United States General Accounting Oleace / 3 4 2 / 0 

Testimony 

For Release GAO Audits of Accounting and Financial 

on Delivery 

Expected at 

10-00 a.m. 

Tuesday 

August 1, 1989 

Management Systems at the Federal 

Housing Administration 

Statement of 

Charles A. Bowsher 

Comptroller General of the United States 

Before the 

Subcommittee on Housing and Urban TiFfairs 

Committee on Banking, Housing and Urban Affairs 

U.S. Senate 

GAO/T-AFMD-89-13 / GAOFonn160(12/87) 
Mr. Chairman and Members of the Committee: 

We are pleased to appear here today to discuss GAO's efforts 

to conduct financial statement audits at the Federal Housing 

Administration (FHA) and the financial management problems at FHA 

that we have previously reported. 

FHA and the Department of Housing and Urban Development 

(HUD) have received a great deal of publicity recently regarding 

various accounting and financial management problems. We have 

reported many of these types of problems for years. In addition, 

HUD's Federal Managers' Financial Integrity Act reports have 

consistently disclosed material weaknesses in FHA and HUD 

internal controls. FHA's serious accounting and financial 

management problems have been well documented in all of these 

reports, as well as in HUD Inspector General reports. Many of 

the problems have been long-standing. We have found that many 

of the deficiencies cited in earlier reports continue to be found 

in our more recent reviews. 

Correction of FHA's problems will require multiyear 

solutions and a long-term management commitment. Strong action 

is needed by top management to address the very serious problems 

that continue to affect FHA. An action plan with milestones 

needs to be developed and implemented with independent monitoring 

and audit, particularly annual financial statement audits, to 

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ensure that progress is achieved and any obstacles are identified 

so that early resolution can be reached. 

Before I get into the details of our various financial 

statement and program reviews, let me spend a few minutes 

discussing some background related to FHA. 

BACKGROUND 

FHA was established in 1934 under authority granted to the 

President by the National Housing Act (Public Law 73-479). In 

1948, FHA became a wholly owned government corporation subject to 

the Government Corporation Control Act, as amended. FHA and its 

functions were transferred to HUD in 1965. After the transfer, 

FHA no longer had separate staff or facilities: its operations 

have been conducted, along with other housing activities, by HUD 

organizations. 

The basic purpose of FHA programs is to encourage 

improvements in housing standards and conditions, provide an 

adequate home financing system through mortgage insurance, and 

exert a stabilizing influence on the mortgage market. To carry 

out this purpose, the Secretary of HUD administers FHA through 

four separate funds for its various mortgage insurance programs-- 

thi Mutual Mortgage Insurance Fund, the Cooperative Management 

Housing Insurance Fund, the General Insurance Fund, and the 

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Special Risk Insurance Fund. As of September 30, 1987, FHA had 

$277 billion of insurance-in-force and net government equity of 

$1.2 billion. The Mutual Mortgage Insurance Fund, which is 

intended to be self-financing, is the largest fund with 

$205 billion of insurance-in-force and government equity of $3.4 

billion as of September 30, 1987. 

EFFORTS TO CONDUCT FINANCIAL STATEMENT AUDITS 

FHA became subject to annual audits by the Comptroller 

General under the Government Corporation Control Act in 1948. In 

1974, the Government Corporation Control Act was amended, and the 

requirement for an annual audit was changed to require that an 

audit be made at least once every 3 years. 

Our fiscal year 1974 financial statement audit resulted in 

our issuance of an unqualified opinion indicating that, in our 

opinion, the financial statements presented fairly, in all 

material respects, FHA's financial position and results of 

operations in conformity with generally accepted accounting 

principles and with applicable federal laws. This was the last 

unqualified opinion issued on FHA's financial statements. 

. 

In 1975, serious problems with FHA's financial management 

operations began to surface. From 1975 until recently, we were 

not able to conduct full financial statement audits of FHA 

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because of very serious accounting and internal control 

deficiencies which prevented FHA from producing accurate 

financial statements. These deficiencies included unrecorded 

transactions, lack of detailed supporting records, and lack of 

reconciliation of several key accounts to detailed supporting 

records. For fiscal years 1975, 1976, and 1978, we issued 

disclaimers of opinion because we were not able to express an 

opinion on the fairness of FHA's financial statements. 

