U.S. GOVERNMENT PRINTING OFFICE

67–313 DTP WASHINGTON : 2001

RESULTS OF THE DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT’S FISCAL YEAR 1999 FINANCIAL STATEMENTS AUDIT

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

MARCH 22, 2000

Serial No. 106–167

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

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Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2250

Mail: Stop SSOP, Washington, DC 20402–0001

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

LISA SMITH ARAFUNE, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

RANDY KAPLAN, Counsel

BRYAN SISK, Clerk

TREY HENDERSON, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on March 22, 2000 ............................................................................ 1

Statement of:

Gaffney, Susan, Inspector General, Department of Housing and Urban

Development, accompanied by Kathryn Kuhl-Inclan, Assistant Inspector General for Audit; James Heist, Director of the Financial Audits

Division; Benjamin Hsiao, Director of the Information Systems Audit

Division; and Saul Ramirez, Deputy Secreary, Department of Housing

and Urban Development, accompanied by Victoria Bateman, Comptroller for FHA .................................................................................................... 7

Letters, statements, etc., submitted for the record by:

Gaffney, Susan, Inspector General, Department of Housing and Urban

Development, prepared statement of .......................................................... 10

Horn, Hon. Stephen, a Representative in Congress from the State of

California, prepared statement of ................................................................ 3

Ramirez, Saul, Deputy Secreary, Department of Housing and Urban Development, accompanied by Victoria Bateman, Comptroller for FHA,

prepared statement of ................................................................................... 27

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 5

(1)

RESULTS OF THE DEPARTMENT OF HOUSING

AND URBAN DEVELOPMENT’S FISCAL YEAR

1999 FINANCIAL STATEMENTS AUDIT

WEDNESDAY, MARCH 22, 2000

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, Biggert, Ose, Turner, and

Maloney.

Staff present: J. Russell George, staff director and chief counsel;

Randy Kaplan, counsel; Louise DiBenedetto, GAO detailee, Bonnie

Heald, director of communications; Bryan Sisk, clerk; Ryan McKee,

staff assistant; Trey Henderson, minority counsel; and Jean Gosa,

minority assistant Clerk.

Mr. HORN. A quorum being present, the Subcommittee on Government Management, Information, and Technology will come to

order.

This hearing is the fourth in a series of hearings to examine the

results of the financial audits of selected Federal agencies. We

began this series in February and have since heard from witnesses

representing the Internal Revenue Service, the Health Care Financing Administration, and the Department of Agriculture.

Today, we will focus on financial management practices at the

Department of Housing and Urban Development [HUD].

On March 1, 2000, HUD’s Inspector General issued a report entitled, U.S. Department of Housing and Urban Development Attempt

to Audit the Fiscal Year 1999 Financial Statements.

In her report, the Inspector General noted that she could not express an opinion on the financial statements because of the Department’s inability to produce verifiable financial statements in a

timely manner.

It is no secret that management weaknesses have plagued HUD

over the years. The General Accounting Office lists HUD as a highrisk agency because its programs are at high risk to fraud, waste,

and mismanagement. Last year, the Inspector General gave HUD

its first—and only—unqualified opinion. However, the Inspector

General noted that verifying the 1998 statements required extensive work and contractor support.

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Many of the same deficiencies continued to exist in fiscal year

1999. In addition, however, HUD’s effort to develop a new financial

management system led to the Inspector General’s disclaimer of

opinion for 1999.

HUD provides rent and operating subsidies that benefit more

than 4 million lower-income households through a variety of programs, including public and Section 8 housing. Eligibility for these

programs depends directly on self-reported income. The Inspector

General found that HUD’s financial control structure did not provide the agency with sufficient information to verify whether tenant incomes were accurate, which often leads to overpayments.

Today, we want to learn what the Department is doing to resolve

these serious problems.

[The prepared statements of Hon. Stephen Horn and Hon. Jim

Turner follow:]

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Mr. HORN. We welcome our witnesses and look forward to their

testimony.

Today’s witnesses are Susan Gaffney. She is accompanied by

Kathryn Kuhl-Inclan, Assistant Inspector General for Audit; James

Heist, Director of the Financial Audits Division; Benjamin Hsiao,

Director of the Information Systems Audit Division; and Saul Ramirez, Deputy Secretary, Department of Housing and Urban Development; and he is accompanied by Victoria Bateman, Comptroller

for FHA.

If you will stand and raise your right hands.

[Witnesses sworn.]

Mr. HORN. The clerk will note that all six witnesses have affirmed the oath, and we will now start with the distinguished Inspector General, Susan Gaffney.

For those of you who haven’t been here before, once we introduce

somebody, their full statement is in the record. We want you to

summarize it in maybe 5 to 10 minutes and look us in the eye and

tell us what this is all about and try to cut out the bureaucratic

labels. That is for keeping in the buildings but not on Capitol Hill.

I want to have a dialog here and not bureaucratic lingo.

Ms. Gaffney, it is all yours.

STATEMENTS OF SUSAN GAFFNEY, INSPECTOR GENERAL, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, ACCOMPANIED BY KATHRYN KUHL-INCLAN, ASSISTANT INSPECTOR GENERAL FOR AUDIT; JAMES HEIST, DIRECTOR

OF THE FINANCIAL AUDITS DIVISION; BENJAMIN HSIAO, DIRECTOR OF THE INFORMATION SYSTEMS AUDIT DIVISION;

AND SAUL RAMIREZ, DEPUTY SECREARY, DEPARTMENT OF

HOUSING AND URBAN DEVELOPMENT, ACCOMPANIED BY

VICTORIA BATEMAN, COMPTROLLER FOR FHA

Ms. GAFFNEY. Thank you, Mr. Chairman.

When the CFO Act was enacted in 1990, I had some questions

about whether this good management legislation was really going

to have substantive results. Now, looking back, there is a lot of

good news. The Congress, OMB, agency CFOs, and IGs, I think,

have made progress governmentwide in improving financial management, although that progress has been slow.

But the CFO’s Act has kept the spotlight on financial management and the importance of financial management in the agencies.

That is very good.

The bad news, from my perspective, is that this spotlight has

narrowed increasingly to look at the importance of unqualified

opinions on agency financial statements. There is significant pressure from OMB and from the Congress, I believe, for agencies to

get unqualified opinions on their financial statements. There seems

to be an assumption that an unqualified opinion equates to what

I read in the media last week, the ‘‘good housing seal of approval’’ on agency financial management. Mr. Chairman, that is simply not

the case, and there are a couple of reasons for that I would like

to point out.

What the CFOs Act is about is having reliable, accurate financial

information on an ongoing basis. Financial statements are prepared once a year at a particular point in time. They don’t give you

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any necessary indication of how well the agency is doing in terms

of ongoing financial management. The second thing that is important to understand is that virtually any entity, given enough time

and resources, can get an unqualified opinion on its financial statements.

My concern is that, with this obsession with unqualified opinions

on financial statements, we are essentially gaming the CFO’s Act.

This is not what the CFOs Act was about, but we seemed to have

stopped our measurement of success with the opinion. So, let me

tell you how this plays out.

Last year, HUD produced financial statements. Their financial

systems were not capable of producing auditable financial statements, and so they hired contractors and spent more than $2 million in getting their financial statements in shape. We audited

them and gave HUD an unqualified opinion. That was last year.

In the intervening year, HUD tried to do something very good.

They tried to implement a standard general ledger for the Department, in order to overcome a real weakness that they had. That is

great news. But they had difficulty in implementing the standard

general ledger and couldn’t produce financial statements, so this

year we issued a disclaimer of opinion.

Now the irony of the situation is that if HUD had not tried to

do something good, which was to implement the standard general

ledger, if they had just done what they did last year, which was

not implement the standard general ledger and hire consultants for

$2 to $3 million to put together financial statements, they probably

would have gotten another unqualified opinion.

What we should be looking for is agency ability to produce financial statements in the course of various ongoing operations, and I

suggest to you that a once-a-year opinion on financial statements

is not an adequate measure of an agency’s abilities to do this. I am

telling you, this compulsion with that opinion has become counterproductive.

HUD is now extremely motivated to get an unqualified opinion.

What I suggest to you is that we need some different and/or additional performance measures, and I am not just talking about

HUD, I am talking governmentwide. We need somehow to be assessing whether it is the agency financial systems that are producing the financial statements without the need for extensive additional manipulation. We also need performance measures that look

at the report on internal controls.

