations.
Report to the Chairman, Committee on Government Reform, House of
Representatives:
www.gao.gov/cgi-bin/getrpt?GAO-04-390.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Linda Calbom at (202)
512-9508 or calboml@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Internal Controls Over SF Property Payments Were Inadequate:
Lack of Controls Contributed To Questionable and Potentially Fraudulent
Payments:
Insufficient Monitoring of a Major Multifamily Program:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Housing and Urban
Development:
GAO Comments:
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Type, Number, and Amount of Questionable Payments:
Table 2: HUD Spending Related to Multifamily Program:
Figures:
Figure 1: Geographical Jurisdictions of HUD's Four Homeownership
Centers:
Figure 2: Four-Step SF Property Payment Process:
Figure 3: Single-Family Properties Average per Property Expenses-Fiscal
Year 2002:
Figure 4: Invoice for Contract Change Orders:
Figure 5: Chain-Link Fence:
Figure 6: Records Management Invoice:
Figure 7: Relocation Invoice:
Figure 8: Agreement to Vacate:
Figure 9: E-mail Approving Payment:
Figure 10: Falsified Work Order:
Figure 11: Property 1-"New" Ceiling:
Figure 12: Property 1-"New" Bathroom Floor:
Figure 13: Property 1-"New" Sheetrock® Walls:
Figure 14: Property 1-"$1,590 Kitchen Cabinet":
Figure 15: Property 2-Bathroom "Repairs":
Figure 16: Property 2-More Bathroom "Repairs":
Figure 17: Property 2-"$1,082 Wooden Dowels":
Figure 18: Property 3-"New" Kitchen Ceiling:
Figure 19: Property 3-"New" Dining Room Ceiling on Floor:
Figure 20: Property 3-"New" Living Room Floor:
Figure 21: Property 4-$2,292 "New" Metal Door:
Figure 22: Property 4-$3,978 in Stoop "Repairs":
Figure 23: Property 5-"Repaired and Painted" Public Hall:
Figure 24: Property 5-"Plastered and Painted" Ceiling:
Figure 25: "Repaired" Bathroom:
Figure 26: "Repaired" Bathtub:
Figure 27: "Newly Tiled" Stairway:
Figure 28: "New" Ceramic Bathroom Floor:
Figure 29: "New" Bathroom Floor:
Figure 30: Timeline of HUD's Relationship with Contractor:
Abbreviations:
AC: Allocated cost:
FHA: Federal Housing Administration:
GTM: Government Technical Monitor:
GTR: Government Technical Representative:
HUD: U.S. Department of Housing and Urban Development:
MF: multifamily:
SAMS: Single-Family Acquired Asset Management System:
SF: single-family:
Letter March 3, 2004:
The Honorable Tom Davis:
Chairman:
Committee on Government Reform:
House of Representatives:
Dear Mr. Chairman,
A strong system of internal controls provides checks and balances
against waste, fraud, abuse, and mismanagement and is an important
component of an organization's ability to operate efficiently and
effectively. This is particularly important to the Department of
Housing and Urban Development (HUD), which depends heavily on
contractors to accomplish its mission. These contractors deliver
program services and perform many functions that used to be done by
HUD's staff, including those in its mortgage insurance program area.
HUD mortgage insurance programs are dependent on the actions of many
third parties, including the contractors who market and manage the HUD
single-family (SF) properties that HUD acquires when borrowers default
on their mortgages.[Footnote 1]
In our 2003 performance and accountability report on HUD, we continued
to identify HUD's single-family mortgage insurance program as high
risk--an area we have found to be at high risk for fraud, waste, abuse,
and mismanagement.[Footnote 2] Also, for years, we and HUD's Office of
Inspector General (OIG) have reported weaknesses in HUD's contract
administration and monitoring for both SF and multifamily (MF)
programs. These weaknesses, together with significant growth in HUD's
contracting activity, increased the department's vulnerability to and
in some cases resulted in fraud, waste, and abuse. Furthermore, HUD
expects contracting to increase even more.
In light of these concerns, you requested that we review internal
controls over fiscal year 2002 payments to contractors and other
vendors related to SF properties. During fiscal year 2002, HUD reported
that it paid more than $310 million for various goods and services,
including management fees and property repairs for its SF property
portfolio. For these payments, our objectives were to determine whether
(1) internal controls provided reasonable assurance that improper
payments would not be made or would be detected in the normal course of
business and (2) payments were properly supported as a valid use of
government funds. In addition, you requested that we continue our
review of HUD's multifamily program. Therefore, we assessed HUD's
monitoring of a major MF program being carried out with a state housing
agency that has payments of over a half billion dollars from its
inception in 1994 through September 30, 2003.
To identify and assess internal controls, we obtained an understanding
of HUD disbursement processes; conducted interviews with HUD
headquarters, four homeownership centers, and three contractor offices,
and performed walk-throughs of transactions. We also reviewed HUD
policies and procedures; property management and marketing contracts
and amendments, and reviewed our own reports, those by HUD's OIG, and
others. In addition, we tested a statistical sample of transactions to
evaluate key internal control activities. To test for validity of
payments, we selected transactions using forensic auditing techniques,
including data mining and document analysis. We then physically
inspected selected properties to determine if the services or goods HUD
paid for had been fully performed and the tangible goods received.
In June 2003, based on the results of the above described work, we
communicated to HUD and members of your office that we had identified
certain potentially fraudulent payments. At your request, we expanded
our work to (1) determine whether HUD had made changes to its internal
controls to address the causes of the potentially fraudulent payments
that we had identified in June 2003 and (2) test for additional
potentially fraudulent payments. To accomplish this additional work, we
interviewed HUD officials and used forensic auditing techniques to test
for additional potentially fraudulent payments made in fiscal years
2002 and 2003.
To assess HUD's monitoring of the MF program with a state housing
agency, we reviewed HUD's MF policies and procedures, the state
agency's policies and procedures, and HUD's interagency agreement with
the state housing agency. We also conducted walk-throughs of
transactions and interviewed officials at HUD headquarters, one field
office, and the state housing agency. In addition, we analytically
reviewed payment activity since inception of the project in 1994
through September 30, 2002.
While we identified some potentially fraudulent and questionable
payments, our work was not designed to identify all fraudulent or
questionable payments. Appendix I provides a more detailed discussion
of our scope and methodology. We conducted our work from December 2002
through January 2004, in accordance with generally accepted government
auditing standards as well as with the investigative standards
established by the President's Council on Integrity and Efficiency. We
requested comments on a draft of this report from the Secretary of HUD
or his designee. HUD's written comments are reprinted in appendix II.
Results in Brief:
Significant internal control weaknesses in the HUD SF property payment
process made the agency vulnerable to and in some cases resulted in
questionable and potentially fraudulent payments. These weaknesses
included (1) the delegation of oversight functions in a manner that
weakened the control environment, (2) a lack of key control activities,
such as proper approvals and clear documentation to support all payment
transactions, and (3) limited monitoring of contractor performance.
On the basis of a statistical sample, we estimated that about 42
percent[Footnote 3] of the total population of SF property payments for
fiscal year 2002 were not adequately supported and 58 percent[Footnote
4] were not properly approved. Further, HUD's monitoring of contracted
activities did not include the detailed analytical review of the
contractors' performance or any augmentation of control activities in
response to previously identified risks. The aggregate effect of these
internal control weaknesses was that HUD did not and still does not
have reasonable assurance that improper payments would be prevented or
detected in the normal course of business.
These weaknesses contributed to the $16.5 million in questionable and
potentially fraudulent payments made during fiscal years 2002 and 2003
to contractors and others that we identified using data mining,
document analysis, and other forensic auditing techniques, including
physical inspection of properties to test for whether the goods and
services billed and paid for had actually been delivered or
satisfactorily performed. These improper payments occurred and were not
detected in the normal course of business even though HUD paid
contractors $11 million during fiscal year 2002 for assistance in
reviewing and processing payments and performing quality control
oversight of management contractor performance.
The questionable payments included $15.2 million to contractors for
contract change orders that lacked adequate supporting documentation to
substantiate the validity of the payments. Payments were made without
basic support, such as standard contract modification agreements signed
by the contractors and HUD officials or identification of the specific
HUD properties covered by the payments.
We also questioned eight payments totaling $268,800 for partial
reimbursement of a contractor's claimed expenses for developing a lead-
based paint abatement program. The support for these payments did not
include a signed contract modification or other agreement for the
contractor to develop such a program, an indication of the total amount
to be paid by HUD to satisfy the claim, or the basis for reimbursing
the contractor for these types of costs that, according to HUD's
management agreement with the contractor, were not allowable unless
approved by HUD in advance. We questioned an additional 65 payments
totaling $844,466 for such things as utility services, "For Sale"
signs, and chain-link fences when the support for the payments was not
adequate to enable us to determine if the payment was a valid use of
government funds.
Deficient HUD monitoring resulted in potentially fraudulent single-
family program payments to a property management contractor for work
that was substandard or not performed at all. For example, in
performing an inspection of an occupied apartment where a bathroom
renovation had been billed and paid for by HUD, we found a rusted out,
broken sink on the floor and an inoperable toilet. We visited 18
properties for which HUD had disbursed $181,450 for renovations that we
determined by physical inspection that a substantial portion of the
work was either overcharged or not performed. This work was billed by
and paid to the same contractor we identified previously in our
multifamily work as having engaged in potentially fraudulent billing
practices.[Footnote 5] Through data mining, we identified $476,104 of
fiscal year 2002 payments to the same contractor for construction
renovations that had the same characteristics of the fraudulent billing
scheme in the multifamily program on which we testified during October
2002. HUD held several meetings with this contractor over several years
to discuss performance concerns and ultimately "heldback" payment for
certain billed work. However, we did not find evidence of additional
controls over the millions of dollars in payments made to this
contractor subsequent to the time that questionable billing practices
were identified. After months of discussion, HUD and the contractor
agreed to end the contract as of October 31, 2003.
In addition, we identified a lack of monitoring by HUD of a MF pilot
program with a state housing agency. While providing all funding for
the program, HUD delegated almost all of its oversight functions,
despite the fact that the program costs continued to escalate
significantly higher than the original development budget approved by
HUD. Ten years into the program, actual costs totaled over a half a
billion dollars, almost triple the original development budget.
Additional oversight by HUD may have helped to prevent at least some of
this cost escalation.
Without significant improvements in its internal controls, HUD's
ability to detect and prevent improper payments will continue to be
severely limited. We make 24 recommendations in this report to address
the internal control and improper payment issues we identified.
In written comments on a draft of this report from HUD's Assistant
Secretary for Housing-Federal Housing Commissioner, HUD agreed with
some of our findings and recommendations and disagreed with others. In
particular, HUD disagreed with our classification of certain payments,
including $15.2 million of inadequately supported payments for contract
change orders, as questionable payments. However, because HUD did not
provide documentation needed to support the validity of the payments,
they remain questionable.
Regarding our recommendations related to the MF pilot program, HUD
agreed to examine opportunities to enhance its oversight over the
remaining life of this particular program, but it did not agree to ask
the HUD IG to review the propriety of the use of the funds at this
time, but said it may elect to refer specific issues to the IG for
review. HUD did not specifically comment on the other 22
recommendations related to its SF program. We continue to believe that
our report is accurate and that all of the recommendations should be
implemented. Our response to HUD's comments is provided in the Agency
Comments section of the report and in appendix II.
Background:
HUD, through its Federal Housing Administration (FHA), helps finance
home purchases by insuring private lenders against losses on mortgages
for single-family and multifamily homes. If a borrower defaults on a
loan and the loan is subsequently foreclosed, the lender may file a
claim for most of its losses with HUD. After an insurance claim is paid
from one of HUD's various mortgage insurance funds, HUD assumes title
to the property and the property becomes part of the HUD property
inventory. HUD's mortgage insurance funds support a wide variety of MF
and SF insured loan activities, including management of HUD properties
until they are sold. HUD's mortgage insurance funds are financed by
annual appropriations from the Congress, upfront and periodic mortgage
insurance premiums from transactions with the public, or interest
revenue.
In 1994, we first designated HUD's programs as high risk due to
serious, long-standing, departmentwide management problems. In January
2001, we reduced the number of programs deemed to be high risk from all
HUD programs to two of its major program areas. One of the two programs
was SF mortgage insurance, which includes the management of property
inventory. In fiscal year 2003, we designated HUD's acquisitions
management, to include contractor monitoring, as a new major management
challenge because of extensive and growing reliance on contractors.
Our initial evaluation of payments related to HUD properties was first
discussed in our October 2002 testimony on our review of, among other
things, fiscal year 2001 payments to a contractor responsible for
managing HUD multifamily properties. We reported that this contractor
engaged in questionable billing practices that resulted in potentially
fraudulent payments. The contractor split construction renovation
charges into multiple projects to stay below the $50,000 threshold of
HUD-required approval. We identified about $10 million of this
contractor's invoices that individually were less than $50,000. We also
found cases for which HUD paid this contractor for goods or services
that were not received.