For fiscal year 1981, due to continuing accounting and 

financial reporting deficiencies, we worked extensively with FHA 

to assemble a set of financial statements in accordance with 

generally accepted accounting principles. We issued a report to 

the Congress (GAO/AFMD-83-66, June 10, 19831, which included 

FHA's unaudited financial statements. We did not conduct an 

audit of the accounts because the effort to assemble the 

statements required a great deal of time and the additional time 

that would have been needed to gather evidence to support an 

opinion would have extended this audit into fiscal year 1984, the 

year of our next required audit. Also, the financial data would 

have been 3 years old. 

In May 1984, we began our fiscal year 1984 financial 

statement audit, but terminated our efforts after several mcnths 

be&ause of the continuing serious accounting and financial 

reporting problems. We met with the HUD Assistant Secretary for 

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Administration and discussed the issues that needed to be 

addressed before we could conduct a successful audit. These 

issues included FHA's responsibility to 

-- improve internal controls over the general ledger system 

to ensure it would generate reliable data, 

-- test new computer systems before implementation to 

ensure proper operation, and 

-- reconcile key financial transactions and account balances 

to the supporting detailed records. 

The Assistant Secretary responded to our discussion in a letter 

dated December 6, 1984, and stated that she was in overall 

. agreement with us and that she had already begun to address a 

number of the issues that we had presented. To help her resolve 

these issues, the Assistant Secretary hired several accountants 

from GAO who were familiar with FHA's financial problems. 

To help us fulfill our audit responsibility for fiscal year 

1987, we contracted with the independent certified public 

accounting firm of Price Waterhouse. Although improvements had 

been made to the accounting and financial systems, the magnitude 

of'accounting and reporting problems still present made it 

impractical to audit FHA's consolidated statements of operations 

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and changes in financial position for fiscal year 1987. 

Therefore, Price Waterhouse's 1987 work focused on auditing 

FHA's statement of financial position as of September 30, 1987, 

so as to establish a baseline for a 1988 audit. For fiscal year 

1988, Price Waterhouse will provide an opinion on a full set of 

audited financial statements, as well as reports on internal 

accounting controls and compliance with laws and regulations. 

After FHA agreed to numerous adjustments totaling some $1.9 

billion, Price Waterhouse expressed an unqualified opinion on the 

fairness of FHA's consolidated statement of financial position as 

of September 30, 1987. In our opinion, and consistent with the 

opinion of Price Waterhouse, FHA's statement of financial 

position was fairly presented. Our report to the Congress 

incorporated Price Waterhouse's report (GAO/AFMD-89-3, May 12, 

1989). 

The fiscal year 1988 audit is well underway and is expected 

to be completed by the end of August. Our report will be issued 

shortly thereafter. In addition to the opinion on the financial 

statements and reports on FHA's internal accounting controls and 

compliance with laws and regulations, Price Waterhouse is 

developing a separate report on those items identified during its 

audits which it believes management needs to correct. After the 

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Congress returns from recess, I would welcome the opportunity to 

discuss the results of our work on the 1988 statements. 

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REVIEWS OF FINANCIAL OPERATIONS 

REVEALED SERIOUS DEFICIENCIES 

In addition to our financial audit work at FHA, we have 

also performed reviews of various FHA programs and over the years 

have issued many reports that describe serious deficiencies in 

FHA's operations. The reports identified a wide range of 

financial management problems including internal control 

weaknesses, accounting system deficiencies, and management 

inattention. Many of the problems noted in our more recent 

reports are the same problems cited in earlier reports. 

Attachment I to this statement includes a list of these reports. 

I would like to highlight for you the problems we found during a 

few of our major reviews in the last several years. 

-- In 1984, based on an overall general management review 

of HUD, we reported (GAO/RCED-84-9, January 10, 1984) 

that HUD's management information systems do not provide 

timely and accurate data necessary to establish 

accountability for, and control over, housing and urban 

development programs. One of these key systems involved 

the process for underwriting FHA's single-family mortgage 

insurance. We reported that, although HUD spends 

Y millions each year to gather data, much of the data 

cannot be relied upon for controlling and monitoring 

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programs, and information needed by managers is not 

accurate, timely, or readily available. 

In addition to program functions, we found that 

accounting activities would benefit from better systems. 