Each one of these audits has three parts: the opinion, the report

on internal controls, and the report on compliance with laws and

regulations, but no one ever talks about the report on internal controls or the report on compliance with the laws and regulations,

and the reason is that they are boring, they lack the pizazz of the

opinion. But it is the report on internal controls that outlines all

those boring systemic problems that need to be fixed before you

have financial systems that can do what we want to do on an ongoing basis. I think we also need to measure institutional/organizational things like do the agencies have CFOs in place, do they have

CIOs in place, and do the CIOs and CFOs have sufficient authority

and responsibility to get the job done in the agencies.

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In the case of HUD, in spite of the fact that they got an unqualified opinion, the material weaknesses and reportable conditions

that we have been reporting have essentially remained unchanged.

HUD has not had a CFO in place for a year now. Further, HUD

has a CIO who has no operational authorities or responsibility. In

HUD, the CIO has been defined as a policy role. The information

technology people are under a separate organizational unit, the Office of Administration, and in a recent reorganization of the Office

of Administration the standing of that information technology staff

has, in my opinion, been reduced.

So, my plea to you is let us look more broadly at these things,

let us develop additional measures, and let’s get at the institutional

problems rather than just the pizazz.

Thank you, Mr. Chairman.

Mr. HORN. Thank you for that testimony.

[The prepared statement of Ms. Gaffney follows:]

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Mr. HORN. We now turn to the Deputy Secretary, Mr. Saul Ramirez, Department of Housing and Urban Development. Welcome.

Mr. RAMIREZ. Thank you, Chairman Horn and Ranking Member

Turner, for allowing us to testify on this issue of the audit and

where we currently stand as far as our financial condition.

I would like to request that my written testimony which was provided be submitted for the record, and I will summarize my comments working off of it.

Let me say first that the Department’s financial house is in

order. HUD has received a $26 billion budget for the delivery of decent, safe, and sanitary housing to over 5 million Americans, and

we have invested those funds in sound policies and programs that

have assisted homeless people, low-income families, and first-time

home buyers in communities across the country.

FHA and its Mutual Mortgage Insurance Fund are the healthiest

they have been in decades. The total value of the fund stands at

an all-time record high at over $16.6 billion, an increase of $5.3 billion from the economic value reported in fiscal year 1998. The Clinton administration’s fiscal year 2001 budget proposal has already projected over $20 billion to be returned to the Treasury by FHA

from 2002 to 2006. When combined with the current economic

value of $17 billion, this amount is more than sufficient to assure

the safety and soundness of FHA’s $450 billion portfolio of outstanding mortgage insurance.

Building on their successes, HUD has been working very hard to

improve our management controls, including our financial management systems, in order to rebuild public confidence in our ability

to administer housing funds. Last year, for the first time, HUD received an unqualified opinion for its fiscal year 1998 financial

statements. We regarded that as a significant achievement, but we

did not rest on our laurels. We proceeded with the implementation

of an ambitious new financial management system called

HUDCAPS which, when completed, will result in a significant consolidation of the agency’s financial reporting protocols from over 80

different systems to a handful of systems.

We have a multiyear conversion plan that we have put in place

and is under way. The technical and logistical challenges that were

posed are as a result of the task of transferring nearly 1 trillion

transactions from our old general ledger system, the PAS system,

to the new HUDCAPS system, significantly complicating the task

of preparing and auditing our financial statements. Each of these

1 billion transactions have been converted from PAS to HUDCAPS,

and the funds reported had to be reconciled to the fund balances

as reported to Treasury. The audit occurred in the middle of this

conversion and reconciliation process.

Mr. HORN. Just so we can understand that chart, obviously the

FHA is Federal Housing Administration. And what is GNMA?

Mr. RAMIREZ. GNMA is Ginnie Mae. LOCCS is our payment system for our grantees and customers.

Mr. HORN. What does it do?

Mr. RAMIREZ. It tracks their spending rates. CDBG grant money,

in order for a grantee to draw down on their entitlement, they need

to file their request through the LOCCS system, which is the payment system.

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Mr. HORN. What is L-O-C-C-S? Can anybody explain that?

Mr. RAMIREZ. The acronym is Letter of Credit—the acronym

itself—— Mr. HSIAO. Line of Credit Control System.

Mr. RAMIREZ. It is a drawdown system. I thought we were going

to stick to plain English, not bureaucratic jargon.

Mr. HORN. Exactly. HUDCAPS is what?

Mr. RAMIREZ. It is our recapture system for the agency. The general ledger for all of the different activities that take place within

the Department through the different programs that we administer.

Mr. HORN. What is P-A-S?

Mr. RAMIREZ. That is the PAS system, which is the current ledger system which is our primary accounting system.

Mr. HORN. What is Hyperion?

Mr. RAMIREZ. That is the equivalent of a Lotus system, but for

financial reporting systems that produces the actual financial

statements that you see that they are pointing to at the end.

Ms. GAFFNEY. To be fair to Mr. Ramirez, just for the record, that

is our chart. I just wanted to make sure that the chairman knew

that you were being put on the spot with our chart.

Mr. RAMIREZ. Thanks.

Let me just continue, Mr. Chairman. If you have any questions,

I will try to answer them.

Each of these transactions, the trillion transactions that we do

a year that are currently booked through the principal accounting

system or primary accounting system, the PAS, were being converted to HUDCAPS. The audit occurred in the middle of that conversion, and so what we were doing is running simultaneously in

order to be able to make sure our system would hold the transactions when we went into HUDCAPS, the PAS system and our

HUDCAPS system. Ultimately, what happened was the HUD Inspector General’s office informed us that they were unable to complete their task, as the Inspector General mentioned, of auditing

our financial statements for 1999 by the March 1 deadline which

had been accelerated under the new requirements.

We are working with the OIG to enable a complete review of our

financial statements, and I am proud to say that we are working

well in that endeavor. The retention of a clean audit opinion on

HUD’s consolidated financial statements is an annual goal that we

are working at.

Closely related and even of greater importance, and I agree with

what the Inspector General stated, is to deal with our corrective actions, with our long-standing material internal control and systems

weaknesses which led to the GAO designating HUD as a high-risk

agency in 1994. HUD’s efforts to correct these weaknesses were

recognized just last month by GAO’s David Walker, the Comptroller General, who testified before the House Budget Committee that

HUD had made credible progress toward improving its management and that HUD’s management team had given top priority to

addressing the Department’s management deficiencies.

Some of the HUD reforms referenced by Mr. Walker are worth

noting here, particularly those relating to modernizing our financial systems.

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As the committee is well aware, several long-standing agency

weaknesses related to HUD’s inability to manage our housing portfolio. We did not know exactly what properties we were funding

and how to maximize the public dollars for investments and improvements to public and assisted housing. To address this, HUD

developed and tested a four-part Public Housing Assessment System which evaluates our public housing authorities on their physical condition, financial soundness, management capacity, and resident satisfaction. As a result, we now have the Nation’s first computerized record detailing the condition of our housing stock.

As part of these assessment protocols, HUD also developed a

state-of-the-art tenant income verification, a fraud prevention system that uses computer-matching technology to identify potential

underpayments of tenant income and ensures that only income

qualified households receive housing subsidies to benefit tenants

and property administrators by streamlining the verification process.

We are now in a position to perform front-end risk analysis for

new housing programs, provide regulatory relief to the public and

assisted housing properties that score exceptionally well on their

assessments, and target our resources to those who need to elevate

their delivery of decent, safe, and sanitary housing to our residents.

The results are reflected not only in our communities but in

HUD’s financial and audit reports as well.

Turning our attention to the audit reports, I am pleased to report

that although we started fiscal year 1999 with eight material

weaknesses, one material weakness, management and control of

staff resources, was downgraded to a reportable condition. This was

accomplished because HUD completed organizational changes, provided greater management accountability for achieving program

and operating goals, and enhanced the Management Control Program structure and activities, as well as increased risk-based management control techniques.

In addition, the Federal Housing Administration accomplished

significant progress in addressing its three reported material weaknesses, eliminating one of them and downgrading another to a

management concern.

In this year’s FHA audit, the material weakness relating to the

FHA Resource and Asset Management Strategy has been completely eliminated. In addition, the real estate assessment tools I

just described have enabled FHA to monitor its insured multifamily portfolio such that the material weaknesses related to our early

warning and loss prevention for FHA insured mortgages was downgraded to a management concern. Only one material weakness remains open—that is the FHA Federal basis and budgetary reporting. Even here, significant actions have been taken to account for

FHA’s financial commitments, such as routine procedures to analyze contracts and purchase orders as well as reviews of loan guarantee commitments and endorsements to ensure that all our credit

subsidy amounts have been properly recorded.