Single-Family Program:
In its SF property program, HUD contracts with six property management
firms who are responsible for all activities associated with managing
and marketing properties. Each of the contracts includes (1) having the
properties appraised; (2) securing the properties to prevent
unauthorized entry; (3) inspecting the properties to ensure that they
are clean and in presentable condition; (4) performing routine
maintenance, as well as repairs and renovations necessary to preserve
and protect the property; (5) listing the properties for sale, and (6)
selling them. Each contract covers a different geographic area that is
under the jurisdiction of what are referred to as HUD's homeownership
centers. Contractors may have agreements in more than one geographical
area. HUD also contracts with a support services contractor to
facilitate payment to these management firms and other vendors.
The homeownership centers are located in Atlanta, Georgia; Denver,
Colorado; Philadelphia, Pennsylvania; and Santa Ana, California. Figure
1 shows the geographical jurisdiction of each of the four centers. The
centers report directly to HUD's Deputy Assistant Secretary for Single-
Family Housing who, in turn, reports to the Assistant Secretary for
Housing-Federal Housing Commissioner.
Figure 1: Geographical Jurisdictions of HUD's Four Homeownership
Centers:
[See PDF for image]
[End of figure]
The Director of the Real Estate Owned Division in each of the four
centers is responsible for monitoring contractors' performance in the
respective center's jurisdiction. Homeownership center staff manage and
conduct the monitoring and prepare monthly assessments on contractors'
performance. The homeownership centers have a number of resources upon
which they can draw to aid them in making these assessments. For
instance, to assist in HUD's oversight, third-party contractors are to
inspect 10 percent of the properties handled by each management and
marketing contractor. Also for oversight purposes, another national
contractor is to follow a HUD checklist of procedures to be performed
for the review of 10 percent of the management and marketing
contractors' property case files each month. In fiscal year 2002, HUD
paid contractors $11 million for assistance in reviewing and processing
payments and performing quality control oversight of management
contractor performance.
In addition, the center's program support staff are to conduct follow-
up property inspections and file reviews, as well as a monthly on-site
review at the contractors' offices. As part of the analysis, the HUD
staff assign a risk rating of low, medium, or high to the contractor's
performance on each of 11 performance dimensions such as claims review,
property maintenance, and sales procedures. According to agency data,
payments for SF property expenses totaled more than $310 million in
fiscal year 2002. The SF Acquired Asset Management System (SAMS)
payment process reimburses management contractors for costs incurred in
managing and marketing HUD properties, and makes direct payments to
certain other vendors, such as oversight contractors, and pays
management fees to the management contractors. The HUD payment process,
as designed, includes four key steps: (1) the preparation of the
payment request by the property management contractor or other vendor
seeking funds, (2) initial review of the payment request by a support
services contractor, (3) HUD approval, to include a technical review by
a person appointed as the government technical monitor (GTM),[Footnote
6] and final authorization by a government technical representative
(GTR),[Footnote 7] and (4) payment either by electronic transfer or
paper check.
Multifamily Project:
In its MF program, HUD contracts for property management services, such
as on-site management, rent collection, and maintenance for the
multifamily properties it acquires through the foreclosure process. In
1994, due to a substantial increase in HUD's inventory of MF
properties, HUD entered into an agreement with a state housing agency
for the renovation, disposition, and interim management of certain MF
properties located in one geographical region.
HUD officials told us this program was intended to be a demonstration
or pilot program, to determine if this type of agreement is feasible as
a common practice within HUD. Under this pilot, HUD is responsible for
providing all the money needed to fund the program, and the state
agency is responsible for developing and monitoring the project.
Internal Controls Over SF Property Payments Were Inadequate:
HUD's internal controls did not provide reasonable assurance that
improper payments would not occur or would be detected in the normal
course of business. We identified fundamental weaknesses in the four-
step process used to pay for SF property expenses. Our Standards for
Internal Control in The Federal Government include (1) establishing a
positive control environment throughout the organization, (2)
performing of control activities, which are an integral part of an
entity's accountability for stewardship of government resources, and
(3) monitoring to assess the quality of performance over time. However,
we found HUD did not delegate functions in a way that supported a
positive control environment; specifically, the agency routinely relied
on a support services contractor to prepare management contractors' and
other vendors' payment requests and perform technical reviews of
payment requests. HUD also routinely failed to require or ensure that
all transactions were clearly documented, which is a control activity
that helps ensure accountability for resources. HUD monitoring of
contractors' performance, particularly the review of the nature and
amount of expenses incurred, was also inadequate. In addition, HUD did
not respond appropriately to identified vulnerabilities that increased
the risk of unsatisfactory performance. These internal control
weaknesses made the HUD SF property program highly susceptible to
fraud, waste, and abuse.
Process for Payment of SF Property Expenses Relied Extensively on
Contractor:
HUD delegated oversight functions in a manner that weakened its control
environment and resulted in established controls not being followed. We
found that HUD routinely relied on a support services contractor to
perform key elements of the first three steps in the four-step payment
process (fig. 2) for SF property expenses. These delegated oversight
functions included preparing payment requests (step 1), performing the
administrative review (step 2) and performing a technical review (step
3.1) of payment requests.
Figure 2: Four-Step SF Property Payment Process:
[See PDF for image]
[End of figure]
HUD relied on the support services contractor to perform the functions
in both step 1 and step 2 of the payment process when HUD staff or the
support service contractor determined that the original request needed
to be modified. When payment requests received by HUD from the property
management firms or other vendors needed modification to either the
amount requested or property to be charged with the expense or other
information, the support service contractor would make the change and
prepare a revised payment request. This function is analogous to
voiding and then replacing a check in a manual payment system. HUD's
written policies require that the management contractor create its own
payment requests and those needing modification be returned to the
requesting contractor for any changes.[Footnote 8] That is, the
contractor requesting the payment was responsible for resubmitting the
payment request after addressing the issues that caused the need for
modification.
However, HUD regional officials advised us and were aware that this
control was not followed primarily to avoid delays in processing
payments. In these cases, the support service contractor, using the
same transmittal number that was used for the original request, created
the revised payment requests.
HUD also relied on the support service contractor to prepare payment
requests (step 1) and perform the administrative review (step 2) of
payment requests when the vendors requesting payment did not have
access to the electronic payment system--HUD SAMS. While the property
management contractors have access to SAMS, other vendors who routinely
request payment from HUD, for example closing agents, do not. In some
of the cases, the vendors without access to SAMS were submitting
requests for payments directly to the support services contractor,
rather than to the property manager of the underlying property or a HUD
official who would be in a better position to monitor the completion
and quality of work.
In addition, HUD requires that vendors provide a signed request form,
as assurance that the information submitted on payment requests is true
and accurate. We found numerous requests created by the support
services contractor that did not have this signature. Instead, the
support services contractor signed the request form.
The third step of the HUD payment process, as designed, is HUD approval
that includes a technical review by a HUD-appointed employee. However,
on the basis of the results of our statistical sample of payment
transactions, we estimate that about 58 percent[Footnote 9] of the
total population of single-family payment transactions to contractors
and other vendors at the four homeownership centers were not properly
approved due to a lack of technical review. Specifically, we found that
the support services contractor was routinely performing the technical
review (step 3.1) reserved for the HUD-appointed GTM at two of the four
HUD homeownership centers.[Footnote 10] In these situations, HUD
permitted the support services contractor to act outside the
contractor's scope of authority granted through the HUD control
structure by conducting the review, which requires a HUD-appointed
individual with specific technical expertise. That is, the request for
payment should not have been approved due to the absence of the GTM
technical review.
HUD's delegation of the oversight functions for three of the four steps
of the SF property payment process significantly weakened the control
environment. The overreliance on the support service contractor
resulted in a control environment where the controls over rejected
payment requests and the approval of requests were not followed. When
oversight functions are delegated in a manner that does not support a
positive control environment, the control process may not be effective
in detecting and preventing improper payments.
HUD Payments Lacked Adequate Support:
On the basis of our statistical sample, we estimated that about 42
percent[Footnote 11] of the total number of SF property payments at the
four homeownership centers were not adequately supported. That is, the
minimum support necessary for a third party to determine the validity
of the payment was not included in the documentation provided with the
payment. Control activities, such as clearly documenting all
transactions, are an integral part of an entity's accountability for
stewardship of government resources.
HUD did not enforce consistent program wide documentation requirements,
but rather allowed each HUD approving official to determine the
adequacy of supporting documentation. As a result, the nature and
extent of acceptable supporting documentation was inconsistent from
region to region. For example, two of the four HUD homeownership
centers accepted "manual" payment requests that were created outside of
the HUD automated system. This deviation from the written internal
control policy created inconsistencies in the payment request process
among the contractors for that region as well as across the four
homeownership centers. These "manual" payment requests did not have all
the supporting data elements (e.g., payee Social Security number or tax
identification number, address, remittance address) that the system-
generated payment request included. Therefore, edit checks in the
automated system, such as limitations on who was authorized to change
the payment remittance address, were lost when manual payment requests
were created.
We found payments that also lacked adequate support, such as evidence
that goods or services had been received, and that competitive bids had
been obtained prior to the work being performed. Some supporting
documentation lacked evidence of any validation of the charges. For
example, payments to the contractor responsible for spot inspections of
properties typically would be based on an invoice that reflected a
fixed rate per property inspected and a list of the properties
inspected. However, the support for these payments was devoid of any
indication that the reviewer had verified the rate used, HUD's
ownership of the properties inspected, or otherwise determined the
validity of the amount and relevant terms of the payment request. We
also found that invoices and other supporting documentation were not
effectively canceled to prevent unauthorized or inadvertent reuse as
support for subsequent billings, and that other than original documents
were used to support payments without any indication as to why other
than an original invoice was accepted.
We advised HUD officials when adequate supporting documentation was
missing and we could not determine the validity of a payment selected
for review. HUD management advised us that the support for certain
amounts paid was not included with the payment documentation; however,
the reviewing, approving and certifying officials were to simply review
the contract file to verify the accuracy of the charges. We did not see
evidence of this contract review. For example, as discussed later,
through data mining we identified $15.2 million in payments for
contract modifications with insufficient supporting documentation. The
support for these payments was typically limited to copies of e-mails
to the homeownership center from headquarters directing that payment be
made, incomplete standard contract modification forms, and spreadsheets
detailing by property only an insignificant portion of the total amount
paid. We also identified cases where the HUD approving official at one
of the homeownership centers was not requiring a contractor to provide
specific support for payments to subcontractors, even though certain
minimum support was required by the terms of the management contract,
such as evidence that the contractor had paid the subcontractor before
requesting reimbursement from the government. Adequate support for
these amounts is critical because the payment is a reimbursement for
the amount paid by the contractor to the subcontractor. Later in this
report, these and other examples of payments without adequate support
that were identified through data mining will be discussed in more
detail.
HUD Failed to Monitor Contractors Adequately:
Neither HUD headquarters personnel, nor the regional staffs,
systematically performed detailed analytical reviews of the millions of
dollars in expenses generated by payments to contractors and other
vendors. Monitoring the quality of performance over time is a critical
control activity. Detailed analytical review of expenses focusing on
key data elements is a way for management to assess performance and
identify areas of risk. Although monitoring was deficient, HUD did
perform some program wide analysis of certain financial performance
indicators and limited analysis was done on a region-by-region basis.
For example, the average holding costs per property[Footnote 12] and
average time held in inventory were calculated. HUD headquarters
officials stated that when a region had a "spike" in one of its
performance indicators, a conversation to identify potential causes
will take place. However, without specific analytical review of
expenses, the real causes of the "spikes" may not be identified.
Analytical reviews include focusing on key data elements, such as
property number, vendor name, and expense classification, to identify
patterns or anomalies that may require further inquiry or analysis. The
results of detailed reviews can lead to cost-saving opportunities, the
identification of usual patterns, and ultimately the discovery of
instances of fraud, waste, and abuse. The automated SF payment system
captures expenses by (1) case number and (2) expense category. These
system features have the potential to assist HUD in strengthening its
oversight of contractors. For example, totaling expenses by property
provides HUD with the ability to compare and analyze property expenses
over time from acquisition through sale of the property in a variety of
ways, including by geographical region and contractor. Further,
analyzing expenses by category, such as board-up, general repair, and
clean-up expenses, would provide HUD with meaningful oversight
information. Also, HUD management may find focused expense analysis
work, similar to that which we performed for this review, to be an
effective and efficient method for assisting in preventing and
detecting improper payments. Our detailed analytical reviews of HUD
payment data identified patterns that led us to specific improper
payments. For example, figure 3 illustrates one of the basic types of
analyses we performed to determine areas of high risk that allowed us
to focus on the areas we viewed as most vulnerable to improper
payments.
