a

GAO

United States General Accounting Office

Report to the Chairman, Committee on 

Government Reform, House of 

Representatives

March 2004 HUD SINGLE-FAMILY 

AND MULTIFAMILY 

PROPERTY 

PROGRAMS

Inadequate Controls 

Resulted in 

Questionable 

Payments and 

Potential Fraud

GAO-04-390
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. 

Highlights of GAO-04-390, a report to the 

Honorable Tom Davis, Chairman, 

Committee on Government Reform, 

House of Representatives 

March 2004

HUD SINGLE-FAMILY AND MULTIFAMILY 

PROPERTY PROGRAMS 

Inadequate Controls Resulted in 

Questionable Payments and Potential 

Fraud 

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. 

Source: GAO.

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. 

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 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. You also asked us to assess 

HUD’s monitoring of a major 

multifamily project with a state 

housing agency. 

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. 
Page i GAO-04-390 HUD Single-Family and Multifamily Property Programs

Contents

Letter 1

Results in Brief 3

Background 6

Internal Controls Over SF Property Payments Were Inadequate 10

Lack of Controls Contributed To Questionable and Potentially 

Fraudulent Payments 17

Insufficient Monitoring of a Major Multifamily Program 52

Conclusions 56

Recommendations for Executive Action 57

Agency Comments and Our Evaluation 60

Appendixes

Appendix I: Scope and Methodology 64

Appendix II: Comments from the Department of Housing and Urban 

Development 67

GAO Comments 74

Appendix III: GAO Contacts and Staff Acknowledgments 77

GAO Contacts 77

Acknowledgments 77

Tables Table 1: Type, Number, and Amount of Questionable Payments 19

Table 2: HUD Spending Related to Multifamily Program 55

Figures Figure 1: Geographical Jurisdictions of HUD’s Four 

Homeownership Centers 8

Figure 2: Four-Step SF Property Payment Process 11

Figure 3: Single-Family Properties Average per Property 

Expenses-Fiscal Year 2002 16

Figure 4: Invoice for Contract Change Orders 21

Figure 5: Chain-Link Fence 24

Figure 6: Records Management Invoice 26

Figure 7: Relocation Invoice 27

Figure 8: Agreement to Vacate 28

Figure 9: E-mail Approving Payment 29

Figure 10: Falsified Work Order 31

Figure 11: Property 1–“New” Ceiling 34

Figure 12: Property 1–“New” Bathroom Floor 35

Figure 13: Property 1–“New” Sheetrock® Walls 35
Contents

Page ii GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 14: Property 1–“$1,590 Kitchen Cabinet” 36

Figure 15: Property 2–Bathroom “Repairs” 37

Figure 16: Property 2–More Bathroom “Repairs” 38

Figure 17: Property 2–“$1,082 Wooden Dowels” 38

Figure 18: Property 3–“New” Kitchen Ceiling 39

Figure 19: Property 3–“New” Dining Room Ceiling on Floor 40

Figure 20: Property 3–“New” Living Room Floor 40

Figure 21: Property 4–$2,292 “New” Metal Door 41

Figure 22: Property 4–$3,978 in Stoop “Repairs” 42

Figure 23: Property 5–“Repaired and Painted” Public Hall 43

Figure 24: Property 5–“Plastered and Painted” Ceiling 44

Figure 25: “Repaired” Bathroom 46

Figure 26: “Repaired” Bathtub 47

Figure 27: “Newly Tiled” Stairway 48

Figure 28: “New” Ceramic Bathroom Floor 49

Figure 29: “New” Bathroom Floor 50

Figure 30: Timeline of HUD’s Relationship with Contractor 51

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

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Page 1 GAO-04-390 HUD Single-Family and Multifamily Property Programs

United States General Accounting Office

Washington, D.C. 20548

A

March 3, 2004 Letr

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.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.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 

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).
Page 2 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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. 
Page 3 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 percent3 of 

the total population of SF property payments for fiscal year 2002 were not 

adequately supported and 58 percent4 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 

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.
Page 4 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 leadbased 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.5

 Through data mining, we identified 

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).
Page 5 GAO-04-390 HUD Single-Family and Multifamily Property Programs

$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 
Page 6 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 
Page 7 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.
Page 8 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 1: Geographical Jurisdictions of HUD’s Four Homeownership Centers 

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 

Atlanta

Denver

Santa Ana

Philadelphia

Source: GAO’s analysis of data from HUD’s Office of Housing.
Page 9 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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),6

 and final authorization by a government 

technical representative (GTR),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.

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.
Page 10 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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. 
Page 11 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 2: Four-Step SF Property Payment Process 

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

Property

management

contractors

and other vendors

HUD Disbursement

contractor Treasury

Support

services

contractor

Reviews and

prepares 

manual

check

Issue

check

Disburse

electronic

payment

Sources: GAO and HUD's Controls for M&M Contractors Disbursements.