We have dedicated resources to address each and every material

weakness and reportable condition cited in the audit. Already, we

are in the process of completing the HUDCAPS conversion and reconciling process by compiling documentation to support the recVerDate 11-MAY-2000 10:52 Mar 15, 2001 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 C:\DOCS\67313.TXT HGOVREF1 PsN: HGOVREF1
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onciliation which was a weakness and I believe the principal reason that the Inspector General felt that they needed to file the disclaimer on our finances.

We are hopeful, though, that we will yet receive a clean audit for

the fiscal year 1999 and in particular our financial statements. Our

goal is to ensure that our statements merit unqualified opinions

year after year, but, more importantly, that we do address in a

very concrete and measurable way the internal controls and system

controls that have traditionally plagued the agency in the past

which we are addressing today to deal with them and eliminate

those material weaknesses that we have. With the final implementation of our HUD 2020 management reform plan, I feel very confident that we will be able to address the remaining concerns that

are addressed in the audit, Mr. Chairman.

Thank you very much.

Mr. HORN. Thank you very much.

[The prepared statement of Mr. Ramirez follows:]

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Mr. HORN. We have three opening statements, maybe four here.

Do you have one, the gentlewoman from Illinois?

Mrs. BIGGERT. I do, but if you would just include it in the record.

Mr. HORN. Mr. Turner has an opening statement. We will put it

at the beginning as if read. That will save us some time.

Let me ask, we are going to go 5-minute rounds here, and that

will get more questions on the table.

We are nearly halfway through the fiscal year 2000, and the

question is, has the Department adequately addressed the problems that resulted in your disclaimer of opinion, Ms. Gaffney, on

the fiscal year 1999 financial statements?

Ms. GAFFNEY. I am going to ask Mr. Heist, who is in charge of

the financial audit, to answer that question.

Mr. HEIST. What I can say to that point, as the Deputy Secretary

said, they are working hard to document what they need to do to

support the reconciliation process. I can only speak to where we

were when we stopped the audit. They had significant differences

that were unexplained to us with respect to their reconciliations.

They brought in an accounting firm to help them work through

those issues; and, as they indicated, they will be making that information available for our review as we proceed with our responsibility to audit the fiscal year 2000 financial statements. We have to

establish opening balances for that audit anyway, so the logical

way to proceed is to finish our audit work related to fiscal year

1999.

Mr. HORN. The Deputy Secretary asked the Inspector General to

extend her March 1 reporting deadline to June 2000, so she may

be able to render an opinion on the Department’s fiscal year 1999

financial statements. Is that true?

Mr. RAMIREZ. We didn’t ask for an extension of the date. What

we asked for is that they would work with us to come back by June

to come out with an opinion on our 1999 financial statements, Mr.

Chairman.

Mr. HORN. Moving that date would not be in compliance with the

Chief Financial Officer Act of 1999. I guess I would just ask, how

do you justify not meeting the statutory March 1 deadline?

Mr. RAMIREZ. We felt confident that we could have reached the

March 1 deadline and had documentation that we feel could have

effectively answered the major concerns that led to the disclaimer

that was filed by the Inspector General and that the numbers that

remained after us answering the concerns that they had specific to

the amounts that they were claiming caused the disclaimer would

be immaterial in accountant terms for me. A lot of money still but

in accountant percentages would have dictated that it would have

been an immaterial amount.

That information, unfortunately, was not reviewed before March

1 because the auditors felt that they had completed their work

prior to that day, which is their prerogative certainly. Our wish

would only be, as Mr. Heist has mentioned, that as they continue

to work with us now to review this information and additional information to be able to effectively show what occurred when we

were running the dual systems because what basically happened

was we were very aggressive in trying to convert our general ledgers into the HUDCAPS system. Again, let me reiterate for the sysVerDate 11-MAY-2000 10:52 Mar 15, 2001 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCS\67313.TXT HGOVREF1 PsN: HGOVREF1
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tem that this is a multi-year effort. It is an activity that is consolidating, as I mentioned, 80 systems into just a handful and creating

some standardization along the way.

We ran the PAS system, which was the system that got us a

clean opinion last year, at the same time. We focused the Inspector

General’s attention to HUDCAPS and neglected to—as equally emphasize the PAS system to track back the actual transactions. And

so when it went down to this Hyperion statement that was coming

out of HUDCAPS, they were unable to reconcile certain transactions that had occurred between the PAS system and the

HUDCAPS system that threw off the Hyperion financial statements that came out, referring back to the chart.

We tried to address those prior to the March 1 deadline. Again,

regrettably, they did not review this information at the same time

because they felt that the majority of their work was complete and,

as I understand, in their opinion would push them past the March

1 deadline.

I would like to just again concur and reiterate what Mr. Heist

has said, that they are working to get the fund balances close for

1999 so that we can then properly account for 2000, and my only

request was that we will try to get this work done before June 1.

We feel very confident that we can provide the information to get

this work done before June 1.

Mr. HORN. Vicky.

Ms. BATEMAN. We have not asked for an extension of the March

1 deadline because we know that is the OIG’s prerogative. We have

three technical issues that caused the disclaimer. What we have

done at this point is obtain the supportable documentation that we

need to satisfy them. We have since met with the OIG, showed

them what we have done and asked them to come and work with

us. What we are asking for is that they allow us to restate our

1999 statements based on the supporting detail that we have been

able to adjust our cash balances with Treasury, come back now and

not next year to finish the 1999 audit, and save the taxpayers

money instead of repeating this next year. By June—initially, they

said it would be 6 to 8 weeks to complete the audit. We are saying,

come back now, we are ready for you. Let us restate the 1999 and

render an opinion as part of your 2000 audit and let’s move on.

Mr. RAMIREZ. By way of introduction, Mr. Chairman, this is Victoria Bateman. She is the comptroller for FHA.

FHA did garner a clean opinion from the Inspector General’s

books. When this issue came up 2 weeks out of the March 1 deadline that was brought to my attention by the CFO’s office, I put together a team to address it as expeditiously as possible, and Ms.

Bateman has been leading that team for me to clear up these specific issues as they relate to what led to a disclaimer, sir.

Mr. HORN. On my sheet here it says Victoria Bateman, Acting

Chief Financial Officer.

Mr. RAMIREZ. That is not correct, sir. Dave Gibbons is the Deputy CFO. We have over the last year aggressively tried to recruit

a CFO candidate and twice we have been at the point of making

offers only to be countered on both offers by the private sector for

substantially more money to both candidates and as a result lost

the opportunity to hire them. We are aggressively seeking to hire

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our CFO and working to get a candidate that would meet also with

the pleasure of the Senate committee that would confirm the nomination for CFO.

Mr. HORN. Will that CFO be exclusively in the position of CFO

or is he or she going to be doing other things?

Mr. RAMIREZ. No, exclusively CFO.

Mr. HORN. Mr. Turner, you have 8 minutes. I went over, but I

wanted to finish that up.

Mr. TURNER. Ms. Gaffney, since HUD was placed on the highrisk list back in 1994, is it fair to say that HUD has made significant progress in getting its financial house in order?

Ms. GAFFNEY. What I think is fair to say is that HUD has recognized its areas of systemic weakness to a degree that it never did

before and that, in each of these areas, it has plans in place, and

activities under way to address the problems; and I think what you

are hearing is this situation, this disclaimer of opinion resulted

from HUD trying to correct one of its systemic weaknesses. So that

is a good thing. But we are not at the end of any of these processes.

We are not to the point where we can say the corrective actions

have been taken.

Mr. TURNER. So what you are saying is that the problem that resulted in your failure to be able to issue an opinion by March 1,

that problem was created by the fact that they are converting this

payment system, which is a good thing?

Ms. GAFFNEY. Exactly. It is unfortunate the implementation

didn’t go smoother, but you have to recognize that this was an attempt to solve a problem that we have been identifying for years.

Mr. TURNER. OK. So we missed a deadline because we were trying to correct a problem that everyone agreed needed to be corrected?

Ms. GAFFNEY. Correct.

Mr. TURNER. I have heard a little conversation about the failure

to meet the deadline. It seems that we may be making too much

of that, even though it is statutory. If I understand the sequence

of events, we basically had a week before the March 1 deadline

when you gave HUD notice that you didn’t think that you were

going to be able to issue an opinion, and they tried to get all of the

things together you needed, and yet time was running out, and you

didn’t take those things into account, and you ended up passing the

March 1 deadline unable to issue an unqualified opinion. Is it fair

to say that we shouldn’t make too much of what went on during

that period of time with regard to the failure to meet the March

1 deadline? This doesn’t represent any severe financial problem

that is in question that has resulted in the failure to meet the

March 1 deadline, it is a matter of basically communication and

the furnishing of adequate information?