Figure 3: Single-Family Properties Average per Property Expenses-Fiscal
Year 2002:
[See PDF for image]
[End of figure]
Our analysis, as depicted at figure 3, focused our attention on
determining the reason for the relatively high expense per property in
the Philadelphia homeownership center, and then on one particular
contractor within that center, when compared to other regions. We
ultimately identified significant potentially fraudulent payments made
at the New York City properties that are discussed later in the report.
Our Executive Guide: Strategies to Manage Improper Payments[Footnote
13] explains how data mining and other forensic auditing techniques
analyze data for relationships that have not previously been
discovered. The guide also provides examples of various federal and
state agencies that had performed such analysis. HUD officials
indicated that lack of resources was the primary reason that they did
not perform detailed expense analysis.
We found that one potential roadblock to a meaningful detailed
analytical review was HUD's lack of control over expenses that it
classified as allocated costs (AC). This expense category was intended
to be used to accumulate expenses that could not be directly charged to
a property and then allocate those expenses over all properties or
those that received some benefit from the expense. For instance, the
expense incurred for bonding coverage and file reviews for the entire
program would be properly chargeable to AC and then allocated to all
properties. However, HUD routinely used AC for expenses that should
have been charged to specific properties. For example, we identified
renovation charges for a specific property being classified as
allocated costs. The accountability for HUD resources and ultimately
the monitoring of the contractors' performance were negatively affected
when expenses were not consistently and accurately classified.
HUD's internal control monitoring of its contractors did not ensure
timely and effective action in response to identified risks. For
example, we found there was not an effective property inspection
program that linked physical inspections to work billed. We also found
that HUD made payments in its single-family program to a contractor for
1 year after we testified that the same contractor was engaging in
abusive billing practices in HUD's multifamily program. Although HUD
held numerous meetings with the contractor over several years since
shortly after the inception of the contract in June 2001, HUD did not
promptly or effectively address the identified risk by implementing
compensating controls over this contractor's activities. We will
discuss these issues in greater detail later in this report.
Lack of Controls Contributed To Questionable and Potentially Fraudulent
Payments:
The lack of fundamental internal controls over the process used to pay
SF property expenses likely contributed to $16.3 million of
questionable and $181,450 of potentially fraudulent payments that we
identified through the use of forensic auditing techniques, including
data mining and document analysis. We found questionable payments for
invoices that had not been appropriately reviewed and authorized, that
lacked adequate support and documentation, and where one person
falsified a key support document. In addition, HUD did not monitor
contractor performance and take prompt action to correct known
deficiencies. As a result, we found a number of instances where HUD
paid for contractor services that were substandard or not performed at
all. These potentially fraudulent billings were all made by a
contractor we identified in our previous work on certain fiscal year
2001 MF property payments as carrying out highly questionable billing
practices. HUD recently took action to end its use of this contractor.
The $16.5 million of questionable and potentially fraudulent payments
made to contractors and other vendors during fiscal years 2002 and 2003
demonstrates the unacceptably high vulnerability of the program to
questionable and potentially fraudulent payments.
Questionable Payments:
We classified payments as questionable if they were not supported by
sufficient documentation to enable an objective third party to
determine if each payment was a valid use of government funds. For the
$16.3 million in payments we classified as questionable, we could not
determine, as applicable, one or more of the following: (1) the nature
of the goods or services HUD was paying for, (2) if the quantity and
cost for the goods or services was correct for each item purchased, (3)
if the government received the goods or services, (4) if a valid
contract or other agreement existed to support the payment, (5) if the
payment was for a valid obligation of the program, (6) if competitive
bids had been obtained for the work, and (7) if there was a legitimate
government need for the goods or services. Table 1 summarizes these
questionable payments.
Table 1: Type, Number, and Amount of Questionable Payments:
1;
Types of payment: Contract change orders; Inadequate support;
Number of payments: 23;
Amount: $15,180,098.
2;
Types of payment: Water and sewer services; HUD did not own the
properties at the time of service;
Number of payments: 1;
Amount: $206,597.
3;
Types of payment: Lead-based paint abatement program; Inadequate
support;
Number of payments: 8;
Amount: $268,800.
4;
Types of payment: Signs and airfreight delivery; Competitive bids not
obtained;
Number of payments: 10;
Amount: $58,343.
5;
Types of payment: Chain-link fences; Competitive bids not obtained;
Number of payments: 5;
Amount: $30,366.
6;
Types of payment: Records management services; No evidence of an
agreement for the services;
Number of payments: 3;
Amount: $296,087.
7;
Types of payment: Relocation fee; No justification or verification;
Number of payments: 1;
Amount: $1,300.
8;
Types of payment: Lawn service and repairs; Falsified work orders;
Number of payments: 23;
Amount: $23,000.
9;
Types of payment: Other; Inadequate support;
Number of payments: 22;
Amount: $228,773.
Total questionable payments;
Number of payments: 96;
Amount: $16,293,364.
Source: GAO analysis of payments for fiscal year 2002.
[End of table]
For illustrative purposes, we provide specific examples of actual
support[Footnote 14] for eight payments. The documents that are
reproduced in the examples were provided to us by HUD as support for
these payments and are the same support that HUD officials relied on to
review and approve the payments.
Example 1-Contract Change Orders:
We identified $15.2 million of questionable payments to contractors for
contract change orders with inadequate support for the payments. For
example, five property management contractors received $10.6 million in
payments for change orders when either no standard contract
modification agreement supported the payments or the modification
agreement was not signed by one or both parties. In addition, details
of the amount charged for each property were not provided for most of
the amounts included in each payment. Frequently, the payments were for
services performed over long periods of time prior to the date of
payment and the supporting documentation did not address why. For
example, a change order issued March 2001 led to payments over a year
later of fixed amounts totaling in the millions without an adequate
explanation for the delay in payment included in the supporting
documentation.
In January 2004, HUD headquarters officials advised us that fully
executed contract modification agreements existed at the time each of
the payments was made. While HUD officials acknowledged that the
agreements and underlying detail support by property were not in the
payment files, they stated that the reviewer, approver, and certifying
official reviewed all documentation in order to verify the accuracy of
the charges. We found no evidence that the reviewers, approvers, or
certifying officials had located these documents to validate payments.
Figure 4 shows that the only support for a single payment of $1,318,692
in June 2002 was an invoice that included two lines of explanation for
$452,000 and $862,661 with the description: "Lump sum Payment for
Change Order." No other support was provided for these two line items,
such as a copy of a contract modification agreement signed by both
parties, a list of the property numbers for the properties that
received the goods or services, the time period covered by the
payments, or an explanation as to what the government was paying for.
Allocated costs, a pooled expense category, was charged with $1,314,661
of the total payment. The balance of $4,031 was charged to specific
properties. HUD internal control policies require that specific
properties be charged for all identifiable expenses. Further, there was
no indication that the approver sought to determine the time period of
the charges and relate that period to the dates HUD owned the
properties for which the payments were made.
Figure 4: Invoice for Contract Change Orders:
[See PDF for image]
[End of figure]
Example 2-Water and Sewer Services:
We identified a $206,597 payment to one contractor for water and sewer
charges related to 31 HUD properties for an average of $6,664 per
property. HUD acquired the majority of the properties in 2001 or 2002.
Substantially all the $206,597 paid was for services provided prior to
HUD's ownership. We considered this payment as questionable because the
support was inadequate.
HUD regional officials informed us that payments were made to protect
the properties from liens by the water authority. We found no
indication in the payment support as to why HUD was paying for services
provided even before the period of ownership covered by the most recent
HUD-insured mortgage. While recognizing HUD's concern to protect the
property from liens, we found no indication that HUD pursued why these
charges had not been identified at the time of settlement and
acquisition of the properties, or that the contractor or HUD had
pursued negotiating a settlement with the water authority. Further, our
review of the charges indicated numerous large amounts given the nature
of the property and the time period involved. For example, one invoice
dated July 2002 was for $35,756 for water and sewer services from May
1995 through June 2002 for a property HUD acquired in June 2001. Our
research identified three prior owners of this property during the
period covered by the bill paid by HUD. Another invoice was for $18,530
for services from January 1999 through May 2002 on a property HUD
acquired in May 2002. Furthermore, at least two of the prior owners
received FHA loans to purchase this property, even though at the time
of purchase there were outstanding water and sewer bills related to the
property. Yet, HUD's payment files contain no indication that HUD
officials reviewed the charges for accuracy, despite the unusually
large amounts.
Example 3-Lead-Based Paint Abatement Program:
Our review found eight payments totaling $268,800 that HUD headquarters
directed its regional offices to make to a contractor for partial
reimbursement of claimed expenses of $529,682 to develop a lead-based
paint abatement program. The contractor claimed that the lead-based
paint abatement program was developed in response to a HUD request.
Support for these payments did not include a signed contract
modification form or other agreement for the contractor to develop such
a program, or any indication of the amount or basis for settlement
against the claimed expense of $529,682. The support provided to us for
two payments totaling $99,000 had no signatures by HUD officials
indicating the requests had been reviewed, approved or certified for
payment.
Further, the entire amount of the payments was charged to allocated
costs, a pooled expense category, and not to specific properties as
required by HUD policy.
Although we started asking for support for these payments in August
2003 and received some information from HUD over time, it was not until
January 2004, HUD headquarters provided us with documentation that
included emails from a HUD contracting official to the contractor that
indicate that the contractor agreed to accept $240,000 as the remaining
payment on the lead-based paint services, that invoices for this amount
will be handled as pass-through expenses similar to what was done for
the initial payment of $300,000 and that "we won't need to issue
contract modifications this way."
No explanation was provided as to how the $540,000 settlement was
reached or why such amount exceeded the total amount claimed by the
contractor. Further, the management contract provides that all costs of
performance are at the expense of the contractor unless otherwise
specifically identified as pass-through cost in the contract. HUD must
approve any additional pass-through expenses prior to the expense being
incurred. We found no evidence that development of a lead based paint
abatement program was specifically identified as a pass-through cost or
that HUD granted approval prior to the contractor incurring the
expense.
Example 4-Signs and Airfreight Delivery:
We identified 10 payments totaling $58,343 for the purchase and
shipping of over 14,950 "for sale" signs for use by contractors on HUD
properties. The airfreight fee to ship the signs from Texas, the
contractor's home office, to field offices in various states including
California, Tennessee, and Illinois, totaled $6,805. The contractor did
not obtain the required competitive bids.[Footnote 15] Further, we
found no evidence that (1) local supply sources had been considered,
(2) the quantity of signs paid for was reviewed for reasonableness, or
(3) the large air freight charges had been questioned. Also, we could
not reconcile some amounts paid to the invoices used to support the
payments. In January 2004, HUD headquarters officials advised us that
they agreed to be responsible for all costs incurred by the contractor
for developing the signs and for the accelerated delivery and that a
contract modification agreement was executed. However, they did not
provide an explanation as to why local supply sources had not been
considered, nor did they address the other issues described above.
Example 5-Chain-Link Fences:
We identified five payments totaling $30,366, to reimburse a management
contractor for fencing installed at multiple locations by a single
vendor. Figure 5 shows one such fence. There was no evidence that the
contractor obtained the required written competitive bids. The
representatives of the contractor that we interviewed in August 2003
told us that a city ordinance requires this particular fencing vendor
be used. In January 2004, HUD headquarters officials advised us that
the vendor was awarded the work after a competitive bidding process.
However, HUD could not locate the supporting documentation as the
bidding process had occurred some years earlier.
Figure 5: Chain-Link Fence:
[See PDF for image]
[End of figure]
Example 6-Records Management Services:
We identified one payment of $98,695 and two subsequent payments of
$98,696 each for a total of $296,087 to a contractor for "Records
Management." The support for the first payment (fig. 6) was the billing
from the contractor and an annotation from a HUD employee indicating
that it was "OK to pay." There was no contract included with the
support for any of the payments. There also was no indication that the
amount of the payments had been compared to a contract. HUD regional
staff advised us that the "OK to pay" notation on one of the invoices
by the division director was sufficient to process the payment. In
January 2004, HUD headquarters officials advised us that a valid
agreement for the services was in place at the time of payment, but
neither the contract for the services, nor the modification to the
agreement with the contractor, is required to be attached to the
payment. However, we found no evidence that these documents were
reviewed or considered prior to payment of the invoices.
Figure 6: Records Management Invoice:
[See PDF for image]
[End of figure]
Example 7-Relocation Fee:
We identified a payment of $1,300 to reimburse a contractor for a fee
paid to an individual to vacate a property not in the HUD inventory.