Although HUD started automating its accounting systems in 

the 195Os, these systems are not fully automated and 

extensive manual effort is needed ,for accounting 

functions. Historically, these functions have received 

limited top-management emphasis and lower priority in 

systems development. The result has been, as stated in 

our report, that systems do not include the necessary 

internal controls to adequately protect against fraud, 

waste, and mismanagement; do not comply with GAO's 

principles and standards: and do not provide management 

with timely and accurate financial data needed for 

oversight, program implementation, and budgetary 

analysis. 

-- In May 1985, we reported (GAO/RCED-85-4, May 13, 1985) 

that HUD needed to strengthen its internal controls over 

procedures for approving insurance on single-family home 

loans. We found that HUD relies on lenders to obtain and 

verify information needed to determine the financial 

* capacity of borrower e to repay and does not independently 

8 

: 
verify the credit information submitted by the lender, 

like other properly managed mortgage insurance programs. 

Because HUD's single-family loan insurance program 

protects lenders from the risk that they will not be 

repaid, making an FHA-insured home loan is virtually risk 

free for the lender. Because of the weaknesses we 

reported in HUD's procedures, in a much-publicized case, 

a single lender was able to make many loans to home 

buyers who had no credit history and, in some cases, 

information regarding the identity of the borrowers and 

their financial qualifications was misleading. 

-- In 1985 (GAO/RCED-86-22, October 8, 1985), we reviewed 

HUD's second-year implementation of the Federal Managers' 

Financial Integrity Act of 1982 (FMFIA). The act was 

intended to help reduce fraud, waste, and abuse in 

federal government operations by requiring agencies to 

assess and report annually on the adequacy of their 

internal controls and accounting systems. Our review 

found that HUD needed to improve its process of 

identifying, evaluating, and correcting internal control 

problems. Also, our review noted that HUD's systems 

were not in conformance with GAO's standards and 

requirements. 

') 

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-- In June 1986, in reporting internal control actions 

taken on the basis of recommendations made by the HUD 

Secretary's Single Family Task Force and in our May 1985 

report, we found that controls over monitoring loan 

defaults and verifying loan data submitted to HUD by 

lenders still needed to be improved (GAO/RCED-86-172, 

June 3, 1986). 

-- In September 1987, we reported (GAO/RCED-87-165, 

September 30, 1987) on the continuing weaknesses in FHA's 

home appraisal program. HUD's 1983 FMFIA report 

identified material weaknesses in its method of selecting 

and reviewing home appraisals, which opened the program 

to fraud and abuse, and contributed to FHA's mounting 

losses. Appraisals were inappropriately selected for 

review, reviews were inadequate, appraisers were used as 

reviewers, and computer controls over appraiser 

assignments were routinely overridden. 

FHA has a mortgage monitoring system, and we have been 

reviewing FHA's management controls to ensure they are being 

implemented as intended to eliminate fraud, waste, and abuse. 

The early results of our review of the monitoring system show 

the following. 

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-- FHA's system is not adequate for monitoring regional and 

field offices, lenders, fee appraisers, and counseling 

agencies. The system does not include all necessary 

monitoring to ensure that lender quality control plans 

are adequate, sanctions are imposed for poor 

performance, and appropriate management uses are made of 

the results of monitoring. 

-- FHA does not have a complete and reliable system for 

tracking audit findings and recommendations. 

In addition to identifying breakdowns in FHA's management 

controls, I would also like to point out that our work has 

indicated that there are opportunities to reduce costs by 

improving program policies and procedures. For example, in 

April 1988, we reported that in fiscal year 1987 FHA lost $1.2 

billion on the sale of properties acquired because of loan 

defaults, and we identified changes to improve controls over the 

foreclosure process to reduce costs. For example, we pointed out 

that FHA encourage lenders to obtain property deeds from 

delinquent borrowers willing to offer deeds in lieu of undergoing 

prolonged foreclosure proceedings which are costly to FHA. Based 

on our observations, HUD,has implemented this and several other 

procedural changes that, if properly implemented, could result in 

multimillion dollar savings to the government. 

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CONCLUSIONS 

I have mentioned a few examples of the many reports we have 

issued over the years describing various deficiencies in many of 

FHA's programs. FHA's accounting and financial management 

problems have been long-standing and well documented. Correction 

of these problems will require multiyear solutions and a longterm commitment by top management. 