Ms. GAFFNEY. No, I don’t agree with that. I don’t mean to repeat

myself, Mr. Turner. I don’t know if you were here for my opening

statement. What I agree with you about is we are all making too

much out of the opinion on the audit on the financial statements.

I think we are attributing to the opinion, the unqualified opinion,

the disclaimer of opinion, the adverse opinion, importance that is

not warranted.

37

Given that, my plea to you today is, let’s look at the more important stuff. We should be concerned about getting that general ledger implemented, and we should be doing everything to help HUD

get it implemented. And if HUD gets a disclaimer of opinion in the

process, so what? The problem is that the opinion is being used as

the sole measurement.

With respect to the March 1 deadline, you know, we worked on

this audit since June—June through February. We devoted 20 staff

years to this audit. At some point, the preoccupation and the focus

of resources on the financial statements and the audit I think becomes counterproductive. We should be trying to get the real stuff

done.

Mr. TURNER. I think we all understood the point you made, and

I think there is probably general agreement that the emphasis

should be on a broader range of issues, including internal control,

which is what they were trying to address in implementing the

HUDCAPS system.

The only point I was trying to make is that the dispute over

whether or not the data was provided by March 1 and whether or

not you got the opinion done by March 1 is not a reflection of any

severe financial problem. It is more of an internal thing between

you and HUD that perhaps will now be resolved by June 1, as I

understand it. And so I don’t want there to be a misimpression that

somehow HUD has a severe financial problem simply because that

March 1 deadline was not an unqualified opinion, was not reached

or given by you by March 1. I don’t think that is what you intended

for that action to say.

Ms. GAFFNEY. HUD did not have the financial statements in

shape and we didn’t have a chance to finish our audit of them by

March 1. I am convinced that, as Mr. Ramirez and Ms. Bateman

have said, that by June that undoubtedly will take place. Which is

not to say that HUD doesn’t have serious financial management

problems, but I agree that they will be able to do that.

Mr. TURNER. I think that is important for us all to understand.

With regard to your criticism of the emphasis on the financial

audit, I am not sure what the answer to that is, other than what

you just said, and that is for us to think about the broader range

of issues that we should be concerned about.

The law does say we have got the March 1 deadline. You do it

every year. It is something we all look to. I think as a committee

we certainly can be sensitive to the fact that we shouldn’t make too

much of that process, but it is statutory and it is important to try

to meet the deadline.

Mr. Chairman, I have no further questions.

Mr. RAMIREZ. May I?

Mr. HORN. Yes, please.

Mr. RAMIREZ. In our efforts—and I can appreciate the Inspector

General’s overall emphasis on condition, entire condition of the

agency, but the measuring stick is the financial audit and the condition of the report that comes out from this audit.

As we were getting close to this deadline—and, yes, the work did

start in June. It came down out of these trillion transactions that

we did a year that we transferred and ran simultaneously. And,

again, shame on us for not focusing the IG on both systems during

38

that period and just on HUDCAPS, that it came down to three

transactions and we were prepared to explain those three transactions prior to that March 1 deadline.

Apparently, there was a great deal of work that had already gone

into preparing this audit that the Inspector General had done; and,

yes, they did invest 20 man years to this audit; but we did work

with them to adjust for their vacation schedules during the holidays and other periods that were critical coming into the closure

of this audit to try to get to a resolution in this regard. That is behind us, and we accept that, and we appreciate the acknowledgment from the Inspector General to resolve the issue by June if not

sooner. We believe we can do it sooner and with their help and cooperation we feel very confident that we will be able to report back

together to this committee and the Nation as a whole as to an accurate read of our financial condition.

But I would like to also quickly state that, in addition to our financial statement and perhaps coming out with a clean opinion

prior to this June date from 1999, that we still have internal controls and system weaknesses that we are addressing to try to resolve and these have been weaknesses that have been systemic

over the last 2 decades. And so old habits are hard to break, but

we are breaking them. It is clearly indicated by many of these

weaknesses or several of these weaknesses, to be more accurate,

that have already been downgraded by the Inspector General to

just management concerns for the Department.

Mr. TURNER. Well, I appreciate those remarks and I think it is

probably incumbent upon this committee to continue to encourage

the IG and the agency to meet the March 1 deadline. I agree that

audit report is looked to as a significant indicator of your financial

standing. But I gather from the interchange that we have had this

morning that the fact that it was not issued by that date did not

reflect any significant financial difficulties within the agency but

rather reflected the fact that you are in the midst of this conversion and it created some problems between the two offices that apparently for whatever reason, it didn’t happen and you are going

to do it and we would urge you next year to try to meet the deadline.

Mr. RAMIREZ. Just to quickly wrap that up, and thank you very

much for those comments, Congressman Turner, we are already

preparing to start generating not an annual report but quarterly

reports so that we can better work together to assess the financial

conditions of the agency and we are quickly getting to that particular point.

I would like to just conclude by again reassuring this committee

and the taxpayers that we know better than ever at the Department where our money was spent and are prepared to provide any

auditor the audit trail of how the bulk of our resources were spent

there at the Department of Housing and Urban Development.

Mr. TURNER. Thank you, Mr. Chairman.

Mr. HORN. Let me pursue some of these fiscal matters.

Was Mr. Gibbons in charge of clearing this particular audit?

Mr. RAMIREZ. The financial management of the organization

under the CFO’s operation has several points, but he was responsible for shepherding the entire effort from the different divisions

39

that are responsible for compiling the information that the Inspector General needs in order to conduct an audit.

Mr. HORN. What was his title at this point?

Mr. RAMIREZ. Deputy Chief—Deputy Financial Officer and acting

in essence Financial Officer because of the vacancy.

Mr. HORN. Was he able to give full attention to that?

Mr. RAMIREZ. Yes. He was giving his full attention. We were focusing on material weaknesses ironically and the period of discussions with the auditors between June and their disclaimer in

March, and as a result a great deal of our effort went into trying

to resolve those material weaknesses and management concerns

that were in our previous audits. It didn’t focus—— Mr. HORN. Was he on vacation during this time and was that

why the whole thing was late?

Mr. RAMIREZ. No. When Mr. Gibbons left the country for a couple

of weeks and it was—it was the 2 weeks before this was completed,

the Inspector General’s auditing team and our team had been

meeting on a weekly basis. Prior to that they had been meeting on

a biweekly basis. It was his impression as a result of the last biweekly and checking with his staff primarily and getting a general

indication of the different activities that the Inspector General had

been focusing their work on till prior to the week before that we

were in sound condition. That does not, though, excuse the fact

that we did not do as good an effort of focusing the Inspector General’s attention on both our HUDCAPS and PAS system at the

same time, Mr. Chairman.

Mr. HORN. In implementing the new system, why didn’t you consider the need for a backup plan to ensure that you could produce

all of the reliable financial statements?

Mr. RAMIREZ. We did, sir, and that was the PAS system. We ran

concurrent systems.

Mr. HORN. And did that satisfy you, Inspector General?

Mr. RAMIREZ. It is unusual but in defense of the Inspector General we focused their attention on the HUDCAPS system and general ledger as the principal source of documents and amounts for

their audit work and did not refer them back to the PAS system

as——

Mr. HORN. That is the system used in 1999?

Mr. RAMIREZ. It got us a clean opinion. If we said don’t look at

HUDCAPS because we are going to conversion, look at PAS, I

think we would have been in better condition. All of the Treasury

reports came back fine through our PAS system.

Mr. HORN. Mr. Hsiao.

Mr. HSIAO. My name is Ben Hsiao, Director of the Information

Systems at HUD OIG, and I have been reviewing and looking at

HUDCAPS for a number of years for the financial statement audit.

I want to clarify something. HUDCAPS is kind of like LOCCS

but it pays for another set or programs besides the grants, it pays

the Section 8, what they call the voucher program, which is essentially payments to the housing authorities. That system was envisioned to be the general ledger. That decision was made a year and

a half or 2 years ago back in 1997. They never envisioned that PAS

would go away, but they would translate all of the numbers in PAS

into HUDCAPS. One of the difficulties they had was that PAS data

40

did not contain the source year along with a bunch of other variations, which by the way we are going to look at in depth to make

sure and figure out why this conversion went awry.

The conversion was very problematic. And in the interface between PAS and HUDCAPS they were rejecting transactions hundreds a day. They finally got it working somewhat, but as I understand it, it is still problematic and we have to work on it. In fact,

I was informed yesterday that we plan to do extensive work on this

so we can come up with recommendations to correct the problems

in HUDCAPS. There are lots and lots of problems. Many are technical, but it has not been an easy implementation. There are a lot

of difficulties, many of which I think can be overcome but it takes

management effort and it takes a tremendous effort on the part of

the CFO and CIO and the IT.

