Internal Controls

As part of its responsibility to audit the federal government's consolidated financial statements for fiscal years 1997 and 1998, GAO participated in the Department of Veterans Affairs' (VA) Office of the Inspector General (OIG) audit of VA's Housing Credit Assistance program. In its report on VA's fiscal year 1997 financial statements, the OIG cited several deficiencies that led to VA's receiving a qualified opinion on those statements. The OIG was unable to conclude that the $3 billion loans receivable account balance of the direct loan portfolio was fairly stated because of inadequate controls and incomplete records. Also, the OIG found several errors in recording loan sale transactions, including the inaccurate and untimely recording of loan sales and the improper accounting of loan guarantees. VA is trying to correct the internal control weaknesses mentioned in the audit of its fiscal year 1997 financial statement. This report describes the weaknesses in the level of VA's accountability and control over the Housing Credit Assistance program's direct loan and loan sale activities and recommends actions needed to improve VA's internal control environment and financial and budgetary reporting for these activities.

GAO noted that: (1) VA did not have appropriate management and operational controls in place to maintain accountability over its direct loan and loan sale activities; (2) VA provided little oversight of contractors that were managing billions of dollars of assets on its behalf and did not ensure that revenues and expenses were accurate or that cash receipts were deposited promptly in Treasury accounts; (3) when VA outsourced the servicing of its direct loan portfolio to a contractor in fiscal year 1997, it did not adequately plan or manage the transfer; (4) it concurrently shut down its automated district loan system and surrendered almost all hard copy loan records to the contractor without retaining basic information needed to confirm or reconcile the number and value of loans serviced by the contractor; (5) as a result, VA was unable to appropriately manage its loan portfolio; (6) further, the data transferred to the contract servicer, which up to that point had been maintained by more than 40 VA regional offices, were incomplete and inconsistent; (7) this immediately created loan servicing problems; (8) there were delays in allocating payments to borrowers' accounts and in paying property taxes on behalf of borrowers as well as property taxes on VA-owned houses; (9) VA lacked assurance that receipts from loans were properly collected and allocated to borrowers' accounts, and did not determine the propriety of property tax expenses associated with VA-owned property and, accordingly, could not be confident that appropriate amounts were transmitted to the government; (10) in addition, VA lacked a basis for properly reconciling the financial activity reported by the contractor to the data recorded in VA's general ledger; (11) GAO found that VA's failure to timely monitor the contractors that service the loans, representing roughly $9 billion since 1992, allowed servicing inefficiencies and improper actions by two servicers to cause financial losses to VA; (12) GAO found that VA's financing and accounting for the guarantees associated with the loan sales in effect masked both the existence of the estimated liability for defaulted loans as well as the sources of funds being used to finance those liabilities; and (13) until 1997, VA had not reported or disclosed the loan sales in its financial statements or budget reports or requested funding to cover the cost of these guarantees.

Recommendations

Our 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.

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