The support for the payment was an internal e-mail questioning if the
property was in HUD's inventory, a generic invoice that was unsigned
and did not include the FHA property number-a HUD requirement for all
payments (fig. 7), an unsigned "Agreement to Vacate" (fig. 8), and a
final approval e-mail (fig. 9) without explanation. HUD regional staff
subsequently told us that a signed "Agreement to Vacate" existed;
however, we found no evidence of the signed agreement with the support
for the payment. HUD charged the payment to Allocated Costs, a category
for pooled expenses. The property located at the address on the form
did not have a FHA property number, which is required to submit
expenses for a HUD property. In January 2004, HUD regional officials
confirmed that at the time of payment the property was not in the HUD
automated payment system.
Figure 7: Relocation Invoice:
[See PDF for image]
[End of figure]
Figure 8: Agreement to Vacate:
[See PDF for image]
[End of figure]
Figure 9: E-mail Approving Payment:
[See PDF for image]
[End of figure]
Example 8-Lawn Service and Repairs:
During our document analysis work we identified suspicious documents
supporting a number of payments. Specifically, we found numerous work,
one of which is illustrated by figure 10, that were initialed three
times by the same person certifying (1) receipt of competitive bids,
(2) completion of the work by the subcontractor, and (3) inspection of
the work performed. During our site visit to Santa Ana, California, we
interviewed representatives of the contractor and asked for an
explanation for the initials on these work orders. We were told that
they had not noticed the similarity in the initials and did not know
the identity of "S. C", the person whose initials were on the work
orders. Later the same day, the contractor advised HUD by phone that
the work orders had been falsified to support disbursement requests.
Figure 10: Falsified Work Order:
[See PDF for image]
[End of figure]
We suggested to HUD that it perform an extensive review of payments
meeting certain criteria to identify any additional potentially
improper payments. HUD advised us in August 2003 that it was seeking
reimbursement of approximately $23,000 in payments that had been made
based on similar falsified work orders. However, approximately 2 months
later, HUD reversed its position and decided not to seek reimbursement
for these payments because the contractor assured them the work had
been performed. In January 2004, HUD headquarters officials advised us
that they supported the decision to not seek reimbursement from the
contractor because the work was "verified for completion." However, the
verification of performance of the work was provided-months after the
date of payment-by the contractor that had falsified the documentation;
HUD has not independently verified that the work was performed.
In addition to the previous eight examples, we identified 22 other
questionable payments totaling $228,773. These included payments for
steel roll-up doors, appraisal services, newspaper advertising, and
utilities. The common issue with these payments, like others classified
as questionable, was the lack of adequate supporting documentation
included with the payment. Without this support, we could not determine
whether these payments were a valid use of government funds.
Because we tested only a small portion of the transactions that
appeared to be high risk and HUD internal controls did not provide
reasonable assurance that improper payments would not occur or would be
detected in the normal course of business, there are likely other
questionable payments that we have not identified.
Potentially Fraudulent Payments:
HUD's failure to monitor contractor performance and institute
additional control activities in response to known risks resulted in at
least $181,450 of potentially fraudulent payments. We identified
$163,965 of potentially fraudulent payments made in fiscal year 2002
and $17,485 made in fiscal year 2003. We classified payments as
potentially fraudulent when the scope or quality of the work appeared
to be misrepresented by the contractor or the work appeared not to have
been done at all.
Through data mining, we initially identified 287 invoices, totaling
$476,104, for single-family construction renovations that were
submitted to HUD by the contractor that our prior work identified as
using highly questionable billing practices, including (1) alleging
that construction renovations were emergencies, thus not requiring HUD
preapproval, and (2) splitting renovations into multiple projects to
stay below the dollar threshold requiring HUD approval. Each of the 287
invoices supported fiscal year 2002 payments and was for an amount less
than the $2,500 threshold[Footnote 16] requiring HUD approval. We
selected properties to test the validity, by physical inspection, of
some of these $476,104 in payments, focusing on those that appeared to
be for tangible goods that we could readily identify. In total, we
tested the validity of payments totaling $136,264.
In June 2003, we visited nine HUD-owned single-family properties in New
York City being managed by the contractor referred to above. HUD staff
responsible for oversight of this contractor accompanied us to the
properties. At each of the nine properties we visited, we noted
discrepancies between what was represented on select invoices[Footnote
17] and what was actually received, and determined that all of the
$136,264 payments tested were potentially fraudulent payments. We took
photographs to support our observations, when possible.
All of the invoices that we tested indicated that the work performed
was purported to have been for emergency repairs, meaning that no HUD
preapproval was required, nor was the property manager required to
obtain competitive bids for the work. Many of the work projects for the
same addresses were split among multiple invoices, most likely to stay
below the dollar threshold requiring HUD approval-as in the case we
reported last year about the multifamily construction renovation work
performed by this contractor. The labor charge was always $91 an hour-
whether for clean up and debris removal or a project typically
requiring a mastered skill, such as masonry.
We noted serious discrepancies between what was represented on invoices
and what was actually received at each of the nine properties we
visited. For illustrative purposes, we are providing specific examples
of some of the discrepancies noted at five of the nine properties.
Property 1:
On the basis of physical inspection, we determined that HUD paid at
least $30,701 in fiscal year 2002 for goods or services related to this
property that were incomplete or do not appear to have been provided at
all by the contractor. For example, HUD paid (1) over $4,000 for
replacement of the entire apartment floor, including the bathroom, (2)
$2,320 for a new ceiling and bathroom door, (3) $2,170 to have four
workers repair and install new Sheetrock®, and (4) $1,590 for a small
kitchen cabinet. The photographs (figs. 11 through 14) show little or
no evidence that this work was performed.
Figure 11: Property 1-"New" Ceiling:
[See PDF for image]
[End of figure]
Figure 12: Property 1-"New" Bathroom Floor:
[See PDF for image]
[End of figure]
Figure 13: Property 1-"New" Sheetrock® Walls:
[See PDF for image]
[End of figure]
Figure 14: Property 1-"$1,590 Kitchen Cabinet":
[See PDF for image]
[End of figure]
As illustrated in figures 11 through 14, we saw no evidence of new
flooring in the apartment, and in fact, most of the floors were missing
tiles or otherwise very worn. The "new" ceiling was severely damaged
and caved in, and there was no new bathroom door. We found no new
Sheetrock®, but about two square feet of wall had been roughly patched.
While there was a new cabinet, we found a cabinet similar to the one
pictured at a large retailer for a price of less than $50.
Property 2:
On the basis of our physical inspection, we determined that HUD paid at
least $11,176, in fiscal year 2002, for goods or services related to
this occupied property that were incomplete or do not appear to have
been provided at all by the contractor. For example, HUD paid $2,060
for "emergency repairs" to a bathroom and $1,082 for repairs to a
stairway. The photographs (figs. 15 through 17) show the condition of
the "repaired" bathroom and minimal work performed in the stairway at
the time of our physical inspection.
Figure 15: Property 2-Bathroom "Repairs":
[See PDF for image]
[End of figure]
Figure 16: Property 2-More Bathroom "Repairs":
[See PDF for image]
[End of figure]
Figure 17: Property 2-"$1,082 Wooden Dowels":
[See PDF for image]
[End of figure]
As illustrated in figure 17, the bathroom was in total disrepair. The
repairs to the stairway were merely two wooden dowels that replaced
missing balusters.
Property 3:
On the basis of physical inspection, we determined that HUD paid at
least $9,538 for goods or services related to this property that were
incomplete or do not appear to have been provided at all by the
contractor. Specifically, HUD paid (1) $2,265 for new ceilings, (2)
$3,560 for repairing and painting walls and ceilings, (3) $3,162 for
floor repairs and replacement, and (4) $551 for a new refrigerator. The
photographs (figs. 18 through 20) show the general condition of the
ceilings, walls, and floors throughout this property after the repairs.
Figure 18: Property 3-"New" Kitchen Ceiling:
[See PDF for image]
[End of figure]
Figure 19: Property 3-"New" Dining Room Ceiling on Floor:
[See PDF for image]
[End of figure]
Figure 20: Property 3-"New" Living Room Floor:
[See PDF for image]
[End of figure]
As shown in the preceding pictures, it appeared that new Sheetrock® was
installed on the kitchen ceiling, however the job was not completed-the
ceiling had not been sanded or painted. The dining room ceiling was
caved in and the floors were old and in poor condition. In addition,
the new refrigerator was missing.
Property 4:
On the basis of a physical inspection, we determined that HUD paid at
least $32,677 for goods or services related to this property that were
incomplete or do not appear to have been provided at all by the
contractor. For example, HUD paid $2,292 for four new metal doors and
installation. We only found one metal door in the basement, shown in
figure 21, which does not appear to be new.
Figure 21: Property 4-$2,292 "New" Metal Door:
[See PDF for image]
[End of figure]
In addition, HUD reimbursed the contractor for five invoices, totaling
$8,407, for additional work performed in the basement, including clean
up and debris removal and replacement of a wooden floor. The occupant
we spoke with said the only work he was aware of being done to the
basement was the installation of the one old metal door. HUD also paid
$3,978 for repairs to the front entrance stoop (fig. 22).
Figure 22: Property 4-$3,978 in Stoop "Repairs":
[See PDF for image]
[End of figure]
Although we did observe patches of relatively new concrete, it appears
that HUD was overcharged for this work. In addition, HUD paid $3,200
for cleaning and removing debris from the backyard. The occupant said
no one had cleaned the backyard and we noted that the backyard was
currently covered with debris, including old broken bicycles and large
broken slabs of concrete.
Property 5:
On the basis of physical inspection, we determined that HUD paid at
least $5,021 for goods or services related to this property that were
incomplete or never received. The contractor was reimbursed $1,048 for
"emergency" repair and painting of the public hall. The photograph
(fig. 23) is of the public hall.
Figure 23: Property 5-"Repaired and Painted" Public Hall:
[See PDF for image]
[End of figure]
As shown in figure 23, only portions of the walls were roughly painted.
In addition, HUD paid $2,167 for repairs, including plastering and
painting the walls and ceiling in the living room and dining room of
one of the apartments on this property. The photograph (fig. 24) shows
the condition of the ceiling and part of the wall in one of the rooms
where this work was said to have been performed. Similar conditions
were observed in the other rooms purported to have been repaired.
Figure 24: Property 5-"Plastered and Painted" Ceiling:
[See PDF for image]
[End of figure]
We noted similar discrepancies, totaling $47,151, at the other four
properties we visited. In total, based on our June 2003 physical
inspection, our work indicated that 82 invoices, totaling $136,264,
were most likely fraudulent.
In June 2003, we met with HUD officials in headquarters to discuss the
results of our June visit. The HUD Philadelphia office officials that
accompanied us on our physical inspection were teleconferenced in on
the meeting. We used the photographs included in this report to help
communicate the severity of the deficiencies we noted.
We also discussed the results of our June visit with Committee staff,
which resulted in an expansion of our work (1) to determine whether HUD
had made changes to its internal controls to address the causes of the
potentially fraudulent payments that we had identified in June 2003 and
(2) to test for additional potentially fraudulent payments. Our work
included additional tests for receipt of goods and services for
payments made in fiscal year 2002, as well as certain payments made in
fiscal year 2003. As a result, we found another $45,186 in potentially
fraudulent payments, consisting of $25,657 of fiscal year 2002 payments
and $19,529 of fiscal year 2003 payments.
We determined that HUD had not implemented new controls or modified
existing controls to address weaknesses previously identified. For
example, HUD did not institute monitoring policies that would increase
the frequency or scope of the inspection to verify that goods or
services paid for had, in fact, been received. Furthermore, HUD
officials told us that the contractor had not been directed to perform
the services for which HUD had paid $136,264 and received little in
return.
In November 2003, we attempted to physically inspect the same
apartments in each of the nine previously visited properties. However,
we only had access to the apartments within each property where the
occupants allowed us to enter. In total, we gained access to seven of
the nine properties that we visited in June. At these seven properties,
we saw no evidence that any attempt was made to correct the work that
HUD paid $39,686 for and we previously identified as having been
incomplete or not performed at all. The additional $45,186 in
potentially fraudulent payments that we found included $13,138 for
repairs and renovations to the properties we visited in June. The
remaining $32,048 of additional potentially fraudulent payments was
related to nine additional properties that we visited. The same
contractor managed these properties.
During this second visit, we again noted numerous discrepancies between
what was represented on invoices and what was actually received. For
illustrative purposes, we are providing specific examples of a few of
the discrepancies noted.
At one of the properties that we revisited, HUD paid a total of $2,759
for "emergency" repairs to a bathroom wall and floor tiles ($1,756) and
bathtub repairs ($1,003). As evidenced by the photograph (fig. 25), the
only indication that the bathroom wall or floor tiles had been repaired
was that a few tiles on the wall by the toilet had been replaced.