Prepares 

payment

request 

Attach invoice, 

vendor bills, 

and receipts

to payment

request

Administrative

review

of payment

request

Technical

review 

of payment

request

(step 3.1)

GTR approval 

of payment

request

(step 3.2)

Certifying

officer 

certifies

payment

(step 3.3)

either

Step 1 Step 2 Step 3 Step 4
Page 12 GAO-04-390 HUD Single-Family and Multifamily Property Programs

contractor for any changes.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 percent9

 of the total population of single-family 

payment transactions to contractors and other vendors at the four 

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.

a

This text box as well as those following in this section of the report are quotes from the U.S. 

General Accounting Office, Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.31.1. (Washington, D.C.: Nov. 1999).

“The control 

environment is 

affected by the manner 

in which the agency 

delegates 

responsibilities.”a
Page 13 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.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 percent11

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 

10Housing 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.

11We are 95 percent confident that the actual proportion of payments lacking key supporting 

documentation is between 35 and 49 percent.

“Transactions and other 

significant events should 

be executed by persons 

acting within the scope of 

their authority.”
Page 14 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 systemgenerated 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 

“All transactions 

need to be clearly 

documented.”
Page 15 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 property12 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 

12Holding costs represent total costs incurred from the date of acquisition through sale of 

the property. 
Page 16 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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

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 Payments13 explains how data mining and 

13U.S. General Accounting Office, Strategies to Manage Improper Payments: Learning 

from Public and Private Sector Organizations, GAO-02-69G (Washington, D.C.: Oct. 2001).

 Santa Ana

710

Denver

633

Atlanta

564

Philadelphia

1,709

New York City

contractor 

16,388

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Dollars

Source: GAO analysis.
Page 17 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 
Page 18 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.
Page 19 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Table 1: Type, Number, and Amount of Questionable Payments 

Source: GAO analysis of payments for fiscal year 2002.

For illustrative purposes, we provide specific examples of actual support14

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 

Types of payment

Number of 

payments Amount

1 Contract change orders

Inadequate support 23 $ 15,180,098

2 Water and sewer services

HUD did not own the

properties at the time of service 1 206,597

3 Lead-based paint abatement program

Inadequate support 8 268,800

4 Signs and airfreight delivery

Competitive bids not obtained 10 58,343

5 Chain-link fences 

Competitive bids not obtained 5 30,366

6 Records management services

No evidence of an agreement for the services 3 296,087

7 Relocation fee

No justification or verification 1 1,300

8 Lawn service and repairs

Falsified work orders 23 23,000

9 Other

Inadequate support 22 228,773

 Total questionable payments 96 $ 16,293,364

14We have redacted identifying information by “blacking-out” such information in the 

following figures. 
Page 20 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.
Page 21 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 4: Invoice for Contract Change Orders 

For $452,000 no support 

was included with the 

payment documentation 

For $4,031 there was no 

sign of verification of 

HUD ownership

For $862,661 no support 

was included with the 

payment documentation 

Source: HUD.
Page 22 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 
Page 23 GAO-04-390 HUD Single-Family and Multifamily Property Programs

$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.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 

15HUD requires written bids for property expenses anticipated to exceed $2,000.
Page 24 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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

Source: GAO.
Page 25 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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. 
Page 26 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 6: Records Management Invoice

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. 

Source: HUD.

Authorization from 

officials 
Page 27 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 7: Relocation Invoice

Source: HUD.

No HUD 

property identifier 

(case number)
Page 28 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 8: Agreement to Vacate

Source: HUD.

Unsigned

Listed address is not 

location of a property 

with an FHA number
Page 29 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 9: E-mail Approving Payment

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 

Source: HUD.

HUD “OK.” — 

approval to pay
Page 30 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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. 
Page 31 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 10: Falsified Work Order 

Source: HUD.

Receipt of competitive 

bids should be signed by 

the contractor

Completion of the work should 

be signed by the sub-contractor 

who performed the work

Inspection of the work 

performed should be signed by 

the contractor
Page 32 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 
Page 33 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 threshold16

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 invoices17 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. 

16Under the terms of the contract, the contractor was required to obtain HUD approval for 

all repairs anticipated to exceed $2,500.

17It 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.
Page 34 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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

Source: GAO.
Page 35 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 12: Property 1–“New” Bathroom Floor

Figure 13: Property 1–“New” Sheetrock® Walls

Source: GAO.

Source: GAO.
Page 36 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 14: Property 1–“$1,590 Kitchen Cabinet”

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” 

Source: GAO.
Page 37 GAO-04-390 HUD Single-Family and Multifamily Property Programs

bathroom and minimal work performed in the stairway at the time of our 

physical inspection. 