I want to set the record straight that HUDCAPS is not the only

system. PAS has always been there, but translating the data was

the major problem in not producing a financial statement.

Mr. HORN. The Inspector General testified the most critical need

faced by HUD in improving its internal controls is to complete development of adequate financial systems.

Mr. HSIAO. Absolutely.

Mr. HORN. Mr. Ramirez, when do we expect those systems to be

in place and operating properly?

Mr. RAMIREZ. I don’t disagree, it is a complex, messy process

when you have to convert 80 some odd systems into a handful of

systems and a trillion transactions a year and I challenge anybody

who has a checkbook which has a trillion transactions that does

not have to go through an in-depth trial and error. The important

thing to note is that the PAS system was accounting for our resources. We did not go into this first phase of major conversion,

and I think the Inspector General would agree that this was the

first major conversion into HUDCAPS, without making sure that

we kept track of the resources that we are appropriated to administer.

I would say that in our HUDCAPS effort, I would venture to say

that we will be well in control of the HUDCAPS operation and conversion within the next 18 months or so. We are looking forward

to the work that the Inspector General, in particular Ben here was

a great computer technician, to get their advice and recommendations as we move through this process, sir.

Mr. HORN. I am glad to see your optimism on that, but Ms.

Gaffney reported that the HUDCAPS does not fully comply with

the Federal financial system requirements. Will the Inspector General elaborate on what she means by that?

Ms. GAFFNEY. HUDCAPS does not comply. The easiest example

is that FHA and GNMA are supposed to be feeding summary data

into HUDCAPS on a monthly basis. FHA, because of problems that

it had in its own system inputs their data into HUDCAPS only

once, and that was after the close of the fiscal year. Obviously one

of the government financial system standards is that you have accurate, timely information. In this case the failure to post into

HUDCAPS meant that there was no such information.

Ms. BATEMAN. Mr. Chairman, as the FHA Comptroller at the

time, the IG is correct. FHA did not supply its data by year end

41

close. I was very concerned at that point with the conversion of

HUDCAPS, and I was aware of the fund balance of Treasury reconciliations. I didn’t want to take my data and put it into

HUDCAPS and risk FHA getting an unclean opinion. We put a corrective action plan in place to make the general ledger good within

the next 12 months. We are working to get the summary data, we

have dedicated resources to get files out of the FHA legacy systems

and treat it at summary level into HUDCAPS.

Keep in mind, FHA is a subsidiary of HUD, a very large subsidiary of HUD, and we have a commercial package and we have to

do Federal reporting at this point. I am summarizing that data at

a very high level because you don’t want a million transactions

going into your general ledger, which is HUDCAPS.

In order to get through the audits I want to make sure that FHA

has a clean opinion and not make the conversion from PAS to

HUDCAPS even worse. We thought we made a good decision not

to put more data into HUDCAPS. But we do have auditable data

going from the HUDCAPS back to FHA. It is supportable and

auditable. KPMG tells you it is a clean opinion.

The real issue came down to when we converted from PAS to

HUDCAPS, we took those trillion transactions and put it in. We

knew that we couldn’t get any reporting out HUDCAPS, it is a

brand new system. We didn’t get the reports that we needed to reconcile to Treasury. We are now getting those reports and we are

able to support the 224s and reporting to Treasury, and we have

invited the IG to come back in and work with us to get the clean

opinion.

But Ben is right, we have more issues than just this conversion.

The IG pointed out three reasons that they had disclaimer. They

were right. We acknowledge that we have these problems. We

made a lot of adjustments to Hyperion outside the system. Shame

on us for doing that. It is lessons learned.

I think the IG has been very gracious to work with us instead

of waiting a whole year. But there are internal control issues. We

have stopped all system conversions based on the IG’s recommendation. The Deputy Secretary has tasked me to make sure

that we have the controls in place before we do any more conversions. So our No. 1 priority is to get auditable to get to the clean

opinion, let’s take our time and do it right. Look at the cost of

doing this, and the last thing I want to do is put FHA detail into

HUDCAPS, a million transactions a day.

Mr. HORN. We thank you for that perspective. We have a vote

on the floor now. We are delighted to see the gentlewoman from

New York. You are free to use all of the time you wish on questioning while we are going over to vote and we will keep the door open

for you.

Mrs. MALONEY [presiding]. Thank you very much, Mr. Chairman.

I thank you for your persistent and ongoing commitment to better

financial management not only in HUD but all financial agencies.

I have been watching the progress at HUD from my position on the

subcommittee and on the Banking Committee as well, and I have

been particularly interested in some of the strides made under Secretary Cuomo not only because he is a fellow New Yorker from my

State but because he has set out to tackle what seems to be an imVerDate 11-MAY-2000 10:52 Mar 15, 2001 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 C:\DOCS\67313.TXT HGOVREF1 PsN: HGOVREF1
42

possible task improving HUD’s management and organization and

by most accounts these efforts are well on their way to success.

Like many of my colleagues, I am especially pleased last year

when HUD received its first ever clean audit and all of us know

HUD has a history of mismanagement, so the fact that HUD did

receive a clean audit is really noteworthy and I would like to ask

Mr. Ramirez, do you expect to receive a clean audit for this fiscal

year in the near future when it is completed?

Mr. RAMIREZ. We believe that we have the supporting documentation that upon review by the Inspector General will in all

probability lead us to a reflection of sound financial condition and

a clean opinion on their part. We will work with them to be able

to justify our reasons as to why, and so we feel very comfort about

that.

Mrs. MALONEY. Well, an issue I am very interested in, and I

know that the chairman is as well, is how we can help the government operate more efficiently by making sure that the right people

get the right benefits. I understand that HUD is taking steps in

this direction by implementing a nationwide income verification

program so that tenants pay their fair share of rent. Could you discuss what HUD is attempting to accomplish with this effort, and

what sort of progress you have made?

Mr. RAMIREZ. We have made substantial progress in that area,

and it has been one of the major weaknesses that has been highlighted by the Inspector General in their reports. Based on a sampling of approximately 1,000 residents, they compulate and trend

out an amount of potential lost revenues as a result of underpayments.

We have now modernized our income verification process by linking with Social Security and IRS to get information on residents,

and when there is a discrepancy, an $8,000 discrepancy on the public housing side or a $4,000 discrepancy on the multifamily side,

the resident receives a letter or will be receiving a letter as soon

as we send them out to go back to their respective landlord or

housing authority to recertify their income. We have done a $4 million-plus survey of that information out of our new system and we

have found it to be very effective and impacted residents about

280,000, or so we estimate.

We are working with the industry quite closely, as well as resident groups to make sure that the notice that goes out is crafted

in such a way that it would encourage individuals to go back and

get their incomes recertified but at the same time not make it one

that would be in essence the gotcha game. We feel by doing this

we will greatly enhance our estimate of underpayments and to

some smaller degree overpayments that actually occur within our

system and better narrow that estimate which has been put out by

the Inspector General of close to in some instances $900 millionplus.

Mrs. MALONEY. I am going to give two more questions and at the

completion of them the hearing would stand in recess and then I

am going to dash to vote.

I am interested and you may have already answered this, but I

am interested in the fact that GAO has listed all of HUD’s programs on its high risk list. Do we have anybody here from GAO?

43

Ms. GAFFNEY. No.

Mrs. MALONEY. What progress is HUD making to address the

specific problems that were raised in the GAO report that they

brought up?

I am also very interested in what is your followup in inspecting

properties which receive financial assistance from HUD in making

sure that those dollars are allocated properly and spent properly?

Those two questions and I would like them in the record. I may

have to dash because I walk slower than the chairman, and he has

already left. Answer those two questions.

Mr. RAMIREZ. For the record what we have done with GAO have

worked closely in establishing a working protocol which has been

very effective in trying to address not just prior audits and recommendations that they made but current audits that they have

initiated. Mr. Walker, the Comptroller, has stated here before Congress that we have made considerable progress. On our continuing

relationship with him we feel very comfortable with the work we

are doing that by January 2001 that we will be prepared to have

GAO make a recommendation that HUD as an agency be taken off

the high risk list.

On our inspection protocols, we have for the first time gone out

and assessed the physical condition of our entire portfolio, over

40,000-plus properties. We are currently assessing all of their financial statements to make sure that finances are in order and

that they are sound.

Third, taking into consideration the residents alone as well as

the condition and circumstances that they live in, and for the first

time we can accurately assess the physical, financial, and also resident approval of our properties.

So thank you very much for those questions, Congresswoman.

Mrs. MALONEY. You are in recess until the chairman returns.