Figure 25: "Repaired" Bathroom:
[See PDF for image]
[End of figure]
As shown in the photograph (fig. 26), the "repaired" bathtub was old
and rusted and did not appear to have received $1,003 in repairs.
Figure 26: "Repaired" Bathtub:
[See PDF for image]
[End of figure]
At yet another revisited property, we found an additional $2,977 that
HUD paid the contractor for repairs to the entrance lobby and public
hallway. As discussed previously in this section, the entrance lobby
had not been repaired and only portions of the public hall had been
roughly painted. It was not evident that any further work had been
done.
The remaining $32,048 of additional potentially fraudulent payments was
related to the nine new properties that we visited. We determined that
HUD paid at least $19,763 for goods and services related to one of
these properties that did not appear to have been delivered. For
example, HUD paid $1,813 for installing new tiles to the stairs
pictured (fig. 27).
Figure 27: "Newly Tiled" Stairway:
[See PDF for image]
[End of figure]
As evidenced by the photograph above, the stairway was not retiled. At
this same property, HUD paid the contractor $2,008 to install a new
ceramic tile bathroom floor, a shower rod, and a medicine cabinet. The
floor we saw (fig. 28) appeared to be several years old. Furthermore,
the occupant stated that he purchased and installed the medicine
cabinet.
Figure 28: "New" Ceramic Bathroom Floor:
[See PDF for image]
[End of figure]
At another property, we determined that HUD paid at least $7,420 in
potentially fraudulent payments, including $1,847 for installing a new
bathroom floor. As indicated in the photograph (fig. 29), portions of
the bathroom floor were missing, and clearly had not been recently
replaced.
Figure 29: "New" Bathroom Floor:
[See PDF for image]
[End of figure]
Our analysis of supporting documentation indicated that the contractor
might have used the same scheme in the SF payment process that it had
used to circumvent controls in the MF payment process, which we
reported in October 2002. The scheme involved (1) alleging that
construction renovations were emergencies, thus not requiring multiple
bids or HUD preapproval, and (2) splitting renovations into multiple
projects to stay below the dollar threshold of HUD-required approval.
We referred the improprieties that we previously identified to the HUD
OIG. A HUD OIG investigator told us that these improprieties have been
referred to the U.S. Attorney's Office.
As illustrated in figure 30, HUD hired the contractor in July 1997 to
manage a portfolio of MF properties. During the first year of the
contract, HUD became concerned about the contractor's billing
practices. HUD questioned the contractor about the rotation of vendors,
determination of fair pricing, and reasonableness of work orders
issued. HUD documented its many concerns, including that "it is evident
that a great amount of money is being spent with little control in
place." In June 2001, despite serious performance deficiencies,
including questionable procurement practices, HUD increased the
contractor's responsibilities by modifying the contract to include
certain SF properties in New York City. In November 2001, HUD began to
question the contractor about its billing practices related to the SF
properties. In October 2002, we testified about the potentially
fraudulent fiscal year 2001 billing practices of this contractor.
According to HUD officials, the MF contract expired in February 2003.
Figure 30: Timeline of HUD's Relationship with Contractor:
[See PDF for image]
[End of figure]
According to HUD officials, the agency aggressively monitored the
contractor's performance; identified performance deficiencies from the
onset of the task order; and identified deficiencies in services,
products, and billings to the contractor management. A HUD memorandum
summarizing its efforts to improve the contractor's performance
indicated that in November 2001, it began meeting with the contractor
to review issues of concern about the SF properties. HUD noted that one
of the obstacles to the contractor's successful performance was that
the contract did not clearly define the details of work to be
performed. In addition, the statement of work for the contract did not
take into account the special nature of the 203(k) property challenges,
such as sites dispersed throughout New York City and extensive legal
and municipal involvement. The memorandum also stated that HUD
considered terminating the contract. However, since the agency (1) had
not issued any formal notices of concern to the contractor and (2)
difficulty existed in quickly finding a qualified replacement
contractor, HUD agreed to one final effort to improve the contractor's
performance. HUD and the contractor agreed to revise the statement of
work to reflect a clearer and mutually agreed upon basis by which to
measure the contractor's performance. The new statement of work was
issued in June 2003. Within 60 days of the issuance of the new
statement of work, HUD noted serious findings, including unacceptable
work, unreasonable prices, and some work that appeared not to have been
done at all. Throughout all of this period, HUD continued to pay bills
from this contractor.
On October 23, 2003, HUD issued an amendment to the contractor's task
order to end the contractor's management responsibilities on October
31, 2003. A new contract was put in place on October 17, 2003, which
requires the new contractor to absorb the cost of all routine
maintenance and repairs. HUD officials stated that the agency held back
the payment of recently submitted billings from the prior contractor
that HUD deemed questionable. However, HUD officials also told us that
the agency was not seeking reimbursement for any previously paid
billings, including those identified by our audit for which HUD
received little in return. HUD paid this contractor $2 million in
fiscal year 2002 and over $2.5 million in fiscal year 2003 for SF
property expenses.
Insufficient Monitoring of a Major Multifamily Program:
We found HUD's monitoring of a major multifamily pilot program with a
state housing agency to be insufficient. HUD entered into an agreement
that made it responsible for providing all the money needed to complete
the program, while the state agency was responsible for developing and
monitoring the program. HUD viewed the program as a way for the state
agency to employ innovative management and disposition methods and
entered into a sole source agreement with an initial development budget
in the amount of $187.5 million.[Footnote 18] However, HUD did not
fully assess the program's inherent risks under the terms of the
agreement and design compensating internal controls to address these
risks. In addition, HUD did not implement internal controls appropriate
for monitoring the escalating risks, while the cost of the program,
borne by one of HUD's mortgage insurance funds, climbed to over $537
million from inception in 1994 through September 30, 2003. Additional
oversight by HUD may have helped prevent at least some of the more than
half a billion dollars in program costs--$286,400 expended per
apartment unit--for the renovation, interim management, and ultimate
disposition of 1,875 apartment units.
The National Housing Act authorizes the Secretary of HUD to delegate to
state agencies the performance of management and disposition-related
functions.[Footnote 19] HUD determined that it was in the public
interest for it to enter into a sole source agreement with a state
housing agency for interim property management, to include renovation
and ultimate disposition of 18 HUD-owned multifamily properties within
the agency's home state. HUD is providing all the money for the program
and the state agency is responsible for all spending, including amounts
for construction, renovation, and day-to-day operations of the
properties. Although the program agreement did not list an expected
completion date, HUD officials told us that the program was intended to
take approximately 3 years. It is currently in its 10th.
Our publication, Standards for Internal Control in The Federal
Government, states that (1) management needs to comprehensively
identify risks and should consider all significant interactions between
the entity and other parties, (2) internal control monitoring be
performed to assess the quality of performance over time, and (3)
appropriate internal controls should be implemented to improve
accountability. However, we found that HUD's monitoring was limited to
the approval of property budgets. Internal controls should be designed
to ensure that ongoing monitoring occurs in the course of normal
operations. When, as here, the terms of the agreement charge one party
with authority over virtually all spending decisions, including to
whom, in what amount, and under what terms large construction contracts
will be let, and the other party is responsible for paying all the
bills, strong monitoring controls are necessary to control spending and
encourage financial accountability.
In spite of the inherent risks that stemmed from the terms of the
underlying agreement with the state housing agency, HUD did not analyze
these risks and design controls to address them either initially or in
reaction to escalating costs over a 9-year period. HUD did not
incorporate adequate spending controls that may have served to limit
its financial exposure before entering into the program agreement with
the state agency. Spending controls that may have been appropriate
considering the terms of the agreement with the state agency include:
specifying performance penalties for missed completion dates, requiring
that feasibility studies be conducted prior to undertaking major
contractual commitments, providing a cost-sharing formula that would
assign some economic risk to the program developer, and limiting the
amount that HUD would pay for specific line items by project, such as a
ceiling on the amount that would be reimbursed for tenant upgrades by
property. Furthermore, despite significant spending in excess of the
original budget, HUD's oversight of the program never evolved beyond
approval of the properties' initial development budgets. HUD also did
not establish processes to routinely estimate and compare projected
development costs to total estimated costs per the program agreement or
to consider the impact of unanticipated occurrences, such as expenses
to mitigate environmental hazards.
The largest categories of expenditures were for general construction
and other contractor charges. The state agency was responsible for all
aspects of the contracting process including the competition plan,
which typically is a key function in ensuring that the government
receives the best combination of price and quality. These general
construction payments totaled approximately $178 million of the total
incurred cost of $481 million through September 30, 2002. The state
agency awarded 23 separate construction contracts to rehabilitate the
16 properties in the program that ranged in amount from $49,600 to over
$45 million. The construction contractors received periodic payments
based on the percentage of work completed, which was reflected in
monthly requisitions. The state agency was solely responsible for
reviewing and approving the monthly requisitions and construction
contractors' periodic payment requests. HUD paid all of these expenses,
while providing no oversight of the construction contractor's monthly
payments beyond the approval of initial development budgets.
HUD paid significant amounts for expenses in excess of amounts in the
original contract award due to unforeseen natural conditions, tenant
requests, and other contract amendments for changes in the
architectural scope of work. For example, HUD paid an additional $8.9
million in contract amendments at one property, which had an initial
construction contract of over $45 million. Contract amendments were
granted when the architectural specifications included in the original
construction contract did not include certain work being performed by
the construction contractor. These payments were for unforeseen
conditions, such as the need to address environmental hazards and
requests from tenants for tenant upgrades. Tenant upgrades at one 236-
unit property included the following: installation of molding on
stairs, $101,779 ($431 per unit); labor and materials for two coats of
varnish on stair molding, $115,000 ($487 per unit); upgrades to ceiling
light fixtures, $114,648 ($189 per bedroom); ceramic tile back
splashes, $71,775 ($304 per unit); soap dispensers at sinks for $19,430
($82 per unit); and upgrades of door hardware from satin chrome to
satin brass for $18,650 ($79 per unit). HUD was not in a position, due
to its limited monitoring of the program, to challenge or otherwise
determine the validity of these payments.
HUD also granted the state agency the flexibility to make payments
"off-budget." The expenses designated as off-budget included such costs
as environmental hazards, consulting and monitoring, and tenant
relocation expenses. The state agency's annually adjusted asset
management fee was also considered off budget. In addition, for one
property we found that HUD directed the classification of charges
associated with extraordinary site development and building demolition
as environmental hazard expenses. This classification allowed the costs
to be considered as off budget. Since inception of the program,
payments made by HUD that were classified as off-budget totaled over
$241 million (see table 2), including environmental hazard expenses of
approximately $58 million, and expenses related to tenant relocation of
$46 million. When HUD granted the state agency the ability to charge
off-budget items and then did not define or limit this type of
spending, it substantially weakened the effectiveness of the limited
control stemming from its approval of the original development budget
for each property.
Table 2: HUD Spending Related to Multifamily Program:
Dollars in millions.
Budget costs: Original budget; $187.5;
Budget costs: Amendments: $52.0;
Budget costs: Amounts: $239.5.
Off-Budget costs; Environmental hazard abatement: $57.6;
Off-Budget costs; Tenant relocation expenses: $45.5;
State agency management fee: $15.1;
Off-Budget costs; Operating cost (security, payroll, etc.): $123.3;
Off-Budget costs; Amounts: 241.5.
Total; Amounts: $481.
Source: GAO analysis.
[End of table]
As of the close of fiscal year 2002, the program has cost HUD in excess
of $481 million, almost $300 million more than the original development
budget, and remains a work in progress. In addition, HUD reported that
an additional $56 million was expended for this program in fiscal year
2003. HUD officials have advised us that they do not plan on entering
into any future agreements with similar terms. Internal controls
tailored to address the inherent risk, including additional oversight
by HUD, may have prevented some of the cost escalation and would have
provided management with a reasonable basis for ensuring that the more
than half a billion dollars in program payments were properly supported
as a valid use of government funds.
Conclusions:
The problems we identified with internal controls and risk management
over HUD single-family and multifamily property programs leave the
agency vulnerable to wasteful, fraudulent, or otherwise improper
payments. This vulnerability was capitalized upon by at least one
contractor and potentially others during the period of our review as
evidenced by the potentially fraudulent and questionable payments we
identified in the SF program. Even after HUD officials became fully
aware of this improper activity, they did not take timely action to
stop the flow of money being paid to this contractor for substandard or
nonexistent services. Further, HUD also failed to establish any kind of
control over money it provided for the major multifamily program, even
though costs escalated to triple the original development budget.
Improper payments increase the expense of program delivery and may
reduce the quality of program services. This additional expense must be
funded by either a decrease in spending-in the affected program area or
in other FHA programs-or by an increase in revenue from congressional
appropriations or mortgage insurance premiums paid by those buying
homes through the FHA SF program. Because of the long-term nature of
funding decisions for the HUD mortgage insurance funds, including the
rates charged for mortgage insurance, the impact of improper payments
might not be visible to policymakers and managers. Such hidden expenses
are nevertheless real and cumulative in effect. HUD must take steps to
identify and manage its improper payments in order to minimize costs to
FHA mortgage holders and taxpayers and maximize funds available to
carry out its programs.