Figure 15: Property 2–Bathroom “Repairs”

Source: GAO.
Page 38 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 16: Property 2–More Bathroom “Repairs”

Figure 17: Property 2–“$1,082 Wooden Dowels”

Source: GAO.

Source: GAO.
Page 39 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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

Source: GAO.
Page 40 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 19: Property 3–“New” Dining Room Ceiling on Floor

Figure 20: Property 3–“New” Living Room Floor

Source: GAO.

Source: GAO.
Page 41 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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

In addition, HUD reimbursed the contractor for five invoices, totaling 

$8,407, for additional work performed in the basement, including clean up 

Source: GAO.
Page 42 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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”

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 

Source: GAO.
Page 43 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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

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 

Source: GAO.
Page 44 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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

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 

Source: GAO.
Page 45 GAO-04-390 HUD Single-Family and Multifamily Property Programs

(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. 
Page 46 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 25: “Repaired” Bathroom

Source: GAO.
Page 47 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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

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).

Source: GAO.
Page 48 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 27: “Newly Tiled” Stairway

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.

Source: GAO.
Page 49 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 28: “New” Ceramic Bathroom Floor 

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.

Source: GAO.
Page 50 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Figure 29: “New” Bathroom Floor

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 

Source: GAO.
Page 51 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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

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 

1997 1998 1999 2000 2001 2002 2003 2004

Contractor hired to

manage MF properties

July 1997

June 2001

Contractor's responsibility

is expanded to

SF program

November 2001

Contractor's SF billing

practices questioned

by HUD

Contractor’s billing practices

questioned by HUD

May 1998

GAO testifies on contractor’s

potentially fraudulent

MF billing practices

October 2002

MF contract ends

February 2003

June 2003

GAO notifies HUD of

questionable billing

practices in SF program

October 2003

HUD ends contractor’s SF

responsibilities

Questionable billing practices

over 2 years in SF program

Questionable billing practices

over 5 years in MF program

Source: GAO analysis.
Page 52 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.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 

18The development budget is based on rehabilitation costs of $100,000 per apartment units.
Page 53 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.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 dayto-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 

1912 U.S.C. § 1702.
Page 54 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 
Page 55 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 “offbudget.” 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 

Source: GAO analysis.

Dollars in millions

Program spending through 

fiscal year 2002 Amounts

Budget costs

Original budget

 Amendments

$187.5

52.0

$239.5

Off-Budget costs

Environmental hazard abatement

Tenant relocation expenses

State agency management fee

Operating cost (security, payroll, etc.)

57.6

45.5

 15.1

123.3

241.5

Total $481

Improper payments result in 

hidden expenses that must be 

paid for by either decreases in 

program spending or increases 

in appropriations or mortgage 

insurance premiums paid by the 

public.
Page 56 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.
Page 57 GAO-04-390 HUD Single-Family and Multifamily Property 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;
Page 58 GAO-04-390 HUD Single-Family and Multifamily Property Programs

• 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. 
Page 59 GAO-04-390 HUD Single-Family and Multifamily Property Programs

• 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 
Page 60 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 
Page 61 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.
Page 62 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.
Page 63 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 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 calboml@gao.gov or Robert Owens, 

Assistant Director, at (202) 512-8579 or owensr@gao.gov. Major 

contributors to this report are acknowledged in appendix III.

Sincerely yours,

Linda M. Calbom

Director, Financial Management

and Assurance
Page 64 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Appendix I

Scope and Methodology ApApenednxidexiIs

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 mining1 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 

1

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.
Appendix I

Scope and Methodology

Page 65 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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
Appendix I

Scope and Methodology

Page 66 GAO-04-390 HUD Single-Family and Multifamily Property Programs

• 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.
Page 67 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Appendix II

Comments from the Department of Housing 

and Urban Development ApendxiI

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.

See comment 1.

See comment 2.
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 68 GAO-04-390 HUD Single-Family and Multifamily Property Programs

See comment 3.
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 69 GAO-04-390 HUD Single-Family and Multifamily Property Programs

See comment 4.

See comment 5.

See comment 6.

See comment 7.

See comment 8.
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 70 GAO-04-390 HUD Single-Family and Multifamily Property Programs

See comment 9.

See comment 4.

See comment 2.

See comment 2.
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 71 GAO-04-390 HUD Single-Family and Multifamily Property Programs

See comment 10.

See comment 11.

See comment 2.
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 72 GAO-04-390 HUD Single-Family and Multifamily Property Programs

See comment 12.
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 73 GAO-04-390 HUD Single-Family and Multifamily Property Programs
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 74 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 75 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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 
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 76 GAO-04-390 HUD Single-Family and Multifamily Property Programs

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.
Page 77 GAO-04-390 HUD Single-Family and Multifamily Property Programs

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

GAO Contacts Linda Calbom, (202) 512-9508 or calboml@gao.gov

Robert Owens, (202) 512-8579 or 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)
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