[Recess.]

Mr. HORN [presiding]. The recess is over and we will continue

the questioning.

I want to ask just one question of the Inspector General. Given

this late date, wouldn’t it be more productive for your office to focus

its resources on the fiscal year 2000 audit?

Ms. GAFFNEY. We are going to focus our efforts on the fiscal year

2000 audit. However, we need opening balances for fiscal year

2000, which means they need to do the reconciliation work that

they are talking about and we will need to look at that work. But

our work will be in the context of the fiscal year 2000 audit.

Mr. HORN. I think we are a little unclear as to whether you are

going to issue an opinion on the fiscal year 1999 financial statements in June?

Ms. GAFFNEY. We have not made that decision. Certainly that is

the request that HUD is making. We haven’t made that decision.

Mr. HEIST. One of our options, since HUD in fiscal year 2000 will

also be reporting on 1999 and including comparative financial

statements, we could change our opinion when we issue the report

for fiscal year 2000. That is one of our options.

Ms. GAFFNEY. To go back to our position, what we should not be

doing is diverting time and energy from our 2000 audit at this

point.

44

Mr. HORN. I yield 10 minutes to Mr. Ose and if he needs more,

we will give him another 10.

Mr. OSE. Mr. Chairman, thank you. Procedurally, if I understand

correctly, we had an audit and an opinion expressed on that audit

in previous years to the current year, and what I am trying to figure out is for some reason we have not been able to get to a similar

point on the current year that would otherwise comply with the reporting date requirement with the CFO act. That is some opinion

as to the financial condition of the agency issued on or before

March 1; am I correct on that? Were we able to achieve that goal

last year?

Ms. GAFFNEY. Yes.

Mr. OSE. I have read the testimony and I can’t pick out what

happened? Why are we unable to issue an audit or an opinion on

the audit? Is it because the audit is not completed?

Ms. GAFFNEY. The financial statements were not completed;

therefore, the audit was not completed. The answer to your question is HUD tried something new in 1999. They tried to overcome

a weakness and implemented this new HUDCAPS system and that

created a whole new set of difficulties for HUD that they had not

experienced the previous year.

Mr. OSE. From a processing side?

Ms. GAFFNEY. Right.

Mr. OSE. That is the reference to the trillion transactions?

Ms. GAFFNEY. Right.

Mr. OSE. Well, I must say—I am at least partially entertained

by the—— Ms. GAFFNEY. Irony, right?

Mr. OSE [continuing]. The consequence of an agency not responding to a statutory requirement laid out by the Congress. Are there

sanctions, Mr. Chairman, to such a failure? I mean, I—— Mr. HORN. Well, the sanction we try to think is the law, and that

has not been obeyed in several administration areas because they

have made the Chief Financial Officer, say the Assistant Secretary

for Management and Treasury sort of subsumes everything, the

CIO, CFO. That wasn’t the intent of the Republicans or Democrats.

Those are full-time jobs, 18 hours a day, if you are doing it right.

That is where some of the mess has been, is they haven’t focused

on it within their own administration.

Mr. OSE. In a situation like we are confronted with today, which

is we don’t have all the balances on which to move forward, in that

situation recognizing what the law is, what are Congress’s—I guess

I should ask——

Mr. HORN. If you think they are really playing games, you shorten the amount of appropriations granted. That is not a new task.

For example, when the Federal Elections Commission was given $3

million to get their computers moving because they weren’t able to

respond to thousands of people with the press and candidates, they

completely violated what Congress had specified. Needless to say,

they took a whack out of that budget the next year. That is your

one penalty when you think one agency is messing around and

thumbing their nose at Congress.

Mr. OSE. The concern that I have is if the agency directed to perform this audit, whether that be the Office of the Inspector General

45

or the HUD itself, is not in compliance to the statutory requirement for whatever reason, I would think that they would have

come back to us and asked for additional resources or assistance

to expedite solving that problem.

My question would be: Has such a request been received from

the administration or any of these—particularly HUD in this

case—any of the agencies that are so affected?

Mr. HORN. I am unaware of any but if you are a cabinet officer

or a Deputy Secretary who is here today, you have to reprogram

money at the end of the year. And if you are serious about this,

you move some of that reprogrammed money—— Mr. OSE. Discretionary money?

Mr. HORN. Absolutely. When Dr. Raines came in as Director of

OMB, I told him what we had been urging the cabinet to do, reprogram it; and he said I agree with you. That is how Y2K was dealt

with so they didn’t have to spin their wheels for 1 year between

the budget office in the executive branch and the legislative

branch.

Ms. GAFFNEY. Mr. Chairman, there was a brief discussion when

you were asking questions about who was the acting CFO. In point

of fact, Mr. Gibbons was our point of contact for this audit. He was

the acting CFO. I have known Dave Gibbons for a long time, and

I have enormous respect for him. But he is not an accountant. He

doesn’t know accounting. He is a budget person. He worked in

OMB for many years. So, Mr. Gibbons was very ill equipped to deal

with this situation.

If you want to know how I think the Congress should help; Mr.

Ramirez has said it is now a year since they have had a qualified

CFO in place and my bet is everyone is now saying it is too late

in this administration, we are going to give up on it for—how long

do we have to go, 10 months?

Mr. HORN. You are right about that. I happened to have joined

an administration in the last year and a half and it is almost impossible to get people.

Mr. OSE. Let me explore that a little bit. Let me digress first. Is

it you, Mr. Ramirez, or whomever, who would I ask the question

of, has the agency asked for additional resources from Congress in

order to address this problem?

Mr. RAMIREZ. No, we haven’t but we have utilized the discretion

that the chairman alluded to that was talked about when Dr.

Raines was head of OMB and we have redirected resources to remediate the matter.

Prior to that there has been talk about us hiring an accounting

firm to come in last year to help us get a clean audit. Their sole

purpose was not to help us get a clean audit but to help us clean

up the data to be able to get a clean audit.

Mr. OSE. That was the Hyperion people?

Mr. RAMIREZ. No, that was Arthur Andersen.

What we have done is, taking into account what led to us being

classified as a high risk agency, was that over the last two decades,

approximately 80 systems, accounting systems, were built within

the Department and there was little communication between these

systems. Three and a half years ago or so, a little less than that,

we took the position that our effort was to consolidate these sysVerDate 11-MAY-2000 10:52 Mar 15, 2001 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 C:\DOCS\67313.TXT HGOVREF1 PsN: HGOVREF1
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tems into a handful of systems that could talk to each other and

could better account for our resources. We have made significant

progress, but we have not completed the task. There is still internal controls that need to be dealt with.

This year, and the reason that there was a disclaimer filed by

the Inspector General on March 1, and I need to remind the committee members, although I don’t think you need reminding, this

was reduced by 30 days from last year’s deadline as well. What we

did this year was we went through a significant conversion, ran

dual systems during this conversion but focused primarily our attention as it related to the audit that was being done on the financial piece. Let me say that was the only piece that led to a disclaimer. All of their other work has been done.

So again, our hope is as a result of that, and that being the only

piece, we are prepared to move ahead with the Inspector General

to clear up the 1999 finances. We know where the dollars were

spent, we can show them where they were spent, and we are prepared to do that. We would hope that it would be sooner than June

that we could come to terms. They have indicated back to us that

it will take them approximately 6 weeks to review this one last

piece of information, and that is fine because I can appreciate their

efforts primarily being focused, as the chairman has said, on their

2000 audit but we will also in order to facilitate the 2000 audit

work which actually technically does not start for them until June

any way to come in here, is that we will now have quarterly reports that in the past were not being generated that can help facilitate and deal with whatever workload they may have.

We are looking forward to working that through, but to get back

to your specific question, we did not see a need to come to Congress

for additional resources. We appreciate the discretion that was allowed to us based on the leadership of the chairman to allow us

to dedicate the necessary resources to be able to resolve the issues

that were highlighted as the reasons for the disclaimer in our financial statements.

Ms. BATEMAN. Keep in mind that we don’t agree with the disclaimer. We felt as if we had the resources and the statements

were prepared, and we were ready to address their concerns. And

that February 21, the OIG said they had to issue an opinion by

March 1. We felt that we had the supportable detail to refute the

disclaimer. We felt that if we did do as Congress mandated, which

was prepare the statements and be subject to the audit.

Mr. OSE. You mentioned that 31⁄2 years ago, Mr. Ramirez, you

undertook the—started the effort to allow this system, the new system to come into place?

Mr. RAMIREZ. No. Our efforts are capitalized in our HUD 2020

reform. They are a comprehensive effort to deal with not just the

financial systems, which are a weakness that had been outlined for

years as a material weakness in the Department, but also dealt

with a more comprehensive approach to solving other weaknesses

like management and——

Mr. OSE. When did that program become initiated?