Recommendations for Executive Action:
Single-Family Property Program:
To improve internal controls over HUD's single-family property program,
we recommend that the Secretary for Housing and Urban Development
direct the Assistant Secretary for Housing-Federal Housing Commissioner
to take the following 22 actions to address the weaknesses within the
single-family program discussed in this report.
* Establish policies and procedures that create a positive control
environment for all key steps in the single-family payment process.
These polices and procedures should:
* require management contractors to prepare all payment requests for
which they are the payee, including any revised payment requests that
may be required;
* provide adequate controls over preparation, review, and approval of
payment requests for vendors that do not have access to the automated
HUD Single-Family Acquired Asset Management System;
* specify that the technical review of payment requests be performed
solely by HUD-appointed individuals with the requisite training and
experience; and:
* require HUD monitoring at prescribed time intervals to ensure that
these control features are being consistently implemented at all
payment review locations.
* Establish policies and procedures over single-family payments to
contractors and other vendors that ensure all such payments are clearly
documented and the documentation is readily available for appropriate
officials to consider at the time they review and approve payment
requests. Depending on the type of payment, these policies and
procedures should:
* necessitate evidence of the nature of the goods or services the
payment is for;
* call for documenting that the quantity and cost for the goods or
services is correct, was received and has been reviewed for each item
purchased;
* require annotated verification that the amount and timing of the
payment is supported by a valid contract or other agreement signed by
both parties;
* require documentation that the payment is for a valid obligation of
the program;
* stipulate that competitive bids be obtained and evaluated before the
work is performed;
* require confirmation that the goods or services are for a legitimate
government need;
* require that all invoices and other supporting documentation be
effectively canceled to prevent reuse; and:
* require that only original documents be used to support payments, or
that there be evidence of compliance with policies concerning the use
of reproduced documents.
* Establish policies and procedures over single-family payments to
contractors and other vendors that will improve the effectiveness of
HUD's oversight of contractor performance. These policies and
procedures should:
* establish standard business metrics for comparing contractor
performance, to include expense data by contractor, total expenses per
property, and per expense classification;
* ensure the preparation and review of these metrics regularly to
identify cost saving opportunities, unusual patterns that require
attention, and potential instances of fraud, waste, and mismanagement;
and:
* establish specific guidelines for when single-family payments to
contractors and other vendors may be classified as allocated costs.
* Establish consistent practices for single-family payment processes,
to include the preparation of payment requests, review and approval of
payment requests, and minimum supporting documentation standards for
all payments, that will clarify what policies and procedures must be
adhered to by headquarters and all homeownership centers.
* Follow up on each of the payments we identified as questionable or
potentially fraudulent to:
* determine if the payments are a valid use of government funds;
* identify the causes for these payments to occur and not be detected
in the ordinary course of business; and:
* pursue recovery of amounts paid, as appropriate.
* Perform a risk assessment of single-family payments to contractors
and other vendors to determine the nature and extent of HUD's exposure
to improper payments. The risk assessment should:
* include a comprehensive review and analysis of operations to
determine where risks exist and what those risks are, including
assessing the need for linking property inspections with billed amounts
for goods and services provided;
* measure the potential or actual impact of identified risks on program
operations; and:
* establish compensating internal controls to address areas of
vulnerability identified through the risk assessment process.
Multifamily Program with a State Housing Agency:
* To address the significant internal control weaknesses that we
identified related to monitoring the multifamily program with a state
housing agency under a sole source agreement, we recommend that the
Secretary of Housing and Urban Development direct the Assistant
Secretary for Housing-Federal Housing Commissioner take the following
two actions.
* Implement risk-based oversight and monitoring policies and procedures
to reduce HUD's vulnerability to fraud, waste, abuse, and mismanagement
in the multifamily program with the state housing agency.
* Consider requesting the HUD Office of Inspector General to review the
propriety of the use of funds under the program with the state housing
agency.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, from HUD's Assistant
Secretary for Housing-Federal Housing Commissioner which are reprinted
in appendix II, HUD agreed with some of our findings and
recommendations and disagreed with others. In particular HUD (1)
disagreed with our classification of certain payments, including $15.2
million of inadequately supported payments for contract change orders,
as questionable payments; (2) agreed that the contractor for the New
York properties failed to provide certain services or provided
unacceptable services, but stated it had held back certain payments to
the contractor that included amounts we reported as potentially
fraudulent; and (3) regarding our recommendations related to the MF
pilot program, acknowledged that its agreement with the state agency
did not contain the necessary controls and oversight protocols to
preclude the types of problems we identified and agreed to examine
opportunities to enhance its oversight over the remaining life of this
particular program; however, it did not agree to enlist the HUD IG's
support to review the propriety of the use of the funds at this time.
HUD did not specifically comment on the other 22 recommendations
related to its SF program.
With regard to contract change orders, HUD stated that it is
inappropriate for us to consider these 23 payments totaling $15.2
million as questionable. HUD stated that for each of these payments (1)
it had provided us signed copies of the contract modifications, (2) the
payments are clearly supported by contract modifications issued by
approved HUD contracting specialists, (3) agency staff adhered to
appropriate procedures in the review and payment for the services
identified in the modifications, and (4) notations on the respective
invoices by the HUD reviewing official that he or she had looked at the
contract modification to confirm its existence prior to payment
[emphasis added] is certainly not a prescribed procedure and should not
cause these payments to be classified as questionable.
We disagree. We classified payments as questionable if they were not
supported by sufficient documentation to enable an objective third
party to determine if the payment was a valid use of government funds.
We found each of these 23 payments totaling $15.2 million to be
inadequately supported at the time the payment was made. As stated in
the report, these payments were made without basic support such as
standard contract modification or other agreements signed by the
contractors and HUD, indication of the timing, quantity, and nature of
the goods and services provided, and identification of the specific
properties covered by the payments.
In January 2004, several months after our initial request for
supporting documentation for these payments and after our fieldwork was
completed, HUD headquarters officials advised us that fully executed
contact modification agreements existed at the time each of these
payments was made. These officials acknowledged that the agreements and
underlying detail support by property were not in the payment files but
that the reviewing, approving, and certifying officials reviewed all
documents in order to verify the accuracy of the charges. However, we
found no evidence of this during our site visits. In fact not one HUD
reviewing, approving, or certifying official indicated to us that they
went beyond the documentation contained with the payment request to
ascertain the propriety of the payments we reviewed.
Also, in January 2004, HUD headquarters officials forwarded us signed
copies of some, but not all of the contract modifications. That fact
that the signed contract modifications may have existed at the time
payments were made is peripheral to one of our core points that--HUD
reviewing, approving, and certifying officials have available and
consider at the time they review and approve the payment sufficient
supporting documentation to determine that a payment is a valid use of
government funds. It is clear from our review that this did not occur
in the case of these $15.2 million payments for contract change orders.
In addition, the existence of the contract modifications does not
negate our other core point. Without specific documentation, which HUD
did not provide, indicating such things as (1) the properties the
charges relate to, (2) the time period the charges were incurred, (3)
an explanation of what goods or services were provided, and (4) that
HUD owned the properties at the time the goods or services were
provided, we could not determine the validity of these payments.
Therefore, they remain questionable.
HUD raised similar issues with regard to each of the other 8 categories
of payments totaling $1,113,266 that we classified as questionable. We
address these other issues in our more detailed comments in appendix
II, where we reaffirm our position that all of these payments are
questionable.
Regarding the potentially fraudulent payments, HUD stated, and we
agree, that the department is obligated by government contracting
procedures to work with a sub-performing contractor to improve
performance, rather than move to immediate termination. However, it is
not clear to us why knowing of these serious performance deficiencies,
including questionable procurement practices that became apparent
within the first year of the contract, HUD continued for over 6 years
to pay this contractor over $425 million for charges related to SF and
MF properties without instituting additional controls to determine
whether the goods and services billed for had actually been provided at
the properties.
In addition, we disagree with HUD's statement that its "hold back"
included disbursements reported as potentially fraudulent payments in
this report. First, we assume that HUD means that it is recouping some
of these payments by holding back payment on newly received invoices
from this contractor. However, HUD staff responsible for oversight of
the contractor informed us that the held back payments relate to a
barrage of old invoices, some going back 2 or 3 years, that the
contractor submitted during the contract termination process. Many of
these invoices had previously been rejected by HUD, and the contractor
merely resubmitted them. Therefore, holding back payment on these
invoices, while helping HUD avoid making additional potentially
fraudulent payments, does not result in the recoupment of previously
made payments for invalid charges.
In regards to our MF program recommendation to consider requesting the
HUD IG to review the propriety of the use of funds under the program,
HUD stated it has already initiated enforcement actions and claims
against certain architects and contractors for failing to perform
satisfactorily and plans to vigorously pursue all necessary enforcement
actions that arise related to this program. However, HUD said it would
not consider requesting the IG to review the propriety of the use of
the funds for this program at this time, as we recommended, but may
elect to refer unsatisfactory performance issues to the IG for further
review. HUD also said that it intends to complete a full evaluation of
the program goals and implementation at the end of the program and that
the current HUD administration would not recommend that the program be
repeated. We share HUD's concern regarding this type of program and
continue to believe that given the hundreds of millions of dollars in
budget overruns, and the minimal oversight by HUD, that an independent
review by the IG office should be considered a part of HUD's fiduciary
responsibilities over the funds.
:
As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its date. At that time, we will send copies to the Ranking
Minority Member of the House Committee on Government Reform; the
Secretary of Housing and Urban Development; and other interested
parties. We will make copies available to others upon request. In
addition, this report will be available at no charge on GAO's Web site
at [Hyperlink, http://www.gao.gov].
Should you or your staff have questions on matters discussed in this
report, please contact me at (202) 512-9508 or [Hyperlink,
calboml@gao.gov] or Robert Owens, Assistant Director, at (202) 512-
8579 or [Hyperlink, owensr@gao.gov]. Major contributors to this report
are acknowledged in appendix III.
Sincerely yours,
Signed by:
Linda M. Calbom:
Director, Financial Management and Assurance:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
Single-Family Property Program:
To assess internal controls over HUD SF property payment transactions
and determine whether they provide reasonable assurance that improper
payments will not be made or will be detected in the normal course of
business, we:
* reviewed HUD SF policies and procedures, property management and
marketing contracts and amendments, our previous reports, and reports
issued by HUD's IG, a financial management consultant, and an
independent contractor.
* conducted walk-throughs of transactions and interviewed officials at
HUD headquarters, each of the four homeownership centers, and three
contractor offices.
* tested internal controls using a statistically selected sample of
transactions. Specifically, we selected a stratified random probability
sample of 145 single-family disbursement transactions from a population
of 238,411 fiscal year 2002 transactions. We stratified the population
into HUD's four regions--Atlanta, California, Denver, and Philadelphia-
-on the basis of SF disbursement transactions made during fiscal year
2002. The sampling unit was one disbursement transaction occurring
between the October 1, 2001, and September 30, 2002 posting dates. Our
estimates were calculated using a 95 percent confidence level. In other
words, we are 95 percent confident that each of the confidence
intervals in the report includes the true values in the population. We
tested the following attributes: (1) proper approval and (2) validity
of payment. We provided HUD with the transactions selected and obtained
and reviewed related supporting documentation.
To determine whether payments are properly supported as a valid use of
government funds, we:
* performed data mining[Footnote 20] on the database of HUD's fiscal
year 2002 disbursements for HUD SF properties to identify potentially
improper and questionable payments. We discussed the results of our
analysis with HUD regional and headquarters managers and requested that
they provide specific written responses to the payments that we
identified as potentially improper and questionable. We considered the
responses we received to assess whether in fact the payments were
improper-that is, questionable or potentially fraudulent and:
* nonstatistically selected certain payments described in the payment
records as incurred for tangible goods and services and physically
inspected the properties to test if the work described in the books and
records was fully performed and the tangible goods received.
In June 2003, on the basis of the results of the above-described work,
we communicated to HUD and representatives of your Committee on
Government Reform, that we had identified certain potentially
fraudulent payments. In November 2003, at the request of the Committee,
we expanded our work to (1) determine whether HUD had made changes to
its internal controls to address the causes of the potentially
fraudulent payments that we had identified in June 2003 and (2) test
for additional potentially fraudulent payments. We performed this work
by interviews with officials at HUD headquarters and one homeownership
center, data mining and physical inspection of properties. Our data
mining and physical inspection work included additional tests for
receipt of goods and services for payments made in fiscal year 2002 as
well as certain payments made in fiscal year 2003.