Although there are no easy fixes to the problems in federal 

financial management, the development of accurate and reliable 

financial statements is a very important step in addressing the 

accountability for assets, recognition of liabilities, and 

accounting for operations. I have often stated in testimony 

before the Congress that annual audits, including reviews of 

internal accounting controls and compliance with laws and 

regulations, would focus attention on an agency's major problems. 

To improve accountability, I strongly believe top management 

needs to develop an action plan with milestones addressing the 

improvements needed in FHA/HUD's accounting and financial 

management systems. The plan should also provide for the 

accountability and discipline of financial statements and the 

performance of annual financial audits. Agency management and 

the Congress can monitor HUD's progress through an annual review 

of the independent auditor's opinion, reports on internal 

accointing controls and compliance with laws and regulations, and 

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management's report required by the Federal Managers' Financial 

Integrity Act. 

Thie concludes my statement, Mr. Chairman. We will be 

pleased to respond to any questions you or members of the 

Committee may have. 

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ATTACHMENT I ATTACHMENT I 

LIST OF SELECTED GAO REPORTS RELATING TO FHA--1975-1988 

Housing Programs: HUD Policies to Minimize Costs in 

Acquiring Foreclosed Properties (GAO/RCED-88-141BR, 

April 18, 1988) 

Weaknesses in HUD's Single Family Housing Appraisal Program 

(GAO/RCED-87-165, September 30, 1987) 

Housing Programs: Agency Actions to Discourage Single 

Family Mortgage Insurance Fraud (GAO/RCED-86-172BR, June 3, 

1986) 

Debt Collection: Billions Are Owed While Collection and 

Accountinq Problems Are Unresolved (GAO/AFMD-86-39, May 23, 

1986) 

HUD's Second-Year Implementation of the Federal Managers' 

Financial Integrity Act (GAO/RCED-86-22, October 8, 1985) 

Stronger Internal Controls Over HUD Single-Family Mortgage 

Insurance Programs Would Discourage Fraud (GAO/RCED-85-4, 

' May 13, 1985) 

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ATTACHMENT I ATTACHMENT I 

Increasing HUD Effectiveness Throuqh Improved Management 

(GAO/RCED-84-9, January 10, 1984) 

Problems Continue in Accounting for and Servicing HUD-Held 

Multifamily Mortgages (GAO/AFMD-82-18, August 18, 1982) 

Defaulted Title I Home Improvement Loans--Highly Vulnerable 

to Fraud, Waste, and Abuse (GAO/AFMD-82-14, December 7, 

1981) 

HUD Should Make Immediate Changes in Accounting for 

Secretary-Held Multifamily Mortqages (FGMSD-80-43, 

May 16, 1980) 

Housing and Urban Development's Efforts to Improve Its 

Accounting System for Mortqage Insurance Premiums (FGMSD-80- 

27, March 19, 1980) 

Delays in Implementing the Department of Housing and Urban 

Development's Accountinq System for its Mortgage Insurance 

Proqram (FGMSD-80-37, March 4, 1980) 

Y Weaknesses in Servicinq and Accounting for Home Mortgages 

Held by HUD (FGMSD-79-41, August 16, 1979) 

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ATTACHMENT I ATTACHMENT I 

Action Being Taken to Correct Weaknesses in the 

Rehabilitation Loan Program (FGMSD-79-14, March 14, 1979) 

Weaknesses in the Department of Housing and Urban 

Development's Financial Management System (FGMSD-77-75, 

December 28, 1977) 

Millions of Dollars in Delinquent Mortgage Insurance 

Premiums Should Be Collected by the Department of Housing 

and Urban Development (FGMSD-77-33, September 8, 1977) 

Second Interim Report on Review of HUD's Accounting System 

for Billing and Collection of Federal Housing Administration 

Mortgage Insurance Premiums From Mortgagees (FGMSD-77-7, 

December 13, 1976) 

Action Being Taken to Correct Weaknesses in the System of 

Paying Taxes on Acquired Residential Properties (FGMSD-76- 

24, November 26, 1975) 

Need for Improvements in the Automated Payroll System of the 

* Department of Housing and Urban Development (FGMSD-75-31, 

June 18, 1975) 

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