Mr. RAMIREZ. We went through approximately 12 months of setting up the system.

Mr. OSE. Beginning in?

47

Mr. RAMIREZ. Beginning in 1997. We went through a full cycle

of our 2020 structure in place already for a year. We are into the

second year of a full—of now the second year of a cycle of our management structure in place to deal with the specific concerns. In

fact, Mr. Walker from GAO has alluded to the fact that our staffing, our structure, and our placing of staff have led us to make

credible progress in getting us off the high risk list and is no longer

an issue as it related to us getting on the high risk initially.

We still have more work to do, don’t misunderstand me, Congressman, and we are working quite diligently to get it done. But

we, and I say it in all candor as the Deputy Secretary, our financial

house isn’t where it needs to be, but it is in the best condition it

has ever been in the history of our Department and us going from

an agency that basically went out there and built boutique systems

of accounting that couldn’t talk to each other to consolidating them

now to an effective accounting system to deal with a full financial

integration of our Department.

Mr. OSE. Let me just share with you the difficulty I have here.

Mr. RAMIREZ. Yes, sir.

Mr. OSE. Fifteen months ago I was on the private side. Now I

have the privilege of serving here in Congress. My affairs continue.

If I can’t get an opinion from my auditor or a clean set of books

then I have to stay in Sacramento and fix my business. I cannot

come back here and do the job that I was elected to do, and believe

me, this weekend was not a lot of fun at my house in Sacramento.

Unless we can solve this problem, unless we can get a clean opinion, Congress has no evidentiary basis on which to make decisions

related to the funding that you all are requesting of us.

Mr. RAMIREZ. Let me reassure you, and if you look at the audit

and the substance outside of the actual reconciliation with Treasury, which was the item that led to this disclaimer that our financial house is in order. The biggest operator within the Department

is FHA. FHA got its own independent audit that came out with a

clean opinion. We still have material weaknesses within FHA but

I am happy to note that the Inspector General withdrew one completely, downgraded another one, and we are working diligently to

solve the third within FHA.

Within our overall accounting system what we have been able to

do is that we believe that the disclaimer that was issued on March

1, recognizing the statutory requirement primarily placed on the

Inspector General to produce this audit, caused us to not work with

the Inspector General over the last week because that was when

this particular issue was raised to management as an issue that

would lead to a disclaimer within our financial statements to clear

up the concerns that they had. And out of the trillion transactions

it came down to three, and we were prepared to document those

three transactions to show that it did not produce a materiality to

cause a disclaimer to take place. That did not occur and that is behind us.

Mr. OSE. Does the Office of Inspector General agree with that?

Ms. KUHL-INCLAN. We respectfully disagree with that, sir. It

wasn’t just an issue of a fund balance with Treasury. It first began

that any good business has a general ledger that you can depend

on. And so when you process these transactions that flow through

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PAS, the 1 trillion transactions, and so many are rejected on a dayto-day basis, we had to be comfortable with why those transactions

were being rejected. That was the one thing that we were trying

to get the Department to do and for us to understand the reason

for the rejection.

The next issue was the fund balance with Treasury. If you don’t

reconcile your cash balances on a monthly or even quarterly basis,

then you don’t know where you stand. That is good business sense.

That was not being done.

The third issue, when you prepare financial statements, they

must be based on the general ledger. They had some 264 entries

that didn’t go through the general ledger. That was over $60 billion

worth of entries that didn’t go through the general ledger. We cannot rely on financial statements where the general ledger is not the

source document.

Mr. OSE. You are referring to Ms. Gaffney’s written testimony on

page 4 as it relates to the adjustments to the general ledger?

Ms. KUHL-INCLAN. Exactly. You can’t run those adjustments outside of the general ledger. We didn’t know what the adjustments

meant, nor did we have the proof to show the documentation for

those entries. Any good business runs on a general ledger. And

then we had the issue of material weaknesses. The material weakness and reportable conditions have not really changed. Some have

been downgraded, some have been upgraded, but there has been no

change since we started in 1991.

The issue of resource management, yes, we took it off. That is

why you have problems monitoring your multi-family portfolio. It

became an issue why these material weaknesses are occurring versus standing alone analyzing your basic resources. We have not

really altered our opinion or our ideas about what are material

weaknesses and reportable conditions since we began the audit.

Those conditions still remain. There have been some changes, yes.

Mr. OSE. I want to make sure that I understand you correctly.

These are material weaknesses that were pointed out in 1991?

Ms. KUHL-INCLAN. Yes.

Ms. GAFFNEY. Yes.

Ms. KUHL-INCLAN. Some are more serious than others. But that

group of reportable conditions has basically been in effect since we

started doing the audit. There has not been any significant change.

Mr. OSE. So we still suffer those same material weaknesses in

the opinion of the Inspector General?

Ms. KUHL-INCLAN. Yes, sir.

Mr. OSE. Mr. Ramirez.

Mr. RAMIREZ. First, let me address the issue of 200-some odd entries that were made. We made it clear at the hearing that this

was a conversion year. All of those 200 entries were specifically related to conversion. If they would have just audited the PAS system, which was the one that got us a clean opinion last year, we

would probably have gotten a clean opinion this year.

Ms. KUHL-INCLAN. But that is not the general ledger.

Mr. RAMIREZ. They didn’t, and that is where the supporting documentation is to the HUDCAPS. We were prepared prior to March

1 on the $63 billion that she is talking about that were material

49

were two entries that we had the supporting document prior to

March 1 that they refused to receive until after March 1.

Mr. HSIAO. From a systems perspective, last year they had a little program called CRS which really summarizes PAS data into a

financial statement. That is real key. You can’t get information,

that is why we have Hyperion. These systems are old. You and I,

even me with my knowledge and my experience, it would be very

difficult to get any data out of it. You need a set of essentially

COBOL programmers to get anything out of it.

Mr. OSE. We did COBOL when I was in college. Seriously?

Ms. GAFFNEY. Yes.

Mr. HSIAO. This is over 20-plus years old. That is very difficult

to get data. That is why they had these reporting systems so you

can easily produce the financial statements. It is not easy to go in

and produce financial statements from PAS. CRS—when they converted, CRS did not work. They did not produce financial statements from PAS into CRS, it went straight to HUDCAPS, converted and then went to Hyperion, and that is how the financial

statement gets produced.

Mr. OSE. Mr. Chairman, if I might, I am trying to approach this

methodically and I think the first question I might ask, and unfortunately I am not sure that we will get an answer here, is that

from 1991 to the present we have had no apparent change in the

material weaknesses. Now, if I understand correctly, perhaps the

CRS system did not lend us the information to create the solutions

by virtue of its antiquated nature but the reality is that this has

been every year tolerated.

Ms. GAFFNEY. Right.

Mr. OSE. I don’t understand why we tolerate it. Mr. Ramirez is

the Deputy Secretary, who is the Deputy of HUD. Why is it that

we are not doing anything about this? Why does it take us 8 years

to address these material weaknesses that we kicked up by virtue

of the good work previous Congresses did.

Ms. GAFFNEY. You know what I am going to say.

Mr. HORN. Have any problems come in terms of corruption, pilfering, and embezzlement because of that general ledger being so

useless?

Ms. GAFFNEY. I have no evidence of that.

Mr. HORN. You have no evidence of that, OK. Because that is a

field day for anyone who figures gee, they will never figure these

books out.

Ms. GAFFNEY. Right. I would like to answer you by saying what

is remarkable is the guts of what is wrong is the material weaknesses. HUD has plans, HUD always has plans to correct material

weaknesses, but the problem in the government, generally, is nobody talks about the material weaknesses. They talk about the unqualified audit opinion and what is happening is agencies are jury

rigging financial statements and getting unqualified opinions, and

then that is the end of the story. If you got an unqualified opinion,

you are a success. It is really very problematic.

Mr. HORN. You are telling me the corporate culture rests on

what, on simply saying you have an unqualified opinion?

Ms. GAFFNEY. That’s it. You get an unqualified opinion and you

are a success, so agencies will do anything to get an unqualified

50

opinion. And it actually doesn’t take that much. All you have to do

is hire a bunch of consultants from accounting firms, have them

jerry-rig financial statements, take enough time to do it and have

them audited, and you will get an unqualified opinion no matter

what your material weaknesses are.

Mr. HORN. I can guarantee you that the Federal Government and

the California State government, which is the second largest entity

in this country in government, they have old timers for years that

balanced the numbers and they plugged in a little number here

and there and somehow they all balanced.