To assess internal controls over HUD SF properties and to identify
generally accepted principles and practices for a sound internal
control environment, we used our Standards for Internal Control in the
Federal Government, Internal Control Management and Evaluation Tool,
Guide for Evaluating and Testing Controls Over Sensitive Payments, and
Strategies to Manage Improper Payments.
While we identified some improper payments-questionable and potentially
fraudulent-our work was not designed to identify all improper payments
made in the HUD SF property program.
Multifamily Program with a State Housing Agency:
To assess HUD's monitoring of the multifamily program with a state
housing agency, we:
* reviewed HUD's MF policies and procedures, the state housing agency's
policies and procedures, contracts and agreements including HUD's
contract with the state housing agency, our previous reports, as well
as reports issued by HUD's IG and:
* conducted walk-throughs of transactions and interviewed officials at
HUD headquarters, a field office, and the state housing agency and its
contractor offices to identify what controls had been established to
manage the inherent risk of the program as well as monitor payments
over time.
We also performed analytical reviews of the payment activity since
inception in 1994 through September 30, 2002. Specifically, we
developed a template of program expenses for each property by expense
line items, such as general construction expense, environmental
abatement expenses, and expense per housing unit. We compared total
costs per property to amounts per the initial contract with the general
contractor as well as subsequent amendments. We discussed the results
of our analysis with HUD regional and headquarters managers and
requested that they provide specific written responses to issues and
questions identified by our analysis. We considered the responses we
received - in writing and orally-in assessing HUD's performance in
monitoring the program.
We conducted our review, in accordance with generally accepted
government auditing standards as well as with the investigative
standards established by the President's Council on Integrity and
Efficiency, from December 2002 through January 2004 at HUD
headquarters, a field office, and homeownership centers in Atlanta,
Ga.; Philadelphia, Pa.; and Santa Ana, Calif. We also visited
contractor offices in Atlanta, Ga.; Philadelphia, Pa.; Santa Ana, Ca.;
and Falls Church, Va.
We requested written comments on this report from the Acting Secretary
of HUD or his designee. Written comments were received from Assistant
Secretary for Housing-Federal Housing Commissioner and are reprinted in
appendix II.
[End of section]
Appendix II: Comments from the Department of Housing and Urban
Development:
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON. DC 20410-8000:
ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER:
February 19, 2004:
Ms. Linda M. Calbom:
Director, Financial Management and Assurance
United States General Accounting Office
Washington, DC 20548:
Dear Ms. Calbom:
Thank you for the opportunity to comment on the draft report, "HUD
Single-Family and Multifamily Property Programs - Inadequate Controls
Resulted in Questionable and Fraudulent Payments." (GAO-04-390). This
report resulted from a review by your office lasting a period of
approximately 18 months. The draft report notes that the General
Accounting Office (GAO) and HUD's Office of Inspector General (OIG)
have previously reported weaknesses in HUD's monitoring of both Single
Family and Multifamily programs. In fact, significant improvements have
been implemented in both programs over this 18-month period, and this
year HUD's OIG removed a "reportable condition" noted in earlier years
concerning HUD's oversight of its Single Family Management and
Marketing (M&M) contractors.
The report raises four issues: (1) questionable payments to Management
and Marketing contractors; (2) improper payments to a single contractor
and subcontractor for a group of properties in New York City. apart
from the Management and Marketing contractors; (3) failure to follow
appropriate review procedures for Management and Marketing contract
payments; and (4) failure to establish adequate controls for a single
multifamily demonstration project in Boston. I will address each of
these issues in turn.
Questionable Payments to Management and Marketing Contractors:
A series of ostensibly questionable payments are listed on a chart on
page 28 of the report. Related to Category 1 on the chart, the report
states that GAO classifies $16.3 million of payments on single family
properties as questionable because they were not supported by
sufficient documentation to determine their validity. Of this amount,
$15.2 million involves a single category of payments to single family
M&M contractors (Category I on the chart, subsequently detailed in
Example 1). These payments are appropriate and are clearly supported by
contract modifications issued by approved HUD contracting specialists.
Copies of the contract modifications, signed by representatives from
both HUD and the contractors, have been forwarded to your staff. Copies
of the initial unilateral work orders that directed that contractors
complete specified tasks, again signed by appropriate HUD contracting
specialists, have also been provided. In all payments related to these
modifications, HUD staff adhered to appropriate procedures in the
review and payment for the services identified in the modifications.
Further information concerning these payments may be useful. During
March 2001, each M&M contract was modified pursuant to the Changes
Clause (FAR 52.243-1) to revise specific terms of the contract scope of
work. As provided by FAR 43.103(b)(2) and 43.201, these "change orders"
(a type of contract modification) were issued unilaterally by the
contracting officer. The change orders required each M&M contractor to
alter its performance accordingly, and extended to each contractor an
opportunity to submit a proposal and negotiate an equitable adjustment
to the contract price and terms. These negotiations lasted about a
year, because there was a significant difference between the prices
that each M&M contractor sought and the charges that HUD believed to be
reasonable.
As a result of the negotiations, each M&M contract was modified (in
most cases more than once) by a supplemental agreement (a modification
signed by both parties-FAR 43.103(a)(1)). While these negotiations were
protracted. HUD negotiated a cumulative reduction of over $88 million
from the amount proposed by the M&M contractors.
Within this category, the specific instance cited by GAO on pages 29 -
31 of the draft report concerns contract C-OPC-21519 with Golden
Feather (GF) covering "Atlanta Area 1" (Illinois). GAO Figure 4, page
31, is an invoice from GF. Items 1 and 3 on the invoice track directly
to the lump sum settlement outlined in modification 33 (bi-lateral
supplemental agreement - signed by both parties) to the GF A 1
contract. The top of the invoice (GAO Figure 4) has the header "Equity
(sic) Adjustment - MOD#0033." Modification 33 to the GF contract was
provided to GAO and it established as item 1 that GF was entitled to a
"Lump sum payment of $452,000 for Atlanta Area 1 ...for costs resulting
from the Change Order (excluding windows, roofs, and incentive/
disincentives)." item 3 of the same modification established a "Lump
sum payment of $862,661 for Atlanta Area 1 ...for costs resulting from
the Change Order covering windows, roofs, and incentive/disincentives."
The audit trail is very clear.
It is inappropriate to label these payments as questionable. Your staff
has expressed a concern that the invoices submitted by the contractors
and the contract modifications and change orders were maintained in
separate files within each Single Family Homeownership Center, raising
a concern that the HUD reviewing official failed to confirm proper
support for the payment. In fact, the example of an invoice provided in
your draft report included the correctly referenced contract
modification. Further notation on the invoice by the HUD reviewing
official that lie or she had looked at the contract modification to
confirm its existence prior to payment (as recommended by your staff)
is certainly not a prescribed procedure, and should not cause these
payments to be classified as "questionable."
Category 2 on the chart concerns $206,597 for water payments for
properties owned by HUD, where the obligations were incurred prior to
HUD's acquisition of the property. Failure to satisfy such obligations
as water bills may result in liens being placed on the property. Even
if the Department were successful in challenging these liens, delays in
property sales due to the liens would increase property expenses and
would certainly have a detrimental impact on the communities in which
these houses are located. Further, under their contract of insurance.
Lenders
who own properties after foreclosure and prior to conveyance to HUD can
be reimbursed by HUD for expenses such as water bills, and former
occupants who have lost their homes to foreclosure are unlikely to pay
restitution to HUD on this matter. When properties are conveyed by
lenders with such obligations still outstanding, payment by M&M
contractors (with reimbursement by HUD to the M&M contractor rather
than to the lender) to utility companies to satisfy these obligations
are a practical and appropriate action. With the exception of two
properties where part of the obligation was incurred prior to FHA loan
insurance. these payments are justified.
Category 3 on the chart concerns $169,800 for partial reimbursements
of a contractors claimed expenses for a lead based paint abatement
program. which lacked a signed contract modification. Thus category of
payments is also discussed on page 6 and page 33 of the draft report.
As part of your request for relevant documentation, the Department
provided your staff with an e-mail issued by the HUD Contracting
Officer in the HUD Denver Office just prior to disbursements, verifying
for Office of Housing staff that no contract modification was necessary
as these payments were reimbursable expenses. On February 2, 2004, your
staff requested two transmittals related to these reimbursements. HUD
staff noted, in response to this request, that copies of the
transmittals had been previously provided to GAO. We have again
obtained copies of the two transmittals requested and three others that
support payments made for these services, and these transmittals have
been forwarded to your staff.
Category 4 on the chart concerns payments for Management and Marketing
contractors to produce revised "For Sale" signs. This example is also
discussed on page 7 of the draft report. Revisions to HUD For Sale
signs were directed by the prior FHA Commissioner. based on his
determination that communities were being adversely effected by
ineffective signs failing to clearly designate where referrals could be
made regarding poor property conditions. Using his management
prerogative, the former Commissioner directed that the signs be
produced on an emergency basis. Contract modifications supporting these
expenditures were put in place and have been provided to your staff.
Category 5 on the chart concerns special expenses related to chain link
fence installations in the Los Angeles area. This example is discussed
on page 35 of the draft report. Your staff was provided with a copy of
the local ordinance requiring special fencing. HUD officials were
unable to locate copies of competitive bids from fence installers and
provide these to your staff, although such bids had been obtained by
HUD staff at an earlier date. Recently the HUD office acquired updated
bids to support payments related to this required activity.
Category 6 refers to a payment made to Best Assets/Citiwest. This is
also a proper payment supported by a signed, appropriately executed
contract modification previously provided to GAO staff. Similar to
other contract modifications which were the result of negotiations by
HUD contracting officers, the contract modification represents the
appropriate supporting documentation for this disbursement.
Category 7 refers to one payment listed on the chart of $1,300 for
relocation expenses. HUD agrees that this payment, made to pay for
relocation expenses of a tenant living in a property securing a HUD
insured loan, should not have been treated as a pass through expense,
but rather should have been made directly to the servicing lender on
the HUD-insured property.
Category 8 refers to an invoice improperly prepared and attested to by
a management and marketing subcontractor for $23,000. HUD agrees that
the actions taken by the subcontractor in submission of this invoice
were inappropriate.
The remaining items are combined into a single category. Page 42 of the
report provides only slight reference to these items, but does mention
two disbursements totaling $99,000 which were approved in Headquarters.
These two disbursements refer to reimbursement for the lead based paint
issue identified above (Category 3). They are redundant and also do not
represent questionable payments.
To more properly illustrate findings, I recommend that GAO correct the
chart on page 28 to eliminate those payments clearly supported by
contract modifications, and to redefine the remaining items as those
involving "questionable payment procedures", rather than questionable
payments.
By correcting the report to eliminate payments where HUD has provided
appropriate supporting documentation, the amount of payments in this
category will represent less than 1 percent oh the payments made to
single family M&M contractors during the period covered by the GAO
review.
Improper Payments to a Single Contractor and Subcontractor for a Group
of Properties in New York City:
Beginning on page 43, the report refers to possible fraudulent payments
to a contractor providing property management services to occupied
properties in New York City. The Department agrees that this firm
failed to provide services or provided unacceptable services for
extensive periods in FY 2002. In fact, this contract was terminated in
2003, and HUD held back $892,199 in payments to the contractor. The
holdback amount included amounts for disbursements reported by GAO in
the draft audit. In addition, the contractor was referred to HUD's OIG,
for further investigation.
These properties came into HUD‘s inventory as a result of a scam that
occurred during 1998-2000. Both HUD and GAO testified about this scam
at a Congressional hearing in Harlem on September 10, 2001. To repair
these properties HUD staff had previously issued a task order to this
contractor in June 2001. Initial work performance was not satisfactory,
and specific concerns were addressed in a series of formal meetings
held between November 2001 and February 2002. The Department is
obligated by Government contracting procedures to work with a sub-
performing contractor to improve performance, rather than move to
immediate termination, and these efforts seemed to bear fruit, as work
performance improved in early 2002. However, by May 2002 HUD again
found it necessary to conduct a series of meetings with the contractor
to identify serious performance issues. These concerns were documented
in "Letters of Concern" sent to the contractor in June and again in
November of 2002. In FY 2003 the contractor and HUD modified the task
order through a series of negotiations to clarify contract
responsibilities, while contract performance deficiencies were
identified. The task order was formally modified in June 2003. By July
the contractor's failure to perform even under the modified contract
was apparent, and HUD
issued a "cure letter," advising the contractor of the Government's
intent to terminate the task order if dramatic improvement and
corrective actions were not taken. The Department undertook an
intensive effort to acquire replacement contract services, and the task
order was terminated in October 2003.
In addition to the steps noted above, the Department directed the
replacement contractor to take emergency steps to address the most
chronic problems associated with these properties. As evidence of the
implementation of tighter contract controls and effective property
management, the Department has offered to provide GAO with five volumes
of pictures and data on work already performed by the replacement
contractor on the 150 occupied properties in New York City.
Failure to Follow Appropriate Review Procedures for Management and
Marketing Contract Payments:
The report states that 58 percent of single family property payments
were not properly approved (page 5). HUD agrees that in two of the four
Single Family Homeownership Centers, payment review procedures were not
strictly followed. The procedures require an initial review of payment
requests by an outside contractor, and subsequent reviews by a HUD
Government Technical Monitor and HUD Government Technical
Representative. In the sample of payments referenced by the report, in
two of the Homeownership Centers only the outside contractor and the
Government Technical Monitor completed the review. However, it is
important to note that in these two Centers, two of the three internal
control reviews did occur.
HUD disputes the statement that detailed analytic review of vouchers
did not take place. HUD staff provided data from the SAMs system
indicating that during FY 2002 1.190 vouchers were returned to the M&M
contractors because errors were detected in voucher preparation, based
on careful HUD reviews. These returned vouchers represented effective
financial controls in all four Homeownership Centers.
Failure to Establish Adequate Controls for a Single Multifamily
Demonstration Project in Boston:
With regard to the Multifamily Demonstration Disposition Program in
Boston, it is first important to note that this program was a
demonstration, beginning in 1994. It is not reflective of any of the
program requirements, policies, procedures and monitoring that the
Department has implemented for its regular Multifamily Property
Disposition Program. The major goal of the Demonstration Program was to
provide to the fullest extent possible the opportunity for the
residents (over 1,800 families) in these projects to purchase the
projects and become homeowners. This is not an objective of the
Department's regular property disposition program.
Based on this ambitious goal and the physical condition of the housing
inventory in this Demonstration, the Department would agree with GAO
that the Agreement between the state agency and the Department executed
in 1994 did not contain the necessary controls and
oversight protocols to address the inherent risks in the Demonstration.
For example. the extensive resident involvement including homeownership
training and property management training should have been taken into
account in both the timing and the funding of the Demonstration. In
addition, there were no requirements in the Agreement (with respect to
either costs or time) for the unforeseen issues such as environmental
concerns and extensive rehabilitation needs. The Department was forced
in some projects to proceed with new construction or gut
rehabilitation, neither of which was anticipated in the original
agreement.
However, despite the absence of those controls in the Agreement, the
Department has implemented a number of specific protocols and actions
regarding oversight and monitoring of the program over the last three
years. These protocols and actions include: monthly reporting:
rescinding the state housing agency's authorities where necessary
(change orders in excess of $50.000 are required to have HUD approval);
implementing sanctions against architects and contractors (including
claims, suspensions, and debarments): and requiring additional HUD
approvals for certain budget items (environmental and resident
relocation). These steps were taken to attempt to minimize the cost
overruns of the Demonstration Disposition Program.
In order for the Department to provide the opportunity for the
residents to purchase their projects, the residents were required to be
involved in all phases of the development process, including
relocation, rehabilitation and/or new construction, security, and the
eventual ownership entity. Resident involvement has unfortunately
resulted in extensive delays. Cost overruns have also resulted in the
areas of environmentally hazardous materials remediation, security and
resident relocation in a tight Boston rental market.
This Administration reviewed the Demonstration Disposition Program and
determined that, after six years of effort, it was in the best interest
of the residents and the Department not to terminate the existing
Agreement with the state housing agency, despite the cost overruns.
Rather. the Department preferred to aggressively continue to monitor
the program and work to complete the redevelopment. The Department has
sold four projects to the residents and is on schedule to sell all of
the projects by the end of this calendar year. The Department has also
initiated enforcement actions and claims against the architects and
contractors that have failed to perform satisfactorily (involving poor
installation of aluminum siding, faulty masonry work, lack of proper
testing and removal of asbestos).
During this Administration, per year costs have been approximately $20
million less than in previous years.
GAO has recommended that the Department implement additional risk based
oversight and monitoring for this Program. The Department will agree to
review what additional oversight and monitoring protocols may be put in
place at this juncture; but the Department will also aggressively
pursue completing the construction and rehabilitation of these
buildings, and selling the projects to the residents by the end of this
year.
With regard to the second recommendation, HUD will not consider
requesting the Inspector General to review the propriety of the use of
funds under this Demonstration at this time. As stated earlier, the
Department is vigorously pursuing all necessary enforcement actions
against entities that have not performed satisfactorily. In pursuing
those actions, the Department may elect to make referrals to the
Inspector General for further review.
At the end of the Demonstration Disposition Program, the Department
intends to complete a full evaluation of the Demonstration goals and
implementation. Based on the costs and length of time to complete this
demonstration, this Administration would not recommend that the
demonstration be repeated or be made a permanent program.
Again, thank you for this opportunity to comment on the draft report.
If you have any questions regarding these comments, please contact
Joseph McCloskey at 202-708-1672.
Sincerely,
Signed by:
John C. Weicher:
Assistant Secretary for Housing-Federal Housing Commissioner:
The following are GAO's comments on the Department of Housing and Urban
Development's letter dated February 19, 2004.
GAO Comments:
1. During the course of our work, we considered whether changes had
been made to HUD's processes and procedures. For example, we identified
HUD's over reliance on a support services contractor in the payment
process for fiscal year 2002 payments and determined that this practice
continued through the conclusion of our work. In addition, in November
2003, we updated our work to determine whether HUD had made changes to
its internal controls to address the cause of the potentially
fraudulent payments that we had identified in June 2003. Again, no
changes had been made.
2. See "Agency Comments and Our Evaluation" section.
3. We understand that it may be necessary to pay for services provided
before HUD owned the properties in order to avoid liens. However, given
the unusually large amounts involved and the nature of the properties
and time period covered by the bill, we continue to believe that HUD
officials should have questioned these charges before payment. As
stated in our report, we found no indication that HUD attempted to find
out why these charges were so large, or why they had not been
identified at the time of settlement and acquisition of the properties.
We also found no indication that the contractor or HUD had pursued
negotiating a settlement with the water authority or recovery from
other parties who may have been responsible for the charges.
4. The draft of this report sent for agency comment included 6 payments
totaling $169,800 that were paid to a contractor for developing a lead
based paint abatement program that we classified as questionable
because they were not adequately supported at the time the payments
were made. Based on recently provided HUD documents, we shifted $99,000
previously included in the "other" questionable payments category to
this category (lead based paint abatement program). We had originally
classified it as "other" because we had received no support for the
payments and thus had no basis for knowing that the $99,000 related to
the paint abatement program. We initially requested support for 2
payments totaling $99,000 in October 2003. On February 17, 2004--for
the first time--HUD provided some documentation for these two payments
which indicated that these were made to the same contractor for
developing the lead based paint abatement program. On this basis, we
changed our report to clarify that 8 payments totaling $268,800 is the
amount of questionable payments to a single contractor for developing a
lead based paint abatement program.
None of the $268,800 in payments were adequately supported because,
among other things, there was no evidence of a contract modification or
other agreement for the contractor to develop such a program. In
addition, there was no indication of the total amount to be paid by HUD
to satisfy the amount claimed by the contractor, or the basis for
reimbursing the contractor for these types of costs that, according to
written provisions in HUD's management agreement with the contractor,
were not allowable unless approved by HUD in advance.
5. Our review found no indication of the emergency nature of the
charges in HUD's supporting documentation for any of these payments.
The payments we identified took place over an extended period of time
in fiscal year 2002 and were not limited to a narrow "emergency"
period. Our stated concerns about duplicate invoices used to support
payments and invoices not matching amounts paid also are unresolved.
Further, we continue to question why local supply sources were not
considered, which would have avoided the incurrence of significant
airfreight charges.
6. Each of the five payments we tested were made not only without
documentation of the competitive bids, but also without any indication
by the reviewing, approving or certifying official that they were even
aware of the possible existence of competitive bids, or whether the
billing contractor had in fact been the successful bidder. Therefore we
continue to view these payments as questionable.
7. HUD provided us with a copy of the signed modification on January
26, 2004, more than 3 months after our initial request for
documentation to support the payments totaling $296,087 that HUD paid
for records management services. As stated in the report, there was no
contract (or modification) included with the support for these payments
or any indication that the payment had been compared to a contract (or
modification) prior to payment to confirm that HUD had authorized these
services at the amount charged. Rather, HUD regional staff advised us
that the "OK to pay" notation on one of the invoices by the division
director was sufficient to process the payment. Such action represents
circumvention of HUD's payment process controls and therefore these
payments continue to be questionable.
8. HUD's response does not address the points raised in our report
regarding the lack of proper documentation to support the validity of
the payment including whether HUD owned the property or a related FHA
loan existed at the time of payment.
9. As described in the report it is the actions of the management
contractor that are at issue, not the actions of a subcontractor.
10. Regarding HUD's statement that "it is important to note that in
these two Centers, two of the three internal controls reviews did
occur", our view is that internal controls over payments are not one
event, but rather a sequential process with each action being dependent
on the preceding steps having been satisfactorily performed. The flaw
we identified in these cases relates to a fundamental control for
authorizing payments whether in the public or private sector. Without
confidence that payment requests are justified based on contracts or
other agreements for those specific services at the prices billed and
that the work has been satisfactorily completed, there is no basis for
payment.
11. It is unclear what HUD means by "detailed analytical reviews of
vouchers." Our point is that detailed analytical reviews of expenses
did not take place. As stated in our report, such reviews would be an
efficient and effective way of analyzing expenses to identify anomalies
and cost saving opportunities. It was just such review that alerted us
to potential improprieties in payments related to the New York City
properties.
12. Neither our report nor our recommendations address the timing for
completion of construction and rehabilitation of the MF program.
However, given that the program has now extended over 10 years and the
costs are in excess of $500 million dollars through fiscal year 2003,
we agree with HUD's stated goal to complete the program by the end of
this year.
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Linda Calbom, (202) 512-9508 or [Hyperlink, calboml@gao.gov],
Robert Owens, (202) 512-8579 or [Hyperlink, owensr@gao.gov].
Acknowledgments:
Staff members who made key contributions to this report include Sharon
Byrd, Stephanie Chen, Lisa Crye, Bonnie Derby, Carmen Harris, Kelly
Lehr, Sharon Loftin, Julia Matta, Irvin McMasters, Andrew O'Connell,
Lien To, Estelle Tsay, and Brooke Whittaker.
(190082):
FOOTNOTES
[1] HUD single-family properties consist of one to four units or
apartments.
[2] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Housing and Urban Development, GAO-03-103
(Washington, D.C.: Jan. 2003).
[3] We are 95 percent confident that the actual proportion of payments
lacking key supporting documentation is between 35 and 49 percent.
[4] We are 95 percent confident that the actual proportion of payments
not properly approved is between 51 and 65 percent.
[5] U.S. General Accounting Office, Financial Management: Strategies to
Address Improper Payments at HUD, Education, and Other Federal
Agencies, GAO-03-167T (Washington, D.C.: Oct. 3, 2002).
[6] The GTM serves as a technical adviser to the GTR.
[7] HUD - Government Technical Representative Handbook states that the
GTR is responsible for being the principal judge of a contractor.
[8] Housing and Urban Development, Controls for Management & Marketing
(M&M) Contractors Disbursements (Washington, D.C.).
[9] We are 95 percent confident that the actual proportion of HUD
payments not properly approved is between 51 and 65 percent.
[10] Housing and Urban Development: Government Technical Representative
Handbook 2210.3 Chapters 11 & 12 (Washington, D.C.: 2003) states, in
order to act as the GTM for a contract and perform the duties of one,
an individual must be formally appointed by HUD, have basic knowledge
of the contracting process, and complete certain minimum training.
[11] We are 95 percent confident that the actual proportion of payments
lacking key supporting documentation is between 35 and 49 percent.
[12] Holding costs represent total costs incurred from the date of
acquisition through sale of the property.
[13] U.S. General Accounting Office, Strategies to Manage Improper
Payments: Learning from Public and Private Sector Organizations, GAO-
02-69G (Washington, D.C.: Oct. 2001).
[14] We have redacted identifying information by "blacking-out" such
information in the following figures.
[15] HUD requires written bids for property expenses anticipated to
exceed $2,000.
[16] Under the terms of the contract, the contractor was required to
obtain HUD approval for all repairs anticipated to exceed $2,500.
[17] It was not practical for us to test whether all of the other goods
or services paid for were actually received due to the nature of the
goods or services.
[18] The development budget is based on rehabilitation costs of
$100,000 per apartment units.
[19] 12 U.S.C. § 1702.
[20] Data mining applies a search process to a data set, analyzing for
trends, relationships, and interesting associations. For instance, it
can be used to efficiently query transaction data for characteristics
that may indicate potentially improper activity.
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