Ms. GAFFNEY. Right.

Mr. RAMIREZ. I would counter by saying that the accounting expertise that we brought in was to clear up a system that had been

sorely lacking improvement for years. We are taking the most aggressive stand ever to do that and I would venture to say that the

very same kind of experts and consultants that the Inspector General hired to do the audit for FHA did not jerry-rig any numbers

to come out with a clean opinion for FHA.

So these are the top five financial accounting firms in this country that do primarily the work for the Federal Government and the

reason that we hired them was not to do our financial statements

but to get to the heart of what we believe is the problem, and I

think the Inspector General would concur, which is that the data

that was in those systems needed to be cleaned up in order for it

to be quality accounted for and booked. I would say that all financial statements, corporate or government, should seek and strive

for a clean opinion because that truly is the benchmark of what we

want to do. As equally important is to take into consideration and

implement those recommendations that are made by auditors even

when they issue clean opinions to deal with weaknesses that they

have found in your systems. We are convinced that the disclaimer

issued was issued because of a timing concern and the lack of effort

of review to deal with the three items out of a trillion by the Inspector General.

That is behind us, Mr. Chairman. I believe in working productively and proactively to resolve our differences and our issues. I

am looking forward to hopefully resolving sooner than the 6 weeks

that the Inspector General has indicated to us it will take them to

review these specific items that they mentioned as a disclaimer to

come back to you and quality report the financial condition of our

finances.

And finally, let me just say that I would ask the Congressman

to look at the substance of the entire financial report that was prepared by the Inspector General because she is correct, although we

focus on a clean opinion, there is a lot of good material that still

highlights our weaknesses but also captures the strengths that

have come into being as a result of our efforts, and we want to

work collaboratively to resolve these issues that are before you at

this time, Mr. Chairman.

Mr. HORN. Has the Department looked at an off the shelf general

ledger in updating itself? What do your consultants say?

Mr. RAMIREZ. What we have had again, the dynamics of the

problem that was a material weakness even before Inspector General Gaffney came in as Inspector General and it is Secretary AnVerDate 11-MAY-2000 10:52 Mar 15, 2001 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 C:\DOCS\67313.TXT HGOVREF1 PsN: HGOVREF1
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drew Cuomo from New York, the Secretary of Housing and Urban

Development, and those weaknesses when Jack Kemp was there,

and in fact were trying to be resolved as a result of the debacle

that was had by the leadership of Samuel Pierce that led to the

scandals in the eighties.

To bring a little history to that, that is when we had these different systems that weren’t talking to each other. We felt it important to get to what the IG was recommending, what GAO is recommending as well, that we integrate our financial systems. We

are striving for that. What led to the disclaimer, as the Inspector

General has stated before this committee, is that as a result of us

trying to do something right and being caught in a time-consuming

difficult conversion but yet running a parallel system to make sure.

As the Congressman has said and quite correctly, that if we can’t

show you how we spent our money we should not be getting money,

we are prepared to show you how and where we spent our money.

It didn’t get into the general ledger HUDCAPS, as was mentioned

earlier by the Inspector General, and that is correct, too. But what

we were saying is that when this issue was brought up and this

was an issue that led to her coming out with saying that there

would be a disclaimer came to our attention a week before the

March 1 deadline. By the next day within 12 hours we were prepared to sit down with the Inspector General and outline what

these numbers were and what they meant. They did not receive

this information and refuse to acknowledge this information until

after March 1. I can appreciate that. They are under a statutory

requirement to file something by the first, but it was a week before

and it was three items out of a trillion.

Yes, there were a lot of other things that could be brought up as

weaknesses. Yes, they were there and they were there last year

when we got a clean opinion from the Inspector General. We have

reduced some. Some have been highlighted even more. That has

also been acknowledged by the Inspector General. That wasn’t

what was discussed over that period of time that the audit occurred. The incident that led to the disclaimer was brought to management’s attention a week before the first and we were prepared

within 12 hours to respond to that but it was not accepted.

Mr. HORN. Well, you have mentioned the tenant income verification system to address the problem of subsidy payments. Do you

think that will eliminate the problem?

Mr. RAMIREZ. That will eliminate, we believe, after we have run

the system and have run one survey, and we are in the process of

getting these letters out, but we will run another cycle and it will

be an annual verification process. It will clearly be able to point to

a more accurate number than the one that has been derived out

of a sampling of a thousand households, as it currently is being

done under the method that the Inspector General has employed

for the last several years. We will be able to get to a more accurate

number and to the person who is underpaying to be able to either

get them to their fair share of rent or to get families or individuals

that are qualified into those housing units and reduce that waste

that is currently being outlined as a weakness.

Ms. KUHL-INCLAN. One point, we agree with the tenant verification process, but it is a back-end process. They are reviewing the

52

income of tenants after they are in the units. One of the material

weaknesses is the up-front issue—overseeing the multifamily

projects which receive payments and Section 8 moneys. What kind

of monitoring is HUD doing to make sure that the owners and

housing authority executive directors are ensuring that the right

tenants get in in the first place?

Yes, they are doing tenant income verification, and we agree

with that, but it doesn’t exclude the up front issue, which is a material weakness of overseeing and monitoring multifamily efforts at

the beginning of the process, not the end.

Mr. HORN. Mr. Ramirez, you testified that the Department’s financial house is now really in order?

Mr. RAMIREZ. No, I said it is in the best condition it has been

in the history of the Department, sir, and we still have work to do.

Mr. HORN. Yes, I think you have a lot of work to do and you do

too and you know it, and I appreciate your comments on that. So

we agree you can’t really make an assertion when the Inspector

General continues to report material weaknesses and you won’t

produce financial statements in a timely manner.

Mr. RAMIREZ. We can dispute it. We believe that, sir, is behind

us. We don’t want to bog down our work in the present as a result

of what occurred in the past. We are hopeful, as indicated by the

Inspector General, that we resolve this 1999 disclaimer based on

what got the financial statements disclaimed, and be able to report

back to you in a timely manner the financial condition, overall financial condition of the Department, sir.

Mr. HORN. Well, you say in your first full paragraph that the Department’s financial house is in order.

Mr. RAMIREZ. Mr. Chairman, we have not reached management

nirvana, and we are not going to get there any day soon, but we

are making credible progress, as Mr. Walker has said from the

GAO.

Mr. HORN. I don’t know that we can beat this poor old dog any

more. It kept going through my mind that Hyperion is a facility in

El Segundo, CA, of the city of Los Angeles, a waste water and

water treatment facility.

Mr. RAMIREZ. Isn’t it a shame that they use that throughout the

Federal Government?

Mr. HORN. And any good parochial student here probably studied

mythology, Greek and Roman, and I think that is it, too. We have

an analogy on the West Coast.

Mr. RAMIREZ. Yes, we agree.

Ms. GAFFNEY. Mr. Chairman, may I just say one thing?

Mr. HORN. Go ahead.

Ms. GAFFNEY. HUD did want an extension of the March 1 date.

The other thing is that OMB tried very hard. They said that we

should extend by a couple of days, a couple of weeks, a month because of the importance of getting an unqualified opinion. We

should do whatever. So I just wanted you to be aware that that

kind of pressure exists.

Mr. RAMIREZ. Let me say by a matter of days, four agencies did

delay their report through their Inspector General’s office, and it

did produce in a quite expeditious manner, as we believe it would

have for us, a clean opinion, sir.

53

Mr. HORN. Well, I am worried about the possibility for corruption.

Mr. RAMIREZ. We all are.

Mr. HORN. Do you have your own investigative unit within the

Department?

Mr. RAMIREZ. We leave all of the criminal investigation work to

the Inspector General. Our focus through the enforcement center is

to deal specifically with civil violations of law. In particular, what

has been set statutorily and regulatorily through the agency by

way of landlords, grantees and recipients, sir.

Mr. HORN. Well, you have a major mandate without question. It

is a very difficult Department. Historically you are talking about

decentralization all over the place and it will be a real gold medal

if somebody pulls that together.

Mr. RAMIREZ. Thank you.

Mr. HORN. Let me thank the staff that put this hearing together,

J. Russell George, the staff director and chief counsel for the subcommittee; Randy Kaplan, counsel, and he is to my left and your

right; and Louise DiBenedetto is from GAO and a professional staff

member working for us. Bonnie Heald, director of communications;

Bryan Sisk, clerk; Ryan McKee, staff assistant. The minority staff,

Trey Henderson is counsel and Jean Gosa is minority clerk, and

the court reporter today is Doreen Dotzler. We thank you very

much, and with that we are adjourned.

[Whereupon, at 11:55 a.m., the subcommittee was adjourned.]

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